LSCC

Business Context and Reporting Period

Company: Lattice Semiconductor Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 28, 2003 (Second Quarter of Fiscal Year 2003)
Business Overview: Lattice designs, develops, and markets high-performance programmable logic devices (PLDs), including FPGAs, CPLDs, and SPLDs. The company operates in a single industry segment serving communications, computing, industrial, automotive, medical, consumer, and military end markets.

Key Financial Metrics

Note: Long-term debt includes $172.3 million in 4 3/4% Convertible notes due 2006 and $200 million in Zero Coupon Convertible notes due 2010.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 3% in Q2 2003 and 1% for the six-month period compared to the prior year. This slight growth was driven by new product sales, offsetting a continued downturn in the semiconductor and PLD markets.
• Operating Loss: The operating loss narrowed significantly on a year-to-date basis. Loss from operations was $(38.4) million for the six months ended June 30, 2003, compared to $(58.0) million in the same period in 2002. This improvement is largely due to the absence of a $24.2 million in-process research and development (IPR&D) charge recorded in 2002 related to the Agere FPGA acquisition.
• Expense Trends:
  • R&D: Increased by $1.1 million year-to-date, primarily due to headcount increases from the Cerdelinx acquisition.
  • Amortization: Increased by $3.3 million year-to-date, driven by the Cerdelinx acquisition and a $2.2 million accelerated write-off of deferred compensation due to a stock option exchange program.
• Liquidity: Cash and short-term investments increased by $193.3 million to $470.2 million, primarily due to the issuance of $200 million in Zero Coupon Convertible notes in June 2003.

Guidance, Outlook, and Risks

• Revenue Guidance: Management expects revenue for the quarter ended September 30, 2003, to be between $52 million and $55 million.
• Debt Redemption: On July 21, 2003, the company redeemed all outstanding 4 3/4% convertible notes due in 2006 for approximately $178.8 million. A call premium and unamortized issuance costs totaling approximately $5.7 million will be recorded as an expense in the third quarter of 2003.
• Market Risks:
  • Industry Downturn: Continued weakness in communications and computing end markets limits revenue growth.
  • Supply Chain: Reliance on third-party foundries (Seiko Epson, UMC, Chartered Semiconductor) creates risks regarding wafer supply, yield, and pricing.
  • Goodwill Impairment: The company's stock price is trading near its consolidated book value. A sustained decline could trigger a goodwill impairment charge under SFAS 142.
  • Equity Investment: The company holds a significant equity stake in UMC (United Microelectronics Corporation), subject to market price volatility.

Investor Verification Checklist

• Debt Structure: Verify the impact of the July 2003 redemption of the 2006 notes and the associated $5.7 million expense on Q3 2003 earnings.
• Revenue Sustainability: Assess whether the 1-3% revenue growth is sustainable given the broader semiconductor downturn and reliance on new product introductions.
• Goodwill Valuation: Monitor the stock price relative to book value to evaluate the risk of a future goodwill impairment charge.
• UMC Investment: Review the valuation and liquidity of the UMC equity stake, noting restrictions on the sale of approximately 23.3 million shares.
• Amortization Burden: Confirm the schedule of future amortization expenses for intangible assets, which is projected to be $35.7 million for the remainder of 2003.