Lattice Semiconductor Corporation — Form 10-Q Summary
Period: Fiscal second quarter and first six months ended July 2, 2016; comparative periods ended July 4, 2015. The request metadata says “2015 Q2,” but the filing is for 2016 Q2.
Business context
Lattice provides semiconductor devices and intellectual property for communications and computing, mobile and consumer, industrial and automotive, and licensing markets. The company acquired Silicon Image in March 2015; consequently, the prior-year six-month comparison includes Silicon Image for only about 16 weeks, limiting comparability. Qterics was sold in April 2016.
Financial results
| Metric | Three months ended July 2, 2016 | Prior-year quarter | Six months ended July 2, 2016 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $99.2 million | $106.5 million | $195.7 million | $195.1 million |
| Gross margin | 58.9% | 54.6% | 59.0% | 54.3% |
| Operating loss | $6.4 million | $25.9 million | $19.7 million | $52.8 million |
| Net loss | $13.8 million | $35.6 million | $33.5 million | $88.9 million |
| Loss per share, diluted | $0.12 | $0.30 | $0.28 | $0.76 |
Quarterly revenue declined about 7%, chiefly as weakness in communications and computing and mobile and consumer markets outweighed growth in industrial and automotive. First-half revenue was approximately flat. Gross margin improved, primarily from better product mix and lower purchase-accounting effects. Operating expenses also fell, reflecting acquisition synergies and restructuring; first-half acquired-intangible amortization was higher than the prior-year period.
For the first six months, operating cash flow was $32.7 million, versus cash used of $15.4 million in the prior-year period. Investing activities used $4.8 million, and financing activities used $1.5 million. Cash and equivalents were $110.5 million and short-term marketable securities $8.8 million at July 2, 2016, totaling $119.3 million. Inventory rose to $86.7 million from $75.9 million at fiscal year-end; inventory on hand increased to 6.4 months from 4.8 months.
At July 2, 2016, term-loan principal was $344.0 million, with a 6.00% effective variable interest rate and maturity in March 2021. The balance sheet reported $20.5 million current and $315.2 million long-term debt, net of unamortized costs and discount. The loan requires quarterly payments and currently a 75% share of defined excess cash flow; the company reported compliance with its covenants. Current assets were $307.6 million and current liabilities $153.0 million.
Changes, outlook, and risks
- Industrial and automotive revenue grew about 49% year over year in the quarter; communications and computing fell 12%, and mobile and consumer fell 38%. Asia contributed 68% of quarterly revenue, down from 78% a year earlier.
- Sell-through distributors accounted for 59% of quarterly revenue, versus 43% a year earlier. Two distributor groups represented 41% and 20% of gross receivables, respectively, at quarter-end.
- The Qterics sale generated $2.0 million net proceeds and a $2.6 million gain, recorded in other income. A separate private-company investment generated $0.4 million of equity-method loss in the quarter and $0.7 million for the half-year.
- Restructuring plans were substantially complete. Management estimated total costs of approximately $21 million for the March 2015 plan and $9 million for the September 2015 workforce reduction, with remaining charges expected to be limited.
- Management stated that available financial resources should meet working-capital needs for at least 12 months and anticipated continued significant R&D investment. The filing gives no numerical revenue or margin forecast. Management cautioned that mix and pricing pressure may affect future margins.
- Key risks include semiconductor and end-market cyclicality, pricing and demand, reliance on a limited number of wafer foundries and distributors, inventory build and obsolescence, acquisition integration and ERP transition, debt service, and international and tax exposures. The company was discussing a narrower or eliminated HDMI-agent role that could reduce future adopter fees; its HDMI royalty allocation was expected to be about 20% for 2016.
- Lattice sued Technicolor over alleged patent infringement relating to HDMI. Technicolor raised a potential claim concerning sharing unused HDMI adopter fees. The company could not estimate the likelihood or financial consequences of that claim.
Important facts for investors to verify
- Whether inventory growth and higher distributor sell-through represent end demand or channel inventory accumulation; also monitor distributor receivables concentration.
- Whether industrial and automotive growth can offset ongoing weakness in mobile and consumer and communications and computing.
- Debt amortization and excess-cash-flow payments, the variable-rate exposure, and the effect of debt restrictions on future investment or acquisitions.
- Expected impact on licensing revenue from HDMI consortium discussions, royalty allocations, and the Technicolor litigation and potential fee-sharing claim.
- Progress and costs of restructuring, Silicon Image integration, and the planned company-wide ERP transition.
- Non-GAAP results exclude items including restructuring, stock compensation, acquired-intangible amortization, and acquisition accounting effects; assess them alongside GAAP losses.