Lattice Semiconductor Corporation — FY2015 Form 10-K
Period clarification: The filing covers the 52-week fiscal year ended January 2, 2016, not fiscal 2014 Q4. It includes quarterly data; FY2015 Q4 ended January 2, 2016. FY2014 had a 14-week fourth quarter, so quarterly comparisons are not directly like-for-like.
Business context and reporting period
Lattice develops programmable logic devices, video-connectivity chips, 60 GHz wireless products, and intellectual-property licensing. Its markets include Consumer, Communications, and Industrial. FY2015 includes Silicon Image results for approximately ten months following its March 2015 acquisition; prior-year results are Lattice standalone.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $406.0 million | $366.1 million |
| Gross profit / margin | $219.9 million / 54.2% | $206.2 million / 56.3% |
| Operating income (loss) | $(107.2) million | $41.6 million |
| Net income (loss) attributable to stockholders | $(159.2) million | $48.6 million |
| Diluted EPS | $(1.36) | $0.40 |
| Cash from operating activities | $(22.9) million | $40.1 million |
FY2015 non-GAAP operating income was $12.8 million and non-GAAP net loss attributable to stockholders was $15.0 million; these measures exclude specified acquisition, restructuring, impairment, amortization, stock-compensation, and purchase-accounting items.
At year-end, cash, cash equivalents, and short-term marketable securities totaled $102.6 million, down from $254.8 million. Total assets were $785.9 million and total liabilities were $480.4 million. Term-loan principal was $347.4 million (carrying value, net of discount and issuance costs, was $338.4 million). The loan bears variable interest at LIBOR, subject to a 1% floor, plus 4.25%; its stated effective rate was 6.14%. The company reported no off-balance-sheet arrangements.
Material changes versus the prior year
- Revenue rose 11%, principally because of Silicon Image; this comparison is not on a combined-company basis. Silicon Image contributed approximately $135.6 million revenue and a $77.0 million net loss for its included period.
- Communications revenue fell 26% as Chinese 4G-LTE infrastructure demand normalized. Consumer revenue rose 37%, mainly reflecting the acquisition, partly offset by a 60% decline in Lattice FPGA revenue in that market. Industrial revenue increased 7%.
- Licensing and services generated $36.8 million of new reported revenue, with a 96.9% gross margin. Product gross margin fell to 49.9% from 56.3%; management cited acquired inventory and deferred-revenue purchase-accounting effects and less favorable product mix.
- Operating results included $22.5 million acquisition-related charges, $19.2 million restructuring charges, $29.6 million acquired-intangible amortization, and $21.7 million goodwill and intangible-asset impairment. The impairment related to Qterics; no Core-segment impairment was recorded.
- Operating cash flow turned negative, while acquisition-related cash outflow was $431.1 million net of cash acquired. The company issued $350 million gross term-loan principal to help fund the acquisition.
FY2015 Q4 revenue was $101.2 million and net loss attributable to stockholders was $45.5 million, versus FY2014 Q4 revenue of $83.6 million and net income of $15.4 million. The FY2014 quarter contained an extra week.
Outlook, management commentary, risks, and contingencies
- Management said it expects to continue significant R&D investment and believed available financial resources would meet working-capital needs for the next 12 months. The filing provides no specific revenue or earnings guidance.
- Some restructuring expense was expected to continue into FY2016. The March 2015 plan was expected to cost $14–19 million overall; the separate September workforce reduction was expected to cost $6.0–6.5 million, with both substantially completed by the end of FY2016 Q2.
- Management identified product/customer mix, selling-price pressure, demand cycles, new-product acceptance, distributor inventory and resale reporting, and reliance on a small number of foundries as risks. Sell-through distributors accounted for 45% of revenue; two distributor groups accounted for 32%.
- China’s NDRC concluded its investigation of HDMI Licensing without intending monetary penalties, subject to an agreement with the China Video Industry Association; implementation terms remained under negotiation and potential financial consequences were not estimable. The company’s patent suit against Technicolor and a possible counterclaim concerning HDMI adopter fees also remained unresolved, with no estimated financial exposure.
- The company recorded a $32.5 million income-tax expense despite a pretax loss, including a valuation allowance on U.S. federal and state deferred tax assets. Its $48.2 million unrecognized tax benefits and related tax examinations are additional items to monitor.
- Management and the auditor reported effective internal controls, but Silicon Image was excluded from the internal-control assessment and audit scope while integration continued. The excluded acquired business represented $129.2 million of assets and $135.6 million of FY2015 revenue.
Important facts for investors to verify
- Assess underlying performance apart from Silicon Image’s partial-year contribution and the substantial acquisition, restructuring, impairment, and purchase-accounting items; review GAAP and non-GAAP reconciliations together.
- Track operating cash generation, available liquidity, variable-rate debt, required excess-cash-flow repayments, and the planned $7.0 million asset-sale-related repayment.
- Evaluate whether acquired products and licensing revenue can offset weaker programmable-logic demand and sustain margins as purchase-accounting effects abate.
- Monitor customer and distributor concentration, distributor inventory/resale data, and end-market demand—especially in Consumer and China-related Communications.
- Follow Qterics impairment implications, tax-asset realizability and uncertain tax positions, the pending HDMI/CVIA and Technicolor matters, and completion of Silicon Image systems and control integration.