Lattice Semiconductor Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended March 29, 2014; comparative quarter ended March 30, 2013. The filing covers 2014 Q1, notwithstanding the request metadata stating 2013 Q1. The company designs and markets programmable logic products and related software.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $96.6 million | $71.2 million |
| Gross margin | $54.1 million; 56.0% | $38.2 million; 53.6% |
| Operating income | $13.4 million; 13.9% of revenue | $2.6 million; 3.7% of revenue |
| Net income | $12.0 million; $0.10 diluted EPS | $1.9 million; $0.02 diluted EPS |
| Operating cash flow | $2.9 million | $4.2 million |
- Revenue rose approximately 36% year over year. Growth was led by new products and higher sales in Communications and Consumer markets.
- Gross margin increased 2.4 percentage points, principally from product cost reductions on higher-volume wafer, assembly and package purchases. Mix, lower sell-through of excess and obsolete inventory, and Fujitsu fab-transition costs partly offset the improvement.
- Cash and cash equivalents were $112.2 million; marketable securities totaled $112.6 million, for combined cash and securities of $224.8 million. The company reported no long-term debt and no credit arrangements.
- Current assets were $357.3 million versus current liabilities of $68.5 million. Total liabilities were $71.8 million and stockholders’ equity was $404.7 million.
- Cash declined $2.1 million during the quarter. Operating cash flow was reduced by working-capital outflows, including increases of $16.6 million in receivables and $12.0 million in inventory; investing activities used $9.1 million and financing activities provided $4.2 million.
Material changes and operating developments
- Communications revenue increased 44%, Consumer revenue increased 63%, and Industrial, Scientific, Medical and Computing revenue increased approximately 7% year over year.
- Revenue from products classified as New increased 83% and represented 53% of revenue, up from 39%. Mainstream and Mature product revenue each increased 5%.
- Asia supplied 75% of revenue, up from 69%; Europe contributed 15% and the Americas 10%. Management expects Asia to remain the primary revenue source.
- The top five end customers represented approximately 51% of revenue, versus 39% in the prior-year quarter. The two largest contributed approximately 23% and 14%.
- Receivables increased 33% from year-end and days sales outstanding rose from 50 to 62. Inventory increased 26%; months on hand rose from 3.4 to 4.1, reflecting expected near-term demand and inventory built for the Fujitsu fab transition.
- Sell-through distributors accounted for 39% of revenue, down from 49%. Deferred income and allowances for those distributors increased to $17.0 million from $7.5 million.
Outlook, risks and contingencies
- Management said financial resources should meet working-capital needs for the next 12 months. No specific revenue or earnings guidance was provided. The filing says Fujitsu fab-transition costs were expected to affect gross margin nominally through Q2 2014.
- Management expects continued significant R&D investment. A new share-repurchase authorization permits up to $20 million over 12 months; no shares had been repurchased under it by quarter-end.
- Key risks include dependence on a limited number of foundries, particularly Fujitsu; customer and distributor concentration; cyclical and difficult-to-forecast end markets; product acceptance and pricing; and foreign-market exposure. The company relies on distributor resale reporting to recognize a significant portion of revenue.
- A long-running patent-infringement case remained unresolved. Trial was scheduled for December 2014; the company said it could not estimate potential exposure and had recorded no loss accrual for the current lawsuits.
- The company held illiquid auction-rate securities with $5.7 million par value and $5.2 million fair value, classified as long-term, and intended to sell when markets resumed or reasonable offers became available. Federal and French tax returns for 2011 and 2012 were under examination.
- Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and new-product demand persist, particularly in Consumer and Communications and in Asia.
- Whether receivables and inventory convert to cash as expected, and whether distributor deferred balances and resale reporting remain appropriate.
- Whether Fujitsu fab-transition costs end as anticipated and gross-margin gains from cost reductions continue to offset mix and pricing pressures.
- Whether concentrated customers, distributors or foundry suppliers change purchasing, supply or commercial terms.
- Developments in the patent litigation, tax examinations and the liquidity or valuation of auction-rate securities.