Lattice Semiconductor Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended October 1, 2016; unaudited. The request metadata says 2015 Q3, but the filing itself reports fiscal 2016 Q3. Unless stated otherwise, figures below are in U.S. dollars.
Business context and reporting period
Lattice supplies semiconductor devices and intellectual property for communications and computing, mobile and consumer, industrial and automotive, and licensing markets. The 2015 nine-month comparison includes Silicon Image only from its March 2015 acquisition date (about 29 weeks), so year-over-year comparisons are not fully like-for-like.
Financial performance and position
| Metric | Three months ended Oct. 1, 2016 | Prior-year quarter | Nine months ended Oct. 1, 2016 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $113.2 million | $109.7 million | $308.9 million | $304.8 million |
| Gross margin | $67.4 million; 59.5% | $59.8 million; 54.5% | $183.0 million; 59.2% | $165.8 million; 54.4% |
| Operating loss | $6.0 million | $18.0 million | $25.7 million | $70.8 million |
| Net loss | $12.4 million | $24.9 million | $45.9 million | $113.8 million |
| Basic and diluted loss per share | $0.10 | $0.21 | $0.38 | $0.97 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $19.3 million provided | $20.6 million used |
For the first nine months, investing activities used $14.4 million and financing activities used $1.8 million. Cash and cash equivalents were $87.2 million at quarter-end; short-term marketable securities were $11.8 million, for combined liquidity of $98.9 million, down $3.7 million from January 2, 2016.
At October 1, 2016, total assets were $756.3 million, total liabilities $482.6 million, and stockholders’ equity $273.7 million. Debt had a $343.1 million principal balance ($335.4 million carrying value, including unamortized discount and costs); $27.6 million was classified current and $307.7 million long-term. The term loan bears variable interest, with a reported effective rate of 5.97%, and matures in March 2021.
Company-defined non-GAAP results were operating income of $14.7 million and net income of $5.9 million in Q3 2016, compared with operating income of $3.6 million and a net loss of $5.4 million in Q3 2015. These measures exclude specified items and are not GAAP results.
Material changes versus the prior comparable periods
- Quarterly revenue rose 3%, while nine-month revenue was broadly flat. Industrial and automotive revenue increased 43% in Q3 and 36% for nine months; communications and computing declined 15% in both comparisons. Mobile and consumer revenue fell 4% in Q3 and 12% for nine months.
- Gross margin improved 5.0 percentage points in Q3 and 4.8 points for nine months. Management cited lower overhead, favorable product mix, reduced purchase-accounting effects, and a one-time recovery of previously expensed pre-production materials for the quarterly improvement.
- Operating losses narrowed as R&D and restructuring expenses declined. Q3 SG&A increased 23%, mainly due to bad-debt expense relating to a distributor with a high likelihood of bankruptcy.
- The company recorded $7.9 million of non-cash impairment on HDMI-related intangible assets after changes to the consortium’s agent and adopter-fee arrangements.
- Net receivables included a $7.2 million allowance for doubtful accounts, up from $0.6 million at the prior fiscal year-end; the filing cites $7.5 million of bad-debt expense tied to the distributor matter. Inventory rose 6% to $80.5 million, and inventory on hand increased to 5.3 months from 4.8 months.
Outlook, commentary, risks, and unusual items
- Management said liquidity should be sufficient for working-capital needs through at least the next 12 months. The filing provides no numerical revenue or gross-margin forecast; after announcement of the proposed merger, the company discontinued forward-looking revenue and gross-margin guidance.
- On November 3, 2016, after quarter-end, Lattice announced a definitive merger agreement under which a Canyon Bridge affiliate would acquire the company for $8.30 per share in cash, approximately $1.3 billion inclusive of net debt. Closing was expected in early 2017, subject to shareholder, regulatory, and other conditions. Failure or delay could affect operations and share price; a $34.18 million termination fee may apply in specified circumstances.
- Lattice expects a reduced share of HDMI adopter fees after a new independent licensing agent is appointed, expected in fiscal 2017. A consortium member may also claim a share of certain unused adopter fees; the company could not estimate the likelihood or financial amount of any resulting exposure.
- Other key risks include distributor and customer concentration, dependence on a limited number of wafer foundries and subcontractors, semiconductor-market cyclicality, pricing pressure, product acceptance, and execution of systems integration and the ERP transition. The term loan requires excess-cash-flow payments—currently stated as 75% under the agreement—and includes restrictive covenants, though the company reported compliance at quarter-end.
- Restructuring plans were substantially complete; management expected remaining costs to be immaterial and to be incurred through the first quarter of fiscal 2017. The Qterics business was sold in April 2016 for net proceeds of about $2.0 million, with a $2.6 million gain.
Important facts for investors to verify
- Confirm merger conditions, regulatory approvals, shareholder vote, expected timing, and any developments affecting the $8.30-per-share offer.
- Monitor the distributor bankruptcy exposure, collectability of receivables, and the elevated receivable concentrations with two distributor groups.
- Assess the future revenue and earnings effect of revised HDMI adopter-fee sharing and any potential claim for unused fees.
- Review operating cash generation against required debt amortization and excess-cash-flow payments, and track the variable-rate debt balance.
- Compare GAAP performance with management’s non-GAAP adjustments, and account for the acquisition-related comparability limitation in the prior-year nine-month period.