Lattice Semiconductor Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The request metadata says “2021 Q4,” but the supplied filing is the FY2022 annual report; FY2021 ended January 1, 2022. Amounts below are U.S. dollars.
Business context
Lattice develops low-power programmable logic semiconductors, related software and system solutions, and provides IP licensing and services. Its products serve Communications and Computing, Industrial and Automotive, and Consumer markets. It operates primarily as a fabless semiconductor company, relying on third-party foundries and assembly and test providers, mainly in Asia.
Financial results and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $660.4 million | $515.3 million |
| Gross profit / margin | $452.1 million / 68.5% | $321.7 million / 62.4% |
| Operating income / margin | $187.4 million / 28.4% | $100.8 million / 19.6% |
| Net income | $178.9 million | $95.9 million |
| Diluted EPS | $1.27 | $0.67 |
| Cash from operations | $238.8 million | $167.7 million |
| Cash and cash equivalents at year-end | $145.7 million | $131.6 million |
| Debt principal at year-end | $130.0 million | $158.8 million |
FY2022 investing cash outflow was $34.9 million; financing cash outflow was $188.1 million, including $110.1 million of share repurchases. Year-end current assets were $379.2 million and current liabilities were $127.4 million. Inventories rose 63% to $110.4 million, and days of inventory on hand increased to 187 from 122. The company said the inventory increase supported customer demand and new-product ramps.
Material changes versus FY2021
- Revenue increased 28.1%, driven principally by data-center servers, client computing, 5G infrastructure, industrial automation, and robotics.
- Industrial and Automotive revenue grew 41.2%; Communications and Computing grew 26.1%. Consumer revenue declined 3.1%, and Licensing and Services revenue declined 16.3%.
- Gross margin increased 610 basis points, with product gross margin rising to 67.6% from 60.9%. Management attributed the improvement to its margin-expansion strategy.
- Operating income rose to $187.4 million from $100.8 million. R&D expense increased 22.8% to $135.8 million, primarily due to headcount and product-roadmap investment; SG&A rose 15.6%, including higher staffing and legal costs.
- Operating cash flow increased by $71.1 million, while inventory-related working-capital use partially offset stronger operating performance.
- The company refinanced its prior borrowings in September 2022 with a five-year, secured revolving credit facility of up to $350 million, due September 2027. It had $130 million drawn at year-end.
Outlook, risks, contingencies and unusual items
- Management expects to continue significant R&D investment. It stated that cash, operating cash flow, and credit facilities should meet liquidity and working-capital needs for at least the next 12 months. The filing does not provide annual revenue or earnings guidance.
- Key risks include distributor and customer concentration, reliance on Asian foundries and assembly/test providers, semiconductor cyclicality, inventory forecasting, and export controls or trade restrictions affecting China. Two distributor groups accounted for 58.8% of FY2022 revenue; distributors overall accounted for 89.5%.
- China represented 45% of FY2022 revenue, and Asia represented 70.5%. The company cautions that U.S.–China restrictions and Taiwan-related geopolitical disruption could affect sales and supply chains.
- FY2022 included a $0.7 million loss on debt refinancing, $2.6 million of restructuring charges, and $0.5 million of acquisition-related charges. No goodwill or acquired-intangible impairment charges were recorded in FY2020–FY2022.
- A lawsuit seeks $155 million to $268 million, treble damages and other remedies. The company says it believes the claims are without merit and intends to defend them; it cannot estimate the likelihood or amount of potential exposure.
- The company maintained a full valuation allowance against U.S. federal and state deferred tax assets. Unrecognized tax benefits were $58.9 million at year-end.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Inventory valuation was identified as a critical audit matter because estimates depend on projected customer demand.
Important facts for investors to verify
- Whether elevated inventory and 187 days on hand convert into sales without material obsolescence or write-downs.
- End-customer demand and sell-through behind distributor shipments, particularly given the 89.5% distributor revenue share and reliance on two major distributors.
- Progress and economics of margin expansion, and whether revenue growth across Industrial and Automotive and Communications and Computing is sustained.
- Exposure to China export controls and concentration of manufacturing and supply-chain partners in Asia.
- Developments in the $155 million–$268 million lawsuit, tax examinations, and the realization of deferred tax assets.
- Availability under the $350 million revolving facility, covenant compliance, and the effect of variable interest rates on debt costs.