Lattice Semiconductor Corporation — Form 10-K Summary
Period clarification: The supplied filing is for the fiscal year ended December 31, 2011, not 2010 Q4 as indicated in the request metadata. Fiscal 2011 was a 52-week year. The filing also provides unaudited quarterly results, including Q4 2011.
Business context and reporting period
Lattice designs and markets programmable logic devices (PLDs), FPGAs, and related software. It uses external foundries and contractors for wafer fabrication, assembly, and most testing. Fiscal 2011 revenue was weighted toward PLDs (66%) and foreign markets (86%); communications accounted for 44% of revenue.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $318.4 million | $297.8 million |
| Gross profit / margin | $188.6 million / 59.2% | $179.8 million / 60.4% |
| Operating income / margin | $41.3 million / 13.0% | $55.1 million / 18.5% |
| Income before taxes | $42.7 million | $57.6 million |
| Income tax benefit (provision) | $35.5 million benefit | $0.5 million provision |
| Net income | $78.2 million | $57.1 million |
| Diluted earnings per share | $0.65 | $0.48 |
| Cash provided by operating activities | $62.2 million | $82.1 million |
Revenue increased 6.9%, while operating income declined. Net income includes a substantial tax benefit, rather than reflecting operating improvement alone. Cash and cash equivalents totaled $141.4 million; cash, cash equivalents, and short-term marketable securities totaled $210.1 million, down from $238.2 million. Working capital was $248.6 million. The company reported no long-term debt and said available liquidity and expected operating cash flow should cover requirements for at least 12 months.
FY2011 investing cash use was $86.2 million, including acquisitions and purchases of marketable securities; financing cash use was $8.9 million, mainly reflecting $14.4 million of share repurchases. Cash and cash equivalents fell by $33.0 million during the year. The company held $6.9 million of illiquid auction rate securities at fair value, against $8.3 million par value.
Material changes versus the prior period
- Revenue rose from $297.8 million to $318.4 million, primarily on growth in newer products. New-product revenue increased 20% and reached 48% of sales.
- Gross margin declined 1.2 percentage points, which management attributed mainly to a higher mix of newer products with lower margins.
- Operating income fell from $55.1 million to $41.3 million as R&D, SG&A, and restructuring costs increased. R&D spending rose to $71.9 million from $60.3 million.
- Operating cash flow decreased by $19.9 million to $62.2 million.
- Communications revenue declined 4% and its share of sales decreased to 44% from 49%; industrial and other revenue increased 29%.
- In December 2011, Lattice acquired SiliconBlue for $63.2 million in cash. The acquisition added $43.9 million of goodwill and $18.5 million of identifiable intangible assets. SiliconBlue contributed $0.7 million of revenue after acquisition through year-end.
Outlook, commentary, risks, and unusual items
- Outlook: The filing gives no numerical revenue or earnings guidance. Management expects significant ongoing R&D investment and identifies communications and Asia-Pacific as continuing major revenue drivers. It expects approximately $9.7 million of additional income tax provision in Q1 2012 and approximately $0.8 million of remaining restructuring costs in that quarter.
- Tax item: A global tax restructuring generated a $76.8 million tax provision, offset by a release of valuation allowance; a further valuation-allowance reversal contributed to a reported $35.5 million full-year tax benefit. The benefit depended on management’s estimates of future taxable income. The company also reported $21.6 million of unrecognized tax benefits.
- Restructuring: The 2011 plan involved workforce changes and transfers of development and supply-chain functions, including to the Philippines. FY2011 restructuring charges were $6.1 million; management said the plan was substantially complete by year-end.
- Concentration and supply risks: China represented 39% of revenue; three major distributors together accounted for about 53%. Fujitsu was the sole-source wafer supplier for the newest FPGA and PLD products. The Avnet franchise agreement ended in 2011; management did not expect significant customer-service disruption.
- Other risks and contingencies: The filing highlights semiconductor cyclicality, competition and pricing pressure, new-product execution, distributor reporting and demand forecasting, international operations, and outsourced manufacturing dependencies. Two patent-infringement cases seek unspecified damages; no loss accrual was recorded because exposure could not be estimated.
- Subsequent event: In February 2012, the board authorized a new share-repurchase program of up to $20 million over 12 months, funded from working capital.
Important facts for investors to verify
- Confirm the filing period: FY2011, despite the request metadata’s “2010 Q4” label.
- Assess how much reported net income depends on the deferred-tax-asset valuation allowance release, and whether those tax assets are ultimately realizable.
- Monitor revenue, margins, and cash conversion as newer products grow and communications demand softens.
- Track continuity of customer service and sales following Avnet’s agreement termination, given distributor concentration.
- Evaluate wafer-supply continuity and the implications of Fujitsu’s sole-source role for newest products.
- Follow the SiliconBlue integration, acquired-asset amortization, and potential effects on margins and operating costs.
- Monitor the patent cases, auction rate security liquidity and valuation, and execution and final costs of the restructuring and tax changes.