Lattice Semiconductor Corporation — Form 10-Q Summary
Period: Fiscal third quarter and first nine months ended September 26, 2020; comparative periods ended September 28, 2019. The request metadata says “2019 Q3,” but the filing itself is for fiscal 2020 Q3.
Business context
Lattice develops and sells programmable logic semiconductors, system solutions, design services, and licenses. Its markets include communications and computing, industrial and automotive, and consumer. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $103.0m | $103.5m | $300.9m | $303.9m |
| Gross margin | $62.3m; 60.5% | $61.4m; 59.4% | $180.4m; 60.0% | $179.1m; 59.0% |
| Operating income | $12.8m | $16.7m | $35.0m | $43.6m |
| Net income | $12.6m | $13.5m | $31.4m | $29.5m |
| Diluted EPS | $0.09 | $0.10 | $0.22 | $0.21 |
- Operating cash flow for the first nine months was $69.0m, compared with $84.8m a year earlier. Capital expenditures and software-license payments totaled $16.6m; cash increased by $64.2m to $182.3m.
- At September 26, cash was $182.3m and principal debt was $171.9m, including $50.0m drawn on the revolving facility during Q1. Debt’s carrying amount was approximately $170.6m. Current assets were $339.0m and current liabilities $87.8m.
- Revenue was nearly flat year over year in Q3 and down about 1% for the nine-month period. Gross margin improved, while operating income fell in both comparisons. Nine-month net income rose despite lower operating income, supported in part by substantially lower interest expense and the absence of the prior-year debt-refinancing loss.
Material changes and operating trends
- Q3 communications and computing revenue rose 6% and industrial and automotive rose 14%; consumer revenue fell 45%, which the company attributed to weaker pandemic-affected demand and a planned mix shift. For nine months, those changes were respectively up 10%, up 9%, and down 40%.
- Gross margin increased 110 basis points in Q3 and 100 basis points for the nine-month period, attributed to pricing optimization, product cost reductions, and product mix.
- Research and development and selling, general, and administrative expenses increased year over year, including higher headcount, salaries, and stock-based compensation. Nine-month stock-based compensation was $30.2m versus $13.3m.
- Q3 restructuring expense was $2.7m versus $0.3m, including costs associated with a partially vacated San Jose facility and the 2020 workforce restructuring. The June 2017 plan is expected to cost approximately $22.0m–$23.5m in total; approximately $21.2m had been incurred through the period.
- China accounted for 56% of Q3 revenue; distributors accounted for approximately 82%. The two largest distributors represented 53% and 31% of accounts receivable at period end.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance is provided in the supplied filing text. Management expected COVID-19 to affect demand in Q4 and potentially beyond, and said forecasting remained especially difficult.
- The company said available cash, operating cash flow, and credit facilities should meet liquidity and working-capital needs for at least the next 12 months. Required quarterly debt installments had been prepaid through Q1 2021; the next installment was due in Q2 2021. Term-loan and revolver effective rates were 1.62% and 1.42%, respectively.
- COVID-19 risks include weaker customer demand, supply-chain and shipping disruption, delays in product development, and effects on operations and cash flows. The filing also highlights tariffs and U.S. export-control restrictions affecting sales to certain Chinese customers.
- A lawsuit related to products sold in or around 2008 seeks $138m, treble damages, and other remedies. The company disputes the claims; it could not estimate the likelihood or amount of exposure.
- The company reported a $23.0m liability for uncertain tax positions and continued to maintain a full U.S. deferred-tax valuation allowance. It authorized a $40m share-repurchase program but had made no repurchases through quarter-end.
Important facts for investors to verify
- Whether COVID-19, export restrictions, or supply-chain constraints materially changed demand, deliveries, or the company’s outlook after quarter-end.
- Whether elevated receivables and inventory convert to cash as expected; days sales outstanding rose to 65 from 59 at year-end, and inventory days rose to 133 from 123.
- Debt balances, revolver availability, required repayments, and compliance with credit-agreement covenants.
- Progress and remaining costs for restructuring plans, particularly the San Jose facility, and the drivers of increased stock-based compensation.
- Developments in the $138m legal claim and the uncertain-tax-position liability.
Management concluded disclosure controls were effective at period-end and reported no material change in internal control over financial reporting during the quarter.