Lattice Semiconductor Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 29, 2012, not 2011 Q3. It compares Q3 and the first nine months of fiscal 2012 with the corresponding 2011 periods. Amounts below are in U.S. dollars.
Business context and reporting period
Lattice designs and markets programmable logic devices and related software for communications, computing, consumer, industrial and other markets. It operates as one segment. Most revenue is generated outside the U.S.; Asia Pacific accounted for 57% of Q3 revenue. The financial statements are unaudited.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $70.9m | $81.7m | $213.4m | $248.2m |
| Gross margin | 54.4% | 58.6% | 53.9% | 59.7% |
| Operating income (loss) | ($0.3m) | $12.3m | ($3.0m) | $35.7m |
| Net income (loss) | ($2.2m) | $13.3m | ($22.4m) | $37.3m |
| Diluted EPS | ($0.02) | $0.11 | ($0.19) | $0.31 |
| Operating cash flow | Not presented by quarter | ($0.3m) | $45.7m |
Q3 revenue fell 13% year over year and nine-month revenue fell 14%. Lower customer and product mix reduced gross margin; manufacturing and material cost improvements partly offset the decline. R&D rose 20% in Q3 and 6% year to date, while SG&A rose 5% and 6%, respectively. The nine-month net loss included a $20.3m income-tax provision, versus a $0.4m tax benefit in the prior-year period; management attributed tax expense in part to implementation of its global tax structure and the sale of intercompany inventory.
At September 29, 2012, cash and cash equivalents were $138.3m and short-term marketable securities were $48.0m, totaling $186.2m in cash and short-term investments. Working capital was $243.9m. Total assets were $437.7m and total liabilities were $70.8m, including $19.0m of long-term liabilities; the balance sheet does not separately identify a debt balance. Nine-month capital expenditures were $11.2m. Cash declined $3.2m during the period. The company repurchased $12.4m of stock year to date under a $20m authorization.
Material changes and operating trends
- New-product revenue increased 95% in Q3 and 65% year to date, but growth was outweighed by declines in mainstream and mature products. Mature-product revenue fell 42% in Q3 and 33% year to date.
- Q3 FPGA revenue was essentially flat; PLD revenue declined approximately 19%. Communications remained the largest end market, representing 47% of revenue; industrial and other revenue fell 25% in Q3, primarily due to military business declines.
- Accounts receivable increased $19.0m year to date. Days sales outstanding increased to 71 from 59 a year earlier, which management linked mainly to a higher share of Asian customers with longer payment terms.
- Cash and short-term investments decreased by approximately $23.9m from December 31, 2011. The company redeemed $2.6m par value of auction-rate securities at par; $4.7m fair value remained classified as long-term due to illiquidity.
Outlook, risks, and unusual items
- Management expects existing liquid resources and cash from future operations to cover requirements for at least 12 months. It expects significant continued R&D investment; no specific revenue or earnings guidance is provided.
- On October 12, 2012, the board adopted a restructuring plan targeting an approximately 13% headcount reduction and closure of certain sites, including Pennsylvania and Illinois. Expected charges are approximately $5.5m in Q4 2012 and $0.5m in Q1 2013; substantial completion is expected in Q1 2013.
- Fujitsu is the sole-source wafer supplier for most of the company’s newest FPGA and PLD products. The company also depends on distributors: two distributors together represented approximately 47% of Q3 revenue and 46% year-to-date revenue. Sell-through distributor resales represented 56% of Q3 revenue.
- Key exposures include semiconductor cyclicality, weak communications demand, product transitions and pricing pressure, distributor concentration and reporting, international operations, tax uncertainty, and foundry and assembly supply disruptions.
- Two patent-infringement lawsuits remain pending. The company says it cannot estimate potential exposure at this stage and has recorded no litigation-loss accrual. It also holds illiquid auction-rate securities whose estimated value could differ from proceeds if sold.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the correct reporting period: this filing covers Q3 2012, despite the request’s 2011 Q3 label.
- Track whether new-product growth can offset continuing declines in mature and mainstream products and restore gross margin.
- Monitor receivables, collection days, and operating cash flow after the year-to-date cash-flow deterioration.
- Assess the execution, total costs, and operational effects of the October 2012 restructuring.
- Review dependence on major distributors and Fujitsu, along with the recoverability and liquidity of remaining auction-rate securities.
- Follow tax-provision variability and developments in the pending patent cases; the filing provides no clear estimate of potential legal losses.