Business Context and Reporting Period
Lattice Semiconductor Corporation, a Delaware corporation, filed this Form 10-Q for the quarterly period ended September 26, 1998. The company designs and sells programmable logic devices, primarily addressing the in-system programmable (ISP) segment of the CMOS market. The company operates on a 52-53 week fiscal year ending on the Saturday closest to March 31.
Key Financial Metrics
| Metric | Q2 FY1999 (3 Months) | Q2 FY1998 (3 Months) | YTD FY1999 (6 Months) | YTD FY1998 (6 Months) |
|---|---|---|---|---|
| Revenue | $48.1 million | $64.1 million | $96.1 million | $125.7 million |
| Net Income | $9.9 million | $14.9 million | $19.7 million | $29.1 million |
| Diluted EPS | $0.42 | $0.62 | $0.83 | $1.22 |
| Gross Margin | 60.4% | 59.6% | 60.3% | 59.5% |
| Operating Cash Flow (YTD) | $32.9 million (YTD FY1999) vs $27.9 million (YTD FY1998) | |||
| Cash & Short-Term Investments | $287.1 million (as of Sept 26, 1998) | |||
| Debt | No long-term debt; $10 million unused credit facility |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 25% in the quarter and 24% year-to-date compared to the prior year. Management attributes this to a decline in demand in Asia due to the regional economic crisis and reduced demand in computing and communications end markets.
- Expense Management: Selling, general, and administrative (SG&A) expenses decreased by 12% in the quarter and 10% year-to-date, primarily due to lower sales commissions. Research and development (R&D) expenses remained flat in absolute dollars but increased as a percentage of revenue (from ~13% to ~16%) due to lower revenue.
- Margin Expansion: Despite revenue declines, gross margins improved slightly (from 59.6% to 60.4% in the quarter) due to favorable product mix changes and manufacturing cost reductions.
- Share Repurchases: The company repurchased 305,000 shares of common stock for approximately $8.5 million during the period.
Outlook, Risks, and Contingencies
- Guidance: The filing does not provide specific numerical guidance for future quarters. Management anticipates capital expenditures of $20 to $25 million for the fiscal year ending April 3, 1999.
- Supply Chain Risks: The company relies entirely on third-party foundries (Seiko Epson and UMC) for wafer manufacturing and Asian subcontractors for assembly. Risks include the Asian economic crisis, potential work stoppages, and the transition to new eight-inch wafer fabs.
- UICC Foundry Fire: A fire destroyed the UICC foundry in October 1997. Management states the loss was covered by insurance and rebuilding has begun, with alternative capacity arrangements in place.
- Year 2000 Compliance: The company is in the compliance phase of its Y2K project, targeting completion by July 1999. Estimated costs for internal software and systems are under $2 million.
- Intellectual Property: The company faces potential patent infringement claims common in the semiconductor industry. While licenses have been offered for recent claims, there is no assurance they can be obtained on favorable terms.
Investor Verification Checklist
- Verify the extent of revenue exposure to the Asian market and the specific impact of the regional economic crisis on future orders.
- Confirm the status of wafer supply commitments with Seiko Epson and UMC, particularly regarding the transition to eight-inch wafer production.
- Monitor the progress of the UICC foundry reconstruction and the adequacy of alternative capacity arrangements.
- Review the timeline and cost estimates for Year 2000 compliance, specifically regarding critical suppliers and business partners.
- Assess the sustainability of gross margins given the cyclical nature of the semiconductor industry and potential price erosion.