Lattice Semiconductor Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended July 2, 2011; comparative periods ended July 3, 2010. The filing itself is for 2011, notwithstanding the request metadata indicating 2010 Q2. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Lattice designs, develops and markets programmable logic devices, FPGAs and related software. Its customers serve communications, industrial, computing and consumer markets. The company operates as one segment and relies on third parties for wafer fabrication, assembly, testing and distribution.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $83.9 | $77.1 | $166.5 | $147.6 |
| Gross margin | 60.4% | 61.2% | 60.2% | 59.9% |
| Operating income | $12.9 | $15.8 | $23.4 | $26.8 |
| Net income | $13.0 | $16.7 | $24.0 | $27.8 |
| Diluted EPS | $0.11 | $0.14 | $0.20 | $0.23 |
- Quarterly revenue rose about 9% year over year, while net income fell about 22%; six-month revenue grew about 13%, while net income declined about 14%.
- For the six months, research and development expense was $38.8 million (up from $29.8 million); selling, general and administrative expense was $34.9 million (up from $31.8 million). Six-month restructuring charges were $3.2 million, versus a $0.04 million credit in the prior-year period.
- Six-month operating cash flow was $17.7 million, down from $48.9 million. Investing activities provided $3.2 million, versus $42.5 million used in the prior period; financing activities used $4.2 million, including $8.0 million of share repurchases. Cash and equivalents increased $16.7 million to $191.0 million.
- At July 2, cash and equivalents plus short-term marketable securities totaled $247.5 million. Working capital was $294.8 million; current assets were $347.4 million and current liabilities $52.7 million. Total liabilities were $60.1 million. The balance sheet does not provide a separate borrowing or debt figure.
- Total marketable securities were $63.9 million, including $7.4 million of illiquid auction-rate securities classified as long-term. Management said a hypothetical 10% interest-rate movement would not materially affect their fair value.
Changes, outlook and management commentary
- Growth was strongest in Industrial and other: Q2 revenue increased 28% year over year, and six-month revenue increased 45%. New-product revenue rose 28% in Q2 and 30% for the first half; Mainstream revenue declined 13% and 3%, respectively.
- Communications represented 47% of Q2 revenue and 45% of first-half revenue. Management expected near-term Communications revenue to grow faster than other end markets and said a significant portion of revenue would remain dependent on Communications. Asia Pacific generated 53% of Q2 revenue; exports overall were 89%.
- Q2 gross margin declined year over year, which management attributed primarily to product mix: New products, typically lower-margin, rose to 49% of revenue from 41%. Management expects continued significant R&D investment; advanced-process mask and engineering-wafer costs are increasing.
- The 2011 restructuring plan targets R&D headcount and supply-chain changes, including shifting some work to Manila. The company recorded approximately $4.0 million of related charges in the first half and projected total charges of about $6.0 million through fiscal 2012. Implementation was expected to be substantially complete during 2011; transition could initially raise certain costs.
- Management stated that liquid resources and expected operating cash generation should cover operating and capital needs for at least 12 months. No numerical revenue or earnings guidance was provided.
- Avnet’s global franchise agreement was scheduled to end August 28, 2011. Avnet represented approximately 21% of first-half 2011 revenue; management did not expect significant customer-service disruption, but the transition is a material execution risk.
Risks, contingencies and unusual items
- Fujitsu was identified as the sole wafer source for the newest FPGA and PLD products. Dependence on foundries and Asia-based assembly, test and supply-chain providers exposes production to capacity, yield, cost and disruption risks.
- Multiple patent cases were pending, including claims by Lizy K. John, Intellitech, Intellectual Ventures and, after quarter-end, Commonwealth Global Research Group. The company could not estimate likelihood or amount of exposure.
- A Tax Court decision concerning prepaid-expense deductions could require approximately $0.9 million in tax payments; the company was evaluating settlement or further proceedings. It also said $2.5 million of unrecognized tax benefits, interest and penalties could significantly change within 12 months.
- Auction-rate securities remained illiquid following failed auctions. Their estimated fair value may differ materially from proceeds on sale; further other-than-temporary impairment could affect results.
- The company repurchased approximately 1.3 million shares for $8.0 million in the first half under a $20 million program; about $10.1 million of authorization remained at quarter-end. APAC IC, a Manila engineering-layout and design-services company, was acquired after quarter-end on July 15 for approximately $1.0 million.
- Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the period. ERP implementation continued.
Important facts for investors to verify
- Whether distributor changes following Avnet’s agreement termination affected orders, resale reporting or customer service.
- Whether Communications demand, new-product adoption and product mix support revenue growth without further pressure on margins.
- Actual restructuring costs, savings and operational effects, including the Manila transition and APAC IC integration.
- Cash conversion and working-capital trends, given the year-over-year reduction in operating cash flow.
- Resolution and financial exposure from the tax dispute and pending patent litigation.
- Liquidity and valuation developments for auction-rate securities, and any subsequent share repurchases or foundry financing commitments.