Lattice Semiconductor Corporation — Form 10-Q Summary
Business context and period. Lattice designs and markets programmable logic devices (PLDs), field-programmable gate arrays (FPGAs), and related software. This report covers the quarter and nine months ended October 1, 2011, compared with periods ended October 2, 2010. The request metadata says “2010 Q3,” but the filing itself is for fiscal 2011 Q3.
Key financial results
Amounts are in millions except per-share data and percentages.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $81.7 | $77.1 | $248.2 | $224.7 |
| Gross margin | 58.6% | 59.1% | 59.7% | 59.6% |
| Operating income | $12.3 | $14.9 | $35.7 | $41.7 |
| Net income | $13.3 | $15.4 | $37.3 | $43.2 |
| Diluted EPS | $0.11 | $0.13 | $0.31 | $0.36 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $44.1 | $64.3 |
- Q3 revenue grew approximately 6% year over year, while operating income and net income declined approximately 17% and 13%, respectively. Nine-month revenue increased approximately 10%, while net income declined approximately 14%.
- At October 1, 2011, cash and cash equivalents were $204.9 million; short-term marketable securities were $62.3 million and long-term marketable securities were $7.4 million. Working capital was $301.7 million, versus $271.0 million at January 1, 2011.
- Total liabilities were $73.3 million, including $64.8 million of current liabilities and $8.5 million of long-term liabilities. The balance sheet does not present a separate debt balance; the nature of all long-term liabilities is not detailed in the provided text.
- Nine-month capital expenditures were $8.7 million. The company repurchased approximately 2.15 million shares for $12.8 million during the first nine months; the repurchase program ended October 26, 2011.
Material changes and operating trends
- Growth came principally from new products and the Industrial and other end market. Q3 revenue from Industrial and other increased 30%; Consumer increased 21%. Communications revenue fell 7% and represented 44% of Q3 revenue. For the first nine months, Communications represented 45% of revenue and declined 1% year over year.
- New-product revenue rose 11% in Q3 and 23% in the first nine months. Mainstream-product revenue fell 13% and 7%, respectively; Mature-product revenue rose 23% and 13%.
- Q3 gross margin decreased 0.5 percentage point, which management attributed partly to product mix and higher gold and yield-related costs. R&D expense rose to $17.0 million in Q3 and $55.8 million for nine months, reflecting higher labor, mask and wafer, outside-service, depreciation, and license costs.
- Operating cash flow fell year over year, primarily reflecting lower net income and differing working-capital and foundry-advance movements. Cash increased $30.5 million over the nine-month period.
- Exports generated 86% of revenue; Asia Pacific accounted for 50% of Q3 revenue. Management expects the region to remain the primary revenue source.
Outlook, risks, and unusual items
- Management believes existing liquidity and expected operating cash generation will cover operating and capital needs for at least the next 12 months. No specific revenue or earnings guidance is provided.
- The 2011 restructuring is intended to refocus R&D and sales resources and streamline supply-chain operations, including transferring some activities to Manila. The filing estimates approximately $7.6 million of total charges through Q1 fiscal 2012; implementation and cost savings are uncertain. The filing reports $4.982 million of restructuring charges in the nine-month income statement and separately describes $5.8 million as recorded against the plan.
- Avnet’s global franchise agreement ended August 28, 2011, with inventory transition terms through December 31, 2011. Avnet accounted for approximately 20% of revenue in the first nine months. Management did not expect significant customer-service disruption, but distributor transition remains a risk.
- Fujitsu is the sole wafer supplier for the newest products. Other key risks include semiconductor cyclicality, a communications-market downturn, dependence on distributors and Asia-Pacific supply chains, product acceptance and competition, and execution of restructuring and ERP changes.
- The company held $7.4 million of illiquid, Level 3 auction-rate securities, down from $10.2 million at year-end. Failed auctions continued; sale proceeds could differ from carrying value, and impairment could materially affect results.
- A $0.9 million tax benefit was recognized following resolution of an IRS matter; the company paid $1.0 million in October 2011, which had been fully reserved. It was not paying federal income taxes and expected to use tax-loss carryforwards before federal cash taxes resume.
- Patent litigation remained pending with Lizy K. John, Intellectual Ventures, and Commonwealth; the company said potential exposure could not be estimated. It reached an agreement to resolve the Intellitech litigation in August 2011.
- Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue growth can continue as Communications demand weakens and new-product sales become increasingly important.
- Whether the Avnet transition preserves customer service and sales after the inventory transition period.
- Actual restructuring costs, timing, disruption, and realized savings versus management’s estimate.
- Fujitsu wafer supply continuity and the availability, cost, and yield of manufacturing capacity.
- Liquidity and valuation of the remaining auction-rate securities, as well as outcomes of pending patent cases and tax matters.
- Quarterly cash conversion and the drivers of the year-over-year decline in operating cash flow and earnings.