LATTICE SEMICONDUCTOR CORP (LSCC)
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 03/12/2012
Filed Period 12/31/2011
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2011
or
o 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
________________________________________
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
5555 NE Moore Court
Hillsboro, Oregon
(Address of principal executive offices)
93-0835214
(I.R.S. Employer Identification Number)
97124-6421
(Zip Code)
Registrant's telephone number, including area code: (503) 268-8000
Securities registered pursuant to Section 12(b) of the Act:
________________________________________
(Title of Class)
Common Stock, $.01 par value
(Name of each exchange on which registered)
NASDAQ Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Yes o No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No [X]
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes [X] No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Non-accelerated filer o
Accelerated filer [X]
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No [X]
Aggregate market value of voting stock held by non-affiliates of the registrant as of July 1, 2011
Number of shares of common stock outstanding as of March 7, 2012
$
614,681.648
118,417.447
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive
proxy statement relating to the 2012 Annual Meeting of Stockholders, which definitive proxy statement shall be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year to which this Report relates.
LATTICE SEMICONDUCTOR CORPORATION
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
ITEM OF FORM 10-K
PART I
Item 1.
- Business
Item 1A.
- Risk Factors
Item 1B.
- Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
- Properties
- Legal Proceedings
- Mine Safety Disclosures
- Market for the Registrant's Common Equity, Related Stockholder Matters & Issuer Purchases of Equity Securities
- Selected Financial Data
- Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
- Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
- Financial Statements and Supplementary Data
- Changes in and Disagreements with Accountants On Accounting and Financial Disclosure
Item 9A.
- Controls and Procedures
Item 9B.
- Other Information
PART III
Item 10.
- Directors, Executive Officers and Corporate Governance
Item 11.
- Executive Compensation
Item 12.
- Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
- Certain Relationships and Related Transactions, and Director Independence
Item 14.
- Principal Accountant Fees and Services
PART IV
Item 15.
- Exhibits, Financial Statement Schedules
Signatures
Schedule II—Valuation and Qualifying Accounts
2
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S-1
Forward-Looking Statements
This Annual Report on Form 10-K 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. 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:
programmable logic products being expected to simplify board management design and reduce development costs; customers using both PLD and FPGA
architectures; our plan to introduce new FPGA, PLD and associated software design tool products and to reduce the manufacturing cost of our products; the
increase of seasonal trends in our product revenue; our existing facilities being suitable and adequate for our future needs; the majority of our revenue being
through our sell-through distributors; the completion of our global tax structure and expectations regarding taxes and tax adjustments; our expectations that a
significant portion of our revenue will continue to be dependent on the communications end market and the growth of our revenue from this end market; the
Asia Pacific market being the primary source of our revenue; our ability to continue to serve our customers after the termination of our relationship with
Avnet; the benefits of our purchase of APAC IC and SiliconBlue; our plans to sell our auction rate securities; the costs and benefits of our restructuring plans;
the impact of new accounting pronouncements; our making significant future investments in research and development and the increase of mask and
engineering wafer costs; and our beliefs concerning the adequacy of our liquidity and ability to meet our operating and capital requirements and obligations.
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 that could cause our actual results to differ materially from the forward-looking statements
include global economic conditions and uncertainty, the concentration and growth of our sales in the communications equipment end market, particularly as it
relates to the concentration of our sales in the Asia Pacific region, market acceptance and demand for our new products, any disruption of our distribution
channels, unexpected charges relating to our restructuring plans, the effect of the downturn in the economy on capital markets and credit markets, the impact
of competitive products and pricing, unanticipated taxation requirements, or positions of the IRS, unexpected impacts of recent accounting guidance and the
other risks that are 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 I of this Report. 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
Item 1. Business.
PART I
Lattice Semiconductor Corporation (“Lattice” or the “Company”) designs, develops and markets programmable logic products and related
software. Programmable logic products are widely used semiconductor components that can be configured by end customers as specific logic circuits,
enabling shorter design cycle times and reduced development costs. Our end customers are primarily original equipment manufacturers (“OEMs”) in the
communications, computing, consumer, industrial, military, automotive, and medical end markets.
Lattice was incorporated in Oregon in 1983 and reincorporated in Delaware in 1985. Our headquarters facility is located at 5555 N.E. Moore Court,
Hillsboro, Oregon 97124, our telephone number is (503) 268-8000 and our website can be accessed at www.latticesemi.com. Information contained or
referenced on our website is not incorporated by reference into, and does not form a part of, this Annual Report on Form 10-K.
We report based on a 52 or 53-week fiscal year ending on the Saturday closest to December 31. Our fiscal 2011, 2010, 2009 and 2007 were 52-
week years and ended December 31, 2011, January 1, 2011, January 2, 2010 and December 29, 2007, respectively. Our fiscal 2008 was a 53-week year and
ended on January 3, 2009. Our fiscal 2012 will be a 52-week year and will end on December 29, 2012. All references to quarterly or yearly financial results
are references to the results for the relevant fiscal period.
Programmable Logic Market Background
Three principal types of digital integrated circuits are used in most electronic systems: microprocessors, memory and logic. Microprocessors are
used for control and computing tasks, memory is used to store programming instructions and data, and logic is employed to manage the interchange and
manipulation of digital signals within a system.
Logic circuits are found in a wide range of today's digital electronic equipment, including communications, computing, consumer, industrial,
automotive, medical, and military systems. The logic market encompasses general purpose logic semiconductor products, which include programmable logic
devices, and application-specific semiconductor products, which include application-specific integrated circuits (“ASICs”) (custom devices for a single user)
and application-specific standard products (“ASSPs”) (standardized logic devices marketed to multiple users). According to research from IHS iSuppli1, the
general purpose logic and application-specific semiconductor product categories combined accounted for approximately 37% of the estimated $313 billion
worldwide semiconductor market in 2011.
Manufacturers of electronic equipment are challenged to bring differentiated products to market quickly. These competitive pressures often
preclude the use of custom-designed ASICs, which generally entail significant design risks, non-recurring expenses and time delays. ASSPs, an alternative to
custom designed ASICs, limit a manufacturer's flexibility to adequately customize an end system. Programmable logic addresses this inherent dilemma.
Programmable logic is a standard semiconductor product, purchased by systems manufacturers in a “blank” state that can be custom-configured into a
virtually unlimited number of specific logic functions by programming the device with electrical signals. Programmable logic gives system designers the
ability to quickly create custom logic functions to provide product differentiation without sacrificing rapid time to market.
According to IHS iSuppli2, the programmable logic market was approximately $4.9 billion in 2011. Within this market, there are two main markets;
field programmable gate arrays (“FPGA”) and programmable logic devices (“PLD”), each representing a distinct silicon architectural approach to
programmable logic. In 2011, FPGA was a $4.3 billion market2 while PLD was a $0.6 billion market.2 Products based on the two alternative programmable
logic architectures are generally best suited for different types of logic functions, although many logic functions can be implemented using either architecture.
FPGAs are characterized by a narrow-input logic cell and use a distributed interconnect scheme. FPGAs may also contain dedicated blocks of fixed circuits
such as memory, high-speed input/output interfaces or processors. PLDs are traditionally characterized by a regular building block structure of wide-input
logic cells, called macrocells, and use a centralized logic interconnect scheme. Although FPGAs and PLDs are typically suited for use in distinct types of
logic applications, we believe that a substantial portion of programmable logic customers utilize both FPGA and PLD products. In addition, mixed signal
PLDs that combine digital and analog features are growing in popularity.
1
2
IHS iSuppli, “Competitive Landscaping Tool (CLT) Q4 2011,” Nov. 17, 2011
IHS iSuppli, “Core Silicon Q4 2011 Market Tracker & Component AMFT,” Jan. 30, 2012
4
Lattice Products
Lattice actively participates in both the FPGA and PLD (which includes the growing mixed signal PLD) markets. We strive to meet our customers'
needs by offering innovative and differentiated solutions that include not only silicon devices, but also design tools and intellectual property. A brief overview
of our key products follows.
FPGA Products
During fiscal 2011, 34% of our revenue was derived from FPGA products, compared to 33% in 2010 and 33% in 2009. In the future, we plan to
introduce new FPGA families in high-growth market niches where we believe that we have sustainable and differentiated positions.
LatticeECP2M and LatticeECP3 Low-Power High-Value FPGAs
The LatticeECP FPGA family is designed for customers who need FPGAs with digital signal processing (“DSP”), a significant amount of memory,
and high-speed serial communications channels ("SerDes"), but do not want to pay the price or power premiums of high end FPGAs. The LatticeECP2M and
LatticeECP3 families are able to serve this mid-range market due to careful circuit design choices aimed at achieving lower cost and various architectural
enhancements to reduce power consumption.
Introduced in February 2009, the fourth generation LatticeECP3 FPGA family is particularly well suited for deployment in wireless infrastructure
and wireline access equipment, as well as video and imaging applications. All four generations of the LatticeECP family are manufactured using our foundry
partner Fujitsu Limited's (“Fujitsu”) advanced process technologies. In November 2011, we announced the next generation LatticeECP4 FPGA family that
builds on the LatticeECP3 family by bringing premium features to mainstream customers while maintaining low power and low cost.
LatticeXP and LatticeXP2 Non-Volatile FPGAs
Unlike traditional FPGAs that require an external device to load its application program, Lattice's two generations of the non-volatile LatticeXP
FPGA family embed a Flash memory block on-chip to store the program. This on-chip program memory offers customers several unique benefits. First, as a
single chip solution it enables customers to reduce their board size. Second, without the comparatively long time delay caused by loading a program
externally, a customer's equipment can start up much more quickly. We refer to this feature as "instant-on". While broadly used across many market segments,
we believe that the single-chip, instant-on, and high-security provided by the LatticeXP and LatticeXP2 FPGA families make them particularly attractive for
the security, surveillance, and display markets.
Both the LatticeXP and LatticeXP2 families are manufactured using embedded Flash processes co-developed with our foundry partner Fujitsu. The
use of embedded Flash for the non-volatile memory enables the LatticeXP and Lattice XP2 families to be re-programmable.
The key features of our selected FPGA families are described in the table below:
FPGA Family
LatticeECP3 TM
LatticeXP2 TM
Year
Introduced
Process
Technology (nm)
Operating
Voltage
Logic
(K LUTs)
SERDES
Channels
Max
RAM (Mb)
2009
2007
65
90
1.2
1.2
5
17-149
5-40
4-16
—
7.2
1.0
I/O Pins
(#)
116-586
86-540
PLD Products
During fiscal 2011, 66% of our revenue was derived from PLD products, compared to 67% in fiscal 2010 and 67% in fiscal 2009. We currently
offer the industry's broadest line of PLDs based on our numerous families of ispLSI ® , ispMACH®, GAL ® , MachXO, and iCE products.
ispMACH4000 CPLDs
Lattice offers seven versions of the ispMACH4000 in-system programmable CPLD (complex programmable logic device) family. The most recent
version, the ispMach4000ZE, is designed for high performance and features an architecture optimized to ensure low power consumption. The
ispMach4000ZE devices are offered in ultra-small, space saving packages and are targeted toward handheld and portable equipment.
MachXO and MachXO2 PLD Families
The MachXO and MachXO2 families of versatile non-volatile reconfigurable PLDs are designed for applications traditionally implemented using
CPLDs or low-capacity FPGAs. Widely adopted in a broad range of high value, cost sensitive applications that require general purpose I/O expansion,
interface bridging and power-up management functions, MachXO and MachXO2 PLDs offer the benefits of increased system integration by providing
embedded memory, built-in Phase-locked Loops, high performance Low-voltage Differential Signaling (“LVDS”) I/O, remote field upgrade and a low power
sleep mode.
In November 2010, Lattice introduced its MachXO2 PLD family. Built on a low power 65-nm process featuring embedded Flash technology, the
MachXO2 family delivers a 3X increase in logic density, a 10X increase in embedded memory and more than a 100X reduction in static power than the
MachXO PLD family. In addition, several popular functions used in low-density PLD applications, such as User Flash Memory (UFM), I2C, SPI and timer/
counter, have been hardened into the MachXO2 devices, providing designers a “Do-it-All-PLD” for high volume, value orientated applications.
Designed for a broad range of low density applications, the MachXO and MachXO2 PLD families are used in a variety of end markets including
consumer, communications, computing, industrial and medical.
The key features of our selected PLD families are described in the table below:
PLD Family
MachXO2
MachXO
Lattice iCE40TM
ispMACH 4000ZE
ispMACH 4000Z
Year
Introduced
Process
Technology (nm)
2010
2005
2011
2008
2003
65
130
40
180
180
Operating
Voltage
3.3/2.5/1.2
3.3/2.5/1.8/1.2
1.2
1.8
1.8
Logic
(Macrocells)
128-3,432
128-1,140
320-8,096
32-256
32-256
I/O Pins
(#)
19-335
73-271
25-222
32-108
32-128
Note: MachXO, MachXO2, and iCE40 implement logic using look-up tables. The figures shown are the macrocell equivalents.
Lattice iCE Ultra-Low Power PLD Devices
In December 2011, Lattice acquired SiliconBlue Technologies Ltd., (a Cayman Islands exempted company ("SiliconBlue")), a pioneer and leader
in Custom Mobile DeviceTM solutions for the consumer handheld market. Lattice is now able to offer customers the mobile-targeted iCE40 and iCE65
products.
Utilizing a single chip, ultra-low power programmable logic fabric, the iCE40 and iCE65 families enable mobile device designers to quickly add
features to their mobile platform in areas such as connectivity, memory / storage, sensor management, and video / imaging. Lattice iCE products offer
designers of handheld, battery-based consumer devices a programmable logic solution that delivers design flexibility and fast time-to-market benefits coupled
with features that address their power, logic capacity, cost, and small form factor requirements.
Platform Manager, Power Manager and ispClock Programmable Mixed Signal Devices
6
As customer equipment grows more complex, their power and clock management problems also become more complex. Our Power Manager and
ispClockTM families feature a combination of programmable logic and programmable analog circuitry that allows system designers to reduce system cost and
design time by quickly and easily integrating a wide variety of power or clock management functions within a single integrated circuit. These products can
replace numerous discrete components, reducing cost and conserving board space, while providing customers with additional design flexibility and time-to-
market benefits. The accuracy of our Power Manager products enables more reliable system performance for our customers.
The Platform Manager™ family is Lattice's third-generation mixed-signal device family. The programmable Platform Manager devices are
expected to simplify board management design significantly by integrating programmable analog and logic to support many common functions, such as
power management, digital housekeeping and glue logic. By integrating these support functions, Platform Manager devices can not only reduce the cost of
these functions compared to traditional approaches, but also can improve system reliability and provide a high degree of design flexibility that minimizes the
risk of circuit board re-spins.
Software Development Tools and Intellectual Property Cores
Our FPGA and PLD products are supported by the Lattice Diamond™ design and development tool suite. Our mixed signal products are supported
by PAC-Designer® software. Supporting Windows and Linux platforms, Diamond software allows our customers to easily enter, verify and synthesize a
design, perform logic simulation and timing analysis, assign I/O pins, designate critical paths, debug, execute automatic timing-driven place and route tasks,
and download a logic and I/O configuration to our devices. Lattice will continue to support its ispLEVER tool suite for FPGA design while transitioning its
FPGA customer base to the Diamond design environment.
In April 2011, Lattice announced Version 1.2 of its Lattice Diamond FPGA design software. Lattice Diamond software provides a complete set of
powerful tools, efficient design flows, and modern user interface that enable designers to more quickly target low power, cost sensitive FPGA applications. In
addition to features that improved ease of use and increased user productivity, version 1.2 included updated data and additional package options for the
MachXO2 Family.
Lattice Diamond software Version 1.3 was announced in July 2011. It includes, in addition to features to improve ease of use and increase user
productivity, clock jitter analysis, integration with PAC-Designer ® tool suite for support of the Platform Manager device family, and final data for the
MachXO2-1200 device.
Lattice Diamond software Version 1.4 was announced in December 2011. It includes, in addition to features to improve ease of use and increase
user productivity for design exploration, final data support for the entire MachXO2 family, and initial support for the newly announced LatticeECP4 device
family. LatticeECP4 support is extended to select early access program customers.
Synopsys' Synplify Pro advanced FPGA synthesis is included for all operating systems supported, and Aldec's Active-HDL Lattice Edition II
simulator is included for Windows. In addition to the tool support for Lattice devices provided by the OEM versions of Synplify Pro and Active-HDL, Lattice
devices are also supported by the full versions of Synopsys Synplify Pro and Aldec Active-HDL. Mentor Graphics ModelSim SE is also supported.
Lattice's IP core program (LatticeCORE™) assists our customers' design efforts by providing pre-tested, reusable functions that can be easily
utilized, allowing our customers to focus on their unique system architectures. These IP cores eliminate the need to “re-invent the wheel” by providing many
industry-standard functions, including PCI Express, DDR, Ethernet, CPRI, OBSAI, 7:1 LVDS, and embedded microprocessors.
Product Development
We place substantial emphasis on new product development and believe that continued investment in this area is required to maintain and improve
our competitive position. Our product development activities emphasize new proprietary products, advanced packaging, enhancement of existing products and
process technologies, and improvement of software development tools. Product development activities occur primarily in: Hillsboro, Oregon; San Jose,
California; Downers Grove, Illinois; Shanghai, China; and Manila, Philippines.
Research and development expenses were $71.9 million in 2011, $60.3 million in 2010 and $56.1 million in 2009. We expect to continue to make
significant future investments in research and development. During fiscal 2011, we consolidated our research and development activities and established an
engineering development center in the Philippines as part of a 2011
7
restructuring plan. See discussion under “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” for more
information on our 2011 restructuring plan.
Operations
We do not manufacture our own silicon products. We maintain strategic relationships with large semiconductor foundries to source our finished
silicon wafers. This strategy allows us to focus our internal resources on product and market development, and eliminates the fixed cost of owning and
operating semiconductor manufacturing facilities. We are also able to take advantage of the ongoing advanced process technology development efforts of
semiconductor foundries.
The Company and Fujitsu Limited (“Fujitsu”) have entered into agreements pursuant to which Fujitsu manufactures most of our new products on
its 130 nanometer, 90 nanometer and 65 nanometer CMOS process technologies, as well as on 130 nanometer, 90 nanometer and 65 nanometer technologies
with embedded flash memory that we have jointly developed with Fujitsu. Fujitsu is our sole source supplier of wafers for our newest FPGA and PLD
products.
In addition, all of our assembly operations and most of our test operations are performed by outside suppliers.
We rely on a third party vendor to provide cost-effective and efficient supply chain services. Among other activities, these outsourced services
relate to direct sales logistics, including order fulfillment, inventory management and warehousing, and distribution of inventory to third party distributors.
During December 2009, we adopted a restructuring plan under which we established an operations center and transferred a portion of our supply chain
support activities from our headquarters in Oregon to the new operations center in Singapore in 2010. During fiscal 2011, we adopted a restructuring plan
under which we transferred most of our remaining supply chain support activities from our headquarters in Oregon to a new operations center in the
Philippines.
We perform certain test operations and reliability and quality assurance processes internally. We have achieved and maintained ISO9001:2000
Quality Management Systems Certification and ISO16949:2002 Quality Systems Certification, and released a full line of PLD products qualified to the AEC-
Q100 Reliability Standard.
Wafer Fabrication
We source silicon wafers from our foundry partners, Fujitsu Semiconductor Limited in Japan, Seiko Epson Corporation in Japan, United
Microelectronics Corporation in Taiwan and GLOBALFOUNDRIES in Singapore, pursuant to agreements with each company and their respective affiliates.
In addition, as a result of our acquisition of SiliconBlue, we now have manufacturing capability with Taiwan Semiconductor Manufacturing Company Ltd.
(TSMC) in Taiwan for products on its 65 nanometer and 40 nanometer CMOS LP process technologies. We negotiate wafer volumes, prices and other terms
with our foundry partners and their respective affiliates on a periodic basis.
Assembly
After wafer fabrication and initial testing, we ship wafers to independent subcontractors for assembly. During assembly, wafers are separated into
individual die and encapsulated in plastic packages. Presently, we have qualified assembly partners in: Indonesia, Malaysia, Taiwan, the Philippines,
Singapore and South Korea. We negotiate assembly prices, volumes and other terms with our assembly partners and their respective affiliates on a periodic
basis.
We currently offer an extensive list of standard products in lead (Pb) free packaging. Our lead-free products meet the European Parliament
Directive entitled “Restrictions on the use of Hazardous Substances" ("ROHS"). A select and growing subset of our ROHS compliant products are also
offered with a "Halogen Free" material set.
Testing
We electrically test the die on each wafer prior to shipment for assembly. Following assembly, prior to customer shipment, each product undergoes
final testing and quality assurance procedures. Wafer sort testing is performed by independent contractors in: Malaysia, Japan, and Singapore. Final testing is
performed by independent contractors in: Indonesia, Malaysia, the Philippines, Singapore, and South Korea.
Marketing, Sales and Customers
We sell our products directly to end customers through a network of independent manufacturers' representatives and
8
indirectly through a network of independent sell-in and sell-through distributors. We also employ a direct sales management and field applications
engineering organization to support our end customers and indirect sales resources. Our end customers are primarily original equipment manufacturers in the
communications, computing, consumer, industrial, automotive, medical and military end markets.
We have agreements with 19 manufacturers' representatives and two primary distributors; Arrow Electronics, Inc., including Nu Horizon
Electronics Corp., (wholly owned subsidiary of Arrow Electronics, Inc.), and distributors of the Weikeng Group (Weikeng Industrial Co. Ltd. (Taiwan) and
Weikeng International Co. Ltd. (Hong Kong)). We have also established foreign sales channels in over 50 foreign countries through a network of over 15
sales representatives and distributors. The majority of our sales are made through distributors.
Orders from our sell-through distributors are initially recorded at published list prices; however, for a majority of our sales, the final price is set at
the time of resale and is determined in accordance with a distributor price agreement. In addition, we allow returns from sell-through distributors of unsold
products under certain conditions. For these reasons, we do not recognize revenue until products are resold by sell-through distributors to an end customer. At
times, we protect our sell-through distributors against reductions in published list prices.
We provide technical support to our end customers with engineering staff based at our headquarters, product development centers and selected field
sales offices. We maintain numerous domestic and international field sales offices in major metropolitan areas.
The composition of our revenue by geographical location of our direct and indirect customers was as follows (dollars in thousands):
Year Ended
December 31, 2011
January 1, 2011
January 2, 2010
Total
%
Total
%
Total
%
United States
$
44,847
14 $
36,211
12 $
28,296
China
Europe
Japan
Taiwan
Other Asia
Other Americas
Total foreign revenue
Total revenue
$
123,124
66,319
36,961
8,346
32,687
6,082
273,519
318,366
39
21
11
3
10
2
86
100 $
124,910
54,332
38,992
8,839
27,853
6,631
261,557
297,768
42
18
13
3
10
2
88
100 $
15
43
17
10
3
9
3
83,813
33,389
19,460
6,313
17,476
5,673
166,124
194,420
85
100
Both foreign and domestic sales are denominated in U.S. dollars, with the exception of sales to Japan, where sales to certain customers are
denominated in yen.
Revenue from Distributors
Our largest customers are distributors and have historically made up a significant portion of our total revenue. Revenue attributable to resales of
products by Arrow Electronics, Inc., which includes its wholly-owned subsidiary, Nu Horizons Electronics Corp., accounted for approximately 22%, 18% and
12% of revenue in fiscal years 2011, 2010 and 2009, respectively. Revenue attributable to resales of products by Avnet, Inc. accounted for approximately
17%, 17% and 13% of revenue in fiscal years 2011, 2010 and 2009, respectively. Revenue attributable to resales of products by the Weikeng Group (Weikeng
Industrial Co. Ltd. (Taiwan) and Weikeng International Co. Ltd. (Hong Kong)) accounted for approximately 14%, 14% and 9% of revenue in fiscal years
2011, 2010 and 2009, respectively. Sales of products to ASTI Holdings Ltd. accounted for approximately 0%, 0% and 16% of revenue in fiscal years 2011,
2010 and 2009, respectively. No other individual customer accounted for more than 10% of total revenue in any of the fiscal years 2011, 2010 and 2009.
On August 28, 2011, our global franchise agreement with Avnet terminated; however, we mutually agreed to terms for the transition of inventory
through December 31, 2011. We do not expect a significant disruption in our ability to service customers as a result of this change. We continue to serve our
end customers with a network that includes a global distributor,
9
regional distributors, manufacturer's representatives, and our direct sales team.
During fiscal 2009, we embarked on a program to restructure our distribution channels, primarily in the Asia Pacific region, from a sell-in to a sell-
through distribution model. As a result the majority of our revenue in fiscal 2011 and 2010 was from resale of our products by sell-through distributors. In
connection with this program, we terminated our distribution agreement between the Company and Promaster Technology Corporation on July 2, 2009,
between the Company and Dragon Technology Distribution and FE Global Electronics effective for various territories on February 1 and February 6, 2010,
respectively, and between the Company and other distributors effective on various dates. Dragon Technology Distribution and FE Global Electronics are
wholly-owned subsidiaries of ASTI Holdings Ltd. Additionally, we converted in-place distributors in the Asia Pacific region and Europe from a sell-in to a
sell-through model. As a result, we estimate that revenue was lower in the fourth quarter of fiscal 2009 by approximately $2.0 million compared to revenue
had we not embarked on this program.
Revenue related to resale of our products by sell-through distributors makes up 61%, 56%, and 38% of total revenue for fiscal 2011, 2010 and
2009, respectively.
Seasonality
In most years, we experience some seasonal trends in the sale of our products. Sales of our products are often higher during our fiscal quarters two
and three, but lower during our fiscal quarters one and four. As the Company pursues new opportunities in the consumer end market, we expect there will be
more seasonal trends in product revenue. However, on balance, general economic conditions and the cyclical nature of the semiconductor industry have a
greater impact on our business and financial results than seasonal trends.
Backlog
We accept purchase orders for deliveries covering periods from one day up to approximately one year from the date on which the order is placed.
However, purchase orders, consistent with common industry practices, can generally be revised or canceled by many of our customers without penalty. Our
backlog for sell-through distributors is valued at list price, which in most cases is substantially higher than the prices ultimately recognized as revenue. In
addition, significant portions of our sales are ordered with relatively short lead times, often referred to as “turns business.” Considering these practices and our
experience, we do not believe the total of customer purchase orders outstanding (backlog) provides meaningful information that can be consistently relied on
to predict actual sales for future periods.
Competition
The semiconductor industry is intensely competitive and characterized by rapid rates of technological change, product obsolescence and price
erosion. Our current and potential competitors include a broad range of semiconductor companies from emerging companies to large, established companies,
many of which have greater financial, technical, manufacturing, marketing and sales resources than we do.
The principal competitive factors in the programmable logic market include silicon and software product features, price, technical support, sales,
marketing and distribution strength. The availability of competitive intellectual property cores is also critical. In addition to product features such as density,
performance, power consumption, re-programmability, and reliability, competition occurs on the basis of price and market acceptance of specific products and
technology. We intend to continue to address these competitive factors by working to continually introduce product enhancements and new products and by
reducing the manufacturing cost of our products.
We compete directly with Altera Corporation and Xilinx, Inc. We also indirectly compete with other semiconductor companies that provide logic
solutions that are not user programmable, or, that offer products based on alternative solutions such as ASIC, ASSP, microcontroller, analog and DSP
technologies. Although to date we have not experienced direct competition from companies located outside the United States, such companies may become a
more significant competitive factor in the future. Competition may also increase if other larger semiconductor companies seek to expand into our market. Any
such increases in competition could have a material adverse effect on our operating results.
Intellectual Property
We seek to protect our products and technologies primarily through patents, trade secrecy measures, copyrights, mask work protection, trademark
registrations, licensing restrictions, confidentiality agreements and other approaches designed to
10
protect proprietary information. There can be no assurance that others may not independently develop competitive technology not covered by our intellectual
property rights or that measures we take to protect our technology will be effective.
Patents
We hold numerous domestic, European and Asian patents and have patent applications pending in the United States, Europe and Asia. Our current
patents will expire at various times between 2011 and 2030. There can be no assurance that pending patent applications or other applications that may be filed
will result in issued patents, or that any issued patents will survive challenges to their validity. Although we believe that our patents have value, there can be
no assurance that our patents, or any additional patents that may be issued in the future, will provide meaningful protection from competition. We believe that
our success will depend primarily upon the technical expertise, experience, creativity and the sales and marketing abilities of our personnel.
Patent and other proprietary rights infringement claims are common in our industry. There can be no assurance that, with respect to any claim made
against us, that we would be able to successfully defend against the claim or that we could obtain a license that would allow us to use the proprietary rights on
terms or under conditions that would not harm our business.
Licenses and Agreements
Advanced Micro Devices
In 1999, as part of our acquisition of Vantis Corporation, a wholly owned subsidiary of Advanced Micro Devices, Inc. (“AMD”), we entered into
an agreement with AMD pursuant to which we have cross-licensed Vantis patents with AMD patents, having an effective filing date on or before June 15,
1999, related to programmable logic products. This cross-license was made on a worldwide, non-exclusive and royalty-free basis. Additionally, as part of our
acquisition of Vantis, we acquired certain third-party license rights held by Vantis prior to the acquisition.
Agere Systems
In 2002, as part of our acquisition of the FPGA business of Agere Systems, Inc., we entered into an intellectual property agreement with Agere and
Agere Systems Guardian Corporation. Pursuant to this agreement, these Agere companies assigned or licensed to us certain FPGA and Field Programmable
System Chip patents, trademarks, software and other intellectual property rights and technology, and we licensed back rights in these same assets. These
cross-licenses were made on a worldwide, non-exclusive and royalty-free basis.
Altera
In 2001, we entered into a comprehensive, royalty-free, non-exclusive patent cross-license agreement and a multi-year patent peace agreement with
Altera.
SiliconBlue
Under a patent license agreement dated July 21, 2006, Kilopass Technology, Inc. granted to SiliconBlue a license to certain U.S. patents and related
foreign patents. The license is an exclusive, fully paid, worldwide license but is limited to the use of the patented inventions in the field of stand-alone
programmable logic devices.
Employees
At December 31, 2011, we had 852 full-time employees. We believe that our future success will depend, in part, on our ability to continue to attract
and retain highly skilled technical and management personnel. No employee is subject to a collective bargaining agreement. We have never experienced a
work stoppage and consider our employee relations to be good.
11
Executive Officers of the Registrant
The following individuals currently serve as our executive officers:
Name
Age
Position
Darin G. Billerbeck
52 President, Chief Executive Officer and Director
Joe Bedewi
52 Corporate Vice President and Chief Financial Officer
Byron W. Milstead
55 Corporate Vice President, General Counsel and Secretary
Sean Riley
43 Corporate Vice President and General Manager, Infrastructure Business Unit
Darin G. Billerbeck joined the Company as President and Chief Executive Officer on November 8, 2010. Prior to joining the Company, Mr.
Billerbeck served as the Chief Executive Officer of Zilog, a microcontroller manufacturer, which was acquired by IXYS Corporation in February 2010. Prior
to joining Zilog in January 2007, Mr. Billerbeck served 18 years in various executive and management positions at Intel Corporation, including as Vice
President and General Manager of Intel's Flash Products Group from 1999 to 2007.
Joseph Bedewi joined the Company as Corporate Vice President and Chief Financial Officer on April 15, 2011. Mr. Bedewi served 17 years as
Financial Controller for several groups, and held various other financial and operational management roles at Intel Corporation. His operations experience
ranges from organizational development and optimization, strategic planning, business development and process improvement, to capacity and capital
planning. After leaving Intel, Mr. Bedewi served as Chief Financial Officer at International DisplayWorks, Malibu Boats, LLC., and Solar Power, Inc.
Byron W. Milstead joined the Company in May 2008 as Corporate Vice President and General Counsel. Prior to joining the Company, Mr.
Milstead served as Senior Vice President and General Counsel of Credence Systems Corporation from December 2005 to May 2008. Mr. Milstead served as
Vice President and General Counsel of Credence Systems Corporation from November 2000 until December 2005. Prior to joining Credence Systems
Corporation, Mr. Milstead practiced law at the Salt Lake City office of Parsons Behle & Latimer and the Portland offices of both Bogle and Gates and Ater
Wynne.
Sean Riley joined the Company in September 2008 and became Corporate Vice President and General Manager, Infrastructure Business Unit in
December 2011. Prior to joining the Company, Mr. Riley was Vice President of Marketing for MathStar from April 2005 to May 2008, a programmable logic
startup company. Mr. Riley joined MathStar from Intel Corporation, where he worked from June 1992 to April 2005 in various marketing, engineering and
general management roles.
Available Information
We make available, free of charge through our Investor Relations section of our website at www.latticesemi.com, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports and statements as soon as reasonably
practicable after such materials are electronically filed with, or furnished to, the SEC. You may also obtain free copies of these materials by contacting our
Investor Relations Department at 5555 N.E. Moore Court, Hillsboro, Oregon 97124-6421, telephone (503) 268-8000. Our SEC filings are also available at the
SEC's website at www.sec.gov.
Item 1A. Risk Factors
The following risk factors and other information included in this Annual Report should be carefully considered before making an investment decision
relating to our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial
condition, operating results and cash flows could be materially adversely affected.
Currently, Fujitsu Semiconductor Limited ("Fujitsu") is our sole source supplier of wafers for our newest FPGA and PLD products.
As a semiconductor company, we operate in a dynamic environment marked by rapid product obsolescence. The programmable logic market is
characterized by rapid technology and product evolution followed by a slow ramp process to
12
volume production. Our success depends on our ability to develop and introduce new products that compete effectively on the basis of price and performance
and which address the markets we serve. We work closely with foundries in our development of products meeting these market demands, and rely on the
foundry to timely produce high quality products.
We have entered into agreements with Fujitsu pursuant to which Fujitsu manufactures most of our new products on its 130 nanometer, 90 nanometer
and 65 nanometer technologies. Fujitsu is our sole source supplier of wafers for our newest FPGA and PLD products. The success of certain of our next
generation products is dependent on our ability to successfully partner with Fujitsu or new foundry partners. If for any reason Fujitsu does not provide their
facilities and support for our process technology development, we may have difficulty timely and effectively developing new products until we can find a
replacement supplier. Similarly, if for any reason Fujitsu discontinues manufacturing our new products (e.g. stop production on certain process technologies)
we will have to switch to a new foundry. We may be unsuccessful in establishing new foundry relationships for our next generation products, or may incur
substantial cost and manufacturing delays until we form a new relationship, each of which could adversely affect our operating results.
In order to secure new or additional wafer supply, we may from time to time consider various financial arrangements including equity investments,
advance purchase payments, loans, or similar arrangements with independent wafer manufacturers in exchange for committed wafer capacity. To the extent
that we pursue any such additional financing arrangements, additional debt or equity financing may be required. There can be no assurance that such
additional financing will be available when needed or, if available, will be on favorable terms. Any future equity financing will decrease existing
stockholders’ equity percentage ownership and may, depending on the price at which the equity is sold, result in dilution.
Additionally, a disruption of Fujitsu's foundry operations as a result of a fire, earthquake, act of terrorism, political or labor unrest, governmental
uncertainty, war, disease or other natural disaster or catastrophic event, or any other reason, could disrupt our wafer supply and could adversely affect our
operating results.
Our future revenue is dependent on programmable logic solutions. Customer design-in activity, and thus, future revenue growth is dependent on
market acceptance of our new silicon and software design tool products and the continued market acceptance of our current products. Future
revenue is inherently uncertain and could impact our ability to manage production or our ability to forecast sales.
We face uncertainties relating to the potential impact of customer design-in activity because it is unknown whether any particular customer design-in
will ultimately result in sales of significant volume. After a specific customer design-in is obtained, many factors can impact the timing and amount of sales
that we ultimately realize. Changes in the competitive position of our technology, the customer's product competitiveness or product strategy, the financial
position of the customer, and other factors can impact the timing and amount of sales ultimately realized from any specific customer design-in.
We are presently shipping our latest generation FPGA, PLD and Programmable Mixed Signal product families that are critical to our ability to grow
our overall revenue. We also plan to continue upgrading our customer design tool products and increase our offerings of intellectual property cores. Our future
revenue growth is dependent on customer design-in activity, market acceptance of our new silicon and software design tool products and the continued market
acceptance of our current products. The success of these products is dependent on a variety of specific technical factors including:
•
•
•
•
•
•
•
successful product definition;
timely and efficient completion of product design;
timely and efficient implementation of wafer manufacturing and assembly processes;
product performance;
product cost;
the quality and reliability of the product; and
ease of use.
If, due to these or other factors, our new silicon and software products do not achieve market acceptance, or our current products do not maintain
market acceptance, we may not be able to manage production levels or accurately forecast the future revenue and operating results may be adversely affected.
We depend on distributors, primarily those that use the sell-through distribution model, to generate a majority of our sales and complete order
fulfillment. The failure of our distributors to sell our products and otherwise perform as expected could materially reduce our future sales.
We depend on our distribution partners to sell our products to end customers, generate a majority of our sales, complete
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order fulfillment and stock our products. Our distributors also help us provide technical support and other value-added services to end customers. Our sales
could be adversely affected if our distribution partners do not continue to effectively sell our products and provide related services.
We expect that the majority of our revenue in fiscal 2012 will be reported resale by our sell-through distributors. Our primary sell-through distributors,
Arrow Electronics, Inc. including Nu Horizons Electronics Corp., (a wholly owned subsidiary of Arrow Electronics, Inc. USA), Avnet, Inc. ("Avnet"), and
Weikeng (International and Industrial) Co. LTD made up approximately 53%, 49% and 34% of total revenue for fiscal years 2011, 2010 and 2009,
respectively. We depend on the timeliness and accuracy of these resale reports from our distributors; late or inaccurate resale reports could have a detrimental
effect on our ability to properly recognize revenue and our ability to predict future sales.
In addition, our distribution channels recently have experienced consolidation due to merger and acquisition activity in that business sector.
Consolidation may result in our distributors allocating fewer resources to the distribution and sale of our products, which could adversely affect our financial
results.
On December 31, 2011 our global franchise agreement with Avnet terminated. Revenue from Avnet made up approximately 17% of our total revenue
for both years ended December 31, 2011, and January 1, 2011. We intend to serve the Avnet end customers through a network that includes a global
distributor, regional distributors, manufacturer's representatives, and our direct sales team. If our end customers experience disruption in the supply of our
products, or if our distributors and representatives are unable to provide technical support and other value-added services at least at historical levels, we may
lose future sales and our financial results could be adversely affected.
At times, our sales are concentrated in a small number of distributors, which are in various international locations and of various financial strengths.
Financial difficulties, inability to access capital markets, or other reasons may affect our distributors' performance, which could materially harm our business
and our operating results.
Our success depends on our ability to rapidly develop and introduce new products. Failure to do so would have a material adverse effect on our
business and negatively impact our financial condition and results of operations.
The programmable logic market is characterized by rapid technology and product evolution on some of the most advanced technologies. Our success
depends on our ability to develop and introduce new products which compete effectively on the basis of price and performance and which address the markets
we serve. We continually design next generation products that enable us to offer our customers lower power, lower cost, and more innovative products to
maintain our competitive position. These new products typically are more technologically complex than their predecessors, and thus have increased potential
for delays in their introduction.
The success of new product introductions is dependent upon several factors, including timely completion and introduction of new product designs,
achievement of acceptable prices for wafer, package, assemble and test costs, yields and market acceptance. Our development of new products and our
customers’ decisions to design them into their systems can take as long as three years, depending upon the complexity of the device and the application.
Accordingly, new product development requires a long-term forecast of market trends and customer needs, and the successful introduction of our products
may be adversely affected by competing products or by technologies serving the markets addressed by our products. If we experience delays in the
introduction of new products, our operating results could be adversely affected.
In addition, new product introductions frequently depend on our development and implementation of new process technologies, and our growth will
depend in part upon the successful development and market acceptance of these process technologies. Our products require technically sophisticated sales and
marketing personnel to market these products successfully to customers. We are developing new products with lower power consumption, with smaller
feature sizes, the fabrication of which will be substantially more complex than our current products. If we are unable to design, develop, manufacture, market
and sell new products successfully, our operating results will be harmed. Our new product development, process development or execution to design and
bring to market products that offer lower power, lower cost with more innovation marketing and sales efforts may not be successful. Furthermore, our new
products may not achieve market acceptance and price expectations for our new products may not be achieved which could significantly harm our business
and may have an adverse effect on our financial condition or operating results.
We may be unable to assimilate and integrate the operations, personnel, technologies, products, and information systems of SiliconBlue Technologies
Ltd., APAC IC Layout Consultants, Inc., or future acquisitions, which may harm our business, financial condition or operating results.
One element of our business strategy includes expansion through the acquisition of businesses, assets, products or
14
technologies that allow us to complement our existing product offerings, expand our market coverage, increase our skilled engineering workforce or enhance
our technological capabilities.
On December 9, 2011, we acquired SiliconBlue Technologies Ltd., a Cayman Islands exempted company ("SiliconBlue") which put us in a unique
position in the mobile consumer segment of the programmable logic market. The purchase price, totaling $63.2 million was paid in cash. In addition, the
Company recorded Goodwill of $43.9 million in connection with the purchase of SiliconBlue.
The acquisition of SiliconBlue may result in revenue and gross margin fluctuations due to seasonality, increased operating expenses, inventory
valuation volatility and a more competitive pricing environment.
On July 15, 2011, we completed the purchase of Rise Technology Development Limited ("Rise"), a Hong Kong company, and its subsidiary, APAC IC
Layout Consultants, Inc. ("APAC IC"), a Manila, Philippines based company engaged in engineering layout and design services, for approximately $1.0
million, which includes all assets and liabilities of the entity. This acquisition of Rise and APAC IC is part of our effort to improve our research and
development and operations activities, reduce costs and streamline our supply chain for improved predictability and flexibility. In addition, the Company
recorded Goodwill of $0.9 million in connection with the purchase of Rise and APAC IC.
Acquisitions similar to SiliconBlue and APAC, or future acquisitions typically entail many risks and we may encounter difficulties in assimilating and
integrating the operations, personnel, technologies, products and information systems of the acquired companies or businesses. We may experience delays in
the timing and successful integration of an acquired company’s technologies and product development as a result of:
•
•
•
•
•
volume production;
unanticipated costs and expenditures;
changing relationships with customers;
suppliers and strategic partners; or,
contractual, intellectual property or employment issues.
In addition, key personnel of an acquired company may decide not to work for us. The acquisition of another company or its products and technologies
may also require us to enter into a geographic or business market in which we have little or no prior experience. These challenges could disrupt our ongoing
business, distract our management and employees, harm our reputation and increase our expenses. These challenges are magnified as the size of the
acquisition increases.
Acquisitions typically require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, and the
recording and later amortization of amounts related to certain purchased intangible assets, any of which items could negatively impact our results of
operations. In addition, we have or may record goodwill in connection with an acquisition and incur goodwill impairment charges in the future. Any of these
charges could cause the price of our common stock to decline.
Acquisitions or asset purchases made entirely or partially for cash may reduce our cash reserves. We may seek to obtain additional cash to fund an
acquisition by selling equity or debt securities. Any issuance of equity or convertible debt securities may be dilutive to our existing stockholders.
We cannot assure you that we will be able to consummate any future acquisitions or that we will realize any anticipated benefits from any of our
historic or future acquisitions. We may not be able to find suitable acquisition opportunities that are available at attractive valuations, if at all. Even if we do
find suitable acquisition opportunities, we may not be able to consummate the acquisitions on commercially acceptable terms, and any decline in the price of
our common stock may make it significantly more difficult and expensive to initiate or consummate additional acquisitions.
We are required under U.S. GAAP to test goodwill for possible impairment on an annual basis and at any other time that circumstances arise indicating
the carrying value may not be recoverable. At December 31, 2011, we had $44.8 million of goodwill. We completed our annual test of goodwill impairment
in the fourth quarter of 2011 and concluded that we did not have any impairment at that time. There is no assurance that future impairment tests will indicate
that Goodwill will be deemed recoverable. The success of any acquisition, including Rise and APAC IC and SiliconBlue, requires the integration of products,
technologies, personnel and administrative resources, and could result in departures of key personnel, loss of key customers, distributors or vendors, equity
dilution or acquisition of unknown liabilities. Furthermore, our ability to predict seasonality, end customer demand, and our customers' end customer demand
for SiliconBlue products is limited. As a result, an acquisition similar to SiliconBlue and APAC, or future acquisitions could disrupt our operations and may
have an adverse effect on our
15
business, financial condition or operating results.
A downturn in the communications equipment end market could cause a reduction in demand for our products and limit our ability to maintain
revenue levels and operating results.
Historically the largest percentage of our revenue (approximately 44% of fiscal 2011 revenue) has been derived from customers participating in the
communications equipment end market. In addition, during fiscal year 2009, the Company participated in the China 3G telecommunications network build-
out by selling products used by two large telecommunication equipment providers, which accounted for a combined 19% of our aggregate revenue. This is
primarily due to strength in the wireless portion of the communications end market. For the 2011 fiscal year, the same two large telecommunication
equipment providers accounted for a combined 12% of revenue. In the past, a general weakening in demand for programmable logic products from customers
in the communications end market has adversely affected our revenue. In addition, telecommunication equipment providers are building networks for 4G
networks in which we compete. Any deterioration in the communication end market, our ability to compete in future telecommunications solutions (e.g. 4G
networks) or our end customers' reduction in capital spending to support this end market could lead to a reduction in demand for our products which could
adversely affect our revenue and results of operations.
The consumer end market is characterized by rapid product obsolescence and requires that we have the right products at the right time for our
customers to fulfill demand for products in the consumer end market. If we are unable to forecast demand for our products, or we don't have
products to ship at the right time, our financial condition and results may be adversely affected.
Our revenue from the consumer end market consists primarily of revenue from our products designed and used in a broad range of products including
flat panel displays, DVD players and recorders, digital cameras and camcorders, gaming consoles, set-top boxes, and smart handheld devices is characterized
by rapidly changing market requirements and products. Our success in this market will depend principally on our ability to:
•
•
•
•
meet the market windows for consumer products;
to predict technology and market trends;
to develop products on a timely basis;
avoid cancellations or delay of products;
Any of the foregoing problems could materially and adversely affect our business, financial condition, and results of operations.
Global economic conditions and uncertainty, as well as the highly cyclical nature of the semiconductor industry, could adversely affect our revenue,
gross margin and expenses, collectability of accounts receivable, supplier relationships, and ability to access capital markets.
Our revenue and gross margin can fluctuate significantly due to downturns in the general economy or the semiconductor industry. These downturns are
often severe and prolonged and can result in significant reductions in the demand for PLD and FPGA products in markets in which we compete. Global
economic weakness or cyclical downturns have previously resulted from periods of economic recession, reduced access to credit markets, weakening or
strengthening of the U.S. dollar relative to other currencies, weak end-user demand, excess industry capacity, political instability, government fiscal policy,
sovereign debt, terrorist activity, military actions, or general reductions in inventory levels by customers, and may cause a decrease in revenue, gross margin,
earnings or growth rates and problems with our ability to manage inventory levels and collect customer receivables. In addition, our relationships with our
suppliers and our ability to access capital markets could be adversely affected. In addition, customer financial difficulties have previously resulted and could
in the future result in, increases in bad debt write-offs and additions to reserves in our accounts receivable. Global economic and cyclical downturns also may
lead to restructuring actions and associated expenses. Uncertainty about future economic conditions makes it difficult for us to forecast operating results and
to make decisions about future investments. Any or all of these factors could adversely affect our financial condition and results of operations in the future.
Because of our international business and operations, we are vulnerable to the economic conditions and tax policies of various jurisdictions and other
business risks associated with conducting operations outside of the U.S. which could have a material adverse effect on our business and negatively
impact our financial condition and results of operations.
In addition to our U.S. operations, we have significant international operations, including foreign sales offices to support our international customers
and distributors, our operational centers in the Philippines and Singapore, and our research and
16
development sites in China, India and the Philippines. In connection with the restructuring we announced in 2011 our international operations grew as we
relocated certain operational, design, and administrative functions outside the U.S. All of these activities are subject to the uncertainties associated with
international business operations, including tax laws and regulations, trade barriers, economic sanctions, import and export regulations, duties and tariffs and
other trade restrictions, changes in trade policies, foreign governmental regulations, potential vulnerability of and reduced protection for IP, longer receivable
collection periods and disruptions or delays in production or shipments, any of which could have a material adverse effect on our business, financial condition
and/or operating results. Moreover, our financial condition and results of operations could be affected in the event of political conflicts or economic crises in
countries where our main wafer providers, end customers and contract manufacturers who provide assembly and test services worldwide, are located. Adverse
change to the circumstances or conditions of our international business operations could have a material adverse effect on our business.
We may not be able to compete successfully in the highly competitive semiconductor industry.
The semiconductor industry is intensely competitive and many of our direct and indirect competitors have substantially greater financial, technological,
manufacturing, marketing and sales resources. The current level of competition in the programmable logic market is high and may increase in the future. We
currently compete directly with companies that have licensed our technology or have developed similar products, including Altera Corporation, and Xilinx,
Inc. We also compete indirectly with numerous semiconductor companies that offer products based on alternative solutions such as ASIC, ASSP,
microcontroller, analog, and digital signal processing (DSP) technologies. These direct and indirect competitors are established, multinational semiconductor
companies as well as emerging companies. If we are unable to compete successfully in this environment, our future results will be adversely affected.
Our revenue and gross margin are subject to fluctuations, including quarter over quarter, due to many factors, which make our future financial
results difficult to predict.
Our operating results have fluctuated in the past and may continue to fluctuate, including quarter over quarter fluctuations. Consequently, our operating
results may fail to meet the expectations of analysts and investors. Our revenue and gross margin may fluctuate due to product mix, seasonality, inventory
fluctuations at our distributor end customers, market acceptance of new products, competitive pricing dynamics, geographical and market-segment pricing
strategies, wafer, package and assembly prices and yields, overhead absorption, as well as provisions for warranty and excess and obsolete inventory.
We have limited ability to foresee changes or the pace of change in sales by product classification. In the past we have also experienced periods of
decline in sales of our mainstream and mature products. If, in any period, sales of our mature and mainstream products decline and sales of new products do
not increase at a rate that is sufficient to counteract this decline, then our total revenue would decline. In addition, as mature products typically generate a
higher gross margin than mainstream or new products, a faster than normal decline in sales of mature products could adversely impact our gross margins.
We also have experienced, and may experience in the future, gross margin declines in certain products or end markets, reflecting the effect of
competitive pricing pressures, inventory write-downs, charges associated with the cancellation of planned production lines, costs associated with our
customers' unplanned demand to build inventory, and increases in component and manufacturing costs resulting from higher labor and material costs borne by
our manufacturers and suppliers that, as a result of competitive pricing pressures or other factors, we are unable to pass on to our customers.
Further, our ability to predict seasonality, end customer demand, our customers' end customer demand, and resale of our products by our sell-through
distributors is limited. Typically, a significant amount of our revenue comes from “turns orders,” which are orders placed and filled within the same period.
By definition, turns orders are not captured in a backlog measurement at the beginning of a quarter. Accordingly, we cannot use backlog as a reliable measure
for predicting revenue.
Foreign sales, primarily in the Asia Pacific region, account for the majority of our revenue and may decline in the future due to economic and
governmental uncertainties.
We derive the majority of our revenue from sales outside of the United States. Accordingly, if we experience a decline in foreign sales, our operating
results could be adversely affected. Our foreign sales are subject to numerous risks, including:
•
•
•
•
•
changes in local economic conditions;
exchange rate volatility;
governmental stimulus packages, controls and trade restrictions;
export license requirements and restrictions on the use of technology;
political instability, war, terrorism or pandemic disease;
17
•
•
•
•
•
•
•
changes in tax rates, tariffs or freight rates;
reduced protection for intellectual property rights in some countries;
longer receivable collection periods;
natural or man-made disasters in the countries where we sell our products;
interruptions in transportation;
different labor regulations; and
difficulties in staffing and managing foreign sales offices.
Product quality problems could lead to reduced revenue, gross margins and net income.
We generally warrant our products for varying lengths of time against non-conformance to our specifications and certain other defects. Because our
products, including hardware, software and intellectual property cores, are highly complex and increasingly incorporate advanced technology, our quality
assurance programs may not detect all defects, whether manufacturing defects in individual products or systematic defects that could affect numerous
shipments. Inability to detect a defect could result in increased engineering expenses necessary to remediate the defect and also result in increased costs due to
inventory impairment charges. On occasion we have also repaired or replaced certain components or made software fixes or refunded the purchase price or
license fee paid by our customers due to product or software defects. If there are material increases in product defects, the costs to remediate such defects, net
of reimbursed amounts from our vendors, if any, or to resolve warranty claims compared with our historical experience, may adversely affect our revenue,
gross margins and net income.
We may experience a disruption of our business activities related to the successful execution of the 2011 restructuring plan.
During 2011, our Board of Directors adopted a restructuring plan (the “2011 restructuring plan”) to more efficiently implement our product
development strategy and to better align our corporate strategy with the our sales resources to reduce development and operational costs and to streamline our
supply chain for improved predictability and flexibility. Part of the 2011 restructuring plan includes extending silicon development capabilities and planning
and logistics activities by locating personnel in Manila, Philippines. We expect this to initially increase certain supply chain and research and development
costs until we complete the transition. During the third quarter of 2011, we incurred restructuring costs related to outsourcing certain non-core IT services. We
may experience disruption in our business activities as we execute our 2011 restructuring plan, and our relationships with employees, customers and suppliers
could be adversely affected by these disruptions. We expect to complete the 2011 restructuring plan by the first quarter of 2012. If we are unable to
successfully complete our 2011 restructuring plan, our future results will be adversely affected.
If we are unable to adequately protect our intellectual property rights, our financial results and competitive position may suffer.
Our success depends in part on our proprietary technology. We intend to continue to protect our proprietary technology through patents, copyrights and
trade secrets. Despite this intention, we may not be successful in achieving adequate protection. Claims allowed on any of our patents may not be sufficiently
broad to protect our technology. Patents issued to us also may be challenged, invalidated or circumvented. Finally, our competitors may develop competing
technologies. If any of these events occur, our competitive position could be adversely affected.
Companies in the semiconductor industry vigorously pursue and defend their intellectual property rights. We may be forced to pursue legal action to
protect or enforce our intellectual property rights. If we become involved in protracted intellectual property disputes or litigation, we may be forced to use
substantial financial and management resources, which could have an adverse effect on our operating results.
We face a number of patent infringement claims and may be subject to other intellectual property disputes, which could require us to spend a
significant sum to defend and could cause losses.
Our industry is characterized by increasingly frequent claims regarding patents and other intellectual property rights of others. We have been, and from
time to time expect to be, notified of claims that we are infringing upon the intellectual property rights of others. For instance, we are exposed to certain
asserted and unasserted potential claims, including the pending patent litigation brought against us by Lizy K. John, and Intellectual Ventures I LLC and
Intellectual Ventures II LLC as described in Item 3. Legal Proceedings, below. If any third party makes a valid claim against us, we could face significant
liability and could be required to make material changes to our products and processes. In response to claims of infringement, we have incurred legal costs
and committed management resources, and there can be no assurance that we would be successful
18
in our defense against the claims. Any such litigation could result in a substantial diversion of management and financial resources, including legal costs
incurred to defend claims, which by itself could have a material adverse effect on our financial condition and operating results. We may seek licenses under
patents that we are alleged to be infringing; however, we may not be able to obtain a license on favorable terms, or at all, which could have an adverse effect
on our operating results.
If our foundry partners and assembly and test contractors experience quality or yield problems, we may face a shortage of products available for
sale and our revenue or gross margin could be adversely affected.
We depend on our foundry partners to deliver high quality silicon wafers with acceptable yields in a timely manner consistent with our safety stock
inventory level and production plan. In addition, we rely on assembly and test contractors to assemble and test our devices with acceptable quality and yield
levels. As is common in our industry, we have experienced wafer and device yield problems, quality or delivery delays in the past.
The reliable manufacture of silicon wafers and the assembly and test of high performance programmable logic devices are complicated and technically
demanding process requiring:
•
•
•
•
•
•
•
a high degree of technical skill;
state-of-the-art equipment;
the availability of certain basic materials and supplies, such as chemicals, gases, polysilicon, silicon wafers, ultra-pure metals, gold and
copper;
our ability to successfully replace gold with copper for assembled devices beginning in the second half of 2012;
the absence of defects in production wafers and assembly and packaging manufacturing;
the elimination of minute impurities and errors in each step of the fabrication, assembly and test process; and
effective cooperation between the foundry partners, and assembly and test contractors and us.
As a result, our foundry partners and or assembly and test contractors may periodically experience difficulties in achieving acceptable quality and yield
levels in manufacturing, assembling and testing our products. If we experience prolonged quality or yield problems in the future and we do not have adequate
levels of safety stock inventory on-hand, our operating results could be adversely affected.
Our wafer supply, which is sourced entirely from the Asia Pacific region, could be interrupted or reduced or, could experience increased costs, which
may result in a shortage of products available for sale or increased costs.
We do not internally manufacture finished silicon wafers and most of our products, including all of our newest products, are manufactured by a sole
source. Currently, our silicon wafers are manufactured by Fujitsu in Japan, Seiko Epson Corporation in Japan, United Microelectronics Corporation in
Taiwan, Taiwan Semiconductor Manufacturing Company Ltd. in Taiwan, and GLOBALFOUNDRIES in Singapore. If any of our current or future foundry
partners significantly interrupts or reduces our wafer supply, increases wafer costs, or if any of our relationships with our partner suppliers is terminated, our
operating results could be adversely affected.
At present, we believe that our supply commitments are adequate. However, these existing supply commitments may not be sufficient for us to satisfy
customer demand in future periods. Additionally, notwithstanding our supply commitments, we may still have difficulty in obtaining wafer deliveries
consistent with the supply commitments. We negotiate wafer prices and supply commitments from our suppliers on at least an annual basis. If any of our
foundry partners were to reduce its supply commitment or increase its wafer prices, and we cannot find alternative sources of wafer supply, our operating
results could be adversely affected.
Many other factors that could disrupt our wafer supply are beyond our control. Since worldwide manufacturing capacity for silicon wafers is limited
and inelastic, we could be harmed by significant industry-wide increases in overall wafer demand or interruptions in wafer supply, or periods of increased
wafer prices. During periods of economic uncertainty, our foundry partners may reduce or restructure their operations which may also affect the availability
and price of wafers, and adversely affect our operating results. Additionally, a future disruption of any of our foundry partners’ foundry operations as a result
of a fire, earthquake, act of terrorism, political unrest, governmental uncertainty, war, disease or other natural disaster or catastrophic event could disrupt our
wafer supply and could adversely affect our operating results.
Our supply of assembled and tested products, all from the Asia Pacific region, could be interrupted, could experience increased costs or could be
reduced, which may result in a shortage of products available for sale or increased costs.
19
We do not assemble our finished products or perform all testing of our products. Our finished silicon wafers are assembled and tested by independent
contractors located in Indonesia, Malaysia, the Philippines, Singapore and South Korea. Economic, financial, social and political conditions in Asia have
historically been volatile. Financial difficulties, the effects of currency fluctuation, governmental actions or restrictions, prolonged work stoppages, political
unrest, war, natural disaster, cost of converting to more copper content, cost of assembly materials such as gold and copper, disease or any other difficulties
experienced by our suppliers may disrupt our supply and could adversely affect our operating results. In addition, certain provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection Act may soon require us to report on “conflict materials” used in our products and the due diligence plan we put in
place to track whether such minerals originate from the Democratic Republic of Congo and adjoining countries. The implementation of these requirements
could affect the sourcing and availability of minerals used in certain of our products.
In the past, we have experienced delays in obtaining assembled and tested products and in securing assembly and test capacity commitments from our
suppliers. At present, we anticipate that our assembly and test capacity commitments are adequate; however, these existing commitments may not be
sufficient for us to satisfy customer demand in future periods. Additionally, notwithstanding our assembly and test capacity commitments, we may still have
difficulty in obtaining deliveries of finished products consistent with the capacity commitments. We negotiate assembly and test prices and capacity
commitments from our contractors on a periodic basis. If any of our assembly or test contractors were to reduce its capacity commitment or increase its prices,
and we cannot find alternative sources, our operating results could be adversely affected.
Many other factors that could disrupt our supply of finished products are beyond our control. Because worldwide capacity for assembly and testing of
semiconductor products is limited and inelastic, we could be harmed by significant industry-wide increases in overall demand or interruptions in supply. The
assembly of complex packages requires a consistent supply of a variety of raw materials such as substrates, lead frames, gold, copper and mold compound. A
significant industry-wide increase in demand, or interruptions in the supply of these materials to our assembly or test contractors, could adversely affect our
operating results. Additionally, a future disruption of any of our assembly or test contractors’ operations as a result of a fire, earthquake, flooding, act of
terrorism, political unrest, governmental uncertainty, war, disease or other natural disaster or catastrophic event could disrupt our supply of assembled and
tested devices and could adversely affect our operating results.
In addition, our quarterly revenue levels may be affected to a significant extent by our ability to match inventory and current production mix with the
product mix required to fulfill orders. The large number of individual parts we sell and the large number of customers for our products, combined with
limitations on our and our customers’ ability to forecast orders accurately and our relatively lengthy manufacturing cycles, may make it difficult to achieve a
match of inventory on hand, production units, and shippable orders sufficient to realize quarterly or annual revenue projections.
We rely on information technology systems to manage our business. Failure of these systems to function properly or our failure to control
unauthorized access to our systems may cause operating or reporting disruptions. The failure of these systems to function properly could result in
business disruption.
We rely in part on various information technology ("IT") systems to manage our operations, including financial reporting, and we regularly make
changes to improve them as necessary. Consequently, we periodically implement new, or enhance existing, operational and IT systems, procedures and
controls. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, could harm our ability to
record and report financial and management information on a timely and accurate basis. These systems are also subject to power and telecommunication
outages or other general system failures. Failure of our IT systems or difficulties in managing them could result in business disruption. While we have not yet
experienced any significant disruptions to our business, we may encounter some unexpected aspects of the conversion, outsourcing, or new systems
implementations that cause difficulty in the new reporting system which could adversely affect our business, results of operations and cash flows.
Our legal organizational structure is complex, which could result in unanticipated unfavorable tax or other consequences including our ability to
maintain or forecast a competitive corporate tax rate, which could have an adverse effect on our financial condition and results of operations.
On December 31, 2011, we began to implement a global tax structure to more effectively align our corporate structure and transaction flows with our
geographic business operations including responsibility for sales and purchasing activities. We have numerous sales offices in foreign locations, operational
centers in the Philippines and Singapore, and research and development sites in China, India and the Philippines. Revenues from foreign regions account for
over 80% of all revenue. In addition, the large majority of our suppliers are located in the Asia Pacific region. Based on these factors we have created new and
realigned existing legal entities, intercompany sales of rights to intellectual property, inventory and fixed assets across different tax jurisdictions, and
implemented cost-sharing and intellectual property licensing and royalty agreements between
20
our U.S. and low cost tax jurisdictions. We currently operate legal entities in countries where we conduct manufacturing, design, and sales operations around
the world. In some countries, we maintain multiple entities for tax or other purposes. Changes in tax laws, regulations, and related interpretations in the
countries in which we operate may impact the taxes we pay or tax provision we record, which could adversely affect our results of operations.
We cannot give any assurance as to what taxes we pay or the ability to estimate our future effective tax rate because of, among other things, uncertainty
regarding the tax policies of the jurisdictions where we operate. As a result, our actual effective tax rate, or taxes paid may vary materially from our
expectations. Changes in tax laws, regulations, and related interpretations in the countries in which we operate may have an adverse effect on our business,
financial condition or operating results.
If our independent software and hardware developers and suppliers are unable or unwilling to meet our contractual requirements, we may face a
delay in the introduction of new products, a shortage of new or existing products, or a lack of support for new or existing products.
We rely on independent software and hardware developers for the design, development, supply and support of intellectual property cores, design and
development software, and certain elements of evaluation boards. As a result, failure or significant delay to complete software or hardware under contract to
deliver could disrupt the release of or introduction of new or existing products, which might be detrimental to the capability of our new products to win
designs. Any of these delays or inability to complete the design or development could have an adverse effect on our business, financial condition, or operating
results.
We depend upon a third party to provide inventory management, order fulfillment, and direct sales logistics.
We rely on a third party vendor located in Singapore to provide cost-effective and efficient supply chain services. Among other activities, these
outsourced services relate to direct sales logistics, including order fulfillment, inventory management and warehousing, and distribution of inventory to third
party distributors. If our third party supply chain partner were to discontinue services for us or its operations are disrupted as a result of a fire, earthquake, act
of terrorism, political unrest, governmental uncertainty, war, disease or other natural disaster or catastrophic event, our ability to fulfill direct sales orders and
distribute inventory timely, cost effectively, or at all, would be hindered, which could adversely affect our business.
Uncertainties involving the ordering and shipment of our products could materially adversely affect us.
We typically sell our products pursuant to individual purchase orders. We generally do not have long-term supply arrangements with our customers or
minimum purchase requirements except that orders generally must be for standard pack quantities. Generally, our customers may cancel orders more than 30
days prior to shipment without incurring significant fees. We base our inventory levels on customers' estimates of demand for their products, which may not
accurately predict the quantity or type of our products that our customers will want in the future or ultimately end up purchasing. Our ability to forecast
demand is even further complicated when we sell indirectly through distributors, as our forecasts for demand are then based on estimates provided by multiple
parties. Moreover, consumer end-markets are characterized by short product lifecycles, which can lead to rapid obsolescence and price erosion. In addition,
our customers may change their inventory practices on short notice for any reason. We may build inventories during periods of anticipated growth, and the
cancellation or deferral of product orders or overproduction due to failure of anticipated orders to materialize, could result in excess or obsolete inventory,
which could result in write-downs of inventory and an adverse effect on gross margins. Factors that may result in excess or obsolete inventory, which could
result in write-downs of the value of our inventory, a reduction in the average selling price, and/or a reduction in our gross margin include:
•
•
•
a sudden and significant decrease in demand for our products;
a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements;
a failure to accurately estimate customer demand for our older products as our new products are introduced.
Because market conditions are uncertain, these and other factors could materially adversely affect our business.
We may have failed to adequately insure against certain risks, and, as a result, our financial condition and results may be adversely affected.
We carry insurance customary for companies in our industry, including, but not limited to, liability, property and casualty, worker's compensation and
business interruption insurance. We also insure our employees for basic medical expenses. In
21
addition, we have insurance contracts that provide director and officer liability coverage for our directors and officers. Other than the specific areas mentioned
above, we are self-insured with respect to most other risks and exposures, and the insurance we carry in many cases is subject to a significant policy
deductible or other limitation before coverage applies. Based on management's assessment and judgment, we have determined that it is more cost effective to
self-insure against certain risks than to incur the insurance premium costs. The risks and exposures for which we self-insure include, but are not limited to,
natural disasters, product defects, political risk, theft, patent infringement and some employment practice matters. Should there be a catastrophic loss due to an
uninsured event such as an earthquake or a loss due to adverse occurrences in any area in which we are self-insured, our financial condition or operating
results could be adversely affected.
22
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters consists of land and 189,000 square feet of buildings we own in Hillsboro, Oregon. A portion of undeveloped land near
the corporate headquarters is currently owned by the Company and listed for sale. In Shanghai, China, we own an 18,869 square foot research and
development facility and lease an additional 6,481 square foot research and development facility. We currently lease a 66,350 square foot research and
development facility in San Jose, California through December 2013. We also currently lease a 6,334 square foot research and development facility in Illinois
through August 2012, and an 18,114 square foot research and development facility in Pennsylvania through September 2014. In addition, we lease a 4,200
square foot facility in Singapore, with a term through February 2013, primarily to support supply chain activities. We lease a 5,296 square foot research and
development facility in Bangalore, India with a term through October 2012. In December 2011, we completed a lease agreement for a 17,114 square foot
research and development facility in Manila, Philippines with a term lease through December 2016. As the result of our acquisition of SiliconBlue we
assumed a lease for 11,863 square feet in Santa Clara, California, which terminates on March 31, 2012. We also lease office facilities in multiple metropolitan
locations for our domestic and international sales staff. We believe that our existing facilities are suitable and adequate for our current and foreseeable future
needs.
Additionally, we leased a 25,000 square foot facility in Austin, Texas through December 2011. In December 2005, we ceased our research and
development operations in this location, and have subleased the Austin facility through the end of 2011.
Item 3. Legal Proceedings.
On June 11, 2007, a patent infringement lawsuit was filed by Lizy K. John (“John”) against Lattice Semiconductor Corporation in the U.S. District
Court for the Eastern District of Texas, Marshall Division. John seeks an injunction, unspecified damages, and attorneys' fees and expenses. The Company
filed a request for re-examination of the patent by the United States Patent and Trademark Office (“PTO”), which was granted by the PTO, and the re-
examination has concluded. The litigation was stayed pending the results of the re-examination. The stay was lifted on January 1, 2012, but the court has not
yet conducted a scheduling conference or set a trial date. At this stage of the proceedings, we do not have an estimate of the likelihood or the amount of any
potential exposure to us. The Company believes it possesses defenses to these claims and intends to vigorously defend this litigation.
On December 8, 2010, Intellectual Ventures I LLC and Intellectual Ventures II LLC (“Intellectual Ventures”) filed a patent infringement lawsuit
against the Company, Altera Corporation and Microsemi Corporation in the U.S. District Court for the District of Delaware, seeking unspecified damages. At
this stage of the proceedings, we do not have an estimate of the likelihood or the amount of any potential exposure to us. The Company believes it possess
defenses to these claims and intends to vigorously defend this litigation.
We are also exposed to certain other asserted and unasserted potential claims. There can be no assurance that, with respect to potential claims made
against us, we could resolve such claims under terms and conditions that would not have a material adverse effect on our business, our liquidity or our
financial results.
Item 4. Mine Safety Disclosures.
Not applicable.
23
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters & Issuer Purchases of Equity Securities.
Market Information
As of January 1, 2011, our common stock is traded on the NASDAQ Global Select Market under the symbol “LSCC”. For 2010 our stock traded on
the NASDAQ Global Market. The following table sets forth the low and high intraday sale prices for our common stock for the last two fiscal years, as
reported by NASDAQ.
2011:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
Low
High
$
$
5.51
5.76
4.70
4.84
2.41
3.69
4.11
4.24
7.38
7.19
6.79
7.18
3.80
5.97
6.02
6.17
Holders
As of March 7, 2012, we had approximately 378 stockholders of record.
Dividends
The payment of dividends on our common stock is within the discretion of our Board of Directors. We intend to retain earnings to finance the
growth of our business. We have never paid cash dividends.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities (most recent quarter only)
Period
Total Number of
Shares Purchased
Average Price paid
Per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Program
Maximum Dollar Value of Shares That
May Yet Be Purchased Under the
Program
288,300
$
5.71
288,300
$
—
October 2,
2011 through
October 28,
2011
On February 24, 2012, the Company's Board of Directors approved a stock repurchase program pursuant to which up to $20.0 million of
outstanding common stock may be repurchased from time to time. The duration of the repurchase program is twelve months. In connection with this stock
repurchase program, the Company entered into a 10b5-1 plan. All repurchases will be open market transactions and funded from available working capital.
On October 21, 2010, the Company's Board of Directors approved a stock repurchase program pursuant to which up to $20.0 million of outstanding
common stock could have been repurchased. The duration of the repurchase program was twelve months from adoption. In connection with this stock
repurchase program, the Company entered into a 10b5-1 plan. During fiscal 2011, approximately 2.4 million shares were repurchased for $14.2
million. During fiscal 2010, approximately 0.4
24
million shares were repurchased for $2.0 million. All shares repurchased under this program were retired by December 31, 2011. All repurchases were open
market transactions and were funded from available working capital. The program ended by its terms in October 2011.
On December 13, 2008, our Board of Directors approved a stock repurchase program pursuant to which up to $20.0 million of outstanding common
stock could have been repurchased. In connection with the stock repurchase program, we entered into a 10b5-1 plan. The duration of the repurchase program
was twelve months from adoption, and expired on December 13, 2009. During fiscal 2009, approximately 263,000 shares were repurchased for $0.3 million,
all of which were open market transactions and were funded from available working capital. All shares repurchased under this program were retired in 2010.
Comparison of Total Cumulative Stockholder Return
The following graph shows the five-year comparison of cumulative stockholder return on our common stock, the Standard and Poor's (“S&P”) 500
Index and the Philadelphia Semiconductor Index (“PHLX”) from December 2006 through December 2011. Cumulative stockholder return assumes $100
invested at the beginning of the period in our common stock, the S&P and PHLX. Historical stock price performance is not necessarily indicative of future
stock price performance.
Lattice Cumulative Stockholder Return
25
Item 6. Selected Financial Data.
STATEMENT OF OPERATIONS DATA:
Revenue
Costs and expenses:
Cost of products sold
Research and development
Selling, general and administrative
Impairment loss on goodwill (1)
Acquisition related and Amortization of intangible assets
Restructuring charges
Income (loss) from operations
Other income (expense), net
Income (loss) before income taxes
Benefit (provision) for income taxes (2)
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
Shares used in per share calculations:
Basic
Diluted
BALANCE SHEET DATA:
Cash, cash equivalents and Short-term marketable securities
Total assets
Convertible notes
Stockholders' equity
_______________
December 31,
2011
January 1,
2011
Year Ended
January 2,
2010
January 3,
2009
December 29,
2007
(in thousands, except per share data)
$
318,366
$
297,768 $
194,420 $
222,262 $
228,709
129,769
71,855
68,838
—
536
6,079
117,943
60,326
64,359
—
—
11
90,077
56,133
52,545
—
228
3,689
102,831
103,157
68,610
58,680
82,977
58,485
—
223,556
5,587
6,789
9,832
2,372
277,077
242,639
202,672
242,497
480,379
41,289
1,434
42,723
35,509
78,232
0.66
0.65
$
$
$
55,129
2,474
57,603
(531)
(8,252)
1,812
(6,440)
(517)
(20,235)
(17,791)
(38,026)
(180)
(251,670)
12,540
(239,130)
(686)
57,072 $
(6,957) $
(38,206) $
(239,816)
0.49 $
0.48 $
(0.06) $
(0.06) $
(0.33) $
(0.33) $
(2.09)
(2.09)
$
$
$
117,875
121,139
116,726
115,384
115,291
120,143
115,384
115,291
114,915
114,915
At
December 31,
2011
January 1,
2011
January 2,
2010
January 3,
2009
December 29,
2007
(in thousands)
$
$
$
$
210,134
467,924
$
$
238,220 $
164,540 $
65,909 $
85,063
377,687 $
296,557 $
291,936 $
376,285
— $
— $
— $
— $
40,000
393,561
$
318,722 $
253,360 $
254,939 $
286,232
(1) At December 29, 2007, the estimated fair value of the Company was below book value. Therefore, the Company performed an impairment test
on goodwill in accordance with ASC 350. We calculated the impairment loss based on an allocation of the fair value of the Company's equity to the fair value
of the Company's assets and liabilities in a manner similar to a purchase price allocation in a business combination. Fair value was based on two primary
valuation methodologies: the income approach, which used the discounted cash flow method, and the market approach, which used the market capitalization
method. In the allocation, goodwill was determined to have no implied fair value, and, as a result, goodwill related to the acquisition of Vantis Corporation on
June 15, 1999, the acquisition of Integrated Intellectual Properties, Inc. on March 16, 2001, and the acquisition of the FPGA business of Agere Systems, Inc.
on January 18, 2002 totaling $223.6 million was written off and recorded as an Impairment loss on goodwill. As a result, we no longer have goodwill related
to these acquisitions recorded on our Consolidated Balance Sheets.
(2) On December 31, 2011, we began to implement a global tax structure to more effectively align the Company's
26
corporate structure and transaction flows with the Company's geographic business operations including responsibility for sales and purchasing activities. We
have numerous sales offices in foreign locations, operational centers in the Philippines and Singapore, and research and development sites in China, India and
the Philippines. Revenues from non-Domestic regions account for over 80% of all revenue. In addition, the large majority of our suppliers are located in the
Asia Pacific region. Based on these factors we have created new and realigned existing legal entities, intercompany sales of rights to intellectual property,
inventory and fixed assets across different tax jurisdictions, and implemented cost-sharing and intellectual property licensing and royalty agreements between
our U.S. and low cost tax jurisdictions. These actions created a gain for tax purposes, for which we recorded a $76.8 million tax provision in the fourth quarter
of fiscal 2011. This provision was fully offset by the release of valuation allowance on deferred tax assets of $76.8 million recorded as a tax benefit during the
fourth quarter of fiscal 2011. We expect that the global tax structure will be completed during the first quarter of 2012 upon the intercompany sale of
inventory and fixed assets, and we expect to record approximately $9.7 million in additional income tax provision during the first quarter of fiscal 2012.
During the fourth quarter of 2011, we also concluded that it was more likely than not that we would be able to realize the benefit of a portion of our
remaining deferred tax assets. We based this conclusion on improved operating results over the past two years and our expectations about generating taxable
income in the foreseeable future including the implementation of a global tax structure discussed above. Based on our assessment regarding the potential to
realize deferred tax assets, we reversed additional valuation allowance, which when offset by the provision recorded related to our new global tax structure,
resulted in an income tax benefit of $35.2 million. We exercised significant judgment and considered estimates about our ability to generate revenues, gross
profits, operating income and taxable income in future periods under our new tax structure in reaching this decision.
27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Lattice Semiconductor Corporation (“Lattice” or the “Company”) designs, develops and markets programmable logic products and related
software. Programmable logic products are widely used semiconductor components that can be configured by end customers as specific logic circuits,
enabling shorter design cycle times and reduced development costs. Our end customers are primarily original equipment manufacturers (“OEMs”) in the
communications, computing, consumer, industrial, military, automotive, and medical end markets. Within the programmable logic market there are two
groups of products - programmable logic devices (“PLD”) and field programmable gate arrays (“FPGA”) - each representing a distinct silicon architectural
approach. Products based on the two alternative programmable logic architectures are generally optimal for different types of logic functions, although many
logic functions can be implemented using either architecture. We believe that a substantial portion of programmable logic customers utilize both PLD and
FPGA architectures.
Critical Accounting Policies and 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. A description of our critical accounting policies follows.
Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and classification of assets, such as marketable securities, accounts receivable, inventory,
auction rate securities, goodwill (including the assessment of reporting unit), intangible assets, deferred income taxes and liabilities, such as accrued liabilities
(including restructuring charges and bonus arrangements), income taxes and deferred income and allowances on sales to sell-through distributors, disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the fiscal periods
presented. Actual results could differ from those estimates.
Revenue Recognition and Deferred Income. Revenue from sales to customers is recognized upon shipment, or in the case of sales by our sell-
through distributors, at the time of reported resale, provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, title has
transferred, collection of resulting receivables is reasonably assured, there are no customer remaining acceptance requirements and no remaining significant
obligations. We sell our products directly to end customers or through a network of independent manufacturers' representatives and indirectly through a
network of independent sell-in and sell-through distributors. Distributors provide us periodic data regarding the product, price, quantity, and end customer
when products are resold as well as the quantities of our products they still have in stock. We must use estimates and apply judgment to reconcile sell-through
distributors' reported inventories to their activities. Any error in our judgment could lead to inaccurate reporting of our Revenue, Cost of products sold,
Deferred income and allowances on sales to sell-through distributors, and Net income (loss).
At the time of shipment to a sell-through distributor we invoice at published list price. The final price is set at the time of resale and is determined
in accordance with a distributor price agreement. Invoices are recorded in Accounts receivable, net with a corresponding credit to Deferred income and
allowances on sales to sell-though distributors and inventory is credited from Inventories with a corresponding charge to Deferred income and allowances on
sales to sell-through distributors. At the time of shipment to a sell-through distributor amounts are invoiced at published list price. The final price is set at the
time of resale and is determined in accordance with a distributor price agreement. Amounts invoiced are recorded in Accounts receivable, net and inventory is
transferred from Inventories to Deferred income and allowances on sales to sell-through distributors. Revenue and cost of products sold to sell-through
distributors are deferred until either the product is resold by the distributor or, in certain cases, return privileges terminate, at which time Revenue and Cost of
products sold are reflected in Net income (loss).
The components of Deferred income and allowances on sales to sell-through distributors are presented in the following table (in thousands):
28
Inventory valued at published list price and held by sell-through distributors with right of return
Allowance for distributor advances
Deferred cost of sales related to inventory held by sell-through distributors
Total Deferred income and allowances on sales to sell-through distributors
December 31,
2011
January 1,
2011
$
$
40,147
$
50,085
(23,300)
(6,086)
(26,830)
(7,563)
10,761
$
15,692
During fiscal 2009, the Company embarked on a program to restructure our distribution channels primarily in the Asia Pacific region, from a sell-in
to a sell-through distribution model. As a result, the majority of our revenue in fiscal 2011 and 2010 was from resale of our products by sell-through
distributors. Resale of product by sell-through distributors as a percentage of our total revenue was 61%, 56% and 38% in fiscal 2011, 2010 and 2009,
respectively.
Revenue from software licensing was not material for the periods presented.
Fair Value of Financial Instruments. We invest in various financial instruments including corporate and government bonds, notes, commercial
paper and auction rate securities. 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 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”) ASC 820, “Fair Value Measurements and Disclosures". 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.
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.
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. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity.
Inventory. Inventories are recorded at the lower of actual cost (approximated by standard cost) determined on a first-in-first-out basis or market.
We establish provisions for inventory if it is in excess of projected customer demand, and the creation of such provisions results in a write-down of inventory
to net realizable value and a charge to cost of sales.
Impairment of Long-Lived Assets and Intangible Assets. We review our long-lived assets, primarily property and equipment and amortizable
intangible assets, in accordance with ASC 360, “Property, Plant and Equipment", which requires us to review the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is determined by comparing the
estimated undiscounted cash flows to the carrying amount. A loss is recorded if the carrying amount of the asset exceeds the estimated undiscounted cash flow
for the difference between carrying value and fair value.
Valuation of Goodwill. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination
that are not individually identified and separately recognized. We review goodwill for impairment annually during the fourth quarter and whenever events or
changes in circumstances indicate the carrying value of goodwill may not be recoverable. The goodwill impairment test is a two-step test. Under the first step,
the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value,
an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two,
an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual
fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a
29
discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. For purposes of testing
goodwill for impairment we operate as a single reporting unit. No impairment charges relating to goodwill was recorded for the fiscal year ended 2011.
Restructuring Charges. Expenses associated with exit or disposal activities are recognized when incurred under ASC 420, “Exit or Disposal Cost
Obligations,” for everything but severance. Because we have a history of paying severance benefits, the cost of severance benefits associated with a
restructuring charge is recorded when such costs are probable and the amount can be reasonably estimated in accordance with ASC 712, “Compensation -
Nonretirement Postemployment Benefits.” For leased facilities that are vacated, an amount equal to the total future lease obligations from the date of vacating
the premises through the expiration of the lease, net of any future sublease income, is recorded as a part of restructuring charges.
Accounting for Income Taxes. Our provision for income tax is comprised of our current tax liability and change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to
reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that in management’s judgment is more likely than not to be
recoverable against future taxable income. U.S. income taxes and foreign withholding taxes were not provided for on a cumulative total of approximately $1.6
million of the undistributed earnings of our Chinese subsidiary. We intend to reinvest these earnings indefinitely in our Chinese subsidiary. If these earnings
were distributed to the U.S. in the form of dividends or otherwise, we would be subject to additional U.S. income taxes and foreign withholding taxes.
Our income tax calculations are based on application of the respective U.S. federal, state or foreign tax law. The Company’s tax filings, however,
are subject to audit by the relevant tax authorities. Accordingly, we recognize tax liabilities based upon its estimate of whether, and the extent to which,
additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases
are recorded as income tax expense or benefit in the consolidated statements of operations.
In assessing the realizability of deferred tax assets, we evaluate both positive and negative evidence that may exist and considers whether it is
more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible.
Any adjustment to the net deferred tax asset valuation allowance is recorded in the consolidated statement of operations for the period that the
adjustment is determined to be required.
Stock-Based Compensation. We use the Black-Scholes option pricing model to estimate the fair value of substantially all share-based awards
consistent with the provisions of ASC 718. Option pricing models, including the Black-Scholes model, also require the use of input assumptions, including
expected volatility, expected term, expected dividend rate, and expected risk-free rate of return. The assumptions for expected volatility and expected term are
the two assumptions that significantly affect the grant date fair value.
Restricted stock unit grants are part of the Company's equity compensation practices for employees who receive equity grants. The restricted stock
units granted to employees generally vest quarterly over a four-year period beginning on the grant date.
Results of operations
Key elements of our Consolidated Statements of Operations were as follows (dollars in thousands):
30
December 31, 2011
Year Ended
January 1, 2011
January 2, 2010
$
$
318,366
188,597
71,855
68,838
536
6,079
41,289
100.0% $
297,768
100.0% $
59.2
22.5
21.6
0.2
1.9
179,825
60,326
64,359
60.4
20.3
21.6
—
11
—
—
13.0% $
55,129
18.5% $
194,420
104,343
56,133
52,545
228
3,689
(8,252)
100.0 %
53.7
28.9
27.0
0.1
1.9
(4.2)%
Revenue
Gross margin
Research and development
Selling, general and administrative
Acquisition related charges
Restructuring charges
Income (loss) from operations
Revenue
Revenue in fiscal 2011 increased to $318.4 million as compared to $297.8 million in fiscal 2010, primarily due to an increase in revenue from New
products. Revenue in fiscal 2010 increased to $297.8 million as compared to $194.4 million in fiscal 2009 primarily due to an increase in revenue from New,
Mainstream and Mature products.
A significant portion of our revenue is dependent on the health of the communications end market, which accounted for approximately 44% , 49%
and 56% of our total revenue in fiscal 2011 , 2010 and 2009 , respectively. Forecasting future revenue by end market is particularly challenging as revenue
growth is dependent on overall economic conditions for our industry and market acceptance of our new products.
On December 16, 2011, the Company completed the purchase of SiliconBlue Technologies Ltd., (a Cayman Islands exempted company
(“SiliconBlue”)) a developer of a single chip, ultra-low power Field Programmable Gate Array solution for handheld devices. The acquisition of SiliconBlue
is part of the Company's effort to expand its presence in the consumer end market with low-power programmable logic devices for the smartphone market.
SiliconBlue was consolidated into our financial statements beginning on December 16, 2011. The revenue of SiliconBlue recorded in our consolidated
statement of operations from the acquisition date through December 31, 2011 was $0.7 million, and was included in our PLD product line, Mature revenue
and Consumer end market summary tables below.
Revenue by Product Line
There was a 10% increase for fiscal 2011 compared to fiscal 2010 in FPGA units sold primarily driven by an increase in demand for our New
products, partially offset by a decrease in average selling price. PLD revenue increased in fiscal 2011 compared to fiscal 2010 due to a 10% increase in units
sold primarily related to New and Mature products, partially offset by a decrease in average selling price.
PLD and FPGA revenue increased in fiscal 2010 , when compared to fiscal 2009 due to an increase in units sold for both product lines, primarily
related to revenue from our New products.
The composition of our revenue by product line for fiscal years 2011, 2010 and 2009 was as follows (dollars in thousands):
December 31, 2011
January 1, 2011
January 2, 2010
FPGA
PLD
Total revenue
$
$
107,330
211,036
318,366
34% $
97,089
33% $
66%
200,679
67%
64,564
129,856
33%
67%
100% $
297,768
100% $
194,420
100%
Year Ended
Revenue by End Market
The global communications end market accounted for approximately 44%, 49% and 56% of our revenue for fiscal years 2011, 2010 and 2009,
respectively. Our revenue for this end market is largely dependent on five large telecommunications equipment providers; however, none exceeded 10% of
revenue in fiscal 2011 or 2010, and one accounted for approximately 11% of our revenue in fiscal 2009, resulting from sell-through resale by one of our
distributors. Although
31
revenue from the communications end market declined 4% in fiscal 2011 when compared to fiscal 2010, we expect that a significant portion of our revenue
will continue to be dependent on the health of the communications end market, which experienced a downtrend in the second half of fiscal 2011. Revenue
from the Industrial and other end market increased 29% for fiscal 2011 as compared to fiscal 2010 and 103% in fiscal 2010 when compared to fiscal 2009.
Revenue from the Computing end market decreased 1% in fiscal 2011 when compared to fiscal 2010, but increased 59% in fiscal 2010 when compared to
fiscal 2009. Revenue from the Consumer end market increased 13% for fiscal 2011 as compared to fiscal 2010 and 53% for fiscal 2010 as compared to fiscal
2009.
32
The composition of our revenue by end market for fiscal years 2011, 2010 and 2009 was as follows (dollars in thousands):
Communications
Industrial and other
Computing
Consumer
Total revenue
Revenue by Product Classification
Year Ended
December 31, 2011
January 1, 2011
January 2, 2010
$
141,283
44% $
146,607
49% $
108,780
97,519
42,706
36,858
31%
13%
12%
75,667
42,969
32,525
25%
15%
11%
37,248
27,086
21,306
56%
19%
14%
11%
$
318,366
100% $
297,768
100% $
194,420
100%
Revenue for New products increased 20% for fiscal 2011 as compared to fiscal 2010, and 91% for fiscal 2010 as compared to fiscal 2009, primarily
as a result of increased unit sales. Revenue from Mainstream products decreased 8% for fiscal 2011 but increased 33% for fiscal 2010 primarily related to a
decrease and increase in unit sales, respectively. Mature product revenue increased 6% in fiscal 2011 and increased 35% for fiscal 2010 primarily related to an
increase in unit sales.
The composition of our revenue by product classification for fiscal years 2011, 2010 and 2009 was as follows (dollars in thousands):
Year Ended
December 31, 2011
January 1, 2011
January 2, 2010
New*
Mainstream*
Mature*
Total revenue
$
$
151,472
48% $
126,648
43% $
90,155
76,739
28%
24%
98,413
72,707
33%
24%
66,294
74,218
53,908
34%
38%
28%
318,366
100% $
297,768
100% $
194,420
100%
___________
* Product classification
New:
LatticeECP3, LatticeXP2, LatticeECP2/M, MachXO, Power Manager II, ispClockA/D/S, ispMACH 4000ZE, iCE40
Mainstream:
ispXPLD, ispGDX2, ispMACH 4000/Z, ispXPGA, LatticeSC, LatticeECP, LatticeXP, ispClock, Power Manager I, Software and IP
Mature:
FPSC, ORCA 2, ORCA 3, ORCA 4, ispPAC, ispLSI 8000V, ispMACH 5000B, ispMACH 2LV, ispMACH 5LV, ispLSI 2000V, ispLSI
5000V, ispMACH 5000VG, all 5-volt CPLDs, GDX/V, ispMACH 4/LV, iCE65, all SPLDs
* Product categories are modified as appropriate relative to our portfolio of products and the generation within each major product family. New products consist of our latest generation of
products, while Mainstream and Mature are older or based on unique late stage customer-based production needs. Generally, product categories are adjusted every two to three years, at which
time prior periods are reclassified to conform to the new categorization.
In fiscal 2010 we reclassified our New, Mainstream and Mature product categories to better reflect our current product portfolio. No changes were
made in fiscal 2011.
33
Revenue by Geography
The composition of our revenue by geographical location of our direct and indirect customers was as follows (dollars in thousands):
Year Ended
December 31, 2011
January 1, 2011
January 2, 2010
Total
%
Total
%
Total
%
United States
$
44,847
14 $
36,211
12 $
28,296
China
Europe
Japan
Taiwan
Other Asia
Other Americas
Total foreign revenue
Total revenue
$
123,124
66,319
36,961
8,346
32,687
6,082
273,519
318,366
39
21
11
3
10
2
86
100 $
124,910
54,332
38,992
8,839
27,853
6,631
261,557
297,768
42
18
13
3
10
2
88
100 $
15
43
17
10
3
9
3
83,813
33,389
19,460
6,313
17,476
5,673
166,124
194,420
85
100
We assign revenue to geographies based on customer ship-to address at the point where revenue is recognized. In the case of sell-in distributors and
OEM customers, revenue is typically recognized, and geography is assigned, when products are shipped to our distributor or customer. In the case of sell-
through distributors, revenue is recognized when resale occurs and geography is assigned based on the customer location on the resale reports provided by the
distributor.
Revenue from foreign sales as a percentage of total revenue was 86% for fiscal 2011 , 88% for fiscal 2010 and 85% for fiscal 2009 . We believe the
foreign market to the Asia Pacific region will remain the primary source of our revenue due to relatively more favorable business conditions in Asia and a
continuing trend towards outsourcing of manufacturing by North American and European customers to the Asia Pacific region.
Revenue from Distributors
Our largest customers are distributors and have historically made up a significant portion of our total revenue. Revenue attributable to resales of
products by Arrow Electronics, Inc., which includes its wholly-owned subsidiary, Nu Horizons Electronics Corp., accounted for approximately 22%, 18% and
12% of revenue in fiscal years 2011, 2010 and 2009, respectively. Revenue attributable to resales of products by Avnet, Inc. ("Avnet"), accounted for
approximately 17%, 17% and 13% of revenue in fiscal years 2011, 2010 and 2009, respectively. Revenue attributable to resales of products by the Weikeng
Group (Weikeng Industrial Co. Ltd. (Taiwan) and Weikeng International Co. Ltd. (Hong Kong)) accounted for approximately 14%, 14% and 9% of revenue
in fiscal years 2011, 2010 and 2009, respectively. Sales of products to ASTI Holdings Ltd. accounted for approximately 0%, 0% and 16% of revenue in fiscal
years 2011, 2010 and 2009, respectively. No other individual customer accounted for more than 10% of total revenue in any of the fiscal years 2011, 2010 and
2009.
On August 28, 2011, our global franchise agreement with Avnet terminated, however, we mutually agreed to terms for the transition of inventory
through December 31, 2011. We do not expect a significant disruption in our ability to service customers as a result of this change. We continue to serve our
end customers with a network that includes a global distributor, regional distributors, manufacturer's representatives, and our direct sales team.
During fiscal 2009, we embarked on a program to restructure our distribution channels, primarily in the Asia Pacific region, from a sell-in to a sell-
through distribution model. As a result the majority of our revenue in fiscal 2011 and 2010 was from resale of our products by sell-through distributors. In
connection with this program, we terminated our distribution agreement between the Company and Promaster Technology Corporation on July 2, 2009,
between the Company and Dragon Technology Distribution and FE Global Electronics effective for various territories on February 1 and February 6, 2010,
respectively, and between the Company and other distributors effective on various dates. Dragon Technology Distribution and FE Global Electronics are
wholly-owned subsidiaries of ASTI Holdings Ltd. Additionally, we converted in-place distributors in the Asia Pacific region and Europe from a sell-in to a
sell-through model. As a result, we estimate that revenue was lower in the fourth quarter of fiscal 2009 by approximately $2.0 million compared to revenue
had we not embarked on this program.
34
Revenue related to resale of our products by sell-through distributors makes up 61%, 56%, and 38% of total revenue for fiscal 2011, 2010 and
2009, respectively.
Gross Margin and Operating Expenses
Our gross margin percentage was 59.2% for fiscal 2011 , 60.4% for fiscal 2010 and 53.7% for fiscal 2009. The decrease in gross margin percentage
during fiscal 2011 compared to fiscal 2010 was primarily attributed to an increase in New product revenue which typically carries a lower gross margin than
our Mainstream and Mature products. The increase in gross margin percentage during fiscal 2010 compared to fiscal 2009 was primarily attributed to the
significantly higher production volume in fiscal 2010 when compared to fixed overhead costs charged to Cost of products sold. Additionally, due to the broad
based nature of our revenue increase, revenue from our Mature and Mainstream products, which typically carry a higher gross margin than our New product
categories, increased during fiscal 2010. We also realized a benefit related to some sales of older, fully reserved products in fiscal 2010.
Research and development expense was $71.9 million for fiscal 2011 compared to $60.3 million for fiscal 2010 and $56.1 million for fiscal 2009.
Research and development expenses consist primarily of personnel, masks, engineering wafers, third-party design automation software, test equipment and
tooling depreciation, and qualification expenses. The increase in fiscal 2011 compared to fiscal 2010 was related to personnel, masks, engineering wafers,
third-party design automation software, test equipment and tooling depreciation and qualification expense. The increase in fiscal 2010 compared to fiscal
2009 was related to personnel related costs, primarily accrued bonus costs recorded in connection with the 2010 Cash Incentive Compensation Plan, as well as
an increase in outside service costs for engineering development. We believe that a continued commitment to research and development is essential to
maintain product leadership and provide innovative new product offerings, and therefore we expect to continue to make significant future investments in
research and development. As we continue to move to more advanced process technologies, our mask and engineering wafer costs are becoming more
expensive and will therefore increasingly represent a greater proportion of total research and development expenses.
Selling, general and administrative expense was $68.8 million in fiscal 2011, $64.4 million in fiscal 2010 and $52.5 million in fiscal 2009. The
increase in fiscal 2011 compared to fiscal 2010 was the result of an increase in labor related costs, sales commission costs, legal costs, and outside service
costs for marketing and financial consulting. The increase in fiscal 2010 compared to fiscal 2009 was primarily a result of an increase in sales commission
costs, marketing related costs and accrued bonus costs recorded in connection with the 2010 Cash Incentive Compensation Plan.
Acquisition related charges were $0.5 million in fiscal 2011, none in fiscal 2010 and $0.2 million in fiscal 2009. The charges in fiscal 2011 include
$0.4 million in professional service and legal fees, and $0.1 million amortization of intangible assets related to our December 16, 2011 acquisition of
SiliconBlue. We estimate charges related to amortization of intangible assets will be approximately $3.2 million for fiscal 2012, and $0.4 million in
professional service type charges. Fiscal 2009 Acquisition related charges relate to our 2002 acquisition of the FPGA business of Agere Systems, Inc. and of
Cerdelinx Technologies, Inc.
The Company implemented restructuring plans during the fiscal years 2005, 2007, 2008, 2009 and 2011. Included in our Consolidated Statements
of Operations and reported as Restructuring charges for fiscal 2011 , 2010 and 2009 are charges of $6.1 million, less than $0.1 million and $3.7 million,
respectively, primarily resulting from severance and related costs and costs to vacate leased properties under these restructuring plans.
35
Other income, net
The following table summarizes the activity in Other income, net (in thousands):
Interest income
Gain related to sale or fair value adjustment, net of impairment charges on auction rate securities
Gain on sale of real estate
(Loss) gain on deferred compensation plan assets and other, net
Total
Year Ended
December 31,
2011
January 1,
2011
January 2,
2010
$
1,142
$
998 $
1,227
589
—
(297)
668
720
88
374
—
211
$
1,434
$
2,474 $
1,812
The increase in interest income in fiscal 2011 compared to fiscal 2010 relates to higher invested balances in fiscal 2011 when compared to fiscal
2010. The decrease in interest income in fiscal 2010 compared to fiscal 2009 relates to lower interest rates on invested balances.
Benefit (provision) for income taxes
Benefit for income taxes resulted from a portion of our deferred tax valuation allowance reversed and the recognition of previously unrecognized
uncertain tax positions, partially offset by a provision recorded related to our new global tax structure and foreign taxes.
On December 31, 2011, we began to implement a global tax structure to more effectively align the Company's corporate structure and transaction
flows with the Company's geographic business operations including responsibility for sales and purchasing activities. We have numerous sales offices in
foreign locations, operational centers in the Philippines and Singapore, and research and development sites in China, India and the Philippines. Revenues from
non-Domestic regions account for over 80% of all revenue. In addition, the large majority of our suppliers are located in the Asia Pacific region. Based on
these factors we have created new and realigned existing legal entities, intercompany sales of rights to intellectual property, inventory and fixed assets across
different tax jurisdictions, and implemented cost-sharing and intellectual property licensing and royalty agreements between our U.S. and low cost tax
jurisdictions. These actions created a gain for tax purposes, for which we recorded a $76.8 million tax provision in the fourth quarter of fiscal 2011. This
provision was fully offset by the release of valuation allowance on deferred tax assets of $76.8 million recorded as a tax benefit during the fourth quarter of
fiscal 2011. We expect that the global tax structure will be completed during the first quarter of 2012 upon the intercompany sale of inventory and fixed
assets, and we expect to record approximately $9.7 million in additional income tax provision during the first quarter of fiscal 2012, which will result in an
increase to the effective tax rate.
During the fourth quarter of 2011, we also concluded that it was more likely than not that we would be able to realize the benefit of a portion of our
remaining deferred tax assets. We based this conclusion on improved operating results over the past two years and our expectations about generating taxable
income in the foreseeable future including the implementation of a global tax structure discussed above. Based on our assessment regarding the potential to
realize deferred tax assets, we reversed additional valuation allowance, which when offset by the provision recorded related to our new global tax structure,
resulted in an income tax benefit of $35.2 million. We exercised significant judgment and considered estimates about our ability to generate revenues, gross
profits, operating income and taxable income in future periods under our new tax structure in reaching this decision.
We are not currently paying federal income taxes and do not expect to pay such taxes until the benefits of our tax net operating losses and credits
are fully utilized. We expect to pay a nominal amount of state income tax. We accrue interest and penalties related to uncertain tax positions in the Provision
for income taxes.
We are paying foreign income taxes which are primarily related to the cost of operating offshore research and development and marketing
subsidiaries.
The inherent uncertainties related to the geographical distribution, and relative levels of profits among various high and low tax jurisdictions make
it difficult to quantify the impact of the global tax structure on our future effective tax rate.
36
Liquidity and Capital Resources
Financial Condition (Sources and Uses of Cash)
Our sources and uses of cash from operating, financing and investing activities were as follows (in thousands):
Net cash provided by operating activities
Net cash (used in) provided by investing activities
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Fiscal 2011 compared to 2010
Operating Activities
December 31,
2011
Year Ended
January 1,
2011
January 2,
2010
$
$
62,176
$
82,102
$
101,389
(86,232)
(8,905)
(67,185)
3,398
1,944
(932)
(32,961)
$
18,315
$
102,401
Net cash provided by operating activities was $62.2 million in fiscal 2011, compared to Net cash provided by operating activities of $82.1 million
in fiscal 2010. The decrease in comparable periods is primarily the result of a decrease in Net income before income taxes from $57.6 million to $42.7 million
and the use of foundry advances of $11.5 million in fiscal 2010 and no such transactions in fiscal 2011. In addition, other significant items of operating
activities include:
Net cash was provided by a reduction in Accounts receivable, net of $4.6 million in fiscal 2011 but was used in operations as the result of an increase of
•
$7.6 million in fiscal 2010. Billings in the fourth quarter of fiscal 2011 were relatively low when compared to billings in the fourth quarter of fiscal 2010.
Net cash was provided by a reduction in Inventory of $2.6 million in fiscal 2011 but was used in operations as the result of an increase of $11.4 million in
•
fiscal 2010. The increase in inventory in fiscal 2010 was driven by demand for our product to support quarterly sequential revenue increases through the
second quarter of fiscal 2011, at which time revenue then declined on a quarterly sequential basis.
Net cash was used in operations as a result of a decrease in Deferred income and allowances on sales to sell-through distributors of $4.9 million in fiscal
•
2011 but was provided by operations as the result of an increase of $5.5 million in fiscal 2010. This decrease in fiscal 2011 is primarily related to the
termination of our distribution agreement with Avnet.
Net cash was used in operation as a result of a decrease in Accounts payable and accrued expenses (includes restructuring) and Accrued payroll
•
obligations of $3.3 million in fiscal 2011 but was provided by operations as the result of an increase of $13.3 million in fiscal 2010.
Net cash was provided by operations as a result of an increase in Other liabilities of $13.1 million in fiscal 2011 but was used in operations as the result
•
of a decrease of $0.7 million in fiscal 2010. The increase in fiscal 2011 is primarily related to an increase in unrecognized tax benefits.
Investing Activities
Net cash used in investing activities was $86.2 million in fiscal 2011 compared to Net cash used in investing activities of $67.2 million in fiscal
2010. The increase in net cash used for comparable periods is primarily the result of $63.2 million used in the acquisition of SiliconBlue on December 16,
2011. Net cash was used in investing activities for net purchases greater than proceeds from sales of marketable securities of $1.9 million in fiscal 2011
compared to net cash used in investing activities as the result of net purchases greater than proceeds from sales of marketable securities of $51.4 million in
fiscal 2010. Capital expenditures decreased from $13.9 million in fiscal 2010 to $13.0 million in fiscal 2011.
Financing Activities
37
Net cash used in financing activities was $8.9 million for fiscal 2011 compared to Net cash provided by financing activities in fiscal 2010 of $3.4
million primarily due to an increase in cash used to buy Treasury stock of $14.4 million in fiscal 2011 from $2.0 million in fiscal 2010.
Fiscal 2010 compared to 2009
Operating Activities
Net cash provided by operating activities was $82.1 million in fiscal 2010, compared to Net cash provided by operating activities of $101.4 million
in fiscal 2009, primarily as a result of the receipt of a $60.0 million repayment in fiscal 2009, of the Company's advance payment made to Fujitsu Limited
(“Fujitsu”) in fiscal 2007, while no receipt occurred in fiscal 2010, and a decrease in usage of Fujitsu advance credits from $20.1 million in fiscal 2009 to
$11.5 million in usage in fiscal 2010. Offsetting these amounts was an increase in cash flow from Net income (loss) due to Net income of $57.1 million in
fiscal 2010 compared to a Net loss of $7.0 million in fiscal 2009. In addition other significant items of operating activities include:
Net cash used in operations as the result of increased inventory of $11.4 million in fiscal 2010 compared to cash provided by operations as the result of a
•
decrease in Inventory of $6.8 million in fiscal 2009.
Net cash provided by operations due to an increase in Accrued payroll obligations of $6.5 million in fiscal 2010 compared to a decrease of $1.6 million
•
in fiscal 2009.
Investing Activities
Net cash used in investing activities was $67.2 million in fiscal 2010 compared to Net cash provided by investing activities of $1.9 million in fiscal
2009 as purchases of marketable securities exceeded sales of marketable securities and Short-term marketable securities increased by $55.4 million as
reflected on the Consolidated Balance Sheet when fiscal 2010 is compared to fiscal 2009. Capital expenditures increased from $7.0 million in fiscal 2009 to
$13.9 million in fiscal 2010.
Financing Activities
Net cash provided by financing activities was $3.4 million for fiscal 2010 compared to Net cash used by financing activities in fiscal 2009 of $0.9
million primarily due to the issuance of common stock of $6.2 million in fiscal 2010 compared to $0.4 million in fiscal 2009, offset by the increase in
purchase of treasury stock of $2.0 million in fiscal 2010 compared to $0.3 million in fiscal 2009.
Liquidity
As of December 31, 2011, our principal source of liquidity was $210.1 million of Cash and cash equivalents and Short-term marketable securities,
which was approximately $28.1 million less than the balance of $238.2 million at January 1, 2011. Working capital decreased to $248.6 million at
December 31, 2011, from $271.0 million at January 1, 2011. The primary reason for decline in both measures above is attributed to our $63.2 million cash
purchase of SiliconBlue and our $14.4 million purchase of treasury stock under our stock repurchase program, partially offset by cash provided by operating
activities.
We believe that our existing liquid resources and cash expected to be generated from future operations will be adequate to meet our operating and
capital requirements and obligations for at least the next twelve months. We have no long-term debt.
At December 31, 2011 and January 1, 2011, the Company held auction rate securities with a par value of $8.3 million and $11.6 million,
respectively. The Company intends to sell its auction rate securities as markets for these securities resume or reasonable offers become available. At
December 31, 2011, due to continued multiple failed auctions and a determination of illiquidity, the $8.3 million par value of auction rate securities held by
the Company had an estimated fair value of $6.9 million and are classified as Long-term marketable securities. These auction rate securities are exposed to
risks associated with student loan asset-backed notes. Such loans are insured by the federal government or guaranteed by the Federal Family Educational Loan
Program. If we were to liquidate our position in these securities, the amount realized could be materially different than the estimated fair value amounts at
which we are carrying these securities and there could be a materially detrimental effect on our financial results.
In accordance with ASC 320, “Investments - Debt and Equity Securities,” the Company recorded an unrealized loss of
38
$0.1 million during the year ended December 31, 2011 on certain Short-term marketable securities, which has been recorded in Accumulated other
comprehensive income. Future fluctuations in fair value related to these instruments that the Company deems to be temporary, including any recoveries of
previous write-downs, would be recorded to Accumulated other comprehensive income. For the year ended December 31, 2011, approximately $0.4 million
in unrealized losses related to the increase in fair value of auction rate securities were recorded in Accumulated other comprehensive income. If the Company
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
materially detrimental impact 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 income.
On February 24, 2012, the Company's Board of Directors approved a stock repurchase program pursuant to which up to $20.0 million of
outstanding common stock may be repurchased from time to time. The duration of the repurchase program is twelve months. All repurchases will be open
market transactions and funded from available working capital.
On October 21, 2010, the Company's Board of Directors approved a stock repurchase program pursuant to which up to $20.0 million of outstanding
common stock could have been repurchased. The duration of the repurchase program was twelve months from adoption. In connection with this stock
repurchase program, the Company entered into a 10b5-1 plan. During fiscal 2011, approximately 2.4 million shares were repurchased for $14.4
million. During fiscal 2010, approximately 0.4 million shares were repurchased for $2.0 million. All shares repurchased under this program were retired by
December 31, 2011. All repurchases were open market transactions and were funded from available working capital. The program ended by its terms in
October 2011.
On December 13, 2008, the Company's Board of Directors approved a stock repurchase program pursuant to which up to $20.0 million of
outstanding common stock could have been repurchased. In connection with the stock repurchase program, we entered into a 10b5-1 plan. The duration of the
repurchase program was twelve months, and expired on December 13, 2009. During fiscal 2009, approximately 263,000 shares were repurchased for $0.3
million, all of which were open market transactions and were funded from available working capital. All shares repurchased under this program were retired
in 2010.
On August 11, 2004, the Company entered into an agreement with a bank under the terms of which we could borrow up to $6.0 million in Japanese
yen in a revolving line of credit arrangement. In the first fiscal quarter of 2008, we amended the agreement to reduce the line of credit to $4.0 million.
Outstanding borrowings were collateralized by a market rate investment account. Interest on outstanding borrowings were based on the Japanese LIBOR
Fixed Rate. Outstanding borrowings at January 3, 2009 were $0.8 million and were reported in Accounts payable and accrued expenses on the Consolidated
Balance Sheets. This arrangement was terminated by the Company during the first quarter of fiscal 2009.
We may in the future seek new or additional sources of funding. In addition, in order to secure additional wafer supply, we may from time to time
consider various financial arrangements including equity investments, advance purchase payments, loans, or similar arrangements with independent wafer
manufacturers in exchange for committed wafer capacity. To the extent that we pursue any such additional financing arrangements, additional debt or equity
financing may be required. There can be no assurance that such additional financing will be available when needed or, if available, will be on favorable terms.
Any future equity financing will decrease existing stockholders' equity percentage ownership and may, depending on the price at which the equity is sold,
result in dilution.
Contractual Obligations
The following table summarizes our significant contractual cash obligations at December 31, 2011 (in thousands):
Fiscal year
2012
2013
2014
2015
2016
Thereafter
$
$
Operating
leases(1)
Purchase order
obligations(2)
$
67,188
3,652
3,060
635
98
32
—
7,477
$
39
—
—
—
—
—
67,188
_________
(1) Certain of our facilities and equipment are leased under operating leases, which expire at various times through 2016.
(2) This column excludes amounts already recorded on our Consolidated Balance Sheet as current or long-term liabilities at December 31, 2011.
We also have other liabilities of $21.6 million relating to uncertain tax positions. However, as we are unable to reliably estimate the timing of
future payments related to uncertain tax positions, we have excluded this amount from the table above.
Our significant operating leases are for our facilities in San Jose, California, Bethlehem, Pennsylvania, Shanghai, China and Downers Grove,
Illinois. Our lease in San Jose expires in December 2013 with annual rental costs estimated to be $2.0 million with 3% annual increases. Our lease in
Bethlehem expires in September 2014 with annual rental costs estimated to be $0.5 million with 3% annual increases. Our lease in Shanghai expires in May
2012 with remaining rental costs estimated to be $0.1 million. Our lease in Downers Grove expires in August 2012 with annual rental costs estimated to be
$0.1 million. Leasehold improvements are amortized over the shorter of the non-cancelable lease term or the estimated useful life of the assets.
New Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (“FASB”) issued changes to the presentation of comprehensive income. These changes
give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income
either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other
comprehensive income as part of the statement of changes in stockholders' equity was eliminated. The items that must be reported in other comprehensive
income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the
calculation and presentation of earnings per share. These changes become effective for the Company on January 1, 2012. We will adopt this standard in the
first quarter of fiscal 2012.
In May 2011, the FASB issued amended guidance on fair value measurement and related disclosures. The new guidance clarified the concepts
applicable for fair value measurement of non-financial assets and requires the disclosure of quantitative information about the unobservable inputs used in a
fair value measurement. This guidance will be effective for reporting periods beginning after December 15, 2011, and will be applied prospectively. We are in
the process of evaluating the financial and disclosure impact of this guidance. We do not anticipate a material impact on our Consolidated Financial
Statements as a result of the adoption of this amended guidance.
In September 2011, the FASB issued amended guidance on testing goodwill for impairment. The new guidance provides an entity the option to first
perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an
entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill
impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of
a reporting unit is more than its carrying amount, the two-step goodwill impairment test is not required. This guidance will be effective for reporting periods
beginning after December 15, 2011. We are in the process of evaluating the financial and disclosure impact of this guidance. We do not anticipate a material
impact on our Consolidated Financial Statements as a result of the adoption of this amended guidance.
Off-Balance Sheet Arrangements
As of December 31, 2011, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Credit Market Risks
At December 31, 2011 and January 1, 2011 , we held auction rate securities with a face value of $8.3 million and $11.6 million , respectively. At
December 31, 2011 , the auction rate securities held by us had an estimated fair value of $6.9 million . At January 1, 2011 , the auction rate securities had an
estimated fair value of $10.2 million . Our investments in auction rate securities are subject to interest rate and market risk. A hypothetical 10% movement in
interest rates would not have a material impact on the fair value of the portfolio. If the market for our investment portfolio declines, our consolidated operating
results
40
may be negatively impacted.
Foreign Currency Exchange Rate Risk
We have international subsidiary and branch operations. In addition, a portion of our silicon wafer and other purchases are denominated in Japanese
yen and we bill our Japanese customers in yen. We mitigate the resulting foreign currency exchange rate exposure by entering into foreign currency forward
exchange contracts for Japanese yen. Although such hedges mitigate our foreign currency exchange rate exposure from an economic perspective they were
not designated as "effective" hedges for accounting purposes and are adjusted to fair value through earnings. We do not hold or issue derivative financial
instruments for trading or speculative purposes.
As a result of the use of derivative financial instruments, Lattice is exposed to the risk that counter-parties to derivative contracts will fail to meet
their contractual obligations. To mitigate the counter-party credit risk, Lattice enters into contracts with carefully selected major financial institutions based
upon their credit ratings and other factors.
On December 31, 2011, the Company had two forward contracts to deliver a total of 140 million yen by January 26, 2012. The contracts were
settled by that date.
41
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements and Consolidated Financial Statement Schedule
Consolidated Financial Statements:
Consolidated Balance Sheets, at December 31, 2011 and January 1, 2011
Consolidated Statements of Operations, for the Years ended December 31, 2011, January 1, 2011 and January 2, 2010
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income (Loss), for the Years ended December 31, 2011,
January 1, 2011 and January 2, 2010
Consolidated Statements of Cash Flows, for the Years ended December 31, 2011, January 1, 2011 and January 2, 2010
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statement Schedule:
Schedule II—Valuation and Qualifying Accounts
42
Page
43
44
45
46
47
70
S-1
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value amounts)
ASSETS
Current assets:
Cash and cash equivalents
Short-term marketable securities
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, less accumulated depreciation
Long-term marketable securities
Other long-term assets
Intangible assets, net of amortization
Goodwill
Deferred income taxes
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses
Accrued payroll obligations
Deferred income and allowances on sales to sell-through distributors
Total current liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (See “Note 15—Commitments and Contingencies”)
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, 117,675,000 and 117,971,000 shares issued and outstanding,
excluding 371,000 shares of treasury stock at January 1, 2011
Paid-in capital
Accumulated other comprehensive (loss) income
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these Consolidated Financial Statements.
43
December 31,
2011
January 1,
2011
$
141,423
$ 174,384
68,711
36,993
37,278
16,200
63,836
41,188
37,333
8,648
300,605
325,389
40,430
6,946
11,628
18,377
44,808
45,130
39,322
10,232
2,744
—
—
—
$
467,924
$ 377,687
$
31,842
$ 26,994
9,373
10,761
51,976
22,387
74,363
11,654
15,692
54,340
4,625
58,965
—
1,177
—
1,179
627,637
630,184
(345)
499
(234,908)
(313,140)
393,561
318,722
$
467,924
$ 377,687
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Revenue
Costs and expenses:
Cost of products sold
Research and development
Selling, general and administrative
Acquisition related charges
Restructuring charges
Income (loss) from operations
Other income, net
Income (loss) before income taxes
Benefit (provision) for income taxes
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
Shares used in per share calculations:
Basic
Diluted
December 31,
2011
Year Ended
January 1,
2011
January 2,
2010
$
318,366
$
297,768
$
194,420
129,769
71,855
68,838
536
6,079
277,077
41,289
1,434
42,723
35,509
117,943
60,326
64,359
—
11
242,639
55,129
2,474
57,603
(531)
$
$
$
78,232
$
57,072
$
0.66
0.65
$
$
0.49
0.48
$
$
117,875
121,139
116,726
120,143
90,077
56,133
52,545
228
3,689
202,672
(8,252)
1,812
(6,440)
(517)
(6,957)
(0.06)
(0.06)
115,384
115,384
The accompanying notes are an integral part of these Consolidated Financial Statements.
44
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(in thousands, except par value)
Common Stock
($.01 par value)
Accumulated
other comprehensive (loss) income
Balances, January 3, 2009
Net loss for 2009
Unrealized gain, net, related to marketable
securities
Recognized gain on redemption of marketable
securities, previously unrealized
Translation adjustments
Comprehensive loss
Common stock issued in connection with
exercise of stock options, ESPP and net vested
RSUs
Stock repurchase
Retirement of treasury stock
Stock-based compensation expense related to
stock options, ESPP and RSUs
Distribution of stock held by deferred stock
compensation plan
Balances, January 2, 2010
Net income for 2010
Unrealized gain, net, related to marketable
securities
Tax effect of change in fair market value of
auction rate securities
Translation adjustments
Comprehensive income
Common stock issued in connection with
exercise of stock options, ESPP and net vested
RSUs
Stock repurchase
Retirement of treasury stock
Stock-based compensation expense related to
stock options, ESPP and RSUs
Balances, January 1, 2011
Net income for 2011
Fair value charge related to marketable securities
Recognized gain on redemption of marketable
securities, previously unrealized
Translation adjustments
Comprehensive income
Common stock issued in connection with
exercise of stock options, ESPP and net vested
RSUs
Stock repurchase
Retirement of treasury stock
Stock-based compensation expense related to
stock options, ESPP and RSUs
Shares
Amount
Paid-in
Capital
Treasury stock Accumulated
deficit
115,469 $1,155 $617,572 $
— $ (363,255) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
386
(263)
—
—
—
—
4
(3)
—
—
—
—
198
—
—
—
—
(326)
4,576
(326)
326
—
—
—
238
—
(6,957)
—
—
—
—
—
—
—
—
—
115,592 1,156 622,258
—
(370,212)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,750
(371)
—
—
—
—
27
(4)
—
—
—
—
5,341
—
—
—
—
(1,966)
(1,966)
1,966
4,551
—
57,072
—
—
—
—
—
—
—
—
117,971 1,179 630,184
—
(313,140)
—
—
—
—
—
2,145
—
—
—
—
—
23
—
—
—
—
—
5,508
—
—
—
—
—
—
(2,441)
(25)
—
(14,411)
—
—
—
—
(14,411)
14,411
6,356
—
78,232
—
—
—
—
—
—
—
—
Total
$254,939
(6,957)
1,031
(284)
(56)
(6,266)
202
(329)
—
4,576
238
253,360
57,072
581
(533)
—
1,031
(284)
(56)
—
—
—
—
—
—
158
—
581
(304)
(304)
64
—
—
—
—
—
499
—
(526)
(133)
(185)
—
—
—
—
—
64
57,413
5,368
(1,970)
—
4,551
318,722
78,232
(526)
(133)
(185)
77,388
5,531
(14,436)
—
6,356
Balances, December 31, 2011
117,675 $1,177 $627,637 $
— $ (234,908) $
(345)
$393,561
The accompanying notes are an integral part of these Consolidated Financial Statements.
45
LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Deferred income tax (benefit) provision
Impairment of Long-term marketable securities and Other current assets
Gain on sale of equity securities
Gain on sale of real estate
Stock-based compensation
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net
Other receivable
Inventories
Prepaid expenses and other current assets
Foundry advances (includes advance credits)
Accounts payable and accrued expenses (includes restructuring)
Accrued payroll obligations
Deferred income and allowances on sales to sell-through distributors
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales or maturities of marketable securities
Purchase of marketable securities
Proceeds from sale of land
Acquisitions net of cash acquired
Payment for purchase of intangible assets
Capital expenditures
Acquisition of software licenses
Net cash (used in ) provided by investing activities
Cash flows from financing activities:
Payment on yen line of credit
Net share settlement upon issuance of RSUs
Treasury stock
Net proceeds from issuance of common stock
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
Supplemental disclosures of non-cash investing and financing activities:
Unrealized (loss) gain on assets measured at fair value, net, included in Accumulated other
comprehensive (loss) income
Distribution of deferred compensation from trust assets
Tax effect of change in fair market value of auction rate securities
Year Ended
December 31,
2011
January 1,
2011
January 2,
2010
$
78,232
$
57,072 $
(6,957)
16,666
(49,376)
—
(303)
—
14,492
14,210
(479)
—
(668)
(720)
11
2,600
(2,958)
—
6,356
4,551
4,576
4,553
(7,637)
(7,147)
—
—
60,000
2,618
(1,367)
(11,408)
(3,613)
6,778
676
—
11,475
20,082
(1,059)
(2,281)
(4,931)
13,068
62,176
6,747
6,536
5,532
222
6,312
(1,575)
4,419
362
82,102
101,389
81,313
54,252
19,932
(83,259)
(105,661)
(8,511)
—
(45,645)
(18,500)
(13,001)
(7,140)
(86,232)
—
(642)
(14,436)
6,173
(8,905)
(32,961)
174,384
871
—
—
(13,856)
(2,791)
(67,185)
—
(808)
(1,970)
6,176
3,398
—
—
—
(7,030)
(2,447)
1,944
(805)
(211)
(329)
413
(932)
18,315
102,401
156,069
53,668
$
141,423
$ 174,384 $ 156,069
$
$
$
(526)
$
581 $
1,031
341
$
288 $
— $
(304) $
655
—
Refer to Note 3 - Business Combinations and Goodwill for other non-cash impacts associated with the acquisition of SiliconBlue.
The accompanying notes are an integral part of these Consolidated Financial Statements.
46
LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)—Nature of Operations and Significant Accounting Policies:
Nature of Operations
Lattice Semiconductor Corporation (“Lattice” or the “Company”) designs, develops and markets programmable logic products and related
software. Programmable logic products are widely used semiconductor components that can be configured by end customers as specific logic circuits,
enabling shorter design cycle times and reduced development costs. Our end customers are primarily original equipment manufacturers (“OEMs”) in the
communications, computing, consumer, industrial, military, automotive, and medical end markets.
We do not manufacture our own silicon wafers. We maintain strategic relationships with large semiconductor foundries to source our finished
silicon wafers in Asia. In addition, all of our assembly operations and most of our test operations are performed by outside suppliers in Asia. We perform
certain test operations and reliability and quality assurance processes internally.
We place substantial emphasis on new product development and believe that continued investment in this area is required to maintain and improve
our competitive position. Our product development activities emphasize new proprietary products, advanced packaging, enhancement of existing products and
process technologies, and improvement of software development tools. Product development activities occur primarily in: Hillsboro, Oregon; San Jose,
California; Downers Grove, Illinois; Shanghai, China; and Manila, Philippines.
Fiscal Reporting Period
We report based on a 52 or 53-week fiscal year ending on the Saturday closest to December 31. Our fiscal 2011, 2010 and 2009 were 52-week
years ending December 31, 2011, January 1, 2011 and January 2, 2010, respectively. Our fiscal 2012 will be a 52-week year and will end on December 29,
2012. All references to quarterly or yearly financial results are references to the results for the relevant fiscal period.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of Lattice and its subsidiaries, all of which are wholly owned, after the
elimination of all intercompany balances and transactions. Certain balances in prior fiscal years have been reclassified to conform to the presentation adopted
in the current year.
Cash Equivalents and Marketable Securities
We consider all investments that are readily convertible into cash and 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 with unrealized gains or losses recorded to Accumulated other comprehensive income (loss), unless losses are considered other-
than-temporary, in which case, losses are charged to the Consolidated Statements of Operations.
Fair Value of Financial Instruments
We invest in various financial instruments including corporate and government bonds, notes, commercial paper, auction rate securities and foundry
investments. The Company values these instruments at their fair value and monitors their 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, the Company records an impairment
charge and establishes 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”) ASC 820, “Fair Value Measurements and Disclosures". 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 are characterized generally by 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
47
estimation is not difficult.
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.
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. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity.
Derivative Financial Instruments
At December 31, 2011, January 1, 2011 and January 2, 2010, we had open foreign exchange contracts of 140,000,000 JPY, zero, and zero,
respectively. The contracts outstanding at December 31, 2011 were settled on January 26, 2012. Although such hedges mitigate our foreign currency
exchange rate exposure from an economic perspective they were not designated as "effective" hedges for accounting purposes and are adjusted to fair value
through earnings. We do not hold or issue derivative financial instruments for trading or speculative purposes.
Foreign Exchange and Translation of Foreign Currencies
A portion of our silicon wafer and other purchases are denominated in Japanese yen and we bill certain Japanese customers in yen. Gains or losses
from foreign exchange rate fluctuations on balances denominated in foreign currencies are reflected in Other income (expense), net. Realized and unrealized
gains or losses on foreign currency transactions were not significant for the years 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. Translation adjustments related to the consolidation of foreign
subsidiary financial statements are reflected in Accumulated other comprehensive income (loss) in Stockholders' equity.
Concentration Risk
Potential exposure to concentration risk consists primarily of cash and cash equivalents, marketable securities and trade receivables and supply of
wafers for our new products. We place our investments primarily through three financial institutions and mitigate the concentration of credit risk by placing
percentage limits on the maximum portion of the investment portfolio which may be invested in any one investment instrument. The Company's investment
policy defines approved credit ratings for investment securities. Purchased securities must meet or exceed the ratings; however, due to liquidity issues in
global credit and capital markets, some of our auction rate securities have fallen below our required credit ratings during the past year. Investments consisted
primarily of money market instruments, “AA” or better corporate notes and bonds, “AA” or better rated U. S. municipal notes, and U.S. government agency
obligations. See Note 4 for a discussion of the liquidity attributes of our marketable securities.
Concentration of credit risk with respect to trade receivables are mitigated by a geographically diverse customer base and our credit and collection
process. Accounts receivable are recorded at the invoice amount, do not bear interest, and are shown net of allowances for doubtful accounts of $0.9 million
and $0.9 million at December 31, 2011 and January 1, 2011, respectively. We perform 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. Write-offs for uncollected trade receivables have not been significant to date.
We rely on Fujitsu Limited ("Fujitsu") for most of our wafer purchases for new products.
Revenue Recognition and Deferred Income
Revenue from sales to customers is recognized upon shipment, or in the case of sales by our sell-through distributors, at the time of reported resale,
provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is
reasonably assured, there are no customer remaining acceptance requirements and no remaining significant obligations. We sell our products directly to end
customers or through a network of independent manufacturers' representatives and indirectly through a network of independent sell-in and sell-through
distributors. Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities of
our products they still have in stock. We must use estimates and apply judgment to reconcile
48
sell-through distributors' reported inventories to their activities. Any error in our judgment could lead to inaccurate reporting of our Revenue, Cost of products
sold, Deferred income and allowances on sales to sell-through distributors, and Net income (loss).
At the time of shipment to a sell-through distributor we invoice at published list price. The final price is set at the time of resale and is determined
in accordance with a distributor price agreement. Invoices are recorded in Accounts receivable, net with a corresponding credit to Deferred income and
allowances on sales to sell-though distributors and inventory is credited from Inventories with a corresponding charge to Deferred income and allowances on
sales to sell-through distributors. Revenue and cost of products sold to sell-through distributors are deferred until either the product is resold by the distributor
or, in certain cases, return privileges terminate, at which time Revenue and Cost of products sold are reflected in Net income (loss).
Inventory valued at published list price and held by sell-through distributors with right of return
Allowance for distributor advances
Deferred cost of sales related to inventory held by sell-through distributors
Total Deferred income and allowances on sales to sell-through distributors
December 31,
2011
January 1,
2011
$
$
40,147
$
50,085
(23,300)
(6,086)
(26,830)
(7,563)
10,761
$
15,692
During fiscal 2009, the Company embarked on a program to restructure our distribution channels primarily in the Asia Pacific region, from a sell-
in to a sell-through distribution model. As a result, the majority of our revenue in fiscal 2010 was from reported resale from our sell-through distributors.
Resale of product by sell-through distributors as a percentage of our total revenue was 61%, 56% and 38% in fiscal 2011, 2010 and 2009, respectively.
On August 28, 2011, our global franchise agreement with Avnet terminated, however, we mutually agreed to terms for the transition of inventory
through December 31, 2011. We do not expect a significant disruption in our ability to service customers as a result of this change. We continue to serve our
end customers with a network that includes a global distributor, regional distributors, manufacturer's representatives, and our direct sales team.
Revenue from software licensing was not material for the periods presented.
Inventories
Inventories are recorded at the lower of actual cost (approximated by standard cost) determined on a first-in-first-out basis or market. We establish
provisions for inventory if it is in excess of projected customer demand, and the creation of such provisions results in a write-down of inventory to net
realizable value and a charge to cost of sales.
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. 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 operations. Repair and maintenance costs are expensed as incurred.
Impairment of Long-Lived Assets
We review our long-lived assets, primarily property and equipment and purchased intangible assets subject to amortization, in accordance with
ASC 360, “Property, Plant and Equipment", which requires us to review the impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Impairment is determined by comparing the estimated undiscounted cash flows to the
carrying amount. A loss is recorded if the carrying amount of the asset exceeds the estimated undiscounted cash flow for the difference between carrying
value and fair value.
Valuation of Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business
49
combination that are not individually identified and separately recognized. The Company reviews goodwill for impairment annually during the fourth quarter
and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The goodwill impairment test is a two-step
test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is
less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test
(measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair
value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase
price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is
determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. For
purposes of testing goodwill for impairment the Company operates as a single reporting unit. No impairment charges relating to goodwill was recorded for the
fiscal year ended 2011.
Leases
We lease office space and classify our leases as either operating or capital lease arrangements in accordance with the criteria of ASC 840, “Leases”.
Certain of our office space operating leases contain provisions under which monthly rent escalates over time and certain leases may also contain provisions
for reimbursement of a specified amount of leasehold improvements. When lease agreements contain escalating rent clauses, we recognize expense on a
straight-line basis over the term of the lease. When lease agreements provide allowances for leasehold improvements, we capitalize the leasehold
improvement assets and amortize them on a straight-line basis over the lesser of the lease term or the estimated useful life of the asset, and reduce rent
expense on a straight-line basis over the term of the lease by the amount of the asset capitalized.
Restructuring Charges
Expenses associated with exit or disposal activities are recognized when incurred under ASC 420, “Exit or Disposal Cost Obligations”, for
everything but severance. Because the Company has a history of paying severance benefits, the cost of severance benefits associated with a restructuring
charge is recorded when such costs are probable and the amount can be reasonably estimated in accordance with ASC 712, “Compensation - Nonretirement
Postemployment Benefits”. For leased facilities that were ceased to be used, an amount equal to the total future lease obligations from the date of vacating the
premises through the expiration of the lease, net of any future sublease income, was recorded as a part of restructuring charges.
Research and Development
Research and development costs are expensed as incurred.
Accounting for Income Taxes
The Company’s provision for income tax is comprised of its current tax liability and change in deferred tax assets and liabilities. Deferred tax assets
and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements using enacted tax rates and laws that will be in effect when the difference is expected to reverse. Valuation allowances are
provided to reduce deferred tax assets to an amount that in management’s judgment is more likely than not to be recoverable against future taxable income.
U.S. income taxes and foreign withholding taxes were not provided for on a cumulative total of approximately $1.6 million of the undistributed earnings of
our Chinese subsidiary. We intend to reinvest these earnings indefinitely in our Chinese subsidiary. If these earnings were distributed to the U.S. in the form
of dividends or otherwise, we would be subject to additional U.S. income taxes and foreign withholding taxes.
The Company’s income tax calculations are based on application of the respective U.S. federal, state or foreign tax law. The Company’s tax
filings, however, are subject to audit by the relevant tax authorities. Accordingly, the Company recognizes tax liabilities based upon its estimate of whether,
and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain income tax position will not
be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different than the amounts originally accrued, the
increases or decreases are recorded as income tax expense or benefit in the consolidated statements of operations.
In assessing the realizability of deferred tax assets, the Company evaluates both positive and negative evidence that may exist and considers
whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary differences become deductible.
50
Any adjustment to the net deferred tax asset valuation allowance is recorded in the consolidated statement of operations for the period that the
adjustment is determined to be required.
Stock-Based Compensation
The Company records stock-based compensation expense related to employee and director stock options and the Employee Stock Purchase Plan
(“ESPP”) in accordance with ASC 718, “Compensation - Stock Compensation”. In addition, the Company records compensation expense over the offering
period in connection with shares issuable under the ESPP.
Net Income (Loss) Per Share
We compute basic income (loss) per share by dividing net income (loss) available to common stockholders 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 ESPP shares. Our application of the treasury stock method includes as assumed proceeds
the average unamortized stock-based compensation expense for the period and the impact of the pro forma deferred tax benefit or cost associated with stock-
based compensation expense.
A reconciliation of basic and diluted Net income (loss) per share is presented below (in thousands, except per share data):
Basic and diluted Net income (loss)
Shares used in basic Net income (loss) per share
Dilutive effect of stock options, RSUs and ESPP shares
Shares used in diluted Net income (loss) per share
Basic Net income (loss) per share
Diluted Net income (loss) per share
December 31,
2011
Year Ended
January 1,
2011
January 2,
2010
$
$
$
78,232
$
57,072 $
117,875
3,264
121,139
0.66
0.65
$
$
116,726
3,417
120,143
0.49 $
0.48 $
(6,957)
115,384
—
115,384
(0.06)
(0.06)
The computation of diluted earnings per share for fiscal year 2011, 2010 and 2009 excludes the effects of stock options, RSUs and ESPP shares
aggregating 3.9 million, 3.0 million and 13.1 million shares, respectively, because the effect was antidilutive. Stock options, RSUs, ESPP shares and warrants
are antidilutive when the aggregate of exercise price, unrecognized stock-based compensation expense and tax benefits are greater than the average market
price for our common stock during the period.
Comprehensive Income (Loss)
For fiscal 2011, comprehensive income consists primarily of Net income of $78.2 million and a net fair value charge arising from marketable
securities of $0.6 million. For fiscal 2010, comprehensive income consists primarily of Net income of $57.1 million and a net unrealized gain arising from
marketable securities of $0.6 million. For fiscal 2009, comprehensive loss consists primarily of net loss of $7.0 million partially offset by a $1.0 million
unrealized gain arising from marketable securities.
Supplemental Cash Flow
Income taxes paid approximated $1.5 million, $0.6 million and $0.3 million in fiscal years 2011, 2010 and 2009, respectively. Interest paid was
insignificant for all periods presented.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and classification of assets, such as marketable securities, accounts receivable, inventory, auction rate
securities, goodwill (including the assessment of reporting unit), intangible assets, deferred income taxes and liabilities, such as accrued liabilities (including
restructuring charges and bonus arrangements), income taxes and deferred income and allowances on sales to sell-through distributors, disclosure of
51
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the fiscal periods presented.
Actual results could differ from those estimates.
(2)—New Accounting Pronouncements:
In June 2011, the Financial Accounting Standards Board (“FASB”) issued changes to the presentation of comprehensive income. These changes
give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income
either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other
comprehensive income as part of the statement of changes in stockholders' equity was eliminated. The items that must be reported in other comprehensive
income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the
calculation and presentation of earnings per share. These changes become effective for the Company on January 1, 2012. We will adopt this standard in the
first quarter of fiscal 2012.
In May 2011, the FASB issued amended guidance on fair value measurement and related disclosures. The new guidance clarified the concepts
applicable for fair value measurement of non-financial assets and requires the disclosure of quantitative information about the unobservable inputs used in a
fair value measurement. This guidance will be effective for reporting periods beginning after December 15, 2011, and will be applied prospectively. We are in
the process of evaluating the financial and disclosure impact of this guidance. We do not anticipate a material impact on our Consolidated Financial
Statements as a result of the adoption of this amended guidance.
In September 2011, the FASB issued amended guidance on testing goodwill for impairment. The new guidance provides an entity the option to first
perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an
entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill
impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of
a reporting unit is more than its carrying amount, the two-step goodwill impairment test is not required. This guidance will be effective for reporting periods
beginning after December 15, 2011. We are in the process of evaluating the financial and disclosure impact of this guidance. We do not anticipate a material
impact on our Consolidated Financial Statements as a result of the adoption of this amended guidance.
(3)—Business Combinations and Goodwill:
On July 15, 2011 the Company acquired substantially all of the assets of Rise Technology Development Limited ("Rise"), a Hong Kong company,
and its subsidiary, APAC IC Layout Consultants, Inc. (“APAC IC”), a Manila, Philippines based company engaged in engineering layout and design services
for $1.0 million. The acquisition of Rise and APAC IC, which was for cash, is part of the Company's effort to improve its research and development and
operations activities, reduce costs and streamline its supply chain for improved predictability and flexibility. The Company allocated the purchase price of the
acquisition in accordance with the guidance of ASC 820, “Business Combinations”, which resulted in recording the majority of the purchase price, or $0.9
million, to Goodwill. The Company has not disclosed the purchase price allocation or pro forma information as the acquisition was immaterial to the
Consolidated Financial Statements.
On December 9, 2011, we acquired SiliconBlue Technologies Ltd., a Cayman Islands exempted company ("SiliconBlue") which put us in a unique
position in the mobile consumer segment of the programmable logic market. The purchase price, totaling $63.2 million was paid in cash.
The Company allocated the purchase price of the acquisition in accordance with the guidance of ASC 820, “Business Combinations”. Of the total
purchase price, $43.9 million was allocated to goodwill, which represents the excess of the purchase price of an acquired business over the fair value of the
underlying net tangible and intangible assets. The goodwill balance is primarily attributed to assembled workforce, expected synergies and expanded
opportunities when integrating SilconBlue's technology with our current product offering. SiliconBlue will expand our product offering in the mobile
consumer and handheld market. These are among the factors that contributed to a purchase price for SiliconBlue that resulted in the recognition of goodwill.
The goodwill and identifiable intangible assets are not deductible for tax purposes.
The estimated fair value of the assets and liabilities assumed at the acquisition date, as set forth below, reflects various preliminary fair value
estimates and analyses, including work performed by a third-party valuation specialist. Certain tax attributes and the allocation of purchase price are pending
final valuation and are expected to be finalized within a year of the date of acquisition.
52
The following table presents the estimated fair values of the assets acquired and liabilities assumed, including those items that are still preliminary,
for the acquisition of SiliconBlue (in thousands):
Net tangible assets acquired
Acquired intangible assets:
Developed technology
Customer relationships
Goodwill
Total purchase price allocation
Useful lives (in years)
Estimated Fair Values
7
5.5
$
$
837
10,700
7,800
43,911
63,248
Inventories were recorded at their estimated fair value ("step-up"), which represented an amount equivalent to estimated selling prices less
fulfillment costs and a normative selling profit. The step-up of $0.3 million will be charged to Acquisition related costs in the following six months,
approximating the estimated inventory turn-over for this particular product.
SiliconBlue was consolidated into our financial statements beginning on December 16, 2011. The aggregate net revenues and net losses of
SiliconBlue recorded in our consolidated statement of operations from the acquisition date through December 31, 2011 was $0.7 million and $0.5 million,
respectively. The unaudited pro-forma financial information in the table below summarizes the combined results of our operations and those of SiliconBlue
for the periods shown as though the acquisition had occurred as of the beginning of fiscal year 2010. The pro-forma financial information for the periods
presented includes the business combination accounting effects of the acquisition, including amortization charges from acquired intangible assets. The pro-
forma financial information as presented below is unaudited, for informational purposes only, is subject to a number of estimates, assumptions and other
uncertainties, and may not be indicative of the results of operations that would have been achieved if the acquisition had taken place at January 1, 2010 (in
thousands, except per share) :
Revenues
Income from operations
Net income
Basic net income per share
Diluted net income per share
Year Ended (unaudited)
December 31, 2011
January 1, 2011
$
$
$
325,950
22,697
59,203
0.50
0.49
$
$
$
302,367
34,831
36,338
0.31
0.30
No impairment charges relating to goodwill and intangible assets were recorded for the fiscal year ended 2011.
53
(4)—Marketable Securities:
The following table summarizes the contractual maturities of our marketable securities (in thousands):
Short-term marketable securities:
Maturities of less than five years
Long-term marketable securities:
Maturities of more than ten years
December 31,
2011
January 1,
2011
$
$
68,711
$
63,836
6,946
75,657
$
10,232
74,068
The following table summarizes the composition of our marketable securities (in thousands):
Short-term marketable securities:
Corporate and government bonds, notes and commercial paper
Long-term marketable securities:
Auction Rate Securities (by type of underlying asset):
Federally insured or FFELP guaranteed student loans
December 31,
2011
January 1,
2011
68,711
$
63,836
6,946
75,657
$
10,232
74,068
$
$
The following table summarizes the composition of our auction rate securities (in thousands):
December 31, 2011
January 1, 2011
Par Value Fair Value S&P
Credit
rating
Par Value Fair Value S&P
Credit
rating
Long-term marketable securities:
Federally-insured or FFELP guaranteed student loans
$
8,300 $
6,946 AAA $
11,600 $
10,232 AAA
On March 29, 2011, the Company sold student loan auction rate securities, with a par value of $3.3 million and an estimated fair value of $2.8
million, for $3.3 million, reported a gain of $0.6 million and relieved $0.1 million of previously unrecognized gain in Accumulated other comprehensive
income, in the first quarter of fiscal 2011. On December 9, 2010, the Company sold auction market preferred shares issued by AMBAC Assurance
Corporation with a par value of $8.3 million and a fair value of $0.2 million for $0.5 million and reported a gain of $0.3 million in the fourth quarter of fiscal
2010. On July 29, 2010, the Company sold student loan auction rate securities, with a par value of $3.8 million and fair value of $2.9 million for $3.3 million
and reported a gain of $0.4 million in the third quarter of fiscal 2010. At December 31, 2011, due to continued multiple failed auctions and a determination of
illiquidity, the $8.3 million par value of auction rate securities held by the Company had an estimated fair value of $6.9 million and are classified as Long-
term marketable securities. These auction rate securities are exposed to risks associated with student loan asset-backed notes. Such loans are insured by the
federal government or guaranteed by the Federal Family Educational Loan Program ("FFELP"). The Company intends to sell its auction rate securities as
markets for these securities resume or reasonable offers become available.
54
(5)—Fair Value of Financial Instruments (in thousands):
Fair value measurements as of December 31, 2011 Fair value measurements as of January 1, 2011
Total
Level 1
Level 2
Level 3
Total
Level 1 Level 2
Level 3
Short-term marketable securities
$
68,711 $
68,711 $ — $
— $ 63,836 $ 63,836 $ — $
—
Long-term marketable securities
Foreign currency forward exchange
contracts
6,946
18
—
—
—
18
6,946
10,232
—
—
—
—
—
—
10,232
—
$
75,675 $
68,711 $
18 $
6,946 $ 74,068 $ 63,836 $ — $ 10,232
We invest in various financial instruments including corporate and government bonds and notes, commercial paper and auction rate securities. The
Company carries these instruments at their fair value in accordance with ASC 820. 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 federal
agency, municipal or 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 Sheet.
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.
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. Our auction rate securities are classified as Level 3 instruments. Management uses a combination of the market and income approach to
derive the fair value of auction rate securities, which include third party valuation results, investment broker provided market information and available
information on the credit quality of the underlying collateral. As a result, the determination of fair value for Level 3 instruments requires significant
management judgment and subjectivity. Our Level 3 instruments are classified as Long-term marketable securities on our Consolidated Balance Sheet.
During the fiscal year ended December 31, 2011, the following changes occurred in our Level 3 assets (in thousands):
Beginning fair value of Long-term marketable securities
Fair value of securities sold or redeemed
Temporary or other-than-temporary fluctuations in fair value
Ending fair value of Long-term marketable securities
Year Ended
December 31, 2011
January 1, 2011
$
$
10,232
(2,843)
(443)
6,946
$
$
12,939
(4,147)
1,440
10,232
In accordance with ASC 320, “Investments - Debt and Equity Securities,” the Company recorded an unrealized loss of $0.1 million during the
year ended December 31, 2011 on certain Short-term marketable securities (Level 1 instruments) which has been recorded in Accumulated other
comprehensive income. Future fluctuations in fair value related to these instruments that the Company deems to be temporary, including any recoveries of
previous write-downs, would be recorded to Accumulated other comprehensive income. For the year ended December 31, 2011 , approximately $0.4 million
in unrealized losses were recorded in Accumulated other comprehensive income. If the Company 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 materially detrimental impact 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
55
comprehensive income.
(6)—Inventories (in thousands):
Work in progress
Finished goods
(7)—Property and Equipment (in thousands):
Land
Buildings
Computer and test equipment
Office furniture and equipment
Leasehold and building improvements
Accumulated depreciation and amortization
December 31,
2011
January 1,
2011
$
$
24,260
13,018
37,278
$
$
25,516
11,817
37,333
December 31,
2011
January 1,
2011
$
$
$
1,456
27,809
160,506
9,363
13,484
212,618
(172,188)
40,430
$
1,456
27,672
151,940
9,149
13,842
204,059
(164,737)
39,322
Depreciation expense was $12.2 million, $10.9 million and $10.8 million for fiscal years 2011 , 2010 , and 2009 , respectively.
(8)—Intangible Assets and Acquisition Related Charges:
In connection with our acquisition of SiliconBlue in December 2011, we recorded identifiable intangible assets related to customer relationships
and developed technology based on guidance for determining fair value under the provisions of ASC 820. We did not have any identifiable intangible assets
recorded as of January 1, 2011. The following table summarizes the details of the Company’s total purchased intangible assets (in thousands):
Weighted Average
Amortization Period
(in years)
Gross Accumulated Amortization Intangible assets, net of amortization December
Developed
technology
Customer
relationships
Total
7.0
5.5
6.3
$10,700 $
7,800
$
(64)
(59)
$18,500 $
(123)
$
56
31, 2011
10,636
7,741
18,377
Acquisition related charges includes cash outlays for professional fees as well as the amortization of the stepped up value of inventory and
amortization of identifiable intangible assets with finite useful lives. Acquisition related charges in connection with the acquisition of SiliconBlue from the
date of acquisition to December 31, 2011 were as follows (in thousands):
Professional fees
Amortization of developed technology
Amortization of customer relationships
Adjustment to $0.3 million step-up in inventory fair value
at date of acquisition
Total
Fiscal year
2011
$
$
397
64
59
16
536
Estimated acquisition related charges in connection with the acquisition of SiliconBlue for future years are as follows (in thousands):
Fiscal
year
Estimated Acquisition
related charges
2012
2013
2014
2015
2016
2017
2018
Total
$
3,196
2,947
2,947
2,947
2,947
2,179
1,463
$
18,626
(9)—Lease Obligations:
Certain of our facilities are leased under operating leases, which expire at various times through 2016. Rental expense under the operating leases
was $3.3 million, $2.7 million and $3.0 million for fiscal years 2011, 2010 and 2009, respectively. Future minimum lease commitments at December 31, 2011
are as follows (in thousands):
Fiscal year
2012
2013
2014
2015
2016
Thereafter
Amount
3,652
3,060
635
98
32
—
7,477
$
$
(10)—Income Taxes:
The domestic and foreign components of income (loss) before Benefit (provision) for income taxes consist of the following (in thousands):
57
Domestic
Foreign
Income (loss) before income taxes
Year Ended
December 31,
January 1,
January 2,
2011
2011
2010
$
$
42,619
$
56,782 $
104
821
42,723
$
57,603 $
(8,588)
2,148
(6,440)
The components of the income tax Benefit (provisions) are as follows (in thousands):
December 31,
2011
Year Ended
January 1,
2011
January 2,
2010
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
$
(13,463)
$
137
(541)
(13,867)
45,423
3,894
59
49,376
35,509
$
(83)
(47)
(880)
(1,010)
296
8
175
479
(74)
(55)
(377)
(506)
—
—
(11)
(11)
(517)
Benefit (provision) for income taxes
$
$
(531)
$
The Benefit (provision) for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal
income tax rate to pretax income as a result of the following differences:
Statutory federal rate
Adjustments for tax effects of:
State taxes, net
Intellectual property sale
Research and development credits
Foreign taxes
Foreign dividends
Valuation allowance
Change in uncertain tax benefit accrual
Stock-based compensation
Tax rate change
Other
Effective income tax rate
December 31, 2011
January 1, 2011
January 2, 2010
Year Ended
%
35
3
144
(3)
2
1
(289)
31
—
(7)
—
(83)
%
35
—
—
(2)
—
—
(37)
—
—
5
—
1
%
35
11
—
14
7
(13)
1
(6)
(32)
(22)
(3)
(8)
ASC 740, “Income Taxes”, provides for the recognition of deferred tax assets if realization of these assets is more
58
likely than not. We evaluate both positive and negative evidence to determine if some or all of our deferred tax assets should be recognized on a quarterly
basis.
On December 31, 2011, we began to implement a global tax structure to more effectively align the Company's corporate structure and transaction
flows with the Company's geographic business operations including responsibility for sales and purchasing activities. We have numerous sales offices in
foreign locations, operational centers in the Philippines and Singapore, and research and development sites in China, India and the Philippines. Revenues from
non-Domestic regions account for over 80% of all revenue. In addition, the large majority of our suppliers are located in the Asia Pacific region. Based on
these factors we have created new and realigned existing legal entities, intercompany sales of rights to intellectual property, inventory and fixed assets across
different tax jurisdictions, and implemented cost-sharing and intellectual property licensing and royalty agreements between our U.S. and low cost tax
jurisdictions. These actions created a gain for tax purposes, for which we recorded a $76.8 million tax provision in the fourth quarter of fiscal 2011. This
provision was fully offset by the release of valuation allowance on deferred tax assets of $76.8 million recorded as a tax benefit during the fourth quarter of
fiscal 2011. We expect that the global tax structure will be completed during the first quarter of 2012 upon the intercompany sale of inventory and fixed
assets, and we expect to record approximately $9.7 million in additional income tax provision during the first quarter of fiscal 2012.
During the fourth quarter of 2011, we also concluded that it was more likely than not that we would be able to realize the benefit of a portion of our
remaining deferred tax assets. We based this conclusion on improved operating results over the past two years and our expectations about generating taxable
income in the foreseeable future including the implementation of a global tax structure discussed above. Based on our assessment regarding the potential to
realize deferred tax assets, we reversed additional valuation allowance, which when offset by the provision recorded related to our new global tax structure,
resulted in an income tax benefit of $35.2 million. We exercised significant judgment and considered estimates about our ability to generate revenues, gross
profits, operating income and taxable income in future periods under our new tax structure in reaching this decision.
The components of our net deferred tax assets are as follows (in thousands):
Deferred tax assets:
Accrued expenses and reserves
Inventory
Deferred revenue
Stock-based and deferred compensation
Intangible assets
Fixed assets
Net operating loss carry forwards
Tax credit carry forwards
Capital loss carry forwards
Unrealized loss on securities
Other
Less: valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Prepaid expenses
Other
Total deferred tax liabilities
Net deferred tax assets
December 31,
2011
January 1,
2011
$
$
4,011
4,036
13,047
3,716
9,277
124
125,013
31,768
6,916
925
81
198,914
(147,499)
51,415
768
977
1,745
49,670
$
$
3,843
4,396
15,326
2,731
71,891
1,266
137,387
29,095
6,106
1,042
—
273,083
(271,208)
1,875
732
849
1,581
294
Of the total Net deferred tax assets, $4.5 million is considered current and included in Prepaid expenses and other current assets on the consolidated
balance sheet as of December 31, 2011.
59
At December 31, 2011, we have federal net operating loss carry forwards (pre-tax) of approximately $290.6 million that expire at various dates
between 2023 and 2029. We have state net operating loss carryforwards (pre-tax) of approximately $171.6 million that expire at various dates from 2012
through 2029. We also have federal and state credit carryforwards of $14.1 million, $21.4 million of which do not expire. The remainder credits expire at
various dates from 2012 through 2031.
Future utilization of federal and state net operating losses and tax credit carry forwards may be limited if cumulative changes to ownership exceed
50% within any three-year period, which has not occurred through fiscal 2011. However, if there is a significant change in ownership the future utilization
may be limited and an allowance will be recorded for that amount.
U.S. income taxes and foreign withholding taxes were not provided for on a cumulative total of approximately $1.6 million of the undistributed
earnings of our Chinese subsidiary. We intend to reinvest these earnings indefinitely in our Chinese subsidiary. If these earnings were distributed to the U.S.
in the form of dividends or otherwise, we would be subject to additional U.S. income taxes and foreign withholding taxes.
At December 31, 2011, our unrecognized tax benefits associated with uncertain tax positions were $21.6 million, of which $20.4 million, if
recognized, would affect the effective tax rate. As of December 31, 2011, interest and penalties associated with unrecognized tax benefits were $0.4 million.
The following table summarizes the changes to unrecognized tax benefits for fiscal years 2011, 2010 and 2009 (in thousands):
Unrecognized tax benefit
Balance at January 3, 2009
Additions based on tax positions related to the current year
Additions based on tax positions of prior years
Reduction for tax positions of prior years
Settlements
Reduction as a result of lapse of applicable statute of limitations
Balance at January 2, 2010
Additions based on tax positions related to the current year
Additions based on tax positions of prior years
Reduction for tax positions of prior years
Settlements
Reduction as a result of lapse of applicable statute of limitations
Balance at January 1, 2011
Additions based on tax positions related to the current year
Additions based on tax positions of prior years
Additions for acquisition of SiliconBlue
Reduction for tax positions of prior years
Settlements
Reduction as a result of lapse of applicable statute of limitations
Balance at December 31, 2011
Amount
$
6,238
473
341
—
—
(83)
6,969
786
60
—
—
(74)
7,741
15,005
—
298
(106)
(1,248)
(138)
$
21,552
At December 31, 2011, it is reasonably possible that $0.4 million of unrecognized tax benefits and $0.1 million of associated interest and penalties
could significantly change during the next twelve months. The $0.5 million potential change would represent a decrease in unrecognized tax benefits,
comprised of items related to certain domestic tax credits and uncertain income tax positions related to foreign tax filings for years no longer subject to
examination under expiring statutes of limitations.
The Internal Revenue Service has examined our income tax returns for 2001 and 2002, and issued proposed adjustments of $1.4 million, plus
interest. These adjustments relate to the treatment of acquisition costs and a tax accounting method change for prepaid expenses. We reached an agreement
regarding the acquisition costs during the three months ended
60
March 29, 2008. We made a payment of $0.3 million related to this settlement agreement. On May 23, 2008, we filed a petition with the Tax Court seeking a
redetermination of the prepaid expense adjustment. On May 9, 2011 the United States Tax Court ruled that the IRS did not err in denying our request to
change our accounting method with respect to prepaid expenses and held that we were not allowed a deduction for prepaid expenses on our 2002 tax return.
During the quarter ended October 1, 2011, we decided not to pursue further litigation with regard to the prepaid expense adjustment and paid the adjustments
to the IRS. As a result, we paid $1.0 million in October 2011 related to disallowed prepaid expense deductions and the corresponding carry back of those
deductions to the 1999 and 2000 tax returns through a net operating loss carry back. The amount paid was fully reserved. A benefit of approximately $0.9
million was recognized in the three months ended October 1, 2011 for the reversal of uncertain tax positions and related interest for the years effectively
settled.
We are not currently under examination in any state or local jurisdictions. We are currently under examination in Taiwan. To date, there are no
proposed adjustments that are expected to have a material adverse effect on our results of operations.
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 tax
years that remain subject to examination are 2008 for federal income taxes, 2007 for state income taxes, and 2005 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 carry forward amount.
(11)—Restructuring Charges:
During 2011, the Company's Board of Directors adopted a restructuring plan to more efficiently implement the Company's product development
strategy and to better align the Company's corporate strategy with the Company's sales resources (the “2011 restructuring plan”). In connection with the 2011
restructuring plan, the Company will reduce and refocus its headcount at certain of its research and development facilities, including Pennsylvania and
Shanghai, China, and streamline its supply chain activities at its headquarters for reduced operational costs, improved predictability and flexibility. Part of the
2011 restructuring plan includes extending silicon development capabilities and planning and logistics activities by locating personnel in Manila, Philippines.
The 2011 restructuring plan was substantially complete at the end of fiscal 2011. A total of approximately $7.1 million was incurred in fiscal 2011 and $0.8
million is expected to be incurred in the first quarter of fiscal 2012.
During fiscal 2009, we initiated a restructuring plan ("2009 restructuring plan") to lower operating expenses primarily by reducing headcount,
reducing occupancy in certain leased facilities and to transfer inventory management, order fulfillment, and direct sales logistics from our headquarters in
Oregon to a third party contractor in Singapore. In addition, the Company established an operations center in Singapore to transfer some of its supply chain
activities from the Company’s headquarters in Oregon. As part of the 2011 restructuring plan, we updated our estimate of the remaining severance and lease
loss reserve for the 2009 restructuring plan. This resulted in a credit to Restructuring charges in the first quarter of fiscal 2011 of $0.8 million, primarily for
re-occupying certain leased facilities.
During the third quarter of fiscal 2008, we initiated a restructuring plan (“2008 restructuring plan”) to better align operating expenses with near-
term revenue expectations, primarily by reducing headcount. The 2008 restructuring plan was substantially complete by the end of fiscal 2008. During the
third quarter of fiscal 2007, we approved and initiated a restructuring plan to lower operating expenses primarily by reducing headcount. This plan
encompassed a reduction in work force, a voluntary separation program for certain employees and the closure of certain leased facilities. During the fourth
quarter of fiscal 2005, we initiated and completed a restructuring plan (“2005 restructuring plan”) to reduce operating expenses. The 2005 restructuring plan
encompassed three major components - a streamlining of research and development sites, a voluntary separation program for certain employees and an
organizational consolidation within the Company's largest design center.
At December 31, 2011 , the Consolidated Balance Sheet included $1.6 million primarily related to severance and related expenses accrued under
the provisions of the 2011 restructuring plan.
The following table displays the activity related to all of the plans described above (in thousands):
61
Balance at
January 1,
2011
Charged to
expense in
fiscal 2011
Paid or
settled
Adjustments
to reserve credited to expense in fiscal 2011
2011 Restructuring Plan:
Severance and related costs
$
— $
6,503 $ (4,678) $
Other
Subtotal
—
—
830
(830)
7,333
(5,508)
Pre-2011 Restructuring Plans:
Severance and related costs
Lease loss reserve and other
175
1,027
—
11
—
(191)
Total restructuring plans
$ 1,202 $
7,344 $ (5,699) $
(269)
—
(269)
(175)
(821)
(1,265)
Total restructuring charges in fiscal years 2011, 2010 and 2009 were as follows (in thousands):
Balance at
December 31,
2011
$
1,556
—
1,556
—
26
$
1,582
Severance and related costs
Lease loss reserve
Other
December 31,
2011
Year Ended
January 1,
2011
$
$
6,059
$
20
—
6,079
$
(97)
108
—
11
$
$
January 2,
2010
2,334
1,358
(3)
3,689
We cannot be certain as to the actual amount of any remaining restructuring charges or the timing of their recognition for financial reporting
purposes.
(12)—Common Stock Repurchase Program:
On February 24, 2012, the Company's Board of Directors approved a stock repurchase program pursuant to which up to $20.0 million of
outstanding common stock may be repurchased from time to time. The duration of the repurchase program is twelve months. In connection with this stock
repurchase program, the Company entered into a 10b5-1 plan. All repurchases will be open market transactions and funded from available working capital.
On October 21, 2010, the Company's Board of Directors approved a stock repurchase program pursuant to which up to $20.0 million of outstanding
common stock could have been repurchased. The duration of the repurchase program was twelve months from adoption. In connection with this stock
repurchase program, the Company entered into a 10b5-1 plan. During fiscal 2011, approximately 2.4 million shares were repurchased for $14.4
million. During fiscal 2010, approximately 0.4 million shares were repurchased for $2.0 million. All shares repurchased under this program were retired by
December 31, 2011. All repurchases were open market transactions and were funded from available working capital. The program ended by its terms in
October 2011.
On December 13, 2008, our Board of Directors approved a stock repurchase program pursuant to which up to $20.0 million of outstanding common
stock could have been repurchased. In connection with the stock repurchase program, we entered into a 10b5-1 plan. The duration of the repurchase program
was twelve months, and expired on December 13, 2009. During fiscal 2009, approximately 263,000 shares were repurchased for $0.3 million, all of which
were open market transactions and were funded from available working capital. All shares repurchased under this program were retired in 2010.
(13)—Stockholders' Equity:
Employee and Director Stock Options, Restricted Stock and ESPP
The Company's employee stock option plans include principal plans adopted in 1996 and 2001 (“principal option plans”), as well as various stock
option plans assumed through acquisitions under which stock options are outstanding. We have authorized an aggregate of 9,000,000 and 17,200,000 shares
of common stock for issuance to officers and employees under the
62
2001 plan and 1996 plan, respectively. The principal option plans provide for grants of options to employees to purchase common stock at the fair market
value of such shares on the grant date. The options generally vest quarterly over a four-year period beginning on the grant date. The 2001 plan expired by its
terms in May 2011 and new grants to employees may no longer may be made under the plan. Options granted under the principal option plans are generally
non-qualified stock options but the principal option plans permit some options granted to qualify as “incentive stock options” under the U.S. Internal Revenue
Code. The contractual term of options granted prior to January 31, 2006 was generally ten years, while the contractual term of options granted subsequent to
January 31, 2006 is generally seven years.
Restricted stock unit (“RSUs”) grants are part of the Company's equity compensation practices for employees who receive equity grants. The RSUs
granted to employees generally vest quarterly over a four-year period beginning on the grant date.
In May 2011, the shareholders of the Company approved the 2011 Non-Employee Director Equity Incentive Plan. The Plan provides that non-
employee members of our Board of Directors receive non-qualified option grants and restricted stock units in set amounts and at set times, at option prices
equal to the fair market value on the date of grant. An aggregate of 750,000 shares of common stock have been authorized for issuance under the plan.
Vesting periods for options and RSUs granted to Directors is over three years and one year respectively. The contractual term of all non-employee director
options is ten years.
The Company's ESPP, which was amended and approved most recently by our stockholders in May 2007, permits eligible employees to purchase shares of
common stock through payroll deductions, not to exceed 10% of an employee's compensation. The purchase price of the shares is the lower of 85% of the fair
market value of the stock at the beginning of each six-month offering period or 85% of the fair market value at the end of such period, but in no event less
than the book value per share at the mid-point of each offering period. An aggregate of 5,500,000 shares of common stock have been authorized for issuance
under the plan. We have treated the ESPP as a compensatory plan, and recorded compensation expense related to the ESPP of $0.5 million and $0.4 million
for fiscal 2011 and fiscal 2010, respectively.
Stock-Based Compensation
Total stock-based compensation expense was included in the Consolidated Statements of Operations as follows (in thousands):
Line item:
Cost of products sold
Research and development
Selling, general and administrative
Restructuring charges
December 31,
2011
Year Ended
January 1,
2011
January 2,
2010
$
$
461
2,697
3,095
103
6,356
$
312
$
1,851
2,388
—
$
4,551
$
353
1,572
2,651
—
4,576
ASC 718, “Compensation-Stock Compensation (“ASC 718”),” requires that we recognize compensation expense for only the portion of employee
and director options and ESPP rights that are expected to vest.
The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the
following table. Beginning January 1, 2006, in connection with the adoption of ASC 718, the Company examined the historical pattern of option exercises in
an effort to determine if there were any discernible activity patterns based on certain employee populations. From this analysis, the Company identified two
employee populations. Prior to January 3, 2009, the Company used the simplified method as prescribed by the SEC's Staff Accounting Bulletin No. 107. The
Company now believes that it has sufficient internal historical data to refine the expected term assumption. As such, the expected term computation is based
on historical vested option exercises and includes an estimate of the expected term for options that were fully vested and outstanding at January 3, 2009 for
each of the two populations identified. The expected volatility of both stock options and ESPP shares is based on the daily historical volatility of our stock
price, measured over the expected term of the option or the ESPP purchase period. The risk-free interest rate is based on the implied yield on a U.S. Treasury
zero-coupon issue with a remaining term closest to the expected term of the option. The dividend yield reflects that we have not paid any cash dividends since
inception and do not intend to pay any cash dividends in the foreseeable future.
63
Employee and Director Stock Options
Expected volatility (%)
Risk-free interest rate (%)
Expected term (in years)
Dividend yield
Employee Stock Purchase Plan
Weighted average expected volatility (%)
Weighted average risk-free interest rate (%)
Expected term (in years)
Dividend yield
December 31,
2011
57.4 to 61.9
.003 to .02
4.05 to 4.37
0%
.
48.1
0.14
0.50
0%
Year Ended
January 1,
2011
55.1 to 61.6
.78 to 2.47
4.06 to 4.43
0 %
52.3
0.2
0.50
0 %
January 2,
2010
51.5 to 54.8
1.65 to 2.66
4.00 to 4.51
0 %
71.0
0.3
0.50
0 %
At December 31, 2011, there was $9.2 million of total unrecognized compensation cost related to unvested employee and director stock options,
which is expected to be recognized over a weighted average period of 4.9 years. Our current practice is to issue new shares to satisfy option exercises.
Compensation expense for all stock-based compensation awards is recognized using the straight-line method.
The following table summarizes our stock option activity and related information for the year ended December 31, 2011 (shares and aggregate
intrinsic value in thousands):
Shares
Weighted
average
exercise price
Weighted average
remaining
contractual term
(years)
Aggregate
Intrinsic Value
Balance, January 1, 2011
Granted
Exercised
Forfeited or expired
Balance, December 31, 2011
Vested and expected to vest at December 31, 2011
Exercisable, December 31, 2011
3.38
6.28
3.00
4.03
4.22
4.22
3.97
9,871 $
2,804
(1,842)
(1,546)
9,287 $
9,287 $
4,421 $
64
4.91
3.94
$
$
17,537
9,520
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price
on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the
option holders had all option holders exercised their options on that day. This amount changes based on the fair market value of the Company's stock. Total
intrinsic value of options exercised for fiscal 2011 , 2010 and 2009 was $6.6 million, $5.3 million and less than $0.1 million, respectively. The total fair value
of options and RSUs vested and expensed in fiscal 2011 , 2010 and 2009 was $6.0 million, $4.2 million and $4.3 million, respectively.
The resultant grant date weighted-average fair values calculated using the Black-Scholes option pricing model and the noted assumptions for stock
options granted were $2.92, $2.31 and $1.05 for fiscal years 2011, 2010 and 2009, respectively. The weighted average fair values calculated using the Black-
Scholes option pricing model for the ESPP were $1.80, $1.07 and $.66 for fiscal years 2011, 2010 and 2009, respectively.
The following table summarizes our RSU activity for the year ended December 31, 2011 (shares in thousands):
Balance at January 1, 2011
Granted
Vested
Forfeited
Balance at December 31, 2011
Shares
Weighted
average grant
date fair value
423
$
1,100
(283)
(163)
1,077
$
2.42
6.53
2.71
5.22
6.12
At December 31, 2011, there was $5.1 million of total unrecognized compensation cost related to unvested RSUs. Our current practice is to issue
new shares when RSUs vest. Compensation expense for RSUs is recognized using the straight-line method over the related vesting period.
At December 31, 2011 , a total of 9.7 million shares of our common stock were available for future grants under our stock option plans. Shares
subject to stock option grants that expire or are canceled without delivery of such shares generally become available for re-issuance under these plans. At
December 31, 2011 , a total of 0.05 million shares of our common stock were available for future purchases under our ESPP.
(14)—Employee Benefit Plans:
Qualified Investment Plan
In 1990, we adopted a 401(k) plan, which provides participants with an opportunity to accumulate funds for retirement. The plan does not allow
investments in the Company's common stock. The plan allows for the Company to make discretionary matching contributions in cash. The Company matched
contributions for a total of $0.8 million in fiscal 2011, $0.2 million in fiscal 2010 and made no matching contributions in fiscal 2009.
Executive Deferred Compensation Plan
We initiated an Executive Deferred Compensation Plan effective August 1997. Under the provisions of this plan, as approved by the Board of
Directors, certain senior executives may annually defer up to 75% of their salary and up to 100% of their incentive compensation. The return on deferred
funds is based upon the performance of designated mutual funds. There is no guaranteed return or matching contribution. We paid out $0.3 million, $0.3
million and $0.7 million of the deferred compensation balance in fiscal 2011, 2010 and 2009, respectively. Balances at December 31, 2011 and January 1,
2011 of $0.4 and $0.7 million, respectively, are reflected in Other long-term liabilities in our accompanying Consolidated Balance Sheets and the related
assets are included in Foundry advances and other assets in our accompanying Consolidated Balance Sheets. The deferred compensation amounts are
unsecured obligations, but we have made corresponding contributions to a trust fund owned by the Company for the benefit of deferred compensation plan
participants. The trust fund invests in mutual funds in the manner directed by participants pursuant to provisions of the plan. The mutual funds are accounted
for as trading securities and are marked to market.
Executive Variable Compensation Plan
In December 2007, the Compensation Committee of the Board of Directors approved the 2008 Executive Variable
65
Compensation Plan. The Company's Chief Executive Officer and other members of senior management as nominated by the Chief Executive Officer and
approved by the Compensation Committee are eligible to participate in the Executive Variable Compensation Plan. The payout for each participant is based
both on Company performance, as measured by achievement of revenue and operating income performance goals approved by the Board prior to the
commencement of the plan year, and individual performance. There was no expense under this plan during fiscal years 2011, 2010 or 2009.
2009 Bonus Plan
On December 2, 2008, upon the recommendation of the Compensation Committee, the Board of Directors of the Company approved the 2009
Bonus Plan which provides for the payment of two cash bonuses during the year to non-executive employees upon the achievement of specific performance
criteria for the 2009 fiscal year and the payment of a single cash bonus to certain of the Company's officers, including executive officers, upon the
achievement of specific performance criteria for the 2009 fiscal year. The plan essentially replaced the prior profit sharing plan that terminated in fiscal 2008.
There was no expense recorded under this plan during fiscal 2009.
2010 Cash Incentive Compensation Plan
On December 1, 2009, upon the recommendation of the Compensation Committee, the Board of Directors of the Company approved the 2010 Cash
Incentive Compensation Plan (“2010 Plan”). The Chief Executive Officer, other executive officers, and other members of senior management, including vice
presidents and director-level employees, together with all other employees of the Company, were eligible to participate in the 2010 Plan. Under the 2010 Plan,
individual cash incentive payments for the Chief Executive Officer and other executive officers were based both on Company performance, as measured by
achievement of GAAP operating income, and individual performance, as measured by the achievement of personal management objectives. Under the 2010
Plan, cash incentive payments were funded by the Company’s achievement of GAAP operating income, with funding of the plan to be determined as a
specified percentage of GAAP operating income (before incentive plan accruals) within specified ranges established by the Compensation Committee. The
Compensation Committee determined the individual performance of the Chief Executive Officer based on the achievement of personal management
objectives that were established by the committee during the first fiscal quarter of 2010, and the Chief Executive Officer determined the individual
performance of the other participants based on the achievement of personal management objectives established by the Chief Executive Officer and reviewed
by the committee during the first fiscal quarter of 2010.
The 2010 Plan required that the Company be profitable on a GAAP operating income basis before payments are made under the 2010 Plan. Under
the 2010 Plan, the aggregate target cash incentive awards for all executive management participants, including the Chief Executive Officer, other executive
officers, and other members of senior management, including vice presidents and director-level employees, totaled approximately $1.7 million, and the
aggregate maximum cash award for all management participants totaled approximately $3.0 million. The maximum amount of cash that could be paid out
under the 2010 Plan was $6.5 million. During fiscal 2010, the Company recorded a charge of $5.4 million under the 2010 Plan, which is recorded on the
Consolidated Balance Sheet in Accrued payroll obligations. Cash incentive awards were paid in February 2011.
2011 Cash Incentive Plan
On February 1, 2011, upon the recommendation of the Compensation Committee, the Board of Directors of the Company approved the FY2011
Cash Incentive Plan (the “2011 Plan”). The Chief Executive Officer, other executive officers, and other members of senior management, including vice
presidents and director-level employees, together with all other employees of the Company not on the Company's sales incentive plan, were eligible to
participate in the 2011 Plan. Under the 2011 Plan, individual cash incentive payments for the Chief Executive Officer and other executive officers would be
based both on Company performance, as measured by achievement of operating income (before incentive plan accruals) and revenue goals within specified
ranges established by the Compensation Committee, and individual performance, as measured by the achievement of personal management objectives, with
each of these components representing one-third of the potential cash incentive award. On February 6, 2012, the Compensation Committee approved $2.6
million under the provisions of the 2011 Plan, which was paid in February of 2012.
2012 Incentive Plan
On February 7, 2012, upon the recommendation of the Compensation Committee, the Board of Directors of the Company approved the FY2012
Incentive Plan (the “2012 Plan”). The chief executive officer and other executive officers are eligible to participate in the 2012 Plan. Under the 2012 Plan,
individual cash incentive payments and restricted stock unit grants
66
for the chief executive officer and other executive officers will be based both on Company financial performance, as measured by achievement of operating
income (before incentive plan accruals) and revenue goals within specified ranges established by the Compensation Committee, and Company performance,
as measured by the achievement of personal management objectives. The Compensation Committee will determine the performance of the chief executive
officer, the chief financial officer and other participants based on the achievement of the management objectives established by the committee during the first
fiscal quarter of 2012.
(15)—Commitments and Contingencies:
On June 11, 2007, a patent infringement lawsuit was filed by Lizy K. John (“John”) against Lattice Semiconductor Corporation in the U.S. District
Court for the Eastern District of Texas, Marshall Division. John seeks an injunction, unspecified damages, and attorneys' fees and expenses. The Company
filed a request for re-examination of the patent by the United States Patent and Trademark Office (“PTO”), which was granted by the PTO, and the re-
examination has concluded. The litigation was stayed pending the results of the re-examination. At this stage of the proceedings, we do not have an estimate
of the likelihood or the amount of any potential exposure to us. The Company believes it possesses defenses to these claims and intends to vigorously defend
this litigation.
On December 8, 2010, Intellectual Ventures I LLC and Intellectual Ventures II LLC (“Intellectual Ventures”) filed a patent infringement lawsuit
against the Company, Altera Corporation and Microsemi Corporation in the U.S. District Court for the District of Delaware, seeking unspecified damages. At
this stage of the proceedings, we do not have an estimate of the likelihood or the amount of any potential exposure to us. The Company believes it possesses
defenses to these claims and intends to vigorously defend this litigation.
We are also exposed to certain other asserted and unasserted potential claims. There can be no assurance that, with respect to potential claims made
against us, we could resolve such claims under terms and conditions that would not have a material adverse effect on our business, our liquidity or our
financial results. 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 based on the
provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 450, “Contingencies" (“ASC 450”). 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. Presently, no accrual has been estimated under ASC 450 for potential losses that may or may not arise from the current lawsuits in
which we are involved.
67
(16)—Segment and Geographic Information:
We operate in one industry segment comprising the design, development, and marketing of high performance programmable logic products. Our
revenue by major geographic area was as follows (dollars in thousands):
December 31,
2011
Year Ended
January 1,
2011
January 2,
2010
Total
%
Total
%
Total
%
United States
$
44,847
14 $
36,211
12 $
28,296
China
Europe
Japan
Taiwan
Other Asia
Other Americas
Total foreign revenue
Total revenue
123,124
66,319
36,961
8,346
32,687
6,082
273,519
318,366
$
39
21
11
3
10
2
86
124,910
54,332
38,992
8,839
27,853
6,631
261,557
42
18
13
3
10
2
88
100 $
297,768
100 $
15
43
17
10
3
9
3
83,813
33,389
19,460
6,313
17,476
5,673
166,124
194,420
85
100
We assign revenue to geographies based on the customer ship-to address at the point where revenue is recognized. In the case of sell-in distributors
and OEM customers, revenue is typically recognized, and geography is assigned, when products are shipped to our distributor or customer. In the case of sell-
through distributors, revenue is recognized when resale occurs and geography is assigned based on the customer location on the resale reports provided by the
distributor.
Revenue from Distributors
Our largest customers are distributors and have historically made up a significant portion of our total revenue. Revenue attributable to resales of
products by Arrow Electronics, Inc., which includes its wholly-owned subsidiary, Nu Horizons Electronics Corp., accounted for approximately 22%, 18% and
12% of revenue in fiscal years 2011, 2010 and 2009, respectively. Revenue attributable to resales of products by Avnet, Inc. accounted for approximately
17%, 17% and 13% of revenue in fiscal years 2011, 2010 and 2009, respectively. Revenue attributable to resales of products by the Weikeng Group (Weikeng
Industrial Co. Ltd. (Taiwan) and Weikeng International Co. Ltd. (Hong Kong)) accounted for approximately 14%, 14% and 9% of revenue in fiscal years
2011, 2010 and 2009, respectively. Sales of products to ASTI Holdings Ltd. accounted for approximately 0%, 0% and 16% of revenue in fiscal years 2011,
2010 and 2009, respectively. No other individual customer accounted for more than 10% of total revenue in any of the fiscal years 2011, 2010 and 2009.
On August 28, 2011, our global franchise agreement with Avnet terminated, however, we mutually agreed to terms for the transition of inventory
through December 31, 2011. We do not expect a significant disruption in our ability to service customers as a result of this change. We continue to serve our
end customers with a network that includes a global distributor, regional distributors, manufacturer's representatives, and our direct sales team.
During fiscal 2009, the Company embarked on a program to restructure its distribution channels, primarily in the Asia Pacific region, from a sell-in
to a sell-through distribution model. As a result, the majority of our revenue in fiscal 2010 was related to resale of our products by sell-through distributors. In
connection with this program, Lattice terminated our distribution agreement between Lattice and Promaster Technology Corporation on July 2, 2009, between
Lattice and Dragon Technology Distribution and FE Global Electronics effective for various territories on February 1 and February 6, 2010, respectively, and
between Lattice and other distributors effective on various dates. Dragon Technology Distribution and FE Global Electronics are wholly-owned subsidiaries
of ASTI Holdings Ltd.
68
(17)—Quarterly Financial Data (Unaudited):
A summary of the Company's consolidated quarterly results of operations is as follows (in thousands, except per share data):
Revenue
Gross margin
2011
2010
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
$ 70,170 $ 81,720 $ 83,861 $ 82,615 $ 73,080 $ 77,137 $ 77,119 $ 70,432
$ 40,463 $ 47,854 $ 50,671 $ 49,609 $ 45,841 $ 45,586 $ 47,230 $ 41,168
Restructuring charges (adjustment)
$
1,097 $
1,760 $
1,387 $
1,835 $
(30) $
79 $
(120) $
82
Net income
$ 40,945 $ 13,337 $ 13,031 $ 10,919 $ 13,879 $ 15,368 $ 16,736 $ 11,089
Basic net income per share
Diluted net income per share
$
$
0.35 $
0.34 $
0.11 $
0.11 $
0.11 $
0.11 $
0.09 $
0.09 $
0.12 $
0.11 $
0.13 $
0.13 $
0.14 $
0.14 $
0.10
0.10
(18)—Subsequent Events:
On February 7, 2012, upon the recommendation of the Compensation Committee, the Board of Directors of the Company approved the FY2012
Incentive Plan (the “2012 Plan”). The chief executive officer and other executive officers are eligible to participate in the 2012 Plan. Under the 2012 Plan,
individual cash incentive payments and restricted stock unit grants for the chief executive officer and other executive officers will be based both on Company
financial performance, as measured by achievement of operating income (before incentive plan accruals) and revenue goals within specified ranges
established by the Compensation Committee, and Company performance, as measured by the achievement of management objectives. The Compensation
Committee will determine the performance of the chief executive officer, the chief financial officer and other participants based on the achievement of
management objectives established by the committee during the first fiscal quarter of 2012.
On February 24, 2012, the Company's Board of Directors approved a stock repurchase program pursuant to which up to $20.0 million of
outstanding common stock may be repurchased from time to time. The duration of the repurchase program is twelve months. All repurchases will be open
market transactions and funded from available working capital.
69
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Lattice Semiconductor Corporation:
We have audited the accompanying consolidated balance sheets of Lattice Semiconductor Corporation and subsidiaries as of December 31, 2011 and January
1, 2011 and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income (loss), and cash flows for each of
the years in the three-year period ended December 31, 2011. In connection with our audits of the consolidated financial statements, we also have audited the
consolidated financial statement Schedule II. These consolidated financial statements and consolidated financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lattice Semiconductor
Corporation and subsidiaries as of December 31, 2011 and January 1, 2011, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related consolidated
financial statement Schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Lattice Semiconductor
Corporation's internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2012 expressed an unqualified
opinion on the effectiveness of the Company's internal control over financial reporting.
Portland, Oregon
March 12, 2012
/s/ KPMG LLP
70
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Lattice Semiconductor Corporation:
We have audited Lattice Semiconductor Corporation's internal control over financial reporting as of December 31, 2011, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Lattice
Semiconductor Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Lattice Semiconductor Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31,
2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
The Company acquired APAC IC on July 15, 2011 and SiliconBlue Technologies Ltd. on December 16, 2011 (the Acquisitions). Management excluded the
Acquisitions from its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2011. The Acquisitions
represent 1.1% of the Company's total assets and less than 1% of the Company's total revenues as reported in the consolidated financial statements for the year
ended December 31, 2011. Our audit of internal control over financial reporting of Lattice Semiconductor Corporation also excluded an evaluation of the
internal control over financial reporting of SiliconBlue Technologies Ltd.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets
of Lattice Semiconductor Corporation and subsidiaries as of December 31, 2011 and January 1 2011, and the related consolidated statements of operations,
changes in stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2011, and
our report dated March 12, 2012 expressed an unqualified opinion on those consolidated financial statements.
Portland, Oregon
March 12, 2012
/s/ KPMG LLP
71
Item 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange
Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this annual report.
Management's Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding reliability of financial reporting and the preparation and fair presentation of published financial statements for external
purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2011. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
—Integrated Framework. Based on this assessment, management concluded that, as of December 31, 2011, the Company's internal control over financial
reporting was effective.
The Company acquired APAC IC on July 15, 2011, and SiliconBlue on December 16, 2011 (the Acquisitions). Management excluded the
Acquisitions from its assessment of the effectiveness of the Company's internal controls over financial reporting as of December 31, 2011. The Acquisitions
represent 1.1% of the Company's total assets and less than 1% of the Company's total revenues as reported in the consolidated financial statements for the year
ended December 31, 2011.
KPMG LLP, an independent registered public accounting firm, has audited the Company's financial statements in this report on Form 10-K and
issued its report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2011.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting (as defined in Rules 13a - 15(f) and 15(d) - 15(f) under the Exchanges Act)
that occurred during the fourth quarter of fiscal 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting. In 2010 and most of 2011 we implemented a new ERP system including new modules related to our general ledger, accounts payable and elements
of our cost accounting systems. Legacy operating and financial information was migrated to the new ERP system, which resulted in the modification of
certain controls, procedures and processes. We follow a system implementation life cycle process that requires significant pre-implementation planning,
design and testing. We plan to continue to replace our legacy systems with the new ERP system functionality over the next several years.
Item 9B. Other Information.
None.
72
Certain information required by Part III is incorporated by reference from our definitive proxy statement (the “Proxy Statement”) for the 2012
Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, which we will file not later than 120 days
after the end of the fiscal year covered by this report. With the exception of the information expressly incorporated by reference from the Proxy Statement, the
Proxy Statement is not to be deemed filed as a part of this report.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information regarding our directors that is required by this item is incorporated by reference from the information contained under the captions
“Proposal 1: Election of Directors” and “Corporate Governance and Other Matters--Board Meetings and Committees” in the Proxy Statement. Information
regarding our executive officers that is required by this item is set forth in Part I of this report under the caption “Executive Officers of the Registrant.”
Information regarding Section 16(a) reporting compliance that is required by this item is incorporated by reference from the information contained
under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
We have adopted a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer, principal
accounting officer, and persons performing similar functions. The Standards of Ethics and Conduct is posted on our website at www.latticesemi.com and is an
exhibit to this Annual Report on Form 10-K. Amendments to the code of ethics or any grant of a waiver from a provision of the code of ethics requiring
disclosure under applicable SEC rules, if any, will be disclosed on our website at www.latticesemi.com.
Information about our “Director Code of Ethics” and written committee charters for our Audit Committee, Compensation Committee, and
Nominating and Governance Committee are available free of charge on the Company's website at www.latticesemi.com and is available in print to any
shareholder upon request.
There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since the
filing of our Annual Report on Form 10-K for the year ended December 31, 2011. The procedures by which security holders may recommend nominees to our
Board of Directors were described in detail in the information concerning our Nominating and Governance Committee under the caption “Board Meetings and
Committees” in our Proxy Statement filed March 15, 2012.
Information regarding our Audit Committee that is required by this Item is incorporated by reference from the information concerning our Audit
Committee contained under the caption “Corporate Governance and Other Matters--Board Meetings and Committees” in the Proxy Statement.
Item 11. Executive Compensation.
The information contained under the captions “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” and
“Compensation Committee Report” in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information contained under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information contained under the captions entitled “Certain Relationships and Related Transactions” and “Corporate Governance and Other
Matters--Director Independence” in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information contained under the caption entitled “Audit and Related Fees” in the Proxy Statement is incorporated herein by reference.
73
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) List of Documents Filed as Part of this Report
(1) All financial statements.
The following financial statements are filed as part of this report under Item 8.
Consolidated Financial Statements:
Consolidated Balance Sheets, at December 31, 2011 and January 1, 2011
Consolidated Statements of Operations, for the Years ended December 31, 2011, January 1, 2011 and January 2, 2010
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income (Loss), for the Years ended
December 31, 2011, January 1, 2011 and January 2, 2010
Consolidated Statements of Cash Flows, for the Years ended December 31, 2011, January 1, 2011 and January 2, 2010
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
Schedule II—Valuation and Qualifying Accounts
43
44
45
46
47
S-1
All other schedules have been omitted because the required information is included in the Consolidated Financial Statements or the notes thereto, or is not
applicable or required.
(3) Exhibits.
Exhibit
Number
2.1
3.1
3.2
4.4
4.5
10.23
10.24*
Description
Agreement and Plan of Merger, dated as of December 9, 2011, by and among Lattice Corp., Lattice Semiconductor, Ltd., a Bermuda
exempted company and a wholly owned subsidiary of Lattice Corp., Aff Inv Acquisition Corporation, a Cayman Islands exempted
company and a wholly owned subsidiary of Lattice Ltd., SiliconBlue Technologies Ltd., a Cayman Islands exempted company, and
Fortis Advisors LLC, as the representative for SiliconBlue's security holders (Incorporated by reference to Exhibit 2.1 filed with the
Company's Current Report on Form 8-K filed on December 19, 2011).
The Company's Restated Certificate of Incorporation filed February 24, 2004 (Incorporated by reference to Exhibit 3.1 filed with the
Company's Annual Report on Form 10-K for the year ended January 3, 2004).
The Company's Bylaws, as amended and restated as of January 31, 2006 (Incorporated by reference to Exhibit 99.1 filed with the
Company's Current Report on Form 8-K filed February 3, 2006).
Indenture, dated as of June 20, 2003, between the Company and U.S. Bank National Association (Incorporated by reference to Exhibit
4.1 filed with the Company's Registration Statement on Form S-3 on August 13, 2003).
Form of Note for the Company's Zero Coupon Convertible Subordinated Notes (Incorporated by reference to Exhibit 4.2 filed with the
Company's Registration Statement on Form S-3 on August 13, 2003).
Advance Production Payment Agreement dated March 17, 1997 among Lattice Semiconductor Corporation and Seiko Epson
Corporation and S MOS Systems, Inc. (Incorporated by reference to Exhibit 10.23 filed with the Company's Annual Report on Form 10-
K for the fiscal year ended January 1, 2005)(1).
Lattice Semiconductor Corporation 1996 Stock Incentive Plan, as amended, and Related Form of Option Agreement (Incorporated by
reference to Exhibits (d)(1) and (d)(2) to the Company's Schedule TO filed on February 13, 2003).
74
Exhibit
Number
10.33*
10.34*
10.35
10.37*
10.38*
10.39
10.41*
10.42
10.43
10.44*
10.45*
10.46*
10.47*
10.48*
10.50*
10.51*
10.52*
Description
2001 Outside Directors' Stock Option Plan, as amended and restated effective May 1, 2007 (Incorporated by reference to the Appendix
A filed with the Company's 2007 Definitive Proxy Statement on Schedule 14A filed on April 5, 2007).
2001 Stock Plan, as amended, and related Form of Option Agreement (Incorporated by reference to Exhibits (d)(3) and (d)(4) to the
Company's Schedule TO filed on February 13, 2003).
Intellectual Property Agreement by and between Agere Systems Inc. and Agere Systems Guardian Corporation and Lattice
Semiconductor Corporation as Buyer, dated January 18, 2002 (Incorporated by reference to Exhibit 10.35 filed with the Company's
Annual Report on Form 10-K for the year ended December 29, 2001).
Lattice Semiconductor Corporation Executive Deferred Compensation Plan, as amended and restated effective as of August 11, 1997
(Incorporated by reference to Exhibit 99.3 filed with the Company's Registration Statement on Form S-3, as amended, dated October 17,
2002).
Amendment No. 1, to the Lattice Semiconductor Corporation Executive Deferred Compensation Plan, as amended, dated November 19,
1999 (Incorporated by reference to Exhibit 99.4 filed with the Company's Registration Statement on Form S-3, as amended, dated
October 17, 2002).
Registration Rights Agreement, dated as of June 20, 2003, between the Company and the initial purchaser named therein (Incorporated
by reference to Exhibit 4.3 filed with the Company's Registration Statement on Form S-3 on August 13, 2003).
Form of Indemnification Agreement executed by each director and executive officer of the Company and certain other officers and
employees of the Company and its subsidiaries (Incorporated by reference to Exhibit 10.41 filed with the Company's Annual Report on
Form 10-K for the year ended January 3, 2004).
Amendment dated March 25, 2004 to Advance Production Payment Agreement dated March 17, 1997, as amended, among Lattice
Semiconductor Corporation and Seiko Epson Corporation and S MOS Systems, Inc. (Incorporated by reference to Exhibit 10.42 filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended April 3, 2004)(1).
Advance Payment and Purchase Agreement dated September 10, 2004 between Lattice Semiconductor Corporation and Fujitsu Limited
(Incorporated by reference to Exhibit 10.1 filed with the Company's Quarterly Report on Form 10-Q for the quarter ended October 2,
2004)(1).
Employment Agreement between Lattice Semiconductor Corporation and Stephen A. Skaggs dated August 9, 2005 (Incorporated by
reference to Exhibit 99.1 filed with the Company's Current Report on Form 8-K filed on August 12, 2005).
Compensation Arrangement between Lattice Semiconductor Corporation and Patrick S. Jones, Chairman of the Board of Directors
(Incorporated by reference to Exhibit 99.2 filed with the Company's Current Report on Form 8-K filed on August 12, 2005).
Employment Agreement between Lattice Semiconductor Corporation and Jan Johannessen dated November 1, 2005 (Incorporated by
reference to Exhibit 10.1 filed with the Company's Quarterly Report on Form 10-Q filed on November 4, 2005).
Employment Agreement between Lattice Semiconductor Corporation and Martin R. Baker dated November 1, 2005 (Incorporated by
reference to Exhibit 10.2 filed with the Company's Quarterly Report on Form 10-Q filed on November 4, 2005).
Employment Agreement between Lattice Semiconductor Corporation and Stephen M. Donovan dated November 1, 2005 (Incorporated
by reference to Exhibit 10.3 filed with the Company's Quarterly Report on Form 10-Q filed on November 4, 2005).
Compensation Arrangement between Lattice Semiconductor Corporation and Chairpersons for Committees of the Board of Directors
(Incorporated by reference to Exhibit 99.1 filed with the Company's Current Report on Form 8-K filed on December 12, 2005).
Form of Amendment to Stock Option Agreements for 1996 Stock Incentive Plan, as amended, and 2001 Stock Plan, as amended
(Incorporated by reference to Exhibit 99.3 filed with the Company's Current Report on Form 8-K filed on December 12, 2005).
2006 Executive Bonus Plan (Incorporated by reference to Exhibit 99.4 filed with the Company's Current Report on Form 8-K filed on
December 12, 2005).
75
Exhibit
Number
10.53
10.54
10.55*
10.56*
10.57*
10.58*
10.59*
10.60*
10.61*
10.62*
10.63*
10.64
10.65
10.66*
10.67*
10.68*
10.69*
Description
Addendum dated March 22, 2006 to the Advance Payment and Purchase Agreement dated September 10, 2004 between Lattice
Semiconductor Corporation and Fujitsu Limited (Incorporated by reference to Exhibit 10.53 filed with the Company's Quarterly Report
on Form 10-Q filed on November 7, 2006).
Addendum No. 2 dated effective October 1, 2006 to the Advance Payment and Purchase Agreement dated September 10, 2004 between
Lattice Semiconductor Corporation and Fujitsu Limited (Incorporated by reference to Exhibit 10.54 filed with the Company's Quarterly
Report on Form 10-Q filed on November 7, 2006)(1).
2007 Executive Variable Compensation Plan, as amended (Incorporated by reference to Exhibit 99.1 filed with the Company's Current
Report on Form 8-K filed on December 7, 2006, as amended as described in the Company's Current Report on Form 8-K filed on
February 8, 2007).
Form of Notice of Grant of Restricted Stock Units to Executive Officer (Incorporated by reference to Exhibit 99.1 filed with the
Company's Current Report on Form 8-K filed on February 8, 2007).
2008 Executive Variable Compensation Plan, as amended (Incorporated by reference to Exhibit 99.1 filed with the Company's Current
Report on Form 8-K filed on December 7, 2007).
Letter Agreement between Lattice Semiconductor Corporation and Stephen A. Skaggs dated January 31, 2008 (Incorporated by
reference to Exhibit 10.58 filed with the Company's Annual Report on Form 10-K filed on March 13, 2008).
Employment Agreement between Lattice Semiconductor Corporation and Bruno Guilmart dated May 14, 2008 (Incorporated by
reference to Exhibit 99.1 filed with the Company's Current Report on Form 8-K filed on June 16, 2008).
Employment Agreement between Lattice Semiconductor Corporation and Byron Milstead dated May 14, 2008 (Incorporated by
reference to Exhibit 10.60 filed with the Company's Current Report on Form 10-Q filed on August 8, 2008).
Form of Inducement Stock Option Agreement (Incorporated by reference to Exhibit 10.61 filed with the Company's Current Report on
Form 10-Q filed on November 5, 2008).
Employment Agreement between Lattice Semiconductor Corporation and Michael G. Potter dated February 4, 2009 (Incorporated by
reference to Exhibit 99.2 filed with the Company's Current Report on Form 8-K filed on February 4, 2009).
2009 Bonus Plan of Lattice Semiconductor Corporation (Incorporated by reference to Exhibit 10.63 filed with the Company's Annual
Report on Form 10-K filed on March 13, 2009).
Addendum #4 dated effective December 18, 2009 to the Advanced Payment and Purchase Agreement dated September 10, 2004
between Lattice Semiconductor Corporation and Fujitsu Limited (Incorporated by reference to Exhibit 10.64 filed with the Company's
Annual Report on Form 10-K filed on March 13, 2009).
Letter Agreement effective December 18, 2008 re Repayment of Advance Payment between Lattice Semiconductor Corporation and
Fujitsu Microelectronics Limited and Fujitsu Microelectronics America, Inc. (Incorporated by reference to Exhibit 10.65 filed with the
Company's Annual Report on Form 10-K filed on March 13, 2009).
Employment Agreement between Lattice Semiconductor Corporation and Byron Milstead effective as of December 30, 2008.
(Incorporated by reference to Exhibit 10.66 filed with the Company's Annual Report on Form 10-K filed on March 13, 2009).
Employment Agreement between Lattice Semiconductor Corporation and Sean Riley dated September 22, 2008 (Incorporated by
reference to Exhibit 10.67 filed with the Company's Current Report on Form 10-Q filed on April 4, 2009).
Employment Agreement between Lattice Semiconductor Corporation and Christopher M. Fanning amended and restated as of
December 15, 2008 (Incorporated by reference to Exhibit 10.68 filed with the Company's Current Report on Form 10-Q filed on April
4, 2009).
Lattice Semiconductor Corporation 2010 Cash Incentive Compensation Plan (Incorporated by reference to Exhibit 10.69 filed with the
Company's Annual Report on Form 10-K filed on March 10, 2010).
76
Exhibit
Number
10.70*
10.71*
14.1
21.1
23.1
31.1
31.2
32.1
32.2
Description
Employment Agreement between Lattice Semiconductor Corporation and Darin G. Billerbeck dated as of November 8, 2010
(Incorporated by reference to Exhibit 10.70 filed with the Company's Current Report on Form 10-Q filed on November 5, 2010).
Employment Agreement between Lattice Semiconductor Corporation and Joe Bedewi dated as of April 11, 2011 (Incorporated by
reference to Exhibit 10.71 filed with the Company's Current Report on Form 10-Q filed on May 5, 2011).
Standards of Ethics and Conduct (Incorporated by reference to Exhibit 14.1 filed with the Company's Annual Report on Form 10-K for
the year ended January 3, 2004).
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
________________
(1)
*
Pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, confidential treatment has been granted to portions of this exhibit, which
portions have been deleted and filed separately with the Securities and Exchange Commission.
Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this Annual Report on Form 10-K pursuant to
Item 15(b) thereof.
(b) See (a)(3) above.
(c) See (a)(1) and (2) above.
77
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
LATTICE SEMICONDUCTOR CORPORATION
(Registrant)
By:
/s/ J OE B EDEWI
Joe Bedewi
Corporate Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
Date: March 12, 2012
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Darin G. Billerbeck
and Joe Bedewi, or either of them, his or her attorneys-in-fact, each with the power of substitution, for such person in any and all capacities, to sign any
amendments to this report and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated and on the dates indicated:
Signature
/s/ DARIN G. BILLERBECK
Darin G. Billerbeck
/s/ JOE BEDEWI
Joe Bedewi
/s/ ROBIN ABRAMS
Robin Abrams
/s/ JOHN BOURGOIN
John Bourgoin
/s/ DAVID E. CORESON
David E. Coreson
/s/ PATRICK S. JONES
Patrick S. Jones
/s/ BALAJI KRISHNAMURTHY
Balaji Krishnamurthy
/s/ W. RICHARD MARZ
W. Richard Marz
/s/ GERHARD H. PARKER
Gerhard H. Parker
/s/ HANS SCHWARZ
Hans Schwarz
Title
Date
President, Chief Executive Officer and Director (Principal
March 12, 2012
Executive Officer)
Corporate Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
March 12, 2012
78
Column A
Classification
Fiscal year ended December 31, 2011:
Allowance for deferred taxes
Allowance for doubtful accounts
Allowance for warranty expense
Fiscal year ended January 1, 2011:
Allowance for deferred taxes
Allowance for doubtful accounts
Allowance for warranty expense
Fiscal year ended January 2, 2010:
Allowance for deferred taxes
Allowance for doubtful accounts
Allowance for warranty expense
LATTICE SEMICONDUCTOR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Schedule II
Column B
Balance at
beginning of
period
Column C
Column D
Column E
Column F
Charged (Credit) to
costs and
expenses
Charged to
other accounts
Write-offs
Balance at end
net of
recoveries
of period
$
$
$
$
$
$
271,208 $
(123,709)
(a) $
866
99
73
—
272,173 $
(123,636)
292,683 $
963
153
293,799 $
292,752 $
1,173
625
—
—
—
—
—
62
56
294,550 $
118
S-1
$
$
$
$
$
(2)
—
—
(2)
$
— $
147,497
—
(99)
939
—
$
(99) $
148,436
(476)
$
(20,999) $
271,208
—
—
(97)
(54)
866
99
(476)
$
(21,150) $
272,173
25
—
—
25
$
(94) $
292,683
(272)
(528)
963
153
$
(894) $
293,799
LATTICE SEMICONDUCTOR CORPORATION
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.1
1.
2.
3.
4.
5.
6.
7.
8
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Name
Lattice Semiconductor GmbH
Lattice Semiconducteurs SARL
Lattice Semiconductor AB
Lattice Semiconductor Asia Limited
Lattice Semiconductor KK
Lattice Semiconductor (Shanghai) Co. Ltd.
Lattice Semiconductor UK Limited
Lattice Semiconductor SRL
Lattice Semiconductor International LLC
Lattice Semiconductor Canada Corporation
Lattice Semiconductor (Singapore) Pte. Ltd.
Lattice SG Pte. Ltd.
Lattice Semiconductor (PH) Corporation
Lattice Semiconductor Limited
SiliconBlue Technologies Limited
SiliconBlue Technologies Corporation
Chengdu SiliconBlue Microelectronics Co., Ltd.
SiliconBlue Technologies Japan GK
SiliconBlue Technologies (Hong Kong) Ltd.
SiliconBlue Technologies Korea Co. Ltd.
Jurisdiction of Incorporation
Germany
France
Sweden
Hong Kong
Japan
China
United Kingdom
Italy
Delaware, USA
Canada
Singapore
Singapore
Philippines
Bermuda
Cayman Islands
California
China
Japan
Hong Kong
South Korea
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Lattice Semiconductor Corporation:
We consent to the incorporation by reference in the registration statements on Form S-8 (No. 33-33933, No. 33-35259, No. 33-38521, No. 33-76358, No.
33-51232, No. 33-69496, No. 333-15737, No. 333-40031, No. 333-69467, No. 333-67274, No. 333-99247, No. 333-120959, No. 333-143387, and No.
333-176133) of Lattice Semiconductor Corporation of our reports dated March 12, 2012, with respect to the consolidated balance sheets of Lattice
Semiconductor Corporation and subsidiaries as of December 31, 2011 and January 1, 2011, and the related consolidated statements of operations, changes in
stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2011, and the related
consolidated financial statement schedule, and the effectiveness of internal control over financial reporting as of December 31, 2011, which reports appear in
the December 31, 2011 annual report on Form 10-K of Lattice Semiconductor Corporation.
/s/ KPMG LLP
Portland, Oregon
March 12, 2012
Exhibit 31.1
I, Darin G. Billerbeck, certify that:
CERTIFICATION
1.
2.
3.
4.
(a)
(b)
(c)
(d)
5.
(a)
(b)
I have reviewed this Annual Report on Form 10-K of Lattice Semiconductor Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: March 12, 2012
/s/ DARIN G. BILLERBECK
Darin G. Billerbeck
President and Chief Executive Officer
Exhibit 31.2
I, Joe Bedewi, certify that:
CERTIFICATION
1.
2.
3.
4.
(a)
(b)
(c)
(d)
5.
(a)
(b)
I have reviewed this Annual Report on Form 10-K of Lattice Semiconductor Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
Date: March 12, 2012
/s/ JOE BEDEWI
Joe Bedewi
Corporate Vice President and Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Lattice Semiconductor Corporation (the Company) on Form 10-K for the year ended December 31, 2011
(the Report), I, Darin G. Billerbeck, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon
request.
Date: March 12, 2012
/s/ DARIN G. BILLERBECK
Darin G. Billerbeck
President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Lattice Semiconductor Corporation (the Company) on Form 10-K for the year ended December 31, 2011
(the Report), I, Joe Bedewi, Corporate Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon
request.
Date: March 12, 2012
/s/ JOE BEDEWI
Joe Bedewi
Corporate Vice President and Chief Financial Officer