Lattice Semiconductor Corporation — Form 10-K summary
Reporting period: Fiscal 2014, ended January 3, 2015. It was a 53-week year; the fourth quarter had 14 weeks. Although the request identifies “2013 Q4,” this filing reports fiscal 2014 and includes fiscal 2013 comparisons.
Business context
Lattice designs and sells programmable logic devices and related software, primarily to communications, consumer, and industrial customers. It relies on external foundries and contractors for wafer fabrication, assembly, testing, and logistics. Communications generated 42% of 2014 revenue, Consumer 25%, and Industrial 33%.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $366.1 million | $332.5 million |
| Gross margin | 56.3% ($206.2 million) | 53.6% ($178.2 million) |
| Operating income | $41.6 million (11.4% margin) | $26.8 million (8.1% margin) |
| Net income | $48.6 million | $22.3 million |
| Diluted EPS | $0.40 | $0.19 |
| Cash from operations | $40.1 million | $56.5 million |
Revenue rose 10%; the extra fiscal week affects comparability. Gross margin improved 2.7 percentage points, reflecting product-cost improvements and manufacturing scale, partly offset by product/customer mix, less sell-through of fully reserved inventory, and excess-inventory expense. Net income benefited from an $11.5 million deferred-tax-asset valuation allowance release; the company reported a $5.6 million income-tax benefit overall.
At year-end, cash, cash equivalents, and marketable securities totaled $254.8 million, versus $221.1 million including long-term securities at the prior year-end. Lattice had no long-term debt and said existing resources were sufficient for working-capital needs over the next 12 months. Operating cash flow fell year over year; receivables increased 25% to $62.4 million, DSO rose to 67 from 50 days, and inventory increased 41% to $64.9 million (5.2 months on hand versus 3.4).
Material changes and operating drivers
- Communications revenue increased 21%, supported mainly by Chinese telecommunications infrastructure demand; Industrial revenue rose 14%, with stronger second-half demand. Consumer revenue fell 8%, primarily due to lower demand for certain iCE40 products at a major OEM.
- Samsung represented 19% of revenue, down from 22% in 2013; Huawei represented 12%. The top five end customers accounted for approximately 45% of revenue. Sell-through distributors generated 45% of revenue.
- Foreign sales were 92% of revenue; China accounted for 43%. New-product revenue was 48% of total revenue, up from 46% in 2013.
- Research and development spending increased 8.8% to $88.1 million. The company repurchased approximately 1.9 million shares for $13.1 million during fiscal 2014.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance is provided. Management expects continued significant R&D investment and noted that product mix and average selling-price pressure may weigh on future margins. It expected inventory levels to return toward historical levels.
- On January 26, 2015, after fiscal year-end, Lattice agreed to acquire Silicon Image for $7.30 per share, approximately $602 million plus fees, using cash and planned $350 million debt financing. Completion depended on tender, regulatory approval, and other closing conditions; stockholder litigation could delay or prevent the transaction.
- The company sold its Hillsboro headquarters property for net proceeds of $14.6 million, recording a $1.6 million gain that was deferred over the leaseback period. It also sold its remaining auction-rate securities, realizing a reported $1.7 million gain.
- A patent infringement suit filed by Papst in November 2014 concerned certain simulation products. The company said exposure could not be estimated; no accrual was recorded for the disclosed pending lawsuits. Unrecognized tax benefits totaled $18.7 million, and $14.2 million could change significantly within 12 months, largely relating to an examination of an intellectual-property transfer.
- Key business risks include reliance on a limited number of foundries (Fujitsu supplied the majority of wafers), customer and distributor concentration, volatile communications and consumer demand, competition and price erosion, and exposure to Asia and China. The fiscal 2014 financial statements and internal controls received unqualified audit opinions.
Important facts for investors to verify
- Whether elevated inventory and receivables convert into end-customer demand and cash, including distributor resale and inventory reports.
- How much of the reported earnings improvement depends on the deferred-tax benefit, and whether deferred tax assets can be realized amid tax examinations and carryforward limitations.
- The acquisition’s final financing, debt terms, closing status, integration costs, and any effects of merger-related litigation.
- Whether Chinese communications demand and major-customer volumes remain durable, particularly given Samsung and Huawei concentration.
- Whether gross-margin gains persist as selling prices, customer mix, and product costs change.