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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, 2016
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
or
Commission file number: 000-18032
LATTICE SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
111 SW Fifth Ave, Ste 700, Portland, OR
(Address of principal executive offices)
93-0835214
(I.R.S. Employer Identification Number)
97204
(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
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 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 2, 2016
Number of shares of common stock outstanding as of February 27, 2017
$
494,446,306
121,748,458
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 2017 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.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
LATTICE SEMICONDUCTOR CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for 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
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants On Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits
Signatures
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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. These involve estimates,
assumptions, risks and uncertainties. Any statements about our expectations, beliefs, plans, objectives, assumptions or future
events or performance are not historical facts and may be forward-looking. We use words or phrases such as “anticipates,”
“believes,” “could,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “may,” “will,” “should,” “continue,” “ongoing,”
“future,” “potential” and similar words or phrases to identify forward-looking statements.
Examples of forward-looking statements include, but are not limited to, statements about: our strategies and beliefs regarding
the markets we serve or may serve; growth opportunities and growth in markets we may serve; the advantages our products
provide to our customers, including faster time to market and advanced features in an increasingly intense global technology
market; our competitive advantage over our competitors; our future product development and marketing plans; our intention to
continually introduce new products and enhancements and reduce manufacturing costs; our belief that video consumption will
continue to grow and how our product portfolio will allow us to reach new markets; our plans to introduce new product families in
high-growth market niches where we believe that we have sustainable and differentiated positions; the anticipation that we will
become increasingly dependent on revenue from newer products; our expectations regarding customer preferences and product
use; acceptance of our devices; our expectations that a significant portion of our revenue will continue to be dependent on the
Mobile and Consumer, Communications and Computing, and Industrial and Automotive end markets; the Asia Pacific market
being the primary source of our revenue; a significant portion of our revenue being through our sell-through distributors; our
expectations regarding seasonal and economic trends; our estimates and judgment to reconcile distributors’ inventories; our
making significant future investments in research and development; the costs of making and developing various products; our
expectation that we will continue to transition to increasingly smaller geometry process technologies; our ability to maintain or
develop successful foundry relationships to produce new products; the adequacy of assembly and test capacity commitments;
the impact of products, customers and downward pressure on pricing and effects on gross margin; expected synergies from the
acquisition of Silicon Image; the expected cost and timing of our internal restructuring plans; our expectations regarding
protection of and defenses to claims against our intellectual property; our defenses to claims and the finalization and settlement
of litigation or administrative proceedings; the impact of our global tax structure and expectations regarding taxes and tax
adjustments; our ability to forecast future sales and the relative product mix of those revenues; our expectation regarding the
sufficiency of our financial resources to meet our working capital needs through at least the next 12 months; our expectation that
we may consider acquisition opportunities to further extend our product or technology portfolios and further expand our product
offerings; our belief that our business as a whole is not materially dependent on any particular license or group of licenses; the
impact of new accounting pronouncements; our beliefs concerning the adequacy of our liquidity and facilities, and our ability to
meet our operating and capital requirements and obligations; our continued participation in consortia that develop and promote
the High-Definition Multimedia Interface ("HDMI"), Mobile High-Definition Link ("MHL") and WirelessHD specifications, and our
participation in other standard setting initiatives and deep engagement with the standards bodies; the effect of termination of our
agent functions regarding the HDMI consortium, related reduction in adopter fees, and impairment charges; our ability to
implement a company-wide enterprise resource planning system; any other changes in the agreements relating to various
intellectual property or standards consortia and their sharing of past or present fees or royalties; and our expectation that the
proposed acquisition of the outstanding shares of the Company by Canyon Bridge Acquisition Company, Inc. will occur in early
2017.
Forward-looking statements involve estimates, assumptions, risks, and uncertainties that could cause actual results to differ
materially from those expressed in the forward-looking statements. The key factors, among others, that could cause our actual
results to differ materially from the forward-looking statements included global economic conditions and uncertainty, the
concentration of our sales in the Mobile and Consumer and Communications and Computing end markets, particularly as it
relates to the concentration of our sales in the Asia Pacific region, market acceptance and demand for our new products, our
ability to license our intellectual property, any disruption of our distribution channels, the impact of competitive products and
pricing, unexpected charges, delays or results relating to our restructuring plans, unexpected changes to our implementation of a
company-wide enterprise resource planning system, the effect of the downturn in the economy on capital markets and credit
markets, unanticipated taxation requirements or positions of the U.S. Internal Revenue Service, or unexpected impacts of recent
accounting guidance. In addition, actual results are subject to other risks and uncertainties that relate more broadly to our overall
business, including those more fully described herein and that are otherwise described from time to time in our filings with the
Securities and Exchange Commission, including but not limited to the items discussed in “Risk Factors” in Item 1A of Part I of
this Annual Report on Form 10-K.
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.
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PART I
Item 1. Business
Overview
Lattice Semiconductor Corporation and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) develop semiconductor
technologies that we monetize through products, solutions, and licenses.
We enable our customers to quickly and easily develop smart and connected products. We help their products become more
aware, interact more intelligently, and make better and faster connections. In an increasingly intense global technology market,
we help our customers get their products to market faster than their competitors.
Our historic focus was on the programmable logic devices (PLDs). In 2011, we made the strategic decision to competitively
differentiate from other established programmable logic companies with ultra-low power and ultra-small sized field
programmable gate array (FPGA) solutions, a type of PLD. As a result, we acquired a leader in this technology, SiliconBlue
Technologies, Inc. In 2015, we extended our capabilities beyond PLDs with the acquisition of Silicon Image, Inc. and its portfolio
of standards-driven Video Connectivity application specific standard products (ASSPs), 60 GHz mmWave devices, and
associated intellectual property (IP). We believe that video consumption will continue to grow and our broader product portfolio
will allow us to reach markets that we could not previously access. Video expertise combined with FPGA-based hardware
acceleration and both wired and wireless ways to distribute data allow us to penetrate new markets.
Our results for the year ended January 2, 2016 (fiscal 2015) include the results of Silicon Image for the approximately 10-month
period from March 11, 2015 through January 2, 2016. Results presented for periods prior to fiscal 2015 are those historically
reported for Lattice only. Our results for the year ended December 31, 2016 fully include the results of Silicon Image.
Our Markets and Customers
We sell globally into three markets: Mobile and Consumer, Communications and Computing, and Industrial and Automotive.
In the Mobile and Consumer Market, you can find our solutions making consumer products smarter and thinner, including:
smartphones, tablets and e-readers, wearables, accessories such as chargers and docks, smart home devices, Virtual Reality
(VR) headsets, Ultra High-Definition (UHD) TVs, digital SLR cameras, drones, and other connected devices.
Our Mobile and Consumer customers are driven by the need to deliver richer and more responsive experiences. They typically
require:
Longer battery lives for handheld devices and reduced energy consumption for plugged-in devices.
• More intelligence and computing power. Products need to be always-on and always-aware.
•
• Real-time transmission of higher resolution video content on larger screen sizes.
•
•
Fast design cycles. Products must be quickly and easily differentiated.
Smaller form factors. Products need to lay flatter on the wall or fit more easily in people’s pockets.
Lattice solutions help solve these challenges with the following products and services (described in detail below):
•
PLDs which bring multiple benefits to our customers. PLD’s parallel architecture enables faster processing than
competing devices, such as processors, allowing for a user experience with shorter pauses and fewer delays. Our
FPGAs are among the lowest power in the industry, enabling the application processor and other high power
components to remain dormant longer, resulting in longer battery life. Finally, with some of the industry’s smallest
packages, we enable thinner end products.
• mmWave Devices such as our SiBEAM Snap and WirelessHD products that simplify connectivity. SiBEAM Snap is a
wireless connection technology that can transfer a high definition movie to a mobile device in seconds while eliminating
the connector port. WirelessHD products enable laptops, projectors, accessories, and other Consumer products to
wirelessly communicate at very high speeds.
A full suite of standards-based HDMI and MHL Video Connectivity ASSPs which enable the immersive audio-visual
experience that consumers demand.
Intellectual Property Licensing which enables customers who wish to develop a proprietary solution to use our proven
technology.
•
•
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Our proprietary solutions help our customers get their products to market faster than typical development cycles. With re-
programmability and flexibility, our PLDs inherently allow our customers to have quicker product development. Our deep
engagement with industry standards bodies gives us an intimate knowledge of that technology and the ability to get better
products to market faster. Our mmWave technology is at the forefront of wireless connectivity innovation. These time-to-market
advantages are critical given shorter product life cycles and higher competition in our customers’ end markets.
In the Communications and Computing Market, our solutions play key roles in data center systems such as servers, HetNet
small cell base stations, network backhaul, wired access aggregation, and other related applications.
Our Communications and Computing customers need to “connect anything to everything,” at ever-increasing data rates.
•
As data center servers become smaller and power costs become more dominant, there is a growing requirement for
smaller form factors with lower installed and operational costs.
Additionally, they need simplified control logic, enhanced security, and rigorous power and thermal management.
•
• Networks typically require progressively higher bandwidth and increased reliability as more data is demanded by
consumer and other connected devices. Bandwidth demands are also driven by the rapid transition to a cloud-based
infrastructure.
As wireless cells become smaller, there is a growing requirement for smaller form factors with lower costs.
•
We help customers solve these problems with the following products:
•
PLDs optimized for Input-Output (I/O) expansion, acceleration and hardware management. Our FPGAs consume very
low power, which reduces operating costs. Their small form factor enables higher functional density in less space.
Finally, our FPGAs are I/O rich, which allows for more connections with system application specific integrated circuits
(ASICs) and ASSPs. Our programmable mixed signal devices make power and thermal management easy and reliable.
• mmWave transceivers feature high-integration, low power design, and internal / external antenna options. Our beam-
steering technology makes point-to-point links lighter, cheaper, lower power and easier to install, enabling backhaul at
“wireless fiber” data rates.
Examples of our products enabling intelligent automation in the Industrial and Automotive Market include: machine vision,
robotics, factory automation, industrial handhelds, surveillance cameras and DVRs, digital signage, driver assistance,
automotive infotainment, servers, and data center networks.
Our Industrial and Automotive customers face numerous challenges:
•
As smart factories develop, sensors are proliferating and machine vision is becoming higher definition, in turn requiring
increasing amounts of data to be gathered, connected, and processed.
• Cars, trucks, and trains are also becoming smarter and more connected. Drivers and passengers are demanding better
in-cabin experiences including entertainment, diagnostics, and enhanced safety - often involving multiple displays,
cameras, and sensors.
Our product portfolio helps solve these challenges with the following products and services:
• Our small-sized, low-power PLDs not only provide the I/O expansion, bridging, connectivity and processing inherent in
FPGAs to the full Industrial Market, but they also form the backbone of several integrated solutions, including complete
HD camera and DVR solutions on a single FPGA device and Human-Machine Interfaces (HMI) on a chip.
Performance-tested and regulatory-approved mmWave modules greatly reduce the complexity of adding high-
performance wireless video capabilities to displays, without the wires that clutter a factory floor or medical suite.
Automotive qualified MHL / HDMI Video Connectivity ASSPs allow consumers to stream UHD video from their mobile
phones to their in-car entertainment system, delivering the ultimate connected car experience.
•
•
Our Products, Services, and Competition
We deliver three types of semiconductor devices to help solve our customers' problems: PLDs, Video Connectivity ASSPs, and
mmWave devices. We also serve our customers with IP licensing and various other services.
Programmable Logic Devices (“PLDs”)
PLDs are regular arrays of logic that can be custom-configured by the user through software. This programmability allows
our customers flexibility and reduced time to market while allowing us to offer the chips to many different customers in many
different markets. Five product family lines anchor our PLD offerings:
•
The ECP families are our “Connectivity & Acceleration FPGAs.” They offer customers the lowest cost per gate, Digital
Signal Processing (DSP) capability, and Serialize-Deserialize (SerDes) connectivity. ECP devices are optimized for the
Communications and Computing market but also find significant use in the Industrial and Automotive market.
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•
•
The MachXO families are known as “Bridging and Expansion FPGAs.” They are control oriented and offer the lowest
cost per I/O. MachXO3L was chosen by the trade publication EDN as one of the “100 Hot Products of 2014”. MachXO
families are widely used across our three primary target markets: Communications and Computing, Industrial and
Automotive, and Mobile and Consumer.
iCE40 families are known as the “World’s Smallest FPGAs.” Their small size and ultra-low power, make them the
optimal products for customizing Consumer mobile and Industrial handheld products. The iCE40 UltraLite, was named
“Digital Semiconductor Product of the Year” by the 2015 Elektra European Electronics Industry Awards. In 2016, we
released the latest member of the family, iCE40 UltraPlus, focused on smart phone and IoT edge devices.
• CrossLink was introduced in 2016 as the world’s first video “pASSP” (programmable Application Specific Standard
Part). CrossLink combines the power and speed benefits of hardened camera and display bridging cores with the
flexibility of FPGA fabric. CrossLink was named the 2016 recipient of the “Editor’s Choice Award” by EEPW magazine.
Programmable Mixed Signal devices, such as our Platform Manger 2 and L-ASC10 combine programmable digital logic
with analog functionality to help customers manage power, thermal, and control planes in real time.
To enable our customers to get to market faster we support the PLDs with intellectual property cores, reference
designs, development kits, and design software.
•
•
Competition for our PLDs is fragmented.
• While ASICs, ASSPs, and microcontrollers have historically dominated high-volume market segments through low cost
and reduced power consumption, our PLDs have become small enough with sufficiently low power that we are now
considered by customers in cases where they need the architectural benefits of PLDs, namely programmability with its
accelerated time-to-market and the speed that comes from parallelism. If a customer’s design is not working as
intended, the customer can quickly change it using the programmability of our PLDs through software. In contrast,
ASICs and ASSPs require time consuming and expensive redesign and fabrication. Against microcontrollers we
differentiate our products with smaller sized packages and higher performance.
• Our main PLD competitors are Xilinx and Intel/Altera. Both make PLDs but are generally focused on the high-density
end of the market, making devices that are up to a full order of magnitude larger than ours with the associated
increases in power and size. We differentiate from them with ultra-low power and very small sized packages.
Video Connectivity ASSPs
In the Mobile and Consumer market, consumers need to connect many different types of audio-video devices and expect them
to work seamlessly together. We refer to these connections as “Video Connectivity.” Industry standards, such as HDMI, MHL,
and USB Type-C, ensure that consumers are able to successfully make those connections. These industry standards support
resolutions up to 8K, High Dynamic Range, Deep Color, and HDCP 2.2 content protection. Our Video Connectivity ASSPs
implement these standards along with value-added features and allow Consumer original equipment manufacturers (OEMs)
manufacturers to quickly get feature rich and interoperable products to market.
Our Video Connectivity ASSPs perform many functions, including ensuring interoperability, enhancing picture quality, converting
between resolutions, and transmitting / receiving content without the need for additional components. Specific device types
include port processors, port controllers, video processors, transmitters, receivers, bridges, and converters. These devices are
used in products such as mobile phones, UHD TVs, home theater systems, HDMI cable extenders, automotive infotainment,
PCs, accessories, projectors, and monitors.
In general, our Video Connectivity competition includes:
• HDMI or MHL functionality offered in either discrete devices or integrated into system-on-a-chip products. These are
•
•
offered by a small number of companies.
In-house semiconductor solutions designed by large consumer electronics OEMs.
Alternative HD connectivity technologies such as DisplayPort and MiraCast which are offered by a small number of
companies.
While our competition mainly tries to win with price, we believe that we have an advantage because of our deep engagement
with industry standards bodies. This involvement enables us to bring our “standards plus” products to market more quickly and
gives our customers confidence that we have the expertise needed to successfully execute.
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mmWave Devices
Our mmWave devices and modules allow customers to wirelessly transfer data and UHD video content at gigabit speeds. Built
using our proprietary 60 GHz SiBEAM technology, our mmWave transceivers, processors, and antenna arrays are divided into
three groups, differentiated by their transmission range:
• Gigabit Connector devices “eliminate the connectors on your mobile products.” Built with SiBEAM Snap technology
these devices under development connect consumer products and are effective across centimeter distances.
• Our Gigabit Indoor devices and modules “cut the wires in home, office, and factory.” Geared around the Consumer and
Industrial Markets these devices reach distances measured in meters.
• Gigabit Outdoor products provide “wireless fiber for network backhaul.” Achieving a range of 100’s of meters these
devices provide the Communications market with ultra-high speed links for point-to-point connectivity.
Our competition includes a small number of established semiconductor companies that work to create an advantage by bundling
mmWave technology into their reference designs and processors. We believe that the depth of our 60 GHz experience enables
us to get products to market faster and when combined with advanced features, such as our advanced beam-forming
technology, gives us an edge over our competition.
Intellectual Property (IP) Licensing
Lattice has a broad set of technological capabilities and many US and international patents. We generate revenue from our
technology portfolio via upfront fees and on-going royalty payments with three sets of activities:
1. Standard IP Licensing - these activities include our participation in two consortia for the licensing of HDMI and MHL
2.
technologies to customers who adopt the technology into their products and voluntarily report their usage and royalties.
The royalties are split between consortia members, including us.
IP Core Licensing - some customers need Lattice’s technology for specific functions or features, but for various reasons
are not able to use our silicon solutions. In those cases, we may sell them IP cores which they can integrate into their
own ASICs. In contrast to the use of consortia, these licensing activities are generally performed internally.
3. Patent Monetization - we sell certain patents from our portfolio generally for technology that we are no longer actively
developing. The revenue from these sales generally consists of upfront payments and potential future royalties.
Simplay Labs, LLC (“Simplay Labs”)
Simplay Labs develops performance standards, testing services, development tools, and technologies for Mobile and Consumer
product manufacturers. By partnering with Simplay Labs, manufacturers can reduce the time and cost to market, providing
products that are distinguished by reliability and ease of operation while delivering the high-performance HD their customers
demand. The products that Simplay Labs tests include televisions, A/V receivers, sound bars, set-top boxes, gaming consoles,
and media hubs. Simplay Labs has service centers operating in the United States, South Korea, China, and Taiwan. Simplay’s
service centers provide compliance, interoperability and performance testing.
Research and Development
We place a substantial emphasis on new product development, with a priority on return on investment, and believe that
continued investment in research and development 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, improvement of software development tools, development of innovative technology standards, and
enhanced services. Research and development activities occur primarily in: Hillsboro, Oregon; San Jose, California; Shanghai,
China; Alabang, Philippines; and Hyderabad, India.
Research and development expenses were $117.5 million in 2016, $136.9 million in 2015, and $88.1 million in 2014. The
increase in fiscal 2015 as compared to fiscal 2014 is substantially due to the inclusion of approximately ten months of activity
from Silicon Image following acquisition. We expect to continue to make significant investments in research and development.
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.
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Lattice and Fujitsu Limited ("Fujitsu") have entered into agreements pursuant to which Fujitsu manufactures our products on its
130nm, 90nm and 65nm CMOS process technologies, as well as on 130nm, 90nm and 65nm technologies with embedded flash
memory that we have jointly developed with Fujitsu. Taiwan Semiconductor Manufacturing Company Ltd. (“TSMC”)
manufactures our 40nm iCE and legacy Silicon Image products. United Microelectronics Corporation ("UMC") manufactures
certain of our 40nm products, as well as some of our 350nm and 180nm products. Seiko Epson ("Epson") manufactures some of
our 500nm, 350nm, 250nm and 180nm products.
All of our assembly and volume test operations are performed by outside suppliers.
We rely on third party vendors to provide cost-effective and efficient supply chain services. Among other activities, these
outsourced services relate to direct sales logistics, including order fulfillment, inventory management and warehousing, and
shipment of inventory to third party distributors.
We perform certain test operations as well as reliability and quality assurance processes internally. We have achieved and
maintained ISO9001:2008 Quality Management Systems Certification and released a line of products qualified to the AEC-Q100
Reliability Standard.
Wafer Fabrication
We source silicon wafers from our foundry partners, Fujitsu and Epson in Japan, and TSMC and UMC in Taiwan, pursuant to
agreements with each company and their respective affiliates. We negotiate wafer volumes, prices and other terms with our
foundry partners and their respective affiliates on a periodic basis.
Assembly
After wafer fabrication and initial testing, we ship wafers to independent subcontractors for assembly. During assembly, wafers
are separated into individual die and encapsulated in plastic packages. We have qualified assembly partners in Indonesia,
Malaysia, Taiwan, the Philippines, South Korea, Singapore, Japan, and the United States. 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. We believe 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 sort test the die on most wafers prior to shipment for assembly. Following assembly, but prior to customer
shipment, each product undergoes final testing and quality assurance procedures. Wafer sort testing is performed by
independent contractors in Malaysia, Japan, Indonesia, Taiwan, and Singapore. Final testing is performed by independent
contractors in Indonesia, Malaysia, the Philippines, Singapore, Taiwan, South Korea, Japan, and the United States. We also
perform certain test operations, as well as reliability and quality assurance processes, internally.
Sales and Revenue
We generate revenue by monetizing our technology and patents using two go-to-market strategies.
•
•
Product and Technology Sales involve direct and channel sales of silicon based products with their associated
solutions and services.
Intellectual Property Licensing involves either the license or sale of intellectual property that we have developed,
some of which is used in our products.
Seasonality
While we periodically may experience some seasonal trends in the sale of our products, general economic conditions and the
cyclical nature of the end markets we serve generally have a greater impact on our business and financial results than seasonal
trends.
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Backlog
Our backlog consists of orders from distributors and certain OEMs that require delivery within the next year. Historically, our
backlog has not been a predictor of future sales or customer demand for the following reasons:
•
Purchase orders, consistent with common industry practices, can generally be revised or canceled up to 30 days before
the scheduled delivery date without significant penalty.
• 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.
A sizable portion of our revenue comes from our "turns business," where the product is ordered and delivered within the
same quarter.
A growing portion of our revenue arises from vendor managed inventory arrangements where the timing and volume of customer
utilization is difficult to predict.
Sales and Customers
We primarily sell our products to end customers from Lattice Semiconductor Corporation or our wholly-owned subsidiary, Lattice
SG Pte. Ltd. We sell both directly and through a network of independent manufacturers' representatives. Additionally, we sell
indirectly through independent sell-in (primarily Japan) 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 ("OEMs") in the Communications and Computing, Mobile and Consumer, and
Industrial and Automotive end markets.
We have agreements with 19 manufacturers' representatives in North America. We have established sales channels in over 44
foreign countries and maintain a network of 14 international sales representatives. A substantial portion of our sales are made
through distributors.
We provide global technical support to our end customers with engineering staff based at our headquarters, product
development centers and selected field sales offices. We maintain numerous domestic and international field sales offices in
major metropolitan areas.
Resale of product by sell-through distributors accounted for approximately 61% of our net revenue in fiscal 2016, and
approximately 45% of our net revenue in each of fiscal 2015, and 2014, and we expect our distributors to generate a significant
portion of our revenue in the future. We depend on our distributors to sell our products to end customers, complete order
fulfillment, and maintain sufficient inventory of our products. Our distributors also provide technical support and other value-
added services to our end customers. We have two global sell-through distributors. We also have regional distribution in Asia,
Japan, Israel, and North America, and we sell through three major on-line distributors.
In fiscal years 2016 and 2015, our revenue was broadly distributed across end markets and end customers, with no individual
end customer accounting for more than 10% of the total revenue for the year. In fiscal 2014, our top two end customers
accounted for 19% and 12%, respectively, of total revenue. No other individual end customers, in any end markets, accounted
for more than 10% of total revenue in fiscal year 2014.
Revenue from foreign sales as a percentage of total revenue was 88%, 92%, and 92%, for fiscal 2016, 2015, and 2014,
respectively. We assign revenue to geographies based on customer ship-to address at the point where revenue is recognized.
Revenue attributed to China for fiscal 2016 was approximately 34% of total revenue, compared to 36% and 43% in fiscal 2015
and fiscal 2014, respectively. In the case of sell-in distributors and OEMs, revenue is typically recognized, and geography is
assigned, when products are shipped. In the case of sell-through distributors, revenue is recognized when resale to the end
customer occurs and geography is assigned based on the end customer location on the resale reports provided by the
distributor. Both foreign and domestic sales are denominated in U.S. dollars, with the exception of certain historical sales in
Japan, where were denominated in yen.
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The composition of our revenue by geography, based on ship-to location, is as follows:
(In thousands)
Asia
Europe
Americas
Total revenue
December 31, 2016
Year Ended
January 2, 2016
January 3, 2015
% Change in
2015
2016
$ 305,093
71% $ 308,534
76% $ 266,831
73%
59,835
62,126
14
15
55,596
41,836
14
10
59,041
40,255
16
11
$ 427,054
100% $ 405,966
100% $ 366,127
100%
(1)
8
48
5
16
(6)
4
11
Intellectual Property, Patents, and Licensing
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 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 United States and international patents and have patent applications pending in the United States and
internationally. Our current patents will expire at various times between 2017 and 2035, subject to our payment of periodic
maintenance fees. There can be no assurance that pending or future patent applications 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, and 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, 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
We have acquired various licenses from third parties to certain technologies that are implemented in IP cores or embedded in
our products. Those licenses support our continuing ability to make and sell these products to our customers. While our various
licenses are important to our success, we believe our business as a whole is not materially dependent on any particular license,
or group of licenses.
Our Team
As of December 31, 2016, we had 986 full-time employees worldwide. We believe that our future success will depend, in part, on
our ability to continue to attract and retain highly skilled technical, sales, and management personnel. None of our employees
are represented by a collective bargaining agreement. We have never experienced any work stoppages and consider our
employee relations to be good.
Corporate Background
Lattice was incorporated in Oregon in 1983 and reincorporated in Delaware in 1985. Our headquarters is located at 111 SW Fifth
Avenue, Suite 700, Portland, Oregon 97204, and our website is www.latticesemi.com. Information contained or referenced on
our website is not incorporated by reference into, and does not form a part of, this Annual Report on Form 10-K. Our common
stock trades on the NASDAQ Global Select Market under the symbol LSCC.
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Reporting Calendar
We report based on a 52 or 53-week fiscal year ending on the Saturday closest to December 31. Our fiscal 2016 and 2015 were
52-week years that ended December 31, 2016 and January 2, 2016, respectively. Our fiscal 2014 was a 53-week year, with a
14-week fourth quarter, that ended January 3, 2015. Our fiscal 2017 will be a 52-week year and will end on December 30, 2017.
All references to quarterly or yearly financial results are references to the results for the relevant fiscal period.
Available Information
We make available, free of charge through the 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 111 SW Fifth Ave,
Ste. 700, Portland, Oregon 97204, telephone (503) 268-8000. Our SEC filings are also available at the SEC's website at
www.sec.gov, and they may be read and copied at the SEC's public reference room at 100 F Street NE, Washington, DC 20549.
Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The content
on any website referred to in this filing is not incorporated by reference into this filing unless expressly noted otherwise.
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. If any of the risks described below occur, our business, financial condition,
operating results and cash flows could be materially adversely affected. 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 and financial results.
The announcement and pendency of our proposed acquisition by Canyon Bridge Acquisition Company, Inc. could
materially adversely affect our business, financial condition, and results of operations.
On November 3, 2016, Lattice Semiconductor Corporation and Canyon Bridge Capital Partners, Inc. (“Canyon Bridge”)
announced that the Company and Canyon Bridge Acquisition Company, Inc. (“Parent”), an affiliate of Canyon Bridge, have
signed a definitive agreement (the "Merger Agreement") under which Parent will acquire all outstanding shares of Lattice for
approximately $1.3 billion inclusive of Lattice’s net debt, or $8.30 per share in cash. The transaction (the "Merger") was
unanimously approved by both companies’ boards of directors and is expected to close in early 2017 subject to customary
closing conditions, regulatory approvals and approval by Lattice’s shareholders. Upon the completion of the transaction, Lattice
will be a wholly owned subsidiary of Parent. The announcement and pendency of our proposed acquisition by Parent could
disrupt our business and create uncertainty about our future, which could have a material and negative impact on our business,
financial condition, and results of operations, regardless of whether the acquisition is completed. These risks to our business, all
of which could be exacerbated by any delay in the closing of the acquisition, include:
•
•
•
•
•
restrictions in the Merger Agreement on the conduct of our business prior to the closing of the acquisition, which prevent us
from taking specified actions without the prior consent of Parent, which actions we might otherwise take in the absence of
the Merger Agreement;
the attention of our management may be directed towards the closing of the acquisition and may be diverted from our day-
to-day business operations, and matters related to the acquisition may require commitments of time and resources that
could otherwise have been devoted to other opportunities that might have been beneficial to us;
our customers, suppliers and other third parties may decide not to renew or seek to terminate, change or renegotiate their
relationships with us, whether pursuant to the terms of their existing agreements with us or otherwise;
our employees may experience uncertainty regarding their future roles, which might adversely affect our ability to retain,
recruit and motivate key personnel; and
potential litigation relating to the merger and the related costs.
Any of these matters could adversely affect our stock price, business, financial condition, results of operations, or business
prospects.
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The parties may be unable to satisfy the conditions to the closing of our acquisition by Parent and the acquisition may
not be consummated, and the failure of the acquisition to be completed may adversely affect our business and our
share price.
Consummation of our acquisition by Parent is subject to various closing conditions, including, among other things, (i) the pending
adoption of the Merger Agreement by our stockholders, (ii) the absence of any legal restraints or prohibitions on the
consummation of the Merger, and (iii) approval from the Committee on Foreign Investment in the United States (CFIUS),
expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and
other regulatory approvals. The obligation of each party to consummate the Merger is also conditioned upon the other party’s
representations and warranties being true and correct (subject to certain materiality exceptions), and the other party having
performed in all material respects its obligations under the Merger Agreement. The obligation of Parent to consummate the
Merger is also conditioned upon our not having suffered a Company Material Adverse Effect (as defined in the Merger
Agreement). These and other conditions to the consummation of the Merger may fail to be satisfied. In addition, satisfying the
conditions to the Merger may take longer than we and Parent currently expect. The satisfaction of all of the required conditions
could delay the completion of the Merger for a significant period of time or prevent it from occurring. Thus, there can be no
assurance that the conditions to the Merger will be satisfied or waived or that the Merger will be consummated.
In addition, the Merger Agreement may be terminated under specified circumstances, including by Parent upon a change in the
recommendation of our board of directors in connection with our entering into an acquisition agreement with respect to a Superior
Proposal (as defined in the Merger Agreement). Failure to complete the Merger could adversely affect our business and the market
price of our common stock in a number of ways, including:
•
our current stock price may reflect a market assumption that the proposed acquisition will occur, meaning that a failure to
complete the proposed transaction could result in a decline in the price of our common stock;
• we are subject to legal proceedings related to the Merger;
•
•
the failure of the Merger to be consummated may result in negative publicity and a negative impression of us in the investment
community;
any disruptions to our business resulting from the announcement and pendency of the Merger, including any adverse changes
in our relationships with our customers, vendors and employees, may continue or intensify in the event the Merger is not
consummated;
• we may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures;
• we may be required to pay a termination fee of $34.18 million if the Merger Agreement is terminated under certain circumstances;
• we expect to incur substantial transaction costs in connection with the proposed transaction, whether or not it is completed;
and
• we may not be entitled to receive a termination payment from Parent in all circumstances where the Merger Agreement is
terminated due to Parent’s breach of its obligations under the Merger Agreement or where we fail to obtain CFIUS approval.
Litigation challenging the Merger Agreement may prevent the Merger from being consummated at all or within the
expected timeframe.
Lawsuits have been filed and additional lawsuits may be filed against us, our Board of Directors and other parties to the Merger
Agreement, challenging our acquisition by Parent. Such lawsuits have been and may be brought by our purported stockholders
and may seek, among other things, to enjoin consummation of the Merger. One of the conditions to the consummation of the
Merger is that no order will be in effect that prevents, makes illegal or prohibits the consummation of the Merger. As such, if the
plaintiffs in such potential lawsuits are successful in obtaining an injunction prohibiting the defendants from completing the
Merger on the agreed upon terms, then such injunction may prevent the Merger from becoming effective, or from becoming
effective within the expected timeframe.
We rely on a limited number of independent suppliers for the manufacture of all of our products and a failure by our
suppliers to provide timely, cost-effective, and quality products could adversely affect our operations and financial
results.
We depend on independent foundries to supply silicon wafers for our products. These foundries include Fujitsu in Japan and
United Microelectronics Corporation in Taiwan, which supply the majority of our programmable logic wafers, and Taiwan
Semiconductor Manufacturing, which supplies most of our HDMI and MHL integrated circuits. We negotiate wafer volumes,
prices, and other terms with our foundry partners and their respective affiliates on a periodic basis typically resulting in short-term
agreements which do not ensure long-term supply or allocation commitments. We rely on our foundry partners to produce wafers
with competitive performance attributes. If the foundries that supply our wafers experience manufacturing problems, including
unacceptable yields, delays in the realization of the requisite process technologies, or difficulties due to limitations of new and
existing process technologies, our operating results could be adversely affected.
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If for any reason the foundries are unable to, or do not manufacture sufficient quantities of our products or continue to
manufacture a product for the full life of the product, we may be required to prematurely limit or discontinue the sales of certain
products or incur significant costs to transfer products to other foundries, and our customer relationships and operating results
could be adversely affected. In addition, weak economic conditions may adversely impact the financial health and viability of the
foundries and cause them to limit or discontinue their business operations, resulting in shortages of supply and an inability to
meet their commitments to us, which could adversely affect our financial condition and operating results.
A disruption of one or more of our foundry partners' 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.
Establishing, maintaining and managing multiple foundry relationships requires the investment of management resources as well
as additional costs. If we fail to maintain our foundry relationships, or elect or are required to change foundries, we will incur
significant costs and manufacturing delays. The success of certain of our next generation products is dependent upon our ability
to successfully partner with Fujitsu, Taiwan Semiconductor and other foundry partners. If for any reason one or more of our
foundry partners does not provide its facilities and support for our development efforts, we may be unable to effectively develop
new products in a timely manner.
Should a change in foundry relationships be required, we may be unsuccessful in establishing new foundry relationships for our
current or next generation products, or we may incur substantial cost and or manufacturing delays until we form and ramp
relationships and migrate products, each of which could adversely affect our operating results.
The Mobile and Consumer end market is rapidly changing and cyclical, and a downturn in this end market or our failure
to accurately predict the frequency, duration, timing, and severity of these cycles could adversely affect our financial
condition and results.
With the acquisition of Silicon Image, the Mobile and Consumer end market has increased in importance to us. Revenue from
the Mobile and Consumer end market accounted for 30% of our revenue in fiscal 2016. Revenue from the Mobile and Consumer
end market consists primarily of revenue from our products designed and used in a broad range of consumer electronics
products including smartphones, tablets and e-readers, wearables, accessories such as chargers and docks, Ultra High-
Definition (UHD) TVs, Digital SLR cameras, drones, and other connected devices. This market is characterized by rapidly
changing requirements and product features and volatility in consumer demand. Our success in this market will depend
principally on our ability to:
predict technology and market trends;
develop IP cores to meet emerging market needs;
develop products on a timely basis;
• meet the market windows for consumer products;
•
•
•
• maintain multiple design wins across different markets and customers to dampen the effects of market volatility;
•
•
be designed into our customers' products; and
avoid cancellations or delay of products.
Our inability to accomplish any of the foregoing, or to offset the volatility of this end market through diversification into other
markets, could materially and adversely affect our business, financial condition, and results of operations. Cyclicality in the
Mobile and Consumer end market could periodically result in higher or lower levels of revenue and revenue concentration with a
single or small number of customers. In addition, rapid changes in this market may affect demand for our products, and may
cause our revenue derived from sales in this market to vary significantly over time, adversely affecting our financial results.
A downturn in the Communications and Computing end market could cause a meaningful reduction in demand for our
products and limit our ability to maintain revenue levels and operating results.
Revenue from the Communications and Computing end market accounted for 29% of our revenue in fiscal 2016. Three of our
top five programmable logic customers participate primarily in the Communications and Computing end market. In the past,
cyclical weakening in demand for programmable logic products from customers in the Communications and Computing end
market has adversely affected our revenue and operating results. In addition, telecommunication equipment providers are
building network infrastructure for which we compete for product sales. Any deterioration in the Communications and Computing
end market, our end customers' reduction in spending, or a reduction in spending by their customers to support this end market
or use of our competitors’ products could lead to a reduction in demand for our products which could adversely affect our
revenue and results of operations. This type of decline impacted our results in the past and could do so again in the future.
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We depend on a concentrated group of customers for a significant portion of our revenues. If any of these customers
reduce their use of our products, our revenue could decrease significantly.
A significant portion of our revenue depends on sales to a limited number of customers. In fiscal 2016, our top two end
customers accounted for 9.9% and 6.8% of our total revenue. During fiscal 2015, our top two end customers accounted for 9.3%
and 7.8% of our total revenue. Additionally, in fiscal 2016, our top five end customers accounted for approximately 27% of our
total revenue, which is down from fiscal 2015, during which our top five end customers accounted for approximately 32% of our
total revenue. If any of these relationships were to diminish, if these customers were to develop their own solutions or adopt
alternative solutions or competitors' solutions, or if our relationship with any future customer which accounts for a significant
portion of our revenue were to diminish due to these factors, our results could be adversely affected.
While we strive to maintain strong relationships with our customers, their continued use of our products is frequently reevaluated,
as certain of our customers' product life cycles are relatively short and they continually develop new products. The selection
process for our products to be included in our customers' new products is highly competitive. There are no guarantees that our
products will be included in the next generation of products introduced by these customers. For example, in December 2014, one
of its largest customers informed Silicon Image that the customer had decided not to include Silicon Image’s MHL functionality in
certain designs in order to reduce costs. Any significant loss of, or a significant reduction in purchases by, one or more of these
customers or their failure to meet their commitments to us, could have an adverse effect on our financial condition and results of
operations. If any one or more of our concentrated groups of customers were to experience significantly adverse financial
conditions, our financial condition and business could be adversely affected as well, as occurred when Silicon Image’s fiscal
2014 mobile product revenue decreased as a result of a significant production slowdown by one of its key customers.
Our outstanding indebtedness could reduce our strategic flexibility and liquidity and may have other adverse effects on
our results of operations.
In connection with our acquisition of Silicon Image, we entered into a secured Credit Agreement providing for a $350 million term
loan. Our obligations under the Credit Agreement are guaranteed by our U.S. subsidiaries. Our obligations include a requirement
to pay up to 75% of our excess cash flow toward repayment of the facility. The Credit Agreement also contains certain restrictive
covenants, including limitations on liens, mergers and consolidations, sales of assets, payment of dividends, and additional
indebtedness. The amount and terms of our indebtedness, as well as our credit rating, could have important consequences,
including the following:
• we may be more vulnerable to economic downturns, less able to withstand competitive pressures, and less flexible
•
in responding to changing business and economic conditions;
our cash flow from operations may be allocated to the payment of outstanding indebtedness, and not to research
and development, operations or business growth;
• we might not generate sufficient cash flow from operations or other sources to enable us to meet our payment
obligations under the facility and to fund other liquidity needs;
our ability to make distributions to our stockholders in a sale or liquidation may be limited until any balance on the
facility is repaid in full; and
our ability to incur additional debt, including for working capital, acquisitions, or other needs, is more limited.
•
•
If we breach a loan covenant, the lenders could accelerate the repayment of the term loan. We might not have sufficient assets
to repay such indebtedness upon acceleration. If we are unable to repay the indebtedness, the lenders could initiate a
bankruptcy proceeding against us or collection proceedings with respect to our assets and subsidiaries securing the facility,
which could materially decrease the value of our common stock.
We depend on distributors to generate a significant portion of our revenue and complete order fulfillment and any
adverse change in our relationship or our distributors' financial health, reduction of selling efforts, or inaccuracy in
resale reports could harm our sales or result in misreporting our results.
We depend on our distributors to sell our products to end customers, complete order fulfillment, and maintain sufficient inventory
of our products. Our distributors also provide technical support and other value-added services to our end customers. Resales of
product through sell-through distributors accounted for 61% of our revenue in 2016, with two distributors accounting for 46% of
our revenue in 2016.
We expect our distributors to generate a significant portion of our revenue in the future. Any adverse change to our relationships
with our distributors or a failure by one or more of our distributors to perform its obligations to us could have a material impact on
our business. In addition, a significant reduction of effort by a distributor to sell our products or a material change in our
relationship with one or more distributors may reduce our access to certain end customers and adversely affect our ability to sell
our products.
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The financial health of our distributors is important to our success. Economic conditions may adversely impact the financial
health of one or more of our distributors. This could result in the inability of distributors to finance the purchase of our products or
cause the distributors to delay payment of their obligation to us and increase our credit risk. If the financial health of our
distributors impairs their performance and we are unable to secure alternate distributors, our financial condition and results of
operations may be negatively impacted.
Since we have limited ability to forecast inventory levels of our end customers, it is possible that there may be significant build-up
of inventories in the distributor channel, with the OEM or the OEM’s contract manufacturer. Such a buildup could result in a
slowdown in orders, requests for returns from customers, or requests to move out planned shipments. This could adversely
affect our revenues and profits. Any failure to manage these challenges could disrupt or reduce sales of our products and
unfavorably impact our financial results.
We depend on the timeliness and accuracy of 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.
Acquisitions, strategic investments and strategic partnerships present risks, and we may not realize the goals that were
contemplated at the time of a transaction.
On March 10, 2015, we acquired Silicon Image, and we may make further acquisitions and strategic investments in the future.
Acquisitions and strategic investments, including our acquisition of Silicon Image, present risks, including:
•
•
our ongoing business may be disrupted and our management's attention may be diverted by investment,
acquisition, transition, or integration activities;
an acquisition or strategic investment may not perform as well or further our business strategy as we expected, and
we may not integrate an acquired company or technology as successfully as we expected;
• we may incur unexpected costs, claims, or liabilities that we assume from an acquired company or technology or
that are otherwise related to an acquisition;
• we may discover adverse conditions post-acquisition that are not covered by representations and warranties;
• we may increase some of our risks, such as increasing customer or end product concentration;
• we may have difficulty incorporating acquired technologies or products with our existing product lines;
• we may have higher than anticipated costs in continuing support and development of acquired products, and in
general and administrative functions that support such products;
• we may have difficulty integrating and retaining key personnel;
• we may have difficulty integrating business systems, processes, and tools, such as accounting software, inventory
management systems, or revenue systems which may have an adverse effect on our business;
our liquidity and/or capital structure may be adversely impacted;
our strategic investments may not perform as expected;
•
•
• we may experience unexpected changes in how we are required to account for our acquisitions and strategic
investments pursuant to U.S. GAAP;
• we may have difficulty integrating acquired entities into our global tax structure with potentially negative impacts on
•
our effective tax rate;
if the acquisition or strategic investment does not perform as projected, we might take a charge to earnings due to
impaired goodwill;
• we may divest certain assets of acquired businesses, leading to charges against earnings;
• we may experience unexpected negative responses from vendors or customers to the acquisition, which may
adversely impact our operations; and
• we may have difficulty integrating the processes and control environment from Silicon Image.
The occurrence of any of these risks could have a material adverse effect on our business, results of operations, financial condition,
or cash flows, particularly in the case of a larger acquisition or several concurrent acquisitions or strategic investments. In addition,
we may enter into strategic partnerships with third parties with the goal of gaining access to new and innovative products and
technologies. Strategic partnerships pose many of the same risks as acquisitions or investments.
We cannot guarantee that we will be able to complete any future acquisitions or that we will realize any anticipated benefits from
any of our past or future acquisitions, strategic investments, or strategic partnerships. We may not be able to find suitable
acquisition opportunities that are available at attractive valuations, if at all. A sustained decline in the price of our common stock
may make it more difficult and expensive to initiate or complete additional acquisitions on commercially acceptable terms.
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We are required under U.S. GAAP to test goodwill for possible impairment on an annual basis and to test goodwill and long-lived
assets, including amortizable intangible assets, for impairment at any other time that circumstances arise indicating the carrying
value may not be recoverable. For purposes of testing for impairment, the Company currently operates as one reporting unit: the
core Lattice ("Core") business, which includes intellectual property and semiconductor devices. Qterics, a discrete software-as-a-
service business unit, was previously an immaterial operating segment in the Lattice legal entity structure until it was sold in April
2016. Following our assessment of goodwill and long-lived asset impairment in the fourth quarter of 2015, we concluded that
goodwill and long-lived assets had been impaired in the Qterics segment. As a result, we recorded impairment charges related to
goodwill and intangible assets in the Qterics segment amounting to $12.7 million and $9.0 million, respectively, in the
Consolidated Statements of Operations for the year ended January 2, 2016. In the third quarter of 2016, we determined that the
amendment to the HDMI Founders Agreement constituted an impairment indicator in the Core segment related to the intangible
assets associated with future HDMI adopter fees. Our assessment of the new value of these intangible assets concluded that
they had been impaired as of October 1, 2016, and we recorded a $7.9 million non-cash impairment charge in the Consolidated
Statements of Operations. No impairment charges related to goodwill were recorded in fiscal 2016 and no impairment charges
were recorded for the Core segment in fiscal 2015. There is no assurance that future impairment tests will indicate that goodwill
will be deemed recoverable.
Our success and future revenue depends on our ability to innovate, develop and introduce new products that achieve
customer and market acceptance and to successfully compete in the highly competitive semiconductor industry, and
failure to do so could have a material adverse effect on our financial condition and results of operations.
The semiconductor industry is highly competitive and many of our direct and indirect competitors have substantially greater
financial, technological, manufacturing, marketing, and sales resources. Consolidation in our industry may increasingly mean
that our competitors have greater resources, or other synergies, that could put us at a competitive disadvantage. We currently
compete directly with companies that have licensed our technology or have developed similar products, as well as numerous
semiconductor companies that offer products based on alternative solutions, such as applications processor, application specific
standard product, microcontroller, analog, and digital signal processing technologies. Competition from these semiconductor
companies may intensify as we offer more products in any of our end markets. These competitors include established,
multinational semiconductor companies, as well as emerging companies.
The markets in which we compete are characterized by rapid technology and product evolution, generally followed by a relatively
longer process of ramping up to volume production on advanced technologies. Our markets are also characterized by evolving
industry standards, frequent new product introduction, short product life cycles, and increased demand for higher levels of
integration and smaller process geometry. Our competitive position and success depends on our ability to innovate, develop, and
introduce new products that compete effectively on the basis of price, density, functionality, power consumption, form factor, and
performance addressing the evolving needs of the markets we serve. These new products typically are more technologically
complex than their predecessors.
Our future growth and the success of new product introductions depend upon numerous factors, including:
•
•
•
•
•
timely completion and introduction of new product designs;
ability to generate new design opportunities and design wins, including those which result in sales of significant
volume;
availability of specialized field application engineering resources supporting demand creation and customer
adoption of new products;
ability to utilize advanced manufacturing process technologies;
achieving acceptable yields and obtaining adequate production capacity from our wafer foundries and assembly
and test subcontractors;
ability to obtain advanced packaging;
availability of supporting software design tools;
utilization of predefined IP logic;
•
•
•
• market acceptance of our MHL-enabled and wireless mobile products, and our 60 GHz wireless products;
•
•
• market acceptance of our customers' products.
customer acceptance of advanced features in our new products;
availability of competing alternative technologies; and
Our product innovation and development efforts may not be successful; our new products, MHL-enabled products, and 60GHz
wireless products may not achieve market or customer acceptance; and we may not achieve the necessary volume of production
to achieve acceptable cost. Revenue relating to our mature products is expected to decline in the future, which is normal for our
product life cycles. As a result, we may be increasingly dependent on revenue derived from our newer products as well as
anticipated cost reductions in the manufacture of our current products. We rely on obtaining yield improvements and
corresponding cost reductions in the manufacture of existing products and on introducing new products that incorporate
advanced features and other price/performance factors that enable us to increase revenues while maintaining acceptable
margins. To the extent such cost reductions and new product introductions do not occur in a timely manner, or that our products
do not achieve market acceptance or market acceptance at acceptable pricing, our forecasts of future revenue, financial
condition, and operating results could be materially adversely affected.
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General economic conditions and deterioration in the global business environment could have a material adverse effect
on our business, operating results, and financial condition.
Adverse economic conditions or our customers’ perceptions of the economic environment may negatively affect customer
demand for our products and services and result in delayed or decreased spending. Weak global economic conditions in the
past have resulted in weak demand for our products in certain geographies and had an adverse impact on our results of
operations. If weak economic conditions persist or worsen, our business could be harmed due to customers or potential
customers reducing or delaying orders. In addition, the inability of customers to obtain credit, the insolvency of one or more
customers, or the insolvency of key suppliers could result in sales or production delays. Any of these effects could impact our
ability to effectively manage inventory levels and collect receivables, require additional restructuring actions, and decrease our
revenue and profitability. 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.
The intellectual property licensing component of our business strategy increases our business risk and fluctuation of
our revenue.
Our business strategy includes licensing our intellectual property to companies that incorporate it into their respective
technologies that address markets in which we do not directly participate or compete. We also license our intellectual property
into markets where we do participate and compete. Our licensing and services revenue may be impacted by the introduction of
new technologies by customers in place of the technologies based on our intellectual property, changes in the law that may
weaken our ability to prevent the use of our patented technology by others, and changes of selling prices for products using
licensed patents. We cannot assure that our licensing customers will continue to license our technology on commercially
favorable terms or at all, or that these customers will introduce and sell products incorporating our technology, accurately report
royalties owed to us, pay agreed upon royalties, honor agreed upon market restrictions, maintain the confidentiality of our
proprietary information, or will not infringe upon or misappropriate our intellectual property. Our intellectual property licensing
agreements are complex and depend upon many factors, including completion of milestones, allocation of values to delivered
items and customer acceptances. Many of these require significant judgments. Additionally, this is a new end market for us, with
which we do not yet have extensive experience.
We have also generated revenue from the sale of certain patents from our portfolio, generally for technology that we are no
longer actively developing. While we plan to continue to monetize our patent portfolio through sales of non-core patents, we may
not be able to realize adequate interest or prices for those patents. Accordingly, we cannot provide assurance that we will
continue to generate revenue from these sales. In addition, although we seek to be strategic in our decisions to sell patents, we
might incur reputational harm if a purchaser of our patents sues one of our customers for infringement of the purchased patent,
and we might later decide to enter a space that requires the use of one or more of the patents we sold.
Our licensing and services revenue fluctuates, sometimes significantly, from period to period because it is heavily dependent on
a few key transactions being completed in a given period, the timing of which is difficult to predict and may not match our
expectations. Because of its high margin, the licensing and services revenue portion of our overall revenue can have a
disproportionate impact on gross profit and profitability. Generating revenue from intellectual property licenses is a lengthy and
complex process that may last beyond the period in which our efforts begin, and the accounting rules governing the recognition
of revenue from intellectual property licensing transactions are increasingly complex and subject to interpretation. As a result, the
amount of license revenue recognized in any period may differ significantly from our expectations.
A single large customer may be in a position to demand certain functionality, pricing or timing requirements that may
detract from or interfere with our normal business activities. If this happens, delays in our normal development
schedules could occur, causing our products to miss market windows, thereby reducing the total number of units sold
of a particular product.
The products we develop are complex and require significant planning and resources. In the Mobile and Consumer end market,
new products are typically introduced early in the year, often in association with key trade shows. In order to meet these
deadlines, our customers must complete their product development by year-end, which usually means we must ship sample
parts in early spring. If we cannot ship sample parts in early spring, customers may be forced to remove the feature provided by
our product, use a competitor’s product, or use an alternate technology in order to meet their timelines. We plan our product
development with these market windows in mind, but if we receive requests from a large customer to deploy resources to meet
their requirements or work on a specific solution, our normal development path could be delayed, causing us to miss sample
deadlines and therefore future revenues.
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A number of factors, including our inventory strategy, can impact our gross margins.
A number of factors, including how products are manufactured to support the consumer market segment, yield, wafer pricing,
cost of packaging raw materials, product mix, market acceptance of our new products, competitive pricing dynamics, geographic
and/or end market mix, and pricing strategies, can cause our gross margins to fluctuate significantly either positively or
negatively from period to period. In addition, forecasting our gross margins is difficult because a significant portion of our
business is based on turns within the same quarter.
Our customers typically test and evaluate our products prior to deciding to design our product into their own products, and then
require additional time to begin volume production of those products. This lengthy sales cycle may cause us to experience
significant delays and to incur additional inventory costs until we generate revenue from our products. It is possible that we may
never generate any revenue from products after incurring significant expenditures.
While our sales cycles are typically long, our average product life cycles tend to be short as a result of the rapidly changing
technology environment in which we operate. In addition, our inventory levels may be higher than historical norms, from time to
time, due to inventory build decisions aimed at meeting expected demand from a single large customer, reducing direct material
cost or enabling responsiveness to expected demand. In the event the expected demand does not materialize, or if our short
sales cycle does not generate sufficient revenue, we may be subject to incremental excess and obsolescence costs. In addition,
future product cost reductions could impact our inventory valuation, which could adversely affect our operating results.
We and our connectivity customers depend on the availability of certain functions and capabilities within mobile and
personal computing operating systems over which we may have no control. New releases of these operating systems
may render certain of our products inoperable or may require significant engineering effort to create new device driver
software.
Certain portions of our business operate within a market that is dominated by a few key OEMs. These OEMs could play a role in
driving the growth of our business or could prevent our growth through deliberate or non-deliberate action. We do not have a
presence in the Windows eco-system or in all iOS or Android devices. Our success and ability to grow depend upon our ability to
continue to be successful within the iOS and Android eco-systems or gain significant traction within the Windows eco-system.
Failure to maintain and grow our presence in these key eco-systems could adversely affect unit volumes.
Further, many of our products depend on the availability of certain functionality in the device operating system, typically Android,
Linux, Windows, or iOS. Certain operating system primitives are needed to support video output. We have no control over these
operating systems or the companies that produce them, and it is unlikely that we could influence any internal decision these
companies make that may have a negative impact on our integrated circuits and their function. Updates to these operating
systems that, for example, change the way video is output or remove the ability to output video could materially affect sales of
MHL and HDMI integrated circuits.
Products targeted to personal computing or mobile, laptop, or notebook designs often require device driver software to operate.
This software is difficult to produce and may require certifications before being released. Failure to produce this software could
have a negative impact on our relation with operating system providers and may damage our reputation with end consumers as
a quality supplier of products.
We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels
of design integration, which may result in reduced manufacturing yields, delays in product deliveries, and increased
expenses.
To remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller geometries. This
requires us to change the manufacturing processes for our products and to redesign some products as well as standard cells
and other integrated circuit designs we may use in multiple products. We periodically evaluate the benefits, on a product-by-
product basis, of migrating to smaller geometry process technologies to reduce our costs. The transition to lower nanometer
geometry process technologies will result in significantly higher mask and prototyping costs, as well as additional expenditures
for engineering design tools.
We depend on our relationships with our foundry partners to transition to smaller geometry processes successfully. We make no
assurance that our foundry partners will be able to effectively manage the transition in a timely manner, or at all. If we or any of
our foundry partners experience significant delays in this transition or fail to efficiently implement this transition, we could
experience reduced manufacturing yields, delays in product deliveries, and increased expenses, all of which could adversely
affect our relationships with our customers and our financial condition and operating results.
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Shortages in, or increased costs of, wafers and materials could adversely impact our gross margins and lead to
reduced revenues.
Worldwide manufacturing capacity for silicon wafers is relatively inelastic. If the demand for silicon wafers or assembly material
materially exceeds market supply, our supply of silicon wafers or assembly material could quickly become limited. A shortage in
manufacturing capacity could hinder our ability to meet product demand and therefore reduce our revenue. In addition, silicon
wafers constitute a material portion of our product cost. If we are unable to purchase wafers at favorable prices, our gross
margins will be adversely affected.
We depend on independent contractors for most of our assembly and test services, and disruption of their services, or
an increased in cost of these services, could negatively impact our financial condition and results of operations.
We depend on subcontractors to assemble, test, and ship our products with acceptable quality and yield levels. Our operations
and operating results may be adversely affected if we experience problems with our subcontractors that impact the delivery of
product to our customers. Those problems may include: prolonged inability to obtain wafers or packaging materials with
competitive performance and cost attributes; inability to achieve adequate yields or timely delivery; disruption or defects in
assembly, test, or shipping services; or delays in stabilizing manufacturing processes or ramping up volume for new products.
Economic conditions may adversely impact the financial health and viability of our subcontractors and result in their inability to
meet their commitments to us resulting in product shortages, quality assurance problems, reduced revenue, and/or increased
costs which could negatively impact our financial condition and results of operations.
In the past, we have experienced delays in obtaining assembled and tested products and in securing assembly and test capacity
commitments from our suppliers. We currently 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. We negotiate
assembly and test prices and capacity commitments from our contractors on a periodic basis. If any of our assembly or test
contractors reduce their capacity commitment or increase their prices, and we cannot find alternative sources, our operating
results could be adversely affected.
The semiconductor industry routinely experiences cyclical market patterns and a significant industry downturn could
adversely affect our operating results.
Our revenue and gross margin can fluctuate significantly due to downturns in the semiconductor industry. These downturns can
be severe and prolonged and can result in price erosion and weak demand for our products. Weak demand for our products
resulting from general economic conditions affecting the end markets we serve or the semiconductor industry specifically and
reduced spending by our customers can result, and in the past has resulted, in excess and obsolete inventories and
corresponding inventory write-downs. The dynamics of the markets in which we operate make prediction of and timely reaction
to such events difficult. Due to these and other factors, our past results are not reliable predictors of our future results.
Our expense levels are based, in part, on our expectations of future sales. Many of our expenses, particularly those relating to
facilities, capital equipment, and other overhead, are relatively fixed. We might be unable to reduce spending quickly enough to
compensate for reductions in sales. Accordingly, shortfalls in sales could adversely affect our operating results.
Our participation in HDMI and MHL has included our acting as agent for these consortia for which we have been
receiving adopter fees. We will no longer be acting as agent for the HDMI standard and there is no guarantee that we
will continue to act as agent for the MHL standard. Starting in 2017, we will lose HDMI adopter fees and we could in the
future lose MHL adopter fees.
Through our wholly owned subsidiary, HDMI Licensing, LLC, we acted as agent of the HDMI consortium until December 31,
2016 and were responsible for promoting and administering the specification. We received all of the adopter fees paid by
adopters of the HDMI specification in connection with our role as agent. In September 2016, the founders of the HDMI
consortium ("Founders"), of which we are a member, amended the Founders Agreement resulting in changes to our role as
agent for the HDMI consortium and to the model for sharing adopter fee revenues. Under the terms of the agreement, our role as
the agent was terminated effective January 1, 2017 and a new independent entity was appointed to act as the new HDMI
licensing agent with responsibility for licensing and the distribution of royalties among Founders. As a result of the amended
model for sharing revenue, we will be entitled to a reduced share of adopter fees paid by parties adopting the HDMI standard.
In addition, another member of the HDMI consortium asserts that we owe the other HDMI consortium founders their respective
shares of any HDMI adopter fees not used by us in the marketing and other activities in furtherance of the HDMI standard from
our time as agent. The consortium member has previously indicated its belief that the HDMI founders enjoy a right to these funds
but has never pursued such claim. If a determination is made that there were excess adopter fees or if it is determined that we
were obligated to share such fees with other consortium members, it could negatively impact our financial position. At this stage
of the proceedings, we do not have an estimate of the likelihood or the amount of any financial consequences to us.
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We share HDMI royalties with the other HDMI founders based on an allocation formula, which is reviewed every three years. The
most recent royalty sharing formula covered the period from January 1, 2014 through December 31, 2016, and a new agreement
is yet to be signed. Our portion of the royalty allocation has declined for the last several years. In 2015, we received between
24% and 25% of the royalty allocation, while for 2016, we received 20% of the royalty allocation. The royalty allocation for 2017
and future years is not yet known, but if the level continues to decline, our financial performance could be adversely affected. In
addition, if there is a delay in the signing of a new sharing agreement, this may impact our timing of revenue recognition of the
related royalties.
Through our wholly owned subsidiary, MHL, LLC, we act as agent of the MHL specification and are responsible for promoting
and administering the specification. As agent, we are entitled to receive license fees paid by adopters of the MHL specification
sufficient to reimburse us for the costs we incur to promote and administer the specification. Given the limited number of MHL
adopters to date, we do not believe the license fees paid by such adopters will be sufficient to reimburse us for these costs and
we make no assurance that the license fees paid by MHL adopters will ever be sufficient to reimburse us the costs we incur as
agent of the specification.
We currently intend to promote and continue to be involved and actively participate in other standard setting initiatives. For
example, through Silicon Image’s acquisition of SiBEAM, Inc. in May 2011, it achieved SiBEAM’s prior position as founder and
chair of the WirelessHD Consortium. We may decide to license additional elements of our intellectual property to others for use
in implementing, developing, promoting, or adopting standards in our target markets, in certain circumstances at little or no cost.
This may make it easier for others to compete with us in such markets. In addition, even if we receive license fees or royalties in
connection with the licensing of our intellectual property, we make no assurance that such license fees or royalties will
compensate us adequately.
We rely on independent software and hardware developers and disruption of their services could negatively affect our
operations and financial results.
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 deliver hardware in accordance with our plans, specifications, and agreements could disrupt the
release of or introduction of new or existing products, which could be detrimental to the capability of our new or existing 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.
Our failure to control unauthorized access to our IT systems may cause problems with key business partners or
liability.
We may be subject to unauthorized access to our IT systems through a security breach or cyber-attack. In the ordinary course of
our business, we maintain sensitive data on our networks, including our intellectual property and proprietary or confidential
business information relating to our business and that of our customers and business partners. The secure maintenance of this
information is critical to our business and reputation. We believe that companies have been increasingly subject to a wide variety
of security incidents, cyber-attacks, and other attempts to gain unauthorized access. Cyber-attacks have become more prevalent
and much harder to detect and defend against. Our network and storage applications may be subject to unauthorized access by
hackers or breached due to operator error, malfeasance, or other system disruptions. It is often difficult to anticipate or
immediately detect such incidents and to assess the damage caused by them. In the past, third parties have attempted to
penetrate and/or infect our network and systems with malicious software in an effort to gain access to our network and systems.
These data breaches and any unauthorized access or disclosure of our information or intellectual property could compromise our
intellectual property and expose sensitive business information. Cyber-attacks could also cause us to incur significant
remediation costs, result in product development delays, disrupt key business operations, and divert attention of management
and key information technology resources. Our reputation, brand, and business could be significantly harmed, and we could be
subject to third party claims in the event of such a security breach.
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Foreign sales, accounting for the majority of our revenue, are subject to various risks associated with selling in
international markets, which could have a material adverse effect on our operations, financial condition, and results of
operations.
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:
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changes in local economic conditions;
currency exchange rate volatility;
governmental stimulus packages, controls, and trade restrictions;
governmental policies that promote development and consumption of domestic products;
export license requirements, foreign trade compliance matters, and restrictions on the use of technology;
political instability, war, terrorism, or pandemic disease;
changes in tax rates, tariffs, or freight rates;
reduced protection for intellectual property rights;
longer receivable collection periods;
natural or man-made disasters in the countries where we sell our products;
interruptions in transportation;
interruptions in the global communication infrastructure; and
labor regulations.
Any of these factors could adversely affect our financial condition and results of operations in the future.
We have significant international operations exposing us to various economic, regulatory, political, and business risks,
which could have a material adverse effect on our operations, financial condition, and results of operations.
We have significant international operations, including foreign sales offices to support our international customers and
distributors, and operational and research and development sites in China, India, the Philippines, and other Asian locations. In
addition, we purchase our wafers from foreign foundries; have our commercial products assembled, packaged, and tested by
subcontractors located outside of the United States; and rely on an international service provider for inventory management,
order fulfillment, and direct sales logistics.
These and other integral business activities outside of the United States are subject to the risks and uncertainties associated
with conducting business in foreign economic and regulatory environments including trade barriers; economic sanctions;
environmental regulations; import and export regulations; duties and tariffs and other trade restrictions; changes in trade policies;
anti-corruption laws; domestic and foreign governmental regulations; potential vulnerability of and reduced protection for
intellectual property; disruptions or delays in production or shipments; and instability or fluctuations in currency exchange rates,
any of which could have a material adverse effect on our business, financial condition, and operating results. In addition, with the
acquisition of Silicon Image, we have increased the operational challenges of conducting our business in and across multiple
geographic regions around the world, especially in the face of different business practices, social norms, and legal standards.
Moreover, our financial condition and results of operations could be affected in the event of political instability, including as a
result of the United Kingdom referendum on June 23, 2016, in which voters approved an exit from the European Union
(commonly referred to as "Brexit"), terrorist activity, U.S. or other military actions, or economic crises in countries where our main
wafer suppliers, end customers, contract manufacturers, and logistics providers are located.
Our global organizational structure and operations expose us to unanticipated tax consequences.
Our legal organizational structure could result in unanticipated unfavorable tax or other consequences which could have an
adverse effect on our financial condition and results of operations. We have a global tax structure to more effectively align our
corporate structure with our business operations including responsibility for sales and purchasing activities. We created new and
realigned existing legal entities; completed 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 legal entities. We currently operate legal entities in countries where we conduct supply-chain management, design,
and sales operations around the world. In some countries, we maintain multiple entities for tax or other purposes. In addition, we
are currently conducting further restructuring activities following our acquisition of Silicon Image as we integrate Silicon Image
and its subsidiaries, which include numerous foreign entities, into our existing global tax and corporate structures. These
integration activities, changes in tax laws, regulations, future jurisdictional profitability of the Company and its subsidiaries, and
related regulatory interpretations in the countries in which we operate may impact the taxes we pay or tax provision we record,
which could adversely affect our results of operations.
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We are subject to taxation in the United States, Singapore, and other countries. Future effective tax rates could be affected by
changes in the composition of earnings in countries with differing tax rates, changes in the valuation of deferred tax assets and
liabilities, or changes in tax laws. We compute our effective tax rate using actual jurisdictional profits and losses. Changes in the
jurisdictional mix of profits and losses may cause fluctuations in the effective tax rate. Adverse changes in tax rates, our tax
assets, and tax liabilities could negatively affect our results in the future.
We make no assurance as to what taxes we pay or the ability to estimate our future effective tax rate because of, among other
things, uncertainty regarding the tax policies of the jurisdictions where we operate. The U.S. government and the Organization
for Economic Cooperation and Development have proposed tax policy changes with respect to the taxation of global operations
of multinational companies. 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.
Product quality problems could lead to reduced revenue, gross margins, and net income.
In general, we warrant our products for varying lengths of time against non-conformance to our specifications and certain other
defects. Because our products, including hardware, software, and intellectual property cores, are highly complex and
increasingly incorporate advanced technology, our quality assurance programs may not detect all defects, whether
manufacturing defects in individual products or systematic defects that could affect numerous shipments. Inability to detect a
defect could result in a diversion of our engineering resources from product development efforts, increased engineering
expenses to remediate the defect, and increased costs due to customer accommodation or inventory impairment charges. On
occasion we have also repaired or replaced certain components, made software fixes, or refunded the purchase price or license
fee paid by our customers due to product or software defects. If there are significant product defects, the costs to remediate such
defects, net of reimbursed amounts from our vendors, if any, or to resolve warranty claims may adversely affect our revenue,
gross margins, and net income.
The nature of our business makes our revenue and gross margin subject to fluctuation and difficult to predict with
accuracy, which could have an adverse impact on our business and our ability to provide forward-looking revenue and
gross margin guidance.
In addition to the challenging market conditions we may face, we have limited visibility into the demand for our products,
particularly new products, because demand for our products depends upon our products being designed into our end customers'
products and those products achieving market acceptance. Due to the complexity of our customers' designs, the design to
volume production process for many of our customers requires a substantial amount of time, frequently longer than a year. In
addition, we are dependent upon "turns," orders received and turned for shipment in the same quarter. These factors make it
difficult for us to accurately forecast future sales and project quarterly revenues. The difficulty in forecasting future sales weakens
our ability to project our inventory requirements, which could result, and in the past has resulted, in inventory write-downs or
failure to meet customer product demands in a timely manner. While we may give guidance, the difficulty in forecasting revenues
as well as the relative customer and product mix of those revenues limits our ability to provide accurate forward-looking revenue
and gross margin guidance.
In addition, effective with the announcement of the proposed acquisition by Parent, the Company has discontinued the provision
of forward-looking revenue and gross margin guidance.
Reductions in the average selling prices of our products could have a negative impact on our gross margins.
The average selling prices of our products generally decline as the products mature or may decline as we compete for market share
or customer acceptance in competitive markets. We seek to offset the decrease in selling prices through yield improvement,
manufacturing cost reductions, and increased unit sales. We also seek to continue to develop higher value products or product
features that increase, or slow the decline of, the average selling price of our products. However, we cannot guarantee that our
ongoing efforts will be successful or that they will keep pace with the decline in selling prices of our products, which could ultimately
lead to a decline in revenues and have a negative effect on our gross margins.
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If we are unable to adequately protect our intellectual property rights, our financial results and our ability to compete
effectively may suffer.
Our success depends in part on our proprietary technology and we rely upon patent, copyright, trade secret, mask work, and
trademark laws to protect our intellectual property. We intend to continue to protect our proprietary technology, however, we may
be unsuccessful in asserting our intellectual property rights or such rights may be invalidated, violated, circumvented, or challenged.
From time to time, third parties, including our competitors, have asserted against us patent, copyright, and other intellectual property
rights to technologies that are important to us. Third parties may attempt to misappropriate our intellectual property through electronic
or other means or assert infringement claims against us in the future. Such assertions by third parties may result in costly litigation,
indemnity claims, or other legal actions, and we may not prevail in such matters or be able to license any valid and infringed patents
from third parties on commercially reasonable terms. This could result in the loss of our ability to import and sell our products or
require us to pay costly royalties to third parties in connection with sales of our products. Any infringement claim, indemnification
claim, or impairment or loss of use of our intellectual property could materially adversely affect our financial condition and results
of operations.
A material change in the agreements governing encryption keys we use could place additional restrictions on us, or our
distributors or contract manufacturers, which could restrict product shipment or significantly increase the cost to track
products throughout the distribution chain.
Many of the components in our products contain encryption keys used in connection with High Definition Content Protection
(HDCP). The regulation and distribution of these encryption keys are controlled through license agreements with Digital Content
Protection (DCP), a wholly owned subsidiary of Intel Corporation. These license agreements have been modified by DCP from
time to time, and such changes could impact us, our distributors, and our customers. An important element of both HDMI and
MHL is the ability to implement link protection for high definition (HD), and more recently, 4K UltraHD, content. We implement
various aspects of the HDCP link protection within certain parts we sell. We also, for the benefit of our customers, include the
necessary HDCP encryption keys in parts we ship to customers. These encryption keys are provided to us from DCP. We have a
specific process for tracking and handling these encryption keys. If DCP changes any of the tracking or handling requirements
associated with HDCP encryption keys, we may be required to change our manufacturing and distribution processes, which
could adversely affect our manufacturing and distribution costs associated with these products. If we cannot satisfy new
requirements for the handling and tracking of encryption keys, we may have to cease shipping or manufacturing certain
products.
Our participation in consortia for the development and promotion of industry standards in certain of our target markets,
including the HDMI, MHL, and WirelessHD standards, requires us to license some of our intellectual property for free or
under specified terms and conditions, which makes it easier for others to compete with us in such markets.
An element of our business strategy includes participating in consortia to establish industry standards in certain of our target
markets; promoting and enhancing specifications; and developing and marketing products based on those specifications and
future enhancements. We intend to continue participating in consortia that develop and promote the HDMI, MHL, and
WirelessHD specifications. In connection with our participation in these consortia, we make certain commitments regarding our
intellectual property, in each case with the effect of making certain of our intellectual property available to others, including our
competitors, desiring to implement the specification in question. For example, we must license specific elements of our
intellectual property to others for use in implementing the HDMI specification, including enhancements, as long as we remain
part of the consortium. Also, we must agree not to assert certain necessary patent claims against other members of the MHL
consortium, even if those members may have infringed upon those patents in implementing the MHL specification.
Accordingly, certain companies that implement these specifications in their products may use specific elements of our intellectual
property to compete with us. Although in the case of the HDMI and MHL consortia, there are annual fees and royalties
associated with the adopters’ use of the technology, we make no assurance that our shares of such annual fees and royalties will
adequately compensate us for having to license or refrain from asserting our intellectual property. In September 2016, the
Founders of the HDMI consortium, of which we are a member, amended the Founders Agreement resulting in changes to our
role as agent for the HDMI consortium and to the model for sharing adopter fee revenues. Under the terms of the agreement, our
role as the agent was terminated effective January 1, 2017 and a new independent entity was appointed to act as the new HDMI
licensing agent with responsibility for licensing and the distribution of royalties among Founders. As a result of the amended
model for sharing revenue, we will be entitled to a reduced share of adopter fees paid by parties adopting the HDMI standard.
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Our business depends, in part, on the continued adoption and widespread implementation of the HDMI and MHL
specifications and the new implementation and adoption of the WirelessHD specifications.
Silicon Image has depended on its participation in standard setting organizations, such as the HDMI and MHL consortiums, and
the widespread adoption and success of those standards. From time to time, competing standards have been established which
negatively affect the success of existing standards or jeopardize the creation of new standards.
Our future success depends, in part, upon the continued adoption and widespread implementation of the HDMI, MHL, and
WirelessHD specifications. A significant portion of Silicon Image’s total revenue was derived from the sale of HDMI and MHL-
enabled products and the licensing of our HDMI and MHL technology. Silicon Image’s leadership in the market for HDMI and
MHL-enabled products and intellectual property has been based on the ability to introduce first-to-market semiconductor and
intellectual property solutions to customers and to continue to innovate within the standard. Our inability to continue to drive
innovation in the HDMI and MHL specifications could have an adverse effect on our business going forward.
MHL has not been widely adopted and Silicon Image had a reduction in mobile design wins at one of our largest customers as a
result of not including MHL. If other manufacturers who have included MHL in their designs decide that MHL is no longer
necessary or cost-effective as a product feature, they too could choose to omit the MHL functionality (and our product) from their
designs. Such decisions would adversely affect our revenues. Similarly, if our largest customer decides to remove MHL from
other products, our revenue would be adversely affected.
We now have 60GHz wireless technology that we hope will be made widely available and adopted by the marketplace through
the efforts of the WirelessHD consortium and incorporated into certain of our future products. As with our HDMI and MHL
products and intellectual property, our success with this technology will depend on our ability to introduce first-to-market
WirelessHD-enabled semiconductor and intellectual property solutions to our customers and to continue to innovate within the
WirelessHD standard. WiGig is an example of a competing 60GHz standard that has been created as an alternative high-
bandwidth wireless connectivity solution for the personal computing industry. While the WiGig standard has not been in the
market as long as the WirelessHD standard, it does represent a viable alternative to WirelessHD for 60GHz connectivity. If WiGig
should gain broader adoption before WirelessHD is adopted, it could negatively impact the adoption of WirelessHD.
As successor-in-interest to Silicon Image, we have granted Intel Corporation certain rights with respect to our
intellectual property, which could allow Intel to develop products that compete with ours or otherwise reduce the value
of our intellectual property.
Silicon Image entered into a patent cross-license agreement with Intel in which each of them granted the other a license to use
the patents filed by the grantor prior to a specified date, except for use related to identified types of products. We believe that the
scope of this license to Intel excludes our current products and anticipated future products. Intel could, however, exercise its
rights under this agreement to use certain of our patents received in the acquisition of Silicon Image to develop and market other
products that compete with ours, without payment to us. Additionally, Intel’s rights to these patents could reduce the value of the
patents to any third-party who otherwise might be interested in acquiring rights to use these patents in such products. Finally,
Intel could endorse competing products, including a competing digital interface, or develop its own proprietary digital interface.
Any of these actions could substantially harm our business and results of operations.
Litigation and unfavorable results of legal proceedings could adversely affect our financial condition and operating
results.
From time to time we are subject to various legal proceedings and claims that arise out of the ordinary conduct of our business.
Certain claims are not yet resolved, including those that are discussed under Note 20 contained in the Notes to Consolidated
Financial Statements, and additional claims may arise in the future. Results of legal proceedings cannot be predicted with
certainty. Regardless of merit, litigation may be both time-consuming and disruptive to our operations and cause significant
expense and diversion of management attention and we may enter into material settlements to avoid these risks. Should we fail
to prevail in certain matters, we may be faced with significant monetary damages or injunctive relief against us that could
materially and adversely affect our financial condition and operating results and certain portions of our business.
We depend upon a third party to provide inventory management, order fulfillment, and direct sales logistics and
disruption of these services could adversely impact our business and results of operations.
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. If our third party supply chain provider 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, or any other reason, 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.
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We rely on information technology systems, and failure of these systems to function properly may cause business
disruptions.
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 by periodically implementing new, or upgrading or enhancing existing,
operational and IT systems, procedures, and controls. We are undergoing a significant integration and systems implementation
as we integrate the operations and systems of Silicon Image into our operations and systems following the acquisition. Our
current implementation has been delayed to 2017. Such a delay in the implementation of, or disruption in the transition to or
integration of, 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, and could impact our internal control compliance efforts especially
because Silicon Image is now in scope for SOX testing in 2016. In addition, we are presently upgrading our main enterprise
resource planning system, which if not completed on time and as planned, could result in cost overruns or limit our ability to
manufacture and ship products as planned. These systems are also subject to power and telecommunication outages or other
general system failures. Failure of our IT systems or difficulties or delays in managing and integrating them could result in
excessive cost or business disruption.
We may have failed to adequately insure against certain risks, and, as a result, our financial condition and results may
be adversely affected.
We carry insurance customary for companies in our industry, including, but not limited to, liability, property, and casualty; workers'
compensation; and business interruption insurance. We also insure our employees for basic medical expenses. In addition, we
have insurance contracts that provide director and officer liability coverage for our directors and officers. Other than the specific
areas mentioned above, we are self-insured with respect to most other risks and exposures, and the insurance we carry in many
cases is subject to a significant policy deductible or other limitation before coverage applies. Based on management's
assessment and judgment, we have determined that it is more cost effective to self-insure against certain risks than to incur the
insurance premium costs. The risks and exposures for which we self-insure include, but are not limited to, certain natural
disasters, certain product defects, political risk, certain theft, patent infringement, and employment practice matters. Should there
be a catastrophic loss due to an uninsured event (such as an earthquake) or a loss due to adverse occurrences in any area in
which we are self-insured, our financial condition or operating results could be adversely affected.
We compete with others to attract and retain key personnel, and any loss of, or inability to attract, such personnel could
adversely affect our ability to compete effectively.
We depend on the efforts and abilities of certain key members of management and other technical personnel. Our future success
depends, in part, upon our ability to retain such personnel and attract and retain other highly qualified personnel, particularly
product engineers who can respond to market demands and required product innovation. Competition for such personnel is
intense and we may not be successful in hiring or retaining new or existing qualified personnel. From time to time we have
effected restructurings which have eliminated a number of positions. Even if such personnel are not directly affected by the
restructuring effort, such terminations can have a negative impact on morale and our ability to attract and hire new qualified
personnel in the future. If we lose existing qualified personnel or are unable to hire new qualified personnel, as needed, we could
have difficulty competing in our highly-competitive and innovative environment.
The conflict minerals provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act could result in
additional costs and liabilities.
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission
established new disclosure and reporting requirements for those companies who use "conflict" minerals mined from the
Democratic Republic of Congo and adjoining countries in their products, whether or not these products are manufactured by third
parties. As these new requirements are fully implemented, they could affect the sourcing and availability of minerals used in the
manufacture of our semiconductor products. Although enforcement of the disclosure requirements by the Securities and
Exchange Commission remain uncertain, certain customers may still require disclosure related to the sources of certain minerals
used in our products. There are costs associated with complying with the disclosure requirements, including for due diligence in
regard to the sources of any conflict minerals used in our products, in addition to the cost of any required remediation and other
changes to products, processes, or sources of supply as a consequence of such verification activities. Although we filed the
required conflict minerals reports in 2014, 2015, and 2016 it may be several years before we can fully assess the internal and
external cost of compliance of the effect the rules will have on our business.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In March 2015, our corporate headquarters and executive office moved to a 23,680 square foot leased space in Portland,
Oregon through March 2025. In November 2014, we sold the property where our headquarters was formerly located in Hillsboro,
Oregon and leased back a 47,800 square foot portion of this property as a research and development facility through November
2022. We currently lease a 98,874 square foot research and development facility in San Jose, California through September
2026.
In Muntinlupa City, Philippines, we lease a total of 48,565 square feet through May 2025 and 1,938 square feet through June
2025 for research and development and operations facilities. In this location, we also lease another 9,734 square feet through
July 2017 and 2,856 square feet through April 2018. The latter two leases were restructured in 2015.
The March 2015 acquisition of Silicon Image added 128,154, 66,385 and 22,507 square feet of leased spaces in Sunnyvale,
California, Shanghai, China and Hyderabad, India through June 2018, May 2018 and December 2017, respectively. We
terminated the Sunnyvale lease in February 2017. In Shanghai, China, we also had another lease for 3,212 square feet, prior to
the acquisition of Silicon Image, which we terminated in November 2015.
In Shanghai, China, we also own an 18,869 square foot research and development facility for which we have entered into a
contract to sell in January 2017. We expect the sale to be complete in the first quarter of fiscal 2017.
We also lease office facilities in multiple other metropolitan locations for our domestic and international sales staff. We believe
that our existing facilities are suitable and adequate for our current and foreseeable future needs.
Item 3. Legal Proceedings
In February 2016, we filed a complaint against Technicolor SA and its affiliates in the United States District Court for the Northern
District of California alleging that Technicolor had infringed on certain patents relating to the HDMI specification. Technicolor filed
an answer to our complaint on April 11, 2016, which included various defenses to the alleged patent infringement. In November
2016, Technicolor amended its answer and asserted a counterclaim, alleging that the Company’s action constituted a breach of
the HDMI Founders Agreement to provide licenses on fair, reasonable and non-discriminatory terms. Technicolor seeks
declaratory relief and compensation for the alleged breach. At this stage of the proceedings, we do not have an estimate of the
likelihood or the amount of any financial consequences to us.
On or about January 9, 2017, Lattice, members of our Board, Canyon Bridge Capital Partners, Inc., Canyon Bridge Acquisition
Company, Inc. and Canyon Bridge Merger Sub Inc. were named as defendants in a complaint filed in the United States District
Court for the District of Oregon by an alleged stockholder of the Company in connection with the proposed acquisition of the
Company by Canyon Bridge. The complaint was captioned Paul Parshall, et al. v. Lattice, et al. and alleges violations of federal
securities laws based on alleged deficiencies in the disclosure provided to shareholders regarding the transaction. An additional
complaint was subsequently filed on or about January 27, 2017, naming Lattice and members of our Board, in the United States
district Court for the District of Delaware. This complaint is captioned Robert Sellers, et al. v. Lattice, et al. We believe that we
possess defenses to these claims and intend to vigorously defend this litigation. At this stage of the proceedings, we do not have
an estimate of the likelihood or the amount of any potential exposure to the Company, if any.
We are 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 FASB
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.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters, and Issuer Purchases of Equity
Securities
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol "LSCC". 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.
2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders
Low
High
$
4.02
$
4.89
5.21
5.91
$
5.87
$
5.76
3.25
3.68
6.67
6.47
6.69
7.99
7.66
6.98
6.10
7.07
As of February 27, 2017, we had approximately 255 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
On March 3, 2014, our Board of Directors approved a stock repurchase program pursuant to which up to $20.0 million of
outstanding common stock could be repurchased from time to time. The duration of the repurchase program was twelve months.
Under this program during fiscal 2015, approximately 1.9 million shares were repurchased for $13.1 million. The 2014 program
completed during the first quarter of fiscal 2015, during which approximately 1.1 million shares were repurchased for
approximately $7.0 million. All shares repurchased under the 2014 program were retired by the end of the fiscal year in which
they were repurchased. All repurchases were open market transactions funded from available working capital.
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 2011 through December 2016.
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.
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Lattice Cumulative Stockholder Return
28
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Item 6. Selected Financial Data
STATEMENT OF OPERATIONS:
(In thousands, except per share data)
Revenue:
December 31,
2016
January 2,
2016 **
January 3,
2015
December 28,
2013
December 29,
2012
Year Ended *
Product
$
390,704
$
369,200
$
366,127
$
332,525
$
279,256
Licensing and services
Total Revenue
Costs and expenses:
Cost of products sold
Cost of licensing and services revenue
Research and development
Selling, general, and administrative
Amortization of acquired intangible
assets
Restructuring charges
Acquisition related charges
Impairment of goodwill and intangible
assets
(Loss) Income from operations
Interest expense
Other income (expense), net
(Loss) income before income taxes and
equity in net loss of an unconsolidated
affiliate
Income tax expense (benefit)
Equity in net loss of an unconsolidated
affiliate, net of tax
Net (loss) income
Net (loss) income per share
Basic
Diluted
Shares used in per share calculations:
Basic
Diluted
$
$
$
36,350
427,054
179,983
637
117,518
98,602
33,575
9,267
6,305
7,866
453,753
(26,699)
(20,327)
4,303
36,766
405,966
184,914
1,143
136,868
97,349
29,580
19,239
22,450
21,655
513,198
(107,232)
(18,389)
(580)
(42,723)
9,917
(126,201)
32,540
—
—
—
366,127
332,525
279,256
159,940
154,281
128,499
—
88,079
73,527
2,948
17
—
—
324,511
41,616
(172)
1,497
42,941
(5,639)
—
80,966
67,144
2,960
388
—
—
305,739
26,786
(152)
(148)
26,486
4,165
—
—
77,610
72,317
4,178
6,018
—
—
288,622
(9,366)
—
505
(8,861)
20,745
—
(1,459)
(492)
—
(54,099) $
(159,233) $
48,580
$
22,321
$
(29,606)
(0.45) $
(0.45) $
(1.36) $
(1.36) $
0.41
0.40
$
$
0.19
0.19
$
$
(0.25)
(0.25)
119,994
119,994
117,387
117,387
117,708
120,245
115,701
117,081
117,194
117,194
BALANCE SHEET:
(In thousands)
Cash, cash equivalents and short-term
marketable securities
Total assets
Long term liabilities
Total liabilities
Total stockholders' equity
December 31,
2016
January 2,
2016
January 3,
2015
December 28,
2013
December 29,
2012
$
$
$
$
$
116,860
766,883
338,903
496,453
270,430
$
$
$
$
$
102,574
785,920
369,223
480,400
305,520
$
$
$
$
$
254,844
510,530
8,809
69,555
440,975
$
$
$
$
$
215,815
447,876
3,588
62,196
385,680
$
$
$
$
$
183,401
414,619
3,976
57,069
357,550
At
* The year ended January 3, 2015 was a 53-week year as compared to the other years presented, which were based on our standard 52-week year.
** Our results for the year ended January 2, 2016 include the results of Silicon Image for the approximately 10-month period from
March 11, 2015 through January 2, 2016. Results presented for periods prior to fiscal 2015 are those historically reported for
Lattice only. Our results for the year ended December 31, 2016 fully include the results of Silicon Image.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Lattice Semiconductor (“Lattice,” the “Company,” “we,” “us,” or “our”) engages in smart connectivity solutions, providing
intellectual property ("IP") and low-power, small form-factor devices that enable global customers to quickly deliver innovative
and differentiated cost and power efficient products. Our broad end-market exposure extends from mobile devices and
consumer electronics to industrial and automotive equipment, communications and computing infrastructure, and licensing.
Lattice was founded in 1983 and is headquartered in Portland, Oregon. We acquired Silicon Image, Inc. ("Silicon Image") in
March 2015. Silicon Image was engaged in setting industry standards including the HDMI®, DVI®, MHL® and WirelessHD®
standards. Our results for the year ended January 2, 2016 include the results of Silicon Image for the approximately 10-month
period from March 11, 2015 through January 2, 2016. Results presented for periods prior to fiscal 2015 are those historically
reported for Lattice only. Our results for the year ended December 31, 2016 fully include the results of Silicon Image.
Plan of Merger and Reorganization
On November 3, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Canyon Bridge
Acquisition Company, Inc., a Delaware corporation (“Parent”), and Canyon Bridge Merger Sub, Inc., a Delaware corporation and
wholly owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the
“Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent.
At the effective time of the Merger, each share of common stock, par value $0.01 per share, of the Company (the “Shares”) that
is outstanding immediately prior to such time (other than (i) Shares owned by Parent, Merger Sub, the Company (including any
Shares held in the treasury of the Company) or by any direct or indirect wholly owned subsidiary of Parent, Merger Sub or the
Company, or (ii) Shares held by stockholders of the Company who not have voted in favor of the Merger and who are entitled to
demand and properly demand their statutory rights of appraisal in accordance with the Delaware General Corporation Law) will
be canceled and extinguished and automatically converted into the right to receive cash in an amount equal to $8.30 per share
(without interest and subject to deduction for any required withholding tax).
Completion of the Merger is subject to various conditions, including the receipt on a timely basis or at all of any required
regulatory clearances related to the Merger, including under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR)
and from the Committee on Foreign Investment in the United States ("CFIUS"). On January 4, 2017, the parties’ request for early
termination of the waiting period provided by the Hart-Scott-Rodino Act was granted.
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 ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts and classification of assets, such as
marketable securities, accounts receivable, inventory, goodwill (including the assessment of reporting unit), intangible assets,
current and deferred income taxes, accrued liabilities (including restructuring charges and bonus arrangements), deferred
income and allowances on sales to sell-through distributors, disclosure of contingent assets and liabilities at the date of the
financial statements, amounts used in acquisition valuations and purchase accounting, and the reported amounts of product
revenue, licensing and services revenue, and expenses during the fiscal periods presented. Actual results could differ from those
estimates.
Revenue Recognition and Deferred Income
Product Revenue
We sell our products directly to end customers, through a network of independent manufacturers' representatives, and indirectly
through a network of independent sell-in and sell-through distributors. Distributors provide 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.
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Revenue from sales to original equipment manufacturers ("OEMs") and sell-in distributors is generally recognized upon
shipment. Reserves for sell-in stock rotations, where applicable, are estimated based primarily on historical experience and
provided for at the time of shipment. Revenue from sales by our sell-through distributors is recognized at the time of reported
resale. Under both types of revenue recognition, persuasive evidence of an arrangement exists, the price is fixed or
determinable, title has transferred, collection of resulting receivables is reasonably assured, and there are no remaining
customer acceptance requirements and no remaining significant performance obligations.
Orders from our sell-through distributors are initially recorded at published list prices; however, for a majority of our sales, the
final selling price is determined at the time of resale and in accordance with a distributor price agreement. For this reason, we do
not recognize revenue until products are resold by sell-through distributors to an end customer. In certain circumstances, we
allow sell-through distributors to return unsold products. At times, we protect our sell-through distributors against reductions in
published list prices.
At the time of shipment to sell-through distributors, we (a) record Accounts receivable at published list price since there is a
legally enforceable obligation from the distributor to pay us currently for product delivered, (b) relieve inventory for the carrying
value of goods shipped since legal title has passed to the distributor, and (c) record deferred revenue and deferred cost of sales
in deferred income and allowances on sales to sell-through distributors in the liability section of our Consolidated Balance
Sheets. Revenue and cost of sales 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 (loss) income,
and Accounts receivable, net are adjusted to reflect the final selling price.
We use estimates and apply judgment to reconcile sell-through distributors' inventories. Errors in our estimates or judgments
could result in inaccurate reporting of our Revenue, Cost of products sold, Deferred income and allowances on sales to sell-
through distributors, and Net (loss) income.
Licensing and Services Revenue
Our licensing and services revenue is comprised of revenue from our IP core licensing activity, patent monetization activities,
and royalty and adopter fee revenue from our standards activities. These activities are complementary to our product sales and
help us monetize our IP and accelerate market adoption curves associated with our technology and standards.
From time to time we enter into patent sale and licensing agreements to monetize and license a broad portfolio of our patented
inventions. Such licensing agreements may include upfront license fees and ongoing royalties. The contractual terms of the
agreements generally provide for payments of upfront license fees and/or royalties over an extended period of time. Revenue
from such license fees is recognized when payments become due and payable as long as all other revenue recognition criteria
are met, while revenue from royalties is recognized when reported to us by customers.
We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components into their
products pursuant to terms and conditions that vary by licensee. Revenue earned under these agreements is classified as
Licensing and services revenue. Our IP licensing agreements generally include multiple elements, which may include one or
more off-the-shelf or customized IP licenses bundled with support services covering a fixed period of time, generally one year. If
the different elements of a multiple-element arrangement qualify as separate units of accounting, we allocate the total
arrangement consideration to each element based on relative selling price.
Amounts allocated to off-the-shelf IP licenses are recognized at the time of sale provided the other conditions for revenue
recognition have been met. Amounts allocated to the support services are deferred and recognized on a straight-line basis over
the support period, generally one year. Certain licensing agreements provide for royalty payments based on agreed-upon royalty
rates, which may be fixed or variable depending on the terms of the agreement. The amount of revenue we recognize is based
on a specified time period or on the agreed-upon royalty rate multiplied by the reported number of units shipped by the customer.
From time to time, we enter into IP licensing agreements that involve significant modification, customization or engineering
services. Revenues derived from these contracts are accounted for using the percentage-of-completion method or completed
contract method. The completed contract method is used for contracts where there is a risk associated with final acceptance by
the customer or for short-term contracts.
HDMI royalty revenue is determined by a contractual allocation formula agreed to by the Founders of the HDMI consortium.
Evidence of an arrangement, as it relates to HDMI royalty revenue, is deemed complete when all of the Founders agree on the
royalty sharing formula. From time to time through December 31, 2016, as an agent of the HDMI Consortium, we performed
audits on our royalty reporting customers to ensure compliance. As a result of those compliance efforts, we entered into
settlement agreements for the payment of unreported royalties. The contractual terms of those agreements provided for upfront
payment of unreported royalties or payment over a period of time, generally not to exceed one year. Revenue from those
arrangements was recognized when the agreement was executed by both parties, as long as price was fixed and determinable
and collection was reasonably assured.
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Fair Value of Financial Instruments
We invest in various financial instruments, which may include corporate and government bonds, notes, and commercial paper.
We were also invested in auction rate securities until June 2014. We value these instruments at their fair value and monitor our
portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the
decline in value is determined to be other than temporary, we would record an impairment charge and establish a new carrying
value. We assess other-than-temporary impairment of marketable securities in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements 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.
Our Level 1 instruments consist of U.S. Government agency, corporate notes and bonds, and commercial paper that are traded
in active markets and are classified as short-term marketable securities on our Consolidated Balance Sheets.
Level 2 instruments include inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for
similar assets or liabilities, quoted prices for identical instruments in markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level
2 instruments consist of certificates of deposit and foreign currency exchange contracts, entered into to hedge against fluctuation
in the Japanese yen.
Level 3 instruments include unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of the assets or liabilities. As a result, the determination of fair value for Level 3 instruments requires significant
management judgment and subjectivity. Our Level 3 instruments had been entirely made up of auction rate securities consisting
of student loan asset-backed notes, all of which were sold during fiscal 2014.
Inventory
Inventories are recorded at the lower of actual cost determined on a first-in-first-out basis or market. We establish provisions for
inventory if it is obsolete or we hold quantities which are in excess of projected customer demand. The creation of such
provisions results in a write-down of inventory to net realizable value and a charge to cost of products revenue.
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. Leasehold improvements are amortized over the shorter of
the non-cancelable lease term or the estimated useful life of the assets. Upon disposal of property and equipment, the accounts
are relieved of the costs and related accumulated depreciation and amortization, and resulting gains or losses are reflected in
the Consolidated Statements of Operations for recognized gains and losses, or in the Consolidated Balance Sheets for deferred
gains and losses. Repair and maintenance costs are expensed as incurred.
Impairment of Long-Lived Assets
Long-lived assets, including amortizable intangible assets, are carried on our financial statements based on their cost less
accumulated depreciation or amortization. We monitor the carrying value of our long-lived assets for potential impairment and
test the recoverability of such assets annually during the fourth quarter and whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. These events or changes in circumstances, including management
decisions pertaining to such assets, are referred to as impairment indicators. If an impairment indicator occurs, we perform a test
of recoverability by comparing the carrying value of the asset group to its undiscounted expected future cash flows. If the
carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair
value of the asset group to its carrying value. Fair value is generally determined by considering (i) internally developed
discounted projected cash flow analysis of the asset group; (ii) actual third-party valuations; and/or (iii) information available
regarding the current market for similar asset groups. If the fair value of the asset group is determined to be less than the
carrying amount of the asset group, an impairment in the amount of the difference is recorded in the period that the impairment
indicator occurs and is included in our Consolidated Statements of Operations. Estimating future cash flows requires significant
judgment and projections may vary from the cash flows eventually realized, which could impact our ability to accurately assess
whether an asset has been impaired.
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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. When
evaluating whether goodwill is impaired, we make a qualitative assessment to determine if it is more likely than not that the
reporting unit's fair value is less than the carrying amount. If the qualitative assessment determines that it is more likely than not
that the fair value is less than the carrying amount, the fair value of the reporting unit is compared with its carrying value
(including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists
for the reporting unit and we must measure the impairment loss. The impairment loss, if any, is recognized for any excess of the
carrying amount of the reporting unit's goodwill over the implied fair value of the goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit in a manner similar to 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, no further impairment
analysis is needed. For purposes of testing goodwill for impairment, we currently operate as a single reporting unit: the core
Lattice ("Core") business, which includes intellectual property and semiconductor devices. In fiscal 2015 only, we separately
tested goodwill for impairment in Qterics, a discrete software-as-a-service business unit in the Lattice legal entity structure. We
sold Qterics to an unrelated third party in April 2016. Although these two operating units constituted two reportable segments in
fiscal 2015, we combined Qterics with our Core business and reported them together as one reportable segment due to the
immaterial nature of the Qterics unit.
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. However, because we have a history of paying severance benefits, the cost of
severance benefits associated with a restructuring plan is recorded when such costs are probable and the amount can be
reasonably estimated in accordance with ASC 712, “Compensation - Nonretirement Postemployment Benefits.” When leased
facilities are vacated, an amount equal to the total future lease obligations from the date of vacating the premises through the
expiration of the lease, net of estimated 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 changes in deferred tax assets and liabilities. Deferred
tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect
when the difference is expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that in
management’s judgment is more-likely-than-not to be recoverable against future taxable income. At December 31, 2016, U.S.
income taxes were not provided on approximately $3.0 million of the undistributed earnings of our Chinese subsidiary as we
intend to reinvest these earnings indefinitely. If these earnings were distributed to the U.S. in the form of dividends or otherwise,
these earnings would be subject to Chinese withholding taxes and would be subject to additional U.S. income taxes but offset by
net operating loss carryforwards which have been fully reserved.
Our income tax calculations are based on application of the respective U.S. federal, state or foreign tax law. Our tax filings,
however, are subject to audit by the relevant tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of
whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An
uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final
tax liabilities are different than the amounts originally accrued, the increases or decreases as well as any interest or penalties
are recorded as income tax expense or benefit in the Consolidated Statements of Operations.
In assessing the realizability of deferred tax assets, we evaluate both positive and negative evidence that may exist and consider
whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible.
Any adjustment to the net deferred tax asset valuation allowance is recorded in the Consolidated Statements of Operations for
the period that the adjustment is determined to be required.
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, “Compensation - Stock Compensation.” Option pricing models, including the Black-Scholes model,
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 most significantly affect the grant date fair value.
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We have also used a lattice-based option-pricing model to determine and fix the fair value of stock options with a market
condition granted to certain executives. This valuation model incorporates a Monte-Carlo simulation, and considered the
likelihood that we would achieve the market condition. The options have a two year vesting and vest between 0% and 200% of
the target amount, based on the Company's relative Total Shareholder Return ("TSR") when compared to the TSR of a
component of companies of the PHLX Semiconductor Sector Index over a two year period. TSR is a measure of stock price
appreciation plus dividends paid, if any, in the performance period.
Results of Operations*
Key elements of our Consolidated Statements of Operations were as follows:
(In thousands)
Revenue
December 31, 2016
January 2, 2016
January 3, 2015
$ 427,054
100.0 % $ 405,966
100.0 % $ 366,127
100.0%
Year Ended**
Gross margin
Research and development
Selling, general, and administrative
Amortization of acquired intangible assets
Restructuring charges
Acquisition related charges
Impairment of goodwill and intangible assets
246,434
117,518
98,602
33,575
9,267
6,305
7,866
57.7
27.5
23.1
7.9
2.2
1.5
1.8
219,909
136,868
97,349
29,580
19,239
22,450
21,655
54.2
33.7
24.0
7.3
4.7
5.5
5.3
206,187
88,079
73,527
2,948
17
—
—
56.3
24.1
20.1
0.8
—
—
—
(Loss) income from operations
$
(26,699)
(6.3)% $ (107,232)
(26.4)% $
41,616
11.4%
* Lattice acquired Silicon Image on March 10, 2015. Results of Operations for fiscal 2015 include the financial results of Silicon
Image for the approximately 10-month period from March 11, 2015 through January 2, 2016. Silicon Image's revenue and net
loss for that period were approximately $135.6 million and $77.0 million, respectively. Silicon Image's acquisition related
charges in that period, which were expensed as incurred, were approximately $8.2 million.
** The year ended January 3, 2015 (fiscal 2014) was a 53-week year as compared to the current and most recent previous years
(fiscal 2016 and fiscal 2015, respectively) which were based on our standard 52-week year.
Revenue
(In thousands)
Revenue
December 31, 2016
January 2, 2016
January 3, 2015
2016
2015
Year Ended
% Change in
$
427,054
$
405,966
$
366,127
5
11
Revenue increased $21.1 million, or 5%, in fiscal 2016 compared to fiscal 2015, primarily driven by approximately $40.6 million
of growth in the Industrial and Automotive end market for programmable logic devices, along with the inclusion of additional
revenue in connection with our acquisition of Silicon Image for the full year of fiscal 2016 relative to only an approximately 10-
month period in fiscal 2015, partially offset by approximately $20.4 million of decline in the Communications and Computing end
market for programmable logic devices.
Revenue increased $39.8 million, or 11%, in fiscal 2015 compared to fiscal 2014, primarily driven by the acquisition of Silicon
Image during the first quarter of fiscal 2015. The contribution by the addition of Silicon Image products was primarily in
Consumer silicon products and licensing fees associated with certain IP and royalties and license fees from HDMI and MHL
branded products. These increases were offset by a 26% decrease in revenue from programmable logic devices primarily in the
Mobile and Consumer and the Communications and Computing end markets.
In fiscal 2014, one Mobile and Consumer end market customer accounted for 19% of total revenue, and one Communications
and Computing end market customer accounted for 12% of total revenue.
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Revenue by End Market
The end market data below is derived from data provided to us by our distributors and end customers. With a diverse base of
customers who may manufacture end products spanning multiple end markets, the assignment of revenue to a specific end
market requires the use of estimates and judgment. Therefore, actual results may differ from those reported. With our acquisition
of Silicon Image, we added a Licensing end market to report Licensing and services revenue, which includes the licensing of our
IP, the collection of certain royalties, patent sales, the revenue related to our participation in consortia and standard-setting
activities, and services. While Licensing products are primarily sold into the Consumer market, Licensing and services revenue
is reported separately as it has characteristics that differ from other categories, most notably its high gross margin.
The following are examples of end market applications:
Communications and
Computing
Wireless
Wireline
Data Backhaul
Computing
Servers
Mobile and Consumer
Industrial and Automotive
Licensing and Services
Smartphones
Security and Surveillance
Cameras
Displays
Tablets
Wearables
Machine Vision
Industrial Automation
Human Machine Interface
Automotive
Drones
IP Royalties
Adopter Fees
IP Licenses
Patent Sales
Testing Services
Data Storage
Televisions and Home Theater
The composition of our revenue by end market for fiscal years 2016, 2015 and 2014 was as follows:
Year Ended *
% Change in
(In thousands)
December 31, 2016
January 2, 2016
January 3, 2015
2016
2015
Communications and Computing
$ 123,021
29% $ 143,424
35% $ 180,612
49%
Mobile and Consumer
Industrial and Automotive
Licensing and Services
127,405
140,278
36,350
30
33
8
126,130
99,646
36,766
31
25
9
92,152
93,363
—
25
26
—
Total revenue
$ 427,054
100% $ 405,966
100% $ 366,127
100%
(14)
1
41
(1)
5
(21)
37
7
—
11
* During the first quarter of fiscal 2016, we realigned our end market categories to group Computing with Communications rather than with
Industrial, as had been the previous grouping. Prior periods have been reclassified to match current period presentation.
Our revenue in the Communications and Computing end market is largely dependent on a small number of large
telecommunications equipment providers. For fiscal 2016, Communications and Computing end market revenue declined 14%
primarily in programmable products, and was across a general cross section of communications customers and modestly in our
largest computing customer. For fiscal 2015, Communications and Computing end market revenue decreased 21% primarily
driven by a decrease in demand relative to fiscal 2014 from communications customers supporting 4G-LTE infrastructure build
out in China as that program returned to more normal volumes.
Mobile and Consumer end market revenue increased 1% in fiscal 2016, after increasing 37% in fiscal 2015. Mobile and
Consumer end market revenue increased in fiscal 2016 primarily due to a significant increase in new programmable production
volume for a major mobile handset provider offset by a nearly equal decline in ASSP shipments related to high-definition
television ("HDTV") and mobile handsets. Mobile and Consumer end market revenue increased in fiscal 2015 primarily due to
the acquisition of Silicon Image, offset by a 60% decline in our FPGA product revenue due primarily to lower demand at a major
OEM for certain of our iCE40 products. The products acquired were concentrated in the DTV, home theater, and mobile
communications markets.
For fiscal 2016, Industrial and Automotive end market revenue increased 41% when compared to fiscal 2015. This is primarily
due to strength in programmable products revenue resulting from line item reduction and complex programmable logic device
("CPLD") conversions affecting both the Americas and Europe. For fiscal 2015, Industrial and Automotive end market revenue
increased 7% when compared to fiscal 2014 primarily due to Industrial and Automotive end market growth in Asia and the
acquisition of Silicon Image.
Licensing and Services revenue decreased by 1% in fiscal 2016 primarily due to slightly reduced adopter fees and audit
revenues at licensed end customers. Licensing and Services revenue was first recognized in fiscal 2015 following the acquisition
of Silicon Image in March 2015. Previously, we did not have Licensing and Services revenue. Revenue from this end market is
expected to fluctuate, sometimes significantly, from period to period as a result of the timing of completion of IP license
arrangements, IP sales, patent sales, and settlement of royalty audits. As a result of the amended model for sharing revenue
and the appointment of a new independent agent for the HDMI consortium, we will be entitled to a reduced share of adopter fees
paid by parties adopting the HDMI standard in 2017.
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Revenue by Geography
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 OEM customer. In the case of sell-through distributors, revenue is recognized when resale to the end
customer occurs and geography is assigned based on the end customer location on the resale reports provided by the
distributor. Both foreign and domestic sales are denominated in U.S. dollars, with the exception of certain historical sales in
Japan, which were denominated in yen.
The composition of our revenue by geography, based on ship-to location, for fiscal years 2016, 2015 and 2014 was as follows:
(In thousands)
Asia
Europe
Americas
Total revenue
December 31, 2016
Year Ended
January 2, 2016
January 3, 2015
% Change in
2015
2016
$ 305,093
71% $ 308,534
76% $ 266,831
73%
59,835
62,126
14
15
55,596
41,836
14
10
59,041
40,255
16
11
$ 427,054
100% $ 405,966
100% $ 366,127
100%
(1)
8
48
5
16
(6)
4
11
Revenue in Asia decreased 1% in fiscal 2016 and increased 16% in fiscal 2015. In fiscal 2016, revenue decreased in Asia
primarily due to declines in HDTV and ASSP revenue, although these were substantially offset by increases in revenue from
programmable logic products in the Mobile and Consumer end market. In fiscal 2015, revenue growth in Asia was due primarily
to the acquisition of Silicon Image, a high concentration of whose products are in the Consumer market with the end products
they serve heavily manufactured in Asia. We believe 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 the migration of manufacturing by North
American and European customers to the Asia Pacific region.
Revenue in Europe increased 8% in fiscal 2016 primarily due to line item reduction and CPLD conversions. Revenue in Europe
decreased 6% in fiscal 2015 primarily due to the completion of a specific program at a large Communications customer and a
decrease in volume at an Industrial customer.
Revenue from the Americas increased 48% in fiscal 2016 primarily due to line item reduction and CPLD conversions. Americas
revenue increased 4% in fiscal 2015 due to the addition of Silicon Image which contributed revenue both in devices and
Licensing and services enough to offset a decline in programmable products revenue in the region.
Revenue from foreign sales as a percentage of total revenue was 88%, 92%, and 92% for fiscal 2016, 2015 and 2014,
respectively.
Revenue from End Customers
Our top five end customers constituted approximately 27% in fiscal 2016, compared to approximately 32% and 45% in fiscal
years 2015 and 2014, respectively, primarily due to a more diverse customer base.
During fiscal years 2016 and 2015, no end customer accounted for more than 10% of total revenue. Our largest end customer in
fiscal 2016 accounted for approximately 9.9% of total revenue, while our largest end customer in fiscal 2015 accounted for
approximately 9.3% of total revenue. In fiscal 2014, our two largest end customers accounted for 19.1% and 12.3%,
respectively, of total revenue. No other customers accounted for more than 10% of total revenue during these periods.
Revenue by Distributors
Sales through distributors have historically accounted for a significant portion of our total revenue. Revenue attributable to resale
of products by our primary sell-through distributors for fiscal years 2016, 2015 and 2014 was as follows:
Arrow Electronics Inc.
Weikeng Group
All others
All sell-through distributors
% of Total Revenue
2016
2015
2014
24%
22
15
61%
20%
12
13
45%
24%
10
11
45%
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Revenue from sell-through distributors as a percent of total revenue increased in fiscal 2016 primarily due to an increase in new
programmable production volume in consumer mobile devices shipped through a sell-through distributor in 2016, as well as
declines in channels other than sell-through distributors from 2015 levels, mainly due to declines in DTV and Home Theater
related devices and handset content revenues. Revenue from sell-through distributors as a percent of total revenue was flat over
the two-year period from fiscal 2015 through fiscal 2014.
Gross margin
The composition of our gross margin, including as a percentage of revenue, for fiscal years 2016, 2015 and 2014 was as
follows:
(In thousands)
Gross margin
Percentage of revenue
Product gross margin %
Licensing and services gross margin %
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
$
246,434
$
219,909
$
206,187
57.7%
53.9%
98.2%
54.2%
49.9%
96.9%
56.3%
56.3%
—%
Gross margin and Product gross margin, as a percentage of revenue, increased 3.5 and 4.0 percentage points, respectively,
from fiscal 2015 to fiscal 2016. Of this increase, approximately 2.5 percentage points was due to product cost reductions from
lower overhead burden rates, reduced wafer and packaging costs, and improved yields. Approximately another 1.5 percentage
points of the increase was due to the reduced amortization in the current year of purchase price accounting adjustments (now
substantially completed) associated with the sell-through of acquired inventory and deferred revenue. These increases were
partially offset by a less favorable product and customer mix.
Gross margin and Product gross margin, as a percentage of revenue, declined 2.1 and 6.4 percentage points, respectively, from
fiscal 2014 to fiscal 2015, primarily due to purchase accounting adjustments (now substantially completed) from the acquisition
of Silicon Image in March 2015 associated with the sell-through of acquired inventory and deferred revenue combined with a
degradation of product mix. The unfavorable product mix was mainly driven by the acquired mobile communications and DTV
product groups in our Consumer end market slightly offset by the high margins from the acquired Licensing and services
revenue.
Because of its higher margin, the licensing and services portion of our overall revenue can have a disproportionate impact on
gross margin and profitability. For programmable and standard products, we expect that product, end market, and customer mix
will subject our gross margin to fluctuation, while we expect downward pressure on average selling price to adversely affect our
gross margin in the future. If we are unable to realize additional or sufficient product cost reductions in the future to balance
changes in product and customer mix, we may experience degradation in our product gross margin.
Operating Expenses
Research and development expense
The composition of our research and development expenses, including as a percentage of revenue, for fiscal years 2016, 2015,
and 2014 was as follows:
(In thousands)
Research and development
Percentage of revenue
Mask costs included in Research and
development
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
% Change in
2016
2015
$
$
117,518
27.5%
3,328
$
$
136,868
33.7%
5,770
$
$
88,079
(14.1)%
55.4%
24.1%
2,877
(42.3)%
100.6%
Research and development expense includes costs for compensation and benefits, stock compensation, development masks,
engineering wafers, depreciation, licenses, and outside engineering services. These expenditures are for the design of new
products, IP cores, processes, packaging, and software to support new products.
We believe that a continued commitment to research and development is essential to maintaining product leadership and
providing innovative new product offerings and, therefore, we expect to continue to make significant future investments in
research and development.
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The decrease in research and development expense for fiscal 2016 compared to fiscal 2015 is due mainly to significantly
reduced headcount expenses and, to a lesser extent, reduced mask and wafer costs, lab supplies, time-based licenses, and
outside services.
The increase in research and development expense for fiscal 2015 compared to fiscal 2014 was the result of increased
headcount, masks costs, and outside service expenses primarily from the inclusion of Silicon Image research and development,
partially offset by decreased variable compensation expense.
Selling, general, and administrative expense
The composition of our selling, general and administrative expenses, including as a percentage of revenue, for fiscal years 2016,
2015, and 2014 was as follows:
(In thousands)
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
% Change in
2016
2015
Selling, general, and administrative
$
98,602
$
97,349
$
73,527
1.3%
32.4%
Percentage of revenue
23.1%
24.0%
20.1%
Selling, general, and administrative expense includes costs for compensation and benefits related to selling, general, and
administrative employees, commissions, depreciation, professional and outside services, trade show, and travel expenses.
The increase in selling, general, and administrative expense for fiscal 2016 compared to fiscal 2015 was due mainly to an
increase in bad debt expense related to the bankruptcy of one of our distributor groups, substantially offset by the decrease in
expenses due to restructuring and integration of operations undertaken since the acquisition of Silicon Image, predominantly
headcount reductions and site consolidations.
The increase in selling, general, and administrative expense for fiscal 2015 compared to fiscal 2014 was primarily due to
increased headcount and outside service expenses driven primarily by the inclusion of Silicon Image, partially offset by
decreased variable compensation expense.
Amortization of Acquired Intangible Assets
The composition of our amortization of acquired intangible assets, including as a percentage of revenue, for fiscal years 2016,
2015 and 2014 was as follows:
(In thousands)
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
% Change in
2016
2015
Amortization of acquired intangible assets
$
33,575
$
29,580
$
2,948
13.5% 100+%
Percentage of revenue
7.9%
7.3%
0.8%
For fiscal 2016 compared to fiscal 2015, amortization of acquired intangible assets increased due to the inclusion of additional
amortization expense from new intangible assets acquired in connection with our acquisition of Silicon Image for the full year of
fiscal 2016 relative to only an approximately 10-month period in fiscal 2015, partially offset by the reduction of certain intangibles
as a result of impairment charges in late 2015, and the sale of Qterics in April 2016.
For fiscal 2015 compared to fiscal 2014, amortization of acquired intangible assets increased primarily due to additional
amortization expense from intangible assets acquired in connection with our acquisition of Silicon Image in March 2015.
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Restructuring charges
The composition of our restructuring charges, including as a percentage of revenue, for fiscal years 2016, 2015 and 2014 was
as follows:
(In thousands)
Restructuring charges
Percentage of revenue
Year Ended
% Change in
December 31,
2016
January 2,
2016
January 3,
2015
$
9,267
$
19,239
$
2.2%
4.7%
17
—%
2016
2015
(51.8)% 100+%
Restructuring charges include expenses resulting from reductions in our worldwide workforce, consolidation of our facilities, and
cancellation of software contracts and engineering tools.
In March 2015, our Board of Directors approved an internal restructuring plan (the "March 2015 Plan"), in connection with our
acquisition of Silicon Image. The March 2015 Plan was designed to realize synergies from the acquisition by eliminating
redundancies created as a result of combining the two companies. The March 2015 Plan is substantially complete, subject to
certain remaining expected costs that we do not expect to be material and any changes in sublease assumptions should they
occur, which will be expensed as incurred under U.S. GAAP rules through the first quarter of fiscal 2017. Approximately $20.6
million of total expense has been incurred through December 31, 2016 under the Mach 2015 Plan. We expect the total cost of
the March 2015 Plan to be approximately $21.0 million.
In September 2015, we implemented a further reduction of our worldwide workforce (the "September 2015 Reduction") separate
from the March 2015 Plan. The September 2015 Reduction was designed to resize the company in line with the market
environment and to better balance our workforce with the long-term strategic needs of our business. The September 2015
Reduction is substantially complete, subject to certain remaining expected costs, which we do not expect to be material, which
will be expensed as incurred under U.S. GAAP rules through the first quarter of fiscal 2017. Approximately $7.9 million of total
expense has been incurred through December 31, 2016 under the September 2015 Reduction. We expect the total cost of the
September 2015 Reduction to be approximately $8.0 million.
The $10.0 million decrease in restructuring expense from fiscal 2015 to fiscal 2016 is primarily the result of decreased
headcount related restructuring charges in the current year slightly offset by an incremental net charge in the fourth quarter of
2016 to terminate the lease for our Sunnyvale site.
The increase in Restructuring charges for fiscal 2015 compared to fiscal 2014 was driven by the combination of both the March
2015 Plan and the September 2015 Reduction in fiscal 2015 versus only residual restructuring activity in fiscal 2014 related to
past restructuring plans.
Acquisition related charges
The composition of our acquisition related charges, including as a percentage of revenue, for fiscal years 2016, 2015 and 2014
was as follows:
(In thousands)
Acquisition related charges
Percentage of revenue
Year Ended
% Change in
December 31,
2016
January 2,
2016
January 3,
2015
$
6,305
$
22,450
$
1.5%
5.5%
—
—%
2016
2015
(71.9)% 100+%
Acquisition related charges includes severance and professional fees directly related to acquisitions.
For fiscal 2016, acquisition related charges were attributable to professional fees associated with our pending acquisition by
Canyon Bridge Acquisition Company, Inc.
For fiscal 2015, acquisition related charges were entirely attributable to our acquisition of Silicon Image in March 2015 and were
comprised of professional services including legal, accounting, licenses and fees, and severance and stock compensation costs
related to change of control payments to departing executives. Charges related to the acquisition of Silicon Image were
substantially completed as of January 2, 2016. There were no acquisition related charges in fiscal 2014.
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Impairment of goodwill and intangible assets
The composition of our Impairment of goodwill and intangible assets, including as a percentage of revenue, for fiscal years 2016,
2015 and 2014 was as follows:
(In thousands)
December 31,
2016
Year Ended
January 2,
2016
Impairment of goodwill and intangible assets
$
7,866
$
21,655
$
Percentage of revenue
1.8%
5.3%
% Change in
2016
2015
(63.7)% 100+%
January 3,
2015
—
—%
In September 2016, the Founders of the HDMI consortium, of which we are a member, amended the Founders Agreement
resulting in changes to our role as agent for the HDMI consortium and to the model for sharing adopter fee revenues. Lattice
historically served the role of the HDMI licensing agent via a wholly owned subsidiary, HDMI Licensing LLC. Under the terms of
the agreement, our role as the agent was terminated effective January 1, 2017 and a new independent entity was appointed to
act as the new HDMI licensing agent with responsibility for licensing and the distribution of royalties among Founders. As a result
of the amended model for sharing revenue, we will be entitled to a reduced share of adopter fees paid by parties adopting the
HDMI standard. We determined that this modification constituted an impairment indicator related to the intangible assets
associated with future HDMI adopter fees. Our assessment of the new value of these intangible assets concluded that they had
been impaired as of the end of the third quarter of fiscal 2016, and we recorded a $7.9 million non-cash impairment charge in the
Consolidated Statements of Operations. We do not anticipate any future cash expenditures related to this impairment. No
impairment charges related to goodwill were recorded in fiscal 2016 as no indicators of impairment were present.
For fiscal 2015, the impairment of goodwill and intangible assets was related to Qterics, Inc., which was acquired in the March
2015 acquisition of Silicon Image. During the fourth quarter of fiscal 2015, we determined that we experienced an impairment
indicator related to the long-lived assets of the Qterics operating segment. For purposes of testing for impairment in fiscal 2015,
the Company operated as two reporting units: the continuing core Lattice ("Core") business, which includes intellectual property
and semiconductor devices, and Qterics, which was a discrete software-as-a-service business unit in the Lattice legal entity
structure until it was sold in April 2016. Although these two operating segments constituted two reportable segments in fiscal
2015, we combined Qterics with our Core business and reported them together as one reportable segment due to the immaterial
nature of the Qterics segment. Following this assessment, we concluded that goodwill and intangible assets had been impaired
in the Qterics segment as of January 2, 2016. As a result, we recorded impairment charges amounting to $21.7 million, or
approximately 92% of the previous value of goodwill and intangible assets, in the Consolidated Statements of Operations for the
year ended January 2, 2016, comprising $12.7 million pertaining to goodwill, $3.9 million pertaining to developed technology,
and $5.1 million pertaining to customer relationships. The valuation was based on the market approach and was our best
estimate of fair value as of the end of fiscal 2015. No impairment charges were recorded for the Core segment in fiscal 2015,
and we had no impairment charges in fiscal 2014.
Interest Expense
The composition of our Interest expense, including as a percentage of revenue, for fiscal years 2016, 2015 and 2014 was as
follows:
(In thousands)
Interest expense
Percentage of revenue
December 31,
2016
Year Ended
January 2,
2016
$
(20,327)
$
(18,389)
$
(4.8)%
(4.5)%
January 3,
2015
(172)
—%
% Change in
2016
2015
10.5% 100+%
The increase in interest expense for fiscal 2016 compared to fiscal 2015 was primarily driven by the interest expense related to
our debt acquired to partially fund the Silicon Image acquisition, which is further discussed in the Credit Arrangements section
under Liquidity and Capital Resources. This interest expense is comprised of contractual interest and amortization of original
issue discount and debt issuance costs based on the effective interest method and was recognized for the full year of fiscal 2016
versus only an approximately 10-month period in fiscal 2015. The latter shorter period was the result of the Silicon Image
acquisition date late in the first quarter of fiscal 2015.
For fiscal 2015, the $18.2 million increase in interest expense from fiscal 2014 was primarily driven by the issuance of debt to
partially fund the Silicon Image acquisition in fiscal 2015.
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Other income (expense), net
The composition of our other income (expense), net, including as a percentage of revenue, for fiscal years 2016, 2015 and 2014
was as follows:
(In thousands)
Other income (expense), net
Percentage of revenue
Year Ended
% Change in
December 31,
2016
January 2,
2016
January 3,
2015
2016
2015
$
4,303
$
(580)
$
1,497
100+% (100+)%
1.0%
(0.1)%
0.4%
For fiscal 2016 compared to fiscal 2015, the increase in other income (expense), net is driven by the $2.6 million gain on the
sale of Qterics to an unrelated third party, escrow proceeds received from the sale of assets by Silicon Image prior to our
acquisition in 2015, proceeds received from the bankruptcy settlement distribution of a prior customer, all in fiscal 2016, and the
loss on sale of assets in the prior year, not recurring in the current year.
The $0.6 million other expense in fiscal 2015 primarily consisted of a loss on sale of assets combined with foreign exchange
losses as compared to the $1.5 million other income in fiscal 2014, which resulted primarily from the realization of a gain on the
sale of auction rate securities.
Income taxes
The composition of our income taxes for fiscal years 2016, 2015 and 2014 was as follows:
(In thousands)
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
% Change in
2016
2015
Income tax expense (benefit)
$
9,917
$
32,540
$
(5,639)
(69.5)% 100+%
Our overall tax expense for fiscal 2016, compared to fiscal 2015 decreased primarily due to the recording of a valuation
allowance in 2015 resulting in an increase to the tax provision of $21 million, not recurring in the current year.
In the first quarter of 2015, we completed the acquisition of Silicon Image, Inc. At the time of the acquisition, we evaluated the
combined entity's net deferred income taxes, which included an assessment of the cumulative income or loss over the prior
three-year period and future periods, to determine if a valuation allowance is required. After considering the impact of the
acquisition including interest expense and other restructuring expenses, we recorded a valuation allowance on our net federal
and state deferred tax assets.
During the fourth quarter of 2014, we 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, resulting in a tax benefit of $11.5 million. We based this conclusion on improved
operating results over the previous two years and our expectations about generating taxable income in the foreseeable future.
We exercised significant judgment and considered estimates about our ability to generate revenue, gross profits, operating
income and taxable income in future periods under our global tax structure in reaching this decision.
We are not currently paying U.S. federal income taxes and do not expect to pay such taxes until we fully utilize our tax net
operating loss and credit carryforwards. We expect to pay a nominal amount of state income tax. We are paying foreign income
taxes, which are primarily related to withholding taxes on income from foreign royalties, and to a lesser extent related to foreign
sales and to the cost of operating offshore research and development, marketing, and sales subsidiaries. We accrue interest and
penalties related to uncertain tax positions in income tax expense on our Consolidated Statements of Operations.
The inherent uncertainties related to the geographical distribution and relative level of profitability among various high and low
tax jurisdictions make it difficult to estimate the impact of the global tax structure on our future effective tax rate.
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Equity in net loss of an unconsolidated affiliate
The composition of our equity in net loss of an unconsolidated affiliate for fiscal years 2016, 2015 and 2014 was as follows:
(In thousands)
Equity in net loss of an unconsolidated affiliate,
net of tax
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
% Change in
2016
2015
$
(1,459) $
(492) $
—
196.5% 100+%
As of December 31, 2016, we held a 22.7% preferred stock ownership interest in a privately-held company that designs human-
computer interaction technology for a total investment of $6.0 million. Due to the level of our ownership interest and after
considering the nature of our participation in the management and interaction with the investee, we have determined that we
have the ability to exert significant influence on the investee. Accordingly, we have accounted for the investment using the equity
method and have recognized our proportionate share of the investee’s net loss in the Consolidated Statements of Operations
The increase in equity in net loss of an unconsolidated affiliate for fiscal 2016 compared to fiscal 2015 was due to recognition for
the full year of fiscal 2016 versus only for the fourth quarter of fiscal 2015, the period in which we converted from cost to the
equity method of accounting for this investment.
Liquidity and Capital Resources
The following sections discuss the effects of changes in our Consolidated Balance Sheets and the effects of our credit
arrangements and contractual obligations on our liquidity and capital resources, our share repurchase program, as well as our
non-GAAP measures.
We classify our marketable securities as short-term based on their nature and availability for use in current operations. Our cash
equivalents and short-term marketable securities consist primarily of high quality, investment-grade securities.
We have historically financed our operating and capital resource requirements through cash flows from operations. Cash
provided by or used in operating activities will fluctuate from period to period due to fluctuations in operating results, the timing
and collection of accounts receivable, and required inventory levels, among other things.
We believe that our financial resources will be sufficient to meet our working capital needs through at least the next 12 months.
As of December 31, 2016, we did not have significant long-term commitments for capital expenditures. In the future, and to the
extent our Credit Agreement permits, we may continue to consider acquisition opportunities to further extend our product or
technology portfolios and further expand our product offerings. In connection with funding capital expenditures, completing other
acquisitions, securing additional wafer supply, or increasing our working capital, we may seek to obtain equity or additional debt
financing, or advance purchase payments or similar arrangements with wafer manufacturers. We may also need to obtain equity
or additional debt financing if we experience downturns or cyclical fluctuations in our business that are more severe or longer
than we anticipated when determining our current working capital needs, which financing may now be more difficult to obtain in
light of our indebtedness related to the Credit Agreement.
Liquidity
Cash and cash equivalents and Short-term marketable securities
(In thousands)
Cash and cash equivalents
Short-term marketable securities
Total Cash and cash equivalents and Short-term marketable
securities
December 31, 2016
January 2, 2016
$ Change
$
$
106,552
$
10,308
84,606
$
21,946
17,968
(7,660)
116,860
$
102,574
$
14,286
As of December 31, 2016, we had total cash and cash equivalents and short-term marketable securities of $116.9 million, of
which approximately $65.9 million in cash and cash equivalents was held by our foreign subsidiaries. We manage our global
cash requirements considering (i) available funds among the subsidiaries through which we conduct business, (ii) the
geographic location of our liquidity needs, and (iii) the cost to access international cash balances. The repatriation of non-U.S.
earnings may have adverse tax consequences as we may be required to pay and record income tax expense on those funds to
the extent they were previously considered permanently reinvested. As of December 31, 2016, we could access all cash held by
our foreign subsidiaries without incurring significant additional expense.
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The net increase in cash and cash equivalents and short-term investments of $14.3 million as compared to January 2, 2016,
was primarily the result of $41.7 million of cash provided by operations and $2.0 million in proceeds received from the sale of the
Qterics business unit, offset by $25.8 million of cash used in capital expenditures and payment for software licenses and $5.2
million of cash used in the repayment of debt.
Accounts receivable, net
(In thousands)
Accounts receivable, net
Days sales outstanding - Overall
Days sales outstanding - Product
Days sales outstanding - Licensing and services
December 31, 2016
January 2, 2016
$Change
%Change
$
99,637
$
88,471
$
11,166
12.6%
77
75
106
80
70
149
(3)
5
(43)
Accounts receivable, net increased $11.2 million or 13% as of December 31, 2016 compared to January 2, 2016, due to an
increase in shipments to certain distributors at the end of the current fiscal year as compared to the end of the prior fiscal year,
partially offset by decreases in HDMI royalty audit settlements and IP license billings.
Overall days sales outstanding at December 31, 2016 was 77, a decrease of 3 days from 80 days at January 2, 2016. Days
sales outstanding at December 31, 2016 related to Product revenue was 75, an increase of 5 days from 70 days at January 2,
2016. Days sales outstanding at December 31, 2016 related to Licensing and services revenue was 106 days, a decrease of 43
days from 149 days at January 2, 2016.
Inventories
(In thousands)
Inventories
December 31, 2016
January 3, 2015
$Change
%Change
$
79,168
$
75,896
$
3,272
4.3%
Months of inventory on hand
4.3
4.8
(0.5)
Inventory increased $3.3 million, or 4.3%, as of December 31, 2016 compared to January 2, 2016 primarily due to a net shift in
demand for certain product lines. Inventory related to newer offerings increased approximately $15 million, which was offset by
an approximately $10 million decrease in inventory related to older lines, plus an additional decrease in inventory value of
approximately $1 million as production volumes in 2016 lowered overhead costs. Months of inventory on hand decreased to 4.3
months at the end of fiscal 2016 from 4.8 months at the end of fiscal 2015.
Credit Arrangements
On March 10, 2015, we entered into a secured credit agreement (the "Credit Agreement") with Jefferies Finance, LLC and
certain other lenders for purposes of funding, in part, our acquisition of Silicon Image. The Credit Agreement provided for a $350
million term loan (the "Term Loan") maturing on March 10, 2021 (the "Term Loan Maturity Date"). We received $346.5 million, net
of an original issue discount of $3.5 million and we paid debt issuance costs of $8.3 million. The Term Loan bears variable
interest equal to the 6-month LIBOR, subject to a 1.00% floor, plus a spread of 4.25% as of December 31, 2016. The current
effective interest rate on the Term Loan is 6.20%.
The Term Loan is payable through a combination of (i) quarterly installments of approximately $0.9 million which began on July
4, 2015, (ii) annual excess cash flow payments as defined in the Credit Agreement, which are due 95 days after the last day of
our fiscal year, and (iii) any payments due upon certain issuances of additional indebtedness and certain asset dispositions, with
any remaining outstanding principal amount due and payable on the Term Loan Maturity Date. The percentage of excess cash
flow we are required to pay ranges from 0% to 75%, depending on our leverage and other factors as defined in the Credit
Agreement. Currently, the Credit Agreement would require a 75% excess cash flow payment. In the second quarter of fiscal
2016, we made a required additional principal payment of $1.7 million due to the sale of Qterics.
Due to the combination of payments described above, our calculation of the current portion of long-term debt depends on activity
that has occurred subsequent to December 31, 2016. Since our Earnings Release on February 15, 2017, we have entered into a
patent monetization transaction that has triggered a $17.9 million increase to current portion of long-term debt presented in the
Consolidated Balance Sheets. Over the next twelve months, we expect to be required to make principal payments of
approximately $32.5 million, in addition to required quarterly payments.
While the Credit Agreement does not contain financial covenants, it does contain informational covenants and certain restrictive
covenants, including limitations on liens, mergers and consolidations, sales of assets, payment of dividends, and indebtedness.
We were in compliance with all such covenants at December 31, 2016.
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As of December 31, 2016, we had no significant long-term purchase commitments for capital expenditures or existing used or
unused credit arrangements.
Share Repurchase Program
On March 3, 2014, our Board of Directors approved a stock repurchase program pursuant to which up to $20.0 million of
outstanding common stock could be repurchased from time to time. The duration of the repurchase program was twelve months.
Under this program during fiscal 2014, approximately 1.9 million shares were repurchased for $13.1 million. The 2014 program
completed during the first quarter of fiscal 2015, during which approximately 1.1 million shares were repurchased for
approximately $7.0 million. All shares repurchased under the 2014 program were retired by the end of the fiscal year in which
they were repurchased. All repurchases were open market transactions funded from available working capital.
Contractual Cash Obligations
The following table summarizes our contractual cash obligations at December 31, 2016:
(In thousands)
Fiscal year
2017
2018
2019
2020
2021
Thereafter
Operating leases (1)
Long-term Debt (2)
$
$
7,220 $
5,890
4,559
4,528
4,583
18,965
45,745 $
55,056
38,355
67,455
99,362
145,282
—
405,510
(1) Certain of our facilities and equipment are leased under operating leases, which expire at various times through 2026.
(2) Cash payments due for long-term debt include estimated interest payments, which are based on outstanding principal
amounts, currently effective interest rates as of December 31, 2016, timing of scheduled payments and the debt term.
See Liquidity section of Item 7 for further discussion pertaining to our Credit Arrangements.
Our significant operating leases are for our facilities in Portland and Hillsboro, Oregon; San Jose, California; Muntinlupa City,
Philippines; Shanghai, China, and Hyderabad, India. We also had a significant lease for a facility in Sunnyvale, California which
was terminated in February 2017.
In November 2014, we entered into a lease for a new corporate headquarters facility in Portland, Oregon which expires in March
2025. Annual rental costs are estimated at $0.6 million with average annual increases of approximately 5%. We commenced
operations at the new headquarters location in March 2015. In November 2014, we sold the property where our headquarters
was formerly located in Hillsboro, Oregon for net proceeds of $14.6 million. We leased back the majority of this facility from
November 2014 until March 2015, after which we leased a smaller portion of the facility until November 2022. Annual rental
costs are estimated at $0.5 million with 3% annual increases.
Our lease in San Jose, California expires September 2026 with total annual rental costs estimated to be $2.2 million and annual
increases of approximately 3%. Two of our leases in Muntinlupa City, Philippines expire in May 2025 and June 2025, with total
annual rental costs estimated to be $0.7 million and annual increases of approximately 5%. The other two leases in this location
expire in July 2017 and August 2018, with remaining rental costs estimated to be $0.1 million. Our lease in Shanghai expires in
May 2018, with remaining rental costs estimated to be $2.6 million, and our lease in Hyderabad expires in December 2017, with
remaining rental costs estimated to be $0.3 million. Leasehold improvements are amortized over the shorter of the non-
cancelable lease term or the estimated useful life of the assets.
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New Accounting Pronouncements
The information contained under the heading "New Accounting Pronouncements" in Note 1 - Nature of Operations and
Significant Accounting Policies to our Consolidated Financial Statements in Part II, Item 8 is incorporated by reference into this
Part II, Item 7.
Off-Balance Sheet Arrangements
As of December 31, 2016, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K.
Non-GAAP Financial Measures
To supplement our consolidated financial results presented in accordance with U.S. Generally Accepted Accounting Principles
("GAAP"), we also present non-GAAP financial measures which are adjusted from the most directly comparable U.S. GAAP
financial measures. The non-GAAP measures set forth below exclude charges and adjustments primarily related to stock-based
compensation, restructuring charges, acquisition-related charges, amortization of acquired intangible assets, purchase
accounting adjustments, impairment of goodwill and intangible assets, gain on the sale of a business unit, and the estimated tax
effect of these items. These charges and adjustments may be nonrecurring in nature but are a result of periodic or non-core
operating activities of the company.
Management believes that these non-GAAP financial measures provide an additional and useful way of viewing aspects of our
performance that, when viewed in conjunction with our U.S. GAAP results, provide a more comprehensive understanding of the
various factors and trends affecting our ongoing financial performance and operating results than GAAP measures alone. In
particular, investors may find the non-GAAP measures useful in reviewing our operating performance without the significant
accounting charges resulting from the Silicon Image acquisition, alongside the comparably adjusted prior year results.
Management also uses these non-GAAP measures for strategic and business decision-making, internal budgeting, forecasting,
and resource allocation processes and believes that investors should have access to similar data when making their investment
decisions. In addition, these non-GAAP financial measures facilitate management’s internal comparisons to our historical
operating results and comparisons to competitors’ operating results.
These non-GAAP measures are included solely for informational and comparative purposes and are not meant as a substitute
for GAAP and should be considered together with the consolidated financial information located in this report. Pursuant to the
requirements of Regulation S-K and to make clear to our investors the adjustments we make to U.S. GAAP measures, we have
provided the following reconciliations of the non-GAAP measures to the most directly comparable U.S. GAAP financial
measures.
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Reconciliation of U.S. GAAP to Non-GAAP Financial Measures
(In thousands, except per share amounts)
(unaudited)
Revenue Reconciliation
GAAP Revenue
Acquisition related deferred revenue effect (1)
Non-GAAP Revenue
Gross Margin Reconciliation
GAAP Gross margin
Acquisition related net deferred revenue effect (1) (2)
Acquisition related inventory fair value effect (3)
Stock-based compensation expense - gross margin
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
$
$
427,054
—
427,054
$
$
405,966
5,187
411,153
$
$
366,127
—
366,127
$
246,434
$
219,909
$
206,187
—
523
888
3,691
6,078
1,416
—
—
819
Non-GAAP Gross margin
$
247,845
$
231,094
$
207,006
Gross Margin % Reconciliation
GAAP Gross margin %
Cumulative effect of non-GAAP Gross Margin adjustments
Non-GAAP Gross margin %
57.7 %
0.3 %
58.0 %
54.2 %
2.0 %
56.2 %
56.3%
0.2%
56.5%
Operating Expenses Reconciliation
GAAP Operating expenses
Amortization of acquired intangible assets
Restructuring charges
Acquisition related charges (4)
Impairment of goodwill and intangible assets
Stock-based compensation expense - operations
$
273,133
$
327,141
$
164,571
(33,575)
(9,267)
(6,305)
(7,866)
(15,325)
(29,580)
(19,239)
(22,450)
(21,655)
(15,934)
(2,948)
(17)
—
—
(11,983)
Non-GAAP Operating expenses
$
200,795
$
218,283
$
149,623
(Loss) Income from Operations Reconciliation
GAAP (Loss) income from operations
Acquisition related net deferred revenue effect (1) (2)
Acquisition related inventory fair value effect (3)
Stock-based compensation expense - gross margin
Amortization of acquired intangible assets
Restructuring charges
Acquisition related charges (4)
Impairment of goodwill and intangible assets
Stock-based compensation expense - operations
Non-GAAP Income from operations
$
$
(26,699)
$
(107,232)
$
41,616
—
523
888
33,575
9,267
6,305
7,866
15,325
47,050
3,691
6,078
1,416
29,580
19,239
22,450
21,655
15,934
12,811
$
—
—
819
2,948
17
—
—
11,983
57,383
$
(1) Fair value adjustment to deferred revenue from purchase accounting
(2) Fair value adjustment to deferred cost of sales from purchase accounting
(3) Fair value adjustment for inventory step-up from purchase accounting
(4) Includes stock-based compensation and severance costs related to change in control
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Reconciliation of U.S. GAAP to Non-GAAP Financial Measures
(In thousands, except per share amounts)
(unaudited)
(Loss) Income from Operations % Reconciliation
GAAP (Loss) income from operations %
Cumulative effect of non-GAAP Gross Margin and Operating
adjustments
Non-GAAP Income from operations %
Income Tax Expense Reconciliation
GAAP Income tax expense (benefit)
Estimated tax effect of non-GAAP adjustments (5)
Non-GAAP Income tax expense
Net (Loss) Income Reconciliation
GAAP Net (loss) income
Acquisition related net deferred revenue effect (1) (2)
Acquisition related inventory fair value effect (3)
Stock-based compensation expense - gross margin
Amortization of acquired intangible assets
Restructuring charges
Acquisition related charges (4)
Impairment of goodwill and intangible assets
Stock-based compensation expense - operating expense
Gain on sale of Qterics
Estimated tax effect of non-GAAP adjustments (5)
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
(6.3)%
(26.4)%
17.3 %
11.0 %
29.5 %
3.1 %
11.4%
4.3%
15.7%
$
$
9,917
—
9,917
$
$
32,540
(21,030)
11,510
$
$
(5,639)
7,238
1,599
$
(54,099)
$
(159,233)
$
48,580
—
523
888
33,575
9,267
6,305
7,866
15,325
(2,646)
—
3,691
6,078
1,416
29,580
19,239
22,450
21,655
15,934
—
21,030
—
—
819
2,948
17
—
—
11,983
—
(7,238)
Non-GAAP Net income (loss)
$
17,004
$
(18,160)
$
57,109
(1) Fair value adjustment to deferred revenue from purchase accounting
(2) Fair value adjustment to deferred cost of sales from purchase accounting
(3) Fair value adjustment for inventory step-up from purchase accounting
(4) Includes stock-based compensation and severance costs related to change in control
(5) During the second quarter of fiscal 2016, we refined our calculation of non-GAAP tax expense by applying our tax
provision model to year-to-date and projected income after adjusting for non-GAAP items. The difference between
calculated values for GAAP and non-GAAP tax expense has been included as the “Estimated tax effect of
non-GAAP adjustments.” Prior periods have been similarly recalculated to conform to the current presentation.
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Reconciliation of U.S. GAAP to Non-GAAP Financial Measures
(In thousands, except per share amounts)
(unaudited)
Basic Net (Loss) Income Per Share Reconciliation
GAAP Net (loss) income per share - basic
Cumulative effect of Non-GAAP adjustments
Non-GAAP Net income (loss) per share - basic
Diluted Net (Loss) Income Per Share Reconciliation
GAAP Net (loss) income per share - diluted
Cumulative effect of Non-GAAP adjustments
Non-GAAP Net income (loss) per share - diluted
Shares used in per share calculations:
Basic
Diluted - GAAP (6)
Diluted - non-GAAP (6)
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
$
$
$
$
(0.45)
0.59
0.14
(0.45)
0.59
0.14
$
$
$
$
(1.36)
1.21
(0.15)
(1.36)
1.21
(0.15)
$
$
$
$
0.41
0.08
0.49
0.40
0.07
0.47
119,994
119,994
121,957
117,387
117,387
117,387
117,708
120,245
120,245
(6) Diluted shares are calculated using the GAAP treasury stock method. In a loss position, diluted shares equal basic shares.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
Foreign Currency Exchange Rate Risk
A portion of our silicon wafer and other purchases were historically denominated in Japanese yen, we billed our Japanese
customers in yen, and we continue to collect a Japanese consumption tax refund in yen. As a result of this, as well as having
various international subsidiary and branch operations, our financial position and results of operations are subject to foreign
currency exchange rate risk.
We mitigate the resulting foreign currency exchange rate exposure by entering into foreign currency forward exchange contracts.
Although these hedges mitigate our foreign currency exchange rate exposure from an economic perspective, they were not
designated as "effective" hedges under U.S. GAAP and as such are adjusted to fair value through Other (expense) income, net.
We do not engage in speculative trading in any financial or capital market.
At December 31, 2016 and January 2, 2016, we had forward contracts for Japanese yen of $2.3 million and $3.3 million,
respectively. The net fair value of these contracts was favorable by approximately $0.2 million at December 31, 2016 and
unfavorable by less than $0.1 million at January 2, 2016. A hypothetical 10% unfavorable exchange rate change in the yen
against the U.S. dollar would have resulted in an unfavorable change in net fair value of $0.2 million and $0.4 million at
December 31, 2016 and January 2, 2016, respectively. Changes in fair value resulting from foreign exchange rate fluctuations
would be substantially offset by the change in value of the underlying hedged transactions.
Interest Rate Risk
At December 31, 2016, we had $342.2 million outstanding on the $350.0 million gross term loan outstanding under our Credit
Agreement, with a variable contractual interest rate based on the LIBOR, subject to a 1.00% floor, plus a spread of 4.25%. A
hypothetical 10% increase in the LIBOR would not have increased the LIBOR above this 1.00% floor used in the interest rate
calculation, and thus would not have had an impact on Interest expense for the twelve month period ended December 31, 2016.
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Page
50
51
52
53
54
56
84
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value data)
December 31, 2016
January 2, 2016
ASSETS
Current assets:
Cash and cash equivalents
Short-term marketable securities
Accounts receivable, net of allowance for doubtful accounts
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, less accumulated depreciation of $134,786 at
December 31, 2016 and $118,943 at January 2, 2016
Intangible assets, net of amortization
Goodwill
Deferred income taxes
Other long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (includes restructuring)
Accrued payroll obligations
Current portion of long-term debt
Deferred income and allowances on sales to sell-through distributors
Deferred licensing and services revenue
Total current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
Commitments and contingencies (Notes 13 and 20)
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;
121,645,000 shares issued and outstanding as of December 31, 2016 and
118,651,000 shares issued and outstanding as of January 2, 2016
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders' equity
$
106,552
$
10,308
99,637
79,168
19,035
314,700
49,481
118,863
269,758
372
13,709
$
$
766,883
$
80,933
$
9,865
33,767
32,257
728
157,550
300,855
38,048
496,453
—
—
1,216
680,315
(406,945)
(4,156)
270,430
Total liabilities and stockholders' equity
$
766,883
$
84,606
17,968
88,471
75,896
18,922
285,863
51,852
162,583
267,549
578
17,495
785,920
74,298
9,463
7,557
17,866
1,993
111,177
330,870
38,353
480,400
—
—
1,187
660,089
(352,846)
(2,910)
305,520
785,920
The accompanying notes are an integral part of these Consolidated Financial Statements.
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Revenue:
Product
Licensing and services
Total revenue
Costs and expenses:
Cost of product revenue
Cost of licensing and services revenue
Research and development
Selling, general, and administrative
Amortization of acquired intangible assets
Restructuring charges
Acquisition related charges
Impairment of goodwill and intangible assets
(Loss) income from operations
Interest expense
Other income (expense), net
(Loss) income before income taxes and equity in net loss of an
unconsolidated affiliate
Income tax expense (benefit)
Equity in net loss of an unconsolidated affiliate, net of tax
Net (loss) income
Net (loss) income per share
Basic
Diluted
Shares used in per share calculations:
Basic
Diluted
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
$
390,704
$
369,200
$
366,127
36,350
427,054
179,983
637
117,518
98,602
33,575
9,267
6,305
7,866
453,753
(26,699)
(20,327)
4,303
(42,723)
9,917
(1,459)
36,766
405,966
184,914
1,143
136,868
97,349
29,580
19,239
22,450
21,655
513,198
(107,232)
(18,389)
(580)
(126,201)
32,540
(492)
—
366,127
159,940
—
88,079
73,527
2,948
17
—
—
324,511
41,616
(172)
1,497
42,941
(5,639)
—
$
$
$
(54,099) $
(159,233) $
48,580
(0.45) $
(0.45) $
(1.36) $
(1.36) $
0.41
0.40
119,994
119,994
117,387
117,387
117,708
120,245
The accompanying notes are an integral part of these Consolidated Financial Statements
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
(LOSS) INCOME
(In thousands)
Net (loss) income
Other comprehensive (loss) income:
Year Ended
December 31,
2016
January 2,
2016
January 3,
2015
$
(54,099) $
(159,233) $
48,580
Unrealized loss related to marketable securities, net of tax
Reclassification adjustment for losses related to marketable securities
included in other income (expense)
Realized gain on sale of auction rate securities, previously
unrealized, net of tax
Translation adjustment loss, net of tax
Change in actuarial valuation of defined benefit pension
(172)
79
—
(1,303)
150
(69)
442
—
(1,243)
(156)
(373)
170
(1,147)
(330)
(59)
Comprehensive (loss) income
$
(55,345) $
(160,259) $
46,841
The accompanying notes are an integral part of these Consolidated Financial Statements
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
(In thousands, except par value data)
Shares
Amount
Common Stock
($.01 par value)
Paid-in
capital
Treasury
stock
Accumulated
deficit
Accumulated
other
comprehensive
loss
Total
Balances, December 28, 2013
115,671
$
1,157
$ 626,861
$
— $
(242,193) $
(145) $ 385,680
Net income for 2014
Unrealized loss related to marketable
securities, net of tax
Realized gain on sale of auction rate
securities, previously unrealized, net of tax
Recognized loss on redemption of
marketable securities, previously unrealized
Translation adjustments, net of tax
Common stock issued in connection with the
exercise of stock options, ESPP and vested
RSUs, net of tax
Stock repurchase
Retirement of treasury stock
Stock-based compensation expense related
to options, ESPP and RSUs
Change in actuarial valuation of defined
benefit pension
—
—
—
—
—
3,560
—
(1,943)
—
—
—
—
—
—
—
35
—
—
—
—
—
—
8,706
—
—
—
—
—
—
—
(13,089)
(19)
(13,070)
13,089
—
—
12,802
—
—
—
48,580
48,580
—
—
—
—
—
—
—
—
—
(373)
(373)
(1,147)
(1,147)
170
(330)
170
(330)
—
—
—
—
8,741
(13,089)
—
12,802
(59)
(59)
Balance, January 3, 2015
117,288
$
1,173
$ 635,299
$
— $
(193,613) $
(1,884) $ 440,975
Net loss for 2015
Unrealized loss related to marketable
securities, net of tax
Recognized loss on redemption of
marketable securities, previously unrealized
Translation adjustments, net of tax
Common stock issued in connection with the
exercise of stock options, ESPP and vested
RSUs, net of tax
Stock repurchase
—
—
—
—
2,415
—
—
—
—
—
25
—
—
—
—
—
2,161
—
Retirement of treasury stock
(1,052)
(11)
(6,959)
Stock-based compensation expense related
to options, ESPP and RSUs
Fair value of partially vested stock options
and RSUs assumed in acquisition
Change in actuarial valuation of defined
benefit pension
Redemption of noncontrolling interest, net of
previous accretion to redemption value.
—
—
—
—
—
—
—
—
18,396
5,139
—
6,053
—
—
—
—
—
(6,970)
6,970
—
—
—
—
(159,233)
— (159,233)
—
—
—
—
—
—
—
—
—
—
(69)
442
(69)
442
(1,243)
(1,243)
—
—
—
—
—
2,186
(6,970)
—
18,396
5,139
(156)
(156)
—
6,053
Balance, January 2, 2016
118,651
$
1,187
$ 660,089
$
— $
(352,846) $
(2,910) $ 305,520
Net loss for 2016
Unrealized loss related to marketable
securities, net of tax
Recognized gain on redemption of
marketable securities, previously unrealized
Translation adjustments, net of tax
Common stock issued in connection with the
exercise of stock options, ESPP and vested
RSUs, net of tax
Stock-based compensation expense related
to stock options, ESPP and RSUs
Change in actuarial valuation of defined
benefit pension
—
—
—
—
2,994
—
—
—
—
—
—
29
—
—
—
—
—
—
4,013
16,213
—
—
—
—
—
—
—
—
(54,099)
—
(54,099)
—
—
—
—
—
—
(172)
(172)
79
79
(1,303)
(1,303)
—
—
4,042
16,213
150
150
Balances as of December 31, 2016
121,645
$
1,216
$ 680,315
$
— $
(406,945) $
(4,156) $ 270,430
The accompanying notes are an integral part of these Consolidated Financial Statements
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
$
(54,099)
$
(159,233)
$
48,580
Depreciation and amortization
Impairment of goodwill and intangible assets
Amortization of debt issuance costs and discount
Change in deferred income tax provision
Loss (gain) on sale or maturity of marketable securities
Gain on forward contracts
Stock-based compensation expense
Loss on disposal of fixed assets
Gain on sale of business unit
Equity in net loss of an unconsolidated affiliate, net of tax
Changes in assets and liabilities:
Accounts receivable, net
Inventories
Prepaid expenses and other assets
Accounts payable and accrued expenses (includes restructuring)
Accrued payroll obligations
Income taxes payable
Deferred income and allowances on sales to sell-through distributors
Deferred licensing and services revenue
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Proceeds from sales of and maturities of marketable securities
Purchase of marketable securities, net
Proceeds from sale of auction rate securities
Cash paid for business acquisition, net of cash acquired
Proceeds from sale of land and building
Capital expenditures
Proceeds from sale of business unit, net of cash sold
Cash paid for a non-marketable equity-method investment
Cash paid for software licenses
61,806
7,866
1,350
90
79
(184)
16,213
597
(2,646)
1,459
(11,419)
(3,272)
(2,270)
8,338
402
3,216
14,391
(183)
41,734
14,897
(7,490)
—
—
—
(16,717)
1,972
(1,000)
(9,035)
60,808
21,655
2,835
21,367
333
—
18,396
—
—
492
4,578
9,868
(6,710)
6,301
(10,202)
1,749
2,920
1,958
(22,885)
142,956
(15,982)
—
(431,068)
—
(18,209)
—
(5,000)
(9,515)
Net cash used in investing activities
(17,373)
(336,818)
Cash flows from financing activities:
Proceeds from issuance of restricted stock units, net of withholding taxes
Purchase of treasury stock
Net proceeds from issuance of common stock
Net proceeds from issuance of long-term debt
Cash paid for debt issuance costs
Repayment of debt
Cash paid to redeem noncontrolling interest
(3,565)
—
7,607
—
—
(5,154)
—
(3,493)
(6,970)
5,679
346,500
(8,283)
(2,625)
(867)
22,248
—
—
(7,222)
(1,698)
—
12,802
—
—
—
(12,287)
(18,703)
(3,200)
(7,819)
(30)
—
7,451
—
40,122
101,861
(139,792)
5,488
—
14,625
(10,267)
—
—
(6,059)
(34,144)
(3,427)
(13,089)
12,168
—
—
—
—
Net cash provided by (used in) financing activities
$
(1,112)
$
329,941
$
(4,348)
The accompanying notes are an integral part of these Consolidated Financial Statements
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LATTICE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
Effect of exchange rate change on cash
Net (decrease) increase in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
Supplemental cash flow information:
Change in unrealized loss related to marketable securities, net of tax, included in
Accumulated other comprehensive loss
Income taxes paid, net of refunds
Interest paid
Accrued purchases of property and equipment
Transfer of residual temporary equity to additional paid-in capital on redemption of
noncontrolling interest
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
$
$
$
$
$
$
$
(1,303)
$
(1,243)
$
21,946
84,606
(31,005)
115,611
106,552
$
84,606
$
(329)
1,301
114,310
115,611
172
9,359
18,159
1,028
$
$
$
$
69
8,339
11,071
1,277
— $
6,773
$
$
$
$
$
373
1,599
—
478
—
The accompanying notes are an integral part of these Consolidated Financial Statements
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LATTICE SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Operations and Significant Accounting Policies
Nature of Operations
Lattice Semiconductor (“Lattice,” the “Company,” “we,” “us,” or “our”) is a Delaware company that engages in smart connectivity
solutions, providing intellectual property and low-power, small form-factor devices that enable global customers to quickly deliver
innovative and differentiated cost and power efficient products. The Company's broad end-market exposure extends from mobile
and consumer electronics to industrial and automotive equipment, communications and computing infrastructure, and licensing.
We do not manufacture our own silicon wafers. We maintain strategic relationships with large semiconductor foundries located in
Asia to source our finished silicon wafers. In addition, all of our assembly operations and most of our test and logistics operations
are performed by outside suppliers located 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. Research and development activities occur primarily in: Hillsboro, Oregon; San Jose and Sunnyvale, California; Shanghai,
China; Alabang, Philippines; and Hyderabad, India.
Fiscal Reporting Period
We report based on a 52 or 53-week fiscal year ending on the Saturday closest to December 31. Our fiscal 2016 and 2015 were
52-week years that ended December 31, 2016 and January 2, 2016, respectively. Our fiscal 2014 was a 53-week year, with a
14-week fourth quarter, that ended January 3, 2015. Our fiscal 2017 will be a 52-week year and will end on December 30, 2017.
All references to quarterly or yearly financial results are references to the results for the relevant fiscal period.
Principles of Consolidation and Presentation
The accompanying Consolidated Financial Statements include the accounts of Lattice and its subsidiaries after the elimination of
all intercompany balances and transactions. Our results for the year ended January 2, 2016 include the results of Silicon Image,
Inc. ("Silicon Image") for the approximately 10-month period from March 11, 2015 through January 2, 2016. Results presented
for periods prior to fiscal 2015 are those historically reported for Lattice only. Our results for the year ended December 31, 2016
fully include the results of Silicon Image. Certain balances in prior fiscal years have been reclassified to conform to the
presentation adopted in the current year. Net loss attributable to noncontrolling interest amounting to approximately $0.3 million
that was reported separately for the year ended January 2, 2016 is now included in Other income (expense), net.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts and classification of assets, such as
marketable securities, accounts receivable, inventory, goodwill (including the assessment of reporting unit), intangible assets,
current and deferred income taxes, accrued liabilities (including restructuring charges and bonus arrangements), deferred
income and allowances on sales to sell-through distributors, disclosure of contingent assets and liabilities at the date of the
financial statements, amounts used in acquisition valuations and purchase accounting, and the reported amounts of product
revenue, licensing and services revenue, and expenses during the fiscal periods presented. Actual results could differ from those
estimates.
Cash Equivalents and Marketable Securities
We consider all investments that are readily convertible into cash and have original maturities of three months or less, to be cash
equivalents. Cash equivalents consist primarily of highly liquid investments in time deposits or money market accounts and are
carried at cost. We account for marketable securities as available-for-sale investments, as defined by U.S. GAAP, and record
unrealized gains or losses to Accumulated other comprehensive loss on our Consolidated Balance Sheets, unless losses are
considered other than temporary, in which case, those are recorded directly to the Consolidated Statements of Operations and
Statements of Comprehensive (Loss) Income. Deposits with financial institutions at times exceed Federal Deposit Insurance
Corporation insurance limits.
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Fair Value of Financial Instruments
We invest in various financial instruments, which may include corporate and government bonds, notes, and commercial paper.
We were also invested in auction rate securities until June 2014. We value these instruments at their fair value and monitor our
portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and the
decline in value is determined to be other than temporary, we would record an impairment charge and establish a new carrying
value. We assess other-than-temporary impairment of marketable securities in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements 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.
Our Level 1 instruments consist of U.S. Government agency, corporate notes and bonds, and commercial paper that are traded
in active markets and are classified as Short-term marketable securities on our Consolidated Balance Sheets.
Level 2 instruments include inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for
similar assets or liabilities, quoted prices for identical instruments in markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2
instruments consist of certificates of deposit and foreign currency exchange contracts, entered into to hedge against fluctuation
in the Japanese yen.
Level 3 instruments include unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of the assets or liabilities. As a result, the determination of fair value for Level 3 instruments requires significant
management judgment and subjectivity. During fiscal 2014 we sold all of our Level 3 instruments, which had been entirely made
up of auction rate securities consisting of student loan asset-backed notes. These were classified as Long-term marketable
securities on our Consolidated Balance Sheets, and management derived the fair value of the auction rate securities from a
combination of market and income approaches, including third party valuation results, investment broker-provided market
information, and available information on the credit quality of the underlying collateral.
Foreign Exchange and Translation of Foreign Currencies
While our revenues and the majority of our expenses are denominated in U.S. dollars, we have international subsidiary and
branch operations that conduct some transactions in foreign currencies. In addition, a portion of our silicon wafer and other
purchases were historically denominated in Japanese yen, we billed certain Japanese customers in yen, and we continue to
collect a Japanese consumption tax refund in yen. Gains or losses from foreign exchange rate fluctuations on balances
denominated in foreign currencies are reflected in Other (expense) income, net. Realized and unrealized gains or losses on
foreign currency transactions were not significant for the periods presented. We translate accounts denominated in foreign
currencies in accordance with ASC 830, “Foreign Currency Matters,” using the current rate method under which asset and
liability accounts are translated at the current rate, while stockholders' equity accounts are translated at the appropriate historical
rates, and revenue and expense accounts are translated at average monthly exchange rates. Translation adjustments related to
the consolidation of foreign subsidiary financial statements are reflected in Accumulated other comprehensive loss in
Stockholders' equity.
Derivative Financial Instruments
We mitigate foreign currency exchange rate risk by entering into foreign currency forward exchange contracts. At December 31,
2016 and January 2, 2016, we had open contracts for Japanese yen of $2.3 million and $3.3 million, respectively. The two
contract outstanding at December 31, 2016 will settle in June 2017. Of the six contracts outstanding at January 2, 2016, two
settled in January 2016 and the other four contracts settled in June 2016. 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 Other (expense) income, net, with a gain of approximately $0.2 million and a loss of less
than $0.1 million for the years ended December 31, 2016 and January 2, 2016, respectively.
Concentration Risk
Potential exposure to concentration risk may impact revenue, trade receivables, marketable securities, and supply of wafers for
our new products.
Customer concentration risk may impact revenue. For fiscal years 2016, 2015, and 2014, our top five end customers constituted
approximately 27%, 32%, and 45%, respectively, of our revenue. Our largest end customer in fiscal year 2016 accounted for
9.9% of total revenue. Our largest end customer in fiscal year 2015 accounted for 9.3% of total revenue, and our two largest end
customers in fiscal year 2014 accounted for 19.1% and 12.3%, respectively, of total revenue.
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Sales through distributors have historically accounted for a significant portion of our total revenue. For fiscal year 2016, revenue
attributable to resale of products by sell-through distributors as a percentage of our total revenue was 61%. For both of the fiscal
years 2015 and 2014, revenue attributable to resale of products by sell-through distributors as a percentage of our total revenue
was 45%. Our two largest distributor groups also account for a substantial portion of our trade receivables. At December 31,
2016 and January 2, 2016, one distributor group accounted for 38% and 29%, respectively, and the other accounted for 24% and
15%, respectively, of gross trade receivables. No other distributor groups or end customers accounted for more than 10% of
gross trade receivables at these dates.
Concentration of credit risk with respect to trade receivables is mitigated by our credit and collection process including active
management of collections, credit limits, routine credit evaluations for essentially all customers, and secure transactions with
letters of credit or advance payments where appropriate. We regularly review our allowance for doubtful accounts and the aging
of our accounts receivable. Accounts receivable do not bear interest and are shown net of allowances for doubtful accounts of
$9.3 million and $0.6 million at December 31, 2016 and January 2, 2016, respectively. During the third quarter of fiscal 2016, we
received notice from one of our distributor groups that indicated a high likelihood of their bankruptcy. As a result, we reserved our
accounts receivable, net of deferred revenue, from the distributor group resulting in an increase in allowance for doubtful
accounts of $9.0 million and bad debt expense of $7.5 million for fiscal 2016.
We place our investments primarily through one financial institution and mitigate the concentration of credit risk by limiting the
maximum portion of the investment portfolio which may be invested in any one instrument. Our investment policy defines
approved credit ratings for investment securities. Investments on-hand in marketable securities consisted primarily of money
market instruments, “AA” or better corporate notes and bonds and commercial paper, and U.S. government agency obligations.
See Note 3 for a discussion of the liquidity attributes of our marketable securities.
We rely on a limited number of foundries for our wafer purchases including Fujitsu Limited, Seiko Epson Corporation, Taiwan
Semiconductor Manufacturing Company, Ltd, and United Microelectronics Corporation. We seek to mitigate the concentration of
supply risk by establishing, maintaining and managing multiple foundry relationships; however, certain of our products are
sourced from a single foundry.
Revenue Recognition and Deferred Income
Product Revenue
We sell our products directly to end customers, through a network of independent manufacturers' representatives, and indirectly
through a network of independent sell-in and sell-through distributors. Distributors provide 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.
Revenue from sales to original equipment manufacturers ("OEMs") and sell-in distributors is generally recognized upon
shipment. Reserves for sell-in stock rotations, where applicable, are estimated based primarily on historical experience and
provided for at the time of shipment. Revenue from sales by our sell-through distributors is recognized at the time of reported
resale. Under both types of revenue recognition, persuasive evidence of an arrangement exists, the price is fixed or
determinable, title has transferred, collection of resulting receivables is reasonably assured, and there are no remaining
customer acceptance requirements and no remaining significant performance obligations.
Orders from our sell-through distributors are initially recorded at published list prices; however, for a majority of our sales, the
final selling price is determined at the time of resale and in accordance with a distributor price agreement. For this reason, we do
not recognize revenue until products are resold by sell-through distributors to an end customer. In certain circumstances, we
allow sell-through distributors to return unsold products. At times, we protect our sell-through distributors against reductions in
published list prices.
At the time of shipment to sell-through distributors, we (a) record Accounts receivable at published list price since there is a
legally enforceable obligation from the distributor to pay us currently for product delivered, (b) relieve inventory for the carrying
value of goods shipped since legal title has passed to the distributor, and (c) record deferred revenue and deferred cost of sales
in Deferred income and allowances on sales to sell-through distributors in the liability section of our Consolidated Balance
Sheets. Revenue and cost of sales 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 (loss) income,
and Accounts receivable, net are adjusted to reflect the final selling price.
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The components of Deferred income and allowances on sales to sell-through distributors are presented in the following table:
(In thousands)
December 31, 2016
January 2, 2016
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
$
$
86,218
$
(37,090)
(16,871)
32,257
$
47,086
(22,290)
(6,930)
17,866
A significant portion of our revenue in fiscal 2016 was from sell-through distributors. For fiscal year 2016, resale of products by
sell-through distributors as a percentage of our total revenue was 61%. For fiscal years 2015 and 2014, resale of products by
sell-through distributors as a percentage of our total revenue was 45% in each year.
We use estimates and apply judgment to reconcile sell-through distributors' inventories. Errors in our estimates or judgments
could result in inaccurate reporting of our Revenue, Cost of product sold, Deferred income and allowances on sales to sell-
through distributors, and Net (loss) income.
Licensing and Services Revenue
Our licensing and services revenue is comprised of revenue from our intellectual property ("IP") core licensing activity, patent
monetization activities, and royalty and adopter fee revenue from our standards activities. These activities are complementary to
our product sales and help us monetize our IP and accelerate market adoption curves associated with our technology and
standards.
From time to time we enter into patent sale and licensing agreements to monetize and license a broad portfolio of our patented
inventions. Such licensing agreements may include upfront license fees and ongoing royalties. The contractual terms of the
agreements generally provide for payments of upfront license fees and/or royalties over an extended period of time. Revenue
from such license fees is recognized when payments become due and payable as long as all other revenue recognition criteria
are met, while revenue from royalties is recognized when reported to us by customers.
We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components into their
products pursuant to terms and conditions that vary by licensee. Revenue earned under these agreements is classified as
Licensing and services revenue. Our IP licensing agreements generally include multiple elements, which may include one or
more off-the-shelf or customized IP licenses bundled with support services covering a fixed period of time, generally one year. If
the different elements of a multiple-element arrangement qualify as separate units of accounting, we allocate the total
arrangement consideration to each element based on relative selling price.
Amounts allocated to off-the-shelf IP licenses are recognized at the time of sale provided the other conditions for revenue
recognition have been met. Amounts allocated to the support services are deferred and recognized on a straight-line basis over
the support period, generally one year. Certain licensing agreements provide for royalty payments based on agreed-upon royalty
rates, which may be fixed or variable depending on the terms of the agreement. The amount of revenue we recognize is based
on a specified time period or on the agreed-upon royalty rate multiplied by the reported number of units shipped by the customer.
From time to time, we enter into IP licensing agreements that involve significant modification, customization or engineering
services. Revenues derived from these contracts are accounted for using the percentage-of-completion method or completed
contract method. The completed contract method is used for contracts where there is a risk associated with final acceptance by
the customer or for short-term contracts.
HDMI royalty revenue is determined by a contractual allocation formula agreed to by the Founders of the HDMI consortium.
Evidence of an arrangement, as it relates to HDMI royalty revenue, is deemed complete when all of the Founders agree on the
royalty sharing formula. From time to time through December 31, 2016, as an agent of the HDMI Consortium, we performed
audits on our royalty reporting customers to ensure compliance. As a result of those compliance efforts, we entered into
settlement agreements for the payment of unreported royalties. The contractual terms of those agreements provided for upfront
payment of unreported royalties or payment over a period of time, generally not to exceed one year. Revenue from those
arrangements was recognized when the agreement was executed by both parties, as long as price was fixed and determinable
and collection was reasonably assured.
Inventories
Inventories are recorded at the lower of actual cost determined on a first-in-first-out basis or market. We establish provisions for
inventory if it is obsolete or we hold quantities which are in excess of projected customer demand. The creation of such
provisions results in a write-down of inventory to net realizable value and a charge to Cost of product revenue.
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Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method for
financial reporting purposes over the estimated useful lives of the related assets, generally three to five years for equipment and
software, one to three years for tooling, and thirty years for buildings and building space. Leasehold improvements are amortized
over the shorter of the non-cancelable lease term or the estimated useful life of the assets. Upon disposal of property and
equipment, the accounts are relieved of the costs and related accumulated depreciation and amortization, and resulting gains or
losses are reflected in the Consolidated Statements of Operations for recognized gains and losses, or in the Consolidated
Balance Sheets for deferred gains and losses. Repair and maintenance costs are expensed as incurred.
Equity Investments in Privately Held Companies
Equity investments in privately-held companies are reviewed on a quarterly basis to determine if their values have been impaired
and adjustments are recorded as necessary. We assess the potential impairment of these investments by considering available
evidence such as the investee’s historical and projected operating results, progress towards meeting business milestones, ability
to meet expense forecasts, and the prospects for industry or market in which the investee operates. Upon disposition of these
investments, the specific identification method is used to determine the cost basis in computing realized gains or losses.
Declines in value that are judged to be other-than-temporary are reported in other income (expense), net in the accompanying
Consolidated Statements of Operations.
The accounting method for equity investments in privately-held companies is assessed under ASC 323-10, Equity Method and
Joint Ventures. Investments for which we have the ability to exert significant influence on the investee are accounted for under
the equity method with our proportionate share of the investee’s operating results recognized through the Consolidated
Statements of Operations, along with a commensurate increase or decrease in the carrying value of the investment.
Impairment of Long-Lived Assets
Long-lived assets, including amortizable intangible assets, are carried on our financial statements based on their cost less
accumulated depreciation or amortization. We monitor the carrying value of our long-lived assets for potential impairment and
test the recoverability of such assets annually during the fourth quarter and whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. These events or changes in circumstances, including management
decisions pertaining to such assets, are referred to as impairment indicators. If an impairment indicator occurs, we perform a test
of recoverability by comparing the carrying value of the asset group to its undiscounted expected future cash flows. If the
carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair
value of the asset group to its carrying value. Fair value is generally determined by considering (i) internally developed
discounted projected cash flow analysis of the asset group; (ii) actual third-party valuations; and/or (iii) information available
regarding the current market for similar asset groups. If the fair value of the asset group is determined to be less than the
carrying amount of the asset group, an impairment in the amount of the difference is recorded in the period that the impairment
indicator occurs and is included in our Consolidated Statements of Operations. Estimating future cash flows requires significant
judgment and projections may vary from the cash flows eventually realized, which could impact our ability to accurately assess
whether an asset has been impaired. The results of our assessments are detailed in Note 9.
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. When
evaluating whether goodwill is impaired, we make a qualitative assessment to determine if it is more likely than not that the
reporting unit's fair value is less than the carrying amount. If the qualitative assessment determines that it is more likely than not
that the fair value is less than the carrying amount, the fair value of the reporting unit is compared with its carrying value
(including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists
for the reporting unit and we must measure the impairment loss. The impairment loss, if any, is recognized for any excess of the
carrying amount of the reporting unit's goodwill over the implied fair value of the goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit in a manner similar to 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, no further impairment
analysis is needed. For purposes of testing goodwill for impairment, we currently operate as a single reporting unit: the core
Lattice ("Core") business, which includes intellectual property and semiconductor devices. In fiscal 2015 only, we separately
tested goodwill for impairment in Qterics, a discrete software-as-a-service business unit in the Lattice legal entity structure. We
sold Qterics to an unrelated third party in April 2016. Although these two operating units constituted two reportable segments in
fiscal 2015, we combined Qterics with our Core business and reported them together as one reportable segment due to the
immaterial nature of the Qterics unit. The results of our assessments are detailed in Note 9.
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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 plan is recorded when such costs are probable and the amount can be
reasonably estimated in accordance with ASC 712, “Compensation - Nonretirement Postemployment Benefits.” When leased
facilities are vacated, 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.
Research and Development
Research and development expenses include costs for compensation and benefits, development masks, engineering wafers,
depreciation, licenses, and outside engineering services. These expenditures are for the design of new products, intellectual
property cores, processes, packaging, and software to support new products. Research and development costs are expensed as
incurred.
Accounting for Income Taxes
Our provision for income tax is comprised of our current tax liability and changes in deferred tax assets and liabilities. Deferred
tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements using enacted tax rates and laws that will be in effect
when the difference is expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that in
management’s judgment is more-likely-than-not to be recoverable against future taxable income. At December 31, 2016, U.S.
income taxes were not provided on approximately $3.0 million of the undistributed earnings of our Chinese subsidiary as we
intend to reinvest these earnings indefinitely. If these earnings were distributed to the U.S. in the form of dividends or otherwise,
these earnings would be subject to Chinese withholding taxes and would be subject to additional U.S. income taxes but offset by
net operating loss carryforwards which have been fully reserved.
Our income tax calculations are based on application of the respective U.S. federal, state or foreign tax law. Our tax filings,
however, are subject to audit by the relevant tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of
whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An
uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final
tax liabilities are different than the amounts originally accrued, the increases or decreases as well as any interest or penalties are
recorded as income tax expense or benefit in the Consolidated Statements of Operations.
In assessing the ability to realize 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.
Any adjustment to the net deferred tax asset valuation allowance is recorded in the Consolidated Statements of Operations for
the period that the adjustment is determined to be required.
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, “Compensation - Stock Compensation.” Option pricing models, including the Black-Scholes model,
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 most significantly affect the grant date fair value.
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We have also used a lattice-based option-pricing model to determine and fix the fair value of stock options with a market
condition granted to certain executives. This valuation model incorporates a Monte-Carlo simulation, and considered the
likelihood that we would achieve the market condition. The options have a two year vesting and vest between 0% and 200% of
the target amount, based on the Company's relative Total Shareholder Return ("TSR") when compared to the TSR of a
component of companies of the PHLX Semiconductor Sector Index over a two year period. TSR is a measure of stock price
appreciation plus dividends paid, if any, in the performance period.
New Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers,
which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods
or services to customers. In August 2015, the FASB issued ASU 2015-14 deferring the effective date of ASU 2014-09 to periods
beginning on or after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December
15, 2016, and interim periods within that year. We intend to adopt ASU 2014-09 on December 31, 2017 which is the first day of
our fiscal 2018. The new standard allows for two transition methods - (i) apply it retrospectively to each prior reporting period
presented, or (ii) apply it prospectively with the cumulative effect of adoption recognized on December 31, 2017, the first day of
our fiscal 2018. We have not yet concluded upon our selection of the transition method. We have commenced our
implementation efforts, which have thus far focused on developing a project plan and performing a preliminary assessment of
potential impacts of the new standard to our financial statements. Key elements of our project plan include the final determination
of the impacts of the standard to revenues, contract acquisition costs, income taxes and various balance sheet accounts; the
identification of additional system requirements, if any, to support our application of the new standard; and the design and
implementation of relevant internal controls. We believe that we have sufficient time and resources to complete our
implementation efforts no later than the fourth quarter of fiscal 2017.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. Under this ASU, inventory will be
measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The
ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable
costs of completion, disposal, and transportation.” ASU 2015-11 is effective for interim and annual periods beginning after
December 15, 2016. Early application is permitted and should be applied prospectively. We do not expect the adoption of this
accounting standard update to have a material impact on our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities,
to mainly change the accounting for investments in equity securities and financial liabilities carried at fair value as well as to
modify the presentation and disclosure requirements for financial instruments. The ASU is effective for interim and annual
periods beginning after December 15, 2017, with early adoption permitted. Adoption of the ASU is retrospective with a
cumulative adjustment to retained earnings or accumulated deficit as of the adoption date. We are currently evaluating the
impact of ASU 2016-01 on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires that substantially all leases, including
current operating leases, be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease
liability. For public business entities, the standard is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. Early application is permitted for all entities. We are currently evaluating the impact of
ASU 2016-02 on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation, Improvements to Employee Share-Based
payment Accounting (Topic 718). This update is intended to provide simplification of the accounting for share based payment
transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as
classification in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December
15, 2016. Early application is permitted and should be applied prospectively. We do not expect the adoption of this accounting
standard update to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments. The new guidance is intended to reduce diversity in practice in how cash receipts and cash payments are classified
in the statement of cash flows. For public business entities, this guidance will be effective for interim and annual periods beginning
after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of ASU 2016-15 on our consolidated
financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than
Inventory. This update is intended to recognize the income tax consequences of intra-entity transfers of assets other than
inventory when they occur by removing the exception to postpone recognition until the asset has been sold to an outside party.
For public business entities, this guidance is effective for interim and annual periods beginning after December 15, 2017. Early
adoption is permitted, and it is required to be applied on a modified retrospective basis through a cumulative-effect adjustment to
the balance sheet as of the beginning of the fiscal year of adoption. We are currently evaluating the impact of ASU 2016-16 on
our consolidated financial statements and related disclosures.
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In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which narrows the existing definition
of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or
disposal) of assets or a business. This update requires an entity to evaluate if substantially all of the fair value of the gross
assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred
assets and activities (collectively, the set) is not a business. To be considered a business, the set would need to include an input
and a substantive process that together significantly contribute to the ability to create outputs. The standard also narrows the
definition of outputs. The definition of a business affects areas of accounting such as acquisitions, disposals and goodwill. Under
the new guidance, fewer acquired sets are expected to be considered businesses. For public business entities, this guidance is
effective for interim and annual periods beginning after December 15, 2017. We are currently evaluating the impact of ASU
2017-01 on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment, which simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test.
Under the new guidance, an entity will recognize an impairment charge for the amount by which the carrying value exceeds the
fair value. This standard is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December
15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017 and requires a prospective transition method. We are currently evaluating the impact of ASU 2017-04 on our consolidated
financial statements and related disclosures.
Note 2 - Net (Loss) Income Per Share
We compute basic net (loss) income per share by dividing net (loss) income by the weighted average number of common shares
outstanding during the period. To determine diluted share count, we apply the treasury stock method to determine the dilutive
effect of outstanding stock option shares, restricted stock units ("RSUs"), and Employee Stock Purchase Plan ("ESPP") shares.
Our application of the treasury stock method includes, as assumed proceeds, the average unamortized stock-based
compensation expense for the period and the impact of the pro forma deferred tax benefit or cost associated with stock-based
compensation expense. When we are in a net loss position, we do not include dilutive securities as their inclusion would reduce
the net loss per share.
A reconciliation of basic and diluted net (loss) income per share is presented below:
(in thousands, except per share data)
Net (loss) income
Year Ended
December 31,
2016
January 2,
2016
January 3,
2015
$
(54,099) $
(159,233) $
48,580
Shares used in basic net (loss) income per share
Dilutive effect of stock options, RSUs and ESPP shares
Shares used in diluted net (loss) income per share
119,994
117,387
—
—
119,994
117,387
117,708
2,537
120,245
Basic net (loss) income per share
Diluted net (loss) income per share
$
$
(0.45) $
(1.36) $
0.41
(0.45) $
(1.36) $
0.40
The computation of diluted net (loss) income per share for fiscal years 2016 and 2015 excludes the effects of stock options,
RSUs, and ESPP shares, aggregating approximately 9.0 million shares and 9.2 million shares, respectively, which are
antidilutive. The computation of diluted net (loss) income per share for fiscal year 2014 includes the effects of stock options,
RSUs and ESPP shares aggregating approximately 2.5 million shares, as they are dilutive, and excludes the effects of stock
options, RSUs and ESPP shares aggregating approximately 2.6 million shares, as they are antidilutive. Stock options, RSUs and
ESPP shares are considered antidilutive when the aggregate of exercise price, unrecognized stock-based compensation
expense, and excess tax benefit are greater than the average market price for our common stock during the period or when the
Company is in a net loss position, as the effects would reduce the loss per share. Stock options and RSUs that are antidilutive at
December 31, 2016 could become dilutive in the future.
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Note 3 - Marketable Securities
We classify our marketable securities as short-term based on their nature and availability for use in current operations. Our
short-term marketable securities have contractual maturities of up to two years. The following table summarizes the remaining
maturities of our marketable securities at fair value:
(In thousands)
Short-term marketable securities:
Maturing within one year
Maturing between one and two years
Total marketable securities
December 31, 2016
January 2, 2016
$
$
10,308
—
10,308
$
$
12,144
5,824
17,968
The following table summarizes the composition of our marketable securities at fair value:
(In thousands)
Short-term marketable securities:
Corporate and government bonds and notes
Certificates of deposit
Total marketable securities
December 31, 2016
January 2, 2016
$
$
10,230
78
10,308
$
$
17,888
80
17,968
Note 4 - Fair Value of Financial Instruments
(In thousands)
Fair value measurements as of
December 31, 2016
Level 2
Level 1
Total
Level 3
Fair value measurements as of
January 2, 2016
Level 1
Level 2
Total
Level 3
Short-term marketable securities
$ 10,308
$ 10,230
$
78
$
— $ 17,968
$ 17,888
$
80
$
Foreign currency forward exchange
contracts, net
Total fair value of financial
instruments
184
—
184
—
(12)
—
(12)
$ 10,492
$ 10,230
$
262
$
— $ 17,956
$ 17,888
$
68
$
—
—
—
We invest in various financial instruments that may include corporate and government bonds and notes, commercial paper, and
certificates of deposit. In the past we have also invested in auction rate securities. In addition, we enter into foreign currency
forward exchange contracts to mitigate our foreign currency exchange rate exposure. We carry these instruments at their fair
value in accordance with ASC 820. 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. There were no transfers between any of the levels during fiscal 2016, 2015, and 2014.
During the fiscal years ended December 31, 2016 and January 2, 2016, we had no Level 3 instruments. In the second quarter of
the fiscal year ended January 3, 2015, we sold our remaining auction rate securities with a par value of $5.7 million with an
estimated fair value of $5.2 million, for $5.5 million. As a result, we reported a gain of $1.7 million in the Consolidated Statements
of Operations and relieved $1.1 million of previously unrealized gain, net of taxes, from accumulated other comprehensive loss
in fiscal 2014.
In accordance with ASC 320, “Investments-Debt and Equity Securities,” we recorded an unrealized loss of approximately $0.2
million during the fiscal year ended December 31, 2016, and an unrealized loss of less than $0.1 million during the fiscal year
ended January 2, 2016 on certain Short-term marketable securities (Level 1 instruments), which have been recorded in
accumulated other comprehensive loss. Future fluctuations in fair value related to these instruments that we deem to be
temporary, including any recoveries of previous write-downs, would be recorded to accumulated other comprehensive loss. If we
were to determine in the future that any further decline in fair value is other-than-temporary, we would record an impairment
charge, which could have a materially adverse effect on our operating results. If we were to liquidate our position in these
securities, it is likely that the amount of any future realized gain or loss would be different from the unrealized gain or loss
reported in accumulated other comprehensive loss.
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Note 5 - Inventories
(In thousands)
Work in progress
Finished goods
Total inventories
Note 6 - Property and Equipment
(In thousands)
Buildings
Computer and test equipment
Office furniture and equipment
Leasehold and building improvements
Accumulated depreciation and amortization
December 31, 2016
January 2, 2016
$
$
50,688
28,480
79,168
$
$
57,865
18,031
75,896
December 31, 2016
January 2, 2016
$
$
3,554
$
162,388
3,460
14,865
184,267
(134,786)
49,481
$
3,554
148,995
3,880
14,366
170,795
(118,943)
51,852
Depreciation and amortization expense for property and equipment was $18.4 million, $18.1 million including $1.5 million of
restructuring expense, and $11.4 million for fiscal years 2016, 2015, and 2014, respectively.
As of December 31, 2016, our owned building space in Shanghai, China was classified as held for sale as a result of planned
facilities consolidation under our March 2015 Restructuring Plan. We have halted depreciation as of December 31, 2016 and
entered into a contract to sell the building in January 2017. We expect the sale to be completed in the first quarter of fiscal 2017.
The office space had a carrying value of $2.2 million as of December 31, 2016 and is included in property and equipment in the
Consolidated Balance Sheets.
In November 2014, we sold land and buildings, comprising the former location of our corporate headquarters and executive
office in Hillsboro, Oregon, for net proceeds of approximately $14.6 million. This property had a historical cost of $30.9 million
and accumulated depreciation of $17.9 million, resulting in a net gain on sale of $1.6 million. We leased back a portion of the
facilities for a lease term of eight years, resulting in deferral of the gain, which is being amortized over the life of the lease.
Note 7 - Business Combinations and Goodwill
On March 10, 2015, we acquired 100% of the outstanding equity of Silicon Image, Inc. ("Silicon Image"), a provider of video,
audio, and data connectivity solutions for the mobile, consumer electronics, and personal computer markets.
The fair value of the purchase price consideration consisted of the following:
(In thousands)
Cash paid to Silicon Image shareholders
Cash paid for options and RSUs
Fair value of partially vested stock options and RSUs assumed
Total purchase consideration
There is no contingent consideration in this acquisition.
Estimated Fair Value
$
$
575,955
7,383
5,139
588,477
Purchase consideration was allocated to the tangible and intangible assets and liabilities assumed on the basis of the respective
estimated fair values on the acquisition date. In the first quarter of 2016, we revised our valuation and allocation of purchase
price consideration resulting in $2.1 million of additional long-term liabilities related to an uncertain tax position with an
equivalent revision to Goodwill, which is reflected in the Consolidated Balance Sheets for the year ended December 31, 2016.
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The final allocation of the total purchase price is as follows:
(In thousands)
Assets acquired:
Cash, cash equivalents and short-term investments
Accounts receivable
Inventory
Other current assets
Property and equipment
Other non-current assets
Intangible assets
Goodwill
Total assets acquired
Less liabilities assumed:
Accounts payable and other accrued liabilities
Other current liabilities
Long-term liabilities
Redeemable noncontrolling interest
Total liabilities assumed
Fair value of net assets acquired
Estimated Fair Value
$
157,923
30,677
20,839
7,183
23,429
1,573
192,079
237,608
671,311
47,735
1,252
26,675
7,172
82,834
$
588,477
The following table presents details of the identified intangible assets acquired through the acquisition of Silicon Image:
(In thousands)
Developed technology
Customer relationships
Licensed technology
Patents
Total identified finite-lived intangible assets
In-process research and development
Total identified intangible assets
Asset Life in
Years
Fair Value
3-5
4-7
3-5
5
indefinite
$
$
125,000
29,458
1,852
769
157,079
35,000
192,079
We do not believe there is any significant residual value associated with these intangible assets. We are amortizing the
intangible assets using the straight-line method over their estimated useful lives. The estimation of the fair values of the
intangible assets required the use of valuation techniques including the income approach and the cost approach, and entailed
consideration of all the relevant factors that might affect the fair value such as present value factors, and estimates of future
revenues and costs.
Silicon Image’s results of operations and the estimated fair value of the assets acquired and liabilities assumed are included in
Lattice's consolidated financial statements effective March 11, 2015. Silicon Image's revenue and net loss for the approximately
10-month period from March 11, 2015 through January 2, 2016 were approximately $135.6 million and $77.0 million,
respectively. Silicon Image's acquisition related charges in that period, which were expensed as incurred, were approximately
$8.2 million.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. The
goodwill recognized in the acquisition of Silicon Image was derived from expected benefits from cost synergies and
knowledgeable and experienced workforce who joined the Company after the acquisition. Goodwill is not amortized, but is
instead tested for impairment annually or more frequently if certain indicators of impairment are present. We do not expect
goodwill impairment to be tax deductible for income tax purposes. No impairment charges relating to goodwill were recorded in
fiscal 2016 as no indicators of impairment were present. A $13 million charge to fully impair the Qterics goodwill was recorded for
fiscal 2015 (Note 9). No impairment charges related to goodwill were recorded in fiscal 2014 as no indicators of impairment were
present. The goodwill balance of $270 million at December 31, 2016 is comprised of $45 million from prior acquisitions
combined with the $238 million from the acquisition of Silicon Image, reduced by the fiscal 2015 goodwill impairment charge of
$13 million.
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Unaudited Pro Forma Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of operations for the
Company and Silicon Image as if the merger occurred on December 29, 2013, the first day of our 2014 fiscal year. The pro
forma financial information for the periods presented includes adjustments to amortization and depreciation for intangible assets
and property and equipment acquired; adjustments to share-based compensation expense; and interest expense for the
additional indebtedness incurred as part of the acquisition. The total of nonrecurring pro forma adjustments directly attributable
to the business combination included in the reported pro forma revenue and earnings for the year ended January 3, 2015 and
excluded from the reported pro forma revenue and earnings for the year ended January 2, 2016 was $30.6 million related to
acquisition-related charges. The pro forma financial information as presented below is for informational purposes only, is based
on certain assumptions and estimates, and is not indicative of the results of operations that would have been achieved if the
acquisition had taken place at the beginning of the first period presented.
The unaudited pro forma financial information for the fiscal year ended January 2, 2016 combined the historical results of the
Company for the fiscal year ended January 2, 2016, the historical results of Silicon Image for the fiscal year ended January 2,
2016, and the effects of the pro forma adjustments described above.
The unaudited pro forma financial information for the fiscal year ended January 3, 2015 combined the historical results of the
Company for the fiscal year ended January 3, 2015, the historical results of Silicon Image for the fiscal year ended January 3,
2015, and the effects of the pro forma adjustments described above.
(Dollars in thousands, except per share data)
Total revenues
Net (loss) income attributable to stockholders
Basic net (loss) income per share
Diluted net (loss) income per share
Year Ended
January 2, 2016
January 3, 2015
$
$
$
$
450,867
$
(147,436) $
(1.26) $
(1.26) $
624,179
10,376
0.09
0.09
The pro forma adjustments did not have any impact on the pro forma combined provision for income taxes for fiscal 2015 and
2014 due to net loss positions and valuation allowances on deferred income tax assets in those periods.
Note 8 - Intangible Assets
In connection with our acquisitions of Silicon Image in March 2015 and SiliconBlue in December 2011 we recorded identifiable
intangible assets related to developed technology, customer relationships, licensed technology, patents, and in-process research
and development based on guidance for determining fair value under the provisions of ASC 820, "Fair Value Measurements and
Disclosures." Additionally, during fiscal 2015, we licensed additional third-party technology.
We monitor the carrying value of our intangible assets for potential impairment and test the recoverability of such assets
annually during the fourth quarter and whenever events or changes in circumstances indicate that their carrying amounts may
not be recoverable. The results of our assessments are summarized below and more fully detailed in Note 9.
During the third quarter of fiscal 2016, we recorded a $7.9 million non-cash impairment charge to the intangible assets
associated with future HDMI adopter fees. During the fourth quarter of fiscal 2015, we recorded a $9.0 million impairment charge
to the intangible assets of the then Qterics operating segment comprising developed technology of $3.9 million, and customer
relationships of $5.1 million. With the sale of Qterics in April 2016, its balances for intangible assets, accumulated amortization,
and impairment have been removed from the balance for intangible assets, net of amortization in the Consolidated Balance
Sheet as of December 31, 2016. No impairment charges related to intangible assets were recorded during fiscal 2014 as no
indicators of impairment were present.
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The following tables summarize the details of our total purchased intangible assets as of December 31, 2016 and January 2,
2016:
December 31, 2016
Weighted
Average
Amortization
Period (in years)
Gross
Impairment
Accumulated
Amortization
Intangible
assets, net of
amortization
4.7
6.1
3.3
5
$
141,359
$
— $
(55,493) $
30,800
2,127
769
(7,866)
—
—
(13,694)
(1,201)
(279)
175,055
(7,866)
(70,667)
indefinite
22,341
—
—
85,866
9,240
926
490
96,522
22,341
$
197,396
$
(7,866) $
(70,667) $
118,863
January 2, 2016
Weighted
Average
Amortization
Period (in years)
Gross
Impairment
Accumulated
Amortization
Intangible
assets, net of
amortization
4.7
5.5
2.5
5
$
135,700
$
(3,856) $
(28,384) $
37,258
2,127
769
(5,139)
(10,156)
—
—
(610)
(126)
103,460
21,963
1,517
643
175,854
(8,995)
(39,276)
127,583
indefinite
35,000
—
—
35,000
$
210,854
$
(8,995) $
(39,276) $
162,583
(In thousands)
Developed technology
Customer relationships
Licensed technology
Patents
Total identified finite-
lived intangible assets
In-process research and
development
Total identified
intangible assets
(In thousands)
Developed technology
Customer relationships
Licensed technology
Patents
Total identified finite-
lived intangible assets
In-process research and
development
Total identified
intangible assets
We recorded amortization expense associated with these intangible assets on the Consolidated Statements of Operations as
follows:
(In thousands)
Research and development
Amortization of acquired intangible assets
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
$
$
745
33,575
34,320
$
$
731
28,849
29,580
$
$
—
2,948
2,948
The annual expected amortization expense of acquired intangible assets with finite lives is as follows:
(In thousands)
2017
2018
2019
2020
2021
Thereafter
Total
$
Amount
33,759
27,877
25,093
7,145
2,547
101
$
96,522
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Note 9 - Impairment of Goodwill and Intangible Assets
In connection with our acquisitions of Silicon Image in March 2015 and SiliconBlue in December 2011 we recorded goodwill and
identifiable intangible assets related to developed technology, customer relationships, licensed technology, patents, and in-
process research. We monitor the carrying value of our goodwill and intangible assets for potential impairment and test the
recoverability of such assets annually during the fourth quarter and whenever events or changes in circumstances indicate that
their carrying amounts may not be recoverable.
In September 2016, the Founders of the HDMI consortium, of which we are a member, amended the existing Founders
Agreement resulting in changes to our role as agent for the HDMI consortium and to the model for sharing adopter fee revenues.
Lattice historically served the role of the HDMI licensing agent via a wholly owned subsidiary, HDMI Licensing LLC. Under the
terms of the new agreement, our role as the agent was terminated effective January 1, 2017 and a new independent entity was
appointed to act as the new HDMI licensing agent with responsibility for licensing and the distribution of royalties among
Founders. As a result of the amended model for sharing revenue, we will be entitled to a reduced share of adopter fees paid by
parties adopting the HDMI standard. We determined that this modification constituted an impairment indicator related to the
intangible assets associated with future HDMI adopter fees. Our assessment of the new value of these intangible assets
concluded that they had been impaired as of the end of the third quarter of fiscal 2016, and we recorded a $7.9 million non-cash
impairment charge in the Consolidated Statements of Operations. We do not anticipate any future cash expenditures related to
this impairment. No impairment charges related to goodwill were recorded in fiscal 2016 as no indicators of impairment were
present.
For fiscal 2015, the impairment of goodwill and intangible assets was related to Qterics, Inc., which was acquired in the March
2015 acquisition of Silicon Image. During the fourth quarter of fiscal 2015, we determined that we experienced an impairment
indicator related to the long-lived assets of the Qterics operating segment. For purposes of testing for impairment in fiscal 2015,
the Company operated as two reporting units: the continuing core Lattice ("Core") business, which includes intellectual property
and semiconductor devices, and Qterics, which was a discrete software-as-a-service business unit in the Lattice legal entity
structure until it was sold in April 2016. Although these two operating segments constituted two reportable segments in fiscal
2015, we combined Qterics with our Core business and reported them together as one reportable segment due to the immaterial
nature of the Qterics segment. Following this assessment, we concluded that goodwill and intangible assets had been impaired
in the Qterics segment as of January 2, 2016. As a result we recorded an impairment charge amounting to $21.7 million, or
approximately 92% of the previous value of goodwill and intangible assets, in the Consolidated Statements of Operations for the
year ended January 2, 2016, comprising $12.7 million pertaining to goodwill, $3.9 million pertaining to developed technology,
and $5.1 million pertaining to customer relationships. The valuation was based on the market approach and was our best
estimate of fair value as of the end of fiscal 2015. No impairment charges were recorded for the Core segment in fiscal 2015,
and we had no impairment charges in fiscal 2014.
Note 10 - Equity Method Investment
In the first and third quarters of fiscal 2015, we purchased a preferred stock ownership interest in a privately-held company that
designs human-computer interaction technology for total consideration of $3.0 million. This investment accounted for a 15.8%
ownership interest by the end of the third quarter of fiscal 2015 and was accounted for under the cost method as we did not have
the ability to exert significant influence over the investee.
In the fourth quarter of fiscal 2015, we increased our ownership interest to 22.7% by making an additional investment of $2.0
million. This increased our gross investment in the investee to $5.0 million. As a result of the change in ownership interest and
after considering the changes in the level of our participation in the management and interaction with the investee, we
determined that we have the ability to exert significant influence over the investee. Accordingly, we changed our accounting for
the investment from the cost method to the equity method and have since recognized our proportionate share of the investee’s
operating results in the Consolidated Statements of Operations.
In the third quarter of fiscal 2016, we made an additional investment of $1.0 million via a convertible debt instrument, bringing
our gross investment in the investee to $6.0 million. We have determined that this additional investment is an in-substance
common stock and has been included in our equity method accounting but that, in its unconverted state, it does not change our
ownership interest.
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Applying the equity method, the proportionate share of the investee's net loss that we have recognized in the Consolidated
Statements of Operations for fiscal years 2016, 2015, and 2014 was as follows:
(In thousands)
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
Equity in net loss of an unconsolidated affiliate, net of tax
$
(1,459) $
(492) $
—
Through December 31, 2016, we have reduced the value of our investment by approximately $2.0 million, representing our
cumulative proportionate share of the privately-held company’s net loss accumulated to that date. The net balance of our
investment included in other long-term assets in the Consolidated Balance Sheets is detailed in the following table:
(In thousands)
Balance at January 3, 2015
Investment made during fiscal year
Equity in net loss of an unconsolidated affiliate, net of tax
Balance at January 2, 2016
Investment made during fiscal year
Equity in net loss of an unconsolidated affiliate, net of tax
Balance at December 31, 2016
Total
—
5,000
(492)
4,508
1,000
(1,459)
4,049
$
$
Note 11 - Accounts Payable and Accrued Expenses
Included in accounts payable and accrued liabilities in the Consolidated Balance Sheets are the following balances:
(In thousands)
Trade accounts payable
Payable to members of the HDMI and MHL consortia*
Other accrued expenses
Total accounts payable and accrued expenses
December 31, 2016
January 2, 2016
$
$
37,800
$
9,698
33,435
80,933
$
18,616
16,643
39,039
74,298
* As an agent of the HDMI and MHL consortia, we administer royalty reporting and distributions to the members of these
consortia. This excludes amounts payable to us, and is payable quarterly based on collections from HDMI and MHL
customers. Our role as the agent of the HDMI consortium terminated on January 1, 2017.
Note 12 - Redeemable Noncontrolling Interest
With the acquisition of Silicon Image on March 10, 2015, we also assumed a redeemable noncontrolling interest which
comprised a 7% investment in Qterics amounting to $7.0 million invested by the noncontrolling interest holder initially entered
into on December 4, 2014. The investment was redeemable at fair market value at the third-party holder's option on the third,
fourth, or fifth year anniversaries. If the fair market value at the redemption date, as negotiated and agreed to by the parties, did
not exceed $21 million, the redemption price would be 130% of the fair market value.
As of the acquisition date, the fair value of the noncontrolling interest was determined to be $7.2 million (Note 7), recorded as
temporary equity and reported as Redeemable noncontrolling interest in the Consolidated Balance Sheets. The Company
elected to accrete the carrying value to the estimated redemption value over the three-year redemption period and reported the
accretion charge as a reduction to additional-paid-in-capital. During fiscal 2015, we recorded cumulative accretion charges
amounting to $0.4 million bringing the value of the redeemable noncontrolling interest to $7.6 million.
During the fourth quarter of fiscal 2015, we entered into an agreement with the holder pursuant to which the entire interest was
redeemed for a cash payment of approximately $0.9 million. The difference between the carrying value and the redemption
amount totaling approximately $6.7 million was recorded as additional-paid-in-capital during the year ended January 2, 2016.
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Note 13 - Lease Obligations
Certain of our facilities are leased under operating leases, which expire at various times through 2026. Rental expense under
operating leases was $9.5 million, $7.4 million and $4.5 million for fiscal years 2016, 2015 and 2014, respectively. Future
minimum lease commitments at December 31, 2016 were as follows:
Fiscal year
(In thousands)
2017
2018
2019
2020
2021
Thereafter
Note 14 - Income Taxes
The domestic and foreign components of (loss) income before income taxes were as follows:
Amount
7,220
5,890
4,559
4,528
4,583
18,965
45,745
$
$
(In thousands)
Domestic
Foreign
(Loss) income before taxes
The components of the income tax expense (benefit) are as follows:
(In thousands)
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
$
$
(32,503) $
(10,220)
(92,737) $
(33,464)
(42,723) $
(126,201) $
6,292
36,649
42,941
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
$
1,896
$
968
$
13
7,918
9,827
—
—
90
90
80
10,634
11,682
18,713
2,318
(173)
20,858
329
5
1,944
2,278
(7,416)
(513)
12
(7,917)
(5,639)
Income tax expense (benefit)
$
9,917
$
32,540
$
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Income tax expense (benefit) 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
Research and development credits
Stock compensation
Foreign rate differential
Foreign dividends
Foreign withholding taxes
Capital loss expiration
Other permanent
Goodwill impairment
Valuation allowance
Change in uncertain tax benefit accrual
Tax rate change
Other
Effective income tax rate
December 31,
2016
%
Year Ended
January 2,
2016
%
(35)
(35)
7
(2)
3
14
—
9
—
3
—
17
5
—
2
23
(6)
(3)
1
12
5
3
—
4
4
46
(8)
3
—
26
January 3,
2015
%
35
1
(9)
1
(25)
1
—
7
—
—
(23)
1
(4)
2
(13)
ASC 740, “Income Taxes”, provides for the recognition of deferred tax assets if realization of these assets is more-likely-than-
not. We evaluate both positive and negative evidence to determine if some or all of our deferred tax assets should be recognized
on a quarterly basis.
During the fourth quarter of 2014, we 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, resulting in a tax benefit of $11.5 million and a federal and state net deferred tax
asset of $21.3 million. We based this conclusion on improved operating results over the past two years and our expectations
about generating taxable income in the foreseeable future. We exercised significant judgment and considered estimates about
our ability to generate revenue, gross profits, operating income and jurisdictional taxable income in future periods under our tax
structure in reaching this decision.
In 2015, we completed the acquisition of Silicon Image, Inc. At the time of the acquisition, we evaluated the combined entity's net
deferred income taxes, which included an assessment of the cumulative income or loss over the prior three-year period, to
determine if a valuation allowance is required. After considering the significant loss for 2015, we concluded that it was more-
likely-than-not that we would not be able to realize the benefit of our remaining U.S. deferred tax assets, resulting in an increase
to the valuation allowance and an increase to the tax provision of $21.0 million. We exercised significant judgment and
considered estimates about our ability to generate revenue and gross profits sufficient enough to offset expenditures in future
periods within the United States.
In 2016, we continued to evaluate the valuation allowance position in the United States and concluded we should maintain a
valuation allowance against the net federal and state deferred tax assets.
We will continue to evaluate both positive and negative evidence in future periods to determine if more deferred tax assets
should be recognized. We don't have a valuation allowance in any foreign jurisdictions as it has been concluded it is more likely
than not that we will realize the net deferred tax assets in future periods. The net increase in the total valuation allowance
affecting the effective tax rate for the year ended December 31, 2016 was approximately $7.5 million.
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The components of our net deferred tax assets are as follows:
(In thousands)
Deferred tax assets:
December 31, 2016
January 2, 2016
Accrued expenses and reserves
$
5,143
$
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
Other
Less: valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Fixed Assets
Other
Total deferred tax liabilities
Net deferred tax assets
290
426
7,269
20,063
678
137,521
89,174
962
2,975
264,501
(260,687)
3,814
—
3,746
3,746
$
68
$
5,690
303
3,177
7,674
16,959
—
131,829
87,909
1,262
2,458
257,261
(252,578)
4,683
791
3,734
4,525
158
At December 31, 2016, we had federal net operating loss carryforwards (pretax) of approximately $367.0 million that expire at
various dates between 2025 and 2036. We had state net operating loss carryforwards (pretax) of approximately $193.3 million
that expire at various dates from 2017 through 2036. We also had federal and state credit carryforwards of $49.2 million and
$56.7 million of which $55.5 million do not expire. The remaining credits expire at various dates from 2017 through 2036.
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 2016. However, if there is a
significant change in ownership, the future utilization may be limited and the deferred tax asset would be reduced to the amount
available.
At December 31, 2016, U.S. income taxes were not provided for approximately $3.0 million of the undistributed earnings of our
Chinese subsidiary. We intend to reinvest these earnings indefinitely. 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, 2016, our unrecognized tax benefits associated with uncertain tax positions were $47.6 million, of which $44.5
million, if recognized, would affect the effective tax rate, subject to valuation allowance. As of December 31, 2016, interest and
penalties associated with unrecognized tax benefits were $7.5 million.
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The following table summarizes the changes to unrecognized tax benefits for fiscal years 2016, 2015 and 2014:
(In thousands)
Balance at December 28, 2013
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 3, 2015
Additions based on tax positions related to the current year
Additions based on tax positions of prior years
Additions due to acquisition
Reduction for tax positions of prior years
Settlements
Reduction as a result of lapse of applicable statute of limitations
Balance at January 2, 2016
Additions based on tax positions related to the current year
Additions based on tax positions of prior years
Additions due to acquisition
Reductions for tax positions of prior years
Settlements
Amount
$
22,643
770
—
(4,673)
—
(67)
18,673
4,381
—
41,083
(14,958)
—
(972)
48,207
2,573
530
—
(1,824)
—
(1,863)
47,623
Reduction as a result of lapse of applicable statute of limitations
Balance at December 31, 2016
$
At December 31, 2016, it is reasonably possible that $2.2 million of unrecognized tax benefits and $0.1 million of associated
interest and penalties could significantly change during the next twelve months. Our liability for uncertain tax positions (including
penalties and interest) was $29.6 million and $26.9 million at December 31, 2016 and January 2, 2016, respectively, and is
recorded as a component of other long-term liabilities on our Consolidated Balance Sheets. The remainder of our uncertain tax
position exposure is netted against deferred tax assets.
Our income tax return for India is currently under examination for the tax year ended March 31, 2015. We are not under
examination in any other jurisdiction.
We are subject to federal and state income tax as well as income tax in the various foreign jurisdictions in which we operate.
Additionally, the years that remain subject to examination are 2013 for federal income taxes, 2012 for state income taxes, and
2010 for foreign income taxes, including years ending thereafter. However, to the extent allowed by law, the tax authorities may
have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make
adjustments up to the amount of the net operating losses or credit carryforward amount.
The Tax Increase Prevention Tax Act of 2014 was enacted into law in the fourth quarter of 2014 and extended the research and
development tax credit through December 31, 2014. On December 18, 2015, the Protecting Americans from Tax Hikes Act of
2015 was enacted. The Act included several business tax provisions including the permanent extension of the credit for qualified
research and development. The tax benefit in each year resulting from these reinstatements of the federal research and
development tax credit was offset by a valuation allowance and therefore did not impact our annual effective tax rate.
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Note 15 - Restructuring
In March 2015, our Board of Directors approved an internal restructuring plan (the "March 2015 Plan"), in connection with our
acquisition of Silicon Image. The March 2015 Plan was designed to realize synergies from the acquisition by eliminating
redundancies created as a result of combining the two companies. This included reductions in our worldwide workforce,
consolidation of facilities, and cancellation of software contracts and engineering tools. The March 2015 Plan is substantially
complete, subject to certain remaining expected costs that we do not expect to be material and any changes in sublease
assumptions should they occur, which will be expensed as incurred under U.S. GAAP rules through the first quarter of fiscal
2017. Under this plan, approximately $7.3 million and $13.3 million of expense was incurred during the years ended
December 31, 2016 and January 2, 2016, respectively. Approximately $20.6 million of total expense has been incurred through
December 31, 2016 under the March 2015 Plan. We expect the total cost of the March 2015 Plan to be approximately $21.0
million.
In September 2015, we implemented a further reduction of our worldwide workforce (the "September 2015 Reduction") separate
from the March 2015 Plan. The September 2015 Reduction was designed to resize the company in line with the market
environment and to better balance our workforce with the long-term strategic needs of our business. The September 2015
Reduction is substantially complete, subject to certain remaining expected costs, which we do not expect to be material, which
will be expensed as incurred under U.S. GAAP rules through the first quarter of fiscal 2017. Under this reduction, approximately
$2.0 million and $5.9 million of expense was incurred during the years ended December 31, 2016 and January 2, 2016,
respectively. Approximately $7.9 million of total expense has been incurred through December 31, 2016 under the September
2015 Reduction. We expect the total cost of the September 2015 Reduction to be approximately $8.0 million.
In each of the fiscal years 2015 and 2014, less than $0.1 million of expense was incurred related to a prior restructuring plan. No
charges were incurred in fiscal 2016 under this prior plan.
These expenses were recorded to restructuring charges on our Consolidated Statements of Operations. The restructuring
accrual balance is presented in accounts payable and accrued expenses (includes restructuring) on the Consolidated Balance
Sheets.
The following table displays the activity related to the restructuring plans described above:
(In thousands)
Balance at December 28, 2013
Restructuring charges
Costs paid or otherwise settled
Adjustments to prior restructuring costs
Balance at January 3, 2015
Restructuring charges
Costs paid or otherwise settled
Balance at January 2, 2016
Restructuring charges
Costs paid or otherwise settled
Balance at December 31, 2016
Severance
& related *
Lease
termination
Software
Contracts &
Engineering
Tools**
Other
Total
$
368
$
— $
147
$
17
—
(8)
(9)
— $
12,861
(9,165)
3,696
$
2,883
(5,778)
$
$
$
$
1
(341)
15
43
2,667
(1,705)
1,005
2,993
(2,962)
—
—
—
— $
3,040
(2,663)
9
(18)
1
139
671
(810)
$
377
$
— $
1,903
(2,255)
1,488
(1,476)
532
10
(367)
7
182
19,239
(14,343)
5,078
9,267
(12,471)
801
$
1,036
$
25
$
12
$
1,874
* Includes employee relocation costs
**Includes cancellation of contracts, asset impairments, and accelerated depreciation on certain enterprise resource planning and customer
relationship management systems
Note 16 - Long-Term Debt
On March 10, 2015, we entered into a secured credit agreement (the "Credit Agreement") with Jefferies Finance, LLC and
certain other lenders for purposes of funding, in part, our acquisition of Silicon Image. The Credit Agreement provided for a $350
million term loan (the "Term Loan") maturing on March 10, 2021 (the "Term Loan Maturity Date"). We received $346.5 million net
of an original issue discount of $3.5 million and we paid debt issuance costs of $8.3 million. The Term Loan bears variable
interest equal to the 6-month LIBOR as of December 31, 2016, subject to a 1.00% floor, plus a spread of 4.25%. The current
effective interest rate on the Term Loan is 6.20%.
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The Term Loan is payable through a combination of (i) quarterly installments of approximately $0.9 million, which began on July
4, 2015, (ii) annual excess cash flow payments as defined in the Credit Agreement, which are due 95 days after the last day of
our fiscal year, and (iii) any payments due upon certain issuances of additional indebtedness and certain asset dispositions, with
any remaining outstanding principal amount due and payable on the Term Loan Maturity Date. The percentage of excess cash
flow we are required to pay ranges from 0% to 75%, depending on our leverage and other factors as defined in the Credit
Agreement. Currently, the Credit Agreement would require a 75% excess cash flow payment. In the second quarter of fiscal
2016, we made a required additional principal payment of $1.7 million due to the sale of Qterics.
Due to the combination of payments described above, our calculation of the current portion of long-term debt depends on activity
that has occurred subsequent to December 31, 2016. Since our Earnings Release on February 15, 2017, we have entered into a
patent monetization transaction that has triggered a $17.9 million increase to current portion of long-term debt presented in the
Consolidated Balance Sheets. Over the next twelve months, we expect to be required to make principal payments of
approximately $32.5 million, in addition to required quarterly payments.
While the Credit Agreement does not contain financial covenants, it does contain informational covenants and certain restrictive
covenants, including limitations on liens, mergers and consolidations, sales of assets, payment of dividends, and indebtedness.
We were in compliance with all such covenants at December 31, 2016.
The original issue discount and the debt issuance costs have been accounted for as a reduction to the carrying value of the
Term Loan on our Consolidated Balance Sheets and are being amortized to interest expense in our Consolidated Statements of
Operations over the contractual term, using the effective interest method.
The fair value of the Term Loan approximates the carrying value, which is reflected in our Consolidated Balance Sheets as
follows:
(in thousands)
Principal amount
Unamortized original issue discount and debt issuance costs
Less: Current portion of long-term debt
Long-term debt
December 31, 2016
January 2, 2016
$
$
342,221
$
(7,599)
(33,767)
300,855
$
347,375
(8,948)
(7,557)
330,870
Interest expense related to the Term Loan was included in Interest expense on the Consolidated Statements of Operations as
follows:
(in thousands)
Contractual interest
Amortization of debt issuance costs and discount
Total Interest expense related to the Term Loan
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
$
$
18,518
1,350
19,868
$
$
15,225
2,835
18,060
$
$
—
—
—
As of December 31, 2016, minimum expected future principal payments on the Term Loan were as follows:
Fiscal year
2017
2018
2019
2020
2021
(in thousands)
35,996
20,813
52,583
89,113
143,716
342,221
$
$
Note 17 - Common Stock Repurchase Program
On March 3, 2014, our 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 was twelve months.
Under this program during fiscal 2014, approximately 1.9 million shares were repurchased for $13.1 million. The 2014 program
completed during the first quarter of fiscal 2015, during which approximately 1.1 million shares were repurchased for
approximately $7.0 million. All shares repurchased under the 2014 program were retired by the end of the fiscal year in which
they were repurchased. All repurchases were open market transactions funded from available working capital.
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Note 18 - Stockholders' Equity
Employee and Director Stock Options, Restricted Stock and ESPP
We have four equity incentive plans (the "1996 Stock Incentive Plan," the "2001 Stock Plan," the "2013 Incentive Plan" and the
"2011 Non-Employee Director Equity Incentive Plan"). Awards granted under the 1996 Stock Incentive Plan and the 2001 Stock
Plan remain outstanding, but no shares are available for future awards under these plans. Shares remain available for grants to
employees and non-employee directors only under the 2013 Incentive Plan and the 2011 Non-Employee Director Equity
Incentive Plan. "Incentive stock options" under Section 422 of the U.S. Internal Revenue Code and restricted stock unit ("RSU")
grants are part of our equity compensation practices for employees who receive equity grants. Options and RSUs generally vest
quarterly over a four-year period beginning on the grant date. The contractual terms of options granted do not exceed ten years.
In May 2012, the Company's stockholders approved the 2012 Employee Stock Purchase Plan ("2012 ESPP"), which authorizes
the issuance of 3.0 million shares of common stock to eligible employees to purchase shares of common stock through payroll
deductions, which cannot exceed 10% of an employee's compensation. The purchase price of the shares is the lower of 85% of
the fair market value of the stock at the beginning of each six-month offering period or 85% of the fair market value at the end of
such period. Employees are required to hold purchased shares for six months. We have treated the 2012 ESPP as a
compensatory plan and recorded related compensation expense of $0.6 million, $0.4 million and $0.3 million for the fiscal years
2016, 2015 and 2014, respectively.
At December 31, 2016, a total of 1.3 million shares of our common stock were available for future grants under the 2013
Incentive Plan and the 2011 Non-Employee Director Equity Incentive Plan. Shares subject to stock option grants that expire or
are canceled, without delivery of such shares, generally become available for re-issuance under equity incentive plans. At
December 31, 2016, a total of 1.9 million shares of our common stock were available for future purchases under the 2012 ESPP.
On March 10, 2015, in conjunction with the acquisition of Silicon Image, we assumed certain outstanding stock option and RSU
grants of the Silicon Image Equity Incentive Plans. We assumed all stock option grants that were unvested or vested and out-of-
the-money and all outstanding unvested RSU grants. The exchange ratio for the conversion was 1.09816 for all grants. The
conversion ratio was determined by the weighted average closing price of Lattice common stock for the ten days prior to the
acquisition date divided by the offer price of $7.30. The converted outstanding option grants totaled 2,087,605 shares and
converted RSU grants totaled 2,025,255 shares as of March 10, 2015. As of December 31, 2016, 787,130 options and 228,659
RSU shares arising from this conversion remained outstanding.
Stock-Based Compensation
Total stock-based compensation expense included in our Consolidated Statements of Operations was as follows:
(In thousands)
Cost of products sold
Research and development
Selling, general, and administrative
Acquisition related charges
Total stock-based compensation
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
$
$
888
$
7,928
7,397
—
$
1,416
9,141
6,793
4,293
819
5,176
6,807
—
16,213
$
21,643
$
12,802
Of the $21.6 million total stock-based compensation for the twelve months ended January 2, 2016, $3.9 million was paid in cash
during the period as a result of the acquisition of Silicon Image on March 10, 2015.
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 values of each option award on the date of grant and of the shares expected to be issued under the employee stock
purchase plan are estimated using the Black-Scholes valuation model and the assumptions noted in the following table. The
expected term is based on historical vested option exercises and includes an estimate of the expected term for options that are
fully vested and outstanding. The expected volatility of both stock options and ESPP shares is based on the daily historical
volatility of our stock price, measured over the expected term of the option or the ESPP purchase period. The risk-free interest
rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term closest to the expected term of
the option. 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.
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The following table summarizes the assumptions used in the valuation of stock option and ESPP compensation for fiscal years
2016, 2015, and 2014:
Employee and Director Stock Options
Expected volatility
Risk-free interest rate
Expected term (years)
Dividend yield
Employee Stock Purchase Plan
Weighted average expected volatility
Weighted average risk-free interest rate
Expected term
Dividend yield
December 31,
2016
Year Ended
January 2,
2016
January 3,
2015
44.2% to 50.8% 43.6% to 47.3% 45.4% to 50.4%
.94% - 2.06%
1.4% to 1.7%
1.5% to 1.7%
4.06 - 4.78
4.08 to 4.75
4.1 to 4.7
—%
—%
—%
57.9%
0.43%
33.6%
0.12%
38.7%
0.08%
6 months
6 months
6 months
—%
—%
—%
At December 31, 2016, there was $11.0 million of total unrecognized compensation cost related to unvested employee and
director stock options, which is expected to be recognized over a weighted average period of 2.6 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, 2016:
(Shares and aggregate intrinsic value in thousands)
Balance, January 2, 2016
Granted
Exercised
Forfeited or expired
Balance, December 31, 2016
Vested and expected to vest at December 31, 2016
Exercisable, December 31, 2016
Shares
11,444
$
3,907
(1,466)
(1,319)
12,566
12,566
6,876
$
$
$
Weighted
average
exercise
price
Weighted
average
remaining
contractual
term (years)
Aggregate
Intrinsic
Value
5.46
5.65
3.91
5.47
5.70
5.70
5.65
4.39
3.15
$
$
20,966
11,851
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 2016,
2015 and 2014, and was $3.3 million, $2.5 million and $7.8 million, respectively. The total fair value of options and RSUs vested
and expensed in fiscal 2016, 2015 and 2014 and was $15.6 million, $18.0 million and $12.8 million, respectively.
The resultant grant date weighted-average fair values for stock options granted, calculated using the Black-Scholes option
pricing model with the noted assumptions for stock options, were $2.14, $2.35 and $2.93 for fiscal years 2016, 2015 and 2014,
respectively. The weighted average fair values for the ESPP, calculated using the Black-Scholes option pricing model with the
noted assumptions for the ESPP, were $1.82, $1.51 and $1.73 for fiscal years 2016, 2015 and 2014, respectively.
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The following table summarizes our RSU activity for the year ended December 31, 2016:
(Shares in thousands)
Balance, January 2, 2016
Granted
Exercised
Forfeited or expired
Balance, December 31, 2016
Shares
4,757
1,376
(1,742)
(1,144)
3,247
Weighted average
grant date fair value
5.95
$
5.64
5.97
5.68
5.90
$
At December 31, 2016 there was $16.2 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.
We granted stock options and RSUs with a market condition to certain executives, amounting to approximately 321,900 stock
options during fiscal 2016 and approximately 327,200 stock options and 70,000 RSUs during fiscal 2015. Of fiscal 2015 grants,
21,540 stock options and 70,000 RSUs were canceled in fiscal 2016 upon the departure of certain executives. The options and
RSUs have a two year vesting and vest between 0% and 200% of the target amount, based on the Company's relative Total
Shareholder Return (TSR) when compared to the TSR of a component of companies of the PHLX Semiconductor Sector Index
over a two year period. TSR is a measure of stock price appreciation plus dividends paid, if any, in the performance period. The
fair values of the options were determined and fixed on the date of grant using a lattice-based option-pricing valuation model,
which incorporates a Monte-Carlo simulation, and considered the likelihood that we would achieve the market condition. Of these
grants with a market condition, approximately 596,600 stock options were outstanding as of December 31, 2016. We incurred
stock compensation expense related to these market condition awards of approximately $0.8 million in fiscal 2016 and
approximately $0.6 million in fiscal 2015.
During fiscal year 2014, we granted approximately 98,600 market-based RSUs in two equal tranches, each of which vest upon
achievement of certain market-based conditions. The fair values of the market-based RSUs were determined and fixed on the
date of grant using a lattice-based option-pricing valuation model, which incorporates a Monte-Carlo simulation, and considered
the likelihood that we would achieve the market-based conditions. Both tranches vested and we incurred total stock
compensation expense related to performance based awards of $0.7 million for the fiscal year ended January 3, 2015.
The following table summarizes the assumptions used in the valuation of stock options and RSUs with a market condition for
fiscal years 2016, 2015 and 2014:
Executive stock options with a market condition
Expected volatility
Risk-free interest rate
Expected term (years)
Dividend yield
Executive RSUs with a market condition
Expected volatility
Risk-free interest rate
Expected term (years)
Dividend yield
Note 19 - Employee Benefit Plans
Qualified Investment Plan
December 31,
2016
46%
1.1%
4.5
—%
n/a
n/a
n/a
n/a
Year Ended
January 2,
2016
44% to 46%
1.4%
4.5
—%
36.9%
0.6%
2.0
—%
January 3,
2015
n/a
n/a
n/a
n/a
53.5%
2.2%
0.2
—%
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. We recorded matching contributions of $0.9 million in each of fiscal 2016 and 2015. No matching
contributions were recorded in fiscal 2014.
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2016 Cash Incentive Plan
On December 21, 2015, upon the recommendation of the Compensation Committee, the Board of Directors of the Company
approved the 2016 Cash Incentive Plan (the “2016 Cash 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 are eligible to participate in the 2016 Cash Plan. Under the 2016 Cash
Plan, individual cash incentive payments for the eligible employees will be based both on Company financial performance, as
measured by achievement of operating income (before incentive plan accruals) and revenue goals within specified ranges
established by the Compensation Committee, and Company performance, as measured by the achievement of personal
management objectives. The Compensation Committee determines the performance of the chief executive officer, the chief
financial officer and other participants based on the achievement of the management objectives established by the
Compensation Committee during the first fiscal quarter of 2016. There was $4.7 million of expense recorded under this plan in
fiscal 2016.
2015 Cash Incentive Plan
On December 4, 2014, upon the recommendation of the Compensation Committee, the Board of Directors of the Company
approved the 2015 Cash Incentive Plan (the “2015 Cash 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 2015 Cash Plan. Under the 2015
Cash Plan, individual cash incentive payments for the eligible employees were 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 determined the performance of the chief executive officer, the chief
financial officer and other participants based on the achievement of the management objectives established by the
Compensation Committee during the first fiscal quarter of 2015. There was $1.0 million of expense recorded under this plan in
fiscal 2015.
2014 Cash Incentive Plan
On February 3, 2014, upon the recommendation of the Compensation Committee, the Board of Directors of the Company
approved the 2014 Cash Incentive Plan (the “2014 Cash 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 2014 Cash Plan. Under the 2014
Cash Plan, individual cash incentive payments for the eligible employees were 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 determined the performance of the chief executive officer, the chief
financial officer and other participants based on the achievement of the management objectives established by the
Compensation Committee during the first fiscal quarter of 2014. There was $11.6 million of expense recorded under this plan in
fiscal 2014.
Note 20 - Contingencies
Legal Matters
In February 2016, we filed a complaint against Technicolor SA and its affiliates in the United States District Court for the Northern
District of California alleging that Technicolor had infringed on certain patents relating to the HDMI specification. Technicolor filed
an answer to our complaint on April 11, 2016, which included various defenses to the alleged patent infringement. In November
2016, Technicolor amended its answer and asserted a counterclaim, alleging that the Company’s action constituted a breach of
the HDMI Founders Agreement to provide licenses on fair, reasonable and non-discriminatory terms. Technicolor seeks
declaratory relief and compensation for the alleged breach. At this stage of the proceedings, we do not have an estimate of the
likelihood or the amount of any financial consequences to us.
On or about January 9, 2017, Lattice, members of our Board, Canyon Bridge Capital Partners, Inc., Canyon Bridge Acquisition
Company, Inc. and Canyon Bridge Merger Sub Inc. were named as defendants in a complaint filed in the United States District
Court for the District of Oregon by an alleged stockholder of the Company in connection with the proposed acquisition of the
Company by Canyon Bridge. The complaint was captioned Paul Parshall, et al. v. Lattice, et al. and alleges violations of federal
securities laws based on alleged deficiencies in the disclosure provided to shareholders regarding the transaction. An additional
complaint was subsequently filed on or about January 27, 2017, naming Lattice and members of our Board, in the United States
district Court for the District of Delaware. This complaint is captioned Robert Sellers, et al. v. Lattice, et al. We believe that we
possess defenses to these claims and intend to vigorously defend this litigation. At this stage of the proceedings, we do not have
an estimate of the likelihood or the amount of any potential exposure to the Company, if any.
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We are 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 FASB
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.
Note 21 - Valuation and Qualifying Accounts
The following table displays the activity related to changes in our valuation and qualifying accounts:
(In thousands)
Fiscal year ended December 31, 2016
Balance at
beginning
of
period
Balance
received
through
acquisition
Charged
(Credit) to
costs and
expenses
Charged to
other
accounts
Settlements
& write-offs
net of
recoveries
Balance at
end
of period
Allowance for deferred taxes
$
252,578
$
— $
7,450
$
659
$
— $
260,687
Allowance for doubtful accounts
Allowance for warranty expense
621
370
—
—
7,362
216
2,284
—
(968)
(234)
9,299
352
$
253,569
$
— $
15,028
$
2,943
$
(1,202) $
270,338
Fiscal year ended January 2, 2016
Allowance for deferred taxes
$
141,215
$
52,481
$
58,658
$
Allowance for doubtful accounts
Allowance for warranty expense
875
81
—
136
(438)
153
224
189
—
$
— $
252,578
(5)
—
621
370
$
142,171
$
52,617
$
58,373
$
413
$
(5) $
253,569
Fiscal year ended January 3, 2015
Allowance for deferred taxes
$
150,528
$
— $
(9,958) $
645
$
— $
141,215
Allowance for doubtful accounts
Allowance for warranty expense
878
—
—
—
—
81
—
—
(3)
—
875
81
$
151,406
$
— $
(9,877) $
645
$
(3) $
142,171
Note 22 - Segment and Geographic Information
Segment Information
As of December 31, 2016, we had one operating segment: the core Lattice business, which includes IP and semiconductor
devices. Qterics, a discrete software-as-a-service business unit, was previously an immaterial operating segment in the Lattice
legal entity structure. In April 2016, we sold Qterics to an unrelated third party for net proceeds of $2.0 million, net of cash sold,
resulting in a gain of $2.6 million. The gain has been included in other income (expense), net for the year ended December 31,
2016 in the Consolidated Statements of Operations.
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Geographic Information
Our revenue by major geographic area based on ship-to location was as follows:
(In thousands)
United States:
China
Europe
Japan
Taiwan
Other Asia
Other Americas
Total foreign revenue
Total revenue
December 31, 2016
Year Ended
January 2, 2016
January 3, 2015
$
51,752
12%
$
33,677
8%
$
30,848
8%
146,645
59,835
49,080
31,322
78,046
10,374
375,302
34
14
12
7
18
3
88
147,688
55,596
44,067
31,181
85,598
8,159
372,289
36
14
11
8
21
2
92
159,155
59,041
31,207
6,691
69,778
9,407
335,279
43
16
9
2
19
3
92
$
427,054
100% $
405,966
100% $
366,127
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.
Our property and equipment, net by country at the end of each period was as follows:
December 31, 2016
January 2, 2016
(In thousands)
United States
China
Philippines
Taiwan
India
Japan
Other
$
30,532
$
10,617
4,928
2,310
215
637
242
25,615
14,998
3,948
3,677
1,470
1,211
933
26,237
51,852
Total foreign property and equipment, net
Total property and equipment, net
$
18,949
49,481
$
Revenue by Distributors
Our largest customers are often distributors and sales through distributors have historically made up a significant portion of our
total revenue. Revenue attributable to resales of products by our primary distributors are as follows:
Arrow Electronics Inc.
Weikeng Group
All others
All sell-through distributors
% of Total Revenue
2016
2015
2014
24%
22
15
61%
20%
12
13
45%
24%
10
11
45%
Orders from our sell-through distributors are initially recorded at published list prices; however, for a majority of our sales, the
final selling price is determined at the time of resale and in accordance with a distributor price agreement. For this reason, we do
not recognize revenue until products are resold by sell-through distributors to an end customer. In certain circumstances, we
allow sell-through distributors to return unsold products. At times, we protect our sell-through distributors against reductions in
published list prices.
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Note 23 - Quarterly Financial Data (Unaudited)
A summary of the Company's consolidated quarterly results of operations is as follows:
2016
2015 *
(In thousands, except per share data)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Revenue
Gross margin
Restructuring charges
$118,108
$113,225
$ 99,209
$ 96,512
$101,194
$109,715
$106,460
$ 88,597
63,480
67,424
951
317
58,426
2,568
57,104
5,431
54,102
3,459
59,849
6,818
58,126
4,068
47,832
4,894
Net loss
$ (8,164) $ (12,414) $ (13,810) $ (19,711) $ (45,454) $ (24,862) $ (35,570) $ (53,347)
Net loss per share - basic
and diluted
$
(0.07) $
(0.10) $
(0.12) $
(0.17) $
(0.38) $
(0.21) $
(0.30) $
(0.46)
* Our results for the year ended January 2, 2016 include the results of Silicon Image for the approximately 10-month period from
March 11, 2015 through January 2, 2016. Our results for the year ended December 31, 2016 fully include the results of Silicon
Image. The first quarter of fiscal 2015 ended on April 4, 2015.
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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 (the
Company) as of December 31, 2016 and January 2, 2016, and the related consolidated statements of operations, comprehensive
(loss) income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We 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 the Company as of December 31, 2016 and January 2, 2016, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 1, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
Portland, Oregon
March 1, 2017
/s/ KPMG LLP
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Lattice Semiconductor Corporation:
We have audited Lattice Semiconductor Corporation and subsidiaries' (the Company) internal control over financial reporting as of
December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December
31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of December 31, 2016 and January 2, 2016, and the related consolidated
statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the years in the three-
year period ended December 31, 2016, and our report dated March 1, 2017 expressed an unqualified opinion on those
consolidated financial statements.
Portland, Oregon
March 1, 2017
/s/ KPMG LLP
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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
Based on management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of
the end of the period covered by this annual report, our principal executive officer and principal financial officer have concluded
that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that
we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
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, 2016. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this assessment, management concluded
that, as of December 31, 2016, the Company's internal control over financial reporting was effective.
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, 2016.
Changes in Internal Control over Financial Reporting
On March 10, 2015, we acquired Silicon Image, which had operated under its own set of systems and internal controls.
Management excluded the Silicon Image control environment from its assessment of internal controls over financial reporting for
the fiscal year ended January 2, 2016, as allowed in the year of acquisition. For the current fiscal year ended December 31,
2016, our financial reporting control environment includes Silicon Image's systems and much of its continuing control
environment, which we are maintaining until we incorporate those processes into our planned implementation of a new
company-wide enterprise resource planning ("ERP") system in fiscal 2017. We are currently preparing for updates to our control
environment in anticipation of this integration and ERP transition.
Other than as described above, 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 2016 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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Table of Contents
PART III
Certain information required by Part III is incorporated by reference from our definitive proxy statement (the “Proxy Statement”)
for the 2017 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.
Item 10. Directors, Executive Officers and Corporate
Governance
Information regarding our directors that is required by this item is incorporated by reference from the information contained under
the captions “Proposal 1: Election of Directors” and “Corporate Governance and Other Matters--Board Meetings and
Committees” in the Proxy Statement. Information regarding our executive officers that is required by this item is incorporated by
reference from the information contained under the caption "Proposal 2: Executive Compensation--The Executive Officers of the
Company” in the Proxy Statement.
Information regarding Section 16(a) reporting compliance that is required by this item is incorporated by reference from the
information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
We have adopted a Code of Conduct that applies to all of our employees, including our principal executive officer, principal
financial officer, principal accounting officer, and persons performing similar functions. The Code of Conduct is posted on our
website at www.latticesemi.com. There were no changes to our code of conduct during fiscal 2016. Amendments to the Code of
Conduct 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 are 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 January 2, 2016. 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 April
20, 2016.
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,” "Director 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 captions “Security Ownership of Certain Beneficial Owners and Management” and "Equity
Compensation Plan Information" in the Proxy Statement is incorporated herein by reference.
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Item 13. Certain Relationships and Related Transactions,
and Director Independence
Brian Beattie, the Executive Vice President, Business Operations, and Chief Administrative Officer of Synopsys, Inc. was
appointed to our Board effective July 3, 2016. During the years ended December 31, 2016, January 2, 2016, and January 3,
2015, we paid approximately $2.5 million, $2.4 million, and $1.6 million, respectively, to Synopsys Inc. for new and renewed
license arrangements. Subsequent to July 3, 2016, we paid Synopsys $1.4 million. Accounts payable to Synopsys was less than
$0.1 million at December 31, 2016. Mr. Beattie received no direct compensation from the transactions. In addition, 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.
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PART IV
Item 15. Exhibits.
(a) List of Documents Filed as Part of this Report
(1) All financial statements.
The following financial statements are filed as part of this report under Item 8.
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
50
51
52
53
54
56
All other schedules have been omitted because the required information is included in the Consolidated Financial Statements or
the notes thereto, or is not applicable or required.
(2) Exhibits.
Exhibit
Number
Description
2.1
2.2
3.1
3.2
10.1*
10.2*
10.3*
10.4*
Agreement and Plan of Merger, dated January 26, 2015, by and among Lattice Semiconductor Corporation,
Cayabyab Merger Company and Silicon Image, Inc. (Incorporated by reference to Exhibit 2.1 filed with the
Company’s Current Report on Form 8-K filed January 27, 2015).
Agreement and Plan of Merger, dated November 3, 2016, by and among Lattice Semiconductor Corporation,
Canyon Bridge Acquisition Company, Inc. and Canyon Bridge Merger Sub, Inc. (Incorporated by reference to
Exhibit 2.1 filed with the Company’s Current Report on Form 8-K filed November 3, 2016).
The Company’s Restated Certificate of Incorporation filed, as amended on June 4, 2009 (Incorporated by
reference to Exhibit 3.1 filed with the Company's Current Report on Form 8-K filed June 4, 2009).
The Company’s Bylaws, as amended as of November 3, 2016.
Lattice Semiconductor Corporation Employee Stock Purchase Plan, as amended (incorporated by reference to
Appendix B to the Company's Definitive Proxy Statement on Schedule 14A for the 2007 Annual Meeting of
Stockholders filed on April 5, 2007).
Lattice Semiconductor Corporation 1996 Stock Incentive Plan, as amended, and Related Form of Option
Agreement (Incorporated by reference to Exhibit 10.24 filed with the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 2012).
2001 Outside Directors' Stock Option Plan, as amended and restated (Incorporated by reference to Exhibit 10.33
filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2012).
2001 Stock Plan, as amended, and related Form of Option Agreement (Incorporated by reference to Exhibit
10.34 filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2012).
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Table of Contents
Exhibit
Number
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
Description
Form of Indemnification Agreement executed by each director and executive officer of the Company and certain
other officers and employees of the Company and its subsidiaries (Incorporated by reference to Exhibit 10.41
filed with the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004).
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).
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).
Employment Agreement between Lattice Semiconductor Corporation and Byron Milstead effective as of
December 30, 2008 (Incorporated by reference to Exhibit 10.66 filed with the Company's Annual Report on Form
10-K filed for the fiscal year ended January 3, 2009).
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 Quarterly Report on
Form 10-Q for the quarter ended October 2, 2010).
Lattice Semiconductor Corporation 2012 Employee Stock Purchase Plan (incorporated by reference to Annex 1
to the Company's Definitive Proxy Statement on Schedule 14A for the 2012 Annual Meeting of Stockholders filed
on April 12, 2012).
Lattice Semiconductor Corporation Amended 2011 Non-Employee Director Equity Incentive Plan (Incorporated
by reference to Appendix B to the Company's Definitive Proxy Statement on Schedule 14A for the 2014 Annual
Meeting of Stockholders filed on March 20, 2014).
Lattice Semiconductor Corporation 2013 Incentive Plan (Incorporated by reference to Appendix A to the
Company's Definitive Proxy Statement on Schedule 14A for the 2014 Annual Meeting of Stockholders filed on
March 20, 2014).
Office Lease, effective as of October 21, 2014, between 555 SW Oak, LLC and Lattice Semiconductor
Corporation (Incorporated by reference to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed
October 27, 2014).
Lattice Semiconductor Corporation 2016 Cash Incentive Plan
Employment Agreement between Lattice Semiconductor Corporation and Glen Hawk dated November 6, 2015
(Incorporated by reference to Exhibit 10.79 filed with the Company’s Annual Report on Form 10-K filed March 2,
2016).
Letter Agreement between Lattice Semiconductor Corporation, Canyon Bridge Acquisition Company, Inc., and
Darin G. Billerbeck, dated November 3, 2016 (Incorporated by reference to Exhibit 10.1 filed with the Company’s
Current Report on Form 8-K filed November 4, 2016).
Employment Agreement between Lattice Semiconductor Corporation and Max Downing, dated November 3,
2016 (Incorporated by reference to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K filed
November 4, 2016).
Letter Agreement between Lattice Semiconductor Corporation, Canyon Bridge Acquisition Company, Inc., and
Max Downing, dated November 3, 2016 (Incorporated by reference to Exhibit 10.3 filed with the Company’s
Current Report on Form 8-K filed November 4, 2016).
Letter Agreement between Lattice Semiconductor Corporation, Canyon Bridge Acquisition Company, Inc., and
Glen Hawk, dated November 3, 2016 (Incorporated by reference to Exhibit 10.4 filed with the Company’s Current
Report on Form 8-K filed November 4, 2016).
Letter Agreement between Lattice Semiconductor Corporation, Canyon Bridge Acquisition Company, Inc., and
Byron Milstead, dated November 3, 2016 (Incorporated by reference to Exhibit 10.5 filed with the Company’s
Current Report on Form 8-K filed November 4, 2016).
90
Table of Contents
Exhibit
Number
Description
21.1
23.1
31.1
31.2
32.1
32.2
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
*
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.
91
Table of Contents
SIGNATURES
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.
LATTICE SEMICONDUCTOR CORPORATION
(Registrant)
By:
/s/ Max Downing
Max Downing
Chief Financial Officer
(Duly Authorized Officer and Principal Financial and Accounting Officer)
Date:
March 1, 2017
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Darin G. Billerbeck and Max Downing, 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
Title
Date
Principal Executive Officer
/s/ Darin G. Billerbeck
March 1, 2017
Darin G. Billerbeck
President, Chief Executive Officer and Director
Principal Financial and Accounting Officer
Directors
/s/ Max Downing
Max Downing
/s/ Robin Abrams
Robin Abrams
/s/ Brian Beattie
Brian Beattie
/s/ John Bourgoin
John Bourgoin
/s/ Robert Herb
Robert Herb
/s/ Mark Jensen
Mark Jensen
/s/ Jeff Richardson
Jeff Richardson
/s/ Fred Weber
Fred Weber
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
March 1, 2017
Chief Financial Officer
Director
Director
Director
Director
Director
Director
Director
92
Exhibit 3.2
BYLAWS
OF
LATTICE SEMICONDUCTOR CORPORATION
(As amended as of November 3, 2016)
TABLE OF CONTENTS
ARTICLE I CORPORATE OFFICES
1.1
1.2
REGISTERED OFFICE
OTHER OFFICES
ARTICLE II MEETINGS OF STOCKHOLDERS
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14
2.15
2.16
2.17
PLACE OF MEETINGS
ANNUAL MEETING
SPECIAL MEETING
NOTICE OF STOCKHOLDERS’ MEETINGS
MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
NOTICE BY ELECTRONIC TRANSMISSION
QUORUM
ADJOURNED MEETING; NOTICE
ORGANIZATION
INSPECTORS OF ELECTION
VOTING
WAIVER OF NOTICE
STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
PROXIES
LIST OF STOCKHOLDERS ENTITLED TO VOTE
NOMINATIONS AND STOCKHOLDER BUSINESS
ARTICLE III DIRECTORS
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
3.14
POWERS
NUMBER OF DIRECTORS
ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
RESIGNATION AND VACANCIES
PLACE OF MEETINGS; MEETINGS BY TELEPHONE
REGULAR MEETINGS
SPECIAL MEETINGS; NOTICE
QUORUM
WAIVER OF NOTICE
BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
FEES AND COMPENSATION OF DIRECTORS
APPROVAL OF LOANS TO EMPLOYEES
REMOVAL OF DIRECTORS
EXECUTIVE SESSIONS
-i-
Page
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1
1
1
1
1
2
2
2
3
3
4
4
5
5
6
6
6
7
7
7
9
9
9
10
10
11
11
11
12
12
12
12
13
13
13
TABLE OF CONTENTS
(Continued)
ARTICLE IV COMMITTEES
4.1
4.2
COMMITTEES OF DIRECTORS
MEETINGS AND ACTION OF COMMITTEES
ARTICLE V OFFICERS
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12
5.13
5.14
OFFICERS
APPOINTMENT OF OFFICERS
SUBORDINATE OFFICERS
REMOVAL AND RESIGNATION OF OFFICERS
VACANCIES IN OFFICES
CHAIRMAN OF THE BOARD
CHIEF EXECUTIVE OFFICER
PRESIDENT
VICE PRESIDENT
SECRETARY
CHIEF FINANCIAL OFFICER
ASSISTANT SECRETARY
ASSISTANT TREASURER
AUTHORITY AND DUTIES OF OFFICERS
ARTICLE VI INDEMNITY
6.1
6.2
6.3
6.4
6.5
6.6
6.7
RIGHT TO INDEMNIFICATION
RIGHT TO ADVANCEMENT OF EXPENSES
RIGHT OF INDEMNITEE TO BRING SUIT
NON-EXCLUSIVITY OF RIGHTS
INSURANCE
INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS OF THE CORPORATION
DEFINITIONS
ARTICLE VII RECORDS AND REPORTS
7.1
7.2
7.3
MAINTENANCE AND INSPECTION OF RECORDS
INSPECTION BY DIRECTORS
REPRESENTATIONS OF SHARES OF OTHER CORPORATIONS
ARTICLE VIII GENERAL MATTERS
8.1
8.2
8.3
8.4
8.5
8.6
8.7
CHECKS
EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
STOCK CERTIFICATES; PARTLY PAID SHARES
SPECIAL DESIGNATION ON CERTIFICATES
LOST CERTIFICATES
CONSTRUCTION; DEFINITIONS
DIVIDENDS
-ii-
Page
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13
14
14
14
14
14
14
15
15
15
15
16
16
16
17
17
17
17
17
18
18
19
20
20
20
22
22
22
22
23
23
23
23
24
24
24
24
TABLE OF CONTENTS
(Continued)
8.8
8.9
8.10
8.11
8.12
FISCAL YEAR
SEAL
TRANSFER OF STOCK
STOCK TRANSFER AGREEMENTS
REGISTERED STOCKHOLDERS
ARTICLE IX AMENDMENTS
ARTICLE X FORUM OF ADJUDICATION OF CERTAIN DISPUTES
-iii-
Page
25
25
25
25
25
26
27
BYLAWS
OF
LATTICE SEMICONDUCTOR CORPORATION
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be fixed in the certificate of incorporation of the corporation.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at such other places both within and without the State of
Delaware as the board of directors may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of
directors. The board of directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may
instead be held solely by means of remote communication in accordance with the General Corporation Law of Delaware. In the
absence of any such designation or determination, stockholders’ meetings shall be held at the principal executive office of the
corporation.
2.2 ANNUAL MEETING
An annual meeting of the stockholders shall be held each year on such date and at such time as designated by the board
of directors for the purpose of electing directors and for the transaction of such other business as may properly come before the
meeting.
-1-
2.3 SPECIAL MEETING
(a) Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by the General
Corporation Law of Delaware or by the certificate of incorporation, may be called by a majority of the total number of authorized
directors of the board of directors, the chairman of the board of directors or the chief executive officer.
(b) If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing,
specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered
mail or by telegraphic or other facsimile transmission to the chairman of the board of directors, the chief executive officer, or the
secretary of the corporation. No business may be transacted at a special meeting otherwise than specified in the notice. The
board of directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five
(35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon determination of the time
and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Sections 2.4, 2.5 and 2.6 of these bylaws. If the notice is not given within sixty (60) days after
the receipt of the request, the person or persons requesting the meeting may set the time and place of the meeting and give the
notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of
stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS’ MEETINGS
All notices of meetings of stockholders shall be sent or otherwise given in accordance with Section 2.5 or Section 2.6 of
these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to
vote at such meeting. The notice shall specify the place, if any, date, and hour of the meeting, the means of remote
communication, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such
meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Any previously
scheduled meeting of the stockholders may be postponed, and (unless the certificate of incorporation otherwise provides) any
special meeting of the stockholders may be cancelled, by resolution of the board of directors, upon public notice given prior to
the date previously scheduled for such meeting of stockholders.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Notice of any meeting of stockholders shall be given either personally, by mail or, subject to Section 2.6 of these bylaws,
by electronic transmission. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the
stockholder at the address of that stockholder appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. If no address is known, such notice may be sent to the principal executive office of the
corporation. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or, if
electronically transmitted, as provided in Section 2.6 of these bylaws. An affidavit of the secretary or an assistant secretary or of
the transfer agent or other agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
-2-
2.6 NOTICE BY ELECTRONIC TRANSMISSION
Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders
given by the corporation under any provision of the General Corporation Law of Delaware, the certificate of incorporation or
these bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice
is given. Any such consent shall be revocable by the stockholder by written notice to the corporation. Any such consent shall be
deemed revoked if (a) the corporation is unable to deliver by electronic transmission two (2) consecutive notices given by the
corporation in accordance with such consent, and (b) such inability becomes known to the secretary or an assistant secretary of
the corporation, the transfer agent or other person responsible for the giving of notice; provided, however, that the inadvertent
failure to treat such inability as a revocation shall not invalidate any meeting or other action.
Notice given pursuant to the immediately preceding paragraph shall be deemed given (a) if by facsimile
telecommunication, when directed to a number at which the stockholder has consented to receive notice, (b) if by electronic
mail, when directed to an electronic mail address at which the stockholder has consented to receive notice, (c) if by a posting on
an electronic network together with a separate notice to the stockholder of such specific posting, upon the later of (i) such
posting, and (ii) the giving of such separate notice, and (d) if by any other form of electronic transmission, when directed to the
stockholder. An affidavit of the secretary or assistant secretary, the transfer agent or other agent of the corporation that the notice
has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated
therein.
For purposes of these bylaws, “electronic transmission” means any form of communication, not directly involving the
physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and
that may be directly reproduced in paper form by such a recipient through an automated process.
2.7 QUORUM
The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise
provided by the General Corporation Law of Delaware or by the certificate of incorporation. If, however, such quorum is not
present or represented at any meeting of the stockholders, then either (i) the chairman of the meeting or (ii) the stockholders
holding a majority of the shares entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn
the meeting from time to time, without notice other than announcement at the meeting unless otherwise required by these
bylaws, until a quorum is present or represented. At such adjourned meeting at which a quorum was initially present or
represented, any business may be transacted that might have been transacted at the meeting as originally noticed
notwithstanding the withdrawal of enough stockholders to leave less than a quorum if any action is taken by a majority of the
required quorum for that meeting.
When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in
person or represented by proxy shall decide any question properly brought before such meeting, unless the question is one
upon which by express provision of the General Corporation Law of Delaware or of the certificate of incorporation, a different
vote is required in which case such express provision shall govern and control the decision of the question.
If a quorum is initially present, the stockholders may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum, if any action taken is approved by a majority of the stockholders
initially constituting the quorum (or such other vote as is required by express provision of the General Corporation Law of
Delaware or the certificate of incorporation).
-3-
2.8 ADJOURNED MEETING; NOTICE
Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the
meeting or by the vote of a majority of the shares casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, if any, notice need not be given of the adjourned meeting if the time, place, if any, thereof and the means of remote
communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such
adjourned meeting, are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation
may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote at the meeting.
2.9 ORGANIZATION
Meetings of stockholders shall be presided over by: (i) the chairman of the board of directors, if any; (ii) in the absence of
the chairman of the board of directors, the chief executive officer, if any; or (iii) in the absence of the foregoing persons, a
chairman of the meeting, which chairman must be an officer or director of the corporation, designated by the board of directors.
The secretary or in his or her absence an assistant secretary or in the absence of the secretary and all assistant secretaries a
person whom the chairman of the meeting shall appoint shall act as secretary of the meeting and keep a record of the
proceedings thereof.
The board of directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of
stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the board of
directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and
procedures and to do all such acts as, in the judgment of the chairman of the meeting, are necessary, appropriate or convenient
for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such
meeting to stockholders of record of the corporation and their duly authorized and constituted proxies, and such other persons
as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations
on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting
and matters which are to be voted on by ballot. Unless and to the extent determined by the board of directors or the chairman of
the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure.
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2.10 INSPECTORS OF ELECTION
Before any meeting of stockholders, the board of directors may appoint an inspector or inspectors of election to act at the
meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may, and on the request
of any stockholder or a stockholder’s proxy shall, appoint an inspector or inspectors of election to act at the meeting. The
number of inspectors shall be either one (1) or three (3), and may include individuals who serve the corporation in other
capacities, including without limitation as officers, employees or agents. If inspectors are appointed at a meeting pursuant to the
request of one (1) or more stockholders or proxies, then the holders of a majority of the voting power of shares or their proxies
present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. The board of directors may
designate one or more persons as alternate inspectors to replace any inspector who fails to act. If any person appointed as
inspector fails to appear or fails or refuses to act, and if no alternative inspector has been designated by the board or if so
designated fails to appear or fails or refuses to act, then the chairman of the meeting may, and upon the request of any
stockholder or a stockholder’s proxy shall, appoint a person to fill that vacancy. The inspectors shall have the duties prescribed
pursuant to Section 231 of the General Corporation Law of Delaware. The inspectors shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as is practical. If there are three (3) inspectors, the decision, act or
certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the
inspectors is prima facie evidence of the facts stated therein.
2.11 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of
Section 2.14 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware
(relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation or by the General Corporation Law of Delaware,
each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder.
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2.12 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the
certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, or a waiver by
electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice at such meeting, except when the
person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the stockholders need be specified in any written waiver of notice or any waiver by electronic
transmission unless so required by the certificate of incorporation or these bylaws.
2.13 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
No action shall be taken by the stockholders except at an annual or special meeting of stockholders called in accordance
with these bylaws, and no action shall be taken by stockholders by written consent.
2.14 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the board of directors. The record date shall not be more than sixty (60) nor less than ten
(10) days before the date of a meeting of stockholders, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held.
(ii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on
which the board of directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting.
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2.15 PROXIES
Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for the
stockholder by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall
be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed
signed if the stockholder’s name is placed on the proxy (whether by manual signature, typewriting, telegraphic, facsimile,
electronic transmission or otherwise) by the stockholder or the stockholder’s authorized officer, director, employee or agent. The
revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the
General Corporation Law of Delaware.
A proxy is not revoked by the death or incapacity of the maker unless, before the vote is counted, written notice of such
death or incapacity is received by the corporation.
2.16 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before
every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered in the name of each stockholder. The
corporation shall not be required to include electronic mail addresses or other electronic contact information on such list. Such
list shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least ten
(10) days prior to the meeting (i) on a reasonably accessible electronic network, provided that the information required to gain
access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours, at the principal executive
office of the corporation. The method by which the corporation makes the list available shall be determined by the corporation in
its sole discretion. In the event that the corporation determines to make the list available on an electronic network, the
corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. If the
meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote
communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a
reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of
the meeting. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the
number of shares held by each of them.
2.17 NOMINATIONS AND STOCKHOLDER BUSINESS
(a) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought
before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the board of directors, (ii) otherwise properly brought before the meeting
by or at the direction of the board of directors, or (iii) otherwise properly brought before the meeting by a stockholder. For
business to be properly brought before a stockholders’ meeting by a stockholder pursuant to clause (iii) of the preceding
sentence, the stockholder must have given timely notice thereof in writing to the secretary of the corporation and such other
business must otherwise be a proper matter for stockholder action. To be timely for purposes of advance notice requirements, a
stockholder’s proposal must be delivered to the secretary at the principal executive office of the corporation not less than ninety
(90) nor more than one hundred twenty (120) days in advance of the first anniversary of the date the corporation’s proxy
statement was first mailed to stockholders for the preceding year’s annual meeting of stockholders; provided, however, that in
the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more
than thirty (30) days from the date of the prior year’s meeting, notice by the stockholder to be timely must be so received not
later than the close of business on the later of one hundred twenty (120) calendar days in advance of such meeting and ten (10)
calendar days following the date on which public announcement of the date of such meeting is first made by the corporation. In
no event shall the public announcement of an adjournment of a stockholders’ meeting commence a new time period for the
giving of a stockholder’s notice as described above. A stockholder’s notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting: (A) a brief description of the business desired to be brought before the
meeting; (B) the name and address, as they appear on the corporation’s books, of the stockholder proposing such business;
(C) the class and number of shares of the corporation which are owned beneficially by such stockholder; (D) any material
interest of the stockholder in such business; and (E) any other information that is required to be provided by the stockholder
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (or any successor thereto) (the “Exchange
Act”) in such stockholder’s capacity as a proponent of a stockholder proposal. Notwithstanding anything in these bylaws to the
contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this
paragraph (a). The chairman of the meeting shall, if the facts warrant, determine that business was not properly brought before
the meeting in accordance with the provisions of this paragraph (a). If the chairman of the meeting should so determine, the
chairman shall so declare at the meeting and any such business not properly brought before the meeting shall not be transacted.
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(b) Only persons who are nominated in accordance with procedures set forth in this paragraph (b) shall be eligible for
election as directors at a stockholders’ meeting. Nominations of persons for election to the board of directors may be made at an
annual meeting of stockholders by or at the direction of the board of directors or by any stockholder of the corporation entitled to
vote for the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (b). Such
nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in
writing to the secretary of the corporation in accordance with paragraph (a) of this Section 2.17. Such stockholder’s notice shall
set forth: (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (A) the name,
age, business address and residence address of such person, (B) the principal occupation or employment of such person,
(C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all
arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating
to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each
case pursuant to Regulation 14A under the Exchange Act (including without limitation such person’s written consent to being
named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving the
notice, the information required to be provided pursuant to paragraph (a) of this Section 2.17. At the request of the board of
directors, any person nominated by a stockholder for election as a director shall furnish to the secretary of the corporation that
information required to be set forth in a stockholder’s notice of nomination which pertains to the nominee. No person shall be
eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this
paragraph (b). The chairman of the meeting shall, if the facts warrant, determine that a nomination was not made in accordance
with the procedures prescribed by the bylaws. If the chairman of the meeting should so determine, the chairman shall so declare
to the meeting and the defective nomination shall be disregarded.
(c) For purposes of this Section 2.17, “public announcement” shall mean disclosure in a press release reported by the Dow
Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation
with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
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ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation
or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of
directors.
3.2 NUMBER OF DIRECTORS
The board of directors shall consist of one or more members, the number thereof to be determined from time to time by
resolution of the board of directors. The number of authorized directors also may be modified from time to time by amendment of
this Section 3.2 in accordance with the provisions of Article IX hereof. Except as provided in Section 3.3 and Section 3.4 of these
bylaws, and subject to the rights of the holders of any outstanding series of Preferred Stock of the corporation, the directors shall
be elected by the stockholders at their annual meeting in each year. If for any cause, the directors shall not have been elected at
an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that
purpose in the manner provided in these bylaws.
No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term
of office expires.
A majority of the corporation’s directors shall be independent, as that term is defined in the corporation’s then current
Corporate Governance Policies and in the then current rules and regulations of the national securities exchange upon which the
corporation’s stock is then listed or the national securities association on whose automated quotation system the corporation’s
stock is then listed; provided that if at the time of determining the independence of one or more directors the corporation does
not have Corporate Governance Policies in effect and the corporation’s stock is not listed on any national securities exchange or
the automated quotation system of a national securities association, then the term independent shall be as defined by applicable
rules and regulations of the Securities Exchange Commission or such other method as determined by the board of directors.
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3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
(a) Subject to the rights of the holders of any outstanding series of Preferred Stock of the corporation, (i) at the 2010
annual meeting of stockholders, the directors whose terms expire at that meeting shall be elected to hold office for a one-year
term expiring at the 2011 annual meeting of stockholders, (ii) at the 2011 annual meeting of stockholders, the directors whose
terms expire at that meeting shall be elected to hold office for a one-year term expiring at the 2012 annual meeting of
stockholders, and (iii) at the 2012 annual meeting of stockholders and each annual meeting of stockholders thereafter, all
directors shall be elected to hold office for a one-year term expiring at the next annual meeting of stockholders.
(b) Subject to Section 3.4, each director, including a director elected to fill a vacancy, shall hold office until his or her
successor is elected and qualified or until his or her earlier death, retirement, resignation, disqualification or removal.
(c) Elections of directors shall be by written ballot, unless otherwise provided in the certificate of incorporation; if authorized
by the board of directors, such requirement of a written ballot shall be satisfied by a ballot submitted by electronic transmission,
provided that any such electronic transmission must be either set forth or be submitted with information from which it can be
determined that the electronic transmission was authorized by the stockholder or proxy holder.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon notice given in writing or by electronic transmission to the corporation. When one
or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including
those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the
filling of other vacancies.
Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all
of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although
less than a quorum, or by a sole remaining director. A director elected to fill a vacancy or a newly created directorship must stand
for election at the first annual meeting following the director’s initial election, and shall hold office until such annual meeting and
until his or her successor shall be duly elected and qualified or until his or her earlier death, retirement, resignation,
disqualification or removal.
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3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of
Delaware.
Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any
committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by
means of conference telephone or similar communications equipment by means of which all persons participating in the meeting
can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to
time be determined by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors may be called for any purpose or purposes at any time by the chairman of the
board of directors, the chief executive officer or by one-third or more of the authorized number of directors.
Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by
mail or electronic transmission, charges prepaid, addressed to each director at that director’s address, facsimile number,
electronic mail address or other location as is shown on the records of the corporation or given by the director to the corporation
for the purpose of notice. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by telephone or electronic transmission, it shall be
given personally or by telephone or other electronic transmission at least twenty-four (24) hours before the time of the holding of
the meeting. All notices given by electronic transmission shall be deemed to have been given when directed to the electronic
mail address, facsimile number or other location as is shown on the records of the corporation or given by the director to the
corporation for the purpose of notice. Any oral notice given personally or by telephone may be communicated either to the
director directly or by voice recording or to a person whom the person giving the notice has reason to believe will promptly
communicate it to the director. If the meeting is to be held at the principal executive office of the corporation, the notice need not
specify the place of the meeting. Moreover, a notice of special meeting need not state the purpose of such meeting, and, unless
indicated in the notice thereof, any and all business may be transacted at a special meeting.
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3.8 QUORUM
At all meetings of the board of directors, no less than one-third of the authorized number of directors shall constitute a
quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the board of directors, except as may be otherwise specifically provided by the General Corporation
Law of Delaware or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting,
until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the
certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, or a waiver by
electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver
of notice or any waiver by electronic transmission unless so required by the certificate of incorporation or these bylaws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken
at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the
board of directors or committee, as the case may be, consent thereto in writing or by electronic transmission and the writing or
writings or electronic transmission or transmissions are filed with the minutes of proceedings of the board of directors or
committee, as the case may be.
3.11 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors or a committee thereof
shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance of
each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a
stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees of the board of directors may be allowed, and the
board of directors shall have the authority to fix, like compensation for attending committee meetings.
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3.12 APPROVAL OF LOANS TO EMPLOYEES
Subject to the provisions of the Sarbanes-Oxley Act of 2002 and other applicable law, the corporation may lend money to,
or guarantee any obligation of, or otherwise assist any employee who is not an officer of the corporation or any of its
subsidiaries, including any employee who is a director of the corporation or any of its subsidiaries, whenever, in the judgment of
the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or
other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors
shall approve, including, without limitation, a pledge of shares of stock of the corporation.
3.13 REMOVAL OF DIRECTORS
Any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors.
3.14 EXECUTIVE SESSIONS
At every meeting of the board of directors, the chairman of the board of directors (if a chairman is then in office and is
independent, as defined in Section 3.2 above) or the lead independent director (if there is no chairman then in office or the
chairman is not independent) will preside over executive sessions at which non-independent directors are not present.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may designate one or more committees, each committee to consist of one or more of the directors
of the corporation. The board of directors may designate one or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member
of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of the board of directors to act at the
meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of
the board of directors or in these bylaws, shall have and may exercise all the powers and authority of the board of directors in
the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or authority to (i) approve or adopt, or recommend to the
stockholders, any action or matter expressly required by the General Corporation Law of Delaware to be submitted to
stockholders for approval, or (ii) adopt, amend or repeal any bylaw of the corporation.
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4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken in accordance with, the following provisions
of these bylaws: Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting), with
such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings of committees may also be called by resolution
of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, if any,
who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of
any committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a chief executive officer, one or more vice presidents, a secretary, and a chief
financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board of directors, a
president, one or more assistant vice presidents, assistant secretaries, assistant treasurers, and any such other officers as may
be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
5.2 APPOINTMENT OF OFFICERS
The board of directors shall appoint the officers of the corporation, except (i) such officers as may be appointed in
accordance with the provisions of Section 5.3 of these bylaws and (ii) if the board of directors determines in its discretion to have
a chairman of the board of directors, the chairman of the board of directors shall be appointed by majority vote of the
independent directors.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the chief executive officer to appoint, such other officers and agents as
the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or
without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or,
except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by delivering notice of his or her resignation in writing or by electronic transmission to
the corporation. Any resignation shall take effect at the date of the receipt of the notice of resignation or at any later time
specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary
to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the
officer is a party.
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5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled as provided under Section 5.2 or Section 5.3 of these
bylaws.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board of directors, if such an officer be elected, shall, if present, preside at meetings of the board of
directors and exercise and perform such other powers and duties as may from time to time be assigned to him or her by the
board of directors or as may be prescribed by these bylaws. If there is no chief executive officer, then the chairman of the board
shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of
these bylaws.
5.7 CHIEF EXECUTIVE OFFICER
Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board of
directors, if there be such an officer, the chief executive officer shall, subject to the control of the board of directors, have general
supervision, direction, and control of the business and the officers of the corporation. In the absence or nonexistence of a
chairman of the board of directors, the chief executive officer shall preside at all meetings of the board of directors. The chief
executive officer shall have the general powers and duties of management usually vested in the office of chief executive officer
of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws.
5.8 PRESIDENT
In the absence or disability of the chief executive officer, the president, if any, shall perform all the duties of the chief
executive officer. When acting as the chief executive officer, the president shall have all the powers of, and be subject to all the
restrictions upon, the chief executive officer. The president shall have such other powers and perform such other duties as from
time to time may be prescribed for him or her by the board of directors, these bylaws, the chief executive officer or the chairman
of the board of directors.
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5.9 VICE PRESIDENT
In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of
directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and
when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the
board of directors, these bylaws, the chief executive officer, the president or the chairman of the board of directors.
5.10 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the
board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and
stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors’ meetings or committee meetings, the number of
shares present or represented at stockholders’ meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the
corporation’s transfer agent or registrar, as determined by resolution of the board of directors, a stock ledger, or a duplicate stock
ledger, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for
cancellation.
The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors
required to be given by the General Corporation Law of Delaware or by these bylaws. The secretary shall keep the seal of the
corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be
prescribed by the board of directors or by these bylaws.
5.11 CHIEF FINANCIAL OFFICER
The chief financial officer shall be the treasurer of the corporation, and shall keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation,
including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The
books of account shall at all reasonable times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with
such depositaries as may be designated by the board of directors. The chief financial officer shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the chief executive officer and directors, whenever they
request it, an account of all of his or her transactions as chief financial officer and of the financial condition of the corporation,
and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws.
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5.12 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the board of
directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the
event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such
other duties and have such other powers as the board of directors may from time to time prescribe.
5.13 ASSISTANT TREASURER
The assistant treasurer, or, if there is more than one, the assistant treasurers, in the order determined by the board of
directors (or if there be no such determination, then in the order of their election), shall, in the absence of the chief financial
officer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the chief financial
officer and shall perform such other duties and have such other powers as the board of directors may from time to time
prescribe.
5.14 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and
perform such duties in the management of the business of the corporation as may be designated from time to time by the board
of directors.
ARTICLE VI
INDEMNITY
6.1 RIGHT TO INDEMNIFICATION
Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative (collectively, a “Proceeding”), by reason of the fact that he or
she, or a person of whom he or she is the legal representative, is or was a director of the corporation (or any predecessor), or is
or was serving at the request of the corporation (or any predecessor) as a director of another corporation or of a partnership,
joint venture, trust or other enterprise (or any predecessor of such entities), including service with respect to an employee benefit
plan maintained or sponsored by the corporation (or any predecessor) (collectively, an “Indemnitee”), whether the basis of such
Proceeding is alleged action in an official capacity as a director or in any other capacity while serving as a director, shall be
indemnified and held harmless by the corporation to the fullest extent authorized by the General Corporation Law of Delaware as
the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment
permits the corporation to provide broader indemnification rights than such law permitted the corporation to provide prior to such
amendment), against all expense, liability and loss (including attorney’s fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such Indemnitee in connection therewith and such
indemnification shall continue as to an Indemnitee who has ceased to be a director or officer and shall inure to the benefit of the
Indemnitee’s heirs, executors and administrators; provided, however, that, except as provided in Section 6.3 below with respect
to proceedings to enforce rights to indemnification, the corporation shall indemnify any such Indemnitee seeking indemnification
in connection with a Proceeding (or part thereof) initiated by such Indemnitee only if such Proceeding (or part thereof) was
authorized by the board of directors.
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6.2 RIGHT TO ADVANCEMENT OF EXPENSES
In addition to the right to indemnification conferred in Section 6.1, an Indemnitee shall also have the right to be paid by the
corporation the expenses incurred in defending against any such Proceeding in advance of its final disposition (an
“Advancement of Expenses”), such Advancement to be paid by the corporation within twenty (20) calendar days after the receipt
by the corporation of a statement(s) from the Indemnitee requesting such Advancement of Expenses from time to time; provided,
however, that if the General Corporation Law of Delaware requires, the payment of an Advancement of Expenses incurred by a
director in his or her capacity as a director in advance of the final disposition of a proceeding, shall be made only upon delivery
to the corporation of an undertaking (an “Undertaking”), by or on behalf of such director, to repay all amounts so advanced if it
should ultimately be determined that such director is not entitled to be indemnified for such Expenses under this Article VI or
otherwise. The rights to indemnification and to the Advancement of Expenses conferred in Sections 6.1 and 6.2 shall be contract
rights.
6.3 RIGHT OF INDEMNITEE TO BRING SUIT
To obtain indemnification under this Article VI, an Indemnitee shall submit to the corporation a written request, including
such documentation and information as is reasonably available to the Indemnitee and is reasonably necessary to determine
whether and to what extent the Indemnitee is entitled to indemnification. Upon such written request, a determination, if required
by applicable law, with respect to the Indemnitee’s entitlement thereto shall be made as follows: (a) if requested by the
Indemnitee, by Independent Counsel (as defined below); or (b) if no request is made by the Indemnitee for a determination by
Independent Counsel, (i) by the board of directors by a majority vote of a quorum consisting of Disinterested Directors (as
defined below), or (ii) if a quorum of the board of directors consisting of Disinterested Directors is not obtainable or, even if
obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the board of
directors, a copy of which shall be delivered to the Indemnitee; or (c) if a quorum of Disinterested Directors so directs, by the
stockholders of the corporation. In the event the determination of entitlement to indemnification is to be made by Independent
Counsel at the request of the Indemnitee, the Independent Counsel shall be selected by the board of directors, unless there
shall have occurred within two (2) years prior to the date of the commencement of the action, suit or proceeding for which
indemnification or Advancement of Expenses is claimed a Change of Control (as defined below), in which case the Independent
Counsel shall be selected by the Indemnitee unless the Indemnitee shall request that such selection be made by the board of
directors. If it is so determined that the Indemnitee is entitled to indemnification, payment to the Indemnitee shall be made within
forty-five (45) calendar days after such determination.
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If a claim under Section 6.1 or 6.2 is not paid in full by the corporation within forty-five (45) calendar days after a written
claim has been received by the corporation as set forth above, except in the case of a claim for an Advancement of Expenses, in
which case the applicable period shall be twenty (20) calendar days, the Indemnitee may at any time thereafter bring suit against
the corporation to recover the unpaid amount of the claim and, if successful, the Indemnitee shall be entitled to be paid also the
expense of prosecuting such claim. In (a) any suit brought by the Indemnitee to enforce a right to indemnification hereunder (but
not in a suit brought by the Indemnitee to enforce a right to an Advancement of Expenses where the required Undertaking, if any
is required, has been tendered to the corporation) it shall be a defense that, and (b) in any suit brought by the corporation to
recover an Advancement of Expenses pursuant to the terms of an Undertaking, the corporation shall be entitled to recover such
Expenses upon a determination that, the Indemnitee has not met any applicable standard for indemnification set forth in the
General Corporation Law of Delaware. Neither the failure of the corporation (including its board of directors, a committee of the
board of directors, Independent Counsel or its stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable
standard of conduct set forth in the General Corporate Law of Delaware, nor an actual determination by the corporation
(including its board of directors, a committee of the board of directors, Independent Counsel or its stockholders) that the
Indemnitee has not met such applicable standard of conduct, shall create a presumption that the Indemnitee has not met the
applicable standard of conduct or, in the case of such suit brought by the Indemnitee, be a defense to such suit. In any suit
brought by the Indemnitee to enforce a right to indemnification or to an Advancement of Expenses hereunder, or brought by the
corporation to recover an Advancement of Expenses pursuant to the terms of an Undertaking, the burden of proving that the
Indemnitee is not entitled to be indemnified, or to such Advancement of Expenses, shall be on the corporation.
6.4 NON-EXCLUSIVITY OF RIGHTS
If a determination shall have been made pursuant to this Article VI that the Indemnitee is entitled to indemnification or
Advancement of Expenses, the corporation shall be bound by such determination in any judicial proceeding commenced
pursuant to Section 6.3 above. The corporation shall be precluded from asserting in any judicial proceeding commenced
pursuant to Section 6.3 above that the procedures and presumptions of these bylaws are not valid, binding and enforceable and
shall stipulate in such proceeding that the corporation is bound by all the provisions of this Article VI.
The rights to indemnification and to the Advancement of Expenses conferred in this Article VI shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute, the certificate of incorporation, these bylaws,
agreement, vote of stockholders or Disinterested Directors or otherwise. No repeal or modification of this Article VI shall in any
way diminish or adversely affect the rights of any director, officer, employee or agent of the corporation hereunder in respect of
any occurrence or matter arising prior to any such repeal or modification.
If any provision(s) of this Article VI of these bylaws shall be held to be invalid, illegal or unenforceable for any reasons
whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Article VI shall not in any way be
affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Article VI shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal or unenforceable.
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6.5 INSURANCE
The corporation may maintain insurance to protect itself and any director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust or other enterprise, against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense, liability or loss under the General
Corporation Law of Delaware.
6.6 INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS OF THE CORPORATION
The corporation may, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware
and as authorized from time to time by the board of directors, grant rights to indemnification and to the Advancement of
Expenses to any officer, employee or agent of the corporation to the fullest extent of the provisions of this Article VI with respect
to the indemnification and Advancement of Expenses of directors of the corporation.
6.7 DEFINITIONS
For the purposes of this Article VI:
(a) “Change of Control” means:
(i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange
Act)(a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty
percent (20%) or more of either (A) the then outstanding shares of common stock of the corporation (the “Outstanding
Corporation Common Stock”), or (B) the combined voting power of the then outstanding voting securities of the corporation
entitled to vote generally in the election of directors (the “Outstanding Corporation Voting Securities”); provided, however, that
for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (I) any acquisition directly
from the corporation or any acquisition from other stockholders where (aa) such acquisition was approved in advance by the
board of directors, and (bb) such acquisition would not constitute a change of control under subsection (iii) of this definition; (II)
any acquisition by the corporation; (III) any acquisition by an employee benefit plan (or related trust) sponsored or maintained
by the corporation or any corporation controlled by the corporation; or (IV) any acquisition by any corporation pursuant to a
transaction which complies with subsections (A), (B) or (C) of subsection (iii) of this definition; or
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(ii) Individuals who, as of the date hereof, constitute the board of directors (the “Incumbent Board of Directors”) cease for
any reason to constitute at least a majority of the board of directors; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the stockholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board of Directors shall be considered as though such individual
were a member of the Incumbent Board of Directors, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies by or on behalf of a Person other than the board of directors; or
(iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the
assets of the corporation (a “Business Combination”), in each case, unless, following such Business Combination, (A) all or
substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation
Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than fifty percent (50%) of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such Business Combination (including without limitation a corporation which as a
result of such transaction owns the corporation or all or substantially all of the corporation’s assets either directly or through one
or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination
of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (B) no
Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of
the corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, twenty
percent (20%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the
extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were members of the Incumbent board of directors at
the time of the execution of the initial agreement, or of the action of the board of directors, providing for such Business
Combination; or
(iv) Approval by the stockholders of a complete liquidation or dissolution of the corporation.
(b) “Disinterested Director” means a director of the corporation who is not and was not a party to the matter in respect of
which indemnification or Advancement of Expenses is sought by the Indemnitee.
(c) “Independent Counsel” means a law firm, a member of a law firm or an independent practitioner that is experienced in
matters of corporation law and shall include any person who, under the applicable standards of professional conduct then
prevailing, would not have a conflict of interest in representing either the corporation or the Indemnitee in an action to determine
the Indemnitee’s rights under this Article VI.
Any notice, request or other communication required or permitted to be given to the corporation under this Article VI shall
be in writing and either delivered in person or sent by telecopy, telex, telegram, overnight mail or courier service, or certified or
registered mail, postage prepaid, return receipt requested, to the secretary of the corporation and shall be effective only upon
receipt by the secretary of the corporation.
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ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such place or places as designated by the board of
directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each
stockholder, a copy of these bylaws as amended to date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the
purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation’s stock
ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose
shall mean a purpose reasonably related to such person’s interest as a stockholder. In every instance where an attorney or other
agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or agent to so act on behalf of the stockholder. The demand under oath shall be
directed to the corporation at its registered office in Delaware or at its principal executive office.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation’s stock ledger, a list of its stockholders, and its other books and
records for a purpose reasonably related to his or her position as a director.
7.3 REPRESENTATIONS OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the chief executive officer, any vice president, the chief financial officer, the secretary or any
assistant secretary of this corporation, or any other person authorized by the board of directors, the chief executive officer or a
vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares
of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised
either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such
person having the authority.
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ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all
checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or
payable to the corporation, and only the persons so authorized shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or
agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may
be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power
of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or
engagement or to pledge its credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of the corporation shall be represented by certificates, provided that the board of directors may provide by
resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation.
Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and
upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the
corporation by the chairman of the board of directors, or the chief executive officer or a vice president, and by the chief financial
officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares
registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent
or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or
she were such officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the
consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares,
or upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid
shares, the corporation shall declare a dividend upon partially paid shares of the same class, but only upon the basis of the
percentage of the consideration actually paid thereon.
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8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the
powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock;
provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the
foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests a
statement of the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each
class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued
certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new
certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost,
stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or such owner’s legal
representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account
of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General
Corporation Law of Delaware shall govern the construction of these bylaws. Without limiting the generality of this provision, the
singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation
and a natural person.
8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions contained in the certificate of incorporation, may declare and
pay dividends upon the shares of its capital stock pursuant to the General Corporation Law of Delaware. Dividends may be paid
in cash, in property, or in shares of the corporation’s capital stock.
The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or
reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing
dividends, repairing or maintaining any property of the corporation, and meeting contingencies.
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8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of
directors.
8.9 SEAL
The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words
“Corporation Seal, Delaware.” The seal may be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to
issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or
more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes
owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares
to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered
on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise
provided by the General Corporation Law of Delaware.
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ARTICLE IX
AMENDMENTS
These bylaws may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the board of
directors. The fact that such power has been so conferred upon the board of directors shall not divest the stockholders of the
power, nor limit their power to adopt, amend or repeal bylaws. Notwithstanding the foregoing, in addition to any vote of the
holders of any class or series of stock of the corporation required by the General Corporation Law of Delaware or by the
certificate of incorporation, an amendment or repeal of all or any portion of Section 2.3 (Special Meeting), Section 3.2 (Number
of Directors), Article VI (Indemnification) or this Article IX (Amendments) by the stockholders shall require the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66 2/3%) of the shares of voting stock then entitled to vote generally in
the election of directors, voting together as a single class.
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ARTICLE X
FORUM FOR ADJUDICATION OF CERTAIN DISPUTES
Section 10.1. Forum for Adjudication of Certain Disputes. Unless the corporation consents in writing to the selection of an
alternative forum (an “Alternative Forum Consent”), the Court of Chancery in the State of Delaware shall be the sole and
exclusive forum for (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim of
breach of a fiduciary duty owed by any current or former director, officer, stockholder, employee or agent of the corporation to the
corporation or the corporation’s stockholders, (iii) any action asserting a claim against the corporation or any current or former
director, officer, stockholder, employee or agent of the corporation arising out of or relating to any provision of the General
Corporation Law of Delaware or the certificate of incorporation or bylaws, or (iv) any action asserting a claim against the
corporation or any current or former director, officer, stockholder, employee or agent of the corporation governed by the internal
affairs doctrine of the State of Delaware; provided, however, that, in the event that the Court of Chancery in the State of
Delaware lacks subject matter jurisdiction over any such action or proceeding, the sole and exclusive forum for such action or
proceeding shall be another state or federal court located within the State of Delaware, in each such case, unless the Court of
Chancery (or such other state or federal court located within the State of Delaware, as applicable) has dismissed a prior action
by the same plaintiff asserting the same claims because such court lacked personal jurisdiction over an indispensable party
named as a defendant therein. Failure to enforce the foregoing provisions would cause the corporation irreparable harm and the
corporation shall be entitled to equitable relief, including injunctive relief and specific performance, to enforce the foregoing
provisions. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the corporation shall
be deemed to have notice of and consented to the provisions of this Section 10.1. If any action the subject matter of which is
within the scope of this Section 10.1 is filed in a court other than the Court of Chancery in the State of Delaware (or any other
state or federal court located within the State of Delaware, as applicable) (a “Foreign Action”) by or in the name of any
stockholder, such stockholder shall be deemed to have consented to (i) the personal jurisdiction of the Court of Chancery in the
State of Delaware (or such other state or federal court located within the State of Delaware, as applicable) in connection with
any action brought in any such court to enforce this Section 10.1 and (ii) having service of process made upon such stockholder
in any such action by service upon such stockholder’s counsel in the Foreign Action as agent for such stockholder. The
existence of any prior Alternative Forum Consent shall not act as a waiver of the corporation’s ongoing consent right as set forth
above in this Section 10.1 with respect to any current or future actions or claims.
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LATTICE SEMICONDUCTOR CORPORATION
2016 Cash Incentive Plan Summary
Exhibit 10.14
Purpose
The Lattice Cash Incentive Plan (the “Plan”) will encourage and reward strong financial performance and
operational results. Employees will be compensated both for achievement of specific financial measures
derived from the Company’s annual operating plan and corporate performance measured by the
achievement of corporate MBOs. The Plan is established under the terms of and is governed by the
Company’s 2013 Incentive Plan and the Plan accordingly is subject to administration by the
Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”).
Effective Date
The Plan is effective the first day of the fiscal year as defined by the Lattice Finance Department.
Incentive Period
The Incentive Period is the fiscal year as defined by the Lattice Finance Department. Incentives are paid
to Non-Executives (see “Eligibility” below for a definition) based on the Company’s fiscal quarters that
form a part of the Incentive Period.
Eligibility
Regular employees below grade 16 or CVP (the “Non-Executives”) become eligible to participate in the
Plan beginning the first full fiscal quarter after their hire date, except as otherwise provided under the
heading "Other General Provisions." Employees in grade 16 and above (the “Executives”) become
eligible to participate as provided in their initial offer letter or Employment Agreement, as applicable.
Eligibility excludes the following:
• Those who are eligible under the Company’s Sales Incentive Plan (“SIP”);
• Temporary employees (including interns) and contractors; and
• Any other persons deemed ineligible by application of the provisions set forth under the heading
"Other General Provisions."
Incentive Targets
Each participant will be assigned an incentive target (the “Individual Target”) within a range of values
established under the Company’s compensation practices. The target, stated as a percentage of Eligible
Wages (as defined below), is the potential incentive amount that an employee may earn if all funding and
performance criteria for the Incentive Period are met at 100% of target.
Participants may earn from 0% up to 200% of their Individual Target based on achievement of funding
and performance criteria as outlined herein.
Funding
Achievement by the Company of specified levels of GAAP Operating Income before incentive accrual
and acquisition related expenses (“Operating Income”) is required to fund the payment of incentives for
the achievement of the operating income and revenue elements of the Plan.
For Non-Executives, the Plan will fund and potentially pay quarterly incentives for the achievement of the
Operating Income and the Revenue elements if the quarterly thresholds set forth hereafter are met
(indicated as 0 and 50 because the Plan initially pays at a score of 50 at the threshold). For Non-
Executives, the plan may fund with respect to the MBO element even if the Operating Income threshold
has not been met; provided, however, that payments under the Plan for achievement of quarterly MBOs
may only be made if Operating Income is positive and those payments may not exceed 50% of Operating
Income during the period for which payment is to be made. In addition, the aggregate payout to
Executives and Non-Executives after the end of a fiscal year and application of the Executive payment
formula and the yearly Non-Executive formula, when applied, shall not exceed 28% of Operating Income.
Financial Thresholds
A - Non-Executives
Financial thresholds are measured quarterly. The Compensation Committee reserves the right to change
the financial thresholds on an annual or ad hoc basis, as necessary. If a target Operating Income level is
surpassed, the plan will continue funding (and be scored) on a linear basis until the maximum points are
attained.
B - Executives
Financial thresholds are measured annually. As in the case of Non-Executives, if a target Operating
Income level is surpassed, the plan will continue funding (and be scored) on a linear basis until the
maximum points are attained.
The Plan will fund and potentially pay annually if the annual thresholds are met.
Note: In the case of both the Non-Executive and Executive funding of the Plan, the Compensation
Committee reserves the right to change the financial thresholds on an annual or ad hoc basis, as
necessary.
Performance Criteria
Once the funding is achieved, Company financial performance and/or achievement of corporate MBOs
are required for an incentive to be paid.
Performance Metric
1 - Operating Income
2 - Revenue
3 - Corporate MBOs
Total
Weight
33.33%
33.33%
33.33%
100%
1 - Operating Income
One third of the bonus is earned based on achievement of Operating Income Targets (the "OI score").
2 - Revenue
One third of the bonus is earned based on achievement of Revenue Targets (the "Revenue score").
3 - Corporate MBOs
One third of the bonus is earned based on achievement of Corporate MBOs. These measurable goals
will be established and communicated at the beginning of the Incentive Period. The MBOs are approved
by the Compensation Committee of the Board of Directors and that Committee will approve the scoring of
the MBOs at the end of each fiscal quarter. The determination of the Compensation Committee is final.
Payout
A - Non-Executives
On a quarterly basis, applying the foregoing scoring elements, Non-Executives will be eligible for a cash
incentive based on the following formula for each of the first three fiscal quarters:
Non-Executive Employee Payout = Quarterly Eligible Wages * Individual Target * [(Quarterly OI
score *.33) + (Quarterly Revenue score * .33) + (Quarterly MBO score * .33)]
The Quarterly OI score and the Quarterly Revenue score each shall not exceed 100 points for any
quarterly calculation. As is reflected in the foregoing formula, the payout to any Non-Executive employee
may not exceed more than Quarterly Eligible Wages * Individual Target at the end of any quarter. At the
end of the Incentive Period (the fourth fiscal quarter), the Annual Thresholds for Operating Income and
Revenue (as set forth for Executives) will be applied to the following formula for Non-Executive
Employees to determine any additional incentive to be paid to Non-Executive employees for the year:
Non-Exec Final Payout = [Annual Eligible Wages * Individual Target * ((Annual OI score *.33) +
(Annual Revenue score * .33) + (Annual MBO score * .33))] - [Q1 Incentive Payout + Q2 Incentive
Payout + Q3 Incentive Payout + Q4 Incentive Payout]
The annual formula will only be applied and payments made thereunder to the extent that the resulting
payment to Non-Executives, when aggregated with the payment to Executives upon application of the
Executive Formula, will result in a payment that is less than or equal to 28% of Operating Income for the
fiscal year. The Compensation Committee reserves the right to reduce any amount payable under this
Plan at its sole discretion, including without limitation amounts payable on application of this formula, or
in the event that the Quarterly Threshold for OI has not been met at the 100 point level for any quarter
during the fiscal year. Furthermore, an annual payment may only be made if such calculation results in a
positive difference paid to Non-Executives based on the quarterly calculations. In the event the difference
is negative, however, no claw back will be undertaken with respect to the Non-Executive employees.
B - Executives
At the end of the Incentive Period, applying the foregoing scoring elements, Executives will be eligible for
an incentive based on the following formula:
Executive Payout = Annual Eligible Wages * Individual Target * [(OI score *.33) + (Revenue score
* .33) + (MBO score * .33)]
Other General Provisions
Payment and Active Employment
Current Employees
Employee must be an active employee on the first working day of the fiscal quarter for which the bonus is
to be paid to be eligible to receive a bonus for such fiscal quarter. For purposes of this provision, the first
working day shall mean the first day after the commencement of the fiscal quarter that employees are
expected by the Company to attend to their employment duties and be present at their designated
workplace.
New Employees
New employees must be actively at work no later than 14 calendar days after the commencement of the
fiscal quarter (inclusive of that first day) for which the bonus is to be paid to be eligible to receive a bonus
for such fiscal quarter. For purposes of this provision, the first working day shall mean the first day after
the commencement of the fiscal quarter that employees are expected by the Company to attend to their
employment duties and be present at their designated workplace.
Employee must be in an active, eligible employment status as of the date incentive payments are actually
paid to be eligible to receive an incentive payment for the prior fiscal quarter or Incentive Period and such
incentive is not deemed to be earned until the payment date. No pro rata or partial payment will be paid
for employees who are not actively employed on the date payments are made.
Incentive payments will be made after the end of the fiscal quarter, or the fiscal year, as applicable, once
financial results have been determined, and in the case of the fiscal year end audited, and team goal
achievement has been reviewed and approved by the Compensation Committee and Board of Directors
as provided above.
Eligible Wages
Eligible Wages means the 12-month base salary paid during the applicable incentive period, exclusive of
any bonuses or wage supplements. In the case of hourly employees, Eligible Wages mean ordinary
wages earned and paid exclusive of any overtime wages paid during the incentive period.
For Non-Executive employees, the Incentive Target used in any calculation is that Incentive Target that is
effective the last day of the given fiscal quarter. For Executives, the Incentive target used in any
calculation is that Incentive Target that is effective the last day of the fourth fiscal quarter.
Leave of Absences
Employees who are on an approved Leave of Absence at the time the incentive is paid and who have
met the criteria for a payout will be eligible for an incentive payment provided they have worked at least
fifty percent of the working days during that fiscal quarter of Incentive Period, as applicable, unless
otherwise provided by local law.
Performance Improvement Plan
Employees who are on a formal Performance Improvement Plan (PIP) due to a rating determination or
other unsatisfactory performance review at any time during a fiscal quarter are not eligible to receive an
incentive payment for that quarter. The determination of the employee’s manager shall be conclusive and
final with respect to the issue of whether a PIP has been satisfactorily performed.
Taxing
All required and applicable taxes and deductions will be withheld from incentive payments.
Plan Administrators
The Compensation Committee of the Board of Directors will oversee the Plan. The Human Resources
Department will administer the Plan.
Company Discretion
Participation in this plan does not constitute a contract of employment with the Company for any
specified period of time, nor is it an entitlement to participate in any other program or any future program.
The Compensation Committee reserves the right to cancel, revise, interpret, and apply this Plan and its
provisions and to reduce any amounts payable under its terms at its sole discretion. Changes to the Plan
must be in writing. Changes impacting the Executives must be approved by the Compensation
Committee. The Company’s VP of Shared Services, VP of Human Resources, and CEO must approve
any exceptions to the Plan.
LATTICE SEMICONDUCTOR CORPORATION
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.1
Name
Jurisdiction of Incorporation
1.
2.
3.
4.
5.
6.
7.
8
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
Lattice Semiconductor Limited
Lattice Semiconductor Canada Corporation
Lattice Semiconductor (Shanghai) Co. Ltd.
Silicon Image Electronics Technology (Shanghai) Co. Ltd.
Lattice Semiconducteurs SARL
Lattice Semiconductor GmbH
SiliconBlue Technologies (Hong Kong) Ltd.
Lattice Semiconductor Asia Limited
Lattice Semiconductor Hyderabad Private Limited
Lattice Semiconductor (India) Pvt. Ltd.
Lattice Semiconductor SRL
Lattice Semiconductor Japan KK
Lattice Semiconductor Korea Co. Ltd.
Silicon Image Cooperatie U.A.
Lattice Semiconductor (PH) Corporation
Lattice SG Pte. Ltd.
HDMI Licensing, LLC
MHL, LLC
SiBEAM, Inc.
Simplay Labs, LLC
Lattice Semiconductor International LLC
Silicon Image International LLC
SPMT, LLC
WirelessHD, LLC
Lattice Semiconductor UK Limited
Silicon Image UK Limited
Bermuda
Canada
China
China
France
Germany
Hong Kong
Hong Kong
India
India
Italy
Japan
Korea
Netherlands
Philippines
Singapore
Delaware, USA
Delaware, USA
Delaware, USA
Delaware, USA
Delaware, USA
Delaware, USA
Delaware, USA
Delaware, USA
United Kingdom
United Kingdom
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Lattice Semiconductor Corporation:
We consent to the incorporation by reference in the registration statements (No. 333-40031, No 333-69467, No. 333-67274, No.
333-120959, No. 333-143387, No-333-176133, No. 333-182047, No. 333-188455, No. 333-195888, and No. 333-202736) on
Form S-8 of Lattice Semiconductor Corporation (the Company) of our reports dated March 1, 2017, with respect to the
consolidated balance sheets of Lattice Semiconductor Corporation as of December 31, 2016 and January 2, 2016, and the
related consolidated statements of operations, comprehensive (loss) income, changes in stockholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2016 and the effectiveness of internal controls over financial
reporting as of December 31, 2016, which reports appear in the December 31, 2016 annual report on Form 10-K of Lattice
Semiconductor Corporation.
/s/ KPMG LLP
Portland, Oregon
March 1, 2017
Exhibit 31.1
I, Darin G. Billerbeck, certify that:
CERTIFICATION
I have reviewed this Annual Report on Form 10-K of Lattice Semiconductor Corporation;
1.
2. 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;
3. 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;
4. 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:
(a) 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;
(b) 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;
(c) 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
(d) 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
5. 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):
(a) 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
(b) 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 1, 2017
/s/ Darin G. Billerbeck
Darin G. Billerbeck
President and Chief Executive Officer
Exhibit 31.2
I, Max Downing, certify that:
CERTIFICATION
I have reviewed this Annual Report on Form 10-K of Lattice Semiconductor Corporation;
1.
2. 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;
3. 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;
4. 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:
(a) 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;
(b) 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;
(c) 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
(d) 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
5. 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):
(a) 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
(b) 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 1, 2017
/s/ Max Downing
Max Downing
Chief Financial Officer
Exhibit 32.1
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
In connection with the Annual Report of Lattice Semiconductor Corporation (the Company) on Form 10-K for the year ended
December 31, 2016 (the Report), I, Darin G. Billerbeck, 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) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) 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 1, 2017
/s/ Darin G. Billerbeck
Darin G. Billerbeck
President and Chief Executive Officer
Exhibit 32.2
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
In connection with the Annual Report of Lattice Semiconductor Corporation (the Company) on Form 10-K for the year ended
December 31, 2016 (the Report), I, Max Downing, 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) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) 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 1, 2017
/s/ Max Downing
Max Downing
Chief Financial Officer