Lattice Semiconductor Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2017, ended September 30, 2017; comparatives are the quarter and nine months ended October 1, 2016. Figures below are in U.S. dollars. The filing is for 2017, notwithstanding the request metadata indicating 2016 Q3.
Business context and financial results
Lattice provides intellectual property and low-power semiconductor devices for connectivity markets. It reports one operating segment. Asia represented 75% of quarterly revenue and 71% of nine-month revenue.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $92.0 million | $113.2 million | $290.7 million | $308.9 million |
| Gross margin | 58.0% | 59.5% | 56.9% | 59.2% |
| Operating loss | $(37.5) million | $(6.0) million | $(46.9) million | $(25.7) million |
| Net loss | $(43.1) million | $(12.4) million | $(63.3) million | $(45.9) million |
| Net loss per share, diluted | $(0.35) | $(0.10) | $(0.52) | $(0.38) |
For comparison, management reported non-GAAP operating income of $8.9 million for Q3 2017 and $27.7 million for the first nine months, versus $14.7 million and $28.5 million, respectively, in the comparable 2016 periods. Non-GAAP net income was $5.3 million for Q3 and $12.6 million year to date. These measures exclude specified items and are not substitutes for GAAP results.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $35.7 million, compared with $19.3 million in the prior-year period. Investing used $10.7 million and financing used $33.0 million; financing included $33.7 million of debt repayment.
- Cash and cash equivalents were $100.0 million and short-term marketable securities were $8.0 million at September 30, 2017, totaling $108.0 million, down $8.9 million from December 31, 2016. Approximately $90.4 million of cash was held by foreign subsidiaries; the filing says it could be accessed without significant additional expense.
- Net accounts receivable was $79.0 million; inventory was $77.5 million, with months of inventory on hand rising to 6.0 from 4.3 at year-end 2016.
- Term-loan principal was $308.5 million, with a 6.15% effective interest rate and maturity in March 2021. The loan has a variable LIBOR-based rate. The company made required principal and excess-cash-flow payments during the first half; it was compliant with applicable covenants at quarter-end.
- Management believed available financial resources would meet working-capital needs for at least the next 12 months. The filing reports no off-balance-sheet arrangements and no significant long-term capital expenditure commitments.
Material changes and unusual items
- Revenue fell 19% year over year in Q3 and 6% for the first nine months. Q3 declines reflected lower Mobile and Consumer revenue, including a major handset product moving through its lifecycle, lower licensing revenue, and lower Industrial and Automotive revenue. Communications and Computing was also lower, partly because prior-year purchases by a large Asian customer did not recur.
- Q3 included a preliminary $36.2 million impairment of acquired developed-technology intangible assets, following revised forecasts and asset sales. The valuation was still under review and could be revised. The filing recorded $7.9 million of intangible impairment in the comparable 2016 periods.
- The company sold a Shanghai building for gross proceeds of approximately $7.9 million and recorded a $4.6 million gain. Separately, it sold its Hyderabad subsidiary and certain Simplay Labs assets for $5.3 million of consideration, including a $3.0 million note receivable, and recorded a $1.8 million loss.
- The proposed Canyon Bridge acquisition was prohibited by a presidential order on September 13, 2017; the merger agreement was terminated, with no termination fee payable by either party. Acquisition-related charges in 2017 included costs related to that proposed transaction.
- The HDMI royalty-sharing agreement had expired and a replacement was not finalized. Lattice could not recognize all associated royalties because the revenue-recognition criteria were not met; management cited this as a cause of lower licensing revenue. The company’s role as HDMI agent ended January 1, 2017, reducing its share of adopter fees.
Outlook, risks and contingencies
- The company discontinued forward-looking revenue and gross-margin guidance following announcement of the proposed acquisition; the filing provides no numerical revenue or gross-margin outlook. Management expected R&D spending of approximately $25 million per fiscal quarter.
- The company expected June 2017 restructuring-plan costs of approximately $8 million to $19 million; $5.5 million had been incurred through September 30, 2017. The plan included workforce reductions, infrastructure-cost actions, and asset sales.
- Management expected adoption of the new revenue standard at the start of fiscal 2018 using the modified retrospective method. It anticipated accelerated revenue recognition for sell-through distributor shipments; the effect could vary materially with distributor inventory. The filing also anticipated potentially material opening-equity and 2018 revenue impacts from certain licensing arrangements.
- Key risks include dependence on a limited number of foundries and distributors, customer and end-market concentration, cyclical semiconductor demand, product-life-cycle transitions, inventory exposure, competition and pricing pressure, and execution of the new ERP system. Sell-through distributors accounted for 65% of nine-month revenue; the two largest distributor groups together represented 51%.
- The filing describes a possible claim by an HDMI consortium member over adopter fees from Lattice’s former agency period; the company could not estimate the likelihood or amount of any financial consequence. It also reports settlement of its patent dispute with Technicolor in August 2017.
Important facts for investors to verify
- Whether the $36.2 million intangible-asset impairment estimate was revised after completion of the valuation analysis.
- Progress and financial effects of the June 2017 restructuring, including final costs and realized savings.
- Execution of the replacement HDMI royalty-sharing agreement and the amount and timing of any royalty revenue recognition.
- The impact of the fiscal 2018 revenue-standard adoption, particularly distributor inventory levels and licensing revenue adjustments.
- Revenue trends tied to the major handset product lifecycle, concentrated distributors and customers, and the company’s ability to service and reduce its variable-rate debt.