Lattice Semiconductor Corporation — Form 10-Q Summary
Period clarification: The request identifies 2017 Q3, but the supplied filing is for the quarter ended September 29, 2018, with comparisons to the quarter ended September 30, 2017. The filing covers the 13-week quarter and first 39 weeks of fiscal 2018.
Business context and reporting period
Lattice develops semiconductor products, solutions, and intellectual property licenses for communications and computing, mobile and consumer, and industrial and automotive markets. It reports one operating segment. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $101.5 million | $92.0 million | $302.8 million | $290.7 million |
| Gross margin | $58.4 million; 57.5% | $53.3 million; 58.0% | $165.1 million; 54.5% | $165.4 million; 56.9% |
| Operating income (loss) | $13.0 million | $(37.5) million | $(1.4) million | $(46.9) million |
| Net income (loss) | $7.0 million | $(43.1) million | $(19.2) million | $(63.3) million |
| Basic and diluted EPS | $0.05 | $(0.35) | $(0.15) | $(0.52) |
Revenue rose about 10% in Q3 and 4% for the first nine months. Comparisons are affected by adoption of ASC 606 in fiscal 2018: prior-year figures were not restated, and the new standard accelerated revenue recognition on certain distributor shipments. ASC 606 increased 2018 revenue by $2.8 million in Q3 and $12.0 million year to date versus the former method.
- Cash flow: Operating cash flow was $20.6 million for the first nine months, versus $35.7 million a year earlier. Investing cash outflow was $16.9 million and financing cash outflow was $1.4 million. Cash and equivalents increased $1.1 million to $107.9 million.
- Liquidity: Cash, equivalents, and short-term marketable securities totaled $117.5 million at September 29, 2018. Current assets were $283.7 million and current liabilities $70.9 million. Management said resources should meet working-capital needs for at least 12 months.
- Debt: Term-loan principal was $278.9 million, bearing a variable rate with a 7.03% effective rate. Lattice repaid $27.9 million of debt in the first nine months. The loan matures in March 2021; the company reported compliance with covenants.
- Revenue mix: Industrial and automotive revenue grew 28% year to date; communications and computing grew 7%. Mobile and consumer declined 6%, while licensing and services declined 58%, largely reflecting a prior-year patent sale and the sale of Simplay Labs assets. Asia represented 75% of year-to-date revenue.
Material changes versus prior comparable periods
- Q3 returned to GAAP operating and net income from substantial losses a year earlier, when a $36.2 million acquired-intangible impairment was recorded. Year-to-date net loss narrowed, but remained negative.
- Year-to-date gross margin declined 2.4 percentage points, principally reflecting lower licensing and services revenue and an $8.0 million net inventory charge tied to the discontinued millimeter-wave business.
- Research and development expense fell 21% year to date, mainly from restructuring-related cost reductions. SG&A increased 4%, including CEO transition and search costs.
- Cash and securities increased $5.7 million from fiscal year-end, supported by operating cash flow and $26.5 million of net cash proceeds from stock issuance, partly offset by debt repayment, capital spending, and software-license payments.
Outlook, commentary, risks, and unusual items
- No specific quarterly revenue or earnings guidance is provided. Management expects the revenue benefit from distributor inventory under ASC 606 to be minimal in Q4 2018 and estimated the standard could increase 2018 distributor revenue by about 3% versus the former accounting method.
- The June 2018 plan discontinued the millimeter-wave business to reduce costs and refocus on core activities. Approximately $24.0 million of related expense was recorded through the first nine months, including inventory reserves, intangible impairment, and restructuring costs. The company said the plan was substantially complete.
- The June 2017 restructuring plan had incurred $9.4 million of costs through September 29, 2018; estimated total costs are $21.5 million to $23.0 million, with substantial completion expected by the end of fiscal Q1 2019.
- A new HDMI royalty-sharing agreement for 2018 had not been finalized. Revenue estimates depend on the eventual allocation, creating uncertainty in licensing revenue and related contract assets.
- Sales to ZTE were restricted from April 17, 2018 under U.S. Commerce Department sanctions; sanctions were lifted in July subject to conditions. ZTE had represented less than 3% of Q1 revenue; future order effects were uncertain.
- Key risks include heavy distributor dependence (85% of year-to-date revenue; two distributors represented 56%), distributor inventory and collection exposure, reliance on a limited number of foundries, foreign-market and trade-policy exposure, and variable-rate debt. Accounts receivable rose to $75.6 million and days sales outstanding increased to 68 from 53 at fiscal year-end.
- Disclosure controls were not effective as of quarter-end because remediation of a material weakness in risk assessment and controls for significant unusual transactions remained ongoing. Management nevertheless concluded the statements fairly presented the company’s financial position and results in all material respects.
- A Chinese VAT documentation audit remained open; no liability was accrued, and the company estimated any exposure at zero to less than $2 million. No material legal loss accrual was reported.
Important facts for investors to verify
- How much reported revenue growth reflects underlying customer demand versus ASC 606 timing and distributor inventory changes.
- Distributor inventory, sell-through, receivable collections, and the concentration of receivables with Arrow and Weikeng.
- Final terms and allocation under the 2018 HDMI royalty-sharing agreement and the collectability of related contract assets.
- Progress toward restoring positive year-to-date GAAP operating income and maintaining gross margins after restructuring and inventory charges.
- Debt repayment capacity, exposure to LIBOR changes, and timely remediation of the disclosed material weakness in internal controls.