Business Context and Reporting Period
Lattice Semiconductor Corporation (Lattice) designs, develops, and markets high-performance programmable logic devices (PLDs) and field programmable gate arrays (FPGAs). This Form 10-Q covers the quarterly period ended March 31, 2007. The company operates in a single industry segment with significant exposure to the communications, computing, industrial, consumer, automotive, medical, and military end markets.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Revenue | $58.1 million | $57.5 million |
| Gross Margin | 54.9% | 56.2% |
| Net Loss | $(4.4) million | $(0.8) million |
| Loss Per Share (Diluted) | $(0.04) | $(0.01) |
| Operating Cash Flow | $(41.2) million | $(3.5) million |
| Cash and Marketable Securities | $169.7 million | $233.2 million (Dec 30, 2006) |
| Working Capital | $217.0 million | $220.5 million (Dec 30, 2006) |
| Convertible Notes Outstanding | $89.1 million | $110.9 million (Principal) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 1.1% year-over-year, driven by a 23% increase in FPGA unit sales and growth in New and Mainstream product categories. This was offset by an 8% decline in average selling price and weakness in communications and computing markets.
- Profitability Decline: Net loss widened significantly to $4.4 million from $0.8 million. Operating loss increased to $7.2 million from $4.7 million due to higher R&D and SG&A expenses (primarily labor and stock-based compensation) and a decline in gross margin.
- Cash Flow Impact: Net cash used in operating activities surged to $41.2 million, primarily due to a $37.5 million advance payment made to foundry partner Fujitsu Limited for prepaid wafers.
- Debt Reduction: The company used $19.6 million to extinguish Convertible Notes in Q1 2007, resulting in a $0.7 million gain. Total principal outstanding decreased to $89.1 million.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes existing liquid resources ($169.7 million) and future cash generation are adequate for the next 12 months. However, liquidity decreased by $63.6 million from the prior year-end due to the Fujitsu advance and debt extinguishment.
- Supply Chain: Lattice relies on sole-source suppliers for its newest FPGA products (Fujitsu). The company has prepaid $125.0 million to Fujitsu for wafer credits to secure supply, with $24.0 million expected to be returned as credits in the next 12 months.
- Restructuring: The company recorded a net credit of $0.1 million related to the 2005 restructuring plan, primarily due to revised sublease income estimates for vacated premises in Austin, Texas.
- Legal Proceedings: The SEC issued a Cease-and-Desist Order in January 2007 regarding prior financial restatements. The company settled the informal inquiry, but risks remain regarding potential claims and litigation.
- Risk Factors: Key risks include the cyclical nature of the semiconductor industry, dependence on foundry partners for wafer supply, potential product obsolescence, and the ability to successfully migrate to advanced manufacturing processes.
Investor Verification Checklist
- Foundry Dependency: Verify the status of the $125 million advance payment to Fujitsu and the timeline for wafer credit utilization.
- Product Mix Shift: Monitor the transition from Mature to New/Mainstream products and the impact on gross margins, which declined to 54.9%.
- Debt Obligations: Track the remaining $89.1 million in Convertible Notes, noting the holder's right to require payment on July 1, 2008.
- Legal Exposure: Review the status of the SEC settlement and any ongoing internal control assessments related to the 2003 restatement.
- Cash Burn: Assess the sustainability of the current operating cash burn rate, which was heavily influenced by the one-time foundry advance.