Lattice Semiconductor Corporation — FY2016 Form 10-K
Period clarification: The supplied filing is the annual report for the fiscal year ended December 31, 2016—not a 2015 Q4 filing. Fiscal 2016 and fiscal 2015 were both 52-week years. Fiscal 2016 includes Silicon Image for the full year; fiscal 2015 includes it for approximately ten months, limiting comparability.
Business context
Lattice develops programmable logic devices, video-connectivity products, mmWave devices, and intellectual-property licensing and services. It serves Mobile and Consumer, Communications and Computing, and Industrial and Automotive markets. Manufacturing, assembly, and most testing are outsourced to third parties.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $427.1 million | $406.0 million |
| Gross margin | $246.4 million; 57.7% | $219.9 million; 54.2% |
| Operating income (loss) | $(26.7) million | $(107.2) million |
| Net income (loss) | $(54.1) million; $(0.45) per diluted share | $(159.2) million; $(1.36) per diluted share |
| Cash from (used in) operations | $41.7 million | $(22.9) million |
- Revenue increased 5%, primarily reflecting $40.6 million growth in Industrial and Automotive programmable products and the full-year inclusion of Silicon Image, partly offset by a $20.4 million decline in Communications and Computing programmable products.
- Gross margin improved 3.5 percentage points. Management cited lower product costs and yields, plus reduced purchase-accounting effects; less favorable product and customer mix partly offset these benefits.
- Operating loss narrowed substantially, but results remained GAAP loss-making. FY2016 non-GAAP operating income was $47.1 million and non-GAAP net income was $17.0 million; these measures exclude specified items and should be considered alongside GAAP results.
- At year-end, cash, cash equivalents, and short-term marketable securities were $116.9 million; current assets were $314.7 million and current liabilities $157.6 million.
- Term-loan principal was $342.2 million, with a variable rate of 6.20% effective at year-end and a March 2021 maturity. The company reported $334.6 million of current and long-term debt carrying value combined. It expected approximately $32.5 million of principal payments over the next 12 months, in addition to scheduled quarterly payments.
Material changes and unusual items
- End-market revenue was $140.3 million Industrial and Automotive (+41%), $127.4 million Mobile and Consumer (+1%), $123.0 million Communications and Computing (−14%), and $36.4 million Licensing and Services (−1%).
- Sell-through distributors accounted for 61% of revenue, up from 45%; Arrow and Weikeng represented 24% and 22%, respectively. A distributor’s likely bankruptcy led to a $9.0 million increase in doubtful-account allowance and $7.5 million bad-debt expense.
- FY2016 included $9.3 million of restructuring charges, $6.3 million of acquisition-related charges, and a $7.9 million non-cash impairment of HDMI-related intangible assets. The HDMI impairment followed a change in consortium arrangements and reduced the company’s future adopter-fee share.
- Qterics was sold in April 2016 for approximately $2.0 million net proceeds, generating a $2.6 million gain.
- Foreign sales were 88% of revenue; China represented approximately 34%.
Outlook, risks, and contingencies
- Management said it expected financial resources to meet working-capital needs for at least 12 months and planned continued significant R&D investment. The filing provides no forward revenue or gross-margin guidance; the company discontinued guidance after announcing the proposed acquisition.
- A pending merger agreement provided for $8.30 cash per share, valuing the transaction at approximately $1.3 billion including net debt. Closing was expected in early 2017, subject to shareholder and regulatory approvals, including CFIUS. The filing does not establish that the transaction ultimately closed.
- Key risks include cyclical end markets, customer and distributor concentration, reliance on a limited number of foundries and outsourced suppliers, pricing and margin pressure, and dependence on successful new-product adoption. The business also faces uncertainty over reduced HDMI adopter fees and future royalty allocation.
- Litigation included a Technicolor counterclaim related to HDMI licensing and lawsuits challenging merger disclosures. The company stated that potential financial consequences were not estimable at that stage.
- The company reported effective disclosure controls and internal control over financial reporting; KPMG issued unqualified audit opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the proposed Canyon Bridge transaction closed, and its final terms and approvals.
- Debt repayment requirements, including excess-cash-flow payments and the effect of subsequent transactions on near-term maturities.
- Distributor exposure and collections, especially the bankruptcy-related reserve and the high share of revenue routed through two distributor groups.
- Actual revenue and margin trends by end market, and whether Industrial and Automotive growth can offset Communications and Computing weakness.
- The realized effect of the HDMI agreement changes on adopter-fee revenue, royalties, and related litigation or claims.