Lattice Semiconductor Corporation — Form 10-Q Summary
Period note: The request metadata says 2018 Q1, but the filing covers the 13 weeks ended March 30, 2019, compared with the 13 weeks ended March 31, 2018.
Business context and reporting period
Lattice develops programmable logic semiconductor devices and related intellectual property, licensing, services, and solutions. It reports one operating segment. The unaudited quarterly results are presented under U.S. GAAP.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $98.1 million | $98.6 million |
| Gross margin | $57.7 million; 58.8% | $56.5 million; 57.3% |
| Operating income (loss) | $12.5 million | $(0.8) million |
| Net income (loss) | $7.4 million; diluted EPS $0.05 | $(6.0) million; diluted EPS $(0.05) |
| Cash from operating activities | $21.8 million | $2.5 million |
- Revenue was down about 0.5% year over year. Product revenue was $91.6 million, while licensing and services revenue was $6.5 million.
- Cash and cash equivalents were $130.4 million at quarter-end; short-term marketable securities were liquidated during the quarter. Current assets were $281.8 million and current liabilities were $70.2 million.
- Term-loan principal was $236.2 million, with a variable rate and a March 2021 maturity. The company repaid $26.9 million during the quarter, including $25.0 million in voluntary principal payments. Its effective interest rate was 7.42%.
- Capital expenditures were $3.1 million; cash paid for software licenses was $1.7 million.
Material changes versus the prior comparable period
- Licensing and services revenue rose 84%, primarily from increased HDMI royalties. Communications and Computing revenue grew 26%; Mobile and Consumer fell 26%, and Industrial and Automotive declined 10%.
- Gross margin increased 1.5 percentage points, mainly because licensing and services made up a larger share of revenue; product gross margin was 55.9% versus 55.7%.
- Operating expenses fell, including R&D by 14% and SG&A by 23%. Management attributed reductions to restructuring savings and the non-recurrence of prior-year CEO transition costs. Acquired-intangible amortization also declined 40%.
- Operating cash flow increased to $21.8 million from $2.5 million. Management cited operating cash generation and improved collection timing; days sales outstanding decreased to 52 from 58.
- The company adopted ASC 842 lease accounting in Q1 2019, recognizing $30.4 million of operating lease liabilities at March 30, 2019. Adoption did not materially affect net earnings.
Outlook, risks, contingencies, and unusual items
- Management said available financial resources should meet working-capital needs for at least the next 12 months. It expects continued significant R&D investment and cautioned that product mix and average selling-price pressure may weigh on future product margins.
- The June 2017 restructuring plan had incurred about $17.7 million through quarter-end; total costs are expected to be $21.5–$23.0 million, with substantial completion expected by fiscal year-end 2019. Q1 charges included about $1.3 million related to vacating the Portland facility, including a $0.8 million lease-asset impairment.
- A new HDMI royalty-sharing agreement for periods beginning January 1, 2018 had not been finalized. The company recognized estimated royalty revenue; its estimate may change when the agreement is completed.
- A lawsuit alleges export-control-related disclosure failures and seeks $138 million, treble damages, and other relief. The company said it believes the claims are without merit and intends to defend them; it could not estimate the likelihood or amount of exposure.
- Distributor concentration is material: distributors generated 79% of revenue, and Asia represented 70% of revenue. The company also relies on a limited number of wafer foundries, with some products sourced from a single foundry.
- The term loan has a variable LIBOR-based rate; management estimated a 100-basis-point LIBOR increase would raise quarterly interest expense by about $0.6 million. The company was in material compliance with its debt covenants.
- No numerical revenue or earnings guidance was provided in the supplied filing text.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the supplied filing is Q1 2019, not Q1 2018.
- Track HDMI royalty-sharing negotiations and any resulting adjustment to estimated royalty revenue.
- Review debt reduction, variable-rate interest exposure, and the March 2021 loan maturity.
- Monitor the $138 million lawsuit and any change in management’s assessment of potential exposure.
- Assess whether margin gains from licensing mix and operating-cost reductions are sustainable amid product pricing, demand, distributor, geographic, and foundry risks.