Business Context and Reporting Period
Company: Lattice Semiconductor Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 28, 2008 (Second Quarter of Fiscal 2008)
Business Overview: Lattice designs, develops, and markets high-performance programmable logic devices (FPGAs and PLDs) used in communications, computing, consumer, industrial, automotive, medical, and military markets. The company operates in a single industry segment.
Key Financial Metrics
| Metric (in thousands) | Q2 2008 | Q2 2007 | 6 Months 2008 | 6 Months 2007 |
|---|---|---|---|---|
| Revenue | $58,079 | $59,243 | $114,683 | $117,350 |
| Gross Margin | $32,528 (56.0%) | $32,650 (55.1%) | $63,972 (55.8%) | $64,539 (55.0%) |
| Net Loss | $(13,571) | $(1,461) | $(16,825) | $(5,844) |
| Loss Per Share (Basic/Diluted) | $(0.12) | $(0.01) | $(0.15) | $(0.05) |
| Cash & Cash Equivalents | $66,269 | $43,135 (End of Period) | $66,269 | $43,135 (End of Period) |
| Short-term Marketable Securities | $30,017 | $47,731 | $30,017 | $47,731 |
| Working Capital | $120,159 | $110,535 | $120,159 | $110,535 |
| Long-term Debt (Convertible Notes) | $40,000 | $40,000 | $40,000 | $40,000 |
Note: Debt figures reflect the balance at period end. Subsequent to the period, the company retired all convertible notes.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 2% in Q2 and 2% for the six months ended June 28, 2008, compared to the prior year. This was driven by a 26-27% decline in "Mature" product revenue, partially offset by a 90-108% increase in "New" product revenue.
- Significant Impairment Charges: The company recorded a non-operating loss of $10.5 million in Q2 (and $9.2 million for the six months) primarily due to an $11.3 million impairment charge. This included $10.3 million related to an other-than-temporary decline in the fair value of auction rate securities and $1.0 million related to a foundry investment in United Microelectronics Corporation (UMC).
- Restructuring Costs: Restructuring expenses increased to $0.9 million in Q2 and $2.6 million for the six months, compared to negligible amounts in the prior year. These costs relate to a 2007 plan involving headcount reduction and facility closures, including lease losses and severance.
- Operating Cash Flow Improvement: Net cash provided by operating activities turned positive at $19.4 million for the six months ended June 28, 2008, compared to a use of $37.5 million in the prior year period. This improvement was largely due to the absence of a $37.5 million advance payment to Fujitsu made in the prior year.
Guidance, Outlook, and Risks
- Management Transition: The company announced the appointment of Bruno Guilmart as President and CEO (effective July 7, 2008) and the resignation of CFO Jan Johannessen (effective July 31, 2008). Robert O'Brien was appointed Interim CFO. Management is exploring a new cost structure and product strategy.
- Debt Retirement: Subsequent to the reporting period (July 2, 2008), the company completed the purchase of $40.0 million in principal amount of its Zero Coupon Convertible Subordinated Notes. No such notes remain outstanding.
- Liquidity Risks (Auction Rate Securities): The company holds $44.9 million face value of auction rate securities that have experienced failed auctions. These are classified as illiquid long-term assets with a fair value of $34.6 million. Further declines in fair value could result in additional impairment charges.
- Market Risks: The company faces risks related to the cyclical nature of the semiconductor industry, dependence on the communications end market (approx. 52% of revenue), and reliance on sole-source foundry suppliers (e.g., Fujitsu for new FPGA products).
- Legal Proceedings: A patent infringement lawsuit filed by Lizy K. John is stayed pending re-examination by the USPTO. The potential exposure is not estimable.
Investor Verification Checklist
- Auction Rate Securities Valuation: Verify the current fair value and liquidity status of the $44.9 million portfolio of auction rate securities, given the history of failed auctions and the $10.3 million impairment already taken.
- Debt Status: Confirm the complete extinguishment of the $40 million convertible notes following the July 2008 repurchase.
- Executive Transition Impact: Monitor the integration of the new CEO and the execution of the new cost structure and product strategy.
- Product Mix Shift: Assess the sustainability of revenue growth from "New" products versus the continued decline in "Mature" products.
- Foundry Dependencies: Review supply chain stability, particularly regarding sole-source suppliers like Fujitsu for advanced FPGA nodes.