Business Context and Reporting Period
Lattice Semiconductor Corporation (Lattice) designs, develops, and markets high-performance programmable logic products, including Field Programmable Gate Arrays (FPGAs) and Programmable Logic Devices (PLDs). The company operates as a fabless semiconductor entity, relying on foundry partners for wafer fabrication and third-party contractors for assembly and testing. The reporting period covers the fiscal year ended December 29, 2007.
Key Financial Metrics
| Metric | Fiscal 2007 | Fiscal 2006 |
|---|---|---|
| Revenue | $228.7 million | $245.5 million |
| Gross Margin | 54.9% | 56.5% |
| Net Loss | $(239.8) million | $3.1 million (Income) |
| Loss Per Share (Basic/Diluted) | $(2.09) | $0.03 |
| Operating Cash Flow | $(28.5) million | $(14.5) million |
| Cash and Short-term Investments | $85.1 million | $233.2 million |
| Convertible Notes (Current Liability) | $40.0 million | $20.5 million |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 6.8% to $228.7 million, driven primarily by a 24% drop in revenue from "Mature" products and a 3% decline in "Mainstream" products, partially offset by a 99% increase in "New" product revenue.
- Goodwill Impairment: The company recorded a non-cash impairment loss on goodwill of $223.6 million. This charge resulted from an impairment test where the estimated fair value of the company was determined to be below book value, writing off all remaining goodwill.
- Liquidity Reduction: Cash and short-term marketable securities decreased by approximately $148 million. Significant cash outflows included a $37.5 million advance payment to foundry partner Fujitsu and $66.6 million used to extinguish convertible notes.
- Investment Liquidity: Due to failed auctions in the global credit market, $44.9 million of auction rate securities were reclassified from short-term to long-term marketable securities, impacting working capital.
Guidance, Outlook, and Risks
- Executive Transition: CEO Stephen A. Skaggs agreed to resign effective May 31, 2008. The company expects to record approximately $1.7 million in severance and accelerated stock option vesting charges in fiscal 2008.
- Convertible Notes: Holders of $40.0 million in Zero Coupon Convertible Subordinated Notes have the option to require the company to purchase the notes in cash on July 1, 2008. Management expects holders to exercise this right.
- Restructuring: The company initiated a restructuring plan in Q3 2007 to reduce headcount and operating expenses. Additional charges of approximately $1.3 million are expected in Q1 2008 related to facility leases.
- Market Risks: The company faces risks related to the cyclical nature of the semiconductor industry, dependence on the communications end market (51% of revenue), and potential supply disruptions from foundry partners in Asia.
- Legal Proceedings: A patent infringement lawsuit filed by Lizy K. John is stayed pending re-examination by the USPTO; no accrual has been made as the outcome is not estimable.
Investor Verification Checklist
- Verify the company's ability to fund the $40 million convertible note redemption due July 1, 2008, given the current cash balance of $85.1 million.
- Assess the liquidity risk associated with the $44.9 million in illiquid auction rate securities and potential future impairment charges.
- Monitor the progress of the CEO search and the impact of the leadership transition on strategic execution.
- Review the trajectory of "New" product revenue growth to determine if it can offset the continued decline in "Mature" product sales.
- Confirm the status of the patent re-examination regarding the John litigation to evaluate potential future liabilities.