Business Context and Reporting Period
Lattice Semiconductor Corporation, a Delaware corporation, filed this Form 10-Q for the quarterly period ended December 31, 1994 (the third quarter of fiscal 1995). The company designs and sells programmable logic devices (PLDs), including the GAL, pLSI, and ispLSI product families. The company operates on a 52-53 week fiscal year ending on the Saturday closest to March 31.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 1994 | Nine Months Ended Dec 31, 1994 | Nine Months Ended Jan 1, 1994 |
|---|---|---|---|
| Revenue | $36.3 million | $103.8 million | $96.1 million |
| Net Income | $6.9 million | $19.3 million | $16.9 million |
| Diluted EPS | $0.36 | $1.01 | $0.89 |
| Gross Margin | 59.2% | 59.3% | 57.5% |
| Operating Cash Flow (9mo) | N/A | $24.6 million | $10.5 million |
| Cash & Short-term Investments | $89.4 million (Dec 31, 1994) | N/A | $93.6 million (Apr 2, 1994) |
| Debt | None reported | None reported | None reported |
Note: The company has no long-term debt. A significant portion of cash was deployed into a wafer supply advance.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 27% year-over-year for the quarter and 8% for the nine-month period, driven primarily by increased sales of new high-density products.
- Profitability: Net income rose 35% for the quarter and 14% for the nine-month period. Gross margins improved to 59.2% (quarter) and 59.3% (nine months) due to better capacity utilization and lower manufacturing costs.
- Expense Increases: R&D expenses rose 21% for the quarter and 7% for the nine months, while SG&A expenses increased 23% and 7% respectively, largely due to sales force expansion and higher commissions.
- Liquidity Shift: Cash and short-term investments decreased by $4.2 million to $89.4 million. This decline was primarily due to a $27.6 million advance payment made to a wafer supplier (Seiko Epson) during the period, partially offset by strong operating cash flow.
- Balance Sheet: Accounts receivable and deferred income on distributor sales increased by 21% and 25% respectively, reflecting higher revenue levels. Accounts payable increased 86% due to higher expense activity and payment timing.
Outlook, Risks, and Management Commentary
- Guidance: Management anticipates capital expenditures of $7 million to $8 million for the fiscal year ending April 1, 1995. The company expects export sales to remain a significant portion of revenue.
- Wafer Supply Agreement: The company entered a $44 million advanced production payment agreement with Seiko Epson to secure sub-micron wafer capacity. $33.5 million has been paid; the remainder is due in the current fiscal quarter. Repayment will be in the form of wafers over 3-4 years.
- Tax Rate: The effective tax rate increased to approximately 33.5% for the quarter and 33.7% for the nine months, up from ~30-31% in the prior year, due to the utilization of tax credit carryforwards. Future rates are expected to be slightly higher.
- Risks: Key risks include dependence on new product introductions, supply chain interruptions (specifically wafer supply), foreign exchange fluctuations (yen-denominated purchases), and patent infringement claims. The company is currently facing a patent claim from a semiconductor manufacturer but believes it will not have a material adverse effect.
Investor Verification Checklist
- Verify the status and terms of the $44 million wafer supply advance to Seiko Epson and the expected delivery schedule of wafers.
- Monitor the company's ability to maintain gross margins as older products face price erosion and new products are introduced.
- Review the progress of the patent infringement claim mentioned in the "Commitments and Contingencies" section.
- Assess the impact of foreign exchange rates on costs, given the reliance on yen-denominated wafer purchases.
- Confirm the execution of the $7-8 million capital expenditure plan for manufacturing capacity expansion.