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| LSCC > SEC Filings for LSCC > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
Lattice Semiconductor Corporation (the "Company", "we", "us" or "our") designs, develops and markets high performance programmable logic products and related software. Programmable logic products are widely used semiconductor components that can be configured by the end customer as specific logic circuits, and thus enable the end customer to shorten design cycle times and reduce development costs. Within the programmable logic market there are two groups of products - programmable logic devices ("PLD") and field programmable gate arrays ("FPGA") - each representing a distinct silicon architectural approach. Products based on the two alternative programmable logic architectures are generally optimal for different types of logic functions, although many logic functions can be implemented using either architecture. We believe that a substantial portion of programmable logic customers utilize both PLD and FPGA architectures. Our end customers are primarily original equipment manufacturers in the communications, computing, industrial, consumer, automotive, medical and military end markets.
Critical Accounting Policies and Estimates
Critical accounting policies are those that are both most important to the presentation of a company's financial condition and results of operations and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes that there have been no significant changes during the nine months ended October 3, 2009 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and classification of assets, such as marketable securities, accounts receivable, inventory and deferred income taxes and liabilities, such as accrued liabilities (including restructuring charges), income taxes and deferred income and allowances on sales to certain distributors, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the fiscal periods presented. Our most critical estimate relates to auction rate securities, and the estimates of fair value of these securities made in accordance with the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards CodificationTM ("ASC") No. 820, "Fair Value Measurements and Disclosures." Actual results could differ from these estimates.
Recent Accounting Guidance
In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. This guidance amends the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. The Company does not expect the application of the new guidance to have a material impact on the Company's Condensed Consolidated Financial Statements.
Results of Operations
Revenue
Key elements of our Condensed Consolidated Statements of Operations (dollars in
thousands) were as follows:
Three Months Ended Nine Months Ended
October 3, 2009 September 27, 2008 October 3, 2009 September 27, 2008
Revenue $ 49,097 100.0 % $ 57,610 100.0 % $ 139,333 100.0 % $ 172,293 100.0 %
Gross margin 26,619 54.2 31,117 54.0 73,883 53.0 95,089 55.2
Research and development 14,789 30.1 17,534 30.4 43,491 31.2 53,139 30.8
Selling, general and administrative 12,739 25.9 14,547 25.3 39,255 28.1 44,741 26.0
Amortization of intangible assets - - 1,369 2.4 228 0.2 4,218 2.5
Restructuring 2,544 5.2 3,882 6.7 2,504 1.8 6,530 3.8
Loss from operations $ (3,453 ) (7.0 )% $ (6,215 ) (10.8 )% $ (11,595 ) (8.3 )% $ (13,539 ) (7.9 )%
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Revenue in the three and nine months ended October 3, 2009 decreased to $49.1 million and $139.3 million, respectively, compared to $57.6 million and $172.3 million in the three and nine months ended September 27, 2008.
We experienced a sequential increase in revenue of 5% during the third quarter of fiscal 2009, when compared to the second quarter of fiscal 2009, primarily as a result of an increase in sales in the computing end-market sector partially offset by a decrease in sales as a result of a pause in the China 3G telecommunications network build-out.
In April 2009, we notified two of our distributors in Taiwan and China of our intention to terminate the distribution agreements between the Company and those distributors, effective June 6, 2009. This action was taken in connection with the transition of our distribution channels in the Asia Pacific region, from a sell-in to a sell-through distribution model. One of the distributors represented approximately 10% of the Company's revenue in each of the fiscal 2008 and 2007 years. Additionally, we converted in-place selected distributors in the Asia Pacific region and Europe from a sell-in to a sell-through model, effective for the beginning of the fourth quarter of fiscal 2009. As a result, revenue was lower in the third quarter of fiscal 2009 by an estimated $2.0 million and is expected to be lower in the fourth quarter of fiscal 2009 by approximately $1.0 million compared to forecasted revenue in the respective quarters had we not embarked on this conversion. We rely on our channel partners to sell our products to end users. The sell-in distribution model allows the Company to recognize revenue upon shipment to the distributor. The sell-through distribution model is an arrangement that does not include firm prices and includes right of return conditions, and thus revenue is recognized upon resale by the sell-through distributor. Our future revenue from our distribution network in the Asia Pacific and European regions is partially dependent on our ability to manage this transition.
Revenue by Product Line
FPGA revenue decreased in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 due to a decrease in units sold partially offset by an increase in average selling price. FPGA revenue increased in the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008 due to an increase in units sold partially offset by a decrease in average selling price. PLD revenue decreased in the third quarter and first nine months of fiscal 2009, when compared to the third quarter and first nine months of fiscal 2008, respectively, due to a decline in units sold partially offset by an increase in average selling prices.
The composition of our revenue by product line for the third quarter and first nine months of fiscal 2009 and 2008 was as follows (dollars in thousands):
Three Months Ended Nine Months Ended
October 3, 2009 September 27, 2008 October 3, 2009 September 27, 2008
FPGA $ 15,201 31 % $ 16,453 29 % $ 47,920 34 % $ 43,528 25 %
PLD 33,896 69 41,157 71 91,413 66 128,765 75
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Total revenue $ 49,097 100 % $ 57,610 100 % $ 139,333 100 % $ 172,293 100 %
Revenue by End Market
The communications end market accounted for approximately 54% of our revenue for the quarters ended October 3, 2009 and September 27, 2008. We continued to support the China 3G telecommunications network build-out in the quarter ended October 3, 2009, primarily with products sold to two large telecommunications equipment providers, one of which was through one of our distributors. We expect that a significant portion of our revenue will continue to be dependent on the health of the communications end market. The computing end market accounted for 17% of revenue for the quarter ended October 3, 2009 compared to 11% in the same period last year. This was primarily due to strength in the server market.
The composition of our revenue by end market for the third quarter and first nine months of fiscal 2009 and 2008 was as follows (dollars in thousands):
Three Months Ended Nine Months Ended
October 3, 2009 September 27, 2008 October 3, 2009 September 27, 2008
Communications $ 26,670 54 % $ 31,361 54 % $ 80,436 58 % $ 92,377 54 %
Industrial and other 8,212 17 12,185 21 24,177 17 39,130 23
Computing 8,349 17 6,269 11 17,757 13 21,375 12
Consumer and automotive 5,866 12 7,795 14 16,963 12 19,411 11
Total revenue $ 49,097 100 % $ 57,610 100 % $ 139,333 100 % $ 172,293 100 %
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Revenue by Product Classification
Revenue for New products increased 15% and 41% for the third quarter and first nine months of fiscal 2009, respectively, compared to the third quarter and first nine months of fiscal 2008, as a result of increased unit sales. Revenue for Mainstream products decreased 25% and 34% for the third quarter and first nine months of fiscal 2009, respectively, compared to the third quarter and first nine months of fiscal 2008 and Mature product revenue decreased 33% and 45% for the third quarter and first nine months of fiscal 2009, respectively, compared to the third quarter and first nine months of fiscal 2008, primarily due to lower demand associated with the current weak economic conditions.
The composition of our revenue by product classification for the third quarter and first nine months of fiscal 2009 and 2008 was as follows (dollars in thousands):
Three Months Ended Nine Months Ended
October 3, 2009 September 27, 2008 October 3, 2009 September 27, 2008
New * $ 20,220 41 % $ 17,511 30 % $ 57,855 42 % $ 41,032 24 %
Mainstream * 18,740 38 24,968 43 53,603 38 80,770 47
Mature * 10,137 21 15,131 27 27,875 20 50,491 29
Total revenue $ 49,097 100 % $ 57,610 100 % $ 139,333 100 % $ 172,293 100 %
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* Product Classification:
New: LatticeECP3, LatticeXP2, LatticeSC, LatticeECP2/M, LatticeECP,
LatticeXP, MachXO, Power Manager1/2, ispClock1/2, ispMACH 4000ZE
Mainstream: FPSC, ispXPLD, ispGDX2, ispMACH 4/LV, ispGDX/V, ispMACH 4000/Z,
ispXPGA, Software and IP
Mature: ORCA 2, ORCA 3, ORCA 4, ispPAC, ispLSI 8000V, ispMACH 5000B, ispMACH
2LV, ispMACH 5LV,
ispLSI 2000V, ispLSI 5000V, ispMACH 5000VG, all 5-Volt CPLDs, all
SPLDs
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Revenue by Geography
Export revenue as a percentage of total revenue was 88% and 85% for the third quarter and first nine months of fiscal 2009, respectively, compared to 83% for both the third quarter and first nine months of fiscal 2008. Export revenue as a percentage of overall revenue increased primarily due to the on-going shift of manufacturing operations to Asia. We believe the export market to Asia will remain the primary source of our revenue due to more favorable business conditions in Asia and a continuing trend towards outsourcing of manufacturing by North American and European customers to Asia. We allocate revenue by geography by our ship-to location which may not represent the final consumption of our products by the ultimate end customer.
The composition of our revenue by geographic location of our direct and indirect customers is as follows (dollars in thousands):
Three Months Ended Nine Months Ended
October 3, 2009 September 27, 2008 October 3, 2009 September 27, 2008
United States: $ 6,108 12 % $ 9,877 17 % $ 21,164 15 % $ 28,794 17 %
Export revenue:
Asia Pacific (primarily China and
Taiwan) 27,551 56 27,171 47 77,184 56 77,068 44
Europe 8,414 17 11,473 20 25,135 18 35,930 21
Japan 5,673 12 7,170 13 11,547 8 23,927 14
Other Americas 1,351 3 1,919 3 4,303 3 6,574 4
Total export revenue 42,989 88 47,733 83 118,169 85 143,499 83
Total revenue $ 49,097 100 % $ 57,610 100 % $ 139,333 100 % $ 172,293 100 %
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Our five largest customers make up a significant portion of our total revenue. In the first nine months of fiscal 2009 and fiscal 2008, revenue attributable to two large telecommunications equipment providers, one of which was supported through one of our distributors, accounted for approximately 20% and 10% of revenue, respectively. More than 90% of our property and equipment is located in the United States.
Gross Margin and Operating Expenses
Our gross margin percentage was 54.2% and 53.0% in the third quarter and first nine months of fiscal 2009, respectively, compared to 54.0% and 55.2% in the third quarter and first nine months of fiscal 2008, respectively. Our gross margin in the quarter ended October 3, 2009 was flat compared to the quarter ended September 27, 2008. Our gross margin in the nine months ended October 3, 2009 declined compared to the nine months ended September 27, 2008 primarily due to the revenue growth of New products which typically carry an initial lower gross margin than our other product categories and lower production levels during the first three quarters of fiscal 2009, which resulted in a charge to cost of sales for underabsorbed overhead costs.
Research and development expense was $14.8 million and $43.5 million in the third quarter and first nine months of fiscal 2009, respectively, compared to $17.5 million and $53.1 million in the third quarter and first nine months of fiscal 2008, respectively. Research and development expenses consist primarily of personnel, masks, engineering wafers, third-party design automation software, assembly tooling and qualification expenses. The decrease in fiscal 2009 compared to fiscal 2008 was primarily a result of a decrease in labor costs due to headcount reductions related to the restructuring plans implemented in the third quarter of fiscal 2008 and the third quarter of 2009. Our aforementioned restructuring efforts allow us to centralize our resources to support our product development strategy. We believe that a market-based commitment to research and development is essential in order to maintain product leadership and provide innovative and value-based new product offerings, and therefore we expect to continue to make significant future investments in research and development. As we continue to move to more advanced process technologies, such as 65nm, mask and engineering wafer costs are becoming increasingly more expensive and will, therefore, increasingly represent a greater proportion of total research and development expenses.
Selling, general and administrative expense was $12.7 million and $39.3 million in the third quarter and first nine months of fiscal 2009, respectively, compared to $14.5 million and $44.7 million in the third quarter and first nine months of fiscal 2008, respectively. The decrease in fiscal 2009 compared to fiscal 2008 was primarily a result of a decrease in labor costs due to a headcount reduction related to the 2009 restructuring plan, and to a lesser extent, lower selling related costs due to lower revenue.
Amortization of intangible assets was $0.2 million in the first nine months of fiscal 2009 compared to $1.4 million and $4.2 million for the third quarter and first nine months of fiscal 2008, respectively. Intangible assets related to the acquisition of the FPGA business of Agere Systems, Inc. on January 18, 2002, became fully amortized during the first quarter of fiscal 2009.
Restructuring activity relates to the restructuring plans implemented during the fourth quarter of fiscal 2005, the third quarter of fiscal 2007 ("2007 restructuring plan"), the third quarter of fiscal 2008 ("2008 restructuring plan") and the third quarter of fiscal 2009 ("2009 restructuring plan"). Included in our Condensed Consolidated Statements of Operations and reported as Restructuring for both the third quarter and first nine months of fiscal 2009 is a net charge of $2.5 million which consists primarily of severance and related costs and costs to vacate a portion of leased space in San Jose, California under the 2009 restructuring plan. Included in our Condensed Consolidated Statements of Operations and reported as Restructuring for the third quarter and first nine months of fiscal 2008, is a net charge of $3.9 million and $6.5 million, respectively. The amount through the first nine months of fiscal 2008 consists primarily of $3.8 million in severance and related costs and costs to vacate leased properties under the 2008 restructuring plan. Remaining charges for that period relate primarily to the 2007 restructuring plan of which $1.4 million related to future lease payments associated with a vacated facility in San Jose, California and $1.3 million related to severance costs.
The 2009 restructuring plan is expected to be substantially completed in the fourth quarter of fiscal 2009.
Other expense, net
The following table summarizes the activity in Other expense, net:
Three Months Ended Nine Months Ended
October 3, September 27, October 3, September 27,
2009 2008 2009 2008
Interest income $ 296 $ 863 $ 1,025 $ 3,323
Other-than-temporary impairment of
long-term marketable securities (1,067 ) (1,419 ) (2,267 ) (11,764 )
(Loss) gain on sale of marketable
securities (6 ) - 163 -
Loss on sale of UMC investment - (233 ) - (233 )
Impairment of UMC investment - - - (992 )
Gain (loss) on value of deferred
compensation assets 199 (144 ) 203 (342 )
Other, net 42 (66 ) 17 (178 )
$ (536 ) $ (999 ) $ (859 ) $ (10,186 )
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The impairment charge to Long-term marketable securities was recorded due to the continued decline in fair value related to the holdings in auction rate securities that are considered illiquid.
The decrease in interest income is the result of lower interest rates for invested balances in Marketable securities for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 and for the nine months ended October 3, 2009 compared to the nine months ended September 27, 2008.
Provision for income taxes
We are paying foreign income taxes, which are reflected in the Provision for income taxes in the Condensed Consolidated Statements of Operations and are primarily related to the cost of operating an offshore research and development subsidiary and sales subsidiaries. We are not currently paying federal income taxes and do not expect to pay such taxes until the benefits of our tax net operating losses are fully utilized. We expect to pay a nominal amount of state income tax. We also accrue interest and penalties related to unrecognized tax benefits in the Provision for income taxes. See Note 8 to the Condensed Consolidated Financial Statements.
On February 17, 2009, The American Recovery and Reinvestment Act of 2009 was signed into law. This act extends the election to forego bonus depreciation and accelerate certain unutilized income tax credits in 2009. The Company recorded an income tax benefit of $0.3 million during the quarter ended April 4, 2009 related to the acceleration of its research tax.
Liquidity and Capital Resources
Financial Condition (Sources and Uses of Cash) (in thousands):
Nine Months Ended
October 3, September 27,
2009 2008
Net cash provided by operating activities $ 53,744 $ 24,568
Net cash provided by investing activities 8,939 29,519
Net cash used in financing activities (1,287 ) (39,850 )
Net increase in cash and cash equivalents $ 61,396 $ 14,237
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Operating Activities
Net cash provided by operating activities increased by $29.1 million in the first nine months of fiscal 2009, compared to the first nine months of fiscal 2008, primarily as a result of an increase in cash flow from the decline in net loss, an increase in accounts payable and accrued payroll and the net repayment and usage of our Fujitsu Limited (Fujitsu) advance credits of $30.4 million, partially offset by an increase in accounts receivable and a reduction of other liabilities.
Investing Activities
Net cash provided by investing activities decreased by $20.6 million in the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008. The decrease was primarily due to a reduction in the amounts invested in short-term securities in fiscal 2008 that had been transferred to cash and cash equivalents by the end of the third quarter of fiscal 2009.
Financing Activities
Net cash used in financing activities decreased by $38.6 million for the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008 primarily due to the extinguishment of $40.0 million in Zero Coupon Convertible Subordinated Notes in fiscal 2008.
Liquidity
As of October 3, 2009, our principal source of liquidity was $115.1 million of Cash and cash equivalents, which were approximately $49.2 million more than the balance of $65.9 million at January 3, 2009. Working capital increased to $193.6 million at October 3, 2009 from $182.5 million at January 3, 2009.
Under the terms of a letter agreement between the Company and Fujitsu, Fujitsu agreed to repay in cash to the Company $30.0 million (recorded as Other receivable in the Condensed Consolidated Balance Sheets), plus interest, which was received on October 15, 2009. In addition, we expect to receive the remaining advance of approximately $18.0 million in the form of advance credits by the end of the second quarter of the Company's fiscal 2010.
We believe that our existing liquid resources and cash expected to be generated from future operations, combined with a receivable for advance payments from Fujitsu, will be adequate to meet our operating and capital requirements and obligations for at least the next twelve months.
At October 3, 2009 and January 3, 2009, the Company held auction rate securities with a par value of $38.2 million and $39.2 million, respectively. For the quarter ended October 3, 2009, the Company had three partial redemptions at par value of auction rate securities for a total value of $0.1 million. The Company intends to sell its auction rate securities as markets for these securities resume or offers become available. At October 3, 2009, due to continued multiple failed auctions and a determination of illiquidity, the auction rate securities held by the Company had an estimated fair value of $17.7 million and are classified as Long-term marketable securities.
Long-term marketable securities with a par value of $15.8 million are exposed to risks associated with student loan asset-backed notes. Such notes are insured by the federal government or guaranteed by the Federal Family Education Loan Program ("FFELP"). Long-term marketable securities with a par value of $14.0 million are exposed to risks associated with the sale of credit default swaps, pursuant to which the assets underlying the auction rate securities are exposed to claims in the event of default of certain debt instruments owned by third parties. In addition, long-term marketable securities with a par value of $8.3 million were replaced on December 3, 2008 by auction market preferred shares issued by Ambac Assurance Corporation ("AMBAC"), as a result of AMBAC exercising their put option feature provided in this security. Beginning August 1, 2009, AMBAC discontinued paying monthly dividends on its outstanding auction market preferred shares, which reduced our Other expense, net, by less than $0.1 million per quarter.
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