What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-14 compared with 2024-02-16 · 77 added, 52 removed, 216 unchanged (37% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Lattice Semiconductor Corporation and its subsidiaries (“Lattice,” the “Company,” “we,” “us,” or “our”) develop technologies that we monetize through differentiated programmable logic semiconductor products, silicon-enabling products, system solutions, design services, and licenses.

Lattice develops technologies that we monetize through differentiated programmable logic semiconductor products, silicon-enabling products, system solutions, design services, and licenses.

Lattice is the low power programmable leader.

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Impact of Global Economic Activity on our Business

Increased financial market volatility, inflationary pressure, rising interest rates, recessionary concerns, uncertainty in the financial and banking industry, and geopolitical tension continue to impact business globally and may impact our operations by causing disruption to our labor markets and supply chains.

Increased financial market volatility, inflationary pressure, interest rate changes, recessionary concerns, uncertainty in the financial and banking industry, and geopolitical tension continue to impact business globally and may impact our operations by causing disruption to our labor markets and supply chains.

The extent to which increased financial market volatility, inflationary pressures, global pandemics, and related uncertainty will impact our business activities will depend on future developments that are highly uncertain and cannot be predicted at this time.

Additionally, our business is impacted by the cyclic correction affecting the broader semiconductor industry, which has seen softened demand across our end markets and customers reducing or rebalancing their inventory levels.

Additionally, our business is impacted by the cyclic correction affecting the broader semiconductor industry, which has seen softened demand across our end markets.

Critical Accounting Policies and Use of Estimates

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and (iv) viable and prudent tax planning strategies.

Through the end of fiscal 2023, we demonstrated consistent and continued profitability over the preceding three-year period.

In assessing the realizability of the deferred tax assets, we considered our operating environment and estimates about our ability to generate taxable income in future periods within the United States.

As a result, in the fourth quarter of fiscal 2023, we concluded that our history of profitable operating results, including the current period results, along with our expectations about generating sufficient U.S.

Federal taxable income, provided sufficient positive evidence supporting the realizability of our U.S.

Federal deferred tax assets.

Accordingly, we reduced the valuation allowance against a significant portion of our U.S.

deferred tax assets resulting in the inclusion of $56.9 million of U.S.

Federal deferred tax assets on our Consolidated Balance Sheets.

We continue to maintain a full valuation allowance against our state deferred tax assets due to insufficient income sources.

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The amount of the deferred tax asset considered realizable could be adjusted if sufficient positive evidence exists.

We do not maintain a valuation allowance in any foreign jurisdictions as we have concluded that it is more likely than not that we will realize those net deferred tax assets in the future periods.

We do not maintain a valuation allowance on a significant portion of our U.S.

Federal deferred tax assets or in any foreign jurisdictions as we have concluded that it is more likely than not that we will realize those net deferred tax assets in the future periods.

As part of our regular financial review process, we also assess the likelihood that our tax reporting positions will ultimately be sustained on examination by the taxing authorities, based on the technical merits of the position.

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These changes, if any, may require material adjustments to the related deferred tax assets or accrued income tax liabilities and an accompanying reduction or increase in income tax expense which may result in a corresponding increase or decrease in net income in the period when such determinations are made.

Accordingly, the fourth quarter of fiscal 2024 included $27.7 million of income tax benefits due to the expiration of statutes of limitations that reduced our uncertain tax positions.

We recognize the tax impact of including certain foreign earnings in U.S.

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Restructuring

Impairment of acquired intangible assets

Acquisition related

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(In thousands)

Revenue increased $76.8 million, or 11.6%, in fiscal 2023 compared to fiscal 2022, primarily from increased demand for our products used in industrial automation, robotics applications, and data center servers, partially offset by lower demand for our products used in wireless infrastructure and consumer applications.

Revenue decreased $227.8 million, or 31%, in fiscal 2024 compared to fiscal 2023, primarily due to softer demand in industrial and automotive applications, telecommunications infrastructure deployments, and from continued inventory normalization by customers.

Revenue by End Market

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Communications and Computing, Industrial and Automotive, and Consumer.

Across our end markets, our products are increasingly used for Artificial Intelligence ("AI")-related applications, including device usage in AI-optimized servers in data centers, AI-enabled PCs, and AI-enabled robotics and ADAS systems, among others.

We also provide IP licensing and services to our end markets.

Across our end markets, our products are increasingly used for AI-related applications, including device usage in AI-optimized servers in data centers, AI-enabled PCs, and AI-enabled robotics and ADAS systems, among others.

We also provide IP licensing and services to these end markets.

Within these end markets, there are multiple drivers, including:

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smart home, prosumer, and other applications.

The end market data we use is derived from data provided to us by our customers.

The end market data we use 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 judgment.

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Machine Vision

Data Backhaul

Data Networking

Industrial Automation

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Client Computing

Sound Systems

Factory Automation

The composition of our revenue by end market is presented in the following table:

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Total revenue

Revenue from the Communications and Computing end market decreased by 9% in fiscal 2023 compared to fiscal 2022 primarily due to softer end market demand in both wireless and wireline communications infrastructure, partially offset by strong demand in data center applications.

Revenue from the Industrial and Automotive end market increased by 36% in fiscal 2023 compared to fiscal 2022, primarily due to strong customer adoption in a broad range of applications, including industrial automation and robotics.

Growth in Automotive was driven by the adoption of new designs in advanced driver assistance ("ADAS") and infotainment applications.

Revenue from the Consumer end market decreased by 21% in fiscal 2023 compared to fiscal 2022 primarily due to macroeconomic weakness in Consumer.

Revenue from the Communications and Computing end market decreased by 11% in fiscal 2024 compared to fiscal 2023 primarily due to softer end market demand in telecommunications infrastructure deployments and from continued inventory normalization by customers, partially offset by stronger demand in data center applications.

Revenue from the Industrial and Automotive end market decreased by 45% in fiscal 2024 compared to fiscal 2023, primarily due to softer end market demand and from continued inventory normalization by customers.

While we do not consider AI applications as a distinct end market, we expect AI-related revenue to grow over the next few years based on the growing pipeline of AI-related design wins.

Our AI revenue is derived from applications across all three of our end market segments.

Revenue by Geography

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Our revenue by geographical market is based on the ship-to location of our customers, which can vary from time to time.

Revenue from Asia decreased in fiscal 2023 compared to fiscal 2022 primarily due to the macroeconomic environment in the region, while revenue from the Americas and Europe increased due to increased demand in these regions driven by our Industrial and Automotive end market.

Revenue from Asia decreased in fiscal 2024 compared to fiscal 2023 primarily due to the macroeconomic environment in the region, while revenue from the Americas and Europe decreased due to reduced demand in these regions for our products in the Industrial and Automotive end market.

The composition of our revenue by geography is presented in the following table:

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Gross margin percentage

Gross margin percentage increased 130 basis points from fiscal 2022 to fiscal 2023.

Improved margins were driven by benefits from our gross margin expansion strategy including mix.

Gross margin percentage decreased 300 basis points from fiscal 2023 to fiscal 2024.

Reduced margins were primarily due to an approximately $7.0 million one-time charge for expiring production materials, and changes in product mix between the periods presented .

The expiring production materials were purchased on behalf of the company by the OSATs in anticipation of a supply constraint and are no longer expected to be used.

We expect gross margin to increase in future periods due to the non-recurrence of the one-time charge.

Operating Expenses

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Percentage of revenue

Research and development expense includes costs for compensation and benefits, stock-based compensation, engineering wafers, depreciation and amortization, licenses, and outside engineering services.

Research and development expense includes headcount-related costs, including cash- and stock-based compensation and benefits, R&D equipment expenses, engineering wafers, licenses, and outside engineering services.

These expenditures are for the design of new products, IP cores, processes, packaging, and software solutions.

The increase in Research and development expense for fiscal 2023 compared to fiscal 2022 was due primari ly to increased headcount-related costs, including stock-based compensation, as we continue to invest in our long-term product roadmap, and depreciation and amortization related to our research and development equipment.

We believe that investing in research and development is important to delivering innovative products to our customers and, therefore, we expect to continue to increase our investment in research and development.

The decrease in Research and development expense for fiscal 2024 compared to fiscal 2023 was due primari ly to lower costs for outside services and R&D equipment expenses, partially offset by increased headcount-related costs and rent expense.

We believe that investing in research and development is important to delivering innovative products to our customers.

We expect research and development expense to increase in the future, but to decline as a percentage of revenue.

Selling, General, and Administrative Expense

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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 2023 compared to fiscal 2022 was due primarily to increased headcount-related costs, including stock-based compensation and other costs, related to demand creation to support the growth of our business.

The decrease in Selling, general, and administrative expense for fiscal 2024 compared to fiscal 2023 was due primarily to a reduction in stock compensation expense from the forfeiture of equity awards by departing executives and reduced headcount-related costs as we aligned resources to the lower level of business, partially offset by other costs such as outside services and legal expenses.

Amortization of Acquired Intangible Assets

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Percentage of revenue

The decrease in Amortization of acquired intangible assets for fiscal 2023 compared to fiscal 2022 was due to the end of the amortization period during the first quarter of fiscal 2022 for acquired intangible assets from previous acquisitions.

Amortization of acquired intangible assets was flat for fiscal 2024 compared to fiscal 2023.

Restructuring

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Details of our restructuring plans and expenses incurred under them are discussed in Note 8 - Restructuring to our Consolidated Financial Statements in Part II, Item 8 of this report.

Restructuring costs decreased in fiscal 2023 compared to fiscal 2022 due to lower costs in the current year periods for severance compared to higher costs in the prior year periods for lease right-of-use impairment and contract termination fees.

Acquisition Related Charges

The composition of our Acquisition related charges, including as a percentage of revenue, is presented in the following table:

(In thousands)

Acquisition related

Percentage of revenue

Acquisition related charges include legal and professional fees directly related to acquisitions.

For fiscal 2022 and 2021, Acquisition related charges were attributable to our acquisition of Mirametrix in November 2021 and were comprised primarily of professional services including legal and accounting fees, as well as closing costs.

Restructuring costs increased in fiscal 2024 compared to fiscal 2023 primarily due to higher severance costs incurred under the Q3 2024 Plan as we aligned resources to the lower level of business.

Impairment of Acquired Intangible Assets

In connection with our acquisition of Mirametrix in November 2021 we recorded identifiable intangible assets related to existing technology, customer relationships, and trade name / trademarks.

Our review of our strategic long-range plan completed at the end of fiscal 2024 concluded that the originally acquired Mirametrix intangible assets had limited future revenue potential due to a decline in customer demand, which we determined was an indicator of impairment.

Our assessment of the fair value of these intangible assets concluded that they had been fully impaired as of December 28, 2024, and we recorded an impairment charge of $13.9 million for fiscal 2024 in the Consolidated Statements of Operations.

Interest Income (Expense), net

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Percentage of revenue

For fiscal 2023 compared to fiscal 2022, the change in Other income (expense), net was primarily due to a research credit of $0.9 million in the current year compared to the non-recurrence of $0.7 million of loss on the refinancing of our long-term debt in the prior year, and to foreign currency effects.

For fiscal 2024 compared to fiscal 2023, the change in Other income (expense), net was primarily due to a $2.0 million write-off of a non-recoverable cost-method investment, and to foreign currency effects.

The composition of our Income tax (benefit) expense is presented in the following table:

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Income tax (benefit) expense

Our Income tax (benefit) expense includes taxes on foreign income and withholding taxes, partially offset by benefits resulting from excess tax benefits from stock-based compensation.

In the fourth quarter of fiscal 2023, we reduced the valuation allowance against a significant portion of our U.S.

deferred tax assets resulting in the inclusion of $56.9 million of U.S.

Federal deferred tax assets on our Consolidated Balance Sheets.

Our Income tax (benefit) expense on worldwide income for fiscal 2024 includes $27.7 million of income tax benefits due to the expiration of statutes of limitations that reduced our uncertain tax positions, as well as federal tax credits, and stock-based compensation.

The lower income tax benefit in fiscal 2024 was primarily due to the reduction in valuation allowance over the $56.9 million of U.S.

Federal deferred tax assets in 2023.

The income tax benefit from the release of a portion of the valuation allowance was partially offset by an increase in expense in fiscal 2023 as compared to fiscal 2022 primarily due to increased worldwide income and U.S.

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Details of our deferred tax assets and valuation allowance are discussed in Note 12 - Income Taxes to our Consolidated Financial Statements in Part II, Item 8 of this report.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we define as net income before net interest income (expense), income tax (benefit) expense, depreciation and amortization, stock-based compensation, and other items that are considered unusual or not representative of underlying trends of our business, including but not limited to:

litigation expense outside the ordinary course of business, restructuring, transformation, and other charges, impairments, and other non-recurring charges, if applicable for the periods presented.

We believe that the exclusion of the items eliminated in calculating Adjusted EBITDA provides useful measures for period-to-period comparisons of our business.

Accordingly, we believe that Adjusted EBITDA provides useful information in understanding and evaluating our operating results in the same manner as our management and our Board of Directors.

Adjusted EBITDA should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP.

Other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of Adjusted EBITDA as a tool for comparison.

There are a number of limitations related to the use of Adjusted EBITDA rather than net income, which is the most directly comparable financial measure calculated in accordance with GAAP.

Some of the limitations of Adjusted EBITDA include (i) Adjusted EBITDA does not properly reflect capital commitments to be paid in the future, and (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these potential capital expenditures.

Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items, as in the future we may incur expenses similar to the adjustments in this presentation.

Evaluation of our performance should consider Adjusted EBITDA alongside other financial performance measures, including our net income and other GAAP results.

A reconciliation of Net income to Adjusted EBITDA, including as a percentage of revenue, is presented in the following table:

(In thousands)

GAAP Net income

GAAP Net income margin

Interest (income) expense, net

Income tax (benefit) expense

Amortization of acquired intangible assets

Depreciation and other amortization

Stock-Based Compensation (1)

Litigation expense (2)

Restructuring, transformation, and other (3)

Impairment of acquired intangible assets

Other non-recurring charges

Adjusted EBITDA

Adjusted EBITDA margin

The adjustments for Stock-based compensation include related tax expenses.

Legal expenses associated with the defense of claims that are outside the ordinary course of business that were brought against the Company by Steven A.W.

De Jaray, Perienne De Jaray and Darrell R.

Restructuring, transformation, and other includes transformation charges of approximately $2.8 million for fiscal year 2024.

Liquidity and Capital Resources

The following sections discuss material changes in our financial condition from the end of fiscal 2023, including the effects of changes in our Consolidated Balance Sheets, and the effects of our credit arrangements and contractual obligations on our liquidity and capital resources.

There continues to be uncertainty around the extent of market volatility, inflationary pressures, rising interest rates, recessionary concerns, uncertainty in the financial and banking industry, and geopolitical tension, which may impact our liquidity and working capital needs in future periods.

There continues to be uncertainty around the extent of market volatility, inflationary pressures, interest rate changes, recessionary concerns, uncertainty in the financial and banking industry, and geopolitical tension, which may impact our liquidity and working capital needs in future periods.

We have historically financed our operating and capital resource requirements through cash flows from operations, and from the issuance of long-term debt to fund acquisitions.

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As of December 28, 2024, we could access all cash held by our foreign subsidiaries without incurring significant additional expense.

The net decrease in Cash and cash equivalents of $17.4 million between December 30, 2023 and December 31, 2022 was primarily driven by cash flows from the following activities:

The net increase in Cash and cash equivalents of $8.0 million between December 30, 2023 and December 28, 2024 was primarily driven by cash flows from the following activities:

Operating activities — Cash provided by operating activities results from net income adjusted for certain non-cash items and changes in assets and liabilities.

Cash provided by operating activities was $140.9 million in fiscal 2024 compared to $269.6 million in fiscal 2023.

This increase of $30.8 million was primarily driven by an increase of $40.1 million provided by improved operating performance, partially offset by $9.3 million of changes in working capital, primarily from cash used by accrued liabilities, payroll obligations, and accounts payable, net of cash provided by inventories.

This decrease of $128.7 million was primarily driven by a decrease of $159.8 million provided by operating activities, partially offset by $31.1 million of net changes in working capital, primarily in Accounts receivable and Inventories.

Investing activities — Investing cash flows consist primarily of transactions related to capital expenditures and payments for software and intellectual property licenses .

Net cash used by investing activities in fiscal 2024 was $37.7 million compared to $33.3 million in fiscal 2023.

This $1.6 million decrease was primarily a result of decreased capital expenditures.

Financing activities — Financing cash flows consist primarily of activity on our long-term debt, repurchases of common stock, tax payments related to the net share settlement of restricted stock units, and proceeds from the exercise of options to acquire common stock.

Net cash used by financing activities in fiscal 2024 was $94.5 million compared to $253.7 million in fiscal 2023.

This $65.6 million increase was due to the following activities.

During fiscal 2023, we made discretionary payments totaling $130.0 million on our revolving loans under the 2022 Credit Agreement, an increase of $99.8 million from the $30.2 million of net payment and refinancing activity on our long-term debt in fiscal 2022.

This $159.2 million decrease was due to the following activities.

During fiscal 2024, we had no balance outstanding on our long-term debt, while during fiscal 2023 we made discretionary payments totaling $130.0 million on revolving loans under the 2022 Credit Agreement.

We repurchased approximately 1.1 million shares of common stock for $67.0 million in fiscal 2024 compared to repurchases of approximately 1.2 million shares of common stock for $80.0 million in fiscal 2023.

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Accounts receivable, net

Days sales outstanding - Overall

Accounts receivable, net as of December 30, 2023 increased by approximately $10.4 million, or approximately 11%, compared to December 31, 2022.

This resulted primarily from the timing of when our customers wanted our products to be shipped during the fourth quarter of fiscal 2023 compared to the fourth quarter of fiscal 2022.

Days sales outstanding

Accounts receivable, net as of December 28, 2024 decreased by approximately $23.3 million, or approximately 22%, compared to December 30, 2023.

This decrease was due to lower revenue shipments as well as the timing of when our customers want our products.

We calculate Days sales outstanding on the basis of a 365-day year as Accounts receivable, net at the end of the quarter divided by sales during the quarter annualized and then multiplied by 365.

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Days of inventory on hand

Inventories as of December 30, 2023 decreased $11.5 million, or approximately 11%, compared to December 31, 2022 primarily as a result of increased product shipments to meet customer demand.

Inventories as of December 28, 2024 increased $4.6 million, or approximately 5%, compared to December 30, 2023 primarily as a result of product buildup ahead of new product ramps and from softer demand as customers continue to normalize their own inventories.

Days of inventory on hand increased over the period due to lower revenue.

The Days of inventory on hand ratio compares the inventory balance at the end of a quarter to the cost of sales in that quarter.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis