Lattice Semiconductor Corporation — Form 10-Q Summary
Period: Quarter and six months ended June 30, 2018. The request metadata says 2017 Q2, but the filing itself is for fiscal 2018 Q2.
Business context and reporting period
Lattice develops semiconductor products, solutions, and intellectual-property licenses. It reports one operating segment. Financial statements are unaudited. Fiscal 2018 Q2 was a 13-week period; the six-month comparison is against the six months ended July 1, 2017.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $102.7 million | $94.1 million | $201.3 million | $198.7 million |
| GAAP gross margin | 48.9% | 54.4% | 53.0% | 56.4% |
| Operating loss | $13.6 million | $8.7 million | $14.4 million | $9.4 million |
| Net loss | $20.2 million | $13.0 million | $26.2 million | $20.3 million |
| Loss per diluted share | $0.16 | $0.11 | $0.21 | $0.17 |
Product revenue increased year over year, while licensing and services revenue declined. Operating results included $11.9 million of intangible-asset impairment, $8.3 million of inventory reserves, and $4.1 million of restructuring costs associated primarily with discontinuing the millimeter-wave business. The company also reported non-GAAP net income of $12.4 million for Q2 and $18.5 million for the first half; these measures exclude specified items and are not GAAP results.
- Cash flow: First-half operating cash flow was $9.6 million, versus $11.5 million in the prior-year period. Investing cash use was $15.2 million and financing cash use was $7.0 million. Cash and cash equivalents declined $13.1 million to $93.7 million; cash plus short-term marketable securities totaled $105.8 million.
- Liquidity and working capital: Accounts receivable rose $21.5 million to $76.6 million; days sales outstanding increased from 53 to 68. Inventory fell $14.3 million to $65.6 million, with inventory on hand declining from 5.4 to 3.8 months.
- Debt: Term-loan principal was $294.8 million, with a 6.92% effective interest rate, variable based on LIBOR. The loan matures in March 2021. The company repaid $12.0 million during the first half and stated it was in compliance with applicable covenants.
Material changes versus the prior comparable period
- Reported revenue rose 9% in Q2 and 1% for the first half, but comparisons are affected by adopting ASC 606 on December 31, 2017 without restating prior periods. The standard accelerated recognition on qualifying distributor shipments and certain licensing activity. Management estimated ASC 606 increased first-half 2018 revenue by $9.1 million versus prior guidance; Q2 revenue was $0.3 million lower under the new standard than it would have been under the previous guidance.
- Industrial and Automotive revenue grew 43% in Q2 and 37% in the first half. Mobile and Consumer revenue declined 3% and 10%, respectively. Licensing and Services revenue fell 60% in Q2 and 65% in the first half, primarily because the prior-year period included patent-sale revenue that did not recur.
- Distributor shipments accounted for 86% of Q2 revenue and 87% of first-half revenue. The top two distributor groups represented 59% of first-half revenue. Revenue attribution to end customers was incomplete for some distributor shipments.
- Gross margin declined, mainly due to the $8.3 million millimeter-wave inventory reserve and a lower contribution from high-margin licensing revenue.
Outlook, management commentary, risks, and unusual items
- Management said available financial resources should cover working-capital needs for at least 12 months. It expected distributor-related revenue recognition benefits under ASC 606 to lessen in Q3 and potentially Q4, and estimated a $3 million to $6 million increase in 2018 distributor revenue versus the prior accounting standard.
- The June 2018 restructuring plan discontinued the millimeter-wave business to reduce infrastructure costs and refocus on core activities. Management said the approximately $4.1 million of restructuring expense recorded under that plan approximated its total cost and the plan was substantially complete. A separate 2017 restructuring plan was expected to cost $8 million to $12 million and be substantially complete by fiscal year-end 2018.
- U.S. Commerce Department restrictions on sales to ZTE began April 17, 2018; ZTE represented less than 3% of Q1 revenue. The restrictions were lifted in July, subject to ZTE meeting requirements, and Lattice anticipated resuming sales after that. Management did not expect the restriction to materially affect total or Asian revenue.
- A new HDMI royalty-sharing agreement for periods beginning January 1, 2018 had not been signed. Lattice was estimating its royalty share; management expected $1 million to $2 million of additional quarterly licensing and services revenue under ASC 606 while negotiations continued. Estimates may change when the agreement is finalized.
- Key risks include distributor inventory and collection exposure, concentrated distribution and wafer supply, end-market demand and pricing pressure, foreign sales and trade restrictions, variable-rate debt, and potential tax or royalty-sharing changes. An ongoing China VAT documentation audit had no accrued liability; the company estimated possible findings from zero to less than $2 million.
- Disclosure controls were deemed ineffective at June 30, 2018 because remediation of a material weakness involving risk assessment and controls over significant unusual transactions was still in progress. Management said the financial statements nevertheless fairly presented the company’s financial position and results in all material respects.
Most important facts for investors to verify
- Confirm the period: the filing covers fiscal 2018 Q2, despite the request metadata specifying 2017 Q2.
- Assess underlying revenue and distributor inventory trends separately from ASC 606 timing effects, including whether channel inventory converts to end-customer demand.
- Track gross-margin recovery after millimeter-wave reserves and the shift in product, end-market, and licensing mix.
- Review debt repayment capacity, variable-rate exposure, and the concentration of cash held at foreign subsidiaries.
- Monitor completion of the HDMI royalty-sharing agreement, ZTE sales resumption, and remediation and testing of the material weakness in internal controls.