Lattice Semiconductor Corporation — Form 10-K Summary
Period clarification: The supplied filing is the Form 10-K for the fiscal year ended December 29, 2012, not a filing for 2011 Q4. Fiscal 2011 ended December 31, 2011. Amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
Lattice designs and sells programmable logic devices (PLDs), field-programmable gate arrays (FPGAs), and related software. It operates as one segment and relies on third-party foundries and contractors for wafer fabrication, assembly, testing, and logistics. Fiscal 2012 was a 52-week year.
Financial results and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $279.3 million | $318.4 million |
| Gross profit / margin | $150.8 million / 54.0% | $188.6 million / 59.2% |
| Operating income (loss) | $(9.4) million | $41.3 million |
| Net income (loss) | $(29.6) million | $78.2 million |
| Diluted earnings (loss) per share | $(0.25) | $0.65 |
| Cash from operating activities | $4.5 million | $62.2 million |
| Capital expenditures | $13.6 million | $13.0 million |
At year-end, cash and cash equivalents were $118.5 million, short-term marketable securities were $64.9 million, and long-term marketable securities were $4.7 million, including illiquid auction-rate securities. Total liabilities were $71.2 million; the company reported no long-term debt and no credit arrangements. Current assets were $287.3 million versus current liabilities of $53.1 million. Accounts receivable rose to $46.9 million, with days sales outstanding increasing to 64 from 47; inventory rose to $44.2 million, or 4.4 months on hand versus 3.2.
Material changes versus the prior year
- Revenue declined 12%, principally because of weaker Communications and Computing demand and lower military-related sales. Communications remained the largest end market at 46% of revenue.
- Gross margin fell 5.2 percentage points, mainly as New products, which typically carry lower margins, became a larger share of sales. Cost reductions partly offset mix pressure.
- New-product revenue increased 80% to $62.3 million, or 22% of revenue; Mature-product revenue declined 35%. PLD revenue fell 13% and FPGA revenue fell 11%.
- Research and development expense increased 8% to $77.6 million; selling, general and administrative expense increased 5% to $72.3 million.
- Operating cash flow decreased to $4.5 million from $62.2 million. Cash and short-term investments declined by $26.7 million, with share repurchases and capital spending among the principal cash uses.
Outlook, management commentary, and risks
- Management said it expects significant continued investment in R&D and plans new FPGA families for selected growth niches. The filing does not provide a clear numerical revenue or earnings forecast.
- The 2012 restructuring reduced headcount by approximately 110 and closed certain sites. The plan was expected to be substantially complete in Q1 2013, with about $0.5 million of additional charges anticipated then.
- The 2012 tax provision was $20.7 million despite a pretax loss of $8.9 million. The filing attributes tax effects to ongoing operations and implementation of the global tax structure; the structure and jurisdictional earnings mix make future tax rates difficult to estimate.
- Key exposures include reliance on foundries (particularly Fujitsu), distributors, and outsourced manufacturing and logistics; two distributors represented 47% of 2012 revenue. Foreign sales were 88% of revenue, and Asia accounted for 68%.
- Other material risks include semiconductor cyclicality and price erosion, dependence on Communications customers, product acceptance and design wins, inventory obsolescence, foreign and tax risks, and potential disruption from restructuring.
- A patent suit by Lizy K. John remained pending, with trial scheduled for September 2014; the company reported no estimated loss accrual. A separate Intellectual Ventures case was settled through a February 2013 patent license and was not material to financial position, results, or cash flows.
- The company held $5.7 million par value of auction-rate securities at a fair value of $4.7 million; failed auctions left them illiquid. Management intended to sell when markets resumed or reasonable offers became available.
Important facts for investors to verify
- Confirm the intended period: the source filing covers FY2012, not 2011 Q4.
- Review the drivers and sustainability of the sharp decline in operating cash flow, margins, and revenue, as well as the higher receivables and inventory.
- Assess the unusual tax provision, deferred tax asset assumptions, and $21.7 million of unrecognized tax benefits.
- Monitor distributor and foundry concentration, particularly the 47% revenue share of two distributors and reliance on Fujitsu for a majority of wafers.
- Check subsequent progress on restructuring, the new San Jose lease, the February 2013 repurchase authorization, and the pending John patent litigation.