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| LSCC > SEC Filings for LSCC > Form 10-Q on 7-Aug-2012 | All Recent SEC Filings |
7-Aug-2012
Quarterly Report
Overview
Lattice Semiconductor Corporation ("Lattice", 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 end customers as specific logic circuits, enabling shorter design cycle times and reduced development costs. Our end customers are primarily original equipment manufacturers ("OEMs") in the communications, computing, consumer, industrial, military, automotive, and medical end markets. 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.
Critical Accounting Policies and Estimates
Critical accounting policies are those that are both most important to the portrayal of a company's financial condition and results 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 six months ended June 30, 2012 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 December 31, 2011.
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, auction rate securities, goodwill, deferred income taxes and liabilities, accrued liabilities (including restructuring charges and accrual for bonus arrangements), income taxes, deferred income and allowances on sales to certain sell-through distributors, forward exchange contracts, and 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. Actual results could differ from those estimates.
Results of Operations
Revenue
Key elements of our Condensed Consolidated Statements of Operations and
Comprehensive (loss) income were as follows (dollars in thousands):
Three Months Ended Six Months Ended
June 30, 2012 July 2, 2011 June 30, 2012 July 2, 2011
Revenue $ 70,792 100.0 % $ 83,861 100.0 % $ 142,492 100.0 % $ 166,476 100.0 %
Gross margin 37,051 52.3 50,671 60.4 76,536 53.7 100,280 60.2
Research and
development 19,363 27.4 18,631 22.2 38,509 27.0 38,771 23.3
Selling, general
and
administrative 19,405 27.4 17,738 21.2 37,328 26.2 34,908 21.0
Acquisition
related charges 982 1.4 - - 2,689 1.9 - -
Restructuring
charges 87 0.1 1,387 1.7 643 0.5 3,222 1.9
Income from
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Revenue for the three and six months ended June 30, 2012 decreased to $70.8 million and $142.5 million, respectively, compared to $83.9 million and $166.5 million for the three and six months ended July 2, 2011, respectively. Revenue decreased from our Mainstream and Mature products but was partially offset by an increase in revenue from our New products.
Revenue by Product Line
FPGA and PLD revenue decreased in the second quarter and first six months of fiscal 2012, when compared to the second quarter and first six months of fiscal 2011. There was a 13% decrease in FPGA units sold and an 11% decrease in revenue in the second quarter of fiscal 2012 when compared to the second quarter of fiscal 2011. There was a 14% decrease in FPGA units sold and an 18% decrease in revenue in the first six months of fiscal 2012 when compared to the first six months of fiscal 2011. There was a 10% decrease in PLD units sold and an 18% decrease in revenue in the second quarter of fiscal 2012, when compared to the second quarter of fiscal 2011. There was a 2% decrease in PLD units sold and a 12% decrease in revenue in the first six months of fiscal 2012 when compared to the first six months of fiscal 2011.The decrease in reported revenue for each period presented is related to changes in product mix, primarily the result of an increase in New product revenue and a decline in Mainstream and Mature product revenue, and a decrease in units sold.
The composition of our revenue by product line for the three and six months of fiscal 2012 and 2011 was as follows (dollars in thousands):
Three Months Ended Six Months Ended
June 30, 2012 July 2, 2011 June 30, 2012 July 2, 2011
FPGA $ 24,847 35 % $ 27,902 33 % $ 48,184 34 % $ 59,081 35 %
PLD 45,945 65 55,959 67 94,308 66 107,395 65
Total revenue $ 70,792 100 % $ 83,861 100 % $ 142,492 100 % $ 166,476 100 %
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Revenue by End Market
Revenue from the Industrial and other end market decreased 25% and 23% in the second quarter and first six months of fiscal 2012, respectively, when compared to the second quarter and first six months of fiscal 2011. Revenue from the Consumer end market decreased 18% and stayed flat for the second quarter and first six months of fiscal 2012, respectively, when compared to the second quarter and first six months of fiscal 2011. Revenue in the Communications end market, historically our largest end market, decreased 7% and 11% for the second quarter and first six months of fiscal 2012, when compared to the same periods in the prior year and accounted for approximately 52% and 47% of our total revenue for the second quarter and first six months of fiscal 2012. We expect that a significant portion of our revenue will continue to be dependent on the health of the Communications end market.
The composition of our revenue by end market for the second quarter and first six months of fiscal 2012 and 2011 was as follows (dollars in thousands):
Three Months Ended Six Months Ended
June 30, 2012 July 2, 2011 June 30, 2012 July 2, 2011
Communications $ 36,489 52 % $ 39,205 47 % $ 67,000 47 % $ 75,536 45 %
Industrial and other 18,925 26 25,097 30 39,228 27 50,875 31
Consumer 6,911 10 8,386 10 18,211 13 18,228 11
Computing 8,467 12 11,173 13 18,053 13 21,784 13
Total revenue $ 70,792 100 % $ 83,861 100 % $ 142,492 100 % $ 166,476 100 %
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Revenue by Product Classification
Revenue for New products increased 55% and 49% for the second quarter and first six months of fiscal 2012, respectively, compared to the second quarter and first six months of fiscal 2011. New product revenue increased primarily due to an increase in unit sales partially offset by a decrease in average selling price. The decrease in average selling price for New products resulted from changes in product mix and end customer mix, primarily related to revenue from certain significant customers in the communications end market. Revenue for Mainstream products decreased 16% and 18% for the second quarter and first six months of fiscal 2012, respectively, when compared to the second quarter and first six months of fiscal 2011. Mainstream product revenue decreased due to a decrease in both average selling price and in unit sales. Mature product revenue decreased 41% and 28% for the second quarter and first six months of fiscal 2012, respectively, compared to the second quarter and first six months of fiscal 2011. Mature product revenue decreased due to a decrease in average selling price for the comparable six month periods, but was partially offset by an increase in units sold for the comparable three month periods. The decrease in average selling price for Mature products resulted from changes in product mix and end customer mix, primarily associated with the decline in revenue from our Industrial and Other end market.
The composition of our revenue by product classification for the second quarter
and first six months of fiscal 2012 and 2011 was as follows (dollars in
thousands):
Three Months Ended Six Months Ended
June 30, 2012 July 2, 2011 June 30, 2012 July 2, 2011
New * $ 13,766 20 % $ 8,878 10 % $ 25,155 18 % $ 16,908 10 %
Mainstream * 42,709 60 50,826 61 81,052 57 98,853 59
Mature * 14,317 20 24,157 29 36,285 25 50,715 31
Total revenue $ 70,792 100 % $ 83,861 100 % $ 142,492 100 % $ 166,476 100 %
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* Product Classifications:
New: LatticeECP4, LatticeECP3, MachXO2, Power Manager II, and iCE40
Mainstream: ispMACH 4000ZE, ispMACH 4000/Z, LatticeSC, LatticeECP2/M, LatticeECP,
LatticeXP2, LatticeXP, MachXO, ispClock A/D/S, Software and IP
Mature: ispXPLD, ispXPGA, FPSC, 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, ispGDX2, GDX/V, ispMACH 4/LV,
iCE65, ispClock, Power Manager I, all SPLDs
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* Product categories are modified as appropriate relative to our portfolio of products and the generation within each major product family. New products consist of our latest generation of products, while Mainstream and Mature are older or based on unique late stage customer-based production needs. Generally, product categories are adjusted every two to three years, at which time prior periods are reclassified to conform to the new categorization. In the first fiscal quarter of 2012 we reclassified our New, Mainstream and Mature product categories to better reflect our current product portfolio.
Revenue by Geography
The composition of our revenue by geography, based on ship-to location, is as
follows (dollars in thousands):
Three Months Ended Six Months Ended
June 30, 2012 July 2, 2011 June 30, 2012 July 2, 2011
United States: $ 7,669 11 % $ 9,532 11 % $ 18,381 13 % $ 23,217 14 %
Asia Pacific (primarily
China and Taiwan) 40,347 57 44,127 53 76,714 54 87,779 53
Europe 12,086 17 18,740 22 25,312 18 36,321 22
Japan 9,042 13 10,087 12 18,821 13 16,524 10
Other Americas 1,648 2 1,375 2 3,264 2 2,635 1
Total foreign revenue 63,123 89 74,329 89 124,111 87 143,259 86
Total revenue $ 70,792 100 % $ 83,861 100 % $ 142,492 100 % $ 166,476 100 %
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We assign revenue to geographies based on customer ship-to address at the point where revenue is recognized. In the case of sell-in distributors, which made up 56% and 55% of revenue for the second and first six months of fiscal 2012, respectively and OEM customers, which made up 31% and 32% of revenue for the second and first six months of fiscal 2012, respectively, revenue is typically recognized, and geography is assigned, when products are shipped to our distributor or customer. In the case of sell-through distributors, which made up 13% of revenue for both the second and first six months of fiscal 2012, respectively, revenue is recognized when resale occurs and geography is assigned based on the customer location on the resale reports provided by the distributor.
Revenue from foreign sales as a percentage of total revenue was 89% and 87% for the second quarter and first six months of fiscal 2012, respectively, compared to 89% and 86% for the second quarter and first six months of fiscal 2011, respectively. We believe the Asia Pacific region will remain the primary source of our revenue due to relatively more favorable business conditions in Asia and a continuing trend towards the outsourcing of manufacturing by North American and European customers to the Asia
Pacific region.
Termination of Avnet Inc. ("Avnet") global franchise agreement
On August 28, 2011, our global franchise agreement with Avnet terminated, however, we had mutually agreed to terms for the transition of inventory through December 31, 2011. Revenue from Avnet made up approximately 20% and 21% of our total revenue for the second quarter and first six months of fiscal 2011. We do not expect a significant disruption in our ability to service customers as a result of this change. We continue to serve our end customers with a network that includes a global distributor, regional distributors, manufacturer's representatives, and our direct sales team.
Gross Margin and Operating Expenses
Our gross margin percentage was 52.3% and 53.7% in the second quarter and first six months of fiscal 2012, respectively, compared to 60.4% and 60.2% in the second quarter and first six months of fiscal 2011, respectively. The decrease in gross margin percentage for the second quarter and first six months of 2012, as compared to the second quarter and first six months of 2011, was due to product mix as New products accounted for 20% and 18% of revenue in the second quarter and first six months of 2012, respectively, compared to 11% and 10% in the second quarter and first six months of 2011, and a decrease in revenue of our Mature products sold to the Industrial and other end customer market. New products typically have lower gross margins than products classified under our Mainstream and Mature life cycle classifications. In addition, products sold to customers in the Industrial and Other end markets typically have higher gross margins than products sold to customers in other end markets. Gross margin was lower due to an increase in revenue from certain of the Company's large customers, primarily in the communications end markets, when comparing the second quarter and first six months of fiscal 2012 to the second quarter and first six months of fiscal 2011. Additionally, during the second quarter of fiscal 2012 the Company completed the restructuring of its research and development and operations groups under the 2011 restructuring plan, and cost allocations were updated to reflect this new structure.
Research and development expense was $19.4 million and $38.5 million in the second quarter and first six months of fiscal 2012, respectively, compared to $18.6 million and $38.8 million in the second quarter and first six months of fiscal 2011, respectively. Research and development expenses consist primarily of personnel, masks, engineering wafers, third-party design automation software, test equipment and tooling depreciation, and qualification expenses. The increase in the second quarter of fiscal 2012, compared to the second quarter of fiscal 2011, was primarily a result of an increase in severance related labor costs, partially offset by a decrease in engineering mask and wafer costs. The decrease in the first six months of fiscal 2012 compared to the first six months of fiscal 2011 was primarily due to a reduction in masks and engineering wafer costs. We believe that a continued commitment to research and development is essential to maintain product leadership and provide innovative 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, mask and engineering wafer costs become increasingly more expensive and will therefore represent a greater proportion of total research and development expenses.
Selling, general and administrative expense was $19.4 million and $37.3 million for the second quarter and first six months of fiscal 2012, respectively, compared to $17.7 million and $34.9 million in the second quarter and first six months of fiscal 2011, respectively. This increase in the second quarter and first six months of fiscal 2012 compared to the second quarter and first six months of fiscal 2011 was a result of an increase in labor related costs, primarily due to the additional headcount associated with the December 16, 2011 acquisition of SiliconBlue, severance costs charged in the second quarter of fiscal 2012, legal costs and marketing related costs.
Acquisition related charges were $1.0 million and $2.7 million for the second quarter and first six months of fiscal 2012. The charges include $0.7 million and $1.7 million in amortization of intangibles assets for the second quarter and first six months of fiscal 2012, respectively, and $0.6 million in severance related costs, and $0.4 million other costs for the first quarter and first six months of fiscal 2012, related to our December 16, 2011 acquisition of SiliconBlue. We estimate acquisition related charges will be approximately $0.8 million for the third quarter of fiscal 2012, primarily related to amortization of intangible assets.
The Company implemented restructuring plans during the fiscal years 2005, 2009 and 2011. Included in our Condensed Consolidated Statements of Operations and Comprehensive (loss) income and reported as Restructuring charges are charges of $0.1 million and $0.6 million for the second quarter and first six months of fiscal 2012, respectively, and the second quarter and first six months of fiscal 2011, are charges of $1.4 million and $3.2 million, respectively, primarily resulting from severance and related costs under these restructuring plans.
Other income, net
The following table summarizes the activity in Other income, net (in thousands):
Three Months Ended Six Months Ended
June 30, July 2, June 30, July 2,
2012 2011 2012 2011
Interest income $ 238 $ 303 $ 465 $ 602
Gain primarily related to sale of
marketable securities, net 393 (26 ) 393 454
Loss on foreign exchange
transactions and other, net 63 (9 ) (100 ) (125 )
Total other income, net $ 694 $ 268 $ 758 $ 931
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The increase in Other income, net, in the second quarter of fiscal 2012, as compared to the second quarter of fiscal 2011 resulted from a gain on the redemption of auction rate securities that was recorded in the second quarter of fiscal 2012 while no comparable transaction occurred in the second quarter of fiscal 2011. The decrease in Other income, net, in the first six months of fiscal 2012, as compared to the first six months of fiscal 2011, resulted from a gain on the sale of auction rate securities that was recorded in the first quarter of fiscal 2011.
Provision for income taxes
On December 31, 2011, we began to implement a global tax structure to more effectively align the Company's corporate structure and transaction flows with the Company's geographic business operations including responsibility for sales and purchasing activities. We have numerous sales offices in foreign locations, operational centers in the Philippines and Singapore, and research and development sites in China, India and the Philippines. Revenues from non-Domestic regions account for over 80% of all revenue. In addition, the large majority of our suppliers are located in the Asia Pacific region. Based on these factors we have created new and realigned existing legal entities, intercompany sales of rights to intellectual property, inventory and fixed assets across different tax jurisdictions, and implemented cost-sharing and intellectual property licensing and royalty agreements between our U.S. and low cost tax jurisdictions. These actions created a gain for tax purposes, for which we recorded a $76.8 million tax provision in the fourth quarter of fiscal 2011. This provision was fully offset by the release of valuation allowance on deferred tax assets of $76.8 million recorded as a tax benefit during the fourth quarter of fiscal 2011. The global tax structure was completed during the first quarter of 2012 upon the intercompany sale of inventory and fixed assets. The inventory portion of this intercompany sale is expected to be sold to end customers in the normal course of business. As the inventory sells to our end customers, taxes are applied to the gain based on U.S. statutory tax rates, primarily offset by deferred tax assets. Over 90% of this inventory has been sold to end customers as of June 30, 2012, and the remainder is expected to be sold in the third quarter of 2012. This is expected to result in a substantial decrease in the net tax provision in the third quarter and a further decrease in the fourth quarter.
During the fourth quarter of 2011, we also concluded that it was more likely than not that we would be able to realize the benefit of a portion of our remaining deferred tax assets. We based this conclusion on improved operating results over the past two years and our expectations about generating taxable income in the foreseeable future including the implementation of a global tax structure discussed above. We exercised significant judgment and considered estimates about our ability to generate revenues, gross profits, operating income and taxable income in future periods under our new tax structure in reaching this decision.
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 and credits are fully utilized. We expect to pay a nominal amount of state income tax. We accrue interest and penalties related to uncertain tax positions in the Provision for income taxes.
We are paying foreign income taxes which are primarily related to the cost of operating offshore research and development, marketing and sales subsidiaries.
The inherent uncertainties related to the geographical distribution and relative level of profitability among various high and low tax jurisdictions make it difficult to estimate the impact of the global tax structure on our future effective tax rate.
Liquidity and Capital Resources
Financial Condition Sources and Uses of Cash (in thousands):
22
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Table of Contents
Six Months Ended
June 30, July 2,
2012 2011
Net cash (used in) provided by operating activities $ (12,872 ) $ 19,227
Net cash provided by investing activities 8,860 1,623
Net cash used in financing activities (4,943 ) (4,199 )
Net (decrease) increase in cash and cash equivalents $ (8,955 ) $ 16,651
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Operating Activities
Net cash used in operating activities was $12.9 million in the first six months of fiscal 2012, compared to net cash provided by operating activities of $19.2 million in the first six months of fiscal 2011. The decrease in comparable periods is primarily the result of the decrease in Net income from operations from $24.0 million in the first six months of fiscal 2011 to a Net loss from operations of $20.3 million in the first six months of fiscal 2012. In addition, other significant items of operating activities include:
•Net cash was provided by operations as a result of a decrease in Deferred income taxes of $17.8 million in the first six months of fiscal 2012 compared to $0.0 million in the first six months of fiscal 2011.
•Net cash was used in operations as a result of an increase in Accounts receivable, net of $23.4 million in the first six months of fiscal 2012 compared to an increase of $15.2 million in the first six months of fiscal 2011. Days sales outstanding increased from 61 days as of July 2, 2011 to 77 days as of June 30, 2012. The increase in days outstanding is primarily due to an increase in accounts with customers in Asia, which typically carry longer payment terms.
•Net cash was used in operations as a result of an increase in Prepaid expense and other assets of $0.4 million in the first six months of fiscal 2012 compared to a decrease of $0.9 million in the first six months of fiscal 2011.
•Net cash was provided by operations as a result of an increase in Deferred income and allowances on sales to sell-through distributors of $1.6 million in the first six months of fiscal 2012 compared to $0.9 million in the first six months of fiscal 2011. This increase was the result of replenishing inventory at our distributors to offset the decline in inventory related to the termination of our distribution agreement with Avnet at December 31, 2011.
Investing Activities
Net cash provided by investing activities was $8.9 million in the first six months of fiscal 2012, compared to $1.6 million in the first six months of fiscal 2011. Net cash was provided by investing activities for net proceeds on sales greater than purchases of marketable securities of $19.3 million in the first six months of fiscal 2012, compared to $10.5 million for the first six months of fiscal 2011. Capital expenditures were $8.1 million in the first six months of fiscal 2012, an increase from $7.3 million in the first six months of fiscal 2011.
Financing Activities
Net cash used in financing activities increased by $0.7 million for the first six months of fiscal 2012 compared to the first six months of fiscal 2011 due to the purchase of Treasury stock in the amount of $7.0 million in the first six months of fiscal 2012 compared to $8.0 million of purchases in the first six months of fiscal 2011. Partially offsetting these amounts is a net decrease of . . .
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