Business Context and Reporting Period
Lattice Semiconductor Corporation (Lattice) designs, develops, and markets high-performance programmable logic devices (PLDs) and field programmable gate arrays (FPGAs). This Form 10-Q covers the quarterly period ended September 29, 2007, and the nine-month period ended on the same date. The company operates in a single industry segment with significant exposure to the communications equipment end market.
Key Financial Metrics
| Metric | Q3 2007 | Q3 2006 | 9 Months 2007 | 9 Months 2006 |
|---|---|---|---|---|
| Revenue | $58.3 million | $63.5 million | $175.7 million | $183.6 million |
| Gross Margin | 54.2% | 56.2% | 54.7% | 56.5% |
| Net (Loss) Income | $(4.4) million | $0.9 million | $(10.3) million | $2.2 million |
| Diluted EPS | $(0.04) | $0.01 | $(0.09) | $0.02 |
| Operating Cash Flow (9mo) | $(33.7) million used | |||
| Cash & Marketable Securities | $128.4 million (as of Sept 29, 2007) | |||
| Working Capital | $151.1 million (as of Sept 29, 2007) |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 8% in Q3 and 4% for the nine months ended September 29, 2007, compared to the prior year. This was driven primarily by a 29% drop in "Mature" product revenue, partially offset by a 73% increase in "New" product revenue.
- Operating Loss: The company reported an operating loss of $7.8 million in Q3 2007, compared to a loss of $3.2 million in Q3 2006. For the nine-month period, the operating loss widened to $20.6 million from $9.9 million.
- Restructuring Charges: A new restructuring plan was initiated in Q3 2007 to reduce headcount by approximately 7%, resulting in a $1.7 million charge. This contrasts with only $0.1 million in restructuring costs for the same period in 2006.
- Debt Extinguishment: The company extinguished $40.0 million of Zero Coupon Convertible Subordinated Notes in Q3 2007, recognizing a $1.7 million gain. Total debt extinguishment for the nine months was $66.6 million.
- Liquidity Shift: Cash and marketable securities decreased by approximately $104.8 million from year-end 2006, primarily due to a $37.5 million advance payment to foundry partner Fujitsu and debt repurchases.
Guidance, Outlook, and Risks
- Future Restructuring: Management expects to record an additional restructuring charge of $1.5 million to $2.5 million in the fourth quarter of 2007, primarily related to lease terminations.
- Convertible Notes: Holders of the remaining Convertible Notes have the right to require payment on July 1, 2008. The company expects holders to exercise this right. As of July 1, 2007, $40.0 million of these notes were reclassified as a current liability.
- Auction Rate Securities: The company holds $61.4 million in auction rate securities. $22.3 million of these were part of unsuccessful auctions, diminishing liquidity. While the company intends to hold these until orderly auctions resume, credit rating deterioration could require impairment charges.
- Supply Chain Risks: Lattice relies on sole-source suppliers for its newest FPGA products (Fujitsu). Disruptions in wafer supply or yield issues at foundries could materially harm operations.
- Legal Proceedings: A patent infringement lawsuit filed by Lizy K. John in June 2007 is currently stayed pending a PTO re-examination request. The potential exposure is not estimable at this time.
Investor Verification Checklist
- Verify the timeline and sufficiency of cash reserves to meet the July 1, 2008, redemption obligation for Convertible Notes.
- Monitor the liquidity status of the $22.3 million in auction rate securities stuck in unsuccessful auctions.
- Assess the progress of the 7% headcount reduction and the realization of expected cost savings from the 2007 restructuring plan.
- Track the adoption rates of "New" FPGA products to ensure they can offset the continued decline in "Mature" product revenue.
- Review the status of the patent litigation with Lizy K. John and the outcome of the PTO re-examination.