Lattice Semiconductor Reports Second Quarter 2015 Results

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 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, our results could vary due to our acquisition of Silicon Image. We have not had experience operating Silicon Image or projecting its operating results. The acquisition of another company carries inherent risks, including our discovering unknown liabilities or encountering unanticipated issues relating to integrating the business with ours. Any unanticipated declines in revenue or gross margin, any unanticipated increases in our operating expenses or unanticipated charges, including without limitation, restructuring charges, or issues with integrating Silicon Image, 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 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, and the other risks that are described in this press release and that are otherwise described from time to time in our filings with the Securities and Exchange Commission. 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 under GAAP. 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 measures provide a more meaningful representation of the Company’s ongoing financial performance than GAAP measures alone. 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:

Lattice Semiconductor (NASDAQ: LSCC) is the global leader in smart connectivity solutions, providing market leading intellectual property and low-power, small form-factor devices that enable more than 8,000 global customers to quickly deliver innovative and differentiated cost and power efficient products. The Company’s broad end-market exposure extends from consumer electronics to industrial equipment, communications infrastructure and licensing.

Lattice was founded in 1983 and is headquartered in Portland, Oregon. The Company acquired Silicon Image in March 2015, which is a leader in setting industry standards including the highly successful HDMI®, DVI™, MHL® and WirelessHD® standards.

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

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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 4,			April 4,			June 28,		July 4,			June 28,
	2015			2015			2014		2015			2014
Revenue	$	106,460		$	88,597		$	99,320	$	195,057		$	195,957
Costs and expenses:
Cost of sales	48,334			40,765			44,345		89,099			86,844
Research and development	39,552			27,642			22,302		67,194			43,541
Selling, general and administrative	28,189			21,088			18,832		49,277			37,581
Acquisition related charges	3,270			18,198			—		21,468			—
Restructuring	4,068			4,894			3		8,962			14
Amortization of acquired intangible assets	8,941			2,942			737		11,883			1,474
	132,354			115,529			86,219		247,883			169,454
(Loss) income from operations	(25,894		)	(26,932		)	13,101		(52,826		)	26,503
Interest expense	(5,505		)	(1,611		)	—		(7,116		)	(48		)
Other (expense) income, net	(201		)	(154		)	906		(355		)	1,263
(Loss) income before income taxes	(31,600		)	(28,697		)	14,007		(60,297		)	27,718
Income tax expense	4,056			24,665			2,236		28,721			3,963
Net (loss) income	(35,656		)	(53,362		)	11,771		(89,018		)	23,755
Net loss attributable to non-controlling interest	86			15			—		101			—
Net (loss) income attributable to common stockholders	$	(35,570	)	$	(53,347	)	$	11,771	$	(88,917	)	$	23,755

Net (loss) income per share:
Basic	$	(0.30	)	$	(0.46	)	$	0.10	$	(0.76	)	$	0.20
Diluted	$	(0.30	)	$	(0.46	)	$	0.10	$	(0.76	)	$	0.20

Shares used in per share calculations:
Basic	116,903			116,863			117,904		116,883			117,170
Diluted	116,903			116,863			120,944		116,883			120,041

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

	July 4,		January 3,
	2015		2015
Assets
Current assets:
Cash, cash equivalents and short-term marketable securities	$	138,135	$	254,844
Accounts receivable, net	76,873		62,372
Inventories	80,796		64,925
Other current assets	20,527		16,281
Total current assets	316,331		398,422

Property and equipment, net	50,182		27,796
Other long-term assets	11,619		9,862
Intangible assets, net of amortization	189,449		9,537
Goodwill	270,083		44,808
Deferred income taxes	3,941		20,105
	$	841,605	$	510,530

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and other accrued liabilities	$	90,903	$	45,800
Current portion of long-term debt	242		—
Deferred income and allowances on sales to sell-through distributors and deferred license revenue	21,150		14,946
Total current liabilities	112,295		60,746

Long-term debt	338,206		—
Other long-term liabilities	24,316		8,809
Total liabilities	474,817		69,555

Redeemable non-controlling interest	7,366		—

Stockholders' equity	359,422		440,975
	$	841,605	$	510,530

Lattice Semiconductor Corporation
- Supplemental Historical Financial Information -
(unaudited)

	Three Months Ended						Six Months Ended
	July 4,		April 4,		June 28,		July 4,		June 28,
	2015		2015		2014		2015		2014
Operations Information
Percent of Revenue
Gross Margin	54.6	%	54.0	%	55.4	%	54.3	%	55.7	%
R&D Expense	37.2	%	31.2	%	22.5	%	34.4	%	22.2	%
SG&A Expense	26.5	%	23.8	%	19.0	%	25.3	%	19.2	%
Depreciation and amortization (in thousands)	17,055		7,904		5,773		24,959		11,633
Capital expenditures (in thousands)	4,155		2,878		2,480		7,033		4,875
Stock-based compensation (in thousands)	4,979		3,384		3,320		8,363		6,410
Stock-based compensation included in acquisition related charges (in thousands)	—		3,891		—		3,891		—
Restructuring and severance related charges (in thousands)	4,068		4,894		403		8,962		493
Severance costs included in acquisition related charges (in thousands)	—		4,017		—		4,017		—
Taxes paid (cash, in thousands)	2,049		1,063		418		3,112		798
Balance Sheet Information
Current Ratio	2.8		2.9		5.4
A/R Days Revenue Outstanding	66		82		60
Inventory Months	5.0		5.9		4.0
Revenue% (by Geography)
Asia	78	%	70	%	74	%	75	%	75	%
Europe (incl. Africa)	13	%	19	%	16	%	15	%	15	%
Americas	9	%	11	%	10	%	10	%	10	%
Revenue% (by End Market) (1)
Communications	23	%	37	%	44	%	29	%	43	%
Consumer	37	%	22	%	26	%	30	%	28	%
Industrial	31	%	38	%	30	%	34	%	29	%
Licensing	9	%	3	%	—	%	7	%	—	%
Revenue% (by Channel)
Sell-through distribution	43	%	48	%	42	%	45	%	40	%
Direct	57	%	52	%	58	%	55	%	60	%

(1)		During the second quarter of fiscal 2014, the Company condensed its End Market categories. All periods presented have been revised accordingly.

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 4,			April 4,			June 28,			July 4,			June 28,
	2015			2015			2014			2015			2014

GAAP Revenue	$	106,460		$	88,597		$	99,320		$	195,057		$	195,957
Fair Value Adjustment To Deferred Revenue From Purchase Accounting	2,921			1,809			—			4,730			—
Non-GAAP Revenue	$	109,381		$	90,406		$	99,320		$	199,787		$	195,957

GAAP Cost of Products Sold	$	48,334		$	40,765		$	44,345		$	89,099		$	86,844
Fair Value Adjustment To Deferred Revenue From Purchase Accounting	805			644			—			1,449			—
Inventory Step-Up Expense	(1,605		)	(3,041		)	—			(4,646		)	—
Stock-Based Compensation - Gross Margin	(398		)	(240		)	(211		)	(638		)	(376		)
Non-GAAP Cost of Products Sold	$	47,136		$	38,128		$	44,134		$	85,264		$	86,468

GAAP Gross Margin	$	58,126		$	47,832		$	54,975		$	105,958		$	109,113
Fair Value Adjustment To Deferred Revenue From Purchase Accounting	2,116			1,165			—			3,281			—
Inventory Step-Up Expense	1,605			3,041			—			4,646			—
Stock-Based Compensation - Gross Margin	398			240			211			638			376
Non-GAAP Gross Margin	$	62,245		$	52,278		$	55,186		$	114,523		$	109,489
Non-GAAP Gross Margin %	56.9%			57.8%			55.6%			57.3%			55.9%

GAAP Operating Expenses	$	84,020		$	74,764		$	41,874		$	158,784		$	82,610
Restructuring	(4,068		)	(4,894		)	(3		)	(8,962		)	(14		)
Acquisition Related Charges (1)	(3,270		)	(18,198		)	—			(21,468		)	—
Amortization of Acquired Intangible Assets	(8,941		)	(2,942		)	(737		)	(11,883		)	(1,474		)
Stock-Based Compensation - Operations	(4,581		)	(3,144		)	(3,109		)	(7,725		)	(6,033		)
Non-GAAP Operating Expenses	$	63,160		$	45,586		$	38,025		$	108,746		$	75,089

GAAP (Loss) Income from Operations	$	(25,894	)	$	(26,932	)	$	13,101		$	(52,826	)	$	26,503
Fair Value Adjustment To Deferred Revenue From Purchase Accounting	2,116			1,165			—			3,281			—
Inventory Step-Up Expense	1,605			3,041			—			4,646			—
Stock-Based Compensation - Gross Margin	398			240			211			638			376
Restructuring	4,068			4,894			3			8,962			14
Acquisition Related Charges (1)	3,270			18,198			—			21,468			—
Amortization of Acquired Intangible Assets	8,941			2,942			737			11,883			1,474
Stock-Based Compensation - Operations	4,581			3,144			3,109			7,725			6,033
Non-GAAP (Loss) Income from Operations	$	(915	)	$	6,692		$	17,161		$	5,777		$	34,400

(1) Includes stock-based compensation and severance costs related to change in control.

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 4,			April 4,			June 28,			July 4,			June 28,
	2015			2015			2014			2015			2014

GAAP (Loss) Income before Income Taxes	$	(31,600	)	$	(28,697	)	$	14,007		$	(60,297	)	$	27,718
Fair Value Adjustment To Deferred Revenue From Purchase Accounting	2,116			1,165			—			3,281			—
Inventory Step-Up Expense	1,605			3,041			—			4,646			—
Stock-Based Compensation - Gross Margin	398			240			211			638			376
Restructuring	4,068			4,894			3			8,962			14
Acquisition Related Charges (1)	3,270			18,198			—			21,468			—
Amortization of Acquired Intangible Assets	8,941			2,942			737			11,883			1,474
Stock-Based Compensation - Operations	4,581			3,144			3,109			7,725			6,033
Non-GAAP (Loss) Income before Income Taxes	$	(6,621	)	$	4,927		$	18,067		$	(1,694	)	$	35,615

GAAP Income Tax Expense	$	4,056		$	24,665		$	2,236		$	28,721		$	3,963
Non-cash Income Tax Expense	(2,007		)	(23,602		)	(1,818		)	(25,609		)	(3,165		)
Non-GAAP Income Tax Expense	$	2,049		$	1,063		$	418		$	3,112		$	798

GAAP Net (Loss) Income Attributable to Common Stockholders	$	(35,570	)	$	(53,347	)	$	11,771		$	(88,917	)	$	23,755
Fair Value Adjustment To Deferred Revenue From Purchase Accounting	2,116			1,165			—			3,281			—
Inventory Step-Up Expense	1,605			3,041			—			4,646			—
Stock-Based Compensation - Gross Margin	398			240			211			638			376
Restructuring	4,068			4,894			3			8,962			14
Acquisition Related Charges (1)	3,270			18,198			—			21,468			—
Amortization of Acquired Intangible Assets	8,941			2,942			737			11,883			1,474
Stock-Based Compensation - Operations	4,581			3,144			3,109			7,725			6,033
Non-cash Income Tax Expense	2,007			23,602			1,818			25,609			3,165
Non-GAAP Net (Loss) Income Attributable to Common Stockholders	$	(8,584	)	$	3,879		$	17,649		$	(4,705	)	$	34,817

GAAP Net (Loss) Income per Share - Basic	$	(0.30	)	$	(0.46	)	$	0.10		$	(0.76	)	$	0.20
Cumulative Effect of Non-GAAP Adjustments	0.23			0.49			0.05			0.72			0.10
Non-GAAP Net (Loss) Income per Share - Basic	$	(0.07	)	$	0.03		$	0.15		$	(0.04	)	$	0.30

GAAP Net (Loss) Income per Share - Diluted	$	(0.30	)	$	(0.46	)	$	0.10		$	(0.76	)	$	0.20
Cumulative Effect of Non-GAAP Adjustments	0.23			0.49			0.05			0.72			0.09
Non-GAAP Net (Loss) Income per Share - Diluted	$	(0.07	)	$	0.03		$	0.15		$	(0.04	)	$	0.29

Shares Used In Per Share Calculations:
Basic	116,903			116,863			117,904			116,883			117,170
Diluted - GAAP	116,903			116,863			120,944			116,883			120,041
Diluted - Non-GAAP	116,903			120,049			120,944			116,883			120,041

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