Lattice Semiconductor Corporation — Form 10-Q Summary
Period: Second quarter and first six months of fiscal 2015. The quarter ended July 4, 2015; the comparable 2014 quarter ended June 28, 2014. The request metadata says “2014 Q2,” but the filing itself is for 2015 Q2.
Business context and reporting period
Lattice develops semiconductor devices and intellectual property for connectivity applications. It acquired Silicon Image on March 10, 2015; reported 2015 results include Silicon Image from March 11 onward. Silicon Image contributed $53.9 million in revenue and a $33.0 million net loss through July 4. Lattice reports one combined segment; Qterics is included with the core business because it is immaterial.
Key financial metrics
| Metric | Three months ended July 4, 2015 | Three months ended June 28, 2014 | Six months ended July 4, 2015 | Six months ended June 28, 2014 |
|---|---|---|---|---|
| Revenue | $106.5 million | $99.3 million | $195.1 million | $196.0 million |
| Gross margin | 54.6% | 55.4% | 54.3% | 55.7% |
| Operating income (loss) | $(25.9) million | $13.1 million | $(52.8) million | $26.5 million |
| Net income (loss) attributable to common stockholders | $(35.6) million | $11.8 million | $(88.9) million | $23.8 million |
| Diluted EPS | $(0.30) | $0.10 | $(0.76) | $0.20 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $(15.4) million | $24.1 million |
At July 4, 2015, cash and cash equivalents were $101.5 million and short-term marketable securities were $36.6 million, for combined liquidity of $138.1 million, down $116.7 million from January 3, 2015. Total current assets were $316.3 million and current liabilities $112.3 million. Long-term debt was $338.2 million net of discount and issuance costs; reported principal was $349.1 million. The secured term loan bears variable interest at LIBOR, subject to a 1% floor, plus 4.25%; its effective rate was 6.15%. Cash paid for capital expenditures was $7.0 million in the first half.
Quarterly licensing and services revenue was $10.2 million, with a 98.3% gross margin. For the first half, licensing and services revenue was $13.0 million, with a 98.0% gross margin. Resale through sell-through distributors represented 43% of quarterly revenue and 45% of first-half revenue.
Material changes versus the prior comparable period
- Quarterly revenue rose 7% year over year, while first-half revenue was essentially flat. Silicon Image added product and licensing revenue, offset by weakness in Lattice’s communications business.
- Quarterly GAAP operating results swung from $13.1 million income to a $25.9 million loss; first-half results swung from $26.5 million income to a $52.8 million loss. Higher research and development, selling, general and administrative costs, acquisition charges, restructuring, intangible amortization, and debt interest contributed.
- GAAP gross margin fell 0.8 percentage points in the quarter and 1.4 points in the first half. Management cited acquired-inventory and deferred-revenue purchase-accounting effects and less favorable product mix, partly offset by high-margin licensing revenue.
- The company paid $426.7 million net of acquired cash for Silicon Image, funded in part by $346.5 million of net term-loan proceeds. Investing cash outflow was $330.1 million; operating cash flow was negative $15.4 million.
- First-half income tax expense increased to $28.7 million, including a $21.0 million increase from a valuation allowance against remaining U.S. deferred tax assets.
Outlook, commentary, risks and unusual items
- Management expects the $20 million–$25 million acquisition-related restructuring plan to be substantially complete by fiscal year-end 2015. $9.0 million was expensed in the first half. Management expects continued significant R&D investment and stated that available financial resources should meet working-capital needs for the next 12 months. No specific revenue or earnings guidance is provided.
- The loan requires quarterly installments of about $0.9 million and may require annual excess-cash-flow repayments; the agreement currently calls for 75% of excess cash flow. It contains restrictive covenants but no financial covenants.
- Communications revenue declined 45% in the quarter and 32% in the first half, chiefly due to lower demand following the peak of China’s LTE build-out and an inventory correction at one OEM. Consumer revenue benefited from the acquisition, but was partly offset by weaker demand for certain iCE40 products.
- Key exposures include dependence on foundries and distributors, semiconductor cyclicality, customer and end-market demand, acquisition integration and realization of synergies, debt service and restrictions, product acceptance, and international operations. Asia generated 78% of quarterly revenue.
- China’s antitrust authority continued investigating HDMI Licensing’s activities; the company said outcome and potential exposure could not be estimated. Merger-related shareholder suits and a patent matter had tentative settlements subject to approval or completion; the company considered them immaterial. The restructuring and acquisition purchase-price allocation remain subject to estimates and potential revision.
- Management said disclosure controls were effective. Internal control over financial reporting materially changed following the inclusion of Silicon Image and its processes.
Important facts for investors to verify
- Whether integration and planned cost synergies can offset acquired operating costs, amortization and acquisition-related debt expense.
- Actual restructuring spending and completion timing relative to the $20 million–$25 million estimate.
- Operating cash generation, liquidity after acquisition spending, and the impact of variable-rate borrowing and excess-cash-flow repayments.
- Trends in communications demand, consumer product demand, distributor inventories and sell-through revenue recognition.
- Final purchase-price allocation, goodwill and intangible-asset assumptions, and recoverability of deferred tax assets.
- Developments in the HDMI antitrust investigation and pending legal matters, including any financial exposure not currently estimable.