Business Context and Reporting Period
Company: Lattice Semiconductor Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended December 27, 1997 (Fiscal 1998)
Business Overview: The Company designs and sells programmable logic devices, primarily focusing on the in-system programmable (ISP) segment of the CMOS market. It does not manufacture its own silicon wafers, relying on foundry partners Seiko Epson (Japan) and United Microelectronics Corporation (Taiwan).
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Dec 27, 1997 |
9 Months Ended Dec 27, 1997 |
9 Months Ended Dec 28, 1996 |
|---|---|---|---|
| Revenue | $60,038 | $185,726 | $147,821 |
| Cost of Products Sold | $23,855 | $74,786 | $60,800 |
| Gross Margin % | 60.3% | 59.7% | 58.9% |
| Net Income | $13,651 | $42,749 | $32,186 |
| Diluted EPS | $0.57 | $1.79 | $1.41 |
| Cash & Short-term Investments | $264,605 | $264,605 | $228,647 |
| Operating Cash Flow (9mo) | N/A | $33,687 | $25,543 |
Note: Cash and short-term investments total is derived from the Balance Sheet ($65,366 + $199,239).
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 17.7% year-over-year for the quarter and 25.6% for the nine-month period, driven primarily by new ISP product sales.
- Margin Expansion: Gross margin improved to 60.3% (Q3) and 59.7% (9mo) from 58.9% in the prior year periods, attributed to favorable product mix and reduced manufacturing costs.
- Expense Increases: R&D expenses rose 15% (Q3) and 16% (9mo) due to new technology development. SG&A expenses increased 20% (Q3) and 23% (9mo) due to sales force expansion and higher commissions.
- Liquidity: Cash and short-term investments increased by approximately $36 million to $264.6 million, funded by operating cash flow and stock option exercises.
- Inventory: Inventories decreased by $4.8 million (17%) compared to the prior fiscal year-end, supporting higher shipment levels.
Outlook, Risks, and Contingencies
- Guidance: The Company anticipates capital expenditures of $18 million to $22 million for the fiscal year ending March 28, 1998. Management expects existing liquidity to fund operations and required wafer supply payments for the next 12 months.
- Wafer Supply & Fire Incident: A joint venture foundry (UICC) in Taiwan was substantially destroyed by fire in October 1997. The majority owner (UMC) stated the loss is fully insured and rebuilding is underway. Alternative capacity has been arranged, and management does not expect a material adverse effect.
- Wafer Supply Commitments: The Company has committed to advance approximately $90 million to Seiko Epson for an eight-inch facility. Remaining payments will reduce cash and short-term investments by approximately $56 million over the agreement term.
- Patent Litigation: The Company received a claim from a semiconductor manufacturer regarding patent infringement on product packaging. A license has been offered, but terms are not guaranteed. Management believes the outcome will not be materially adverse.
- Market Risks: Significant exposure to the Korean financial crisis (impacting $4 million in backlog), currency fluctuations (yen-denominated wafer purchases), and the cyclical nature of the semiconductor industry.
Investor Verification Checklist
- Verify the status of the UICC foundry reconstruction and the adequacy of alternative wafer supply arrangements.
- Monitor the execution of the $90 million advance payment agreement with Seiko Epson and its impact on future liquidity.
- Assess the resolution of the patent infringement claim and potential licensing costs.
- Track the impact of the Korean financial crisis on international revenue (51% of total) and backlog conversion.
- Confirm the Company's ability to maintain gross margins as new products mature and price erosion occurs.