LSCC

Business Context and Reporting Period

Lattice Semiconductor Corporation, a Delaware corporation, filed this Form 10-Q for the quarterly period ended January 2, 1999, and the nine-month period ended on the same date. The company designs and sells programmable logic devices, primarily addressing the in-system programmable (ISP) segment of the CMOS market. The company operates on a 52-53 week fiscal year ending on the Saturday closest to March 31.

Key Financial Metrics

Liquidity: As of January 2, 1999, the company held $54.7 million in cash and cash equivalents and $244.4 million in short-term investments. The company maintains an unused $10 million unsecured demand bank credit facility.

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 16.4% year-over-year for the quarter ($50.2M vs. $60.0M) and 21.2% for the nine-month period ($146.3M vs. $185.7M). Management attributes this to the Asian economic crisis and reduced demand in computing and communications end markets.
• Profitability: Net income declined 23% for the quarter and 29% for the nine-month period compared to the prior year. Despite lower revenue, gross margins improved slightly (61.0% vs. 60.3% for the quarter) due to product mix shifts toward higher-margin ISP products and manufacturing cost reductions.
• Expense Management: Selling, general, and administrative (SG&A) expenses decreased 8% for the quarter and 10% for the nine-month period, primarily due to lower sales commissions. Research and development (R&D) expenses increased 6% for the quarter to support new product development.
• Balance Sheet: Accounts receivable decreased 34% and inventories decreased 16% compared to the prior fiscal year-end, reflecting reduced shipments and production levels.

Outlook, Risks, and Contingencies

• Guidance: The filing does not provide specific numerical revenue or earnings guidance for the full fiscal year. Management anticipates capital expenditures of approximately $20 million for the fiscal year ending April 3, 1999.
• Supply Chain Risks: The company relies entirely on third-party manufacturers (Seiko Epson in Japan and UMC Group in Taiwan) for wafer fabrication. Risks include supply interruptions, yield issues, and currency fluctuations (yen-denominated purchases). A fire at the UICC foundry (a UMC affiliate) in October 1997 was covered by insurance, and alternative capacity has been secured.
• Year 2000 Compliance: The company is in the compliance phase of its Year 2000 project, with completion expected by the third calendar quarter of 1999. Estimated costs are under $2 million. Management does not anticipate a material adverse impact but notes potential disruptions if suppliers or customers fail to comply.
• Intellectual Property: The company faces potential patent infringement claims common in the semiconductor industry. There is no assurance that licenses can be obtained on favorable terms if claims are asserted.
• Stock Repurchases: The Board authorized the repurchase of up to 1.2 million shares. As of January 2, 1999, 337,500 shares had been repurchased for approximately $9.2 million.

Investor Verification Checklist

• Verify the extent of revenue exposure to the Asian market and the specific impact of the regional economic crisis on future orders.
• Confirm the status of wafer supply commitments with Seiko Epson and UMC, particularly regarding the new eight-inch facility and the UICC foundry reconstruction timeline.
• Monitor the progress of Year 2000 compliance for critical suppliers and customers to assess potential supply chain disruptions in early 2000.
• Review the success rate of new ISP product introductions, as future growth is heavily dependent on market acceptance of these families.
• Assess the impact of currency exchange rates (USD/JPY) on future gross margins given the yen-denominated wafer purchases.