Lattice Semiconductor Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended June 27, 2020 (fiscal Q2 2020), not 2019 Q2. Comparisons below are against the quarter ended June 29, 2019. Financial amounts are in U.S. dollars; tables report millions unless stated otherwise.
Business context and reporting period
Lattice develops and sells programmable logic semiconductors, system solutions, design services, and licenses. Its stated focus includes low-power programmable products for communications and computing, industrial and automotive, and consumer markets. The filing covers the three and six months ended June 27, 2020; statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $100.6 | $102.3 | $197.9 | $200.4 |
| Gross margin | $60.6; 60.2% | $60.0; 58.7% | $118.1; 59.7% | $117.7; 58.7% |
| Operating income | $12.5 | $14.4 | $22.2 | $26.9 |
| Net income | $10.6 | $8.6 | $18.8 | $16.0 |
| Diluted EPS | $0.08 | $0.06 | $0.14 | $0.12 |
| Operating cash flow | Not provided for the quarter | $36.9 | $66.5 |
For the six months, investing activities used $11.5 million and financing activities provided $21.6 million. Cash and cash equivalents were $165.2 million at June 27, 2020, up from $118.1 million at fiscal year-end. Current assets were $331.0 million and current liabilities $90.5 million.
Debt principal was $171.9 million ($170.5 million net of unamortized discount and issuance costs); cash exceeded principal debt by about $6.7 million. The company drew $50.0 million on its revolving facility and repaid $26.3 million of debt in the first half. Effective interest rates at quarter-end were 1.89% on the term loan and 1.67% on the revolver. The next required quarterly installment was due in fiscal Q2 2021.
Material changes versus prior comparable periods
- Q2 revenue fell 1.7% year over year, while net income rose to $10.6 million from $8.6 million. Operating income declined to $12.5 million from $14.4 million as research and development and selling, general, and administrative costs increased.
- Gross margin improved 150 basis points in Q2 and 100 basis points for the first half, which management attributed to pricing optimization, product cost reductions, and product mix.
- First-half operating cash flow decreased $29.6 million year over year, primarily due to working-capital movements, including a $22.5 million increase in accounts receivable. Days sales outstanding rose to 79 from 59.
- Communications and computing revenue grew 15% in Q2; industrial and automotive grew 1%. Consumer revenue declined 43%, which management attributed to COVID-19’s macroeconomic impact and an expected shift in revenue mix. First-half licensing and services revenue declined 19%.
- Stock-based compensation was $19.7 million for the first half versus $7.7 million a year earlier, including expense associated with a modification to certain award measurement periods.
Outlook, commentary, risks, and unusual items
- Management said COVID-19’s future effects were uncertain and expected demand to be affected in Q3 and potentially beyond. It provided no numerical revenue or earnings guidance in the supplied filing text.
- Management considered cash, operating cash flow, and credit facilities sufficient for liquidity and working-capital needs through at least the next 12 months. It said there were no required debt payments until June 30, 2021, following accelerated payments.
- The company approved a $40 million share repurchase program in March 2020, but made no repurchases during Q2 and said it would be conservative about buybacks while prioritizing capital preservation and investment.
- Key risks include COVID-related demand, supply-chain, shipping, productivity, and product-development disruption; reliance on third-party manufacturing and logistics; trade restrictions and sanctions; and global economic uncertainty. Asia accounted for 72% of first-half revenue, and distributors accounted for 81%.
- A lawsuit alleges Lanham Act violations, negligence, and fraud related to products sold around 2008. Plaintiffs seek $138 million, treble damages, and other remedies. The company disputes the claims, intends to defend them, and said it cannot estimate the likelihood or amount of potential exposure.
- Other notable items: a new Q1 2020 restructuring plan had incurred $1.4 million through June 27, which management believed approximated its total cost. The company reported $24.0 million of uncertain-tax-position liabilities and maintained a full U.S. deferred-tax-asset valuation allowance.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is Q2 2020, despite the request metadata stating 2019 Q2.
- Track Q3 and later demand, revenue, and cash conversion against management’s COVID-related expectations, especially as accounts receivable and DSO rose.
- Assess distributor, geographic, and customer concentration, including the two largest distributors’ combined 63% share of receivables at quarter-end and China’s 52% share of Q2 revenue.
- Review debt balances, revolving-facility availability, repayment terms, and the company’s capacity to sustain investment or repurchases.
- Monitor restructuring costs, elevated stock-based compensation, the $138 million legal claim, and uncertain tax positions.