Business Context and Reporting Period
Company: Lattice Semiconductor Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2001
Industry: Semiconductor (Programmable Logic Devices)
Context: The company operates in a single industry segment and is currently facing a significant cyclical downturn in the semiconductor and communications equipment markets, leading to reduced end-customer demand.
Key Financial Metrics
| Metric (in thousands) | Q3 2001 | Q3 2000 | 9M 2001 | 9M 2000 |
|---|---|---|---|---|
| Revenue | $58,038 | $151,038 | $243,218 | $416,971 |
| Gross Margin % | 62.1% | 62.0% | 62.3% | 61.5% |
| Operating (Loss) Income | $(14,327) | $32,831 | $(7,807) | $77,372 |
| Net (Loss) Income | $(104,601) | $22,701 | $(97,002) | $144,264 |
| Diluted EPS | $(0.96) | $0.21 | $(0.89) | $1.27 |
| Cash & Short-term Investments | $540.1 million (as of Sept 30, 2001) | |||
| Long-term Debt | $260 million (Convertible Notes due 2006) |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 62% in Q3 2001 and 42% for the nine months ended Sept 30, 2001, compared to the prior year. This is attributed to weak demand in the communications end market and a general semiconductor downturn.
- Foundry Investment Impairment: The company recorded a non-cash pre-tax charge of $152.8 million in Q3 2001 related to an "other than temporary" decline in the market value of its investment in United Microelectronics Corporation (UMC). This charge reversed a $150 million gain recognized in Q1 2000.
- Operating Expenses: Selling, General, and Administrative (SG&A) expenses decreased significantly ($9.4M in Q3) due to lower variable costs and a $2.8 million reversal of reserves related to settled Altera litigation. R&D expenses also decreased slightly due to reduced discretionary spending.
- Liquidity: Cash and short-term investments increased slightly to $540.1 million. Accounts receivable dropped 61% year-over-year due to lower billings, while inventory increased 9% due to continued wafer receipts despite lower revenue.
Guidance, Outlook, and Risks
- Outlook: Management expects an approximate 10% sequential decline in quarterly revenue for Q4 2001, driven by continued declines in PLD consumption, particularly in the communications sector.
- Accounting Changes: The company expects to adopt SFAS 142 in Q1 2002, which will eliminate the amortization of goodwill (approx. $8 million quarterly), though an initial impairment assessment will be required.
- Supply Chain Risks: The company relies on foundries (Seiko Epson, AMD, UMC) for wafer supply. UMC is closing certain facilities, requiring a technically demanding transfer of Lattice's manufacturing process to alternative fabs, which could delay new product introductions.
- Market Risks: Significant exposure to cyclical downturns, inventory excesses at customer sites, and foreign currency fluctuations (specifically Japanese Yen for wafer purchases).
Investor Verification Checklist
- Foundry Investment Valuation: Verify the current market value of the 84 million UMC shares held and the impact of regulatory restrictions on their liquidity (30% restricted until Jan 2002).
- Inventory Levels: Monitor inventory trends closely; while management anticipates a decline in Q4, the current increase relative to revenue suggests potential future write-downs if demand does not recover.
- Wafer Supply Continuity: Confirm the status of the manufacturing process transfer from the closing UMC fab to ensure no disruption in volume production for advanced products.
- Convertible Notes: Review the terms of the $260 million 4.75% convertible notes due in 2006, specifically the conversion price ($20.72) and redemption schedules, in the context of current stock price volatility.
- Goodwill Impairment: Watch for the Q1 2002 adoption of SFAS 142 and the results of the initial goodwill impairment test, which could result in a significant non-cash charge.