Lattice Semiconductor Corporation — Form 10-Q Summary
Period discrepancy: Request metadata identifies 2013 Q3, but the supplied filing is for the quarter ended September 27, 2014 (fiscal 2014 Q3), with comparisons to September 28, 2013. This summary reflects the filing supplied.
Business context and reporting period
Lattice designs, develops, and markets programmable logic products and related software. Its customers primarily serve communications, consumer, and industrial markets. The filing reports three- and nine-month results through September 27, 2014; fiscal 2014 is a 53-week year, with a 14-week fourth quarter.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $86.6 million | $87.2 million | $282.5 million | $243.0 million |
| Gross margin | 58.7% | 53.2% | 56.6% | 53.3% |
| Operating income | $10.4 million | $8.9 million | $36.9 million | $18.6 million |
| Net income | $9.4 million | $8.8 million | $33.2 million | $15.8 million |
| Diluted earnings per share | $0.08 | $0.08 | $0.28 | $0.13 |
- Q3 revenue declined about 1% year over year, while operating income rose about 16% and net income about 6%. For the first nine months, revenue increased about 16%, operating income nearly doubled, and net income rose about 110%.
- Operating cash flow was $39.3 million for the first nine months, compared with $44.1 million a year earlier. Investing activities used $38.0 million; financing activities provided $6.8 million. Cash and cash equivalents increased by $8.7 million to $123.0 million.
- Cash, cash equivalents, and marketable securities totaled $257.1 million at September 27, 2014, up from $221.1 million at December 28, 2013. The company reported no long-term debt and no existing credit arrangements.
- Total assets were $502.1 million, total liabilities $67.7 million, and stockholders’ equity $434.4 million. Current assets were $388.6 million versus current liabilities of $60.5 million.
- Inventory increased 41% from year-end to $65.1 million; inventory on hand rose from 3.4 to 5.6 months. Management attributed the increase to purchases for expected near-term demand and a seasonally lower year-end balance.
Material changes and management commentary
- Q3 Communications revenue increased 14% year over year, supported mainly by ECP3 product demand tied to telecommunications infrastructure expansion in China. Industrial revenue rose about 25%, while Consumer revenue fell 36%, primarily due to lower demand for certain iCE40 products.
- For the first nine months, Communications revenue grew 32%, Industrial rose 15%, and Consumer was essentially flat. New-product revenue increased 27% year to date but declined 8% in Q3; Mainstream products grew 10% in Q3.
- Gross margin improved, principally due to product cost reductions from high-volume wafer, assembly, and package purchases, with product and customer mix partly offsetting the benefit. Management cautioned that insufficient future cost reductions relative to mix changes could pressure margins.
- Research and development expense rose 9% in Q3 and 12% year to date, reflecting higher mask, wafer, outside-service, and compensation costs. Management expects to continue significant R&D investment.
- The company sold its remaining auction rate securities in June 2014 for $5.5 million, recognizing a $1.7 million gain. Q3 other income was lower year over year, mainly due to foreign-exchange losses versus gains a year earlier.
- A $20 million share repurchase authorization was approved in March 2014. Approximately 226,500 shares were repurchased in Q3 for $1.7 million; $18.3 million remained available under the program at quarter-end.
Outlook, risks, and contingencies
- Management said financial resources should meet working-capital needs for the next 12 months. It gave no specific revenue or earnings guidance in the supplied filing text, noting that demand visibility and forecasting are difficult.
- Key exposures include dependence on a limited number of foundries, particularly Fujitsu for most wafers; reliance on distributors; customer and end-market concentration; and demand cyclicality, especially in Communications and Consumer markets.
- Other risks include inventory obsolescence if expected demand does not materialize, supply or capacity constraints, product acceptance and execution, international operations and currency movements, and uncertainty in tax outcomes. The U.S. and French 2011–2012 returns and Singapore 2012 return were under examination.
- A patent case was settled in August 2014; Lattice received a fully paid-up worldwide license and the case was dismissed with prejudice. The company reported no material adverse financial effect. It had other potential claims but recorded no accrual for possible losses.
- Disclosure controls were concluded effective, and the filing reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied document is fiscal 2014 Q3, not 2013 Q3.
- Track whether the elevated inventory balance converts to sales without excess or obsolescence charges.
- Assess durability of gross-margin gains and the balance between cost reductions, product mix, and selling prices.
- Monitor Consumer demand, Communications growth, and the high concentration of sales in Asia and through distributors.
- Review foundry capacity and supply dependence, tax examination developments, and the status of the share repurchase program.