e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended April 2, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to ________
Commission File Number: 1-10317
LSI LOGIC CORPORATION
(Exact name of
registrant as specified in its charter)
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Delaware
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94-2712976 |
(State of Incorporation)
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(I.R.S. Employer
Identification Number) |
1621 Barber Lane
Milpitas, California 95035
(Address of principal executive offices)
(Zip code)
(408) 433-8000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer (in Rule 12b-2 of the Exchange Act), (Check one):
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-Accelerated Filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act)
Yes o No þ
As of May, 10, 2006, there were 396,721,138 shares of the registrants Common Stock, $.01 par
value, outstanding.
LSI LOGIC CORPORATION
Form 10-Q
For the Quarter Ended March 31, 2006
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
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March 31, |
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December 31, |
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2006 |
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2005 |
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(In thousands, except per-share amounts) |
Assets |
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Cash and cash equivalents |
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$ |
303,830 |
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$ |
264,649 |
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Short-term investments |
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727,759 |
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674,260 |
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Accounts receivable, less allowances of $17,973 and $15,328 |
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266,409 |
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323,310 |
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Inventories |
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186,121 |
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194,814 |
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Prepaid expenses and other current assets |
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159,807 |
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163,086 |
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Total current assets |
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1,643,926 |
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1,620,119 |
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Property and equipment, net |
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94,290 |
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98,285 |
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Other intangibles assets, net |
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34,758 |
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45,974 |
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Goodwill |
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928,542 |
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928,542 |
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Other assets |
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107,889 |
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103,146 |
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Total assets |
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$ |
2,809,405 |
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$ |
2,796,066 |
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Liabilities and Stockholders Equity |
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Accounts payable |
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$ |
150,985 |
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$ |
171,632 |
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Accrued salaries, wages and benefits |
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63,263 |
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77,713 |
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Other accrued liabilities |
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154,164 |
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140,194 |
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Income taxes payable |
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82,605 |
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79,290 |
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Current portion of long-term debt |
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273,225 |
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273,940 |
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Total current liabilities |
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724,242 |
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742,769 |
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Long-term debt |
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350,000 |
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350,000 |
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Tax related liabilities and other |
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74,390 |
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75,110 |
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Total long-term obligations and other liabilities |
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424,390 |
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425,110 |
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Commitments and contingencies (Note 11) |
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Minority interest in subsidiary |
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235 |
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237 |
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Stockholders equity: |
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Preferred shares; $.01 par value; 2,000 shares authorized, none outstanding |
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Common stock; $.01 par value; 1,300,000 shares authorized; 395,931 and
394,015 shares outstanding, respectively |
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3,959 |
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3,940 |
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Additional paid-in capital |
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3,018,880 |
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2,996,102 |
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Accumulated deficit |
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(1,376,776 |
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(1,389,944 |
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Accumulated other comprehensive income |
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14,475 |
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17,852 |
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Total stockholders equity |
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1,660,538 |
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1,627,950 |
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Total liabilities and stockholders equity |
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$ |
2,809,405 |
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$ |
2,796,066 |
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The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
3
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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(In thousands, except per-share amounts) |
Revenues |
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$ |
475,884 |
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$ |
450,007 |
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Cost of revenues |
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271,395 |
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259,901 |
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Gross profit |
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204,489 |
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190,106 |
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Research and development |
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102,274 |
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100,072 |
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Selling, general and administrative |
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68,878 |
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58,599 |
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Restructuring of operations and other items, net |
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5,650 |
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1,533 |
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Amortization of intangibles |
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11,216 |
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17,613 |
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Income from operations |
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16,471 |
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12,289 |
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Interest expense |
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(6,330 |
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(6,710 |
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Interest income and other, net |
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9,527 |
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5,390 |
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Income before income taxes |
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19,668 |
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10,969 |
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Provision for income taxes |
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6,500 |
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6,250 |
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Net income |
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$ |
13,168 |
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$ |
4,719 |
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Net income per share: |
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Basic |
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$ |
0.03 |
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$ |
0.01 |
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Diluted |
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$ |
0.03 |
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$ |
0.01 |
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Shares used in computing per share amounts: |
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Basic |
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394,851 |
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387,664 |
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Diluted |
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402,189 |
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390,458 |
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The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
4
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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(In thousands) |
Operating activities: |
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Net income |
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$ |
13,168 |
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$ |
4,719 |
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Adjustments: |
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Depreciation and amortization |
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25,335 |
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40,765 |
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Stock-based compensation expense |
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11,831 |
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1,455 |
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Non-cash restructuring and other items |
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(2,958 |
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849 |
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Non-cash foreign exchange gain |
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(588 |
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Gain on sale of equity securities |
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(1,429 |
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Gain on sale of property and equipment |
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(54 |
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Changes in deferred tax assets and liabilities |
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(3 |
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37 |
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Changes in assets and liabilities: |
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Accounts receivable |
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56,889 |
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12,576 |
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Inventories |
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8,693 |
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15,534 |
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Prepaid expenses and other assets |
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9,404 |
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(5,115 |
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Accounts payable |
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(23,008 |
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(9,466 |
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Accrued and other liabilities |
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2,226 |
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(1,969 |
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Net cash provided by operating activities |
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99,560 |
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59,331 |
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Investing activities: |
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Purchase of debt securities available-for-sale |
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(166,193 |
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(112,325 |
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Maturities and sales of debt securities available-for-sale |
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108,166 |
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102,313 |
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Purchases of equity securities |
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(150 |
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Proceeds from sales of equity securities |
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1,555 |
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Purchases of property, equipment and software |
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(15,978 |
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(8,433 |
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Proceeds from sale of property and equipment |
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1,411 |
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Adjustment to goodwill acquired in a prior year for
resolution of a pre-acquisition income tax contingency |
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5,792 |
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Net cash used in investing activities |
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(72,600 |
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(11,242 |
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Financing activities: |
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Issuance of common stock |
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11,988 |
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1,354 |
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Repayment of debt obligations |
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(97 |
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Net cash provided by financing activities |
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11,988 |
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1,257 |
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Effect of exchange rate changes on cash and cash equivalents. |
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233 |
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(3,335 |
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Increase in cash and cash equivalents |
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39,181 |
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46,011 |
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Cash and cash equivalents at beginning of period |
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264,649 |
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218,723 |
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Cash and cash equivalents at end of period |
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$ |
303,830 |
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$ |
264,734 |
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The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
5
LSI LOGIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
In the opinion of LSI Logic Corporation (the Company or LSI), the accompanying unaudited
consolidated condensed financial statements contain all adjustments (consisting only of normal
recurring adjustments and restructuring and other items, net as discussed in Note 3 to the
Unaudited Consolidated Condensed Financial Statements, hereafter referred to as the Notes),
necessary to state fairly the financial information included herein. While the Company believes
that the disclosures are adequate to make the information not misleading, it is suggested that
these financial statements be read in conjunction with the audited consolidated financial
statements and accompanying notes included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2005.
For financial reporting purposes, the Company reports on a 13 or 14-week quarter with a year
ending December 31. The current quarter ended April 2, 2006. For presentation purposes, the
consolidated condensed financial statements refer to the calendar quarters for convenience. The
results of operations for the quarter ended April 2, 2006, are not necessarily indicative of the
results to be expected for the full year. The first quarters of 2006 and 2005 consisted of 13
weeks each.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated condensed financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could differ significantly
from these estimates.
Certain items previously reported in specific financial statement captions have been
reclassified to conform to the 2006 presentation.
Recent Accounting Pronouncements
There have been no material changes to the recent accounting pronouncements as previously
reported in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
NOTE 2 STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123(R), Share-Based Payments (SFAS 123R), using
the modified prospective transition method. In accordance with the modified prospective transition
method, the Company began recognizing compensation expense for all share-based awards granted after
January 1, 2006, plus unvested awards granted prior to January 1, 2006. Under this method of
implementation, no restatement of prior periods has been made. The cumulative effect of adopting
SFAS 123R was not significant.
Description of the Companys equity compensation plans:
2003 Equity Incentive Plan (2003 plan): The 2003 Plan was approved by stockholders in May
2003. Under this plan, the Company may grant stock options or restricted stock to employees,
officers and consultants. Stock options will have an exercise price that is no less than the fair
market value of the stock on the date of grant. The term of each option or restricted stock award
is determined by the Board of Directors or its committtee and for option grants on or after February 12, 2004, will
generally be seven years. Options generally vest in annual increments of 25% per year commencing
one year from the date of grant. Restricted stock awards may be granted with the vesting
requirements determined by the Board of Directors.
The 1991 Equity Incentive Plan (the 1991 Plan): Under the 1991 plan, the Company may grant
stock options to employees, officers and consultants, with an exercise price that is no less than
the fair market value of the stock on the date of grant. The term of each option is determined by
the Board of Directors or its committee and has generally been ten
6
years. For options granted on or after February 12, 2004, the term of the options will generally
be seven years. Options generally vest in annual increments of 25% per year commencing one year
from the date of grant. With respect to shares previously approved by stockholders, no incentive
stock options may be granted under this plan after March 2001.
The 1995 Director Option Plan: Under the 1995 Director Option Plan, new directors receive an
initial grant of 30,000 options to purchase shares of common stock and directors receive subsequent
automatic grants of 30,000 options to purchase shares of common stock each year thereafter. The
initial grants vest in annual increments of 25% per year, commencing one year from the date of
grant. Subsequent option grants become exercisable in full six months after the grant date. The
term of each option is ten years. The exercise price of the options granted is equal to the fair
market value of the stock on the date of grant.
The 1999 Nonstatutory Stock Option Plan (the 1999 Plan): Under the 1999 Plan, the Company
may grant stock options to its employees, excluding officers, with an exercise price that is no
less than the fair market value of the stock on the date of grant. The term of each option is
determined by the Board of Directors or its committee and has generally been ten years. For options granted on or
after February 12, 2004, the term of the options will be seven years. Options generally vest in
annual increments of 25% per year commencing one year from the date of grant.
The Employee Stock Purchase Plan, amended and restated (US ESPP): Under the US ESPP, rights
are granted to LSI Logic employees in the United States to purchase shares of common stock at 85%
of the lesser of the fair market value of such shares at the beginning of a 12-month offering
period or the end of each six-month purchase period within such an offering period. There are
10,906,846 shares remaining available for future issuance under this plan. The US ESPP includes an
annual replenishment calculated at 1.15% of the Companys common stock issued and outstanding at
the fiscal year end less the number of shares available for future grants under the US ESPP. No
shares have been added to the US ESPP from the annual replenishment since January 2001.
International
Employee Stock Purchase Plan (IESPP): Under the IESPP, rights are granted to
LSI Logic employees (excluding executive officers) outside of the United States to purchase shares
of common stock at 85% of the lesser of the fair market value of such shares at the beginning of a
12-month offering period or the end of each six-month purchase period within such an offering
period. There are 1,134,789 shares remaining available for future issuance under this plan, of
which 1,000,000 shares were added to the plan by stockholder approval in 2004.
Stock-based compensation expense under SFAS 123R:
Stock-based compensation expense under SFAS 123R in the consolidated condensed statements of
operations for the quarter ended March 31, 2006 was $11.8 million as shown in the table below.
Stock-based compensation costs capitalized to inventory and software for the three months ended
March 31, 2006 are not significant.
The estimated fair value of the Companys stock-based awards, less expected forfeitures,
is amortized over the awards vesting period (the requisite service period), on a straight-line
basis. The table below summarizes stock-based compensation expense, related to employee stock
options, Employee Stock Purchase Plan (ESPP) and restricted stock awards under SFAS 123R for the
three months ended March 31, 2006.
Prior to January 1, 2006, the Company accounted for stock-based compensation awards using the
intrinsic value method under APB 25 and related interpretations and followed the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), as amended. Such disclosure-only provisions are also referred to
herein as pro forma financial information. Under APB 25 and related interpretations, compensation
cost for stock options, if any, was measured as the excess of the
quoted market price on
the date of grant over the exercise price and recognized over the vesting period on a straight-line
basis. The Companys policy is to grant options with an exercise price no less than the quoted
closing market price of the Companys stock on the date of grant. For a complete discussion of
stock-based compensation prior to January 1, 2006, please refer to the Companys Annual Report on
Form 10-K for the year ended December 31, 2005.
7
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Three months ended March 31, |
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Stock-based compensation expense: |
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2006 |
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2005 |
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(In thousands) |
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Cost of revenues |
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$ |
1,525 |
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$ |
161 |
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Research and development |
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4,522 |
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835 |
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Selling, general and administrative |
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5,784 |
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459 |
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Total stock-based compensation expense |
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$ |
11,831 |
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$ |
1,455 |
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Stock Options
The fair value of each option grant is estimated on the date of grant using a reduced
form calibrated binominal lattice model (the lattice model). This model requires the use of
historical data for employee exercise behavior and the use of assumptions outlined in the following
table:
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Three months ended |
Employee Stock Options Granted |
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March 31, 2006 |
Weighted average estimated grant date fair value |
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$ |
3.37 |
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Weighted average assumptions in calculation: |
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Expected life (years) |
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4.25 |
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Risk-free interest rate |
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4.59 |
% |
Volatility |
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47.84 |
% |
Dividend yield |
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Kurtosis |
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4.08 |
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Skewness |
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(0.54 |
) |
The expected life of employee stock options represents the weighted-average period the
stock options are expected to remain outstanding and is a derived output of the lattice model. The
expected life of employee stock options is impacted by all of the underlying assumptions and
calibration of the Companys model.
The Company used an equally weighted combination of historical and implied volatilities as of
the grant date. The historical volatility is the standard deviation of the daily stock returns
for LSI from the date of the Companys initial public offering in 1983. The Company used implied
volatilities of near-the-money LSI traded call options as stock options are call options that are
granted at the money. The historical and implied volatilities were annualized and equally weighted
to determine the volatilities as of the grant date. Prior to January 1, 2006, the Company used
historical implied stock price volatilities in accordance with SFAS 123 for purposes of its pro
forma information. Company management believes that the equally weighted combination of
historical and implied volatilities is more representative of future stock price trends than sole
use of historical implied volatilities.
The risk-free interest rate assumption is based upon observed interest rates of constant
maturity treasuries appropriate for the term of the Companys employee stock options. The
estimated kurtosis and skewness are technical measures of the distribution of stock price returns,
based on the Companys stock price return history as well as consideration of academic analyses.
The lattice model assumes that employees exercise behavior is a function of the
options remaining vested life and the extent to which the option is in-the-money. The lattice
model estimates the probability of exercise as a function of these two variables based on the
entire history of exercises and cancellations on all past option grants made by the Company since
the initial public offering in 1983.
As stock-based compensation expense recognized in the consolidated condensed statement of
operations for the three months ended March 31, 2006 is based on awards ultimately expected to
vest, it has been reduced for
estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant
and revised, if necessary, in
8
subsequent periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based on historical experience. For the Companys pro forma information
required under SFAS 123 for the periods prior to January 1, 2006, the Company accounted for
forfeitures as they occurred.
A summary of the changes in stock options outstanding under the Companys equity-based
compensation plans during the fiscal quarter ended March 31, 2006 is presented below
(share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
Weighted |
|
Weighted |
|
Average |
|
|
|
|
|
|
Average |
|
Average |
|
Intrinsic |
|
|
Number of |
|
Exercise |
|
Remaining |
|
Value |
|
|
Shares |
|
Price Per |
|
Contractual |
|
(In |
|
|
(In thousands) |
|
Share |
|
Term |
|
thousands) |
|
|
|
Options outstanding at January 1, |
|
|
70,618 |
|
|
$ |
13.21 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
2,327 |
|
|
|
9.59 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(1,715 |
) |
|
|
(6.99 |
) |
|
|
|
|
|
|
|
|
Options canceled |
|
|
(3,088 |
) |
|
|
(17.76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, |
|
|
68,142 |
|
|
$ |
13.03 |
|
|
|
5.14 |
|
|
$ |
167,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, |
|
|
44,296 |
|
|
$ |
15.92 |
|
|
|
4.50 |
|
|
$ |
74,392 |
|
|
|
|
|
During the second quarter of 2005, Abhijit Y. Talwalkar, President and Chief Executive
Officer (Mr. Talwalkar) was granted non-statutory stock options to purchase 2,000,000 shares of
Company common stock under the 2003 Equity Incentive Plan at an exercise price equal to the closing
price per share on the NYSE for the common stock of the Company on the date of grant. The shares
subject to such option will vest based on Mr. Talwalkar attaining certain performance criteria
determined by the Compensation Committee of the Board of Directors. The shares subject to such
option are scheduled to fully vest six years after the date of grant, whether or not the
performance goals are met, and subject to Mr. Talwalkars continued employment with the Company on
each scheduled vesting date.
As of March 31, 2006, total unrecognized compensation expense related to nonvested stock
options, net of estimated forfeitures, was approximately $79 million and is expected to be
recognized over the next 1.8 years on a weighted average basis. The total intrinsic value of
options exercised in the first quarter of 2006 was $5.5 million. Cash received from stock option
exercises was $12 million during the three months ended March 31, 2006.
The Companys determination of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Companys stock price as well as assumptions
regarding a number of highly complex and subjective assumptions. The Company uses third-party
consultants to assist in developing the assumptions used in as well as calibrating the lattice
model. The Company is responsible for determining the assumptions used in estimating the fair
value of its share based payment awards.
Employee Stock Purchase Plans
The Company also has two employee stock purchase plans (ESPPs US ESPP and IESPP) under
which rights are granted to all employees to purchase shares of common stock at 85% of the lesser
of the fair market value of such shares at the beginning of a 12-month offering period or the end
of each six-month purchase period within such an offering period. Compensation expense is
calculated using the fair value of the employees purchase rights under the Black-Scholes model. No
shares related to the ESPPs were issued during the quarter ended March 31, 2006. There were
approximately 12 million shares of common stock reserved for issuance under the ESPPs as of March
31, 2006.
Restricted Stock Awards
Under the 2003 Equity Incentive Plan (2003 Plan), the Company may grant restricted
stock awards. No participant may be granted more than 0.5 million shares of restricted stock in any
year. The vesting requirements for
the restricted stock awards are determined by the Board of Directors. Typically, vesting of
restricted stock awards is subject to the employees continuing service to the Company. The cost of
these awards is
9
subject to
the employees continuing service to the Company. The cost of
these awards is determined using the fair value of the Companys common stock on the date of the
grant and compensation expense is recognized over the vesting period on a straight-line basis.
A summary of the changes in restricted stock awards outstanding during the three months ended
March 31, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
Weighted |
|
|
|
|
Average |
|
|
Number of |
|
Grant-Date |
|
|
Shares |
|
Fair Value |
|
|
|
|
|
(In thousands) |
Non-vested shares at January 1, |
|
|
2,375 |
|
|
$ |
6.20 |
|
Granted |
|
|
249 |
|
|
|
9.45 |
|
Vested |
|
|
(518 |
) |
|
|
5.53 |
|
Forfeited |
|
|
(48 |
) |
|
|
5.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares at March 31, |
|
|
2,058 |
|
|
$ |
6.76 |
|
|
|
|
As of March 31, 2006, the Company had approximately $11 million of total unrecognized
compensation expense, net of estimated forfeitures, related to restricted stock awards, which will
be recognized over the weighted average period of 1.4 years. The fair value of shares vested in the
first quarter of 2006 was $4.5 million.
There are a total of approximately 123 million shares of common stock reserved for issuance
upon exercise of options and vesting of restricted stock awards, including options available for
future grants, outstanding under all stock option plans.
Income taxes
In November 2005, The FASB issued FASB Staff Position No. FAS 123R-3 Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards. The Company has one year
from the date of adoption to elect the transition method. Until such election is made, the
Long-Form transition method must be used. In addition, in accordance with SFAS 123R, SFAS No. 109
Accounting for Income Taxes (SFAS 109), and EITF Topic D-32, Intraperiod Tax Allocation of the
Effect of Pretax Income from Continuing Operations, the Company has elected to recognize excess
income tax benefits from stock option exercises in additional paid in capital only if an
incremental income tax benefit would be realized after considering all other tax attributes
presently available to the Company.
The Company records its stock based compensation expense in multiple jurisdictions. In
jurisdictions where an income tax deduction is allowed and an income tax benefit is realizable, the
Company has recognized an income tax benefit. In jurisdictions where an income tax deduction is
not allowed or where an income tax benefit is not realizable, an income tax benefit has not been
recognized.
Earnings per share
Basic net income per share is computed using the weighted-average number of common shares
outstanding during the period. Diluted net income per share is computed using the weighted-average
number of common shares outstanding and dilutive potential common shares outstanding during the
period. Dilutive potential common shares consist of employee stock options and restricted common
stock. Under the treasury stock method, the amount the employee must pay for exercising stock
options, the amount of compensation cost for future service that the Company has not yet
recognized, and the amount of tax benefits that would be recorded in additional paid-in capital
when the award becomes deductible are assumed to be used to repurchase the shares.
10
Pro Forma Information under SFAS 123 for Period Prior to January 1, 2006 :
Prior to January 1, 2006, the Company followed the disclosure-only provisions of SFAS
123. The following table provides pro forma disclosures as if the Company had recorded
compensation costs based on the estimated grant date fair value, as defined by the SFAS 123, for
awards granted under its stock-based compensation plans. In such case, the Companys net income per
share would have been adjusted to the pro forma amounts below.
|
|
|
|
|
|
|
Three month ended |
|
|
|
March 31, 2005 |
|
|
|
(In thousands, except |
|
|
|
per share amounts) |
|
Net income, as reported |
|
$ |
4,719 |
|
Add: Amortization of non-cash
stock-based compensation expense
determined under the intrinsic value
method as reported in net income, net
of related tax effects * |
|
|
296 |
|
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net
of related tax effects |
|
|
(18,039 |
) |
|
|
|
|
Pro forma net loss |
|
$ |
(13,024 |
) |
|
|
|
|
|
|
|
|
|
Income/(loss) per share: |
|
|
|
|
Basic-as reported |
|
$ |
0.01 |
|
Basic-pro forma |
|
$ |
(0.03 |
) |
|
|
|
|
|
Diluted-as reported |
|
$ |
0.01 |
|
Diluted-pro forma |
|
$ |
(0.03 |
) |
|
|
|
* |
|
This amount excludes amortization of stock-based compensation on restricted stock awards. |
The stock-based compensation expense determined under the fair value method, included in the
table above, was calculated using the Black-Scholes model. The Black-Scholes model was developed
to estimate the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Companys stock option awards. This model also
requires highly subjective assumptions, including future stock price volatility and expected time
until exercise, which greatly affect the calculated grant date fair value. The following weighted
average assumptions were used in determining the estimated grant date fair values:
|
|
|
|
|
|
|
Three months ended |
Employee Stock Options Granted |
|
March 31, 2005 |
Weighted average estimated grant date fair value |
|
$ |
3.84 |
|
|
|
|
|
|
Assumptions in calculation: |
|
|
|
|
Expected life (years) |
|
|
4.42 |
|
Risk-free interest rate |
|
|
3.591 |
% |
Volatility |
|
|
78.93 |
% |
Dividend yield |
|
|
|
|
No shares were issued under the ESPPs during the three months ended March 31, 2005.
NOTE 3 RESTRUCTURING AND OTHER ITEMS
The Company recorded charges of $5.7 million in restructuring of operations and other items
for the three months ended March 31, 2006. Of these charges, $4.7 million was recorded in the
Semiconductor segment and $1.0 million was recorded in the Storage Systems segment. The Company
recorded charges of $1.5 million in restructuring
of operations and other items during the first quarter of 2005, primarily in the Semiconductor
segment. For a complete
11
discussion of the 2005 restructuring actions, please refer to the
Companys Annual Report on Form 10-K for the year ended December 31, 2005.
Restructuring and impairment of long-lived assets:
First quarter of 2006:
The $5.7 million charge is related to the net effect of the following items. An expense of
$2.7 million was recorded for changes in sublease assumptions for certain previously accrued
facility lease termination costs. An expense of $0.5 million was recorded to reflect the change in
time value of accruals for facility lease termination costs. An expense of $5.7 million was
recorded for severance and termination benefits for employees primarily related to the one-time
termination benefits for employees affected by the broad-based reorganization that was announced in
August 2005. Other exit costs of $1.4 million include contract termination costs of $0.9 million
related to sales representatives due to the Companys strategic decision and an expense of $0.5
million for facility closure costs related to the Colorado fabrication facility as the expenses
were incurred. A gain of $3.0 million was recorded to reflect the increase in fair value for our
Colorado Springs facility that was sold to a third party subsequent to the first quarter of 2006.
A gain of $1.6 million was recorded for the sale of certain intellectual property to a third-party
during the first quarter of 2006 that was written down to zero due to impairment in a previous
year.
Assets held for sale of $120.5 million and $105.8 million were included as a component of
prepaid expenses and other current assets as of March 31, 2006, and December 31, 2005,
respectively. During the first quarter of 2006, $11.7 million assets were classified to assets
held for sale in addition to the $3.0 million gain recorded as a result of the increase in fair
value of our Colorado facility as discussed above. Assets classified as held for sale are not
depreciated. The fair values of impaired equipment and facilities were thoroughly researched and
estimated by management using the assistance of third party appraisers. Given that current market
conditions for the sale of older fabrication facilities and related equipment may fluctuate, there
can be no assurance that the Company will realize the current net carrying value of the assets held
for sale. The Company reassesses the realizability of the carrying value of these assets at the
end of each quarter until the assets are sold or otherwise disposed of and additional adjustments
may be necessary.
On
April 5, 2006, the Company entered into a definitive agreement to sell its Gresham, Oregon
manufacturing facility to ON Semiconductor for $105 million in
cash. The Company also plans to enter
into additional agreements with ON Semiconductor, including a wafer supply agreement, intellectual
property license agreement and a transition services agreement. The transaction is subject to
customary closing conditions.
The following table sets forth the Companys restructuring reserves as of December 31, 2005
and March 31, 2006, which are included in other accrued liabilities on the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Restructuring |
|
Utilized |
|
Balance at |
|
|
December 31, |
|
Expense |
|
during Q1 |
|
March 31, |
|
|
2005 |
|
Q1 2006 |
|
2006 |
|
2006 |
|
|
|
|
|
(In thousands)
|
Decommissioning costs (a) |
|
$ |
4,993 |
|
|
$ |
|
|
|
$ |
(48 |
) |
|
$ |
4,945 |
|
Lease terminations (b) |
|
|
22,287 |
|
|
|
3,144 |
|
|
|
(2,220 |
) |
|
|
23,211 |
|
Facility closure and other exit costs (c) |
|
|
|
|
|
|
1,368 |
|
|
|
(463 |
) |
|
|
905 |
|
Payments to employees for severance (d) |
|
|
5,395 |
|
|
|
5,693 |
|
|
|
(1,743 |
) |
|
|
9,345 |
|
|
|
|
Total |
|
$ |
32,675 |
|
|
$ |
10,205 |
|
|
$ |
(4,474 |
) |
|
$ |
38,406 |
|
|
|
|
|
|
|
(a) |
|
The $4.9 million balance as of March 31, 2006, relates to estimates for selling costs for
assets held for sale and is expected to be utilized during 2006. |
12
|
|
|
(b) |
|
Amounts utilized represent cash payments. The balance remaining for real estate lease
terminations will be paid during the remaining terms of these contracts, which extend through
2011. |
|
(c) |
|
Amounts utilized represent cash payments. The balance remaining for facility closure and
other exit costs will be paid during 2006. |
|
(d) |
|
Amounts utilized represent cash severance payments to 24 employees during the three months
ended March 31, 2006. The balance remaining for severance is expected to be paid by the end
of 2006. |
NOTE 4 INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
|
|
|
(In thousands)
|
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
Asset and mortgage-backed securities |
|
$ |
356,348 |
|
|
$ |
335,495 |
|
U.S. government and agency securities |
|
|
298,038 |
|
|
|
266,077 |
|
Corporate and municipal debt securities |
|
|
73,373 |
|
|
|
72,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
727,759 |
|
|
$ |
674,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments in equity securities |
|
|
|
|
|
|
|
|
Marketable equity securities available-for-sale |
|
$ |
16,566 |
|
|
$ |
18,769 |
|
Non-marketable equity securities |
|
|
7,220 |
|
|
|
7,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments in equity securities |
|
$ |
23,786 |
|
|
$ |
25,839 |
|
|
|
|
Accumulated other comprehensive income included unrealized gains on investments in
available-for-sale debt and equity securities of $1 million, net of the related tax effect of $1
million, and $4 million, net of the related tax effect of $2 million, as of March 31, 2006, and
December 31, 2005, respectively. Net realized losses on sales of investments in available-for-sale
debt securities were $0.6 million and $0.3 million for the three months ended March 31, 2006 and
2005, respectively.
The Company realized pre-tax gains of $1.4 million related to certain marketable
available-for-sale equity securities in the first quarter of 2006. There were no realized gains or
losses associated with marketable and non-marketable available-for-sale equity securities during
the first quarter of 2005.
In November 2005, FASB issued FSP FAS 115-1/FAS 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments (FSP 115-1/124-1). FSP 115-1/124-1
provides guidance on determining when investments in certain debt and equity securities are
considered impaired, whether that impairment is other-than-temporary, and on measuring such
impairment loss. FSP 115-1/124-1 also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires certain disclosures about unrealized
losses that have not been recognized as other-than-temporary impairments. This FSP is required to
be applied to reporting periods beginning after December 15, 2005. The FSP did not have a material
impact on the Companys consolidated balance sheet or statement of operations.
13
NOTE 5 BALANCE SHEET DETAIL
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
(In thousands) |
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash in financial institutions |
|
$ |
44,440 |
|
|
$ |
85,641 |
|
Cash equivalents |
|
|
259,390 |
|
|
|
179,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
303,830 |
|
|
$ |
264,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
30,784 |
|
|
$ |
30,541 |
|
Work-in-process |
|
|
53,705 |
|
|
|
62,167 |
|
Finished goods |
|
|
101,632 |
|
|
|
102,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
186,121 |
|
|
$ |
194,814 |
|
|
|
|
In November 2004, the FASB issued SFAS No. 151, Inventory Costsan amendment of ARB No. 43,
chapter 4. This statement clarifies the accounting for abnormal amounts of facility expense,
freight, handling costs and wasted materials (spoilage) to require them to be recognized as
current-period charges. This statement is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The adoption of this standard did not have a material impact
on the Companys consolidated balance sheet or statement of operations.
NOTE 6 DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion |
|
March 31, |
|
December 31, |
|
|
Maturity |
|
Interest Rate |
|
Price |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 Convertible Subordinated Notes |
|
May 2010
|
|
|
4 |
% |
|
$ |
13.4200 |
|
|
$ |
350,000 |
|
|
$ |
350,000 |
|
2001 Convertible Subordinated Notes |
|
November 2006
|
|
|
4 |
% |
|
$ |
26.3390 |
|
|
|
271,848 |
|
|
|
271,848 |
|
Deferred gain on terminated swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,377 |
|
|
|
2,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
623,225 |
|
|
|
623,940 |
|
Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(273,225 |
) |
|
|
(273,940 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
350,000 |
|
|
$ |
350,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 RECONCILIATION OF BASIC AND DILUTED INCOME PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted net income per
share computations are as follows:
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
Per- |
|
|
|
|
|
|
|
|
|
|
Per- |
|
|
|
Net |
|
|
|
|
|
|
Share |
|
|
Net |
|
|
|
|
|
|
Share |
|
|
|
Income* |
|
|
Shares+ |
|
|
Amount |
|
|
Income* |
|
|
Shares+ |
|
|
Amount |
|
|
|
(In thousands except per share amounts) |
|
Basic : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
available to common
stockholders |
|
$ |
13,168 |
|
|
|
394,851 |
|
|
$ |
0.03 |
|
|
$ |
4,719 |
|
|
|
387,664 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially
dilutive common
securities |
|
|
|
|
|
|
7,338 |
|
|
|
|
|
|
|
|
|
|
|
2,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
available to
common
stockholders |
|
$ |
13,168 |
|
|
|
402,189 |
|
|
$ |
0.03 |
|
|
$ |
4,719 |
|
|
|
390,458 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Numerator |
|
+ |
|
Denominator |
Options to purchase 45,195,499 and 51,758,887 shares outstanding as of March 31, 2006 and
2005, respectively, were excluded from the computation of diluted shares because of their
antidilutive effect on net income per share.
For the three months ended March 31, 2006, weighted average potentially dilutive shares of
36,401,581 associated with the 2003 and 2001 Convertible Notes were excluded from the calculation
of diluted shares because of their antidilutive effect on net income per share. For the three
months ended March 31, 2005, weighted average potentially dilutive shares of 42,083,345 associated
with the 2003 and 2001 Convertible Notes were excluded from the calculation of diluted shares
because of their antidilutive effect on net income per share.
NOTE 8 COMPREHENSIVE INCOME/(LOSS)
Comprehensive income/(loss) is defined as a change in equity of a company during a period from
transactions and other events and circumstances, excluding transactions resulting from investments
by owners and distributions to owners. Comprehensive income/(loss), net of taxes for the current
reporting period and comparable period in the prior year is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2006 |
|
2005 |
|
|
(In thousands) |
Net income |
|
$ |
13,168 |
|
|
$ |
4,719 |
|
Change in unrealized loss on derivative instruments
designated as and qualifying as cash-flow hedges |
|
|
|
|
|
|
(166 |
) |
Change in unrealized gain on available-for-sale securities. |
|
|
(3,011 |
) |
|
|
(2,823 |
) |
Change in foreign currency translation adjustments |
|
|
(366 |
) |
|
|
(3,449 |
) |
|
|
|
Comprehensive income/(loss) |
|
$ |
9,791 |
|
|
$ |
(1,719 |
) |
|
|
|
NOTE 9 SEGMENT REPORTING
The Company operates in two reportable segments the Semiconductor segment and the Storage
Systems segment in which the Company offers products and services for a variety of electronic
systems applications. LSIs products are marketed primarily to original equipment manufacturers
(OEMs) that sell products to the Companys target markets. The information provided herein has
been recast to include the RAID Storage Adapter (RSA) business as part of the Storage Systems
segment from the Semiconductor segment for all periods presented.
15
The following is a summary of operations by segment for the three months ended March 31, 2006
and 2005:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
Semiconductor |
|
$ |
298,374 |
|
|
$ |
304,038 |
|
Storage Systems |
|
|
177,510 |
|
|
|
145,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
475,884 |
|
|
$ |
450,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor |
|
$ |
3,529 |
|
|
$ |
14,002 |
|
Storage Systems |
|
|
12,942 |
|
|
|
(1,713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,471 |
|
|
$ |
12,289 |
|
|
|
|
|
|
|
|
Intersegment revenues for the periods presented above were not significant. For the three
months ended March 31, 2006, restructuring of operations and other items for the Semiconductor and
Storage Systems segments were $5 million and $1million, respectively. For the three months ended
March 31, 2005, restructuring of operations and other items, net of $2 million, were primarily
included in the Semiconductor segment.
Significant Customers. The following table summarizes the number of our significant
customers, each of whom accounted for 10% or more of the Companys revenues, along with the
percentage of revenues they individually represent on a consolidated basis and by segment:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2006 |
|
2005 |
Semiconductor segment: |
|
|
|
|
|
|
|
|
Number of significant customers |
|
|
1 |
|
|
|
2 |
|
Percentage of segment revenues |
|
|
19 |
% |
|
|
16%, 13 |
% |
Storage Systems segment: |
|
|
|
|
|
|
|
|
Number of significant customers |
|
|
2 |
|
|
|
4 |
|
Percentage of segment revenues |
|
|
43%, 15 |
% |
|
|
39%, 14 12%, 10 |
%, % |
Consolidated: |
|
|
|
|
|
|
|
|
Number of significant customers |
|
|
2 |
|
|
|
2 |
|
Percentage of consolidated
revenues |
|
|
17%, 12 |
% |
|
|
13%, 11 |
% |
The following is a summary of total assets by segment as of March 31, 2006, and December
31, 2005:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Total assets: |
|
|
|
|
|
|
|
|
Semiconductor |
|
$ |
2,309,370 |
|
|
$ |
2,285,913 |
|
Storage Systems |
|
|
500,035 |
|
|
|
510,153 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,809,405 |
|
|
$ |
2,796,066 |
|
|
|
|
|
|
|
|
Revenues from domestic operations were $237 million, representing 50% of consolidated revenues
for the three months ended March 31, 2006, compared to $208 million, representing 46% of
consolidated revenues for the same period of 2005.
16
NOTE 10 RELATED PARTY TRANSACTIONS
A member of our board of directors is also a member of the board of directors of Seagate
Technology. The Company sells semiconductors used in storage product applications to Seagate
Technology for prices an unrelated third party would pay for such products. Revenues to Seagate
Technology were $56.4 million and $47.1 million for the three months ended March 31, 2006 and 2005,
respectively. The Company had accounts receivable from Seagate Technology of $45.9 million and
$41.2 million as of March 31, 2006 and December 31, 2005, respectively.
NOTE 11 COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS
The Company is a party to a variety of agreements pursuant to which it may be obligated to
indemnify the other party with respect to certain matters. Typically, these obligations arise in
connection with contracts and license agreements or the sale of assets, under which the Company
customarily agrees to hold the other party harmless against losses arising from a breach of
warranties, representations and covenants related to such matters as title to assets sold, validity
of certain intellectual property rights, non-infringement of third-party rights, and certain income
tax-related matters. In each of these circumstances, payment by the Company is typically subject
to the other party making a claim to and cooperating with the Company pursuant to the procedures
specified in the particular contract. This usually allows the Company to challenge the other
partys claims or, in case of breach of intellectual property representations or covenants, to
control the defense or settlement of any third-party claims brought against the other party.
Further, the Companys obligations under these agreements may be limited in terms of activity
(typically to replace or correct the products or terminate agreement with a refund to the other
party), duration and/or amounts. In some instances, the Company may have recourse against third
parties and/or insurance covering certain payments made by the Company.
In February 1999, a lawsuit alleging patent infringement was filed in the United States
District Court for the District of Arizona by the Lemelson Medical, Education & Research
Foundation, Limited Partnership (Lemelson) against 88 electronics industry companies, including
LSI. The case number is CIV990377PHXRGS. The patents involved in this lawsuit are alleged to
relate to semiconductor manufacturing and computer imaging, including the use of bar coding for
automatic identification of articles. The plaintiff has sought a judgment of infringement, an
injunction, treble damages, attorneys fees and further relief as the court may provide. In
September 1999, the Company filed an answer denying infringement and raising affirmative defenses.
In addition, the Company asserted a counterclaim for declaratory judgment of non-infringement,
invalidity and unenforceability of Lemelsons patents. In December 2005, Lemelson filed a motion
asking the Court to dismiss, with prejudice, all claims related to the fourteen computer imaging
patents. LSI did not oppose the motion and the Court has dismissed those patents, with prejudice.
In October 2005, the court issued a preliminary ruling on the claim construction of the four
remaining patents, following a hearing in December 2004. At the courts request, the parties have
submitted objections to the preliminary ruling. A final ruling on the claim construction is
anticipated to be issued; however, the Court has not indicated when that will occur. No trial date
has been set. While the Company can give no assurances regarding the final outcome of this
lawsuit, the Company believes the allegations made by Lemelson are without merit and is defending
the action vigorously.
The Company and its subsidiaries are parties to other litigation matters and claims that are
normal in the course of its operations. The Company aggressively defends all legal matters and
does not believe, based on currently available facts and circumstances, that the final outcome of
these matters, taken individually or as a whole, will have a material adverse effect on the
Companys consolidated results of operations and financial condition. However, the pending
unsettled lawsuits may involve complex questions of fact and law and will likely require the
expenditure of significant funds and the diversion of other resources to defend. From time to time
the Company may enter into confidential discussions regarding the potential settlement of such
lawsuits; however, there can be no assurance that any such discussions will occur or will result in
a settlement. Moreover, the settlement of any pending litigation could require the Company to
incur substantial costs and, in the case of the settlement of any intellectual property proceeding
against the Company, may require the Company to obtain a license under a third partys intellectual
property rights that could require royalty payments in the future and the Company to grant a
license to certain of its intellectual property rights to a third party under a cross-license
agreement. The results of litigation are inherently uncertain, and material adverse outcomes are
possible.
17
NOTE 12 SUBSEQUENT EVENTS
On
April 5, 2006, the Company entered into a definitive agreement to sell its Gresham, Oregon
manufacturing facility to ON Semiconductor for $105 million in cash. The Company will also enter
into additional agreements with ON Semiconductor, including a wafer supply agreement, intellectual
property license agreement and a transition services agreement. The transaction is subject to
customary closing conditions.
Silicon Graphics, a customer of LSI, filed for chapter 11 bankruptcy protection under the
United States Bankruptcy Code on May 8, 2006. As a result of this action, the Company recorded a
$5.6 million charge in the first quarter of 2006 because the Company does not believe the
receivable balance as of March 31, 2006 is collectible. Of this charge, $5.4 million relates to the Storage Systems
segment and $0.2 million relates to the Semiconductor segment. As a result, the financial
statements for the first quarter of 2006 contained herein have been
revised from those that were furnished in our Form 8-K that was filed
on April 26, 2006 to reflect this charge. The Company performs ongoing credit
evaluations of its customers financial condition and requires
collateral as considered necessary.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Form 10-Q contains forward-looking statements. In many cases you can identify
forward-looking statements by terminology such as may, will, should, expect, plan,
anticipate, believe, estimate, predict, potential, intend or continue, or the
negative of such terms and other comparable terminology. In addition, forward-looking statements
in this document include, but are not limited to, the following: projected net income per diluted
share in the second quarter of 2006, projected revenues in the second quarter of 2006, projections
of gross profit margins in the second quarter of 2006 and projected capital expenditures in 2006.
We assume no obligation to update any such forward-looking statements, and these statements involve
risks and uncertainties that could cause actual results to differ materially from those in the
forward-looking statements. For a summary of such risks and uncertainties, please see the
paragraphs located in Item 1A entitled Risk Factors in Part II and please also see the Risk
Factors located in our Annual Report on Form 10-K for our year ended December 31, 2005.
OVERVIEW
We are a leading provider of silicon-to-system solutions that are used at the core of products
that create, store and consume digital information. We offer a broad portfolio of capabilities
including custom and standard product intergrated circuits, host bus and RAID adapters, storage
area network solutions and software applications. Our products enable leading technology companies
in the Storage and Consumer markets to deliver some of the most advanced and well-known electronic
systems in the market today. On April 5, 2006, we signed a definitive agreement to sell our
Gresham, Oregon semiconductor manufacturing facility to ON Semiconductor for approximately $105
million in cash. Under the terms of the agreement, ON Semiconductor will offer employment to
substantially all of the LSI manufacturing employees based at the Gresham site, with the remaining
non-manufacturing workforce expected to continue their employment with LSI. ON Semiconductor also
entered into additional agreements with LSI, including a multi-year wafer supply and test
agreement, intellectual property license agreement, transition services agreement and a facilities
use agreement.
18
On March 6, 2006, we announced plans to focus our business on growth opportunities in the
information storage and consumer markets, increasing associated research and development (R&D)
investments in these areas by redirecting R&D from non-core areas and reducing associated selling,
general and administrative (SG&A) expenditures. Consistent with our increased focus on storage
markets, we have cancelled our previously postponed plan for an initial public offering of our
wholly-owned subsidiary Storage Systems subsidiary, Engenio Information Technologies, Inc. We
intend to fund additional R&D investments in our focus markets by redirecting ongoing investments
in RapidChip platform custom solutions technology and by selling our ZSP digital signal processor
(DSP) unit. We will cease further RapidChip development and realign our custom silicon
capabilities to more deeply serve customers in the information storage and consumer markets.
RapidChip customer designs currently in production or under development will continue and are not
affected by this action.
On January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123(R), Share-Based Payments (SFAS 123R), using the modified
prospective transition method. Using the modified prospective transition method of adopting SFAS
123R, we began recognizing compensation expense for all share-based awards granted after January 1,
2006, and all unvested awards granted prior to January 1, 2006. Under this method of
implementation, no restatement of prior periods has been made. Stock-based compensation expense
under SFAS 123R in the consolidated condensed statements of operations for the quarter ended March
31, 2006 was $11.8 million. See Note 2 of the Notes.
We
operate in two segments - the Semiconductor segment and the Storage
Systems segment - in
which we offer products and services for a variety of electronic systems applications. Our
products are marketed primarily to original equipment manufacturers (OEMs) that sell products to
our target markets. The information provided herein has been recast to include the RAID Storage
Adapter (RSA) business as part of the Storage Systems segment from the Semiconductor segment for
all periods presented.
Revenues for the three months ended March 31, 2006 were $475.9 million representing a 6%
increase from $450.0 million in revenues for the months ended March 31, 2005. The increase is
attributable to higher revenues in our Storage Systems segment, offset in part by a decrease in
revenues for our Semiconductor segment.
We reported a net income of $13.2 million or $0.03 a diluted share for the three months ended
March 31, 2006 as compared to a net income of $4.7 million or $0.01 a diluted share for the three
months ended March 31, 2005.
In the second quarter of 2006, we expect our consolidated revenues to be in the range of $470
million to $500 million.
In April 2006, Portal Player, Inc., a customer of ours in the Semiconductor segment, announced
that the next generation of their 5021 solution had not been selected for use in mid-range and
high-end flash-based iPods. We expect this to negatively impact our revenues in the second half of
2006 in an amount up to $40 million.
Cash, cash equivalents and short-term investments were $1.03 billion as of March 31, 2006 as
compared to $938.9 million as of December 31, 2005. For the three months ended March 31, 2006, we
generated $99.6 million in cash provided by operations as compared to $59.3 million in the same
period of 2005.
Where more than one significant factor contributed to changes in results from year to year, we
have quantified such factors throughout Managements Discussion & Analysis, where practicable.
RESULTS OF OPERATIONS
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
March 31, |
|
|
2006 |
|
2005 |
Semiconductor segment |
|
$ |
298.4 |
|
|
$ |
304.0 |
|
Storage Systems segment |
|
|
177.5 |
|
|
|
146.0 |
|
|
|
|
Consolidated |
|
$ |
475.9 |
|
|
$ |
450.0 |
|
|
|
|
19
There were no significant intersegment revenues during the periods presented.
Three months ended March 31, 2006 compared to the same period of 2005
Total consolidated revenues for the first quarter of 2006 increased $25.9 million or 6% as
compared to the first quarter of 2005.
Semiconductor segment:
Revenues for the Semiconductor segment decreased $5.6 million or 2% for the three months ended
March 31, 2006 as compared to the same period in 2005. The decrease in semiconductor revenues is
attributable to the net effect of the following factors:
|
|
|
Revenues decreased for semiconductors used in consumer product applications such as
videogame products and professional products, offset in part by increased demand for
semiconductors used in digital audio players and cable set-top box solutions; |
|
|
|
|
Revenues increased for semiconductors used in storage product applications such as
custom silicon used in hard disk drives and increased demand for semiconductors used in
communication product applications such as office automation solutions, switches and
wide area network ( WAN) products. |
Storage Systems segment:
Revenues for the Storage Systems segment increased $31.5 million or 22% for the first quarter
of 2006 from the first quarter of 2005. The increase in revenues is primarily attributable to
increased demand for the high-end controller product introduced in the second quarter of 2005 and
our command module products.
Significant Customers. The following table summarizes the number of our significant
customers, each of whom accounted for 10% or more of our revenues, along with the percentage of
revenues they individually represent on a consolidated basis and by segment:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2006 |
|
2005 |
Semiconductor segment: |
|
|
|
|
|
|
|
|
Number of significant customers |
|
|
1 |
|
|
|
2 |
|
Percentage of segment revenues |
|
|
19 |
% |
|
|
16%, 13 |
% |
Storage Systems segment: |
|
|
|
|
|
|
|
|
Number of significant customers |
|
|
2 |
|
|
|
4 |
|
Percentage of segment revenues |
|
|
43%, 15 |
% |
|
|
39%, 14%, 12%, 10 |
% |
Consolidated: |
|
|
|
|
|
|
|
|
Number of significant customers |
|
|
2 |
|
|
|
2 |
|
Percentage of consolidated revenues |
|
|
17%, 12 |
% |
|
|
13%, 11 |
% |
Revenues by geography. The following table summarizes our revenues by geography:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2006 |
|
March 31, 2005 |
Revenues: |
|
|
|
|
|
|
|
|
North America |
|
$ |
236.9 |
|
|
$ |
207.5 |
|
Asia, including Japan |
|
|
186.4 |
|
|
|
195.3 |
|
Europe |
|
|
52.6 |
|
|
|
47.2 |
|
|
|
|
Total |
|
$ |
475.9 |
|
|
$ |
450.0 |
|
|
|
|
20
Three months ended March 31, 2006 compared to the same period of 2005
In the first quarter of 2006, revenues increased in North America and Europe as compared to
the first quarter of 2005. The increase in North America is attributable to an increase in demand
for semiconductors used in consumer product applications such as digital audio players and cable
set-top box solutions and increased revenues for the Storage Systems segment. The increase was
offset in part by decreased demand for semiconductors used in storage product applications and
communication product applications such as communication custom solutions and wireless products.
Revenues in Asia, including Japan, decreased in the first quarter of 2006 as compared to the first
quarter of 2005. The decrease in revenues in Asia, including Japan, is attributable to decreased
demand for semiconductors used in consumer product applications such as videogame products, offset
in part by increased demand for DVD-R products and increased revenues for semiconductors used in
storage product applications such as hard disk drives and communication product applications
primarily due to a continued shift in revenues to Asia from other regions for custom solutions.
The increase in Europe is primarily attributable to increases in revenues for semiconductors used
in consumer product applications such as DVD-R and storage product applications and increased
revenues in the Storage Systems segment. These increases were offset in part by decreased demand
for semiconductors used in communication product applications.
Operating costs and expenses. Key elements of the consolidated statements of operations for
the respective segments are as follows:
Gross profit margin:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2006 |
|
March 31, 2005 |
Semiconductor segment |
|
$ |
139.4 |
|
|
$ |
142.5 |
|
Percentage of revenues |
|
|
47 |
% |
|
|
47 |
% |
Storage Systems segment |
|
$ |
65.1 |
|
|
$ |
47.6 |
|
Percentage of revenues |
|
|
37 |
% |
|
|
33 |
% |
|
|
|
Consolidated |
|
$ |
204.5 |
|
|
$ |
190.1 |
|
|
|
|
Percentage of revenues |
|
|
43 |
% |
|
|
42 |
% |
Three months ended March 31, 2006 compared to the same period of 2005
The consolidated gross profit margin as a percentage of revenues increased to 43% in the first
quarter of 2006 from 42% in the first quarter of 2005.
Semiconductor segment:
The gross profit margin as a percentage of revenues for the Semiconductor segment was 47% in
the first quarters of 2006 and 2005. A more detailed description of factors affecting the gross
profit margins in the first quarter of 2006 as compared to the same
period of 2005 is as follows:
|
|
|
Manufacturing variances for the Gresham facility were more favorable in the first
quarter of 2006 compared to the same period of 2005 as a result of yield improvements
and operating cost savings attributable to write-downs recorded in the second half of
2005 related to the impairment of the Gresham manufacturing facility. These
improvements were offset by: |
21
|
|
|
An unfavorable shift in product mix in the first quarter of 2006 and lower average selling prices on DVD-R products; and |
|
|
|
|
Stock-based compensation expense associated with the adoption of SFAS 123R as of
January 1, 2006 (See Note 2 of the Notes). |
Storage Systems segment:
The gross profit margin as a percentage of revenues for the Storage Systems segment increased
to 37% in the first quarter of 2006 from 33% for the same period in 2005. The increase in gross
profit margins is attributable to improved product mix associated with the introduction of our new
high-end controller product in the second quarter of 2005 and material cost reductions. These
increases were offset in part by lower average selling prices on certain RSA products and
stock-based compensation expense associated with the adoption of SFAS 123R as of January 1, 2006.
(See Note 2 of the Notes).
We expect our overall consolidated gross profit margins to be in the 42.5% to 43.5% range in
the second quarter of 2006.
We have wafer-manufacturing operations in Gresham, Oregon, which is our primary manufacturing
site in our Semiconductor segment. On September 13, 2005, we announced that we intend to sell our
Gresham, Oregon manufacturing facility as part of our strategy to move to a fabless semiconductor
manufacturing model. Our new strategy includes the expansion of our working relationships with
major foundry partners and the adoption of a roadmap leading to the production of advanced
semiconductors utilizing 65-nanometer and below process technology on
300-mm or 12-inch wafers.
As a result of our decision to hold the manufacturing facility for sale, depreciation of the
operating assets of the facility ceased as of September 13, 2005.
On
April 5, 2006, we announced that we signed a definitive agreement to sell our Gresham,
Oregon semiconductor manufacturing facility to ON Semiconductor for approximately $105 million in
cash. Under the terms of the agreement, ON Semiconductor will offer employment to substantially
all of the LSI manufacturing employees based at the Gresham site, with the remaining
non-manufacturing workforce expected to continue their employment with LSI. ON Semiconductor will
also enter into additional agreements with LSI, including a multi-year wafer supply and test
agreement, intellectual property license agreement, transition services agreement and a facilities
use agreement.
We also own our Storage Systems segment manufacturing facility in Wichita, Kansas. In
addition, we acquire wafers, assembly and test services from vendors in Taiwan, Japan, Malaysia,
Korea and China and outsource a portion of our Storage Systems segment manufacturing to facilities
in Ireland. Utilizing diverse manufacturing locations allows us to better manage potential
disruption in the manufacturing process due to economic and geographic risks associated with each
location.
Our operating environment, combined with the resources required to operate in the
Semiconductor and Storage Systems industries, requires that we manage a variety of factors. These
factors include, among other things:
|
|
|
Competitive pricing pressures; |
|
|
|
|
Product mix; |
|
|
|
|
Factory capacity and utilization; |
|
|
|
|
Geographic location of manufacturing; |
|
|
|
|
Manufacturing yields; |
|
|
|
|
Availability of certain raw materials; |
22
|
|
|
Implementation of new process technologies; |
|
|
|
|
Adoption of new industry standards; |
|
|
|
|
Terms negotiated with third-party subcontractors; and |
|
|
|
|
Foreign currency fluctuations. |
These and other factors could have a significant effect on our gross profit margin in future
periods.
Research and development:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2006 |
|
March 31, 2005 |
Semiconductor segment |
|
$ |
81.6 |
|
|
$ |
79.2 |
|
Percentage of revenues |
|
|
27 |
% |
|
|
26 |
% |
Storage Systems segment |
|
$ |
20.7 |
|
|
$ |
20.9 |
|
Percentage of revenues |
|
|
12 |
% |
|
|
14 |
% |
|
|
|
Consolidated |
|
$ |
102.3 |
|
|
$ |
100.1 |
|
|
|
|
Percentage of revenues |
|
|
22 |
% |
|
|
22 |
% |
Three months ended March 31, 2006 compared to the same period of 2005
Research and development (R&D) expenses increased $2.2 million or 2% during the first
quarter of 2006 as compared to the first quarter of 2005.
Semiconductor segment:
R&D expenses in the Semiconductor segment increased by $2.4 million or 3% in the first quarter
of 2006 as compared to the first quarter of 2005. The increase in R&D expenses for the
Semiconductor segment is primarily the result of an increase in stock-based compensation expense
associated with the adoption of SFAS 123R on January 1, 2006, offset in part by other miscellaneous
spending reductions.
Storage Systems segment:
R&D expenses in the Storage Systems segment remained relatively flat in the first quarter of
2006 as compared to the first quarter of 2005. R&D expenses as a percentage of Storage Systems
segment revenues were 12% for the first quarter of 2006 as compared to 14% for the same period of
2005.
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2006 |
|
March 31, 2005 |
Semiconductor segment |
|
$ |
40.3 |
|
|
$ |
37.2 |
|
Percentage of revenue |
|
|
14 |
% |
|
|
12 |
% |
Storage Systems segment |
|
$ |
28.6 |
|
|
$ |
21.4 |
|
Percentage of revenue |
|
|
16 |
% |
|
|
15 |
% |
|
|
|
Consolidated |
|
$ |
68.9 |
|
|
$ |
58.6 |
|
|
|
|
Percentage of revenue |
|
|
15 |
% |
|
|
13 |
% |
23
Three months ended March 31, 2006 compared to the same period of 2005
Consolidated SG&A expenses increased $10.3 million or 18% during the first quarter of 2006 as
compared to the first quarter of 2005. Silicon Graphics, a customer of ours, filed for chapter 11
bankruptcy protection under the United States Bankruptcy Code on May 8, 2006. As a result of this
action, we recorded a $5.6 million charge in the first quarter of 2006 because we do not believe
the receivable balance as of March 31, 2006 is collectible. Of this charge, $5.4 million relates to the Storage Systems
segment and $0.2 million relates to the Semiconductor segment. We perform ongoing credit
evaluations of our customers financial condition and require
collateral as considered necessary. (See Note 12 of the Notes).
Semiconductor segment:
SG&A expenses for the Semiconductor segment increased $3.1 million or 8% for the first quarter
of 2006 as compared to the same period of 2005. The increase in the Semiconductor segment was
primarily due to an increase in stock-based compensation associated with SFAS 123R (See Note 2)
offset in part by lower costs associated with professional services.
Storage Systems segment:
SG&A expenses for the Storage Systems segment increased $7.2 million or 34% in the first
quarter of 2006 as compared to the same period of 2005. The increase in SG&A expenses for the
first quarter of 2006 as compared to the first quarter of 2005 is mainly due to the following:
|
|
A $5.4 million charge recorded in the first quarter of 2006 to reduce a receivable balance with customer, Silicon
Graphics, as discussed above; |
|
|
|
An increase in expense associated with new product launches; and |
|
|
|
Stock-based compensation associated with the adoption of SFAS 123R. See Note 2 of the Notes |
Restructuring of operations and other items: We recorded charges of $5.7 million in
restructuring of operations and other items for the three months ended March 31, 2006. Of these
charges, $4.7 million was recorded in the Semiconductor segment and $1.0 million was recorded in
the Storage Systems segment. We recorded charges of $1.5 million in restructuring of operations
and other items during the first quarter of 2005, primarily in the Semiconductor segment. See Note
3 of the Notes. For a complete discussion of the 2005 restructuring actions, please refer to our
Annual Report on Form 10-K for the year ended December 31, 2005.
Stock-based compensation: On January 1, 2006, we adopted SFAS 123R, using the modified
prospective transition method. Using the modified prospective transition method of adopting SFAS
123R, we began recognizing compensation expense for all share-based awards granted after January 1,
2006 plus unvested awards granted prior to January 1, 2006. Under this method of implementation, no
restatement of prior periods has been made. Stock-based compensation expense under SFAS 123R in
the consolidated condensed statements of operations for the quarter ended March 31, 2006 was $11.8
million.
The estimated fair value of our equity-based awards, less expected forfeitures, is amortized
over the awards vesting period on a straight-line basis. The implementation of SFAS 123R did not
have a significant impact on cash flows from operations during the quarter ended March 31, 2006.
See Note 2 to the Notes for a further discussion on stock-based compensation.
Amortization of intangibles: Amortization of intangible assets was $11.2 million for the
first quarter of 2006 as compared to $17.6 million for the first quarter of 2005. The decrease is
primarily a result of certain intangible assets
becoming fully amortized during 2005. As of March 31, 2006, we had approximately $34.8
million of intangible assets, net of accumulated amortization that will continue to amortize.
24
Interest expense: Interest expense decreased slightly by $0.4 million to $6.3 million in the
first quarter of 2006 from $6.7 million in the first quarter of 2005. Interest expense declined as
a result of a lower debt balance from the repurchase of $149.7 million of the 2001 Convertible
Notes during the second quarter of 2005, partially offset by a lower benefit from the amortization
of the deferred gain on the terminated swaps (See Note 6 of the
Notes).
Interest income and other, net: Interest income and other, net, was $9.5 million in the first
quarter of 2006 as compared to $5.4 million in the first quarter of 2005. Interest income
increased to $9.2 million in the first quarter of 2006 from $6.1 million in the first quarter of
2005. The increase in interest income is mainly due to higher returns and higher average cash and
short-term investment balances during the first quarter of 2006 as compared to the first quarter of
2005. Other income, net of $0.3 million in the first quarter of 2006, included a pre-tax gain of
$1.4 million on the sale of certain marketable available-for-sale equity securities in the first
quarter of 2006 (see Note 4 of the Notes), offset in part by $1.1 million expense for points on
foreign currency forward contracts and other miscellaneous items. Other expense, net of $0.7
million in the first quarter of 2005 was comprised of various items that were individually
insignificant.
Provision for income taxes: During the three months ended March 31, 2006 and March 31, 2005,
we recorded income tax expenses of $6.5 million and $6.3 million, respectively. The expenses
primarily relate to foreign income taxes.
Excluding certain foreign jurisdictions, our management believes that the future benefit of
temporary differences, including stock based compensation awards, is not more likely than not to be
realized.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments increased to $1,031.6 million at March 31,
2006, from $938.9 million at December 31, 2005. The increase is mainly due to cash and cash
equivalents provided by operating and financing activities, partially offset by net cash outflows
for investing activities as described below.
Working capital. Working capital increased by $42.3 million to $919.7 million at March 31,
2006, from $877.4 million as of December 31, 2005. The increase in working capital is attributable
to the following:
|
|
|
Cash, cash equivalents and short-term investments increased by $92.7 million. |
|
|
|
|
Accounts payable decreased by $20.6 million due to the timing of invoice receipt and payments. |
|
|
|
|
Accrued salaries, wages and benefits decreased by $14.5 million primarily due to timing
differences in payment of salaries, benefits and performance-based compensation. |
The increase in working capital was offset, in part, by the following:
|
|
|
Accounts receivable decreased by $56.9 million to $266.4 million as of March 31, 2006
from $323.3 million at December 31, 2005. The decrease is mainly attributed to lower
revenues and improved collections in the first quarter of 2006 as compared to the fourth
quarter of 2005. Silicon Graphics, a customer of ours, filed for chapter 11 bankruptcy
protection under the United States Bankruptcy Code on May 8, 2006. As a result of this
action, we recorded a $5.6 million charge in the first quarter of 2006 because we do not
believe the receivable balance as of March 31, 2006 is collectible. Of this charge, $5.4 million relates to the
Storage Systems segment and $0.2 million relates to the Semiconductor segment. We perform
ongoing credit evaluations of our customers financial condition and require collateral as
considered necessary. (See Note 12 of the Notes). |
|
|
|
|
Other accrued liabilities increased by $14.0 million due to increases in interest
payable, restructuring reserves, and deferred revenues, offset in part by other
miscellaneous items. |
25
|
|
|
Inventories decreased by $8.7 million to $186.1 million as of March 31, 2006, from
$194.8 million as of December 31, 2005. The decline in inventory levels reflects our
continued focus on supply chain management. |
|
|
|
|
Income taxes payable increased by $3.3 million due to the timing of income tax payments
made and the income tax provision recorded during the first quarter of 2006. |
|
|
|
|
Prepaid expenses and other current assets decreased by $3.3 million primarily due to
decreases in prepaid software maintenance and other miscellaneous items, offset in part by
an increase in assets held for sale of $14.7 million primarily as a result of the
reclassification of land and building from property and equipment (See Note 3 of the
Notes). |
Cash and cash equivalents generated from operating activities. During the three months ended
March 31, 2006, we generated $99.6 million of net cash and cash equivalents from operating
activities compared to $59.3 million generated in the same period of 2005. Cash and cash
equivalents generated by operating activities for the three months ended March 31, 2006, were the
result of the following:
|
|
|
Net income adjusted for non-cash transactions. The non-cash items and other
non-operating adjustments are quantified in our Consolidated Condensed Statements of Cash
Flows included in this Form 10-Q; and |
|
|
|
|
A net increase in assets and liabilities, including changes in working capital
components from December 31, 2005 to March 31, 2006, as discussed above. |
The adoption of SFAS 123R did not have an impact on cash flows from operations for the quarter
ended March 31, 2006. See Note 2 of the Notes.
Cash and cash equivalents used in investing activities. Cash and cash equivalents used in
investing activities were $72.6 million for the three months ended March 31, 2006, compared to
$11.2 million for the same period of 2005. The primary investing activities for the three months
ended March 31, 2006 were as follows:
|
|
|
Purchases of debt and equity securities available for sale, net of sales and maturities, and |
|
|
|
|
Purchases of property, equipment and software. |
We expect capital expenditures to be approximately $45 million in 2006. In recent years, we
have reduced our level of capital expenditures as a result of our focus on establishing strategic
supplier alliances with foundry semiconductor manufacturers, which enables us to have access to
advanced manufacturing capacity, and reduces our capital spending requirements.
Cash and cash equivalents provided by financing activities. Cash and cash equivalents
provided by financing activities for the three months ended March 31, 2006, were $12.0 million as
compared to $1.3 million for the same period of 2005. The primary financing activities for the
three months ended March 31, 2006 were the issuance of common stock under our employee stock option
plans.
We may seek additional equity or debt financing from time to time. We believe that our
existing liquid resources and funds generated from operations, combined with funds from such
financing and our ability to borrow funds will be adequate to meet our operating and capital
requirements and obligations for the foreseeable future. However, we cannot be certain that
additional financing will be available on favorable terms. Moreover, any future equity or
convertible debt financing will decrease the percentage of equity ownership of existing
stockholders and may result in dilution, depending on the price at which the equity is sold or the
debt is converted.
Contractual Obligations
The following table summarizes our contractual obligations at March 31, 2006, and the effect
these obligations are expected to have on our liquidity and cash flow in future periods.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
Less than |
|
1 - 3 |
|
4 - 5 |
|
After 5 |
|
|
Contractual Obligations |
|
1 year |
|
years |
|
years |
|
years |
|
Total |
|
|
|
|
|
(in millions)
|
Convertible Subordinated
Notes |
|
$ |
271.8 |
|
|
$ |
|
|
|
$ |
350.0 |
|
|
$ |
|
|
|
$ |
621.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
45.7 |
|
|
|
49.4 |
|
|
|
32.8 |
|
|
|
20.4 |
|
|
|
148.3 |
|
Purchase commitments |
|
|
275.8 |
|
|
|
12.4 |
|
|
|
0.1 |
|
|
|
|
|
|
|
288.3 |
|
|
|
|
Total |
|
$ |
593.3 |
|
|
$ |
61.8 |
|
|
$ |
382.9 |
|
|
$ |
20.4 |
|
|
$ |
1,058.4 |
|
|
|
|
Convertible Subordinated Notes
As of March 31, 2006, we had $271.8 million of Convertible Subordinated Notes due in November
2006 (2001 Convertible Notes) and $350.0 million of Convertible Subordinated Notes due in May
2010 (2003 Convertible Notes). All of the Convertible Notes are subordinated to all existing and
future senior debt and are convertible at the holders option, at any time prior to the maturity
date of the Convertible Notes, into shares of our common stock. The 2001 and 2003 Convertible Notes
have conversion prices of approximately $26.34 per share and $13.42 per share, respectively. The
2001 Convertible Notes are redeemable at our option, in whole or in part, on at least 30 days
notice at any time on or after the call date, which is two years before the due date. We cannot
elect to redeem the 2003 Convertible Notes prior to maturity. Each holder of the 2001 and 2003
Convertible Notes has the right to cause us to repurchase all of such holders convertible notes at
100% of their principal amount plus accrued interest upon the occurrence of any fundamental change
to us, which includes a transaction or event such as an exchange offer, liquidation, tender offer,
consolidation, merger or combination. Interest is payable semiannually.
Fluctuations in our stock price impact the prices of our outstanding convertible securities
and the likelihood of the convertible securities being converted into cash or equity. If we are
required to redeem any of the Convertible Notes for cash, it may affect our liquidity position. In
the event they do not convert to equity, we believe that our current cash position and expected
future operating cash flows will be adequate to meet these obligations as they mature. From time
to time, we redeem or repurchase Convertible Notes.
Operating Lease Obligations
We lease real estate, certain non-manufacturing equipment and software under non-cancelable
operating leases.
Purchase Commitments
We maintain certain purchase commitments, primarily for raw materials, with suppliers and for
some non-production items. Purchase commitments for inventory materials are generally restricted
to a forecasted time-horizon as mutually agreed upon between the parties. This forecasted
time-horizon can vary among our different suppliers.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on
the consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires estimates and assumptions that affect the reported amounts and disclosures. For a
detailed discussion of our critical accounting policies, please see the Critical Accounting
Policies contained in Part II, Item 7 of the Managements Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December
31, 2005. A new critical accounting policy has been added with the adoption of SFAS 123R effective
January 1, 2006. See also Note 2 of the Notes.
27
Stock-Based compensation:
On January 1, 2006, we adopted SFAS 123R, using the modified prospective transition method.
In accordance with the modified prospective transition method, we began recognizing compensation
expense for all share-based awards granted after January 1, 2006 plus unvested awards granted prior
to January 1, 2006. Under this method of implementation, no restatement of prior periods has been
made. Stock-based compensation expense under SFAS 123R in the consolidated condensed statements of
operations for the quarter ended March 31, 2006 was approximately $11.8 million. See Note 2 of the
Notes for a description of our Equity compensation plans and a more detailed discussion of the
adoption of SFAS 123R.
Stock Options
The fair value of each option grant is estimated on the date of grant using a reduced
form calibrated binominal lattice model (the lattice model). This model requires the use of
historical data for employee exercise behavior and the use of assumptions as follows:
|
|
|
|
|
|
|
Three months ended |
Employee Stock Options Granted |
|
March 31, 2006 |
|
Weighted average estimated grant date fair value |
|
$ |
3.37 |
|
|
|
|
|
|
Weighted average assumptions in calculation: |
|
|
|
|
Expected life (years) |
|
|
4.25 |
|
Risk-free interest rate |
|
|
4.59 |
% |
Volatility |
|
|
47.84 |
% |
Dividend yield |
|
|
|
|
Kurtosis |
|
|
4.08 |
|
Skewness |
|
|
(0.54 |
) |
The expected life of employee stock options represents the weighted-average period the
stock options are expected to remain outstanding and is a derived output of the lattice model. The
expected life of employee stock options is impacted by all of the underlying assumptions and
calibration of our model.
We used an equally weighted combination of historical and implied volatilities as of the grant
date. The historical volatility is the standard deviation of the daily stock returns for LSI from
the date of our initial public offering in 1983. We used implied volatilities of near-the-money
LSI traded call options since stock options are call options that are granted at the money. The
historical and implied volatilities were annualized and equally weighted to determine the
volatilities as of the grant date. Prior to January 1, 2006, we used historical implied stock
price volatilities in accordance with SFAS 123 for purposes of its pro forma information.
Our management believes that the equally weighted combination of historical and implied
volatilities is more representative of future stock price trends than historical implied
volatilities.
The risk-free interest rate assumption is based upon observed interest rates for constant
maturity treasuries appropriate for the term of our employee stock options. The estimated kurtosis
and skewness are technical measures of the distribution of stock price returns that are based on
stock price return history as well as consideration of academic analyses.
The lattice model assumes that employees exercise behavior is a function of the options
remaining vested life and the extent to which the option is in-the-money. The lattice model
estimates the probability of exercise as a function of these two variables based on the entire
history of exercises and cancellations on all past option grants made by us since the initial
public offering in 1983.
As stock-based compensation expense recognized in the consolidated condensed statement of
operations for the three months ended March 31, 2006 is based on awards ultimately expected to
vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
28
subsequent periods if actual forfeitures differ from those estimates. Forfeitures were
estimated based on historical experience. For our pro forma information required under SFAS 123
for the periods prior to January 1, 2006, we accounted for forfeitures as they occurred.
Restricted Stock Awards
The cost of these awards is determined using the fair value of our common stock on the
date of the grant and compensation expense is recognized over the vesting period on a straight-line
basis.
There were no ESPP issuances in the first quarter of 2006.
Our determination of fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as assumptions regarding a number of
highly complex and subjective assumptions. We use third-party consultants to assist in developing
the assumptions used in as well as calibrating the lattice model. We are responsible for
determining the assumptions used in estimating the fair value of its share based payment awards.
Option-pricing models were developed for use in estimating the value of traded options that have no
vesting or hedging restrictions and are fully transferable. Because our employee stock options
have certain characteristics that are significantly different from traded options, and because
changes in the subjective assumptions can materially affect the estimated value, in managements
opinion, the existing valuation models may not provide an accurate measure of the fair value of our
employee stock options. Although, the fair value of employee stock options is determined in
accordance with SFAS 123 R and SAB 107 using an option-pricing model, that value may not be
indicative of the fair value observed in a willing buyer/willing seller market transaction.
Recent Accounting Pronouncements
The information contained in Item 1 in Note 1 of the Notes under the heading Recent
Accounting Pronouncements is hereby incorporated by reference into this Item 2.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in the market risk disclosures during the three months
ended March 31, 2006, as compared to the discussion in Part II, Item 7a of our Annual Report on
Form 10-K for the year ended December 31, 2005.
Item 4. Controls and Procedures
Our management evaluated, with the participation of our chief executive officer and our chief
financial officer, the effectiveness of our disclosure controls and procedures pursuant to Rule
13a-15 promulgated under the Securities Exchange Act of 1934 as of March 31, 2006. Based on this
evaluation, our chief executive officer and our chief financial officer have concluded that our
disclosure controls and procedures are effective to ensure that information we are required to
disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
This information is included in Note 11 (Legal Matters) of the Notes to the Unaudited
Consolidated Condensed Financial Statements, which information is incorporated herein by reference
from Item 1 of Part I hereof.
29
Item 1A. Risk Factors
We are subject to a number of risks. Some of these risks are endemic to the semiconductor
industry and are the same or similar to those disclosed in our previous SEC filings, and some new
risks may arise in the future. The reader should carefully consider all of these risks and other
information in this Form 10-Q before investing in our stock. The fact that certain risks are endemic to
the high-technology industry does not lessen the significance of these risks.
As a result of these risks, our business, financial conditions or results of operations could
be materially and adversely affected. This could cause the trading price of our common stock to
decline, and stockholders might lose some or all of their investment.
Please consider these risk factors when you read forward-looking statements elsewhere in
this Form 10-Q and in the documents incorporated herein by reference. Forward-looking statements
are statements that relate to our expectations for future events and time periods. Generally, the
words, anticipate, expect, intend and similar expressions identify forward-looking
statements. Forward-looking statements involve risks and uncertainties, and actual results could
differ materially from those anticipated in the forward-looking statements.
General economic weakness and geopolitical factors may harm our operating results and
financial condition. The semiconductor industry is cyclical in nature and is characterized by wide
fluctuations in product supply and demand. In the past, the industry has experienced periods of
rapid expansion of production capacity followed by periods of significant downturn. Even when the
demand for our products remains constant, the availability of additional excess production capacity
in the industry creates competitive pressures that can degrade pricing levels, which can reduce
revenues. In addition, our results of operations are dependent on the global economy. Any
geopolitical factors such as terrorist activities, armed conflict or global health conditions,
which adversely affect the global economy, may adversely impact our operating results and financial
condition. In addition, goodwill and other long-lived assets could be impacted by a decline in
revenues because impairment is measured based upon estimates of future cash flows. These estimates
include assumptions about future conditions within our company and industry.
We have announced our intention to become entirely dependent on independent foundry
subcontractors to manufacture a portion of our current product; accordingly, any failure to secure
and maintain sufficient foundry capacity could materially and adversely affect our business.
Outside foundry subcontractors, located in Asia, currently manufacture a portion of our
semiconductor devices in current production. On September 13, 2005, we announced our intention to
adopt a fabless manufacturing strategy and to sell our wafer fabrication facility located in
Gresham, Oregon. On April 5, 2006, we entered into a definitive agreement to sell this
manufacturing facility to ON Semiconductor. Upon the closing of this transaction, we will become
completely dependent on foundry subcontractors.
Availability of foundry capacity has in the recent past been reduced due to strong demand. In
addition, the occurrence of a public health emergency could further affect the production
capabilities of our manufacturers by resulting in quarantines or closures. If we are unable to
secure sufficient capacity at our existing foundries, or in the event of a quarantine or closure at
any of these foundries, our revenues, cost of revenues and results of operations would be
negatively impacted. If any of our foundries experiences a shortage in capacity, or suffers any
damage to its facilities due to earthquakes or other natural disasters, experiences power outages,
encounters financial difficulties or experiences any other disruption of foundry capacity, we may need to
qualify an alternative foundry in a timely manner. Even our current foundries need to have new
manufacturing processes qualified if there is a disruption in an existing process. We typically
require several months to qualify a new foundry or process before we can begin shipping products
from it. If we cannot accomplish this qualification in a timely manner, we may experience a
significant interruption in supply of the affected products.
Because we rely on outside foundries with limited capacity, we face several significant risks,
including:
|
|
|
a lack of guaranteed wafer supply and potential wafer shortages and higher
wafer prices; |
|
|
|
|
limited control over delivery schedules, quality assurance, manufacturing
yields and production costs; and |
|
|
|
|
the unavailability of, or potential delays in obtaining access to, key
process technologies. |
In addition, the manufacture of integrated circuits is a highly complex and technologically
demanding process. Although we work closely with our foundries to minimize the likelihood of
reduced manufacturing yields, our foundries have from time to time experienced lower than
anticipated manufacturing yields. This often occurs during the production of new products or the
installation and start-up of new process technologies. Poor yields from our foundries could result
in product shortages or delays in product shipments, which could seriously harm our relationships
with our customers and materially and adversely affect our results of operations.
The ability of each foundry to provide us with semiconductor devices is limited by its
available capacity and existing obligations. Although we have entered into contractual commitments
to supply specified levels of products to some of our customers, we do not have a long-term volume
purchase agreement or a significant guaranteed level of production capacity with any of our
foundries. Foundry capacity may not be available when we need it or at reasonable prices.
Availability of foundry capacity has in the recent past been reduced from time to time due to
strong demand. We place our orders on the basis of our customers purchase orders or our forecast
of customer demand, and the foundries can allocate capacity to the production of other companies
products and reduce deliveries to us on short notice. It is possible
that other foundry customers that
are larger and better financed than we are, or that have long-term agreements with our main
foundries, may induce our foundries to reallocate capacity to them. This reallocation could impair
our ability to secure the supply of components that we need. Although we use a number of
independent foundries to manufacture our semiconductor products, most of our components are not
manufactured at more than one foundry at any given time, and our products typically are designed to be manufactured in a
specific process at only one of these foundries. Accordingly, if one of our foundries is unable to
provide us with components as needed, we could experience significant delays in securing sufficient
supplies of those components. Also, our third party foundries typically migrate capacity to newer,
state-of-the-art manufacturing processes on a regular basis, which may create capacity shortages
for our products designed to be manufactured on an older process. We cannot assure you that any of
our existing or new foundries will be able to produce integrated circuits with acceptable
manufacturing yields, or that our foundries will be able to deliver enough semiconductor devices to
us on a timely basis, or at reasonable prices. These and other related factors could impair our
ability to meet our customers needs and have a material and adverse effect on our operating
results.
Although we may utilize new foundries for other products in the future, in using new foundries
we will be subject to all of the risks described in the foregoing paragraphs with respect to our
current foundries.
Our target markets are characterized by rapid technological change. The Semiconductor and
Storage Systems segments in which we conduct business are characterized by rapid technological
change, short product cycles and evolving industry standards. We believe our future success
depends, in part, on our ability to improve on existing technologies and to develop and implement
new ones in order to continue to reduce semiconductor chip size and improve product performance and
manufacturing yields. We must also be able to adopt and implement emerging industry standards in a
timely manner and to adapt products and processes to technological changes. If we are not able to
implement new process technologies successfully or to achieve volume production of new products at
acceptable yields, our operating results and financial condition may be adversely impacted.
We operate in highly competitive markets. Our competitors include many large domestic and
foreign companies that have substantially greater financial, technical and management resources
than we do. Several major diversified electronics companies offer custom solutions and/or other
standard products that are competitive with our product lines. Other competitors are specialized,
rapidly growing companies that sell products into the same markets that we target. Some of our
large customers may also design and manufacture products that compete with our products. There is
no assurance that the price and performance of our products will be superior relative to the
products of our competitors. As a result, we may experience a loss of competitive position that
could result in lower prices, fewer customer orders, reduced revenues, reduced gross profit margins
and loss of market share.
We are dependent on a limited number of customers. A limited number of customers account for
a substantial portion of our revenues. International Business Machines Corporation and Seagate
Technology represented approximately 17% and 12%, respectively, of our total consolidated revenues
for the three months ended March 31, 2006.
Our operating results and financial condition could be significantly affected if:
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we do not win new product designs from major existing customers; |
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major customers reduce or cancel their existing business with us; |
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major customers make significant changes in scheduled deliveries; or |
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there are declines in the prices of products that we sell to these customers. |
We are potentially subject to credit risk from accounts receivable. A majority of the
our trade receivables are derived from sales to large multinational computer, communication,
networking, storage and consumer electronics manufacturers, with the remainder distributed across
other industries. We perform ongoing credit evaluations of our customers financial condition and
require collateral as considered necessary. However, we cannot provide assurance that our accounts
receivable balances will be paid on time or at all. Silicon Graphics, a customer of ours, filed
for chapter 11 bankruptcy protection under the United States Bankruptcy Code on May 8, 2006. As a result of
this action, we recorded a $5.6 million charge in the first quarter of 2006 because we do not
believe the receivable balance as of March 31, 2006 is collectible. Of this charge, $5.4 million related to the Storage
Systems segment and $0.2 million related to the Semiconductor segment.
Our new products may not achieve market acceptance. We introduce many new products each year.
We must continue to develop and introduce new products that compete effectively on the basis of
price and performance and that satisfy customer requirements. Our cores and standard products are
intended to be based upon industry standard functions, interfaces, and protocols so that they are
useful in a wide variety of systems applications. Development of new products and cores often
requires long-term forecasting of market trends, development and implementation of new or changing
technologies and a substantial capital commitment. We cannot provide assurance that the cores or
standard products that we select for investment of our financial and engineering resources will be
developed or acquired in a timely manner or will enjoy market acceptance.
The manufacturing facilities we operate are highly complex and require high fixed costs. Our
only wafer fabrication site is located in Gresham, Oregon. On April 5, 2006, we entered into a
definitive agreement to sell this manufacturing facility to ON Semiconductor for $105 million in
cash. We also plan to enter into additional agreements with ON Semiconductor including a wafer supply
agreement, intellectual property license agreement and a transition services agreement. The
transaction is subject to customary closing conditions.
We also own our Storage Systems segment manufacturing facility in Wichita, Kansas. The
manufacture and introduction of our products is a complicated process. We continually strive to
implement the latest process technologies and manufacture products in a clean and tightly
controlled environment. We confront challenges in the manufacturing process that require us to:
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maintain a competitive manufacturing cost structure; |
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implement the latest process technologies required to manufacture new products; |
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exercise stringent quality control measures to ensure high yields; |
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effectively manage the subcontractors engaged in the wafer fabrication, test
and assembly of products; and |
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update equipment and facilities as required for leading edge production
capabilities. |
We procure parts and raw materials from a limited number of domestic and foreign sources. We
do not maintain an extensive inventory of parts and materials for manufacturing. We purchase a
portion of our requirements for parts and raw materials from a limited number of sources, primarily
from suppliers in Japan and their U.S. subsidiaries, and we obtain other material inputs on a local
basis. There is no assurance that, if we have difficulty in obtaining parts or materials in the
future, alternative suppliers will be available, or that these suppliers will provide parts and
materials in a timely manner or on favorable terms. As a result, we may be adversely affected by
delays in product shipments. If we cannot obtain adequate materials for manufacture of our
products or if such materials are not
31
available at reasonable prices, there could be a material adverse impact on our operating
results and financial condition.
We utilize indirect channels of distribution over which we have limited control. Our
financial results could be adversely affected if our relationship with resellers or distributors
were to deteriorate or if the financial condition of these resellers or distributors were to
decline. In addition, as our business grows, we may have an increased reliance on indirect
channels of distribution. There can be no assurance that we will be successful in maintaining or
expanding these indirect channels of distribution. Failure to do so could result in the loss of certain sales
opportunities. Furthermore, the partial reliance on indirect channels of distribution may reduce
our visibility with respect to future business, thereby making it more difficult to accurately
forecast orders.
We engage in acquisitions and alliances giving rise to financial and technological risks. We
are continually exploring strategic acquisitions that build upon our existing library of
intellectual property, human capital and engineering talent, and increase our leadership position
in the markets where we operate. We did not complete any material acquisitions or alliances in the
first quarter of 2006. Mergers and acquisitions of high-technology companies bear inherent risks.
No assurance can be given that our previous or future acquisitions will be successful and will not
materially adversely affect our business, operating results or financial condition. We must
continue to manage any growth effectively. Failure to manage growth effectively and to integrate
acquisitions could adversely affect our operating results and financial condition.
In addition, we intend to continue to make investments in companies, products and technologies
through strategic alliances. Investment activities often involve risks, including the need to
acquire timely access to needed capital for investments related to alliances and to invest in
companies and technologies that contribute to the growth of our business.
On September 13, 2005, we announced our intention to sell our Gresham, Oregon manufacturing
facility as part of our strategy to transition to a fabless semiconductor manufacturing model. Our
new strategy includes the expansion of our working relationships with major foundry partners and
the adoption of a roadmap leading to the production of advanced semiconductors utilizing
65-nanometer and below process technology on 300-mm or 12-inch wafers. We announced that we signed
a definitive agreement to sell our Gresham, Oregon semiconductor manufacturing facility to ON
Semiconductor on April 5, 2006 .
The price of our securities may be subject to wide fluctuations. Our stock has
experienced substantial price volatility, particularly as a result of quarterly variations in
results, the published expectations of analysts and announcements by our competitors and us. In
addition, the stock market has experienced price and volume fluctuations that have affected the
market price of many technology companies and that have often been unrelated to the operating
performance of such companies. The price of our securities may also be affected by general global,
economic and market conditions. While we cannot predict the individual effect that these and other
factors may have on the price of our securities, these factors, either individually or in the
aggregate, could result in significant variations in stock price during any given period of time. These
fluctuations in our stock price also impact the price of our outstanding convertible securities and
the likelihood of the convertible securities being converted into cash or equity. If our stock
price is below the conversion price of our convertible bonds on the date of maturity, they may not
convert into equity and we may be required to redeem our outstanding convertible securities for
cash. However, in the event they do not convert to equity, we believe that our current cash
position and expected future operating cash flows will be adequate to meet these obligations as
they mature.
We may rely on capital and bank markets to provide liquidity. In order to finance strategic
acquisitions, capital assets needed in our manufacturing facilities and other general corporate
needs, we may rely on capital and bank markets to provide liquidity. As of March 31, 2006, we had
convertible notes outstanding of approximately $622 million. We may need to seek additional equity
or debt financing from time to time. Historically, we have been able to access capital and bank
markets, but we may not be able to access these markets in the future or on terms that are
acceptable to us. The availability of capital in these markets is affected by several factors,
including geopolitical risk, the interest rate environment and the condition of the economy as a
whole. Moreover, any future equity or equity-linked financing may dilute the equity ownership of
existing shareholders. In addition, our own operating performance, capital structure and expected
future performance impact our ability to raise capital. We believe that our
32
current cash, cash equivalents, short-term investments and future cash provided by operations
will be sufficient to fund our needs in the foreseeable future. This includes repaying our
existing convertible debt when due. However, if our operating performance falls below
expectations, we may need additional funds.
We design and develop highly complex semiconductors and storage systems. As technology
advances to smaller geometries, there are increases in the complexity, time and expense associated
with the design, development and manufacture of semiconductors. We must incur substantial research
and development costs to confirm the technical feasibility and commercial viability of any products
that in the end may not be successful. Therefore, we cannot guarantee that any new semiconductor
or storage products will result in market acceptance.
The high technology industry in which we operate is prone to intellectual property litigation.
Our success is dependent in part on our technology and other proprietary rights, and we believe
that there is value in the protection afforded by our patents, copyright rights, trademarks and
other intellectual property rights. We have a program whereby we actively protect our intellectual
property by acquiring patent and other intellectual property rights. However, the industry is
characterized by rapidly changing technology and our future success depends primarily on the
technical competence and creative skills of our personnel.
As is typical in the high technology industry, from time to time we have received
communications from other parties asserting that certain of our products, processes, technologies
or information infringe upon their patent rights, copyrights, trademark rights or other
intellectual property rights. We regularly evaluate such assertions. In light of industry
practice, we believe, with respect to existing or future claims that any licenses or other rights
that may be necessary may generally be obtained on commercially reasonable terms. Nevertheless,
there is no assurance that licenses will be obtainable on acceptable terms or that a claim will not
result in litigation or other administrative proceedings. Resolution of whether our product or
intellectual property has infringed on valid rights held by others could have a material adverse
effect on our results of operations or financial position and may require material changes in
production processes and products.
See
Legal Matters in Note 11 (Legal Matters) of
the Notes regarding pending patent
litigation.
We may not be able to adequately protect or enforce our intellectual property rights, which
could harm our competitive position. Our success and future revenue growth will depend, in part,
on our ability to protect our intellectual property. We primarily rely on patent, copyright,
trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect
our proprietary technologies and processes. Despite our efforts to protect our proprietary
technologies and processes, it is possible that competitors or other unauthorized third parties may
obtain, copy, use or disclose our technologies and processes. We hold more than 3,290 U.S.
patents. However, we cannot assure you that any additional patents will be issued. Even if a new
patent is issued, the claims allowed may not be sufficiently broad to protect our technology. In
addition, any of our existing or future patents may be challenged, invalidated or circumvented. As
such, any rights granted under these patents may not provide us with meaningful protection. We may
not have foreign patents or pending applications corresponding to our U.S. patents and
applications. Even if foreign patents are granted, effective enforcement in foreign countries may
not be available. If our patents do not adequately protect our technology, our competitors may be
able to offer products similar to ours. Our competitors may also be able to develop similar
technology independently or design around our patents. Some or all of our patents have in the past
been licensed and likely will in the future be licensed to certain of our competitors through
cross-license agreements.
Certain of our software (as well as that of our customers) may be derived from so-called open
source software that is generally made available to the public by its authors and/or other third
parties. Such open source software is often made available to us under licenses, such as the GNU
General Public License, or GPL. These licenses impose certain obligations on us in the event we
were to distribute derivative works of the open source software. These obligations may require us
to make source code for the derivative works available to the public, and/or license such
derivative works under a particular type of license, rather than the forms of license customarily
used to protect our intellectual property. While we believe we have complied with our obligations
under the various applicable licenses for open source software, in the event the copyright holder
of any open source software were to successfully establish in court that we had not complied with
the terms of a license for a particular work, we could be required to release the source code of
that work to the public and/or stop distribution of that work. With respect to our proprietary
software, we generally license such software under terms that prohibit combining it with open
source
33
software as described above. Despite these restrictions, parties may combine our proprietary
software with open source software without our authorization, in which case we may nonetheless be
required to release the source code of our proprietary software.
Our manufacturing facilities are subject to disruption. Operations at any of our primary
manufacturing facilities may be disrupted for reasons beyond our control, including work stoppages,
fire, earthquake, tornado, floods or other natural disasters, which could have a material adverse
effect on our results of operation or financial position.
34
We depend on third-party subcontractors to assemble, obtain packaging materials for, and test
substantially all of our current semiconductor products. If we lose the services of any of our
subcontractors or if these subcontractors are unable to obtain sufficient packaging materials,
shipments of our products may be disrupted, which could harm our customer relationships and
adversely affect our revenues. Third-party subcontractors located in Asia assemble, obtain
packaging materials for, and test substantially all of our current semiconductor products. Because
we rely on third-party subcontractors to perform these functions, we cannot directly control our
product delivery schedules and quality assurance. This lack of control has in the past resulted,
and could in the future result, in product shortages or quality assurance problems that could delay
shipments of our products or increase our manufacturing, assembly or testing costs.
If our third-party subcontractors are unable to obtain sufficient packaging materials for our
products in a timely manner, we may experience a significant product shortage or delay in product
shipments, which could seriously harm our customer relationships and materially and adversely
affect our net revenues. If any of these subcontractors experiences capacity constraints or financial
difficulties, suffers any damage to its facilities, experiences power outages or any other
disruption of assembly or testing capacity, we may not be able to obtain alternative assembly and
testing services in a timely manner. Due to the amount of time that it usually takes us to qualify
assemblers and testers, we could experience significant delays in product shipments if we are
required to find alternative assemblers or testers for our components. Any problems that we may
encounter with the delivery, quality or cost of our products could damage our customer
relationships and materially and adversely affect our results of operations. We are continuing to
develop relationships with additional third-party subcontractors to assemble and test our products.
However, even if we use these new subcontractors, we will continue to be subject to all of the
risks described above.
We depend on third-party subcontractors to manufacture all of our current board products.
Third-party subcontractors manufacture all of our current board products. Because we rely on
third-party subcontractors to perform this function, we cannot directly control our product
delivery schedules and quality assurance. This lack of control has in the past resulted, and could
in the future result, in product shortages or quality assurance problems that could delay shipments
of our products or increase our manufacturing, assembly or testing costs.
If our third-party subcontractors are unable to manufacture our products in a timely manner,
we may experience a significant product shortage or delay in product shipments, which could
seriously harm our customer relationships and materially and adversely affect our net sales. If
any of these subcontractors experiences capacity constraints or financial difficulties, suffers any
damage to its facilities, experiences power outages or encounters any other disruption of manufacturing
capacity, we may not be able to obtain alternative manufacturing services in a timely manner. Due
to the amount of time that it usually takes us to qualify manufacturers, we could experience
significant delays in product shipments if we are required to find alternatives. Any problems that
we may encounter with the delivery, quality or cost of our products could damage our customer
relationships and materially and adversely affect our results of operations. We are continuing to
develop relationships with additional third-party manufacturers for our products. However, even if
we use these new subcontractors, we will continue to be subject to all of the risks described
above.
We are increasingly exposed to various legal, business, political and economic risks
associated with our international operations. We currently obtain a substantial portion of our
manufacturing, and all of our assembly and testing services from suppliers located outside the
United States. We also frequently ship products to our domestic
35
customers international manufacturing divisions and subcontractors. We also undertake design
and development activities in Canada, China, Dubai, Germany, India, Russia, Taiwan, and the United
Kingdom. We intend to continue to expand our international business activities and to open other
design and operational centers abroad. The recent war in Iraq and the lingering effects of
terrorist attacks in the United States and abroad, the resulting heightened security and the
increasing risk of extended international military conflicts may adversely impact our international
sales and could make our international operations more expensive. International operations are
subject to many other inherent risks, including but not limited to:
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political, social and economic instability; |
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exposure to different legal standards, particularly with respect to intellectual property; |
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natural disasters and public health emergencies; |
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nationalization of business and blocking of cash flows; |
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trade and travel restrictions; |
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the imposition of governmental controls and restrictions; |
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burdens of complying with a variety of foreign laws; |
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import and export license requirements and restrictions of the United States and
each other country in which we operate; |
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unexpected changes in regulatory requirements; |
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foreign technical standards; |
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changes in tariffs; |
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difficulties in staffing and managing international operations; |
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fluctuations in currency exchange rates; |
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difficulties in collecting receivables from foreign entities or delayed revenue recognition; and |
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potentially adverse tax consequences. |
Any of the factors described above may have a material adverse effect on our ability to
increase or maintain our foreign sales.
Additionally, public health emergencies may impact our operations, including, but not limited
to, disruptions at our third-party manufacturers that are primarily located in Asia, reduced sales
and increased supply chain costs.
We are exposed to fluctuations in foreign currency exchange rates. We have some exposure to
fluctuations in foreign currency exchange rates. We have international subsidiaries and
distributors that operate and sell our products globally. We routinely hedge these exposures in an
effort to minimize the impact of currency fluctuations. However, we may still be adversely
affected by changes in foreign currency exchange rates or declining economic conditions in these
countries.
We must attract and retain key employees in a highly competitive environment. In May 2005,
Abhijit Y. Talwalkar joined us as President and Chief Executive Officer. Mr. Talwalkar succeeded
Wilfred J. Corrigan, whose status as an employee ceased as of May 2005. On February 13, 2006, Mr.
Corrigan notified us that he will not stand for reelection to our board of directors (the Board)
at the 2006 annual stockholders meeting. On May 11, 2006,
we announced that the Board had elected
James H. Keyes to serve as its Chairman, succeeding
Mr. Corrigan in this position.
36
Our employees are vital to our success and our key management, engineering and other employees
are difficult to replace. We do not generally have employment contracts with our key employees.
Despite the economic slowdown of the last few years, competition for certain key technical and
engineering personnel remains intense. Our continued growth and future operating results will
depend upon our ability to attract, hire and retain significant numbers of qualified employees.
The adoption of new accounting standards related to the expensing of stock awards adversely
affected our results for the first quarter of 2006 and is expected to negatively impact the results
of operations in subsequent periods. Future changes in financial accounting standards or practices
or existing taxation rules or practices may also cause adverse unexpected fluctuations and affect
our reported results of operations.
On January 1, 2006, we adopted SFAS 123R. In accordance with the modified prospective
transition method, we began recognizing compensation expense for all
share-based awards on or granted
after January 1, 2006, plus unvested awards granted prior to January 1, 2006. Under this method of
implementation, no restatement of prior periods has been made. The adoption of SFAS 123R has a
significant impact on our operating results as share-based compensation expense is charged directly
against reported earnings. Numerous judgments and estimates are
involved in the calculation of the expense and the changes to those
estimates, or different judgments could result in a significant
impact on the financial statement.
Financial accounting standards in the United States are constantly under review and may be
changed from time to time. Once
implemented, these changes could result in material fluctuations in our financial results of
operations and/or the way in which such results of operations are reported. Similarly, we are
subject to taxation in the United States and a number of foreign jurisdictions. Rates of taxation,
definitions of income, exclusions from income, and other tax policies are subject to change over
time. Changes in tax laws in a jurisdiction in which we have reporting obligations could have a
material impact on our results of operations.
We face uncertainties related to the effectiveness of internal controls. Public companies in
the United States are required to review their internal controls over financial reporting under
Section 404 of the Sarbanes-Oxley Act of 2002. It should be noted that any system of controls,
however well designed and operated, can provide only reasonable, and not absolute, assurance that
the objectives of the system are met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future events. Because of these and other
inherent limitations of control systems, there can be no assurance that any design will achieve its
stated goal under all potential future conditions, regardless of how remote.
Although our management has determined, that our internal controls were effective as of March
31, 2006, we cannot assure you that we or our independent registered public accounting firm will
not identify a material weakness in our internal controls in the future. A material weakness in
our internal controls over financial reporting would require management and our independent public
accounting firm to evaluate our internal controls as ineffective. If our internal controls over
financial reporting are not considered adequate, we may experience a loss of public confidence,
which could have an adverse effect on our business and our stock price.
Internal control deficiencies or weaknesses that are not yet identified could emerge. Over
time we may identify and correct deficiencies or weaknesses in our internal controls and, where and
when appropriate, report on the identification and correction of these deficiencies or weaknesses.
However, the internal control procedures can provide only reasonable, and not absolute, assurance
that deficiencies or weaknesses are identified. Deficiencies or weaknesses that are not yet
identified could emerge and the identification and corrections of these deficiencies or weaknesses
could have a material impact on the results of operations for us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 28, 2000, our Board of Directors authorized a new stock repurchase program in which up
to 5 million shares of the our common stock may be repurchased in the open market from time to
time. There is no expiration date for the plan. No shares were repurchased under this plan during
the first three months of 2005. There are 3.5 million
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shares available for repurchase under this plan as of March 31, 2006. We did not repurchase shares
during the three months ended March 31, 2006.
Item 6. Exhibits
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2.1
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Asset Purchase Agreement between LSI Logic Corporation and
Semiconductor Components Industries, LLC, dated as of April 5, 2006.
Incorporated by reference to exhibit filed with Quarterly Report
on Form 10-Q on April 27, 2006, by ON Semiconductor Corporation.+ |
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10.53
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Written Description of 2006 Incentive Plan. Incorporated by
reference to exhibit filed with the Current Report on Form 8-K on
February 15, 2006. |
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10.54
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LSI Logic Corporation Incentive Plan, as amended and restated on
March 10, 2004. Incorporated by reference to exhibit filed with the
Current Report on Form 8-K on February 15, 2006. |
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31.1
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Certification of the Chief Executive Officer pursuant to Securities
and Exchange Act Rules 13a-15(e) and 15d-1(e), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.** |
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.** |
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+ |
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Schedules to this exhibit not filed herewith shall be furnished to the SEC upon request.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment. |
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** |
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Furnished not filed. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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LSI LOGIC CORPORATION (Registrant) |
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Date: May 11, 2006
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By
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/s/ Bryon Look |
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Bryon Look
Executive Vice President &
Chief Financial Officer |
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INDEX TO EXHIBITS
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2.1
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Asset Purchase Agreement between LSI Logic Corporation and
Semiconductor Components Industries, LLC, dated as of April 5, 2006.
Incorporated by reference to exhibit filed with Quarterly Report
on Form 10-Q on April 27, 2006, by ON Semiconductor Corporation.+ |
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10.53
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Written Description of 2006 Incentive Plan. Incorporated by
reference to exhibit filed with the Current Report on Form 8-K on
February 15, 2006. |
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10.54
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LSI Logic Corporation Incentive Plan, as amended and restated on
March 10, 2004. Incorporated by reference to exhibit filed with the
Current Report on Form 8-K on February 15, 2006. |
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31.1
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Certification of the Chief Executive Officer pursuant to Securities
and Exchange Act Rules 13a-15(e) and 15d-1(e), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Chief Financial Officer pursuant to Securities
and Exchange Act Rules 13-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.** |
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.** |
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+ |
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Schedules to this exhibit not filed herewith shall be furnished to the SEC upon request.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment. |
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** |
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Furnished not filed. |
40