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Lattice Semiconductor Reports Second Quarter 2017 Results

Second Quarter 2017 Financial Highlights*:

* GAAP represents U.S. Generally Accepted Accounting Principles. Non-GAAP represents GAAP excluding the impact of certain activities which the Company's management excludes in analyzing the Company's operating results and in understanding trends in the Company's earnings. For a reconciliation of GAAP to non-GAAP results, see accompanying tables "Reconciliation of U.S. GAAP to Non-GAAP Financial Measures."

PORTLAND, Ore. — (BUSINESS WIRE) — August 8, 2017 — Lattice Semiconductor Corporation (NASDAQ: LSCC), the leading provider of customizable smart connectivity solutions, announced financial results today for the fiscal second quarter ended July 1, 2017.

The Company reported revenue for the second quarter of 2017 of $94.1 million, which decreased 10.0% sequentially, as compared to the first quarter 2017 revenue of $104.6 million, and decreased 5.1%, as compared to the second quarter 2016 revenue of $99.2 million.

Gross margin on a GAAP basis was 54.4% for the second quarter of 2017, as compared to the first quarter of 2017 gross margin of 58.2% and 58.9% for the second quarter of 2016. Gross margin for the second quarter of 2017 was 54.6% on a non-GAAP basis, as compared to 58.4% for the first quarter of 2017 and 59.1% for the second quarter of 2016.

Total operating expenses for the second quarter of 2017 were $59.9 million on a GAAP basis, as compared to $61.5 million for the first quarter of 2017 and $64.8 million for the second quarter of 2016. Total operating expenses were $46.0 million for the second quarter of 2017 on a non-GAAP basis, as compared to $47.7 million for the first quarter of 2017, and $50.8 million for the second quarter of 2016.

GAAP net loss for the second quarter was $13.0 million ($0.11 per basic and diluted share), with net income of $0.1 million ($0.00 per basic and diluted share) on a non-GAAP basis. This compares to a net loss on a GAAP basis in the prior quarter of $7.3 million ($0.06 per basic and diluted share), with net income on a non-GAAP basis in the prior quarter of $7.1 million ($0.06 per basic and diluted share), and compares to a net loss on a GAAP basis in the year ago period of $13.8 million ($0.12 per basic and diluted share), with net income of $0.2 million ($0.00 per basic and diluted share) on a non-GAAP basis. GAAP results for the second quarter of 2017 reflect $1.6 million in restructuring charges, $0.9 million in acquisition related charges, less than $0.1 million in tax expense, $8.7 million in amortization of acquired intangible assets, and $2.9 million in stock-based compensation expense. GAAP results for the first quarter of 2017 reflect less than $0.1 million in restructuring charges, $1.7 million in acquisition related charges, $0.5 million in tax expense, $8.5 million in amortization of acquired intangible assets, and $3.8 million in stock-based compensation expense. GAAP results for the second quarter of 2016 reflect $2.6 million in restructuring charges, $4.5 million in tax expense, $8.3 million in amortization of acquired intangible assets, and $3.2 million in stock-based compensation expense.

Darin G. Billerbeck, President and Chief Executive Officer, said, "Revenue declined in the second quarter due to lower shipments to handset customers along with continued macro softness in the China communications market. Despite the near term environment, we are very encouraged by the pace and attractiveness of our design wins and the growth prospects in handsets and other smart consumer devices at large OEMs. While revenue during the third quarter is likely to be relatively flat sequentially, we expect to see an uptick in the fourth quarter of 2017 based on our strategy to continue growing our base FPGA business along with investing in the next wave of growth initiatives, including mmWave, Human Machine Interface and Artificial Intelligence."

Max Downing, Chief Financial Officer, added, "During the second quarter of 2017, we generated $3.8 million in cash flow from operations and paid approximately $30.0 million in debt payments ($22.9 million for principal and $7.1 million for interest) as compared to debt payments of $15.8 million in the prior quarter ($10.8 million for principal and $5.0 million for interest). As part of our efforts to maximize profitability, we are taking decisive actions to right size our cost and operating structure to focus on the areas of our business with the highest strategic value and greatest return. We currently expect to exit the third quarter of 2017 with quarterly non-GAAP operating expenses reduced to approximately $43 million to $45 million. Other infrastructure activities we have in place are expected to help us further reduce our quarterly non-GAAP operating expense level to approximately $40 million, while also achieving a non-GAAP operating income target of 20% by the end of the first quarter of 2018."

Recent Business Highlights

Investor Conference Call / Outlook:

As a result of the acquisition announcement with Canyon Bridge, the Company will not hold a quarterly conference call and webcast, and will not provide an outlook for its future financial results.

Forward-Looking Statements Notice:

The foregoing paragraphs contain forward-looking statements that 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. Such forward-looking statements include statements relating to: our expectation that we will continue to invest in our business as we capitalize on exciting opportunities, including video and enabling applications in consumer and industrial led by our fast growing CrossLinkTM video bridging product, along with our wireless products showcased in leading edge OEM wireless VR headsets; our expectation that our FPGA technology will allow us to thrive as we leverage the many advantages of our low power solutions critical to the interconnected world of smart devices; and our intention to remain committed to actively managing our operating expenses as we focus on our financial model. Other forward-looking statements may be indicated by words such as “will,” “could,” “should,” “would,” “may,” “expect,” “plan,” “project,” “anticipate,” “intend,” “forecast,” “future,” “believe,” “estimate,” “predict,” “propose,” “potential,” “continue” or the negative of these terms or other comparable terminology; and our expectation that we will remain focused on maximizing the leverage of our operating model and reduce our outstanding debt balance. Lattice believes the factors identified below could cause actual results to differ materially from the forward-looking statements.

Estimates of future revenue are inherently uncertain due to, among other things, the high percentage of quarterly “turns” business. In addition, revenue is affected by such factors as global economic conditions, which may affect customer demand, pricing pressures, competitive actions, the demand for our Mature, Mainstream and New products, and in particular our iCE40™ and MachXO3L™ devices, the ability to supply products to customers in a timely manner, changes in our distribution relationships, or the volatility of our consumer business. Actual gross margin percentage and operating expenses could vary from the estimates on the basis of, among other things, changes in revenue levels, changes in product pricing and mix, changes in wafer, assembly, test and other costs, including commodity costs, variations in manufacturing yields, the failure to sustain operational improvements, the actual amount of compensation charges due to stock price changes. Any unanticipated declines in revenue or gross margin, any unanticipated increases in our operating expenses or unanticipated charges could adversely affect our profitability.

In addition to the foregoing, other factors that may cause actual results to differ materially from the forward-looking statements in this press release include disruptions of our business arising from the announcement and pendency of our proposed acquisition by Canyon Bridge Capital Partners, Inc., global economic uncertainty, overall semiconductor market conditions, market acceptance and demand for our new products, the Company's dependencies on its silicon wafer suppliers, the impact of competitive products and pricing, technological and product development risks, the failure to achieve the anticipated benefits and synergies of the Silicon Image transaction. In addition, actual results are subject to other risks and uncertainties that relate more broadly to our overall business, including those risks more fully described in Lattice’s filings with the SEC including its annual report on Form 10-K for the fiscal year ended December 31, 2016, and Lattice’s quarterly reports filed on Form 10-Q.

You should not unduly rely on forward-looking statements because actual results could differ materially from those expressed in any forward-looking statements. In addition, any forward-looking statement applies only as of the date on which it is made. The Company does not intend to update or revise any forward-looking statements, whether as a result of events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Non-GAAP Financial Measures:

Included within this press release and the accompanying tables and notes are non-GAAP financial measures that supplement the Company's consolidated financial information prepared in accordance with U.S. GAAP. The non-GAAP measures presented exclude charges and adjustments primarily related to stock-based compensation, restructuring charges, acquisition-related charges, amortization of acquired intangible assets, purchase accounting adjustments, 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. The Company describes these non-GAAP financial measures and reconciles them to the most directly comparable GAAP measures in the tables and notes attached to this press release.

The Company's 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 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, the Company uses Adjusted EBITDA to measure compliance with certain of its debt covenants. 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 the tables attached to this press release.

About Lattice Semiconductor Corporation:

Lattice Semiconductor Corporation (NASDAQ: LSCC) provides smart connectivity solutions powered by our low power FPGA, video ASSP, 60 GHz millimeter wave, and IP products to the consumer, communications, industrial, computing, and automotive markets worldwide. Our unwavering commitment to our customers enables them to accelerate their innovation, creating an ever better and more connected world.

For more information, visit www.latticesemi.com. You can also follow us via LinkedIn, Twitter, Facebook, YouTube or RSS.

Lattice Semiconductor Corporation, Lattice (& design), L (& design), iCE40 and MachXO3L, and specific product designations are either registered trademarks or trademarks of Lattice Semiconductor Corporation or its subsidiaries in the United States and/or other countries.

GENERAL NOTICE: Other product names used in this publication are for identification purposes only and may be trademarks of their respective holders.

Lattice Semiconductor Corporation

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 
  Three Months Ended   Six Months Ended
July 1,
2017 		  April 1,
2017 		  July 2,
2016 		July 1,
2017 		  July 2,
2016
Revenue $ 94,137   $ 104,587   $ 99,209   $ 198,724   $ 195,721  
Costs and expenses:
Cost of sales 42,928 43,755 40,783 86,683 80,191
Research and development 26,820 27,389 30,915 54,209 63,523
Selling, general, and administrative 21,938 23,905 23,005 45,843 46,613
Amortization of acquired intangible assets 8,737 8,514 8,311 17,251 17,032
Restructuring 1,576 66 2,568 1,642 7,999
Acquisition related charges 867   1,660   —   2,527   94  
102,866   105,289   105,582   208,155   215,452  
Loss from operations (8,729 ) (702 ) (6,373 ) (9,431 ) (19,731 )
Interest expense (4,656 ) (5,568 ) (5,062 ) (10,224 ) (10,022 )
Other income (expense), net 564   (148 ) 2,532   416   3,349  
Loss before income taxes and equity in net loss of an unconsolidated affiliate (12,821 ) (6,418 ) (8,903 ) (19,239 ) (26,404 )
Income tax expense 47 518 4,539 565 6,439
Equity in net loss of an unconsolidated affiliate, net of tax (154 ) (339 ) (368 ) (493 ) (678 )
Net loss $ (13,022 ) $ (7,275 ) $ (13,810 ) $ (20,297 ) $ (33,521 )
 
Net loss per share, basic and diluted $ (0.11 ) $ (0.06 ) $ (0.12 ) $ (0.17 ) $ (0.28 )
 
Shares used in per share calculations, basic and diluted 122,390   121,800   119,445   122,095   119,125  

Lattice Semiconductor Corporation

Consolidated Balance Sheets

(in thousands)

(unaudited)

 
  July 1,
2017 		  December 31,
2016
Assets
Current assets:
Cash, cash equivalents and short-term marketable securities $ 84,886 $ 116,860
Accounts receivable, net 86,791 99,637
Inventories 78,479 79,168
Other current assets 18,421   19,035
Total current assets 268,577 314,700
 
Property and equipment, net 49,356 49,481
Intangible assets, net of amortization 97,817 118,863
Goodwill 269,758 269,758
Deferred income taxes 379 372
Other long-term assets 11,394   13,709
$ 697,281   $ 766,883
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other accrued liabilities $ 75,916 $ 90,798
Current portion of long-term debt 15,318 33,767
Deferred income and allowances on sales to sell-through distributors and deferred license revenue 25,313   32,985
Total current liabilities 116,547 157,550
 
Long-term debt 286,979 300,855
Other long-term liabilities 34,990   38,048
Total liabilities 438,516 496,453
 
Stockholders' equity 258,765   270,430
$ 697,281   $ 766,883

Lattice Semiconductor Corporation

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 
Six Months Ended
July 1, 2017   July 2, 2016
Cash flows from operating activities:
Net loss $ (20,297 ) $ (33,521 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 30,497 32,352
Amortization of debt issuance costs and discount 1,354 659
Loss on sale or maturity of marketable securities 200 72
Gain on forward contracts (26 ) (4 )
Stock-based compensation expense 6,772 7,798
(Gain) loss on disposal of fixed assets (61 ) 314
Gain on sale of business unit (300 ) (2,646 )
Equity in net loss of an unconsolidated affiliate, net of tax 493 678
Changes in assets and liabilities:
Accounts receivable, net 12,846 3,524
Inventories 689 (10,847 )
Prepaid expenses and other assets 2,822 18
Accounts payable and accrued expenses (includes restructuring) (13,554 ) 23,901
Accrued payroll obligations (1,894 ) 574
Income taxes payable (355 ) (253 )
Deferred income and allowances on sales to sell-through distributors (7,342 ) 10,155
Deferred licensing and services revenue (330 ) (117 )
Net cash provided by operating activities 11,514   32,657  
Cash flows from investing activities:
Proceeds from sales of and maturities of short-term marketable securities 7,200 11,960
Purchases of marketable securities (7,420 ) (2,944 )
Capital expenditures (7,035 ) (10,102 )
Proceeds from sale of business unit, net of cash sold 300 1,972
Cash paid for a non-marketable equity method investment (1,000 ) —
Cash paid for software licenses (4,149 ) (5,672 )
Net cash used in investing activities (12,104 ) (4,786 )
Cash flows from financing activities:
Restricted stock unit withholdings (1,748 ) (1,427 )
Proceeds from issuance of common stock 2,931 3,326
Repayment of debt (33,679 ) (3,404 )
Net cash used in financing activities (32,496 ) (1,505 )
Effect of exchange rate change on cash 950   (441 )
Net (decrease) increase in cash and cash equivalents (32,136 ) 25,925
Beginning cash and cash equivalents 106,552   84,606  
Ending cash and cash equivalents $ 74,416   $ 110,531  
 
Supplemental cash flow information:
Change in unrealized loss related to marketable securities, net of tax, included in Accumulated other comprehensive loss $ 71 $ 27
Income taxes paid, net of refunds $ 976 $ 4,864
Interest paid $ 12,094 $ 9,264
Accrued purchases of plant and equipment $ 2,216 $ 1,585

Lattice Semiconductor Corporation

- Supplemental Historical Financial Information -

(unaudited)

 
  Three Months Ended   Six Months Ended
July 1,
2017 		  April 1,
2017 		  July 2,
2016 		July 1,
2017 		  July 2,
2016
Operations and Cash Flow Information
Percent of Revenue
Gross Margin 54.4 % 58.2 % 58.9 % 56.4 % 59.0 %
R&D Expense 28.5 % 26.2 % 31.2 % 27.3 % 32.5 %
SG&A Expense 23.3 % 22.9 % 23.2 % 23.1 % 23.8 %
Depreciation and amortization (in thousands) 15,201 15,296 15,021 30,497 32,352
Stock-based compensation expense (in thousands) 2,929 3,843 3,242 6,772 7,798
Restructuring and severance related charges (in thousands) 1,576 66 2,568 1,642 7,999
Net cash provided by (used in) operating activities (thousands) 3,849 7,665 9,533 11,514 32,657
Capital expenditures (in thousands) 3,661 3,374 4,402 7,035 10,102
Repayment of debt (thousands) 22,899 10,780 2,529 33,679 3,404
Interest paid (in thousands) 7,069 5,025 4,593 12,094 9,264
Taxes paid (cash, in thousands) 754 222 2,368 976 4,864
 
Balance Sheet Information
Current Ratio 2.3 2.6 2.0
A/R Days Revenue Outstanding 84 57 78
Inventory Months 5.5 5.3 6.4
 
Revenue% (by Geography)
Asia 69 % 70 % 68 % 70 % 68 %
Europe (incl. Africa) 11 % 11 % 15 % 11 % 16 %
Americas 20 % 19 % 17 % 19 % 16 %
 
Revenue% (by End Market)
Communications and Computing 29 % 29 % 29 % 29 % 31 %
Mobile and Consumer 27 % 30 % 24 % 29 % 25 %
Industrial and Automotive 32 % 30 % 37 % 30 % 35 %
Licensing and Services 12 % 11 % 10 % 12 % 9 %
 
Revenue% (by Channel)
Sell-through distribution 66 % 60 % 59 % 63 % 56 %
Direct 34 % 40 % 41 % 37 % 44 %

Lattice Semiconductor Corporation

- Reconciliation of U.S. GAAP to Non-GAAP Financial Measures -

(in thousands, except per share data)

(unaudited)

                   
Three Months Ended Six Months Ended
July 1,
2017 		  April 1,
2017 		  July 2,
2016 		July 1,
2017 		  July 2,
2016
 
Gross Margin Reconciliation
GAAP Gross margin $ 51,209 $ 60,832 $ 58,426 $ 112,041 $ 115,530
Inventory step-up expense — — — — 523
Stock-based compensation - gross margin 180   228   166   408     425  
Non-GAAP Gross margin $ 51,389 $ 61,060 $ 58,592 $ 112,449 $ 116,478
 
Gross Margin % Reconciliation
GAAP Gross margin % 54.4 % 58.2 % 58.9 % 56.4 % 59.0 %
Cumulative effect of non-GAAP Gross Margin adjustments 0.2 % 0.2 % 0.2 % 0.2 % 0.5 %
Non-GAAP Gross margin % 54.6 % 58.4 % 59.1 % 56.6 % 59.5 %
 
Operating Expenses Reconciliation
GAAP Operating expenses $ 59,938 $ 61,534 $ 64,799 $ 121,472 $ 135,261
Amortization of acquired intangible assets (8,737 ) (8,514 ) (8,311 ) (17,251 ) (17,032 )
Restructuring charges (1,576 ) (66 ) (2,568 ) (1,642 ) (7,999 )
Acquisition related charges (1) (867 ) (1,660 ) — (2,527 ) (94 )
Stock-based compensation - operations (2,749 ) (3,615 ) (3,076 ) (6,364 )   (7,373 )
Non-GAAP Operating expenses $ 46,009 $ 47,679 $ 50,844 $ 93,688 $ 102,763
 
Income (Loss) from Operations Reconciliation
GAAP Loss from operations $ (8,729 ) $ (702 ) $ (6,373 ) $ (9,431 ) $ (19,731 )
Inventory step-up expense — — — — 523
Stock-based compensation - gross margin 180 228 166 408 425
Amortization of acquired intangible assets 8,737 8,514 8,311 17,251 17,032
Restructuring charges 1,576 66 2,568 1,642 7,999
Acquisition related charges (1) 867 1,660 — 2,527 94
Stock-based compensation - operations 2,749   3,615   3,076   6,364     7,373  
Non-GAAP Income from operations $ 5,380 $ 13,381 $ 7,748 $ 18,761 $ 13,715
 
Income (Loss) from Operations % Reconciliation
GAAP Loss from operations % (9.3 )% (0.7 )% (6.4 )% (4.7 )% (10.1 )%
Cumulative effect of non-GAAP Gross Margin and Operating adjustments 15.0 % 13.5 % 14.2 % 14.1 % 17.1 %
Non-GAAP Income from operations % 5.7 % 12.8 % 7.8 % 9.4 % 7.0 %
 
(1) Legal fees and outside services in connection with our pending acquisition by Canyon Bridge Acquisition Company, Inc.
 
Lattice Semiconductor Corporation
- Reconciliation of U.S. GAAP to Non-GAAP Financial Measures -
(in thousands, except per share data)
(unaudited)
               
Three Months Ended Six Months Ended
July 1,
2017 		April 1,
2017 		July 2,
2016 		July 1,
2017 		July 2,
2016
 
Income Tax Expense Reconciliation
GAAP Income tax expense $ 47 $ 518 $ 4,539 $ 565 $ 6,439
Estimated tax effect of non-GAAP adjustments (2) 663   (303 ) (2,499 ) 360     (1,951 )
Non-GAAP Income tax expense $ 710 $ 215 $ 2,040 $ 925 $ 4,488
 
Net Income (Loss) Reconciliation
GAAP Net loss $ (13,022 ) $ (7,275 ) $ (13,810 ) $ (20,297 ) $ (33,521 )
Inventory step-up expense — — — — 523
Stock-based compensation - gross margin 180 228 166 408 425
Amortization of acquired intangible assets 8,737 8,514 8,311 17,251 17,032
Restructuring charges 1,576 66 2,568 1,642 7,999
Acquisition related charges (1) 867 1,660 — 2,527 94
Stock-based compensation - operations 2,749 3,615 3,076 6,364 7,373
Gain on sale of business unit (300 ) — (2,646 ) (300 ) (2,646 )
Estimated tax effect of non-GAAP adjustments (2) (663 ) 303   2,499   (360 )   1,951  
Non-GAAP Net income (loss) $ 124 $ 7,111 $ 164 $ 7,235 $ (770 )
 
Net Income (Loss) Per Share Reconciliation
GAAP Net loss per share - basic and diluted $ (0.11 ) $ (0.06 ) $ (0.12 ) $ (0.17 ) $ (0.28 )
Cumulative effect of Non-GAAP adjustments 0.11   0.12   0.12   0.23   0.27  
Non-GAAP Net income (loss) per share - basic and diluted $ — $ 0.06 $ — $ 0.06 $ (0.01 )
 
Shares used in per share calculations:
Basic 122,390 121,800 119,445 122,095 119,125
Diluted - GAAP (3) 122,390 121,800 119,445 122,095 119,125
Diluted - Non-GAAP (3) 124,527 124,343 120,871 124,276 119,125
 
 
(1) Legal fees and outside services in connection with our pending acquisition by Canyon Bridge Acquisition Company, Inc.
(2) We calculate 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.”
(3) Diluted shares are calculated using the GAAP treasury stock method. In a loss position, diluted shares equal basic shares.


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