Lattice Semiconductor Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the fiscal quarter ended October 3, 2015 (fiscal 2015 Q3), not 2014 Q3. Comparisons are with the quarter ended September 27, 2014. Unless noted, figures are in millions of dollars.
Business context and reporting period
Lattice supplies programmable semiconductor devices and intellectual property for communications, consumer, and industrial markets. Its March 2015 acquisition of Silicon Image added connectivity products and licensing activities. Fiscal 2015 results include Silicon Image from March 11 onward.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $109.7 | $86.6 | $304.8 | $282.5 |
| Gross margin | $59.8; 54.5% | $50.8; 58.7% | $165.8; 54.4% | $159.9; 56.6% |
| Operating income (loss) | $(18.0) | $10.4 | $(70.8) | $36.9 |
| Net income (loss) attributable to common stockholders | $(24.9) | $9.4 | $(113.8) | $33.2 |
| Basic and diluted EPS | $(0.21) | $0.08 | $(0.97) | $0.28 |
Q3 product gross margin was 49.9%; licensing and services gross margin was 96.0%. Management attributed lower product margins to product mix, purchase-accounting effects on acquired inventory and deferred revenue, and $1.2 million of costs to ramp a second-source fab and backend capability. It expected a comparable margin impact in Q4 FY2015 and Q1 FY2016.
For the nine months, cash used in operating activities was $20.6 million, versus $39.3 million provided in the prior-year period. Capital expenditures were $11.6 million. Investing cash outflow was $312.1 million, including $431.1 million paid for Silicon Image, net of cash acquired. Financing cash inflow was $330.2 million, primarily reflecting $346.5 million of term-loan proceeds, net of repayments and issuance costs.
Liquidity, debt, and balance sheet
- At October 3, 2015, cash and cash equivalents were $112.4 million and short-term marketable securities were $6.1 million, down from combined liquidity of $254.8 million at January 3, 2015.
- Current assets were $301.2 million and current liabilities were $110.8 million; working capital was approximately $190.4 million.
- Long-term debt was $338.1 million net of unamortized discount and issuance costs; principal outstanding was $348.3 million. The secured term loan matures March 10, 2021, bears variable interest at LIBOR (subject to a 1% floor) plus 4.25%, and had a 7.36% effective rate.
- The credit agreement requires quarterly installments and may require annual excess-cash-flow payments; the filing states the current applicable percentage is 75%. It has restrictive covenants but no financial covenants.
Management believed available financial resources would cover working-capital needs for at least the next 12 months. It cautioned that further financing could be harder to obtain given the new debt.
Material changes and management commentary
- Reported Q3 revenue rose 27% year over year, while nine-month revenue rose 8%. The acquired business materially affects comparability: Silicon Image contributed approximately $96.8 million of revenue and $43.9 million of net loss attributable to stockholders from March 11 through October 3.
- Communications revenue fell 18% in Q3 and 28% year to date, primarily reflecting lower demand after the peak of China’s LTE build-out in the first half of 2014. Consumer revenue rose 82% in Q3, primarily from Silicon Image, partly offset by lower demand for certain iCE40 products at a major OEM.
- Licensing and services revenue was $11.1 million in Q3 and $24.2 million year to date. Management warned that it may vary significantly with the timing of license arrangements and royalty audits.
- Operating results include substantial acquisition and restructuring costs: acquisition-related charges were $22.1 million year to date and restructuring charges were $15.8 million. The March 2015 integration plan is expected to cost $14–19 million; a separate September workforce reduction is expected to cost about $6 million. Both are expected to be substantially completed by the end of Q2 FY2016.
- Income-tax expense was $29.0 million year to date, including a $21.0 million charge from increasing the valuation allowance on remaining U.S. deferred tax assets. U.S. and French 2011–2012 returns and Singapore’s 2012 return were under examination.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management expects continued significant R&D investment. It also identified an expected Q4 FY2015 and Q1 FY2016 gross-margin headwind from fab and backend ramp costs.
Key risks include dependence on a limited number of foundries and external assembly and test providers; cyclical and changing demand, especially in consumer and communications markets; distributor reliance and sell-through reporting estimates; customer and product concentration; integration and synergy execution for Silicon Image; variable-rate debt and cash-flow repayment requirements; and uncertainty in licensing, royalties, and standards-related revenue.
Legal matters include a tentative settlement, subject to court approval, of Silicon Image shareholder litigation; the Papst patent case was settled with a fully paid-up license and dismissed with prejudice in October 2015. China’s NDRC concluded its HDMI licensing investigation without intending monetary penalties, subject to an agreement with the China Video Industry Association; implementation terms remained under negotiation, and financial consequences were not estimable. Disclosure controls were deemed effective, though internal control over financial reporting changed with the inclusion of Silicon Image.
Important facts for investors to verify
- Track post-acquisition revenue, profitability, integration synergies, and the final Silicon Image purchase-price allocation.
- Assess cash generation, debt principal and interest costs, and potential excess-cash-flow repayments.
- Monitor product gross margins, the effect and completion of restructuring plans, and expected fab-ramp costs.
- Evaluate licensing revenue variability and the outcome of negotiations concerning HDMI agent responsibilities and China-related terms.
- Review tax examinations, deferred-tax valuation allowances, and any change in the estimated consequences of legal or regulatory matters.