Lattice Semiconductor Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for fiscal Q3 2019, ended September 28, 2019, with comparisons to Q3 2018. This does not match the request metadata of “2018 Q3.” Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Lattice develops semiconductor technologies and earns revenue from products, solutions, services, and licenses. Its strategy focuses on low-power programmable logic and applications including communications, computing, industrial, automotive, and consumer markets. The filing covers the three- and nine-month periods ended September 28, 2019.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $103.5 | $101.5 | $303.9 | $302.8 |
| Gross margin | $61.4; 59.4% | $58.4; 57.5% | $179.1; 59.0% | $165.1; 54.5% |
| Operating income (loss) | $16.7 | $13.0 | $43.6 | $(1.4) |
| Net income (loss) | $13.5 | $7.0 | $29.5 | $(19.2) |
| Diluted earnings (loss) per share | $0.10 | $0.05 | $0.21 | $(0.15) |
- Nine-month operating cash flow was $84.8, versus $20.6 a year earlier. Capital expenditures were $11.7 and software-license payments were $5.7; investing cash flow was a $7.8 outflow.
- Cash and cash equivalents were $97.4 at September 28, 2019, down from $119.1 at December 29, 2018. The company had no short-term marketable securities at quarter-end; approximately $63.6 of cash was held by foreign subsidiaries.
- Long-term debt principal was $158.1, compared with $263.0 at year-end 2018. The term loan’s effective rate was 4.38%; the $75.0 revolving facility had no balance outstanding. The filing states liquidity is expected to meet working-capital needs for at least 12 months.
- Current assets were $239.2 and current liabilities $81.4. The balance sheet also included $27.1 of operating lease liabilities following adoption of the new lease standard.
Material changes versus comparable periods
- Q3 revenue increased about 2%; nine-month revenue was nearly flat. Q3 growth reflected stronger communications and computing revenue, partly offset by declines in industrial and automotive and consumer markets.
- Communications and computing revenue rose 27% in Q3 and 30% for the nine months, primarily on server, client-computing, and 5G infrastructure demand. Industrial and automotive revenue fell 3% and 9%, respectively; consumer revenue fell 31% and 26%, primarily reflecting weaker mobile-phone-related demand and broad market weakness.
- Gross margin rose 190 basis points in Q3 and 450 basis points for the nine months. Management cited product cost reductions, pricing optimization, favorable mix, and—on the nine-month comparison—the absence of $8.3 of millimeter-wave-related inventory reserves recorded in 2018.
- Nine-month operating results improved from a loss to income. Lower SG&A, acquired-intangible amortization, and the absence of 2018 impairment charges contributed; 2019 restructuring charges were $4.7 versus $5.5.
- Interest expense declined to $10.5 for the nine months from $15.6, reflecting debt repayment and lower borrowing costs under the replacement credit agreement. Other expense included a $2.2 refinancing loss in Q2 2019.
Outlook, commentary, risks, and unusual items
- No quantitative revenue or earnings guidance is provided. Management cites potential growth drivers including 5G, cloud and enterprise servers, client computing, industrial IoT, factory automation, automotive electronics, and smart-home/prosumer markets.
- Management expects R&D expense to remain relatively flat as a percentage of revenue and rise in absolute dollars as revenue grows. It expected quarterly acquired-intangible amortization to remain near current levels through Q1 fiscal 2020, then decline by approximately 80% as most amortization periods end.
- Licensing and services revenue rose 69% in Q3 and 45% year to date, partly due to variable HDMI royalties and certain one-time patent and asset sales. A new HDMI royalty-sharing agreement covering periods beginning January 1, 2018 had not been signed; reported contract assets for estimated HDMI royalties reached $15.4.
- Distributor dependence is significant: distributors generated 81% of Q3 revenue and 82% for the nine months. At quarter-end, the largest and second-largest distributors represented 43% and 28% of net receivables, respectively; another represented 11%.
- A lawsuit alleges claims related to products sold around 2008 and seeks $138 in damages, treble damages, and other remedies. Lattice says it believes the claims are without merit and intends to defend them; it could not estimate likelihood or exposure and recorded no contingency amount.
- The company maintained a full valuation allowance against U.S. federal and state deferred tax assets. It said sustained U.S. profitability over the next 9–12 months could lead to reversal of a significant portion, creating a tax benefit. Uncertain tax-position liabilities, including interest and penalties, were $25.9.
- The new secured credit agreement requires compliance with leverage and interest-coverage covenants. A hypothetical 1% increase in one-month LIBOR would increase quarterly interest expense by about $0.4. Management reported disclosure controls were effective and no material internal-control changes occurred during the quarter.
Most important facts for investors to verify
- Confirm the intended reporting period: the supplied document is Q3 2019, not Q3 2018.
- Track whether communications and computing growth offsets continuing weakness in consumer and industrial/automotive markets.
- Assess the sustainability of margin improvement, operating cash flow, and debt reduction, including working-capital effects.
- Monitor the unsigned HDMI royalty-sharing agreement and the degree to which licensing revenue includes variable or one-time items.
- Review distributor concentration, credit-agreement covenant compliance, the $138 legal claim, and any changes to the U.S. tax valuation allowance.