Lattice Semiconductor Corporation — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended April 4, 2015, compared with the 13 weeks ended March 29, 2014. Although the request specifies 2014 Q1, the filing itself reports fiscal 2015 Q1.
Business context and period
Lattice provides semiconductor devices and intellectual property for connectivity applications. Results include Silicon Image from March 11 through April 4, 2015, following its March 10 acquisition. The partial-period acquisition limits direct year-over-year comparability.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $88.6 million | $96.6 million |
| Gross margin | $47.8 million; 54.0% | $54.1 million; 56.0% |
| Operating income (loss) | $(26.9) million | $13.4 million |
| Net income (loss) attributable to common stockholders | $(53.3) million; $(0.46) per share | $12.0 million; $0.10 per share |
| Operating cash flow | $(0.02) million | $2.9 million |
Revenue declined about 8%. Communications revenue fell 18% and Consumer fell 34%; Industrial revenue grew about 22%. Licensing and services contributed $2.9 million, largely following the acquisition. Gross margin declined 2 percentage points, primarily due to acquisition-related inventory purchase-accounting adjustments, partly offset by lower packaging and wafer costs and higher margins on acquired products.
Operating results included $18.2 million of acquisition-related charges, $4.9 million of restructuring charges, and $2.9 million of acquired-intangible amortization. The $24.7 million income tax provision included a $21.0 million increase in the U.S. deferred-tax valuation allowance; management characterized the valuation allowance effect as noncash. Management’s non-GAAP presentation reported net income of $3.9 million, or $0.03 per share, after specified adjustments; these measures are not GAAP results.
Liquidity, debt and cash flow
At April 4, 2015, cash and cash equivalents were $119.6 million and short-term marketable securities were $40.1 million, totaling $159.8 million, down from $254.8 million at January 3. Current assets were $344.4 million and current liabilities $117.3 million. Operating cash flow was approximately break-even. Investing cash flow included $425.9 million paid for the acquisition, net of cash acquired; financing included $346.5 million of net term-loan proceeds.
The company had a $350 million secured term loan, with a $338.4 million balance-sheet carrying value after discount and issuance costs. It matures March 10, 2021, bears variable interest at LIBOR subject to a 1% floor plus 4.25% (6.16% effective rate at filing), and requires quarterly installments and potentially substantial excess-cash-flow payments. The agreement has restrictive covenants but no financial covenants. Management believed available resources would meet working-capital needs for the next 12 months.
Material changes, outlook and risks
- Silicon Image was acquired for preliminary consideration of $588.5 million. Purchase accounting remained preliminary; acquired goodwill was $223.9 million and acquired intangible assets were valued at $192.1 million.
- A post-acquisition restructuring is expected to cost $20–25 million and be substantially completed by year-end fiscal 2015. The filing gives no numerical revenue or earnings guidance. Management expects significant continued R&D investment and anticipates integration synergies, but does not quantify their expected timing or amount.
- Management cited lower Communications demand, including weaker China LTE build-out, and reduced demand for certain iCE products. Industrial demand, particularly in Europe and Asia, was stronger.
- Key risks include integration and realization of acquisition benefits, debt service and covenant restrictions, reliance on foundries and distributors, customer and end-market concentration, volatile demand and margins, and foreign-market exposure. Sell-through distributors generated 48% of revenue, up from 39% a year earlier; the top five end customers represented about 35%.
- Contingencies include merger-related shareholder litigation, a Papst patent-infringement lawsuit, and a Chinese antitrust investigation of HDMI Licensing. The company said it could not estimate potential losses for these matters; no litigation accrual was recorded for the current lawsuits. A tentative settlement in the Delaware merger case was subject to court approval and considered immaterial by the company.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this filing is fiscal 2015 Q1, not 2014 Q1.
- Track Silicon Image integration, the preliminary purchase-price allocation, restructuring costs, and whether anticipated synergies materialize.
- Monitor cash generation, variable-rate debt costs, excess-cash-flow repayment requirements, and compliance with credit-agreement covenants.
- Assess underlying performance alongside the substantial acquisition, restructuring, inventory step-up, and tax-valuation-allowance effects; review the company’s non-GAAP adjustments against GAAP results.
- Follow the status and potential financial impact of the disclosed litigation and antitrust investigation, for which loss estimates were unavailable.