Lattice Semiconductor Corporation — FY2020 Form 10-K
Period note: The filing is for the fiscal year ended January 2, 2021, not fiscal 2019 Q4. FY2020 was a 53-week year; FY2019 was 52 weeks. The filing also provides unaudited quarterly data, including Q4.
Business context and reporting period
Lattice develops low-power programmable logic devices, related software and system solutions, and licenses intellectual property. Its markets include communications and computing, industrial and automotive, and consumer. It relies on external foundries and assembly/test providers, primarily in Asia, and sells mainly through distributors.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $408.1 million | $404.1 million |
| Gross margin | $245.3 million; 60.1% | $238.4 million; 59.0% |
| Operating income | $52.4 million; 12.8% of revenue | $59.0 million; 14.6% of revenue |
| Net income | $47.4 million; diluted EPS $0.34 | $43.5 million; diluted EPS $0.32 |
| Cash from operations | $91.7 million | $124.1 million |
- Revenue increased 1.0%. Gross margin rose 110 basis points, attributed to pricing optimization, product cost reductions, and product mix. Operating income declined as research and development and selling, general and administrative expenses increased.
- FY2020 cash from operations fell $32.4 million, principally due to working-capital changes, including higher inventory and lower cash from accounts payable; improved operating performance partly offset the decline. Investing cash outflow was $20.9 million and financing cash outflow was $8.1 million.
- Cash and cash equivalents were $182.3 million at year-end, up $64.3 million. Approximately $121.8 million was held by foreign subsidiaries. The company said it could access that cash without significant additional expense and believed resources and credit facilities would meet needs for at least 12 months.
- Long-term debt principal was $171.9 million, including a $50 million revolving-facility draw during the year; the effective rates at year-end were 1.61% on the term loan and 1.40% on the revolver. The agreement includes financial covenants and scheduled principal payments, with remaining principal due at maturity in 2024. Management reported no required debt payment until June 30, 2021 after accelerated payments.
- Inventory increased 17.5% to $64.6 million; days of inventory rose to 139 from 123. Accounts receivable was $64.6 million and days sales outstanding were 55, down from 59.
Unaudited Q4 FY2020 revenue was $107.2 million versus $100.2 million in Q4 FY2019; net income was $16.0 million versus $14.0 million.
Material changes versus the prior year
- Communications and Computing revenue rose 12% to $174.7 million, and Industrial and Automotive rose 11% to $168.3 million. Consumer revenue fell 39% to $45.5 million; the company cited COVID-19-related demand weakness and a planned mix shift toward other markets. Licensing and Services revenue declined 9% to $19.6 million, primarily due to lower HDMI revenue.
- China accounted for 52% of revenue; Asia overall accounted for approximately 75%. Distributors represented 83.1% of revenue. Weikeng and Arrow accounted for 34.8% and 25.1%, respectively.
- Interest expense declined to $3.7 million from $11.7 million, largely due to lower effective borrowing costs and debt reductions. Amortization of acquired intangibles declined to $4.4 million from $13.6 million.
- Research and development expense rose 13.5% to $89.2 million and SG&A rose 15.5% to $95.3 million. Stock-based compensation increased to $40.4 million from $18.9 million.
- The company repurchased approximately 0.4 million shares for $15.0 million during Q4 under a $40 million authorization; the program expired in Q1 FY2021. Subsequent to year-end, the board approved a new 12-month program of up to $60 million.
Outlook, risks, contingencies, and unusual items
- No specific numerical FY2021 guidance is provided. Management said COVID-19 was expected to affect demand in Q1 and potentially beyond, and warned that forecasting was unusually difficult amid uncertain economic, supply-chain, and pandemic conditions. It expects continued investment in R&D, particularly software solutions.
- Key risks include COVID-19 impacts, semiconductor cyclicality, export controls and trade restrictions affecting China business, reliance on concentrated Asian foundry and outsourced manufacturing partners, and dependence on a small group of distributors and end customers. Two distributors together represented 59.9% of FY2020 revenue.
- Inventory valuation was identified by the auditor as a critical audit matter because estimates depend on projected customer demand. The company also highlighted risks from distributor inventory estimates, potential product defects, cybersecurity, and intellectual-property licensing variability.
- An Oregon lawsuit alleges violations of the Lanham Act, negligence, and fraud related to products sold around 2008. Plaintiffs seek $138 million plus treble damages and other remedies. The company disputes the claims; it said it could not estimate the likelihood or amount of potential exposure.
- FY2020 included $3.9 million of restructuring charges. The company reported no goodwill or acquired-intangible impairment in FY2020 or FY2019. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether reported revenue growth and margin improvement persist, particularly given Consumer-market weakness and higher operating expenses.
- Distributor concentration, end-customer demand, and the accuracy of channel inventory and revenue estimates.
- Inventory growth and valuation assumptions relative to customer demand, product lifecycles, and supply availability.
- Debt repayment, covenant headroom, revolver usage, and the availability and location of cash.
- Developments in the $138 million lawsuit and the potential effects of China-related export restrictions.
- Whether R&D and stock-compensation growth translate into product adoption and sustainable operating profitability.