Lattice Semiconductor Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter ended June 28, 2014, with six-month results through that date; comparisons are to the periods ended June 29, 2013. The request metadata says “2013 Q2,” but the filing is for 2014 Q2.
Business context and results
Lattice designs and markets programmable logic products and related software for communications, consumer, and industrial applications. It reports as one operating segment.
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $99.3 million | $84.7 million | $196.0 million | $155.9 million |
| Gross margin | 55.4% | 53.3% | 55.7% | 53.4% |
| Operating income | $13.1 million | $7.0 million | $26.5 million | $9.7 million |
| Net income | $11.8 million | $5.0 million | $23.8 million | $6.9 million |
| Diluted EPS | $0.10 | $0.04 | $0.20 | $0.06 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $24.1 million | $0.9 million |
Financial position and cash flow
- At June 28, 2014, cash and cash equivalents were $138.0 million and marketable securities were $109.1 million, for combined liquidity of $247.0 million.
- Total assets were $501.7 million; total liabilities were $79.1 million. The company reported no long-term debt and no credit arrangements.
- First-half investing cash use was $8.3 million, including $4.9 million of capital expenditures. Financing provided $7.1 million; cash increased $23.7 million.
- Accounts receivable rose to $66.3 million from $50.1 million at fiscal year-end; days sales outstanding increased to 60 from 50. Inventory rose to $59.3 million from $46.2 million, or 4.0 months on hand versus 3.4.
Material changes and drivers
- Q2 revenue grew about 17% year over year; first-half revenue grew about 26%. Communications drove much of the growth, helped by ECP3 demand for China telecommunications infrastructure. New-product revenue rose 27% in Q2 and 50% for the first half.
- Gross margin improved 2.1 percentage points in Q2 and 2.3 points for the first half, mainly from product cost reductions on higher-volume wafer, assembly, and package purchases. Management noted offsets from product/customer mix and less sell-through of excess and obsolete inventory.
- Operating expenses increased in dollars, including R&D and SG&A, but declined as a share of revenue. Management attributed increases principally to engineering-related costs, variable compensation, severance, and outside services.
- Revenue from Asia was 74% of Q2 revenue. The top five end customers represented approximately 47% of Q2 revenue, versus 46% a year earlier; the two largest represented approximately 20% and 14%.
- Sell-through distributors accounted for 42% of Q2 revenue and 40% of first-half revenue, down from 44% and 46%, respectively, as direct OEM sales grew. The related deferred income and allowances liability increased to $23.6 million from $7.5 million at year-end.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management said financial resources should cover working-capital needs for the next 12 months and expects continued significant R&D investment. It cautioned that gross margin could weaken if future cost reductions do not offset product and customer mix changes.
- Inventory growth reflected expected near-term demand and a strategic build associated with the Fujitsu fab transition, which the company said was completed in Q2. Management said current assembly and test capacity commitments were adequate, but may not meet future demand.
- Revenue remains exposed to customer and market concentration, especially communications and Asia, as well as distributor reporting and sell-through estimates. Other principal risks include foundry and subcontractor supply, product adoption, semiconductor cyclicality, pricing and margin pressure, foreign operations, and tax uncertainty.
- The company sold its remaining auction rate securities in June for $5.5 million, recognizing a $1.7 million gain in earnings. This contributed materially to the improvement in other income.
- A 2007 patent suit by Lizy K. John reached a settlement in principle after quarter-end, July 21, 2014; the company expected final documentation and dismissal papers and said the settlement was not expected to materially adversely affect its financial position. No accrual was recorded for potential losses in current lawsuits.
- Federal and French tax returns for 2011 and 2012 were under examination. The company said it was reasonably possible that $4.0 million of unrecognized tax benefits, plus less than $0.1 million of related interest and penalties, could be recognized within 12 months.
Important facts for investors to verify
- Confirm the period: this filing reports fiscal Q2 2014, not Q2 2013.
- Assess whether communications-led growth and newer-product demand can continue, given customer, end-market, and geographic concentration.
- Monitor distributor inventory, resale reporting, deferred income, receivables, and inventory levels for signs of channel build or slower collections.
- Evaluate the durability of margin improvement and separate recurring operations from the auction-rate-security gain.
- Track foundry capacity and supply exposure, particularly the company’s reliance on Fujitsu, as well as the outcome of tax examinations and litigation settlement finalization.