LSCC

Business Context and Reporting Period

Company: Lattice Semiconductor Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 3, 2009 (Third Quarter of Fiscal 2009)
Business Overview: Lattice designs, develops, and markets high-performance programmable logic devices (PLDs and FPGAs). The company operates in a single industry segment with significant exposure to the communications equipment end market, particularly the China 3G telecommunications network build-out.

Key Financial Metrics

Debt and Liquidity: The company has no outstanding long-term debt (Zero Coupon Convertible Subordinated Notes were fully extinguished in 2008). Liquidity is supported by $115.1 million in cash and cash equivalents. The company holds $17.7 million in long-term marketable securities (auction rate securities) which are currently illiquid.

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 14.8% year-over-year for the quarter ($49.1M vs. $57.6M) and 19.1% for the nine-month period ($139.3M vs. $172.3M). This was driven by a pause in the China 3G build-out and a transition in distribution models.
• Improved Loss Position: While the company remains unprofitable, the net loss narrowed significantly compared to the prior year periods (Quarter: $(4.1)M vs. $(7.0)M; Nine Months: $(12.6)M vs. $(23.8)M).
• Restructuring Charges: The company incurred $2.5 million in restructuring charges for the quarter, primarily related to a new 2009 plan to reduce headcount and consolidate facilities. This compares to $3.9 million in the prior year quarter.
• Investment Impairments: The company recorded $1.1 million in other-than-temporary impairment charges on long-term marketable securities (auction rate securities) for the quarter, compared to $1.4 million in the prior year quarter.
• Product Mix Shift: Revenue from "New" products increased 15% year-over-year, while "Mature" product revenue declined 33%.

Guidance, Outlook, and Risks

Management Commentary:

• Distribution Transition: The company is transitioning distributors in Asia Pacific and Europe from a "sell-in" to a "sell-through" model. This transition reduced revenue by an estimated $2.0 million in Q3 and is expected to reduce Q4 revenue by approximately $1.0 million compared to forecasts had the transition not occurred.
• China 3G: Revenue remains heavily dependent on the communications market (54% of Q3 revenue), specifically the China 3G build-out. A pause in this build-out negatively impacted sales.
• Cost Reduction: The 2009 restructuring plan aims to lower operating expenses and is expected to be substantially completed in Q4 2009.

Risks and Contingencies:

• Auction Rate Securities (ARS): The company holds $38.2 million par value of ARS with a fair value of $17.7 million. These securities are illiquid due to failed auctions. Further impairments could materially impact financial results.
• Supply Chain Concentration: Fujitsu Limited is the sole source of silicon wafers for all new products. Disruptions at Fujitsu could halt production.
• Customer Concentration: Two large telecommunications equipment providers accounted for approximately 20% of revenue in the first nine months of fiscal 2009.
• Legal Proceedings: A patent infringement lawsuit filed by Lizy K. John is stayed pending re-examination by the USPTO; exposure cannot be estimated.

Investor Verification Checklist

• ARS Liquidity: Verify the current fair value and potential for further impairment charges on the $38.2 million portfolio of auction rate securities.
• Distribution Transition Impact: Monitor Q4 revenue to confirm the estimated $1.0 million reduction due to the shift to sell-through distribution models.
• China 3G Demand: Assess the status of the China 3G telecommunications network build-out, as it drives over 50% of revenue.
• Fujitsu Dependency: Review supply chain stability given reliance on Fujitsu as the sole wafer source for new products.
• Restructuring Completion: Track the execution of the 2009 restructuring plan to ensure expected cost savings are realized in Q4.