Lattice Semiconductor Corporation — Form 10-Q Summary
Period clarification: The filing is for the quarter ended June 30, 2012, and six months ended June 30, 2012; it compares the prior-year periods ended July 2, 2011. This differs from the request metadata’s “2011 Q2.” Financial statements are unaudited.
Business context
Lattice designs and markets programmable logic devices (PLDs), FPGAs, and related software. Communications was the largest end market, representing 52% of Q2 revenue; Asia Pacific represented 57% of Q2 revenue. The company cited dependence on communications demand, Asia Pacific markets, distributors, and external wafer suppliers.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $70.8 million | $83.9 million | $142.5 million | $166.5 million |
| Gross margin | 52.3% | 60.4% | 53.7% | 60.2% |
| Operating income (loss) | $(2.8) million | $12.9 million | $(2.6) million | $23.4 million |
| Net income (loss) | $(12.5) million | $13.0 million | $(20.3) million | $24.0 million |
| Diluted EPS | $(0.11) | $0.11 | $(0.17) | $0.20 |
- Q2 revenue fell 16% year over year; first-half revenue fell 14%. Management attributed the decline to lower Mainstream and Mature product revenue and fewer units sold, partly offset by growth in New products.
- Gross margin declined 8.1 percentage points in Q2 and 6.5 points for the first half. The company cited product and customer mix, including a larger share of lower-margin New products and communications sales.
- Q2 income tax provision was $10.5 million despite a pretax loss of $2.1 million; first-half provision was $18.4 million. Management said the tax expense was substantially related to the global tax-structure implementation and expected it to decrease substantially in Q3 and further in Q4 as transferred inventory was sold.
- First-half operating cash flow was $(12.9) million, versus $19.2 million provided in the prior-year period. Accounts receivable increased $23.4 million; days sales outstanding rose to 77 from 61 a year earlier.
- At June 30, cash and cash equivalents were $132.5 million; short-term marketable securities were $52.0 million, together totaling $184.5 million. Working capital was $246.7 million. Total liabilities were $71.8 million; the filing does not clearly itemize interest-bearing debt.
- Six-month capital expenditures were $8.1 million. Cash declined $9.0 million to $132.5 million. The company repurchased $7.0 million of stock in the first half under a new $20 million, 12-month authorization.
Material changes and unusual items
- New-product revenue increased 55% in Q2 and 49% in the first half, while Mature-product revenue declined 41% and 28%, respectively. New products rose to 20% of Q2 revenue from 10% in the prior-year quarter.
- SiliconBlue, acquired in December 2011 for $63.2 million cash, contributed acquisition-related costs of $1.0 million in Q2 and $2.7 million in the first half. The filing estimates $19.7 million of future acquisition-related charges through 2018.
- The 2011 restructuring plan was completed in Q2 2012; no restructuring accrual remained at June 30.
- The company redeemed $2.6 million par value of auction-rate securities for $2.6 million, recognizing a $0.4 million gain. Remaining auction-rate securities had $5.7 million par value and $4.7 million fair value and remained classified as long-term due to illiquidity.
Outlook, risks, and contingencies
- Management said existing liquid resources and expected operating cash generation should cover operating, capital, and other obligations for at least 12 months. It provided no numerical revenue or earnings guidance in the supplied filing text.
- Management expects significant future R&D investment; advanced-process development may increase mask and engineering-wafer costs. It also expects communications to remain a significant revenue dependency and Asia Pacific to remain the primary revenue source.
- Fujitsu was identified as the sole-source wafer supplier for most of the newest FPGA and PLD products. Supplier disruption, product acceptance, competitive pricing, distributor performance, economic weakness, and customer demand forecasting are material risks.
- Two patent matters remained pending; the company said it could not estimate potential exposure and had recorded no litigation-loss accrual. It stated that disclosure controls were effective and that no material change in internal control occurred during the period.
Important facts for investors to verify
- Confirm the intended reporting year: the filing itself covers Q2 2012, not Q2 2011.
- Track whether revenue stabilizes and New-product growth offsets Mainstream and Mature declines, and whether gross margin recovers.
- Assess collection of receivables and distributor resale reporting, given higher DSO and concentration among major distributors.
- Verify the expected decline in tax expense as transferred inventory sells, and monitor the effect of the global tax structure on later effective tax rates.
- Review liquidity and valuation of remaining auction-rate securities, future SiliconBlue-related costs, and developments in the patent litigation and Fujitsu supply relationship.