Lattice Semiconductor Reports Third Quarter 2020 Results

* 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. Additional information relating to these measures is included below in “Non-GAAP Financial Measures.” For a reconciliation of GAAP to non-GAAP results, see accompanying tables "Reconciliation of U.S. GAAP to Non-GAAP Financial Measures."

Third Quarter 2020 Highlights

Improved Financial Performance and Operating Profit Expansion: Operating profit of 12.4% on a GAAP basis and expansion to 26.5% on a non-GAAP basis in Q3 2020. Net income per diluted share was up 13% on a GAAP basis and up 12% on a non-GAAP basis in Q3 2020 compared to Q2 2020, with a 30 basis point improvement in gross margin on a GAAP basis and a 20 basis point improvement on a non-GAAP basis.
Launched Lattice Sentry™ Solutions Stack and the Lattice SupplyGuard™: Lattice Sentry solutions stack delivers a NIST-compliant, real-time, dynamic PFR software solution that reduces time-to-market. Lattice's SupplyGuard service preserves trust throughout unprotected supply chains by enhancing protection against counterfeiting and overbuilding.
Lattice CrossLink™-NX FPGA Named Embedded Solution Product of the Year: Lattice CrossLink™-NX FPGA was named Embedded Solution Product of the Year at the Electronics Industry Awards (EIA)
Lattice Added to PHLX Semiconductor Sector Index^SM: Lattice was added to the PHLX Semiconductor Sector Index, representing another milestone for the Company.

Business Outlook - Fourth Quarter of 2020:

Revenue for the fourth quarter of 2020 is expected to be between $99 million and $107 million.
Gross margin percentage for the fourth quarter of 2020 is expected to be 61.0% plus or minus 1% on a non-GAAP basis.
Total operating expenses for the fourth quarter of 2020 are expected to be between $36.5 million and $37.5 million on a non-GAAP basis.

Non-GAAP Financial Measures: In addition to financial measures prepared in accordance with generally accepted accounting principles (GAAP), this earnings release makes reference to non-GAAP financial measures. With respect to the outlook for the fourth quarter of 2020, certain items that affect GAAP measurement of financial measures are out of the Company’s control and/or cannot be reasonably predicted. Consequently, the Company is unable to provide a reasonable estimate of GAAP measurement for guidance or a corresponding reconciliation to GAAP for the quarter. Additional information regarding the reasons the Company uses non-GAAP measures, a reconciliation of these measures to the most directly comparable GAAP measures, and other information relating to these measures are included below, following the GAAP financial information.

Investor Conference Call / Webcast Details:

Lattice Semiconductor will review the Company's financial results for the fiscal third quarter 2020, and business outlook on Tuesday, October 27 at 5:00 p.m. Eastern Time. The dial-in number for the live audio call is 1-888-684-5603 or 1-918-398-4852 with conference identification number 6721419. A live webcast of the conference call will also be available on the investor relations section of www.latticesemi.com. The Company's financial guidance will be limited to the comments on its public quarterly earnings call and the public business outlook statements contained in this press release.

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, but are not limited to, statements relating to: our belief in the continued potential of the company as it accelerates its product roadmap leadership, expands customer engagements and drives toward our long-term financial goals; and the statements under the heading “Business Outlook - Fourth Quarter of 2020.” 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.

Estimates of future revenue are inherently uncertain due to such factors such as global economic conditions which may affect customer demand, pricing pressures, competitive actions, and international trade disputes and sanctions. In addition, the COVID-19 pandemic has negatively impacted the overall economy and, as a result of the foregoing, may negatively impact our operating results for future periods. 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, variations in manufacturing yields, the failure to sustain operational improvements, and the actual amount of compensation charges due to stock price changes. Actual results may differ materially from our expectations and are subject to 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 28, 2019, and Lattice’s quarterly reports filed on Form 10-Q. COVID-19 may increase or change the severity of our other risks reported in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019. Lattice believes these and other risks and uncertainties could cause actual results to differ materially from the forward-looking statements. 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 certain 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 and related tax effects, restructuring plans and related charges, amortization of acquired intangible assets, and the estimated tax effect of these items. The non-GAAP net income for the third quarter of fiscal 2020 includes a change in the non-GAAP tax rate calculation to exclude profits from jurisdictions where there is a full valuation allowance on deferred tax assets to improve alignment of non-GAAP income tax expense to non-GAAP income before tax. These charges and adjustments 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. 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.

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 (NASDAQ: LSCC) is the low power programmable leader. We solve customer problems across the network, from the Edge to the Cloud, in the growing communications, computing, industrial, automotive and consumer markets. Our technology, long-standing relationships, and commitment to world-class support lets our customers quickly and easily unleash their innovation to create a smart, secure and connected world.

For more information about Lattice, please visit www.latticesemi.com. You can also follow us via LinkedIn, Twitter, Facebook, YouTube, WeChat, Weibo or Youku.

Lattice Semiconductor Corporation Consolidated Statements of Operations (in thousands, except per share data) (unaudited)

	Three Months Ended									Nine Months Ended
	September 26,			June 27,			September 28,			September 26,			September 28,
	2020			2020			2019			2020			2019
Revenue	$	103,042		$	100,589		$	103,469		$	300,947		$	303,856
Cost of sales		40,736			40,012			42,030			120,502			124,727
Gross margin		62,306			60,577			61,439			180,445			179,129
Operating expenses:
Research and development		22,439			22,458			20,032			66,590			59,074
Selling, general, and administrative		23,758			24,488			21,078			70,797			61,618
Amortization of acquired intangible assets		603			603			3,389			3,846			10,168
Restructuring		2,692			546			252			4,178			4,719
Total operating expenses		49,492			48,095			44,751			145,411			135,579
Income from operations		12,814			12,482			16,688			35,034			43,550
Interest expense		(792	)		(1,045	)		(2,022	)		(2,914	)		(10,547	)
Other (expense) income, net		(70	)		37			(61	)		(83	)		(2,017	)
Income before income taxes		11,952			11,474			14,605			32,037			30,986
Income tax (benefit) expense		(655	)		845			1,066			634			1,480
Net income	$	12,607		$	10,629		$	13,539		$	31,403		$	29,506

Net income per share:
Basic	$	0.09		$	0.08		$	0.10		$	0.23		$	0.22
Diluted	$	0.09		$	0.08		$	0.10		$	0.22		$	0.21

Shares used in per share calculations:
Basic		135,598			134,857			132,997			134,903			132,065
Diluted		141,524			139,202			138,894			140,763			137,679

Lattice Semiconductor Corporation Condensed Consolidated Balance Sheets (in thousands) (unaudited)

	September 26,		December 28,
	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	182,268	$	118,081
Accounts receivable, net		72,989		64,917
Inventories		59,488		54,980
Other current assets		24,205		24,452
Total current assets		338,950		262,430

Property and equipment, net		39,782		39,230
Operating lease right-of-use assets		21,614		23,591
Intangible assets, net		3,496		6,977
Goodwill		267,514		267,514
Deferred income taxes		483		478
Other long-term assets		10,592		11,796
	$	682,431	$	612,016

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other accrued liabilities	$	74,890	$	73,659
Current portion of long-term debt		8,382		21,474
Current portion of operating lease liabilities		4,562		4,686
Total current liabilities		87,834		99,819

Long-term debt, net of current portion		162,215		125,072
Long-term operating lease liabilities, net of current portion		19,505		21,438
Other long-term liabilities		35,984		38,028
Total liabilities		305,538		284,357

Stockholders' equity		376,893		327,659
	$	682,431	$	612,016

Lattice Semiconductor Corporation Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)

	Nine Months Ended
	September 26,			September 28,
	2020			2019
Cash flows from operating activities:
Net income	$	31,403		$	29,506
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		19,263			24,682
Stock-based compensation expense		30,228			13,335
Other non-cash adjustments		4,663			9,060
Net changes in assets and liabilities		(16,599	)		8,234
Net cash provided by operating activities		68,958			84,817
Cash flows from investing activities:
Capital expenditures		(9,781	)		(11,729	)
Other investing activities		(6,850	)		3,910
Net cash used in investing activities		(16,631	)		(7,819	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		50,000			206,500
Cash paid for debt issuance costs		—			(2,086	)
Repayment of long-term debt		(26,250	)		(311,408	)
Net cash flows related to stock compensation exercises		(12,789	)		8,365
Net cash provided by (used in) financing activities		10,961			(98,629	)
Effect of exchange rate change on cash		899			(7	)
Net increase in cash and cash equivalents		64,187			(21,638	)
Beginning cash and cash equivalents		118,081			119,051
Ending cash and cash equivalents	$	182,268		$	97,413

Supplemental disclosure of cash flow information and non-cash investing and financing activities:
Interest paid	$	2,849		$	9,932
Income taxes paid, net of refunds	$	2,317		$	1,922

Lattice Semiconductor Corporation Supplemental Historical Financial Information (unaudited)

	Three Months Ended
	September 26,			June 27,			September 28,
	2020			2020			2019
Balance Sheet Information
A/R Days Revenue Outstanding (DSO)		65			79			42
Inventory Days (DIO)		133			123			130

Revenue% (by Geography)
Asia		77	%		74	%		77	%
Americas		15	%		14	%		12	%
Europe (incl. Africa)		8	%		12	%		11	%

Revenue% (by End Market)
Communications and Computing		43	%		46	%		40	%
Industrial and Automotive		41	%		39	%		36	%
Consumer		10	%		11	%		18	%
Licensing and Services		6	%		4	%		6	%

Revenue% (by Channel)
Distribution		82	%		85	%		81	%
Direct		18	%		15	%		19	%

Lattice Semiconductor Corporation Reconciliation of U.S. GAAP to Non-GAAP Financial Measures (in thousands, except per share data) (unaudited)

	Three Months Ended
	September 26,			June 27,			September 28,
	2020			2020			2019

Gross Margin Reconciliation
GAAP Gross margin	$	62,306		$	60,577		$	61,439
Stock-based compensation - gross margin (1)		1,022			1,101			453
Non-GAAP Gross margin	$	63,328		$	61,678		$	61,892

Gross Margin % Reconciliation
GAAP Gross margin %		60.5	%		60.2	%		59.4	%
Cumulative effect of non-GAAP Gross Margin adjustments		1	%		1.1	%		0.4	%
Non-GAAP Gross margin %		61.5	%		61.3	%		59.8	%

Research and Development Expene % (R&D Expense %) Reconciliation
GAAP R&D Expense %		21.8	%		22.3	%		19.4	%
Stock-based compensation - R&D (1)		(2.8	)%		(2.3	)%		(1.6	)%
Non-GAAP R&D Expense %		19	%		20	%		17.8	%

Selling, General, and Administrative Expense % (SG&A Expense %) Reconciliation
GAAP SG&A Expense %		23.1	%		24.3	%		20.4	%
Stock-based compensation - SG&A (1)		(7.1	)%		(7.8	)%		(3.5	)%
Non-GAAP SG&A Expense %		16	%		16.5	%		16.9	%

Operating Expenses Reconciliation
GAAP Operating expenses	$	49,492		$	48,095		$	44,751
Stock-based compensation - operations (1)		(10,189	)		(10,306	)		(5,227	)
Amortization of acquired intangible assets		(603	)		(603	)		(3,389	)
Restructuring charges		(2,692	)		(546	)		(252	)
Non-GAAP Operating expenses	$	36,008		$	36,640		$	35,883

Income from Operations Reconciliation
GAAP Income from operations	$	12,814		$	12,482		$	16,688
Stock-based compensation - gross margin (1)		1,022			1,101			453
Stock-based compensation - operations (1)		10,189			10,306			5,227
Amortization of acquired intangible assets		603			603			3,389
Restructuring charges		2,692			546			252
Non-GAAP Income from operations	$	27,320		$	25,038		$	26,009

Income from Operations % Reconciliation
GAAP Income from operations %		12.4	%		12.4	%		16.1	%
Cumulative effect of non-GAAP Gross Margin and Operating adjustments		14.1	%		12.5	%		9	%
Non-GAAP Income from operations %		26.5	%		24.9	%		25.1	%

(1)

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

Lattice Semiconductor Corporation Reconciliation of U.S. GAAP to Non-GAAP Financial Measures (in thousands, except per share data) (unaudited)

	Three Months Ended
	September 26,			June 27,			September 28,
	2020			2020			2019

Income Tax (Benefit) Expense Reconciliation
GAAP Income tax (benefit) expense	$	(655	)	$	845		$	1,066
Estimated tax effect of non-GAAP adjustments (2)		478			(365	)		(83	)
Non-GAAP Income tax (benefit) expense	$	(177	)	$	480		$	983

Net Income Reconciliation
GAAP Net income	$	12,607		$	10,629		$	13,539
Stock-based compensation - gross margin (1)		1,022			1,101			453
Stock-based compensation - operations (1)		10,189			10,306			5,227
Amortization of acquired intangible assets		603			603			3,389
Restructuring charges		2,692			546			252
Estimated tax effect of non-GAAP adjustments (2)		(478	)		365			83
Non-GAAP Net income	$	26,635		$	23,550		$	22,943

Net Income Per Share Reconciliation
GAAP Net income per share - basic	$	0.09		$	0.08		$	0.1
Cumulative effect of Non-GAAP adjustments		0.11			0.09			0.07
Non-GAAP Net income per share - basic	$	0.2		$	0.17		$	0.17

GAAP Net income per share - diluted	$	0.09		$	0.08		$	0.1
Cumulative effect of Non-GAAP adjustments		0.1			0.09			0.07
Non-GAAP Net income per share - diluted	$	0.19		$	0.17		$	0.17

Shares used in per share calculations:
Basic		135,598			134,857			132,997
Diluted - GAAP (3)		141,524			139,202			138,894
Diluted - Non-GAAP (3)		141,524			139,202			138,894

(1)		The non-GAAP adjustments for Stock-based compensation include related tax expenses.
(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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