Lattice Semiconductor Corporation — Form 10-Q Summary
Period: The filing covers the quarter ended June 29, 2019 and six months ended June 29, 2019, with comparisons to the corresponding 2018 periods. The request metadata says “2018 Q2,” but the filing itself is for fiscal 2019 Q2.
Business context and financial results
Lattice develops programmable semiconductor technologies and related solutions, services, and licenses, serving communications and computing, industrial and automotive, and consumer markets. Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $102.3 | $102.7 | $200.4 | $201.3 |
| Gross margin | $60.0; 58.7% | $50.2; 48.9% | $117.7; 58.7% | $106.8; 53.0% |
| Operating income (loss) | $14.4 | $(13.6) | $26.9 | $(14.4) |
| Net income (loss) | $8.6 | $(20.2) | $16.0 | $(26.2) |
| Diluted EPS | $0.06 | $(0.16) | $0.12 | $(0.21) |
| Operating cash flow | Not stated for quarter | $66.5 | $9.6 |
Quarterly revenue was nearly flat year over year. Communications and computing revenue rose 35% to $39.9 million, while industrial and automotive fell 13% to $38.9 million and consumer declined 20% to $19.4 million. First-half revenue was also nearly flat, with growth in communications and computing offset by declines in industrial and automotive and consumer.
Margins, cash flow, liquidity, and debt
- Gross margin increased 9.8 percentage points in Q2 and 5.7 points in the first half. Management attributed most of the improvement to the non-recurrence of $8.3 million of millimeter-wave-related inventory reserves taken in Q2 2018, lower current-period inventory reserves, product cost reductions, and pricing optimization; product mix partly offset gains.
- First-half operating cash flow was $66.5 million, up from $9.6 million, reflecting improved operating performance and working-capital changes, including the timing of customer receipts. Investing cash outflow was $2.4 million; financing cash outflow was $60.6 million. Cash and equivalents ended at $122.6 million, versus $119.1 million at year-end 2018; short-term marketable securities were liquidated.
- Current assets were $256.2 million and current liabilities $83.1 million at June 29, 2019. Accounts receivable fell to $37.9 million from $60.9 million; days sales outstanding declined to 34 from 58. Inventory was $65.0 million, down from $67.1 million.
- Debt principal was $191.5 million at June 29, 2019; the balance-sheet carrying amount was $189.5 million, including unamortized discount and issuance costs. In May, Lattice refinanced with a five-year $175 million term loan and a revolving facility of up to $75 million. Effective rates at quarter-end were 4.34% on the term loan and 4.65% on the revolver. The company reported covenant compliance. After quarter-end, it made an additional voluntary $25 million payment.
- Lease adoption added $26.1 million of operating lease right-of-use assets and $28.6 million of lease liabilities at quarter-end. Lease adoption did not materially affect net earnings.
Material changes, outlook, and risks
- Operating results improved substantially from 2018, when the company recorded an $11.9 million intangible impairment and $8.3 million of inventory reserves related to discontinuing its millimeter-wave business. Lower operating expenses, including R&D and SG&A, also supported the improvement. Interest expense declined with debt repayments and refinancing.
- Management expects gross margin to improve through pricing optimization, product cost improvements, and mix shift. It expects R&D spending to remain relatively flat as a percentage of revenue, while increasing in absolute dollars as revenue grows. Most acquired-intangible amortization was expected to end after Q1 2020, reducing quarterly expense by approximately 80%. The company stated that its financial resources should cover working-capital needs for at least 12 months; it provided no specific revenue or earnings guidance.
- Distributors accounted for 85% of Q2 revenue and 82% of first-half revenue. At quarter-end, two distributors represented 36% and 35% of net accounts receivable, respectively. This concentration exposes the company to distributor demand, collection, and channel-inventory risks.
- A new HDMI royalty-sharing agreement covering periods beginning January 1, 2018 had not been signed. The company was estimating its share of royalties under an anticipated agreement; related estimated revenue was included in contract assets. First-half revenue also included a net $0.3 million reduction from stock-rotation and scrap-return activity.
- A lawsuit alleges export-control disclosure, negligence, and fraud relating to products sold around 2008. Plaintiffs seek $138 million, treble damages, and other remedies. The company said it believes the claims lack merit and intends to defend them, but could not estimate the likelihood or amount of exposure.
- Management said a sustained level of U.S. profitability could permit reversal of a significant U.S. deferred-tax valuation allowance, creating a tax benefit; timing and amount are uncertain. A 1% increase in one-month LIBOR would increase future interest expense by approximately $0.5 million per quarter.
Important facts for investors to verify
- Reconcile the metadata period with the filing’s actual fiscal 2019 Q2 reporting period.
- Monitor whether margin gains persist after accounting for the prior-year inventory-reserve comparison and product mix.
- Track distributor concentration, distributor receivables, collections, and channel demand.
- Review the final HDMI royalty-sharing agreement and any effect on recognized revenue or contract assets.
- Assess the lawsuit’s developments and potential exposure, which the filing does not quantify.
- Confirm post-quarter debt repayments, remaining revolver availability, and compliance with leverage and interest-coverage covenants.