e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the Fiscal Year Ended
December 31, 2008
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to .
|
Commission File
No. 1-10317
LSI CORPORATION
(Exact name of registrant as
specified in its charter)
|
|
|
DELAWARE
|
|
94-2712976
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(IRS Employer
Identification No.)
|
1621 Barber Lane
Milpitas, California 95035
(Address of principal executive
offices) (Zip Code)
Registrants telephone number, including area code:
(408) 433-8000
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Common Stock, $0.01 par value
|
|
New York Stock Exchange
|
Securities registered pursuant to Section 12(g) of the
Act:
NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See definition of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act (check one):
|
|
|
|
|
|
|
Large Accelerated
Filer þ
|
|
Accelerated
Filer o
|
|
Non-accelerated
Filer o
|
|
Smaller reporting
company o
|
|
|
(Do not check if a smaller reporting
company)
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant as of
June 29, 2008 was approximately $4.1 billion, based on
the reported last sale price on the New York Stock Exchange of
such equity on the last business day of the fiscal quarter
ending on such date.
As of February 20, 2009, 648,135,650 shares of common
stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain information required by Part III of this report is
incorporated by reference from the registrants proxy
statement to be filed pursuant to Regulation 14A with
respect to the registrants 2009 annual meeting of
stockholders.
LSI
Corporation
Form 10-K
For the Year Ended December 31, 2008
FORWARD-LOOKING
STATEMENTS
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The
words estimate, plan,
intend, expect, anticipate,
believe and similar words are intended to identify
forward-looking statements. Although we believe our expectations
are based on reasonable assumptions, our actual results could
differ materially from those projected in the forward-looking
statements. We have described in Part I,
Item 1A-Risk
Factors a number of factors that could cause our actual
results to differ from our projections or estimates. Except
where otherwise indicated, the statements made in this report
are made as of the date we filed this report with the Securities
and Exchange Commission and should not be relied upon as of any
subsequent date. We expressly disclaim any obligation to update
the information this report, except as may otherwise be required
by law.
PART I
General
We design, develop and market complex, high-performance
semiconductors and storage systems. We provide silicon-to-system
solutions that are used at the core of products that create,
store, consume and transport digital information. We offer a
broad portfolio of capabilities including custom and standard
product integrated circuits used in hard disk drives, high-speed
communications systems, computer servers, storage systems and
personal computers. We also offer external storage systems and
host bus adapter boards and software applications for attaching
storage devices to computer servers and for storage area
networks.
Integrated circuits, also called semiconductors or chips, are
made using semiconductor wafers imprinted with a network of
electronic components. They are designed to perform various
functions such as processing electronic signals, controlling
electronic system functions and processing and storing data.
Our business is currently focused on providing integrated
circuits for storage and networking applications and on
providing storage systems and related boards and software. Since
the beginning of 2007, we have completed the following actions
as part of our efforts to focus on those areas:
|
|
|
|
|
On March 13, 2007, we completed the acquisition of
SiliconStor, Inc., a provider of semiconductor solutions for
enterprise storage networks. SiliconStors products support
the serial attached-SCSI, or SAS, and serial advanced technology
attachment, or SATA, standards for connecting hard disks to
computers and enabled our Storage semiconductor business to
offer a more complete line of products.
|
|
|
|
On April 2, 2007, we acquired Agere Systems Inc., a
provider of integrated circuit solutions for a variety of
communications and computing applications. Ageres
customers included manufacturers of hard disk drives, mobile
phones, advanced communications and networking equipment and
personal computers. Agere also generated revenues from the
licensing of intellectual property. We believe that the Agere
acquisition allowed our Storage semiconductor business to offer
a broader product line and gave it additional resources,
enabling it to be a stronger competitor. The acquisition also
resulted in the addition of new products and resources for our
Networking semiconductor business. Ageres intellectual
property licensing capabilities also offered us the ability to
generate more revenue from our pre-existing patents than we had
generated as a stand-alone company. Following the Agere
acquisition, we discontinued a number of development projects
and have been reducing headcount in areas with overlap in order
to achieve significant cost synergies from the acquisition.
|
|
|
|
Because our Consumer business, which provided semiconductors for
consumer products such as DVD recorders, no longer had the scale
necessary to be a strong competitor, we sold that business to
Magnum Semiconductor, Inc., completing the sale on July 27,
2007.
|
|
|
|
We saw risk in Ageres Mobility business, which principally
provided integrated circuits for mobile phones, because of the
transition from one generation of technology, 2G products based
on the Global Systems for Mobile Communications, or GSM,
standard, to the next, 3G products based on the wideband Code
Division Multiple Access, or W-CDMA, standard, and because
of its limited customer base. We chose to sell that business,
completing the sale to Infineon Technologies AG on
October 24, 2007.
|
|
|
|
Between mid-2007 and mid-2008, we exited our semiconductor and
storage systems assembly and test operations and transitioned
those activities to third party contract manufacturers. We did
this so that we can focus our resources and attention on our
efforts to design leading-edge semiconductor and storage
solutions, so that we will have a more variable cost structure
and so that we will avoid the capital expenses needed for
facility upgrades. We sold our semiconductor assembly and test
facility in Thailand and discontinued operations at our
Singapore semiconductor assembly and test facility and our
Wichita, Kansas storage systems assembly and test facility.
|
|
|
|
On October 3, 2007, we acquired Tarari, Inc., a maker of
silicon and software that provided content and application
awareness in packet and message processing, enabling advanced
security and network control
|
1
|
|
|
|
|
for service provider and enterprise networks. We believe these
capabilities will become increasingly important as network
operators seek additional billing and security capabilities.
|
|
|
|
|
|
On April 25, 2008, we acquired the assets of
Infineons hard disk drive semiconductor business to
enhance our competitive position in desktop and enterprise hard
disk drives.
|
We operate in two segments the Semiconductor segment
and the Storage Systems segment. We market our products
primarily to original equipment manufacturers, or OEMs, that
sell products to our target end customers. In 2008, the
Semiconductor segment accounted for approximately 67.1% of our
revenue and the Storage Systems segment accounted for
approximately 32.9% of our revenue. You can find additional
financial information about our segments and geographic
financial information in Note 9 to our financial statements
in Item 8. See Item 1A Risk
Factors for information about risks we face as a result of
our operations outside the United States.
Our Semiconductor segment designs, develops and markets highly
complex integrated circuits for storage and networking
applications. These solutions include both custom solutions and
standard products. Custom solutions are designed for a specific
application defined by the customer. Standard products are
developed for market applications that we define and are sold to
multiple customers. Our Storage Systems segment designs and
sells enterprise storage systems. Our high-performance, highly
scalable open storage systems and storage solutions are
distributed through OEMs. The Storage Systems segment also
offers host bus adapters; redundant array of independent disks,
or RAID, adapters; software and related products and services.
Shortly after the Agere acquisition, we changed our name to LSI
Corporation from LSI Logic Corporation. LSI Logic Corporation
was incorporated in California on November 6, 1980, and was
reincorporated in Delaware on June 11, 1987.
We maintain an Internet website at www.lsi.com. We make
available free of charge on our website our annual reports on
Form 10-K,
our quarterly reports on
Form 10-Q,
our current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file such
material with, or furnish it to, the U.S. Securities and
Exchange Commission. You can read any materials that we file
with the Commission at the Commissions Public Reference
Room at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You can obtain information on the
operation of the Public Reference Room by calling the Commission
at
(800) 732-0330.
Information on our website is not incorporated by reference into
this report.
Products
SEMICONDUCTOR
SEGMENT
Storage
Products
Hard Disk and Tape Drive Electronics. We sell
integrated circuits for hard disk and tape drive solutions,
which are used to store and retrieve data in personal computers,
corporate network servers, archive/back-up devices and consumer
electronics products such as digital video recorders, game
consoles and digital media players. A disk drive contains
physical media, one or more platters that store
data, a motor that spins the media, drive heads that read data
from and write data to the media and electronics that process
the data and control the disk drive. Tape drives store data on
magnetic tape and provide a high capacity, cost effective tiered
data storage
back-up
solution. In 2008, we began developing integrated circuits for
use in solid state storage devices, which store data in flash
memory instead of on a hard disk.
Our
TrueStore®
family of storage electronics products includes
systems-on-a-chip,
read channels,
pre-amplifiers,
serial physical interfaces and hard disk controllers as well as
custom firmware. These are the critical chips required to read,
write and protect data. We offer products that can be used in a
variety of hard disk applications, including hard drives
intended for notebook computers, desktop computers and
enterprise computers, and in tape drives.
A storage
system-on-a-chip,
or SoC, is an integrated circuit that combines the functionality
of a read channel, serial interface, memory and a hard disk
controller in a small, high-performance, low-power and
cost-effective package.
2
Read channels convert analog signals that are generated by
reading the stored data on the physical media into digital
signals. Analog refers to a transmission technique employing a
continuous signal that varies in amplitude, frequency or phase
of the transmission. Digital refers to a method of transmitting,
storing and processing data that uses distinct electronic or
optical pulses to represent the binary digits 0 and 1. We also
sell
pre-amplifiers,
or preamps, which are used to amplify the initial signal to and
from the drive disk heads so the signal can be processed by the
read channel. We provide similar technology for tape drives. Our
hard disk controllers are used to control signal processing and
communications functions within the disk drive.
Storage Interface Products. We also offer
solutions that make possible data transmission between a host
computer and storage peripheral devices such as magnetic and
optical disk drives and disk and tape-based storage systems.
These products include:
|
|
|
|
|
Storage Standard Products. Our product line
includes SAS, SATA and
RAID-On-Chip,
or RoC, integrated circuits combined with our
Fusion-MPTTM
firmware and drivers to form intelligent storage interface
solutions primarily for server and storage system motherboard
applications. Additionally, our product line includes SCSI, SAS
and SATA bus expander integrated circuits, Fibre Channel
integrated circuits, SAS switches, and disk drive bridging or
interposer circuits used primarily in storage systems. We sell
our integrated circuit solutions both in an integrated circuit
plus software form or as a complete solution including the host
bus adapter board itself.
|
|
|
|
Storage Custom Solutions. We also offer custom
solutions to customers who develop Fibre Channel and Fibre
Channel over Ethernet storage area network, or SAN, switches and
host bus adapters, storage systems, hard disk drives and tape
peripherals. By leveraging our extensive experience in providing
solutions for these applications, we have developed a full
portfolio of high-speed interface intellectual property that is
combined with our customers intellectual property to form
custom solutions that provide a connection to the network, the
SAN, memory systems and host buses. Using these pre-verified
interfaces, our customers can reduce development risk and
achieve quicker time to market. Our intellectual property
offerings include high performance SerDes cores supporting Fibre
Channel, SAS, SATA, 10-Gigabit Ethernet, Gigabit Ethernet,
Infiniband, SAS, Serial RapidIO and PCI-Express industry
standards and a family of high-performance Fibre Channel,
Ethernet, RapidIO, PCI-E, SAS and SATA protocol controllers.
|
Networking
Products
We offer comprehensive solutions that allow networking service
providers to deliver a variety of highly reliable communications
services to homes, businesses and mobile users over Internet
Protocol, or IP, networks. IP networks are packet based. In an
IP network, packets of data that are part of the same telephone
conversation or video program can be routed over different
paths. Traditional telephone networks are circuit-based where
all data packets follow the same dedicated path or circuit.
Historically, the dedicated paths in circuit-based networks have
provided greater reliability than packet-based networks,
although at the cost of flexibility.
Our networking solutions are designed to enable IP networks to
provide reliability similar to that of circuit-based networks
and incorporate quality of service features that allow more
critical data to receive priority over less critical data. For
example, packets containing data about a television picture,
where a delayed packet can mean a noticeable flaw in the
picture, can be delivered before packets containing web-page
data being downloaded to a personal computer, where a slight
delay is less likely to be noticed.
Our networking portfolio includes solutions for carrier-managed
gateways that would be used in residential, small office, home
office and small-to-medium business applications. The portfolio
also includes solutions for multi-service wired and wireless
access systems found in carrier networks. Multi-service systems
can handle traffic such as data and video in addition to voice.
Our networking solutions include chips such as our network
processors, digital signal processors, content-inspection
processors, traffic shaping devices and physical layer devices
as well as software, evaluation systems and reference designs.
Our development efforts are focused on multicore processor SoCs
to deliver solutions for wireline and wireless access, media
gateway, service provider and enterprise networks.
3
Network
Processors
Network processors are typically used in switching and routing
systems to classify, prioritize and forward packets as they move
through a carriers network. We offer network processors
with the ability to handle a range of data throughputs, from 200
megabits per second up to 6 gigabits per second. Megabits and
gigabits are units of measurement for data. A megabit is equal
to approximately one million bits and a gigabit is equal to
approximately 1,000 megabits. For example, our APP2200 family
provides a lower cost solution intended for systems located
between the customers premises and the carriers
local central office, where data throughput demands are lower,
but the need to prioritize the packets is still critical for all
services to be delivered successfully. Our APP650 is a higher
throughput solution designed for use in systems that are closer
to the core of a carriers IP network, where data
throughput demands are higher.
Digital
Signal Processors
Digital signal processors, or DSPs, transform analog signals
into digitally-encoded bitstreams and perform advanced
algorithms on these bitstreams. Our DSPs perform audio, video
and speech signal processing, compression and transcoding and
can be used in applications including Voice-over-IP, or VoIP,
business and enterprise gateways, video delivery, media gateways
and wired and wireless access network equipment.
Content
Inspection Processors
We offer a family of content-inspection processors, which are
available as integrated circuits, boards and software
acceleration components designed for network equipment,
appliance and server vendors. Our
Tarari®
content inspection processors perform deep packet inspection at
wire speeds, ranging from 100 megabits per second to over 10
gigabits per second. These products offload and accelerate
applications such as anti-virus, anti-spam, intrusion
prevention/detection systems, compliance, content-based routing
and XML processing.
Network
Traffic Aggregation and Framing Solutions
In addition to the networking products described above, we offer
chips with supporting software that are designed for equipment
used in metropolitan and wide area backbone telecommunications
networks. That equipment can be used in both wired and wireless
networks.
Broadband Aggregation Devices. Broadband is a
general term that refers to high-speed data transmission. Our
broadband access integrated circuits, or mappers, support data
transport between central offices and enterprise sites by
aggregation and termination. Aggregation refers to the combining
of many low-speed, or tributary, data signals from enterprises
into higher speed, or trunk, data signals for transmission to a
central office. Termination refers to the separation of trunk
data signals into lower-speed, tributary data signals.
Our products support data transport for T-carrier data transport
in North America. T-carrier is a digital transmission service
from a common carrier. We support similar services worldwide.
These services are referred to as J-carrier in Japan and
E-carrier in
Europe. T-carrier services such as T1 and T3 lines are widely
used to create point-to-point networks for use by enterprises.
T1 and T3 lines refer to different levels of T-carrier service
that transmit data at 1.544 megabits per second and 44.736
megabits per second, respectively.
SONET/SDH Network Devices. Synchronous optical
networks, which are typically referred to as SONET, and
synchronous digital hierarchy standard networks, or SDH, carry
data, voice and video traffic through a network by combining
lines carrying traffic at slower speeds with lines carrying
traffic at higher speeds. This process is known as multiplexing,
and involves directing traffic from the individual lines into
designated time slots in the higher speed lines, and directing
those lines into still higher speed lines. The SONET/SDH
equipment that handles the directing of traffic into slower
speed and faster speed lines is the add-drop multiplexer.
Add-drop multiplexers handle the addition and removal of traffic
from a SONET/SDH communication transmission. We offer
single-chip integrated circuit solutions called framers, for
add-drop multiplexing of data and voice traffic. In addition,
our framers are used in high-speed routers within optical
networks. A router is an interface, or link, between two
networks.
4
Personal
Connectivity Solutions
We sell high speed input/output products primarily to
manufacturers of computers, peripheral equipment and
communications equipment. Input/output refers to the transfer of
data within and between computers; peripheral equipment, such as
printers, scanners and digital cameras; and data networks. Our
products support established connectivity and transmission
standards known as Gigabit Ethernet, IEEE-1394, and Universal
Serial Bus or USB.
In addition, we sell integrated circuits and associated software
for modem products, primarily to leading manufacturers of
personal computers, notebook computers, point-of-sale terminals,
facsimile machines, multi-function printers, cable and satellite
set-top boxes and other electronic equipment.
Other
Networking Products
We also sell integrated circuits that are custom developed for
our customers. These integrated circuits incorporate our
intellectual property or combine our intellectual property with
the intellectual property of our customers or other third
parties to create a customized solution for these customers. For
some customers, we design and manufacture the integrated circuit
while the key intellectual property belongs solely to our
customers.
We believe that our systems-level knowledge and integrated
circuit design methodologies allow us to turn our
customers design concepts into systems solutions quickly
and effectively. Our intellectual property gives our customers
the flexibility to customize their products to meet their
individual cost and performance objectives.
STORAGE
SYSTEMS SEGMENT
We offer a broad line of open, modular storage products
comprised of complete systems and sub-assemblies configured from
modular components, such as our storage controller modules, disk
drive enclosure modules, related management software and
advanced data protection software for creating local and remote
copies of critical data. The modularity of our products provides
our original equipment manufacturer, or OEM, customers with the
flexibility to integrate our sub-assemblies with third-party
components, such as disk drives, or software to form their own
storage system products. Our modular product approach allows OEM
customers to create highly customized storage systems that can
then be integrated with value-added software and services and
delivered as a complete, differentiated data storage solution to
enterprises.
We design and develop storage systems, sub-assemblies and
storage management software that operate within all major open
operating systems, including Windows, UNIX and UNIX variants and
Linux environments. We test and certify our products, both
independently and jointly with our customers, with those of
other hardware, networking and storage software vendors to
ensure a high level of interoperability and performance. Our
products are targeted at a wide variety of data storage
applications, including Internet-based applications such as
online transaction processing and
e-commerce,
data warehousing, video editing and post-production and
high-performance computing.
We offer entry level and mid-range storage systems. In 2008, we
introduced a new mid-range storage system platform, the Engenio
7900, which delivers enhanced performance, reliability and
scalability. We also recently introduced our LSI
StoreAgeTM
SVM suite of hardware and software products that provide virtual
storage capabilities in a heterogeneous storage environment
enabling customers to achieve better utilization of SAN assets.
In addition, we offer a wide spectrum of direct-attach redundant
array of independent disks, or RAID, solutions as part of our
MegaRAID®
product family. Our MegaRAID products include single-chip
RAID-on-motherboard
solutions, a broad family of PCI-X and PCI Express RAID
controller boards featuring SATA and SAS interfaces, and our
software-based RAID products for entry level RAID data
protection. All of these solutions utilize MegaRAIDs fully
featured RAID software and management utilities for robust
storage configuration and deployment.
5
Marketing
and Distribution
Semiconductor
Marketing and Distribution
The semiconductor industry is highly competitive and is
characterized by rapidly changing technology, short product
cycles and emerging standards. Our marketing strategy requires
that we forecast trends in the evolution of products and
technology. We must then act upon this knowledge in a timely
manner to develop competitively priced products offering
superior performance or integration. As part of this strategy,
we are actively involved in the formulation and adoption of
critical industry standards that influence the design
specifications of our products.
Our semiconductor products and design services are sold
primarily through our network of direct sales and marketing and
field engineering offices located in North America, Europe,
Japan and elsewhere in Asia. We also work with independent
component and commercial distributors and manufacturers
representatives or other channel partners in North America,
Europe, Japan and elsewhere in Asia. Some of our distributors
possess engineering capabilities, and design and purchase both
custom solutions and standard products from us for resale to
their customers. Other distributors focus solely on the sale of
standard products.
Storage
Systems Marketing and Distribution
We sell our storage systems products and MegaRAID products to
our OEM customers who sell them worldwide under their own brand
identities using their sales and distribution channels. We also
distribute our MegaRAID products through a network of resellers
and distributors, who resell the products to end users with
additional hardware, software and services, or on a standalone
basis for use with existing equipment.
The products sold by our OEM partners may be integrated by the
OEM with value-added services, hardware and software and
delivered as differentiated complete storage solutions to
enterprises. We work closely with our OEM customers and tailor
these relationships to meet the diverse needs and requirements
of end customers worldwide. We also provide our OEM partners
with training services to enhance their abilities to sell and
support our products. After receiving our training services,
most of our OEM partners independently market, sell and support
our products, requiring limited ongoing product support from us.
We assist some of our OEM partners further by providing
additional resources such as tailored, account-specific
education, training, technical support and sales and marketing
assistance, allowing these partners to leverage our storage
products and industry expertise. By selling products through our
OEM customers and leveraging their brand marketing and worldwide
sales channels, we are able to address more markets, reach a
greater number of enterprises, and achieve better leverage of
our sales and marketing expenditures.
Our marketing efforts support our OEM customers, as well as
distributors and reseller channels, with programs targeted at
developing differentiated go-to-market strategies and increasing
sales effectiveness. Depending on the nature of our channel
customer engagement, our marketing teams offer various levels of
assistance in assessing and analyzing the competitive landscape,
defining product strategy and roadmaps, developing product
positioning and pricing, creating product launch support
materials and assisting in closing the sales process. These
marketing teams carefully coordinate joint product development
and marketing efforts between our customers and us to ensure
that we address and effectively target enterprise requirements.
We maintain sales and marketing organizations in the United
States and internationally in China, France, Germany, Italy,
Japan, Singapore, Sweden and the United Kingdom.
Customers
In 2008, Seagate Technology accounted for approximately 17% and
International Business Machines Corporation accounted for
approximately 16% of our total revenues. No other customer
accounted for more than 10% of our total revenues in 2008. We
currently have a highly concentrated customer base as a result
of our strategy to focus our marketing and sales efforts on
select, large-volume customers. Our top 10 end customers in
2008, based on revenue, accounted for approximately 60.7% of our
revenue. The loss of any of our significant customers, any
substantial decline in sales to these customers, or any
significant change in the timing or volume of purchases by our
customers could result in lower revenues and could harm our
business, financial condition or results of operations.
6
Manufacturing
Semiconductor
Manufacturing
The semiconductor manufacturing process begins with wafer
fabrication, where a design is transferred to silicon wafers
through a series of processes, including photolithography, ion
implantation, deposition of numerous films and the etching of
these various films and layers. Each circuit on the wafer is
tested in the wafer sort operation. The good circuits are
identified and the wafer is then separated into individual die.
Each good die is then assembled into a package that encapsulates
the integrated circuit for protection and allows for electrical
connection to a printed circuit board. The final step in the
manufacturing process is final test, where the finished devices
undergo stringent and comprehensive testing.
Wafer fabrication is very complex and costly, and the industry
trend has been towards outsourcing all or a portion of this
operation to silicon foundries located throughout the world. Our
wafer fabrication is performed by third-party foundries,
including Taiwan Semiconductor Manufacturing Corporation, our
primary foundry partner, and other foundries such as IBM and
Silicon Manufacturing Partners, a joint venture owned by
Chartered Semiconductor and LSI.
We also use third-party suppliers, including STATS ChipPAC and
Amkor Technology, to perform final assembly and test operations
for us.
We believe that using third-party manufacturing services allows
us to focus on product development and increases our operational
flexibility, by improving our ability to adjust manufacturing
capacity in response to customer demand and to introduce new
products rapidly. It also reduces our capital requirements as we
do not need to spend large amounts to build and upgrade
manufacturing facilities, particularly in the area of wafer
fabrication, where facilities must be upgraded periodically and
each upgrade tends to cost significantly more than the preceding
upgrade.
Storage
Systems Manufacturing
We use third-party suppliers for standard components, such as
disk drives and standard computer processors, which are designed
and incorporated into our products. Additionally, we outsource
the manufacturing of our product components, such as printed
circuit boards, chassis assemblies and enclosures, in order to
take advantage of scale, quality and cost benefits afforded by
using third-party manufacturing services. We also use
third-party suppliers to assemble and test our storage systems
products. In 2008, we discontinued assembly and test operations
for storage systems and sub-assemblies at our manufacturing
facility in Wichita, Kansas, and transitioned the work performed
there to third-party suppliers.
The assembly of our storage system products involves integrating
components and manufactured sub-assemblies into final products,
which are configured and rigorously tested before being
delivered to our customers. The highly modularized nature of our
storage system products allows for flexible assembly and
delivery models, which include build-to-order,
configure-to-order, direct shipment, bulk shipment and local
fulfillment services. We have implemented these models in an
effort to reduce requisite lead times for delivery of our
products and to enable channel customers to select from among
multiple manufacturing and delivery alternatives, the methods
that best complement their operations.
Our host bus adapter board products incorporate a variety of
standard industry components and LSI designed components,
mounted on printed circuit board assemblies. The manufacturing,
assembly and test operations of LSIs host bus adapter
boards are all fully outsourced to third-party suppliers to take
advantage of the scale, quality and cost benefits that such
manufacturing models provide. The host bus adapter boards are
produced in configurations ranging from bulk packaging of high
volume units sold to the major server and workstation OEMs, to
low volume products for indirect channels featuring retail
packaging with software media, documentation and interconnect
cables. LSIs host bus adapter boards are shipped from our
third-party suppliers to our worldwide inventory hubs, directly
to OEM factories, or to distributors who supply them to a
variety of indirect channels in the market.
7
Backlog
Semiconductor
Backlog
In the Semiconductor segment, we generally do not have long-term
volume purchase contracts with our customers. Instead, customers
place purchase orders that are subject to acceptance by us. The
timing of the design activities for which we receive payment and
the placement of orders included in our backlog at any
particular time is generally within the control of the customer.
For example, there could be a significant time lag between the
commencement of design work and the receipt of a purchase order
for the units of a developed product. Also, customers may from
time to time revise delivery quantities or delivery schedules to
reflect their changing needs. For these reasons, we do not
believe that our backlog as of any particular date is a
meaningful indicator of future annual sales.
Storage
Systems Backlog
Due to the nature of our business, we generally have relatively
low levels of backlog in the Storage Systems segment and our
quarterly revenues depend largely on orders booked and shipped
within the same quarter. Consequently, we believe that backlog
is not a good indicator of future sales. Because lead times for
delivery of our products are relatively short, we must build
products in advance of orders. This subjects us to certain
risks, most notably the possibility that expected sales will not
materialize, leading to excess inventory, which we may be unable
to sell to our customers.
Competition
Semiconductor
Competitors
The semiconductor industry is intensely competitive and
characterized by constant technological change, rapid product
obsolescence, evolving industry standards and price erosion.
Many of our competitors are larger, diversified companies with
substantially greater financial resources. Some of our
competitors are also customers who have internal semiconductor
design and manufacturing capacity. We also compete with smaller
and emerging companies whose strategy is to sell products into
specialized markets or to provide only a portion of the products
and services that we offer.
Our competitors in the Semiconductor segment include Adaptec,
Inc., Broadcom Corporation, Freescale, Inc., International
Business Machines Corporation, Marvell Technology Group, Ltd.,
NEC Corporation, NetLogic Microsystems, Inc., NXP
Semiconductors, PMC-Sierra, Inc., STMicroelectronics N.V. and
Texas Instruments, Inc.
The principal competitive factors in the semiconductor industry
include:
|
|
|
|
|
design capabilities;
|
|
|
|
differentiating product features;
|
|
|
|
product performance characteristics;
|
|
|
|
time to market;
|
|
|
|
price;
|
|
|
|
breadth of product line;
|
|
|
|
customer support;
|
|
|
|
logistics and planning systems; and
|
|
|
|
utilization of emerging industry standards.
|
While we believe we are competitive on the basis of all the
factors listed above, we believe some of our competitors compete
more favorably on the basis of price and on delivering products
to market more quickly. However, we feel we are particularly
strong in offering integrated solutions, broad product lines,
customer support and logistics and planning systems. In
addition, existing suppliers tend to have an advantage when
competing for
8
designs, which can make it difficult for us to win designs at
new customers, even if we compete favorably on the factors
identified above.
The markets into which we sell our semiconductor products are
subject to severe price competition. We expect to continue to
experience declines in the selling prices of our semiconductor
products over the life cycle of each product. In order to offset
or partially offset declines in the selling prices of our
products, we continually strive to reduce the costs of products
through product design changes, manufacturing process changes,
yield improvements and procurement of wafers from outsourced
manufacturing partners.
Storage
Systems Competitors
The market for our storage system products is highly
competitive, rapidly evolving and subject to changing
technology, customer needs and new product introductions. We
compete with products from storage system and component
providers such as Adaptec, Inc., AMCC-3ware, Dot Hill Systems
Corporation, Infortrend Technology Inc., XIOtech Corporation,
and Xyratex Group Limited. We also compete with the internal
storage divisions of existing and potential OEM customers, with
large well-capitalized storage system companies such as EMC
Corporation, Hitachi Data Systems and Network Appliance, Inc.
and with newer competitors such as 3Par Inc., Compellent
Technologies Inc. and ISILON Systems Inc.
The principal competitive factors for storage system products
include:
|
|
|
|
|
features and functionality;
|
|
|
|
product performance and price;
|
|
|
|
reliability, scalability and data availability;
|
|
|
|
interoperability with other server, storage networking and
storage system platforms;
|
|
|
|
interoperability with industry applications, including database,
email and internet content delivery systems;
|
|
|
|
support for emerging industry and customer standards;
|
|
|
|
levels of training, marketing and customer support;
|
|
|
|
level of easily customizable features;
|
|
|
|
quality and availability of supporting software;
|
|
|
|
quality of system integration; and
|
|
|
|
technical services and support.
|
Our ability to remain competitive will depend largely upon our
ongoing performance in the areas of product development and
customer support. To be successful in the future, we believe
that we must respond promptly and effectively to the challenges
of technological change and our competitors innovations by
continually innovating and enhancing our product offerings. We
must also continue to aggressively recruit and retain employees
highly qualified and technically experienced in hardware and
software development in order to achieve and maintain industry
leadership in product development and support.
Patents,
Trademarks and Licenses
We own or have rights to a number of patents, trademarks,
copyrights, trade secrets and other intellectual property
directly related to and important to our business. As of
December 31, 2008, we had approximately 11,000
U.S. patents and patent applications and a number of
related foreign patents and patent applications. These patents
include patents related to the following technologies:
|
|
|
|
|
Integrated circuit and optoelectronic manufacturing processes;
|
|
|
|
A number of technologies related to storage systems;
|
9
|
|
|
|
|
Consumer electronics products such as digital cameras, digital
audio players, DVD players, digital televisions and personal
computers;
|
|
|
|
Modems, digital signal processors, wireless communications,
network processors and communication protocols; and
|
|
|
|
Optoelectronic products including lasers, optical modulators,
optical receivers and optical amplifiers.
|
We have patents of all ages ranging from pending applications,
which, if awarded, will have a duration of 20 years from
their filing dates, through patents soon to expire.
We indemnify our customers for some of the costs and damages of
patent infringement in circumstances where our product is the
primary factor creating the customers infringement
exposure. We generally exclude coverage where infringement
arises out of the combination of our products with products of
others.
We protect our products and processes by asserting our
intellectual property rights where appropriate and prudent. We
also obtain licenses to patents, copyrights and other
intellectual property rights used in connection with our
business when practicable and appropriate.
Companies in the technology industry are often subject to claims
of intellectual property infringement. You can find information
about the impact of these types of claims in
Item 1A Risk Factors. You can also
find information about several legal proceedings against us that
involve intellectual property claims in Note 15 to our
financial statements in Item 8.
Research
and Development
Our industry experiences rapid change and we must continually
develop new products to remain competitive. Our research and
development expenditures were $673 million,
$655 million and $413 million for fiscal 2008, 2007
and 2006, respectively. Our research and development
expenditures increased significantly in 2007 as a result of the
Agere Systems acquisition. We anticipate that we will continue
to make significant research and development expenditures to
maintain our competitive position with a continuing flow of
innovative products and technology.
Working
Capital
Information about our working capital practices is included in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operation
under the heading Financial Condition, Capital Resources
and Liquidity and is incorporated herein by reference.
Environmental
Regulation
Federal, state and local regulations, in addition to those of
other nations, impose various environmental controls on certain
chemicals and restricted substances used in semiconductor and
storage products and their processing. Our facilities have been
designed to comply with these regulations through the
implementation of environmental, health and safety management
systems. We offer products that comply with the requirements of
the European Union Restriction of Hazardous Substances Directive
2002/95/EC (RoHS Directive) that was implemented on July 1,
2006 and other international environmental regulations impacting
electronic equipment and components. While to date we have not
experienced any material adverse impact on our business from
environmental regulations, such regulations might be adopted or
amended so as to impose expensive obligations on us in the
future. In addition, violations of environmental regulations
including impermissible discharges or use of restricted
substances could result in:
|
|
|
|
|
the need for additional capital improvements to comply with such
regulations or to restrict discharges or use of restricted
substances;
|
|
|
|
liability to our employees
and/or third
parties; and/or
|
|
|
|
business interruptions as a consequence of permit suspensions or
revocations, the granting of injunctions requested by
governmental agencies or private parties, or the unintentional
presence of restricted substances in our products.
|
10
Employees
As of December 31, 2008, we had 5,488 full-time
employees.
Our future success depends upon the continued service of our key
technical and management personnel and upon our ability to
continue to attract and retain qualified employees, particularly
those highly skilled design, process and test engineers involved
in the development of new products and processes. We currently
have favorable employee relations, but the competition for
technical personnel is intense, and the loss of key employees or
the inability to hire such employees when needed could have a
material adverse impact on our business and financial condition.
Seasonality
Our business is largely focused on the information technology
industry. Due to seasonality in this industry, we typically
expect to see stronger revenues in the second half of the year.
Set forth below are risks and uncertainties that, if they were
to occur, could materially adversely affect our business or
could cause our actual results to differ materially from the
results contemplated by the forward-looking statements in this
report and other public statements we make.
We
depend on a small number of customers. The loss of, or a
significant reduction in revenue from, any of these customers
would harm our results of operations.
A limited number of customers accounts for a substantial portion
of our revenues. In 2008, Seagate and IBM, our two largest
customers, represented approximately 17% and 16%, respectively,
of our total revenues, and our 10 largest customers accounted
for approximately 60.7% of our revenue. If any of our key
customers reduced significantly or canceled its orders, our
business and operating results could be significantly harmed.
Because many of our semiconductor products are designed for
specific customers and have long product design and development
cycles, it may be difficult for us to replace key customers that
reduce or cancel their existing orders for these products.
In addition, if we fail to win new product designs from our
major customers, our business and results of operations may be
harmed. Further, if our major customers make significant changes
in scheduled deliveries, or decide to pursue the internal
development of the products we sell to them, our business and
results of operations may be harmed.
If we
fail to keep pace with technological advances, or if we pursue
technologies that do not become commercially accepted, customers
may not buy our products and our results of operations may be
harmed.
Many of the industry segments in which we operate are
characterized by rapid technological change, changes in customer
requirements, frequent new product introductions and
enhancements, short product cycles and evolving industry
standards. We believe that our future success will depend, in
part, on our ability to improve on existing technologies and to
develop and implement new ones, as well as on our ability to
adopt and implement emerging industry standards in a timely
manner and to adapt products and processes to technological
changes. If we fail to develop new and enhanced products and
technologies, if we focus on technologies that do not become
widely adopted, or if new technologies that we do not offer and
that compete with our technologies become widely accepted,
demand for our current and planned products may be reduced.
In addition, the emergence of markets for integrated circuits
may be affected by factors beyond our control. For example, we
design some products to conform to current specific industry
standards. If a competitor offers a product based on a standard
before we are able to do so, our customers may buy our
competitors product rather than our product. Our customers
may not adopt or continue to follow these standards, which would
make our products less desirable to customers, and could
negatively affect sales. Also, competing standards may emerge
that are preferred by our customers, which could reduce sales
and require us to make significant expenditures to develop new
11
products. To the extent that we are not able to adapt
effectively and expeditiously to new standards, our business may
be harmed.
We
operate in intensely competitive markets, and our failure to
compete effectively would harm our results of
operations.
We derive significant revenue from the sale of integrated
circuits as well as storage systems. These industries are
intensely competitive, and competition may increase as existing
competitors enhance their product offerings and as new
participants enter the market. Our competitors include large
domestic and foreign companies that have substantially greater
financial, technical and management resources than us. Several
major diversified electronics companies offer products that
compete with our products. Other competitors are specialized,
rapidly growing companies that sell products into the same
markets that we target. Some of our customers may also design
and manufacture products internally that compete with our
products. We can not provide any assurances that the price and
performance of our products will be superior relative to the
products of our competitors or will be sufficient to obtain
business.
Increased competition may harm our revenues and margins. For
example, competitors with greater financial resources may be
able to offer lower prices than us, or they may offer additional
products, services or other incentives that we may not be able
to match. Competitors may be better able than us to respond
quickly to new technologies and may undertake more extensive
marketing campaigns than we do. They may also make strategic
acquisitions or establish cooperative relationships among
themselves or with third parties to increase their market share.
In addition, competitors may sell commercial quantities of
products before we do, establishing a market position that we
may not be able to overcome once we introduce similar products
in commercial quantities. If we are unable to develop and market
competitive products on a timely basis, we will likely fail to
maintain or expand our market share and our revenues will likely
decline.
Customer
orders and ordering patterns can change quickly, making it
difficult for us to predict our revenues and making it possible
that our actual revenues may vary materially from our
expectations, which could harm our results of operations and
stock price.
We sell a significant amount of product pursuant to purchase
orders that customers may cancel or defer on short notice
without incurring a significant penalty. In addition, the period
of time between order and product shipment can be very short. If
customers reduce the rate at which they place new orders,
whether because of changing market conditions for their products
or other reasons, or if they cancel or defer previously placed
orders, the impact on our revenue can occur quickly and could
cause us to experience revenues that are lower than we may have
indicated in any forecast of our future revenue that we may have
made publicly. For example, as economic conditions deteriorated
in the fourth quarter of 2008, our sales declined below the
expectations we had publicly announced earlier that quarter
because our customers orders declined to a level below
that which we had anticipated. Reductions in new order rates as
well as cancellations or deferrals of existing orders could also
cause us to hold excess inventory, which could adversely affect
our results of operations.
A
prolonged economic downturn could have a material negative
impact on our results of operations and financial
condition.
In late 2008, the media reported significant declines in
economic activity and reduced availability of credit in the
United States and other countries around the world. Prices of
equity securities generally also experienced declines. If these
declines persist or get worse, they could negatively affect our
business in several ways, in addition to resulting in lower
demand for our products and causing potential disruptions at
customers or suppliers that might encounter financial
difficulties.
We have defined benefit pension plans under which we are
obligated to make future payments to participants. We have set
aside funds to meet our anticipated obligations under these
plans. These funds are invested in equity and fixed income
securities. Since mid-2008, market prices of these types of
securities declined significantly. At December 31, 2008,
our projected benefit obligations under our pension plans
exceeded the value of the assets of those plans by approximately
$450 million. U.S. law provides that we must make
contributions to the pension plans
12
in 2009 of at least $20 million. We may be required to make
additional contributions to the plans in later years if the
value of the plan assets does not increase, or continues to
decrease, and these amounts could be significantly larger than
the required contributions in 2009. We may also choose to make
additional, voluntary contributions to the plans.
At December 31, 2008, we had contractual purchase
commitments with suppliers, primarily for raw materials and
manufacturing services and for some non-production items, of
approximately $511 million. If our actual revenues in the
future are lower than our current expectations, we may not meet
all of our buying commitments. As a result, it is possible that
we will have to make penalty-type payments under these
contracts, even though we are not obtaining any products that we
can sell.
During the year ended December 31, 2008, we recognized
goodwill and intangible asset impairment charges of
$541.6 million. If economic conditions worsen and our
revenues decline below our recent forecasts, we may recognize
additional impairment of our assets.
While we believe we currently have sufficient cash and short
term investments to fund our operations for the near term, we
may find it desirable to obtain additional debt or equity
financing or seek to refinance our existing convertible notes in
the event of a prolonged or worsening downturn. We believe that
financing is currently difficult or impossible for many
companies to obtain on acceptable terms or at all. Accordingly,
financing may not be available to us at all or on acceptable
terms if we determine that it would be desirable to obtain
additional financing.
We
depend on outside suppliers to manufacture, assemble, package
and test our products; accordingly, any failure to secure and
maintain sufficient manufacturing capacity or to maintain the
quality of our products could harm our business and results of
operations.
We depend on third-party foundries to manufacture integrated
circuits for us and on outside suppliers to assemble and test
our semiconductor products and to assemble our storage systems
products. As such, we face the following risks:
|
|
|
|
|
a supplier may be unwilling to devote adequate capacity to the
production of our products or may be unable to produce our
products;
|
|
|
|
a supplier may fail to develop, or may discontinue,
manufacturing methods appropriate for our products;
|
|
|
|
manufacturing costs may be higher than planned;
|
|
|
|
product reliability may decline;
|
|
|
|
a manufacturer may not be able to maintain continuing
relationships with suppliers; and
|
|
|
|
we may have reduced control over delivery schedules, quality,
manufacturing yields and costs of products.
|
The ability of an independent foundry to provide us with
integrated circuits is limited by its available capacity and
existing obligations. We generally do not enter into contracts
to reserve foundry capacity. Availability of foundry capacity
has in the past been reduced from time to time due to strong
demand and may not be available when needed at reasonable
prices. If foundry capacity is limited, it is possible that one
of our foundries may allocate capacity to the production of
other companies products. This reallocation could impair
our ability to obtain sufficient wafers. We may also use a
second foundry for a particular product when capacity at the
main foundry is limited, but the cost of integrated circuits at
the second foundry may be higher, which would reduce our margins.
By relying on outside suppliers to manufacture, assemble and
test our products, we may have a reduced ability to control
directly product delivery schedules and quality assurance. This
lack of control may result in product shortages or quality
assurance problems that could delay shipments of products or
increase manufacturing, assembly, testing or other costs. In
addition, if these outside suppliers are unable to obtain
sufficient raw materials in a timely manner, we may experience
product shortages or delays in product shipments, which could
harm our customer relationships and results of operations.
If any of our manufacturing suppliers experiences capacity
constraints, encounters financial difficulties, or experiences
any other major disruption of its operations, we may need to
qualify an alternate supplier, which may
13
take several months and could result in delays in product
shipments. These delays could cause our customers to seek
alternate suppliers, which could adversely impact our business.
As a result of all of these factors and risks, and although we
carefully monitor and plan for capacity and other issues, we can
not provide any assurances that we can obtain products from our
suppliers on a timely basis or at reasonable prices.
Failure
to qualify our semiconductor products or our suppliers
manufacturing lines with key customers could harm our business
and results of operations.
Some customers will not purchase any products, other than
limited numbers of evaluation units, until they qualify the
products or the manufacturing line for the product. We may not
always be able to satisfy the qualification requirements of
these customers. Delays in qualification may cause a customer to
discontinue use of non-qualified products and result in a
significant loss of revenue.
Any
defects in our products could harm our reputation, customer
relationships and results of operations.
Our products may contain undetected defects, errors or failures,
which may not become apparent until the products are deployed in
commercial applications and other equipment. Consequently,
customers may discover errors after the products have been
deployed. The occurrence of any defects, errors or failures
could result in:
|
|
|
|
|
cancellation of orders;
|
|
|
|
product returns, repairs or replacements;
|
|
|
|
diversion of our resources;
|
|
|
|
legal actions by customers or customers end users;
|
|
|
|
increased insurance costs; and
|
|
|
|
other losses to us or to customers or end users.
|
Any of these occurrences could also result in the loss of or
delay in market acceptance of products and loss of sales, which
could negatively affect our business and results of operations.
As our products become even more complex in the future, this
risk may intensify over time and may result in increased
expenses.
As
part of our integration efforts with Agere, we intend to
transition Ageres operation to our enterprise resource
planning system. Any issues that may arise with this transition
could interfere with our business and harm our operating results
or our ability to produce accurate and timely financial
statements.
Ageres business utilizes a different enterprise resource
planning system, or ERP, system than the system we have used
historically. To streamline operations, we are in the process of
converting Ageres business to our ERP system. Converting
Ageres business processes, data and applications is a
complex and time-consuming task. During this transition period,
we are exposed to the possibility that we may not combine
information correctly from the two systems, impacting our
financial statements or our planning processes, and to the
additional cost of maintaining two ERP systems.
Although we are planning the conversion carefully and expect to
perform extensive testing before the actual conversion, it is
possible that we may not convert all information or processes
correctly or that some other problem could arise. Any problems
that arise could impair our ability to process customer orders,
ship products, provide services and support to our customers,
bill and track orders, fulfill contractual obligations, file
reports with the Securities and Exchange Commission in a timely
manner and otherwise run our business. Even if we do not
encounter these adverse effects, the transition to a single ERP
system may be much more costly than we anticipated, which would
adversely affect our future operating results.
14
We may
be subject to intellectual property infringement claims and
litigation, which could cause us to incur significant expenses
or prevent us from selling our products.
As is typical in the semiconductor industry, we are frequently
involved in disputes regarding patent and other intellectual
property rights. We have in the past received, and we may in the
future receive, communications from third parties asserting that
our products, processes or technologies infringe on the patent
or other intellectual property rights of third parties, and we
may also receive claims of potential infringement if we attempt
to license intellectual property to others. Intellectual
property litigation, regardless of the outcome, may be costly
and time consuming, and may divert the attention of management
and key personnel from other business issues. Claims of
intellectual property infringement also might require us to
enter into costly royalty or license agreements. We may not be
able to obtain royalty or license agreements on acceptable
terms. If any of our products or intellectual property infringes
on valid rights held by others, our results of operations or
financial position may suffer and we may have to make material
changes in production processes or products.
In April 2008, we filed an action with the International Trade
Commission seeking the exclusion from the United States of
products produced by 23 companies. Subsequently, a number
of these companies have filed lawsuits or actions in the
International Trade Commission claiming that our products
infringe on their intellectual property rights and seeking
either damages or an order excluding some of our products from
sale in the United States. While we do not believe any of these
actions to be material, we cannot give you any assurance that we
will not be required to pay a material amount or that we will
not have our products excluded from sale in the United States.
If we
are unable to protect or assert our intellectual property
rights, our business and results of operations may be
harmed.
Our future success will depend, in part, upon our ability to
protect and assert our intellectual property rights. We rely
primarily on patent and other intellectual property laws, as
well as nondisclosure agreements and other methods, to protect
our proprietary technologies and processes. It is possible that
competitors or other unauthorized third parties may obtain,
copy, use or disclose proprietary technologies and processes,
despite our efforts to protect them.
While we hold a significant number of patents, we can give you
no assurance that any additional patents will be issued. Even if
new patents are issued, the claims allowed may not be
sufficiently broad to protect our technology. In addition, any
of our existing patents, and any future patents issued to us,
may be challenged, invalidated or circumvented, or changes in
law may result in us having less protection than we may have
experienced historically. 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,
competitors may be able to offer products similar to our
products more easily. 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.
A
decline in the revenue that we derive from the licensing of
intellectual property could have a significant impact on our net
income.
The revenue we generate from the licensing of our intellectual
property typically has a higher gross margin compared to the
revenue we generate from the sale of other products. Although we
derive a relatively small percentage of our total revenue from
the licensing of intellectual property, a decline in this
licensing revenue would likely have a greater impact on our
profitability than a similar decline in revenues from the sale
of our other products. Our licensing revenue tends to come from
a limited number of transactions and the failure to complete one
or more transactions in a quarter could have a material adverse
impact on our profitability.
15
We are
exposed to legal, business, political and economic risks
associated with our international operations.
We derive, and we expect to continue to derive, a substantial
portion of our revenue from sales of products shipped to
locations outside of the United States. In 2008, approximately
72.5% of our total revenue was derived from sales outside the
United States. In addition, we perform a significant amount of
our development work outside the United States and most of our
products are manufactured outside of the United States.
Operations outside of the United States are subject to a number
of risks and potential costs that could harm our business and
results of operations, including:
|
|
|
|
|
political, social and economic instability;
|
|
|
|
fluctuations in foreign currency exchange rates;
|
|
|
|
exposure to different legal standards, particularly with respect
to intellectual property;
|
|
|
|
natural disasters, civil unrest, terrorism and public health
emergencies;
|
|
|
|
nationalization of businesses and blocking of cash flows;
|
|
|
|
trade and travel restrictions;
|
|
|
|
imposition of governmental controls and restrictions;
|
|
|
|
burdens of complying with a variety of foreign laws;
|
|
|
|
import and export license requirements and restrictions;
|
|
|
|
unexpected changes in regulatory requirements;
|
|
|
|
foreign technical standards;
|
|
|
|
difficulties in staffing and managing international operations;
|
|
|
|
international trade disputes;
|
|
|
|
difficulties in collecting receivables from foreign entities or
delayed revenue recognition; and
|
|
|
|
potentially adverse tax consequences.
|
We use
indirect channels of product distribution over which we have
limited control.
Although we have in the past sold our storage systems products
directly to end customers, we have discontinued this practice
and now sell only to other companies that may or may not add
features or functionality to our products before reselling them
to end customers. We also sell some of our semiconductor
products through distributors. A deterioration in our
relationships with our distributors or resellers, or a decline
in their business, could harm our sales. In addition, we may
increase our reliance on indirect channels of distribution in
the future. We may not successfully maintain or expand these
indirect channels of distribution, and our failure to do so
could result in the loss of sales opportunities. Furthermore,
our reliance on indirect channels of distribution may reduce
visibility with respect to future business opportunities,
thereby making it more difficult to forecast orders.
We may
engage in acquisitions and strategic alliances, which may not be
successful and could harm our business and operating
results.
We expect to continue to explore strategic acquisitions that
build upon or expand our library of intellectual property, human
capital and engineering talent, and increase our ability to
address the needs of our customers. For example, in 2007, in
addition to our merger with Agere, we acquired SiliconStor, a
privately held company that provided silicon solutions for
enterprise storage networks, and Tarari, a privately-held maker
of silicon and software that provided content and application
awareness in packet and message processing. Mergers and
acquisitions of high-technology companies have inherent risks.
No assurance can be given that our previous acquisitions or
future acquisitions will be successful and will not harm our
business or operating results. In addition, we may make
16
investments in companies, products and technologies through
strategic alliances and otherwise. If these investments are not
successful, our results of operations may suffer.
The
semiconductor industry is highly cyclical, which may cause our
operating results to fluctuate.
We operate in the highly cyclical semiconductor industry. This
industry is characterized by wide fluctuations in product supply
and demand. In the past, the semiconductor industry has
experienced significant downturns, often in connection with, or
in anticipation of, excess manufacturing capacity worldwide,
maturing product cycles and declines in general economic
conditions. Even if demand for our products remains constant, a
lower level of available foundry capacity could increase our
costs, which would likely have an adverse impact on our results
of operations.
Our
failure to attract, retain and motivate key employees could harm
our business.
In some of our fields of operation, there are only a limited
number of people in the job market who possess the requisite
skills. In the past, we have experienced difficulty in
identifying and hiring sufficient numbers of qualified engineers
in parts of our business as well as in retaining qualified
employees. The loss of the services of any key personnel or our
inability to hire new personnel with the requisite skills could
restrict our ability to develop new products or enhance existing
products in a timely manner, to sell products to our customers
or to manage our business effectively. In light of recent
economic conditions, we have implemented several cost-saving
measures which directly affect employee compensation. These
measures, or others that we may take in the future, may
negatively impact our ability to recruit and retain qualified
personnel.
Our
operations and our suppliers operations are subject to
natural disasters and other events outside of our control that
may disrupt our business and harm our operating
results.
Our operations and those of our suppliers are subject to natural
disasters and other events outside of our control that may
disrupt our business and harm our operating results. For
example, a widespread outbreak of an illness such as avian
influenza, or bird flu, or severe acute respiratory syndrome, or
SARS, could harm our operations and those of our suppliers as
well as decrease demand from customers. We have operations in
Singapore, Thailand and China, countries where outbreaks of bird
flu and/or
SARS have occurred. Also, we have substantial operations in
parts of California that have experienced major earthquakes and
in parts of Asia that have experienced both typhoons and
earthquakes. If our operations or those of our suppliers are
curtailed because of health issues or natural disasters, our
business may be disrupted and we may need to seek alternate
sources of supply for manufacturing or other services. Alternate
sources may not be available, may be more expensive or may
result in delays in shipments to customers, which would affect
our results of operations. In addition, a curtailment of design
operations could result in delays in the development of new
products. If our customers businesses are affected by
health issues or natural disasters, they might delay or reduce
purchases, which could harm our business and results of
operations.
We are
subject to various environmental laws and regulations that could
impose substantial costs on us and may harm our
business.
Our business is subject to various environmental laws and
regulations. For example, some countries have begun to require
companies selling a broad range of electrical equipment to
conform to legislation such as the Waste Electrical and
Electronic Equipment (WEEE) Directive, the Restriction of the
use of certain Hazardous Substances in Electrical &
Electronic Equipment (RoHS) Directive, and Registration,
Evaluation, Authorization and Restriction of Chemicals (REACH)
Regulation in the European Union. Environmental legislation such
as these could require us to redesign our products in order to
comply with the standards and require the development of
compliance administration systems. Redesigned products could be
more costly to manufacture or require more costly or less
efficient raw materials, making our products more costly or less
desirable. In addition, under certain environmental laws, we
could be held responsible, without regard to fault, for costs
relating to any contamination at our past facilities and at
third party waste disposal sites. We could also be held liable
for consequences arising out of human exposure to such
substances or other environmental damage. If we cannot develop
compliant products on a timely basis or properly administer our
compliance programs, our revenues may also decline due to lower
sales, which may harm our business.
17
Our
blank check preferred stock and Delaware law contain provisions
that may inhibit potential acquisition bids, which may harm our
stock price, discourage merger offers or prevent changes in our
management.
Our board has the authority to issue preferred stock and to
determine the rights, preferences, privileges and restrictions,
including voting rights, of the shares without any further vote
or action by our stockholders. If we issue any of these shares
of preferred stock in the future, the rights of holders of our
common stock may be negatively affected. Although we have no
current plans to issue shares of preferred stock, if we issue
preferred stock, a change of control of our company could be
delayed, deferred or prevented. Furthermore, Section 203 of
the Delaware General Corporation Law restricts certain business
combinations with any interested stockholder as
defined by that statute. These provisions are designed to
encourage potential acquirers to negotiate with our board of
directors and give our board an opportunity to consider various
alternatives to increase stockholder value. These provisions are
also intended to discourage certain tactics that may be used in
proxy contests. However, the potential issuance of preferred
stock or the restrictions in Section 203 of the Delaware
General Corporation Law could discourage potential acquisition
proposals and could delay or prevent a change in control, which
may adversely affect the market price of our stock. These
provisions may also have the effect of preventing changes in our
management or board of directors.
Class
action litigation due to stock price volatility or other factors
could cause us to incur substantial costs and divert our
managements attention and resources.
In the past, securities class action litigation often has been
brought against a company following periods of volatility in the
market price of its securities. Companies in the technology
industry are particularly vulnerable to this kind of litigation
due to the high volatility of their stock prices. Our stock has
experienced substantial price volatility in the past. This may
be a result of quarterly variations in our results of
operations, the published expectations of security analysts and
announcements by us and our competitors as well as general
economic conditions and our stock price may continue to
experience substantial volatility. Accordingly, we may in the
future be the target of securities litigation. Any securities
litigation could result in substantial costs and could divert
the attention and resources of our management.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
We lease office space in two buildings in Milpitas, California
for our corporate headquarters, administration and engineering
offices. We also own a 600,000 square foot office complex
in Allentown, Pennsylvania that we use for administration and
engineering offices. We have leased out approximately
69,000 square feet of space in that facility in connection
with the sale of our mobility business.
In our Storage Systems business, we own approximately
330,000 square feet of space in Wichita, Kansas which
includes engineering, administrative offices and systems
training.
We also own approximately 170,000 square feet of sales and
engineering office space in Fort Collins, Colorado and
approximately 180,000 square feet of sales and engineering
office space in Colorado Springs, Colorado. These facilities are
used by both our Semiconductor segment and our Storage Systems
segment.
We own or lease additional space in the United States and in
various other countries, and use that space for sales,
marketing, engineering, general corporate and test purposes.
We believe that our existing facilities and equipment are well
maintained, in good operating condition, suitable for our
operations and are adequate to meet our current requirements.
18
|
|
Item 3.
|
Legal
Proceedings
|
This information is included in Note 15 (Commitments,
Contingencies and Legal Matters) to our financial
statements in Item 8 and is incorporated herein by
reference.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
During the fourth quarter of 2008, no matter was submitted to a
vote of our security holders.
Executive
Officers of LSI
Set forth below is information about our executive officers.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Abhijit Y. Talwalkar
|
|
|
44
|
|
|
President and Chief Executive Officer
|
Philip W. Bullinger
|
|
|
44
|
|
|
Executive Vice President and General Manager, Engenio
Storage Group
|
Jon R. Gibson
|
|
|
62
|
|
|
Vice President, Human Resources
|
Bryon Look
|
|
|
55
|
|
|
Executive Vice President, Chief Financial Officer and Chief
Administrative Officer
|
Andrew Micallef
|
|
|
44
|
|
|
Executive Vice President, Worldwide Manufacturing Operations
|
Jean F. Rankin
|
|
|
50
|
|
|
Executive Vice President, General Counsel and Secretary
|
D. Jeffrey Richardson
|
|
|
44
|
|
|
Executive Vice President and General Manager, Semiconductor
Solutions Group
|
Flavio Santoni
|
|
|
50
|
|
|
Executive Vice President and General Manager, Engenio
Storage Group
|
Mr. Talwalkar has been our President and Chief Executive
Officer and a member of our Board of Directors since May 2005.
Prior to joining LSI, Mr. Talwalkar was employed by Intel
Corporation, a microprocessor manufacturer. At Intel, he was
Corporate Vice President and Co-general Manager of the Digital
Enterprise Group from January 2005 until May 2005, Vice
President and General Manager of Intels Enterprise
Platform Group from May 2004 to January 2005, and Vice President
and General Manager of Intels Platform Products Group,
within Intels Enterprise Platform Group, from April 2002
through May 2004. Mr. Talwalkar also served as Vice
President and Assistant General Manager of Intels
Enterprise Platform Group from June 2001 to March 2002.
Mr. Bullinger has led our Storage Systems business since
August 2005, a role he has shared with Mr. Santoni since
June 2008. From September 2001 through August 2005, he served as
Vice President and General Manager of our RAID Storage Adapters
division. He joined LSI in 1998, following LSIs
acquisition of Symbios, Inc., a storage company, and served as
Director of Product Development until August 2001.
Mr. Gibson has been the leader of our Human Resources
organization since November 2001. Between 1984 and 2001, he held
a number of managerial positions in our Human Resources
organization.
Mr. Look has been Executive Vice President, Chief Financial
Officer and Chief Administrative Officer since January 2009.
From November 2000 through January 2009, he served as Executive
Vice President and Chief Financial Officer. Between March 1997
and November 2000, he was our Vice President, Corporate
Development and Strategic Planning. Prior to joining LSI, he was
manager of business development in Hewlett-Packards
corporate development department. During a
21-year
career at Hewlett-Packard, Mr. Look held a variety of
management positions in finance and research and development.
Mr. Micallef has been in charge of our manufacturing, real
estate and supply chain operations since April 2007.
Mr. Micallef joined LSI in April 2007 following our
acquisition of Agere Systems. At Agere, he held a number of
senior management positions in manufacturing and supply chain
operations from 2000 through April 2007.
19
Ms. Rankin has been our Executive Vice President, General
Counsel and Secretary since April 2007. Ms. Rankin joined
LSI in 2007 following the acquisition of Agere Systems. At
Agere, she had been Executive Vice President, General Counsel
and Secretary since 2000.
Mr. Richardson has been the leader of our Semiconductor
Solutions Group since January 2009. From April 2007 through
January 2009, he led our Network and Storage Products Group,
which included our Networking and Storage Interfaces businesses.
From September 2005 through April 2007, he was the leader of our
Custom Solutions Group, and from June 2005 through September
2005, he led our Corporate Strategy function. From 1992 through
June 2005, he held a variety of management positions at Intel,
including positions as Vice President of the Digital Enterprise
Group and General Manager of the Server Platform Group from
February 2005 through June 2005 and General Manager of
Intels Enterprise Platforms and Services Division from
June 2001 to January 2005. From January 1999 to June 2001, he
was Director of Product Development of Intels Enterprise
Platforms and Services Division.
Mr. Santoni has led our Storage System business together
with Mr. Bullinger since June 2008. Prior to assuming this
role, he was the head of our Storage Systems sales organization
since October 2006. From February 2001 through October 2006, he
held a number of senior sales and marketing positions for our
Storage Systems business. Before joining LSI in 2001,
Mr. Santoni was Executive Vice President and Chief
Operating Officer at Sutmyn Storage Corporation and held various
senior management positions with Memorex Telex in the United
States, United Kingdom and Italy.
Officers are not elected for a fixed term of office but hold
office until their successors have been elected. There are no
family relationships among the executive officers and directors
of LSI.
20
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our stock trades on the New York Stock Exchange under the symbol
LSI. In June 2008, our Chief Executive Officer
submitted to the Exchange an annual certification stating that
he was not aware of any violations of the Exchanges
corporate governance listing standards.
The table below shows the high and low sales prices for our
common stock for each quarter during our last two full fiscal
years, as reported in the consolidated transaction reporting
system.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
5.57
|
|
|
$
|
3.79
|
|
|
$
|
10.67
|
|
|
$
|
8.78
|
|
Second Quarter
|
|
$
|
7.53
|
|
|
$
|
4.73
|
|
|
$
|
10.68
|
|
|
$
|
7.40
|
|
Third Quarter
|
|
$
|
7.87
|
|
|
$
|
5.12
|
|
|
$
|
8.37
|
|
|
$
|
5.99
|
|
Fourth Quarter
|
|
$
|
5.70
|
|
|
$
|
2.36
|
|
|
$
|
7.80
|
|
|
$
|
5.06
|
|
At February 20, 2009, there were 354,006 holders of record
of our common stock. We believe that we have a greater number of
additional stockholders who own their shares through brokerage
firms and other nominees.
We have never paid cash dividends on our common stock. It is
presently our policy to reinvest our earnings, and we do not
currently anticipate paying any cash dividends to stockholders
in the foreseeable future.
PERFORMANCE
GRAPH
The following graph compares the cumulative total stockholder
return on our common stock to that of the S&P 500 Index and
the S&P 500 Semiconductors Index. The graph assumes that a
$100 investment was made in our common stock and each of the
indices at December 31, 2003, and that dividends, if any,
were reinvested in all cases. The stock price performance shown
on the graph is not necessarily indicative of future price
performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 31, 2003
|
|
|
Dec 31, 2004
|
|
|
Dec 31, 2005
|
|
|
Dec 31, 2006
|
|
|
Dec 31, 2007
|
|
|
Dec 31, 2008
|
|
|
LSI Corporation
|
|
$
|
100
|
|
|
$
|
61.78
|
|
|
$
|
90.19
|
|
|
$
|
101.47
|
|
|
$
|
59.86
|
|
|
$
|
37.09
|
|
S&P 500 Index
|
|
$
|
100
|
|
|
$
|
110.88
|
|
|
$
|
116.33
|
|
|
$
|
134.70
|
|
|
$
|
142.10
|
|
|
$
|
89.53
|
|
S&P 500 Semiconductors Index
|
|
$
|
100
|
|
|
$
|
79.11
|
|
|
$
|
88.73
|
|
|
$
|
80.82
|
|
|
$
|
90.50
|
|
|
$
|
49.11
|
|
21
|
|
Item 6.
|
Selected
Financial Data
|
Five-Year
Consolidated Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
2,677,077
|
|
|
$
|
2,603,643
|
|
|
$
|
1,982,148
|
|
|
$
|
1,919,250
|
|
|
$
|
1,700,164
|
|
Cost of revenues
|
|
|
1,608,108
|
|
|
|
1,699,785
|
|
|
|
1,158,983
|
|
|
|
1,150,042
|
|
|
|
1,039,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,068,969
|
|
|
|
903,858
|
|
|
|
823,165
|
|
|
|
769,208
|
|
|
|
660,360
|
|
Research and development
|
|
|
672,511
|
|
|
|
655,224
|
|
|
|
413,432
|
|
|
|
399,685
|
|
|
|
427,805
|
|
Selling, general and administrative
|
|
|
406,875
|
|
|
|
381,409
|
|
|
|
255,569
|
|
|
|
238,265
|
|
|
|
245,460
|
|
Restructuring of operations and other items, net
|
|
|
43,717
|
|
|
|
148,121
|
|
|
|
(8,427
|
)
|
|
|
119,052
|
|
|
|
423,444
|
|
Goodwill and intangible impairment charges
|
|
|
541,586
|
|
|
|
2,021,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
188,872
|
|
|
|
4,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income from operations
|
|
|
(595,720
|
)
|
|
|
(2,491,231
|
)
|
|
|
158,307
|
|
|
|
12,206
|
|
|
|
(436,349
|
)
|
Interest expense
|
|
|
(34,943
|
)
|
|
|
(31,020
|
)
|
|
|
(24,263
|
)
|
|
|
(25,283
|
)
|
|
|
(25,320
|
)
|
Interest income and other, net
|
|
|
36,110
|
|
|
|
46,762
|
|
|
|
51,277
|
|
|
|
34,000
|
|
|
|
22,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before income taxes and minority interest
|
|
|
(594,553
|
)
|
|
|
(2,475,489
|
)
|
|
|
185,321
|
|
|
|
20,923
|
|
|
|
(439,499
|
)
|
Provision for income taxes
|
|
|
27,700
|
|
|
|
11,326
|
|
|
|
15,682
|
|
|
|
26,540
|
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before minority interest
|
|
|
(622,253
|
)
|
|
|
(2,486,815
|
)
|
|
|
169,639
|
|
|
|
(5,617
|
)
|
|
|
(463,499
|
)
|
Minority interest in net income of subsidiary
|
|
|
|
|
|
|
4
|
|
|
|
1
|
|
|
|
6
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(622,253
|
)
|
|
$
|
(2,486,819
|
)
|
|
$
|
169,638
|
|
|
$
|
(5,623
|
)
|
|
$
|
(463,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss)/income per share
|
|
$
|
(0.96
|
)
|
|
$
|
(3.87
|
)
|
|
$
|
0.43
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss)/income per share
|
|
$
|
(0.96
|
)
|
|
$
|
(3.87
|
)
|
|
$
|
0.42
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,344,194
|
|
|
$
|
4,396,390
|
|
|
$
|
2,852,144
|
|
|
$
|
2,796,066
|
|
|
$
|
2,874,001
|
|
Long-term obligations
|
|
$
|
1,105,739
|
|
|
$
|
1,148,689
|
|
|
$
|
429,400
|
|
|
$
|
699,050
|
|
|
$
|
859,545
|
|
Stockholders equity
|
|
$
|
1,440,922
|
|
|
$
|
2,484,996
|
|
|
$
|
1,895,738
|
|
|
$
|
1,627,950
|
|
|
$
|
1,618,046
|
|
Starting in 2007, we included amortization of intangibles in
cost of revenues. For the years ended December 31, 2006,
2005 and 2004, amortization of intangibles of
$32.1 million, $62.5 million and $75.1 million,
respectively, which was previously reported as a separate
component of operating expenses, has been reclassified to cost
of revenues for consistency.
On April 2, 2007, we acquired Agere Systems Inc. through
the merger of Agere and a subsidiary of ours. The merger was
accounted for as a purchase. Accordingly, the results of
operations of Agere and estimated fair value of assets acquired
and liabilities assumed were included in our consolidated
financial statements from April 2, 2007.
During the years ended December 31, 2008 and 2007, we
recognized goodwill and intangible asset impairment charges of
$541.6 million and $2,021.5 million, respectively, in
the Semiconductor segment.
On January 1, 2006, we adopted the fair value recognition
provisions of Financial Accounting Standards Board, or FASB,
Statement of Financial Accounting Standards, or SFAS,
No. 123(R), or FAS 123R, Share-Based
Payment, using the modified prospective transition method.
In accordance with the modified prospective transition
22
method, we began recognizing compensation expense for all
share-based awards granted on or 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.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This managements discussion and analysis should be read
in conjunction with the other sections of this
Form 10-K,
including Part 1, Item 1: Business;
Part II, Item 1A: Risk Factors;
Part II, Item 6: Selected Financial Data;
and Part II, Item 8: Financial Statements and
Supplementary Data.
Where more than one significant factor contributed to changes in
results from year to year, we have quantified these factors
throughout Managements Discussion and Analysis of
Financial Condition and Results of Operations where practicable
and material to understanding a material change included in the
discussion.
OVERVIEW
We design, develop and market complex, high-performance
semiconductors and storage systems. We provide silicon-to-system
solutions that are used at the core of products that create,
store, consume and transport digital information. We offer a
broad portfolio of capabilities including custom and standard
product integrated circuits used in hard disk drives, high-speed
communication systems, computer servers, storage systems and
personal computers. We also offer external storage systems and
host bus adapter boards and software applications for attaching
storage devices to computer servers and for storage area
networks.
We operate in two segments the Semiconductor segment
and the Storage Systems segment. For the Semiconductor segment,
we sell our integrated circuits for storage applications to
makers of hard disk drives and computer servers. We sell our
integrated circuits for networking applications principally to
makers of devices used in computer and communications networks
and, to a lesser extent, to makers of personal computers. For
the Storage Systems segment, we sell our storage systems, host
adapter boards and software applications for attaching storage
devices to computer servers and for storage area networks to
original equipment manufacturers, or OEMs, who resell those
products to end customers under their own brand name. We also
generate revenue by licensing other entities to use our
intellectual property primarily in the Semiconductor segment.
Our revenues depend on market demand for these types of products
and our ability to compete in highly competitive markets. We
face competition not only from makers of products similar to
ours, but also from competing technologies. For example, we see
the development of solid state drives, based on flash memory
rather than the spinning platters used in hard disk drives, as a
long-term potential competitor to certain types of hard disk
drives, and have begun focusing development efforts in that area.
Recently, the U.S. and global economies have experienced a
significant downturn driven by a financial and credit crisis
that could continue to challenge such economies for some period
of time. In the fourth quarter of 2008, our revenues declined
significantly as compared to our revenues in the third quarter
due to the global economic downturn. As our outlook continued to
deteriorate into January 2009, we took a number of actions to
reduce our expenses, including a corporate-level restructuring
designed to increase synergies across our semiconductor
investment, a 5% reduction of our global workforce, reductions
in employee compensation-related expenses and reductions in
discretionary spending.
Our business is currently focused on providing integrated
circuits for storage and networking applications and on
providing storage systems and related boards and software, where
we believe we have the scale, technology and customer
relationships to be most successful. Since the beginning of
2007, we have completed the following actions as part of our
efforts to focus on those areas:
|
|
|
|
|
The acquisition of SiliconStor, Inc., a provider of
semiconductor solutions for enterprise storage networks, in
March 2007;
|
|
|
|
The acquisition of Agere in April 2007 through the merger of
Agere and a subsidiary of ours. Agere was a provider of
integrated circuit solutions for a variety of communications and
computing applications;
|
23
|
|
|
|
|
The sale of our Consumer Products Group in July 2007;
|
|
|
|
The sale of our Mobility Products Group in October 2007;
|
|
|
|
The sale of, or discontinuation of operations at, our
semiconductor and storage systems assembly and test facilities,
and the transition of the work performed at those facilities to
contract manufacturers between mid-2007 and mid-2008;
|
|
|
|
The acquisition of Tarari, Inc., a maker of silicon and software
that provides content and application awareness in packet and
message processing, in October 2007; and
|
|
|
|
The acquisition of the hard disk drive semiconductor business of
Infineon Technologies AG in April 2008.
|
Our revenues for the year ended December 31, 2008 were
$2,677.1 million, an increase of $73.5 million,
compared to $2,603.6 million for the year ended
December 31, 2007. The increase in revenues was primarily
attributable to a full year of revenues from Agere in 2008 and
increased demand for semiconductors used in storage and
networking product applications, for our entry level storage
systems and for our premium feature and direct-attached storage
software products. The increase was offset by the absence of
revenues from the Mobility and Consumer Product Groups.
We reported a net loss of $622.3 million, or $0.96 per
diluted share, for the year ended December 31, 2008, as
compared to a net loss of $2,486.8 million, or $3.87 per
diluted share, for the year ended December 31, 2007. During
the years ended December 31, 2008 and 2007, we recognized
goodwill impairment charges of $364.1 million and
$2,019.9 million in the Semiconductor segment in the
respective years. In addition, we recognized $177.5 million
and $1.6 million in charges for the impairment of other
intangible assets in the Semiconductor segment for the years
ended December 31, 2008 and 2007, respectively.
For the year ended December 31, 2008, we recorded
restructuring of operations and other items, net of
$43.7 million compared to $148.1 million for the year
ended December 31, 2007. The 2007 restructuring of
operations related primarily to the sale of the Mobility
Products Group. For the year ended December 31, 2007, we
recorded a $188.9 million charge for acquired in-process
research and development primarily associated with the merger
with Agere on April 2, 2007. We did not record any charge
related to acquired in-process research and development during
the year ended December 31, 2008.
Cash, cash equivalents and short-term investments were
$1,119.1 million as of December 31, 2008, as compared
to $1,397.6 million as of December 31, 2007. For the
year ended December 31, 2008, we generated
$278.1 million in cash from operating activities as
compared to $295.0 million for the year ended
December 31, 2007.
RESULTS
OF OPERATIONS
Revenues
The following table summarizes our revenues by segment for the
years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Semiconductor segment
|
|
$
|
1,795.1
|
|
|
$
|
1,778.9
|
|
|
$
|
1,223.1
|
|
Storage Systems segment
|
|
|
882.0
|
|
|
|
824.7
|
|
|
|
759.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
2,677.1
|
|
|
$
|
2,603.6
|
|
|
$
|
1,982.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
compared to 2007:
Total consolidated revenues for 2008 increased
$73.5 million or 2.8% as compared to 2007.
24
Semiconductor
Segment:
Revenues for the Semiconductor segment increased
$16.2 million or 0.9% in 2008 as compared to 2007. The
increase was primarily attributable to:
|
|
|
|
|
Increased demand for semiconductors used in storage and
networking product applications, primarily the result of a full
year of revenues from Agere in 2008; and
|
|
|
|
Revenues from the HDD semiconductor business acquired from
Infineon in April 2008.
|
The increase was partially offset by the absence of
$213.1 million and $54.6 million of revenues from the
Mobility Products Group and the Consumer Products Group,
respectively.
Storage
Systems Segment:
Revenues for the Storage Systems segment increased
$57.3 million or 6.9% in 2008 as compared to 2007. The
increase was primarily attributable to an increase in revenues
for our entry level storage systems and a continued increase in
demand for our premium feature and direct-attached storage
software products, partially offset by a decline in the sales of
our mid-range storage systems.
See Note 9 to our consolidated financial statements in
Item 8 for information about our significant customers.
2007
compared to 2006:
Total consolidated revenues for 2007 increased
$621.5 million or 31.4% as compared to 2006, primarily due
to the merger with Agere in April 2007.
Semiconductor
Segment:
Revenues for the Semiconductor segment increased
$555.8 million or 45.4% in 2007 as compared to 2006. The
increase was primarily due to revenues attributable to Agere of
$821.5 million and, to a lesser extent, increased demand
for semiconductors used in storage product applications
associated with the ramping of our Serial Attached SCSI, or SAS,
products.
The increase was partially offset by:
|
|
|
|
|
A decrease in revenues from consumer products due to the sale of
the Consumer Products Group;
|
|
|
|
A decrease in demand for semiconductors used in consumer product
applications such as digital audio players where our
customers solution was not included in the new generation
of its customers products and a decrease in demand for
semiconductors used in DVD products and cable set-top box
solutions;
|
|
|
|
A decrease in demand for semiconductors used in storage
interface connect products; and
|
|
|
|
A decrease in demand for semiconductors used in communication
product applications such as enterprise networking,
telecommunications and printing.
|
Storage
Systems Segment:
Revenues for the Storage Systems segment increased
$65.7 million or 8.7% in 2007 as compared to 2006. The
increase was primarily attributable to:
|
|
|
|
|
An increase in sales due to the ramp of our entry level storage
products, which were introduced in the fourth quarter of 2006;
|
|
|
|
An increase in demand for our premium feature software
products; and
|
|
|
|
Continued strength in our mid-range storage systems.
|
The increase was partially offset by decreased revenues for our
RAID storage adapters due to lower hardware sales.
25
Revenues
by Geography
The following table summarizes our revenues by geography for the
years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
North America*
|
|
$
|
737.2
|
|
|
$
|
858.7
|
|
|
$
|
956.7
|
|
Asia**
|
|
|
1,359.8
|
|
|
|
1,401.3
|
|
|
|
797.1
|
|
Europe and the Middle East
|
|
|
580.1
|
|
|
|
343.6
|
|
|
|
228.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,677.1
|
|
|
$
|
2,603.6
|
|
|
$
|
1,982.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Primarily the United States. |
|
** |
|
Including Japan. |
2008
compared to 2007:
Revenues in Europe and the Middle East increased 68.8% in 2008
compared to 2007. The increase was primarily attributable to
increased revenues in storage systems and increased revenues in
semiconductors used in storage product applications. The
increase in European revenues for storage systems was primarily
the result of a significant customer shifting order placements
from our U.S. subsidiary to a subsidiary in Europe.
Revenues in North America decreased 14.1%. The decrease in North
America was primarily attributable to decreased revenues in
storage systems primarily for the reason discussed above, offset
by increased revenues from semiconductors used in storage and
networking standard products.
2007
compared to 2006:
Revenues in Europe and the Middle East increased 50.5% in 2007
compared to 2006. The increase was primarily attributable to an
increase in revenues associated with the merger with Agere,
increased revenues in storage systems and increased revenues in
semiconductors used in storage product applications. Revenues in
Asia increased 75.8% in 2007. The increase in Asia was primarily
attributable to revenues from Agere and increased revenues in
semiconductors used in storage product applications, offset in
part by a decrease in revenues from the Consumer Products Group
and decreased revenues from semiconductors used in communication
product applications. Revenues in North America decreased 10.2%.
The decrease in North America was primarily attributable to
decreased revenues from semiconductors used in consumer product
applications, offset in part by increased storage system
revenues, increased revenues from semiconductors used in storage
product applications and revenues from Agere.
Gross
Profit Margin
The following table summarizes our gross profit margins by
segment for the years ended December 31, 2008, 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Semiconductor segment
|
|
$
|
736.9
|
|
|
$
|
603.7
|
|
|
$
|
561.7
|
|
Percentage of segment revenues
|
|
|
41.1
|
%
|
|
|
33.9
|
%
|
|
|
45.9
|
%
|
Storage Systems segment
|
|
$
|
332.1
|
|
|
$
|
300.2
|
|
|
$
|
261.5
|
|
Percentage of segment revenues
|
|
|
37.7
|
%
|
|
|
36.4
|
%
|
|
|
34.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
1,069.0
|
|
|
$
|
903.9
|
|
|
$
|
823.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
39.9
|
%
|
|
|
34.7
|
%
|
|
|
41.5
|
%
|
26
Amortization of intangibles, which was previously reported as a
separate component of operating expenses, has been reclassified
to cost of revenues for the year ended December 31, 2006
for consistency.
2008
compared to 2007:
The consolidated gross profit margin as a percentage of total
revenues increased to 39.9% in 2008 from 34.7% in 2007.
Semiconductor
Segment:
The gross profit margin as a percentage of segment revenues for
the Semiconductor segment increased to 41.1% in 2008 from 33.9%
in 2007. The increase in 2008 was primarily attributable to:
|
|
|
|
|
Increased sales of products with higher gross profit margins in
2008;
|
|
|
|
An inventory charge of $47.9 million recorded in the second
quarter of 2007 related to fair valuing the inventory in the
acquisition of Agere;
|
|
|
|
A decrease in inventory provisions from 2007 to 2008 primarily
as a result of improvements in supply chain management; and
|
|
|
|
$19.0 million in charges recorded in 2007 for a wafer
supply agreement with ON Semiconductor resulting from a decline
in demand.
|
Storage
Systems Segment:
The gross profit margin as a percentage of segment revenues for
the Storage Systems segment increased to 37.7% in 2008 from
36.4% in 2007. The increase was primarily driven by lower
manufacturing costs across the product lines and higher demand
for our premium feature and direct-attached storage software
products, which have higher margins.
2007
compared to 2006:
The consolidated gross profit margin as a percentage of total
revenues declined to 34.7% in 2007 from 41.5% in 2006. This
primarily reflects a decrease in Semiconductor segment gross
margins caused in large part by the merger with Agere.
Semiconductor
Segment:
The gross profit margin as a percentage of segment revenues for
the Semiconductor segment decreased to 33.9% in 2007 from 45.9%
in 2006. The decline was primarily attributable to:
|
|
|
|
|
An increase of $143.2 million in the amortization of
intangible assets in 2007 primarily related to the acquisition
of Agere;
|
|
|
|
An inventory charge of $47.9 million in 2007 related to
fair valuing the inventory in the acquisition of Agere; and
|
|
|
|
$19.0 million in charges recorded in 2007 for a wafer
supply agreement with ON Semiconductor resulting from a decline
in demand.
|
Storage
Systems Segment:
The gross profit margin as a percentage of segment revenues for
the Storage Systems segment increased to 36.4% in 2007 from
34.5% in 2006. This increase was primarily driven by lower
manufacturing costs across the mid-range product line and higher
demand for premium feature and direct-attached storage software
products, which have higher margins.
27
Research
and Development
The following table summarizes our research and development, or
R&D, expenses by segment for the years ended
December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Semiconductor segment
|
|
$
|
534.0
|
|
|
$
|
525.4
|
|
|
$
|
315.9
|
|
Percentage of segment revenues
|
|
|
29.7
|
%
|
|
|
29.5
|
%
|
|
|
25.8
|
%
|
Storage Systems segment
|
|
$
|
138.5
|
|
|
$
|
129.8
|
|
|
$
|
97.5
|
|
Percentage of segment revenues
|
|
|
15.7
|
%
|
|
|
15.7
|
%
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
672.5
|
|
|
$
|
655.2
|
|
|
$
|
413.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
25.1
|
%
|
|
|
25.2
|
%
|
|
|
20.9
|
%
|
2008
compared to 2007:
Consolidated R&D expenses increased $17.3 million or
2.6% in 2008 as compared to 2007.
Semiconductor
Segment:
R&D expenses for the Semiconductor segment consist
primarily of employee salaries, costs related to third party
design tools and materials used in the design of custom silicon
and standard products, as well as depreciation of capital
equipment and facilities-related expenditures. In 2008, we
focused our R&D efforts in the storage and networking
markets.
R&D expenses for the Semiconductor segment increased by
$8.6 million or 1.6% in 2008 as compared to 2007 and
increased slightly as a percentage of segment revenues from
29.5% in 2007 to 29.7% in 2008. The increase was attributable to
the merger with Agere, partially offset by reduced expenditures
resulting from the sale of the Mobility and Consumer Product
Groups, headcount reductions from our restructuring actions and
decreased spending related to third party design tools used in
the design of custom silicon and standard products.
Storage
Systems Segment:
R&D expenses for the Storage Systems segment consist
primarily of employee salaries and materials used in product
development, as well as depreciation of capital equipment and
facilities. In addition to the significant resources required to
support hardware technology transitions, we devote significant
resources to developing and enhancing software features and
functionality to remain competitive.
R&D expenses for the Storage Systems segment increased
$8.7 million or 6.7% in 2008 as compared to 2007. The
increase was primarily attributable to increased
compensation-related expenditures as well as increased material
spending for R&D projects associated with new product
development. R&D expenses as a percentage of segment
revenues remained flat at 15.7% in 2008 and 2007.
2007
compared to 2006:
Consolidated R&D expenses increased $241.8 million or
58.5% in 2007 as compared to 2006. This reflects increases in
R&D expenditures, both in dollar amounts and as a
percentage of revenues, in both segments, primarily as a result
of the Agere acquisition.
Semiconductor
Segment:
R&D expenses for the Semiconductor segment increased
$209.5 million or 66.3% in 2007 as compared to 2006 and
increased as a percentage of segment revenues to 29.5% in 2007
from 25.8% in 2006. The increase was primarily attributable to
the acquisition of Agere, SiliconStor and Tarari during 2007.
The increase was partially offset by reduced expenditures
resulting from the sale of the Consumer Products Group and
headcount reductions
28
from our restructuring actions during 2007. In 2007, we focused
our R&D efforts in the storage and networking markets.
Storage
Systems Segment:
R&D expenses for the Storage Systems segment increased by
$32.3 million or 33.1% in 2007 as compared to 2006 and
increased as a percentage of segment revenues to 15.7% in 2007
from 12.8% in 2006. The increase was primarily attributable to
the acquisition of StoreAge and increased compensation-related
expenditures due to an increase in headcount, increased spending
for R&D projects associated with new product lines and
expenses related to a contract with a significant customer.
Selling,
General and Administrative
The following table summarizes our selling, general and
administrative, or SG&A, expenses by segment for the years
ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Semiconductor segment
|
|
$
|
278.6
|
|
|
$
|
264.1
|
|
|
$
|
157.4
|
|
Percentage of segment revenues
|
|
|
15.5
|
%
|
|
|
14.8
|
%
|
|
|
12.9
|
%
|
Storage Systems segment
|
|
$
|
128.3
|
|
|
$
|
117.3
|
|
|
$
|
98.2
|
|
Percentage of segment revenues
|
|
|
14.5
|
%
|
|
|
14.2
|
%
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
406.9
|
|
|
$
|
381.4
|
|
|
$
|
255.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
15.2
|
%
|
|
|
14.6
|
%
|
|
|
12.9
|
%
|
2008
compared to 2007:
Consolidated SG&A expenses increased $25.5 million or
6.7% in 2008 as compared to 2007.
Semiconductor
Segment:
SG&A expenses for the Semiconductor segment increased
$14.5 million or 5.5% in 2008 as compared to 2007 and
increased as a percentage of segment revenues from 14.8% in 2007
to 15.5% in 2008. The increase was attributable to the merger
with Agere, partially offset by reduced expenditures resulting
from the sale of the Mobility and Consumer Product Groups as
well as headcount reductions from our restructuring actions.
Storage
Systems Segment:
SG&A expenses for the Storage Systems segment increased
$11.0 million or 9.4% in 2008 as compared to 2007 and
increased as a percentage of segment revenues from 14.2% in 2007
to 14.5% in 2008. The increase was primarily attributable to an
increase in sales and marketing expenditures to support higher
revenues in 2008 compared to 2007.
2007
compared to 2006:
Consolidated SG&A expenses increased $125.8 million or
49.2% in 2007 as compared to 2006.
Semiconductor
Segment:
SG&A expenses for the Semiconductor segment increased
$106.7 million or 67.8% in 2007 as compared to 2006 and
increased as a percentage of segment revenues to 14.8% in 2007
from 12.9% in 2006. The increase in the amount and as a
percentage of segment revenues was primarily attributable to the
merger with Agere, partially offset by reduced expenditures as a
result of headcount reductions from our restructuring actions
and decreased selling expenses due to the sale of the Consumer
Products Group.
29
Storage
Systems Segment:
SG&A expenses for the Storage Systems segment increased
$19.1 million or 19.5% in 2007 as compared to 2006 and
increased as a percentage of segment revenues to 14.2% in 2007
from 12.9% in 2006. The increase in the amount and as a
percentage of revenues was primarily attributable to the
additional expenses resulting from the acquisition of StoreAge,
increased compensation-related expenses based on increased
headcount and an increase in sales commissions due to increased
revenues.
Restructuring
of Operations and Other Items
A complete discussion of our restructuring actions in 2008, 2007
and 2006 is included in Note 2 to our consolidated
financial statements in Item 8.
2008:
We recorded charges of $43.7 million in restructuring of
operations and other items, net, for the year ended
December 31, 2008, consisting of $35.5 million in
charges for restructuring of operations and $8.2 million in
charges for other items. Of these charges, $41.1 million
were attributable to the Semiconductor segment and
$2.6 million were attributable to the Storage Systems
segment. The restructuring charges were largely related to
severance and termination benefits for approximately
260 employees associated with a broad-based reorganization
that was announced in January 2009 and lease termination costs.
The charges were offset in part by a gain on the sale of land in
Gresham, Oregon.
As a result of the recent restructuring action taken in January
2009, we expect to realize quarterly operating expense savings
of approximately $7.0 million starting from the second
quarter of 2009. Suspended depreciation amounted to
$5.3 million for the period from January 1, 2008 to
June 30, 2008 associated with holding the Singapore
assembly and test facility for sale.
2007:
We recorded charges of $148.1 million in restructuring of
operations and other items, net, for the year ended
December 31, 2007, consisting of $142.9 million in
charges for restructuring of operations and a charge of
$5.2 million for other items. Of these charges,
$143.4 million were recorded in the Semiconductor segment
and $4.7 million were recorded in the Storage Systems
segment. We completed the sale of our Consumer Products Group in
the third quarter of 2007 and the sales of our semiconductor
assembly and test operations in Thailand and our Mobility
Products Group in the fourth quarter of 2007. We also announced
the elimination of approximately 900 non-production positions,
inclusive of the Consumer Products Group, across all business
and functional areas worldwide in the second quarter of 2007,
and in the third quarter of 2007 announced the elimination of
approximately 2,100 production positions worldwide associated
with the sale of our assembly and test operations in Thailand
and our plan to transition assembly and test operations
performed at our facilities in Singapore and Wichita, Kansas to
current manufacturing partners.
2006:
We recorded a credit of $8.4 million in restructuring of
operations and other items, net, for the year ended
December 31, 2006. Of this amount, a credit of
$9.6 million was recorded in the Semiconductor segment and
a charge of $1.2 million was recorded in the Storage
Systems segment. We sold the Gresham facility in the second
quarter of 2006.
Goodwill
and Other Intangible Asset Impairment Charges
We monitor the recoverability of goodwill and other intangible
assets recorded in connection with acquisitions, by reporting
unit, annually in our fourth quarter or sooner if events or
changes in circumstances indicate that the carrying amount may
not be recoverable. During the fourth quarters of 2008 and 2007,
we determined that, based on the then current market conditions
in the semiconductor industry, the carrying amounts of goodwill
and certain other intangible assets for our Semiconductor
reporting unit were no longer recoverable. We recognized
goodwill
30
impairment charges of $364.1 million in the fourth quarter
of 2008 and $2,019.9 million in the fourth quarter of 2007.
The fair value of the Semiconductor reporting unit was estimated
by using the present value of estimated future cash flows. In
addition, we recognized $177.5 million and
$1.6 million in charges for the impairment of certain other
intangible assets in the Semiconductor segment for the years
ended December 31, 2008 and 2007, respectively. There was
no impairment of goodwill and other intangible assets for the
year ended December 31, 2006. For additional details, see
Valuation of Long-Lived Assets, Intangible Assets and
Goodwill under Critical Accounting Estimates.
Acquired
In-Process Research and Development
As of December 31, 2008, the actual development timelines
and costs for the in-process research and development, or
IPR&D, projects described below were in line with original
estimates. However, development of the technology remains a
substantial risk to us due to a number of factors, including the
remaining effort to achieve technical feasibility, rapidly
changing customer needs and competitive threats from other
companies. Failure to bring these products to market in a timely
manner could adversely affect our sales and profitability in the
future. Additionally, the value of other intangible assets
acquired may become impaired.
Our methodology for allocating the purchase price relating to
purchase acquisitions to IPR&D uses established valuation
techniques in the high-technology industry. IPR&D is
expensed upon acquisition because technological feasibility has
not been established and no future alternative uses exist. The
fair value of technology under development is determined using
the income approach, which discounts expected future cash flows
to present value. A discount rate is used for the projects to
account for the risks associated with the inherent uncertainties
surrounding the successful development of the technology, market
acceptance of the technology, the useful life of the technology,
the profitability level of such technology and the uncertainty
of technological advances, which could impact the estimates
recorded. The discount rates used in the present value
calculations are typically derived from a weighted-average cost
of capital analysis. These estimates do not account for any
potential synergies realizable as a result of the acquisition
and are in line with industry averages and growth estimates.
2008:
There were no IPR&D charges for the year ended
December 31, 2008.
2007:
We recorded charges of $188.9 million for the year ended
December 31, 2007 associated with IPR&D in connection
with the Tarari, Agere and SiliconStor acquisitions.
The following table summarizes details for the 2007 acquisitions
at the acquisition dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Cost
|
|
|
|
Revenue Projections
|
Company
|
|
Acquisition Date
|
|
Projects
|
|
IPR&D
|
|
to Complete
|
|
Discount Rate
|
|
Extend Through
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Tarari
|
|
October 3, 2007
|
|
Content Inspection-Abraxas-5 Gbps;
Abraxas-10Gbps; Electra
|
|
$
|
6.0
|
|
|
$
|
2.9
|
|
|
|
22.7
|
%
|
|
|
2013
|
|
Agere
|
|
April 2, 2007
|
|
Storage read channel and preamps;
Mobility HSPDA for 3G;
Networking modems, Firewire, serdes, media gateway,
VoIP, network processors, Ethernet, mappers and framers
|
|
$
|
176.4
|
|
|
$
|
85.8
|
*
|
|
|
13.8
|
%
|
|
|
2021
|
|
SiliconStor
|
|
March 13, 2007
|
|
Storage SATA/SAS multiplexers
|
|
$
|
6.5
|
|
|
$
|
4.4
|
|
|
|
27.0
|
%
|
|
|
2017
|
|
|
|
|
* |
|
This amount excludes estimated cost of $144.2 million to
complete the Mobility-HSPDA for 3G project due to the sale of
the Mobility Products Group to Infineon Technologies during the
fourth quarter of 2007. |
31
2006:
We recorded charges of $4.3 million for the year ended
December 31, 2006 associated with IPR&D in connection
with the StoreAge and Metta Technology acquisitions.
The following table summarizes details for the 2006 acquisitions
at the acquisition dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Projections
|
Company
|
|
Acquisition Date
|
|
Projects
|
|
IPR&D
|
|
Discount Rate
|
|
Extend Through
|
(Dollars in millions)
|
|
StoreAge
|
|
November 21, 2006
|
|
Storage systems software
|
|
$
|
2.4
|
|
|
28%
|
|
2013
|
Metta
|
|
November 10, 2006
|
|
Graphics and audio intellectual property
|
|
$
|
1.9
|
|
|
Not applicable; used a variation of the Cost Approach
|
|
Not applicable; used a variation of the Cost Approach
|
Interest
(Expense) or Income and Other, net
The following table summarizes our interest expense and
components of interest income and other, net, for the years
ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Interest expense
|
|
$
|
(34.9
|
)
|
|
$
|
(31.0
|
)
|
|
$
|
(24.3
|
)
|
Interest income
|
|
|
46.2
|
|
|
|
58.6
|
|
|
|
47.3
|
|
Other income/(expense), net
|
|
|
(10.1
|
)
|
|
|
(11.8
|
)
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.2
|
|
|
$
|
15.8
|
|
|
$
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense:
Interest expense increased $3.9 million in 2008 compared to
2007 as a result of interest on 6.5% convertible notes we
guaranteed in connection with the Agere merger in April 2007,
offset in part by the repurchase of $118.6 million of these
notes in 2008.
Interest expense increased $6.7 million to
$31.0 million in 2007 compared to 2006 as a result of
interest on 6.5% convertible notes we guaranteed in connection
with the Agere merger, offset in part by the repayment at
maturity of $271.8 million of 4% convertible notes in the
fourth quarter of 2006.
Interest
Income and Other, net:
Interest income decreased $12.4 million in 2008 compared to
2007 primarily as a result of lower interest rates during 2008
compared to 2007. Interest income increased $11.3 million
in 2007 compared to 2006 primarily as a result of higher
interest rates and higher cash and investment balances in 2007
as compared to 2006.
Other expenses, net, decreased $1.7 million in 2008
compared to 2007 primarily as a result of foreign exchange gains
in 2008 compared to foreign exchange losses in 2007 and a gain
from the repurchase of convertible notes, offset in part by
impairment charges related to certain available-for-sale debt
and equity securities.
Other expenses, net, increased $15.8 million in 2007
compared to 2006 primarily as a result of foreign exchange
losses, charges for points on foreign currency forward
contracts, loss on impairment of certain non-marketable equity
securities and absence of gain on available for sale of equity
securities in 2007 that existed in 2006.
For all investments in debt and equity securities, unrealized
losses are evaluated to determine if they are other than
temporary. In order to determine if an impairment has occurred
for marketable debt securities, we monitor the
32
credit quality, performance of the underlying collateral for
asset- and mortgage-backed securities, as well as the severity
and duration of the unrealized loss. In order to determine if an
impairment has occurred for equity securities, we review the
financial performance of each investee, industry performance and
outlook for each investee, the trading prices of marketable
equity securities and pricing in current rounds of financing for
non-marketable equity securities. If an unrealized loss is
determined to be other than temporary, a loss is recognized as a
component of interest income and other. For marketable equity
securities, the impairment losses were measured using the
closing market price of the marketable securities on the date
management determined that the investments were impaired. For
non-marketable equity securities, the impairment losses were
measured by using pricing in current rounds of financing.
Provision
for Income Taxes
During 2008, we recorded an income tax provision of
$27.7 million, which represents an effective tax rate of
approximately (5)% on the loss before income taxes of
$594.6 million. This rate differs from the
U.S. statutory rate primarily due to a full valuation
allowance recorded against U.S. and certain
non-U.S. net
deferred tax assets and income taxes related to certain
profitable
non-U.S. jurisdictions.
We have also recorded a release of a $13.9 million
liability relating to FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes an interpretation of
SFAS No. 109, because various statutes of
limitations expired during the year, and an increase of
$5.6 million as a result of a re-measurement of uncertain
tax positions taken in prior periods based on new information
received during 2008.
During 2007, we recorded an income tax provision of
$11.3 million, which represents an effective tax rate of
approximately 0%. This rate differs from the U.S. statutory
rate primarily due to a full valuation allowance recorded
against U.S. and certain
non-U.S. net
deferred tax assets. We also benefited from lower tax rates in
foreign jurisdictions. The provision for income taxes for 2007
reflects the release of a $5.4 million FIN 48
liability because various statutes of limitations expired and a
reduction of previous years uncertain tax positions. The
provision for income taxes for 2007 also includes the impact of
recording a $26.1 million tax benefit as a result of a
$67.9 million reduction to the pension benefit and other
obligations.
During 2006, we recorded a provision for income taxes of
$15.7 million, which represents an effective tax rate of
approximately 8%. This rate differs from the U.S. statutory
rate primarily due to the realization of deferred tax assets not
previously recognized in the U.S., which offset the tax expenses
generated from U.S. sourced income as well as from earnings
of certain foreign subsidiaries taxed in the U.S. We also
benefited from lower tax rates in foreign jurisdictions. During
2006, we closed various audits, which resulted in a tax benefit
of $3.1 million in the 2006 tax provision. These audits
included the U.S. federal, various state and certain
foreign audits.
Excluding certain foreign jurisdictions, management believes
that the future benefit of deferred tax assets is not more
likely than not to be realized.
FINANCIAL
CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments decreased to
$1,119.1 million as of December 31, 2008 from
$1,397.6 million as of December 31, 2007. The decrease
was mainly due to cash outflows from financing and investing
activities as described below, offset in part by cash inflows
from operating activities.
Working
Capital
Working capital decreased by $428.2 million to
$1.0 billion as of December 31, 2008 from
$1.4 billion as of December 31, 2007. The decrease was
attributable to the following:
|
|
|
|
|
Cash, cash equivalents and short-term investments decreased by
$278.5 million;
|
|
|
|
The current portion of our long-term debt increased by
$245.1 million as we reclassified the convertible notes due
on December 15, 2009 from long-term debt to short-term debt;
|
|
|
|
Accounts receivable decreased by $102.4 million as a result
of lower revenues in the fourth quarter of 2008 compared to the
same period in 2007; and
|
33
|
|
|
|
|
Inventories declined by $20.3 million primarily as the
result of a shift to progress billing for one of our customers
and a reduction in buffer stocks established to facilitate our
transition to contract manufacturers, offset in part by
increases in inventory that we will sell to customers later than
expected.
|
These decreases in working capital were offset in part by the
following:
|
|
|
|
|
Accounts payable decreased by $128.4 million primarily
attributable to a reduction in purchases as a result of the
global economic downturn and the timing of invoice receipts and
payments;
|
|
|
|
Other accrued liabilities decreased by $65.2 million
primarily as a result of the utilization of restructuring
reserves, a decrease in the retiree medical liability and a
decrease in liabilities with third party manufacturers,
partially offset by an increase in tax reserves;
|
|
|
|
Income taxes payable decreased by $12.2 million as a result
of a decrease in the tax provision payable and an increase in
tax payments in 2008 compared to 2007;
|
|
|
|
Prepaid expenses and other current assets increased by
$8.1 million primarily attributable to an increase in
deferred tax assets, prepaid taxes, and software additions, net
of amortization, offset in part by decreases in assets held for
sale and a reduction in notes receivables; and
|
|
|
|
Accrued salaries, wages and benefits decreased by
$4.2 million primarily attributable to timing of payments
offset in part by the establishment of a sabbatical reserve.
|
Working capital increased by $321.1 million to
$1.4 billion as of December 31, 2007 from
$1.1 billion as of December 31, 2006. The increase in
working capital was attributable to the following:
|
|
|
|
|
Cash, cash equivalents and short-term investments increased by
$388.7 million;
|
|
|
|
Accounts receivable increased by $57.7 million primarily
due to the merger with Agere, offset in part by improved
collections;
|
|
|
|
Inventories increased by $31.4 million primarily due to the
merger with Agere, offset in part by decreases relating to the
sale of the Consumer Products Group;
|
|
|
|
Prepaid expenses and other current assets increased by
$79.1 million, primarily attributable to the merger with
Agere, a $20.0 million short-term note receivable in
connection with the sale of semiconductor assembly and test
operations in Thailand to STATS ChipPAC in the fourth quarter of
2007, a $6.5 million prepayment on a minimum supply
agreement, and a $5.4 million increase in a deferred tax
asset; and
|
|
|
|
Income taxes payable decreased by $72.6 million due to the
adoption of FIN 48 in the first quarter of 2007, offset in
part by an increase in the tax provision less tax payments.
|
These increases in working capital were offset in part by the
following:
|
|
|
|
|
Accounts payable increased by $129.3 million primarily due
to the merger with Agere, offset in part by a decrease due to
the timing of invoice receipts and payments;
|
|
|
|
Accrued salaries, wages and benefits increased by
$36.7 million primarily attributable to the merger with
Agere, slightly offset by the timing of payment of salaries,
benefits and performance-based compensation; and
|
|
|
|
Other accrued liabilities increased by $142.4 million
primarily due to the merger with Agere, in addition to an
increase in restructuring reserves, merger-related accruals, and
an increase in liabilities with third party manufacturers,
offset in part by a decrease in deferred taxes, and other
accruals and liabilities.
|
34
Cash
Provided by Operating Activities
During the year ended December 31, 2008, we generated
$278.1 million of cash from operating activities compared
to $295.0 million generated in 2007. Cash generated by
operating activities in 2008 was the result of the following:
|
|
|
|
|
A net loss adjusted for non-cash transactions, including
goodwill and other intangible impairment charges and
depreciation and amortization. The non-cash items and other
non-operating adjustments are quantified in our Consolidated
Statements of Cash Flows included in Item 8; and
|
|
|
|
A net decrease in assets and liabilities, including changes in
working capital components from December 31, 2007 to
December 31, 2008, as discussed above.
|
Cash and
Cash Equivalents Used in Investing Activities
Cash and cash equivalents used in investing activities for the
year ended December 31, 2008 were $163.4 million as
compared to $1,121.4 million provided by investing
activities for the year ended December 31, 2007. The
primary investing activities during 2008 were:
|
|
|
|
|
Proceeds from maturities and sales of available-for-sale debt
securities and equity securities, net of purchases;
|
|
|
|
Purchases of property, equipment and software, net of sales;
|
|
|
|
Acquisition of businesses, net of cash acquired;
|
|
|
|
Proceeds from maturity of notes receivable associated with sale
of semiconductor operations in Thailand;
|
|
|
|
An increase in non-current assets and deposits; and
|
|
|
|
Proceeds received from the resolution of a pre-acquisition
income tax contingency.
|
We expect capital expenditures to be approximately
$50.0 million in 2009. 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 and with third-party assembly and
test operations, which enables us to have access to advanced
manufacturing capacity and reduce our capital spending
requirements.
Cash and
Cash Equivalents Used in Financing Activities
Cash and cash equivalents used in financing activities for the
year ended December 31, 2008 were $303.0 million as
compared to $724.5 million in 2007. The primary financing
activities during 2008 were the purchase of common stock under
our repurchase programs, the repurchase of convertible
subordinated notes, and the issuance of common stock under our
employee stock plans.
On December 4, 2006, we announced that our Board of
Directors had authorized a stock repurchase program of up to
$500.0 million worth of our common stock and terminated the
prior stock repurchase program authorized by the Board of
Directors on July 28, 2000. In July 2007, we completed the
repurchase program announced on December 4, 2006. On
August 20, 2007, we announced that our Board of Directors
had authorized a repurchase program of up to an additional
$500.0 million worth of our common stock. During the year
ended December 31, 2008, we repurchased 44.6 million
shares for $229.2 million in cash, which together with the
repurchases in 2007, effectively completed the authorization
announced on August 20, 2007. The repurchased shares were
retired immediately after the repurchases were complete.
Retirement of the repurchased shares is recorded as a reduction
of common stock and additional
paid-in-capital.
It is our policy to reinvest our earnings, and we do not
anticipate paying any cash dividends to stockholders in the
foreseeable future.
Cash, cash equivalents and short-term investments are our
primary source of liquidity. We believe that our existing liquid
resources and cash generated from operations will be adequate to
meet our operating and capital requirements and other
obligations, including repayment of our outstanding convertible
subordinated notes as they
35
mature, for the foreseeable future. We may, however, seek
additional equity or debt financing from time to time. We
believe that financing is currently difficult for many companies
to obtain on acceptable terms or at all. Accordingly, such
financing may not be available to us at all or on acceptable
terms if we determine that it would be desirable to obtain
additional financing. Moreover, any future equity or convertible
debt financing may 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 as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less Than 1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
After 5 Years
|
|
|
Other
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Convertible Subordinated Notes
|
|
$
|
243.0
|
|
|
$
|
350.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
593.0
|
|
Estimated interest payments on Convertible Subordinated Notes
|
|
|
29.8
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36.8
|
|
Operating lease obligations
|
|
|
88.9
|
|
|
|
87.9
|
|
|
|
18.4
|
|
|
|
3.6
|
|
|
|
|
|
|
|
198.8
|
|
Purchase commitments
|
|
|
208.7
|
|
|
|
302.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
510.8
|
|
FIN 48 liabilities
|
|
|
36.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193.6
|
**
|
|
|
230.1
|
|
Pension and post-retirement contributions
|
|
|
23.2 to 62.2
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
23.2 to 62.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
630.1 to $669.1
|
|
|
$
|
747.0
|
|
|
$
|
18.4
|
|
|
$
|
3.6
|
|
|
$
|
193.6
|
|
|
$
|
1,592.7 to $1,631.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
We have pension plans covering substantially all former Agere
U.S. employees, excluding management employees hired after
June 30, 2003. We also have pension plans covering certain
international employees. Although additional future
contributions will be required, the amount and timing of these
contributions will be impacted by actuarial assumptions, the
actual rate of return on plan assets, the level of market
interest rates, and the amount of voluntary contributions to the
plans. If current macroeconomic conditions continue, the
additional contributions in the future years would likely be
higher than those projected for 2009. Effective April 6,
2009, the Company will freeze the U.S. management pension plan.
As of December 31, 2008, our pension benefit obligation
exceeded the fair value of our plan assets by
$449.5 million. See Note 5 to our consolidated
financial statements in Item 8. |
|
** |
|
Represents the non-current tax payable obligation under
FIN 48. We are unable to make a reasonably reliable
estimate as to when cash settlement with a taxing authority may
occur. |
Convertible
Subordinated Notes
As of December 31, 2008, we had outstanding
$350.0 million of 4% Convertible Subordinated Notes
due May 15, 2010. Interest on these notes is payable
semiannually on May 15 and November 15 of each year. These
convertible notes are subordinated to all existing and future
senior debt and are convertible at the holders option into
shares of our common stock at a conversion price of
approximately $13.42 per share at any time prior to maturity. We
cannot elect to redeem these notes prior to maturity. Each
holder of these notes has the right to cause us to repurchase
all of such holders convertible notes at a price equal to
100% of their principal amount plus any accrued interest upon
the occurrence of any fundamental change, which includes a
transaction or an event such as an
36
exchange offer, liquidation, a tender offer, consolidation,
certain mergers or combination. The merger with Agere did not
trigger this right.
As part of the merger with Agere, we guaranteed Ageres
6.5% Convertible Subordinated Notes due December 15,
2009. As of December 31, 2008, we had outstanding
$243.0 million of these notes. Interest on these notes is
payable semiannually on June 15 and December 15 of each year.
These notes are unsecured and subordinated obligations and are
subordinated in right of payment to all of Ageres existing
and future senior debt. These notes are convertible at the
holders option into shares of our common stock at a
current conversion price of $15.3125 per share, subject to
adjustment in certain events, at any time prior to maturity,
unless previously redeemed or repurchased. We may redeem these
notes in whole or in part at any time. We may be required to
repurchase these notes at a price equal to 100% of their
principal amount plus any accrued and unpaid interest if our
stock is no longer approved for public trading, if our
stockholders approve our liquidation or if a specified change in
control occurs.
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 with suppliers
primarily for raw materials and manufacturing services 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 different suppliers.
FIN 48
Tax Liabilities
As of December 31, 2008, the amount of the unrecognized tax
benefits determined under FIN 48 was $232.0 million.
This is a net increase of $25.4 million in unrecognized tax
benefits from the previous year. Of the $232.0 million in
unrecognized tax benefits, we are expected to pay
$36.5 million within one year. Accordingly, this amount has
been reclassified to other current liabilities. For the
remaining balance, we are unable to make a reasonably reliable
estimate as to when cash settlement with a taxing authority may
occur. It is reasonably possible that the total amount of
unrecognized tax benefits will increase or decrease in the next
12 months. Such changes could occur based on the normal
expiration of various statutes of limitations or the possible
conclusion of ongoing tax audits in various jurisdictions around
the world. If those events occur within the next 12 months,
we estimate that, in addition to the $36.5 million
discussed above, additional unrecognized tax benefits, plus
accrued interest and penalties, could decrease by an amount in
the range of $0 to $31.6 million.
Standby
Letters of Credit
As of December 31, 2008 and 2007, we had outstanding
obligations relating to standby letters of credit of
$19.2 million and $11.1 million, respectively. Standby
letters of credit are financial guarantees provided by third
parties for leases, claims from litigations and certain
self-insured risks. If the guarantees are called, we must
reimburse the provider of the guarantee. The fair value of the
letters of credit approximates the contract amount and they
generally have one-year terms.
CRITICAL
ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and
results of operations is based on the consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
Note 1 to those financial statements describes our
significant accounting policies. The preparation of these
financial statements requires estimates and assumptions that
affect the reported amounts and disclosures.
We believe the following to be critical accounting estimates.
They are important to the portrayal of our financial condition
and results, and they require significant management judgment
and estimates about matters that
37
are inherently uncertain. As a result of the inherent
uncertainty, there is a likelihood that materially different
amounts would be reported under different conditions or using
different assumptions. Although we believe that our judgments
and estimates are reasonable, appropriate and correct, different
amounts could have been reported if different estimates were
made.
Stock-Based
Compensation
On January 1, 2006, we adopted FAS 123R, using the
modified prospective transition method. Under this method of
implementation, no restatement of prior periods has been made.
Determining the fair value of stock-based awards at the grant
date requires considerable judgment, including estimating
expected volatility, expected term and risk-free rate. Our
stock-based compensation expense under FAS 123R in 2008,
2007 and 2006 was $72.3 million, $77.3 million and
$47.0 million, respectively. Stock-based compensation costs
capitalized to inventory and software development for 2008, 2007
and 2006 were not significant. (See Note 3 to our
consolidated financial statements in Item 8 for a
description of our equity compensation plans.)
Stock
Options:
The fair value of each option grant is estimated on the date of
grant using a reduced form calibrated binomial 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average estimated grant date fair value per share
|
|
$
|
2.04
|
|
|
$
|
3.05
|
|
|
$
|
3.30
|
|
Weighted average assumptions in calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
4.36
|
|
|
|
4.29
|
|
|
|
4.33
|
|
Risk-free interest rate
|
|
|
2.51
|
%
|
|
|
4.50
|
%
|
|
|
4.78
|
%
|
Volatility
|
|
|
52
|
%
|
|
|
47
|
%
|
|
|
48
|
%
|
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 affected by all of
the underlying assumptions and calibration of our model.
The risk-free interest rate assumption is based upon observed
interest rates for constant maturity U.S. Treasury
securities appropriate for the term of our employee stock
options.
We use an equally weighted combination of historical and implied
volatilities as of the grant date. The historical volatility is
the standard deviation of our daily stock returns from the date
of the initial public offering of our common stock in 1983. For
the implied volatilities, we use near-the-money exchange traded
call options, as stock options are call options that are granted
at-the-money. The historical and implied volatilities are
annualized and equally weighted to determine the volatilities as
of the grant date. We believe that the equally weighted
combination of historical and implied volatilities is more
representative of future stock price trends than sole use of
historical or implied volatilities.
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 for all past option grants made by us since our
initial public offering.
Because stock-based compensation expense recognized is based on
awards ultimately expected to vest, it has been reduced for
estimated forfeitures. Forfeitures are estimated at the time of
grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures were
estimated based on historical experience.
38
Employee
Stock Purchase Plan:
Under the employee stock purchase plan, rights are granted to
our 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. For disclosure purposes,
the assumptions that went into the calculation of fair value for
the May and November 2008, 2007 and 2006 grants were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average estimated grant date fair value per share
|
|
$
|
1.37
|
|
|
$
|
2.09
|
|
|
$
|
2.92
|
|
Weighted average assumptions in calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
0.7
|
|
Risk-free interest rate
|
|
|
1
|
%
|
|
|
4
|
%
|
|
|
5
|
%
|
Volatility
|
|
|
84
|
%
|
|
|
42
|
%
|
|
|
35
|
%
|
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.
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 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 our 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
FAS 123R and Staff Accounting Bulletin No. 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.
Inventory
Valuation Methodology
Inventories are valued at the lower of cost or market using the
first-in,
first-out (FIFO) method. We write down our inventories for
estimated obsolescence and unmarketable inventory in an amount
equal to the difference between the cost of the inventory and
the estimated market value based upon assumptions about future
demand and market conditions. Inventory impairment charges
create a new cost basis for inventory.
We balance the need to maintain strategic inventory levels to
ensure competitive delivery performance to our customers with
the risk of inventory obsolescence due to rapidly changing
technology and customer requirements, product life-cycles,
life-time buys at the end of supplier product runs and a shift
of production to outsourcing. If actual demand or market
conditions are less favorable than we project or our customers
fail to meet projections, additional inventory write-downs may
be required. Our inventory balance was $220.5 million and
$240.8 million as of December 31, 2008 and 2007,
respectively.
If market conditions are more favorable than expected, we could
experience more favorable gross profit margins going forward as
we sell inventory that was previously written down.
Valuation
of Long-Lived Assets, Intangible Assets and Goodwill
We have historically pursued the acquisition of businesses,
which has resulted in significant goodwill and intangible
assets. We assess the impairment of long-lived assets,
identifiable intangibles and related goodwill annually or sooner
if events or changes in circumstances indicate that the carrying
value may not be recoverable.
39
Factors that could trigger an impairment review include the
following: (i) significant negative industry or economic
trends; (ii) exiting an activity in conjunction with a
restructuring of operations; (iii) current, historical or
projected losses that demonstrate continuing losses associated
with an asset; or (iv) our market capitalization being less
than net book value. When we determine that there is an
indicator that the carrying value of long-lived assets,
identifiable intangibles or related goodwill may not be
recoverable, we measure impairment based on estimates of future
cash flows. See Notes 6 and 7 to our financial statements
in Item 8 for more details on long-lived assets, intangible
assets and goodwill.
The goodwill impairment testing is a two-step process and is
performed by reporting unit in accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets. Our reporting units are Semiconductor and Storage
Systems. The first step requires comparing the fair value of
each reporting unit to its net book value. If the fair value of
the reporting unit is greater than its net book value, there is
no impairment. Otherwise, the second step must be completed to
measure the amount of impairment. The second step calculates the
implied fair value of goodwill by deducting the fair value of
all tangible and intangible assets, excluding goodwill, of the
reporting unit from the fair value of the reporting unit as
determined in step 1. The implied fair value of goodwill
determined in step 2 is compared to the carrying value of
goodwill. If the implied fair value of goodwill is less than the
carrying value of goodwill, an impairment loss is recognized
equal to the difference.
In determining the fair value of each reporting unit, we rely
solely on a discounted cash flow analysis. We do research and
analyze peer multiples for comparison purposes, but we do not
rely directly upon such data due to the lack of specific
comparability between the peer companies and our reporting
units. Instead we employ the peer multiple data as a general
check on the results of our discounted cash flow analysis. The
material assumptions used in performing the discounted cash flow
analysis include forecasts of expected future cash flows,
including elements such as revenues, cost of sales, operating
expenses, tax expenses, working capital, investment and capital
expenditures. Key assumptions include expected near and
long-term growth rates, as well as expected profitability levels
and capital investment. Since the forecasted cash flows of the
business, as well as those allocated to individual assets, need
to be discounted to present value in order to arrive at
estimates of fair value, discount rates must be estimated and
applied in the valuation models. These discount rates are based
on estimates of a market weighted average cost of capital for
each reporting unit, with adjustments made to account for the
relative risk of individual assets valued.
In the fourth quarters of 2008 and 2007, the economic conditions
in the semiconductor industry deteriorated and our stock price
declined, resulting in our market capitalization falling below
our net book value. Additionally, in the fourth quarter of 2008,
our revenues declined significantly from initial expectations
amidst a global economic down turn.
During the fourth quarters of 2008 and 2007, the results of our
analysis indicated that the carrying amounts of goodwill for our
Semiconductor reporting unit were no longer recoverable under
the first step of the test for impairment. We recognized
goodwill impairment charges of $364.1 million and
$2,019.9 million in the Semiconductor segment during 2008
and 2007, respectively, under the second step of the test for
impairment. There was no impairment charge to goodwill in 2006.
As of December 31, 2008, we had a remaining goodwill
balance of $175.6 million associated with the Storage
Systems segment. There is no remaining goodwill for the
Semiconductor segment. Our next annual test for the impairment
of goodwill is expected to be performed in the fourth quarter of
2009 or sooner if events or changes in circumstances indicate
that the carrying amount may not be recoverable.
As of December 31, 2008, we had intangible assets of
$890.0 million. For the years ended December 31, 2008
and 2007, we recognized other intangible asset impairment
charges of $177.5 million and $1.6 million,
respectively, in the Semiconductor segment.
Based upon market conditions in the semiconductor industry in
2008 and 2007, we assessed the recoverability of our other
intangible assets in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. The assessment of recoverability was based on
managements estimates of undiscounted projected future
operating cash flows compared to the net book value of the other
intangible assets. In cases where the net book value exceeded
undiscounted projected future operating cash flows, an
impairment existed. The impairment charge was measured as the
difference between the net book value of the other intangible
assets and the fair value of such assets. The fair value is
determined using a discounted cash flow approach for each asset
grouping.
40
Based on the assessment, we recorded intangible asset impairment
charges of $177.5 million during the three months ended
December 31, 2008, of which $98.1 million related to
existing technology and $79.4 million related to customer
relationships. In 2007, we recorded an impairment charge of
$1.6 million which related primarily to existing technology.
Restructuring
Reserves
We have recorded reserves/accruals for restructuring costs
related to our restructuring of operations. The restructuring
reserves include estimated payments to employees for severance,
termination fees associated with leases and other contracts,
decommissioning and selling costs associated with assets held
for sale, and other costs related to the closure of facilities.
Reserves are recorded when management has approved a plan to
restructure operations and a liability has been incurred. The
restructuring reserves are based upon management estimates at
the time they are recorded. These estimates can change depending
upon changes in facts and circumstances subsequent to the date
the original liability was recorded. For example, existing
accruals for severance may be modified if employees are
redeployed due to circumstances not foreseen when the original
plans were initiated, accruals for outplacement services may not
be fully utilized by former employees, and severance accruals
could change for statutory reasons in countries outside the
United States. Accruals for facility leases under which we
ceased using the benefits conveyed to us under the lease may
change if market conditions for subleases change or if we later
negotiate a termination of the lease.
Income
Taxes
Deferred tax assets and liabilities are recognized for temporary
differences between financial statement and income tax bases of
assets and liabilities. We have recorded a valuation allowance
to reduce the deferred tax assets to the amount that is more
likely than not to be realized. We have considered future
taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance.
See Note 13 to our financial statements in Item 8 for
more details about our deferred tax assets and liabilities.
The calculation of our tax liabilities involves the application
of complex tax rules and regulations in multiple jurisdictions
throughout the world. Our tax liabilities include estimates for
all income-related taxes that we believe are probable and that
can be reasonably estimated. To the extent that our estimates
are understated, additional charges to income tax expense would
be recorded in the period in which we determine such
understatement. If our income tax estimates are overstated,
income tax benefits will be recognized when realized.
Retirement
Benefits
Post-retirement assets and liabilities are our estimates of
benefits that we expect to pay to eligible retirees. We consider
various factors in determining our post-retirement group life
asset, including the number of employees that we expect to
receive benefits and other actuarial assumptions. Effective
January 1, 2009, the post-retirement medical plans were
terminated, and therefore that liability represents
managements best estimate for medical claims from 2008. If
the actual post-retirement benefits paid differ from our current
estimate, we may be over- or under- accrued.
We also have pension plans covering substantially all former
Agere U.S. employees, excluding management employees hired
after June 30, 2003, and pension plans covering certain
international employees. We consider various factors in
determining our pension liability, including the number of
employees that we expect to receive benefits, their salary
levels and years of service, the expected return on plan assets,
the discount rate used to determine the benefit obligation, the
timing of the payment of benefits, and other actuarial
assumptions. Effective April 6, 2009, the Company will
freeze the U.S. management pension plan. If the actual
results and events of our pension plan differ from our current
assumptions, our benefit obligations may be over- or under-
valued.
As a result of the acquisition of Agere, we re-measured the
pension and post-retirement liabilities, and adopted FASB
SFAS No. 158, or FAS 158, Employers
Accounting for Defined Benefit Pension and Other Post-retirement
Plans, effective April 2, 2007. The key benefit plan
assumptions are the discount rate and the expected rate of
return on plan assets. These assumptions are discussed below for
our U.S. retirement benefit plans. For our international
plans, we chose assumptions specific to each country.
41
The discount rate we use is based on a cash flow analysis using
the Citigroup Pension Discount Curve and the Citigroup Above
Median Pension Discount Curve as of the measurement date. For
the year ended December 31, 2008, the rate used to
determine our net periodic benefit cost was 6.5%. The discount
rate used to determine the benefit obligation as of
December 31, 2008 was 6.5%.
For the year ended December 31, 2007, we used two discount
rates to determine our net periodic benefit cost for our
management plans since we were required to re-measure our
post-retirement plans due to a curtailment. The rates used prior
to and after the curtailment effect taken in the fourth quarter
of 2007 were 6.00%, and 6.25%, respectively. The rate used to
determine our net periodic benefit cost for our represented
plans and our non-qualified pension plan was 6.00%. The discount
rate used to determine the benefit obligation as of
December 31, 2007 was 6.50%.
We base our salary increase assumptions on historical experience
and future expectations. The expected rate of return for our
retirement benefit plans represents the average rate of return
expected to be earned on plan assets over the period that the
benefit obligations are expected to be paid. In developing the
expected rate of return, we consider long-term compound
annualized returns based on historical market data, historical
and expected returns on the various categories of plan assets,
and the target investment portfolio allocation between debt and
equity securities. The weighted average investment portfolio
allocation for our U.S. management and represented pension
plans as of December 31, 2008 was 48% in equity and 52% in
debt investments as compared to the target investment portfolio
allocation of 53% equity and 47% debt. The portfolios
equity weighting is consistent with the long-term nature of the
plans benefit obligations. For 2008, we used an expected
rate of return on plan assets of 8.25% and 8.00% for the
management and represented pension plans, respectively,
consistent with the target investment portfolio allocation. The
actual loss on our pension assets during 2008 was
$252.1 million, with the losses smoothed over the next five
years through the return on assets assumption using the market
related value of assets (MRVA), with those not yet
recognized through MRVA amortized under current accounting rules
for recognizing asset and liability gains and losses. For our
U.S. post-retirement benefit plans, we used a
weighted-average long-term rate of return on assets of 7.75%.
The weighted average investment portfolio allocation for our
U.S. management and represented pension plans as of
December 31, 2007 was 53% in equity and 47% in debt
investments as compared to the target investment portfolio
allocation of 53% equity and 47% debt. For 2007, we used an
expected rate of return on plan assets of 8.25% and 8.00% for
the management and represented pension plans, respectively,
consistent with the target investment portfolio allocation. For
our U.S. post-retirement benefit plans, we used a
weighted-average long-term rate of return on assets of 7.75%.
Actuarial assumptions are based on our best estimates and
judgment. Material changes may occur in retirement benefit costs
in the future if these assumptions differ from actual events or
experience. We performed a sensitivity analysis on the discount
rate, which is the key assumption in calculating the pension and
post-retirement benefit obligations. For the year ended
December 31, 2008, each change of 25 basis points in
the discount rate assumption would have an estimated
$0.8 million impact on annual net retirement benefit costs
and a $31.0 million impact on benefit obligations. Each
change of 25 basis points in the expected rate of return
assumption would have an estimated $2.6 million annual
impact on net retirement benefit costs.
For the year ended December 31, 2007, each change of
25 basis points in the discount rate assumption would have
an estimated $0.6 million impact on annual net retirement
benefit costs and a $36.0 million impact on benefit
obligations. Each change of 25 basis points in the expected
rate of return assumption would have an estimated
$2.7 million annual impact on net retirement benefit costs.
RECENT
ACCOUNTING PRONOUNCEMENTS
The information contained in Note 1 to our financial
statements in Part II, Item 8 under the heading
Recent Accounting Pronouncements is incorporated by
reference into this Part II, Item 7.
42
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest
Rate Sensitivity
A 10% weighted-average worldwide interest rate movement
affecting our fixed and floating rate financial instruments as
of December 31, 2008 and 2007, including investments and
debt obligations, would not have had a significant effect on our
financial position, results of operations and cash flows over
the next fiscal year, assuming that the debt and investment
balances remained consistent.
With the objective of protecting our cash flows and earnings
from the impact of fluctuations in interest rates, while
minimizing the cost of capital, we may enter into interest rate
swaps. As of December 31, 2008, there were no interest rate
swaps outstanding.
Foreign
Currency Exchange Risk
We have foreign subsidiaries that operate and sell our products
in various global markets. As a result, our cash flows and
earnings are exposed to fluctuations in foreign currency
exchange rates. We attempt to limit these exposures through
operational strategies and financial market instruments. We use
various hedge instruments, primarily forward contracts with
maturities of twelve months or less and currency option
contracts, to manage our exposure associated with net asset and
liability positions and cash flows denominated in non-functional
currencies. We did not enter into derivative financial
instruments for trading purposes during 2008 and 2007.
Based on our overall currency rate exposures at
December 31, 2008, including derivative financial
instruments and non-functional currency-denominated receivables
and payables, a near-term 10% appreciation or depreciation of
the U.S. dollar would not have a significant effect on our
financial position, results of operations and cash flows over
the next fiscal year. In 2007, a near-term 10% appreciation or
depreciation of the U.S. dollar would also not have had a
significant effect.
Equity
Price Risk
We have investments in available-for-sale equity securities
included in long-term assets. The fair values of these
investments are sensitive to equity price changes. Changes in
the value of these investments are ordinarily recorded through
accumulated comprehensive income. The increase or decrease in
the fair value of the investments would affect our results of
operations to the extent that the investments were sold or that
declines in value were concluded by management to be other than
temporary.
If the prices of our available-for-sale equity securities were
to increase or decrease 10% from their fair values as of
December 31, 2008, it would increase or decrease the
investment values by $0.1 million. As of December 31,
2007, a 10% increase or decrease in fair values would have
increased or decreased the investment values by
$0.2 million. We do not use any derivatives to hedge the
fair value of our marketable available-for-sale equity
securities.
Credit
and Market Liquidity Risks
As of December 31, 2008, we had investments in money market
mutual funds of $664.1 million and available-for-sale debt
securities of $297.3 million. These securities are
classified as available-for-sale under the guidance of
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities and accordingly are recorded
at fair market value in cash and cash equivalents or short-term
investments with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income,
net of applicable taxes.
These investments expose us to credit risk, or the risk of loss
should the issuer of the debt securities held in our portfolio
or by the money market mutual funds we invest in be unable to
meet their financial obligations under those securities. Our
available-for-sale debt securities at December 31, 2008
included $184.5 million of asset-backed and mortgage-backed
securities, of which $148.5 million are issued by agencies
of the U.S. government. We diversify our investments to
reduce the exposure to loss from any single issuer, sector, bank
or mutual fund.
We are also exposed to market liquidity risk. This is the risk
that the demand for securities in the market becomes
significantly lower than normal or ceases to exist. The
U.S. government has recently instituted several
43
programs to restore market liquidity such as money market
guarantees, The Commercial Paper Funding Facility, and the
Troubled Asset Relief Program. However, access to our funds
could be limited in some cases and some money market funds could
limit redemptions for a period of time. The impact of market
liquidity risk on our investments is that we may be unable to
sell our investments in a timely manner should we need to, or if
we are able to sell them, the sale price of the investments may
be lower than we expect.
Credit and market liquidity risks could impact our results of
operations to the extent we incur a loss or if management
determines that changes in prices of available-for-sale debt
securities are other than temporary.
44
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
LSI
Corporation
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
829,301
|
|
|
$
|
1,021,569
|
|
Short-term investments
|
|
|
289,841
|
|
|
|
376,028
|
|
Accounts receivable, less allowances of $9,627 and $10,192
|
|
|
303,971
|
|
|
|
406,368
|
|
Inventories
|
|
|
220,535
|
|
|
|
240,842
|
|
Prepaid expenses and other current assets
|
|
|
155,814
|
|
|
|
147,751
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,799,462
|
|
|
|
2,192,558
|
|
Property and equipment, net
|
|
|
235,963
|
|
|
|
229,732
|
|
Other intangible assets, net
|
|
|
889,995
|
|
|
|
1,225,196
|
|
Goodwill
|
|
|
175,624
|
|
|
|
499,551
|
|
Other assets
|
|
|
243,150
|
|
|
|
249,353
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,344,194
|
|
|
$
|
4,396,390
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Accounts payable
|
|
$
|
201,035
|
|
|
$
|
329,444
|
|
Accrued salaries, wages and benefits
|
|
|
114,730
|
|
|
|
118,990
|
|
Other accrued liabilities
|
|
|
233,157
|
|
|
|
298,343
|
|
Income taxes payable
|
|
|
3,504
|
|
|
|
15,679
|
|
Current portion of long-term debt
|
|
|
245,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
797,533
|
|
|
|
762,456
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
350,000
|
|
|
|
717,967
|
|
Pension, post-retirement and other benefits
|
|
|
451,079
|
|
|
|
137,543
|
|
Income taxes payable non-current
|
|
|
193,590
|
|
|
|
185,036
|
|
Other non-current liabilities
|
|
|
111,070
|
|
|
|
108,143
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations and other liabilities
|
|
|
1,105,739
|
|
|
|
1,148,689
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
Minority interest in subsidiary
|
|
|
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred shares; $.01 par value; 2,000 shares
authorized; none outstanding
|
|
|
|
|
|
|
|
|
Common stock; $.01 par value; 1,300,000 shares
authorized; 648,132 and 680,595 shares outstanding
|
|
|
6,481
|
|
|
|
6,806
|
|
Additional paid-in capital
|
|
|
6,058,786
|
|
|
|
6,152,421
|
|
Accumulated deficit
|
|
|
(4,360,775
|
)
|
|
|
(3,738,522
|
)
|
Accumulated other comprehensive income
|
|
|
(263,570
|
)
|
|
|
64,291
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,440,922
|
|
|
|
2,484,996
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,344,194
|
|
|
$
|
4,396,390
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
45
LSI
Corporation
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
2,677,077
|
|
|
$
|
2,603,643
|
|
|
$
|
1,982,148
|
|
Cost of revenues
|
|
|
1,608,108
|
|
|
|
1,699,785
|
|
|
|
1,158,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,068,969
|
|
|
|
903,858
|
|
|
|
823,165
|
|
Research and development
|
|
|
672,511
|
|
|
|
655,224
|
|
|
|
413,432
|
|
Selling, general and administrative
|
|
|
406,875
|
|
|
|
381,409
|
|
|
|
255,569
|
|
Restructuring of operations and other items, net
|
|
|
43,717
|
|
|
|
148,121
|
|
|
|
(8,427
|
)
|
Goodwill and intangible asset impairment charges
|
|
|
541,586
|
|
|
|
2,021,463
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
188,872
|
|
|
|
4,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income from operations
|
|
|
(595,720
|
)
|
|
|
(2,491,231
|
)
|
|
|
158,307
|
|
Interest expense
|
|
|
(34,943
|
)
|
|
|
(31,020
|
)
|
|
|
(24,263
|
)
|
Interest income and other, net
|
|
|
36,110
|
|
|
|
46,762
|
|
|
|
51,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before income taxes and minority interest
|
|
|
(594,553
|
)
|
|
|
(2,475,489
|
)
|
|
|
185,321
|
|
Provision for income taxes
|
|
|
27,700
|
|
|
|
11,326
|
|
|
|
15,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before minority interest
|
|
|
(622,253
|
)
|
|
|
(2,486,815
|
)
|
|
|
169,639
|
|
Minority interest in net income of subsidiary
|
|
|
|
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(622,253
|
)
|
|
$
|
(2,486,819
|
)
|
|
$
|
169,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.96
|
)
|
|
$
|
(3.87
|
)
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.96
|
)
|
|
$
|
(3.87
|
)
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
647,953
|
|
|
|
641,823
|
|
|
|
398,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
647,953
|
|
|
|
641,823
|
|
|
|
405,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
46
LSI
Corporation
Consolidated
Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred Stock
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balances at December 31, 2005
|
|
|
394,015
|
|
|
$
|
3,940
|
|
|
$
|
3,010,166
|
|
|
$
|
(14,064
|
)
|
|
$
|
(1,389,944
|
)
|
|
$
|
17,852
|
|
|
$
|
1,627,950
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,638
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
276
|
|
|
|
|
|
Change in unrealized loss on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of FAS 123R reclassification of
deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
(14,064
|
)
|
|
|
14,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of FAS 123R on foreign entities
|
|
|
|
|
|
|
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
Issuance to employees under stock option and purchase plans
|
|
|
8,944
|
|
|
|
90
|
|
|
|
60,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,013
|
|
Issuance of common stock pursuant to restricted stock awards, net
|
|
|
721
|
|
|
|
7
|
|
|
|
(3,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,243
|
)
|
Stock-based compensation related to employee stock options
|
|
|
|
|
|
|
|
|
|
|
31,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,338
|
|
Stock-based compensation related to employee stock purchases
|
|
|
|
|
|
|
|
|
|
|
10,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,842
|
|
Stock-based compensation related to restricted shares
|
|
|
|
|
|
|
|
|
|
|
6,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
403,680
|
|
|
|
4,037
|
|
|
|
3,102,178
|
|
|
|
|
|
|
|
(1,220,306
|
)
|
|
|
9,829
|
|
|
|
1,895,738
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,486,819
|
)
|
|
|
|
|
|
|
|
|
Cumulative effect adjustment to accumulated deficit with respect
to the adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,193
|
)
|
|
|
|
|
|
|
|
|
Adoption of EITF
06-02
sabbatical leave
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,204
|
)
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,982
|
|
|
|
|
|
Change in unrealized gain on available-for-sale securities, net
of tax $197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,682
|
|
|
|
|
|
Actuarial gain on pension and post-retirement plan, net of tax
$26,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,463,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with Agere merger
|
|
|
368,002
|
|
|
|
3,680
|
|
|
|
3,641,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,645,064
|
|
Agere restricted stock units & options vested as of
acquisition date
|
|
|
|
|
|
|
|
|
|
|
50,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,158
|
|
Repurchase of shares
|
|
|
(102,642
|
)
|
|
|
(1,026
|
)
|
|
|
(769,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(770,752
|
)
|
Issuance to employees under stock option and purchase plans
|
|
|
7,176
|
|
|
|
71
|
|
|
|
46,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,309
|
|
Issuance of common stock pursuant to restricted stock awards, net
|
|
|
4,379
|
|
|
|
44
|
|
|
|
(11,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,825
|
)
|
Stock-based compensation related to employee stock options
|
|
|
|
|
|
|
|
|
|
|
47,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,127
|
|
Stock-based compensation related to employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
11,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,757
|
|
Stock-based compensation related to restricted shares
|
|
|
|
|
|
|
|
|
|
|
35,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
680,595
|
|
|
|
6,806
|
|
|
|
6,152,421
|
|
|
|
|
|
|
|
(3,738,522
|
)
|
|
|
64,291
|
|
|
|
2,484,996
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(622,253
|
)
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,824
|
|
|
|
|
|
Change in unrealized gain on available-for-sale securities, net
of tax $1,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
852
|
|
|
|
|
|
Unrealized loss on cash-flow hedges, net of tax $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(905
|
)
|
|
|
|
|
Actuarial loss on pension and post-retirement plan, net of tax $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(357,957
|
)
|
|
|
|
|
Amortization of prior service cost and net actuarial gain or
(loss) included in net periodic benefit credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(950,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of shares
|
|
|
(44,611
|
)
|
|
|
(446
|
)
|
|
|
(228,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(229,424
|
)
|
Issuance to employees under stock option and purchase plans
|
|
|
9,403
|
|
|
|
94
|
|
|
|
42,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,928
|
|
Issuance of common stock pursuant to restricted stock awards, net
|
|
|
2,745
|
|
|
|
27
|
|
|
|
(6,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,995
|
)
|
Stock-based compensation related to employee stock options
|
|
|
|
|
|
|
|
|
|
|
55,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,037
|
|
Stock-based compensation related to employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
8,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,473
|
|
Stock-based compensation related to restricted shares
|
|
|
|
|
|
|
|
|
|
|
35,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
648,132
|
|
|
$
|
6,481
|
|
|
$
|
6,058,786
|
|
|
$
|
|
|
|
$
|
(4,360,775
|
)
|
|
$
|
(263,570
|
)
|
|
$
|
1,440,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
47
LSI
Corporation
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(622,253
|
)
|
|
$
|
(2,486,819
|
)
|
|
$
|
169,638
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
324,223
|
|
|
|
278,542
|
|
|
|
82,263
|
|
Stock-based compensation expense
|
|
|
72,283
|
|
|
|
77,267
|
|
|
|
47,049
|
|
Non-cash restructuring and other items
|
|
|
(4,215
|
)
|
|
|
98,909
|
|
|
|
(713
|
)
|
Goodwill and intangible impairment charges
|
|
|
541,586
|
|
|
|
2,021,463
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
188,872
|
|
|
|
4,284
|
|
Gain on repurchase of convertible subordinated notes
|
|
|
(3,178
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of intellectual property
|
|
|
|
|
|
|
|
|
|
|
(15,000
|
)
|
Gain on sale of Gresham manufacturing facility and associated
intellectual property
|
|
|
|
|
|
|
|
|
|
|
(12,553
|
)
|
Write-off of intangible assets acquired in a purchase business
combination
|
|
|
|
|
|
|
|
|
|
|
3,325
|
|
Write-down of debt and equity securities/(gain) on sale of
equity securities
|
|
|
15,273
|
|
|
|
2,396
|
|
|
|
(6,727
|
)
|
Gain on sale of property and equipment, including assets
held-for-sale
|
|
|
(123
|
)
|
|
|
(9,399
|
)
|
|
|
(252
|
)
|
Non-cash foreign exchange loss/(gain)
|
|
|
25,469
|
|
|
|
4,207
|
|
|
|
(1,089
|
)
|
Changes in deferred tax assets and liabilities
|
|
|
10,027
|
|
|
|
(3,619
|
)
|
|
|
(98
|
)
|
Changes in assets and liabilities, net of assets acquired and
liabilities assumed in business combinations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
102,386
|
|
|
|
174,962
|
|
|
|
(24,617
|
)
|
Inventories
|
|
|
20,307
|
|
|
|
74,708
|
|
|
|
(18,062
|
)
|
Prepaid expenses and other assets
|
|
|
52,024
|
|
|
|
21,557
|
|
|
|
(24,858
|
)
|
Accounts payable
|
|
|
(130,129
|
)
|
|
|
(39,162
|
)
|
|
|
23,338
|
|
Accrued and other liabilities
|
|
|
(125,628
|
)
|
|
|
(108,885
|
)
|
|
|
21,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
278,052
|
|
|
|
294,999
|
|
|
|
247,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of debt securities available-for-sale
|
|
|
(190,548
|
)
|
|
|
(303,407
|
)
|
|
|
(603,624
|
)
|
Proceeds from maturities and sales of debt securities
available-for-sale
|
|
|
240,157
|
|
|
|
616,224
|
|
|
|
595,135
|
|
Purchases of equity securities
|
|
|
(8,500
|
)
|
|
|
(10,500
|
)
|
|
|
(8,150
|
)
|
Proceeds from sales of equity securities
|
|
|
|
|
|
|
|
|
|
|
11,876
|
|
Purchases of property, equipment and software
|
|
|
(134,589
|
)
|
|
|
(102,823
|
)
|
|
|
(58,671
|
)
|
Proceeds from sale of property and equipment
|
|
|
13,674
|
|
|
|
16,166
|
|
|
|
118
|
|
Cash acquired from acquisition of Agere, net of acquisition costs
|
|
|
|
|
|
|
517,712
|
|
|
|
|
|
Acquisitions of other businesses and companies, net of cash
acquired
|
|
|
(95,137
|
)
|
|
|
(132,830
|
)
|
|
|
(55,328
|
)
|
Proceeds from sale of Consumer Products Group
|
|
|
|
|
|
|
22,555
|
|
|
|
|
|
Proceeds from sale of Mobility Products Group, net of
transaction costs
|
|
|
|
|
|
|
445,500
|
|
|
|
|
|
Proceeds from sale of semiconductor operations in Thailand, net
of transaction costs
|
|
|
|
|
|
|
49,600
|
|
|
|
|
|
Proceeds from sale of intellectual property
|
|
|
|
|
|
|
|
|
|
|
22,670
|
|
Proceeds from sale of Fort Collins facility
|
|
|
|
|
|
|
|
|
|
|
10,998
|
|
Proceeds from sale of Colorado Springs facility
|
|
|
|
|
|
|
|
|
|
|
7,029
|
|
Proceeds from sale of Gresham manufacturing facility
|
|
|
|
|
|
|
|
|
|
|
96,426
|
|
Proceeds from sale of intellectual property associated with the
Gresham manufacturing facility
|
|
|
|
|
|
|
|
|
|
|
5,100
|
|
Proceeds from maturity of notes receivable associated with sale
of semiconductor operations in Thailand
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
Increase in non-current assets and deposits
|
|
|
(13,300
|
)
|
|
|
|
|
|
|
|
|
Proceeds received from the resolution of a pre-acquisition
income tax contingency
|
|
|
4,821
|
|
|
|
3,230
|
|
|
|
2,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by investing activities
|
|
|
(163,422
|
)
|
|
|
1,121,427
|
|
|
|
25,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of convertible subordinated notes
|
|
|
(116,636
|
)
|
|
|
|
|
|
|
|
|
Repayment of debt obligations
|
|
|
|
|
|
|
|
|
|
|
(271,848
|
)
|
Issuances of common stock
|
|
|
42,928
|
|
|
|
46,280
|
|
|
|
61,014
|
|
Purchase of minority interest in subsidiary
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
Purchase of common stock under repurchase programs
|
|
|
(229,231
|
)
|
|
|
(770,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(303,009
|
)
|
|
|
(724,472
|
)
|
|
|
(210,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(3,889
|
)
|
|
|
1,815
|
|
|
|
973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/increase in cash and cash equivalents
|
|
|
(192,268
|
)
|
|
|
693,769
|
|
|
|
63,151
|
|
Cash and cash equivalents at beginning of year
|
|
|
1,021,569
|
|
|
|
327,800
|
|
|
|
264,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
829,301
|
|
|
$
|
1,021,569
|
|
|
$
|
327,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
48
LSI
Corporation
Notes to
Consolidated Financial Statements
|
|
Note 1
|
Significant
Accounting Policies
|
Nature of the Business: LSI Corporation
(LSI or the Company) designs, develops
and markets complex, high-performance semiconductors and storage
systems. The Company provides silicon-to-system solutions that
are used at the core of products that create, store, consume and
transport digital information. The Company offers a broad
portfolio of capabilities including custom and standard product
integrated circuits used in hard disk drives, high-speed
communication systems, computer servers, storage systems, and
personal computers. The Company also offers external storage
systems and host adapter boards and software applications for
attaching storage devices to computer servers and for storage
area networks.
The Company operates in two reportable segments the
Semiconductor segment and the Storage Systems segment. For the
Semiconductor segment, the Company sells its integrated circuits
for storage applications to makers of hard disk drives and
computer servers. The Company sells its integrated circuits for
networking applications principally to makers of devices used in
computer and communications networks and, to a lesser extent, to
makers of personal computers. For the Storage Systems segment,
the Company sells its storage systems, host adapter boards and
software applications for attaching storage devices to computer
servers and for storage area networks to original equipment
manufactures, or OEMs, who resell those products to end
customers under their own brand name. The Company also generates
revenue by licensing other entities to use its intellectual
property.
Basis of Presentation: The consolidated
financial statements include the accounts of the Company and all
of its wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
On April 2, 2007, the Company acquired Agere Systems Inc.
(Agere) through the merger of Agere and a subsidiary
of the Company.
Minority interest in a subsidiary represents the minority
stockholders proportionate share of the net assets and the
results of operations for a majority-owned subsidiary in Japan.
As of December 31, 2007, the Company owned approximately
99.84% of the Japanese subsidiary. During 2008, the Company
purchased all the minority interest. As of December 31,
2008, the Company owned 100% of the Japanese subsidiary.
Where the functional currency of the Companys foreign
subsidiaries is the local currency, all assets and liabilities
are translated into U.S. dollars at the current rates of
exchange as of the balance sheet date, and revenues and expenses
are translated using weighted average rates prevailing during
the period. Accounts and transactions denominated in foreign
currencies have been re-measured into functional currencies
before translation into U.S. dollars. Foreign currency
transaction gains and losses are included as a component of
interest income and other, net. Gains and losses from foreign
currency translation are included as a separate component of
comprehensive income.
Amortization of intangibles, which was previously reported as a
separate component of operating expenses, has been reclassified
to cost of revenues for the year ended December 31, 2006 to
conform to the current year presentation.
Use of Estimates: 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, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ significantly from these
estimates.
Acquisitions: The estimated fair value of
acquired assets and assumed liabilities and the results of
operations of purchased businesses are included in the
Companys consolidated financial statements from the
effective date of the purchase. The total purchase price is
allocated to the estimated fair value of assets acquired and
liabilities assumed based on management estimates. The purchase
price includes direct acquisition costs consisting of investment
banking, legal and accounting fees.
49
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
Revenue Recognition: The majority of the
Companys product revenues are recognized upon shipment,
when persuasive evidence of a sales arrangement exists, the
price is fixed or determinable, the title has transferred and
collection of resulting receivables is reasonably assured (or
probable in the case of software). Standard products sold to
distributors are subject to specific rights of return, and
revenue recognition is deferred until the distributor sells the
product to a third party. Revenues from the licensing of the
Companys intellectual property are recognized when the
significant contractual obligations have been fulfilled. Royalty
revenues are recognized upon the sale of products subject to
royalties. All amounts billed to a customer related to shipping
and handling are classified as revenues, while all costs
incurred by the Company for shipping and handling are classified
as cost of revenues. Consideration given to customers, when
offered, is primarily in the form of discounts and rebates, and
is accounted for as a reduction to revenues in the period the
related sale is made. Reserves for estimated sales returns are
established based on historical returns experience. The Company
has substantial historical experience to form a basis for
estimating returns when products are shipped.
In arrangements where software is more than incidental to the
arrangement as a whole, which includes a combination of the
Companys hardware and premium software products that are
also sold separately, the Company follows the guidance in
Emerging Issues Task Force (EITF) Issue
No. 03-05,
Applicability of AICPA Statement of Position
97-2 to
Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software and accounts for the entire
arrangement as a sale of software and software-related items
because the software is essential to the functionality of the
hardware, as the software provides the majority of the
value-added features and differentiated performance of the
Companys products.
Sales arrangements that include a combination of storage systems
hardware, software
and/or
services are multiple element arrangements. Revenues from
multiple element arrangements that include software that is more
than incidental to the product being sold and that include a
combination of storage systems hardware, premium software,
services and post-contract customer support, are allocated to
the separate elements based on relative fair values, which are
determined based on the prices when the items are sold
separately.
Income/(Loss) per Share: Basic income/(loss)
per share is computed by dividing net income/(loss) available to
common stockholders (numerator) by the weighted average number
of common shares outstanding (denominator) during the period.
Diluted income/(loss) per share is computed using the
weighted-average number of common and potentially dilutive
common shares outstanding during the period using the
treasury-stock method for outstanding stock options and
restricted stock awards and the if-converted method for
convertible notes. Under the treasury stock method, the amount
the employee must pay for exercising stock options and employee
stock purchase rights, 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 shares.
The following table sets forth a reconciliation of the
numerators and denominators used in the computation of basic and
diluted per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Per-Share
|
|
|
|
|
|
|
|
|
Per-Share
|
|
|
|
|
|
|
|
|
Per-Share
|
|
|
|
(Loss)*
|
|
|
Shares+
|
|
|
Amount
|
|
|
(Loss)*
|
|
|
Shares+
|
|
|
Amount
|
|
|
Income*
|
|
|
Shares+
|
|
|
Amount
|
|
|
|
(In thousands except per share amounts)
|
|
|
Basic (loss)/income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income available to common stockholders
|
|
$
|
(622,253
|
)
|
|
|
647,953
|
|
|
$
|
(0.96
|
)
|
|
$
|
(2,486,819
|
)
|
|
|
641,823
|
|
|
$
|
(3.87
|
)
|
|
$
|
169,638
|
|
|
|
398,551
|
|
|
$
|
0.43
|
|
Stock options, employee stock purchase rights and restricted
stock unit awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,612
|
|
|
|
|
|
Diluted (loss)/income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income available to common stockholders
|
|
$
|
(622,253
|
)
|
|
|
647,953
|
|
|
$
|
(0.96
|
)
|
|
$
|
(2,486,819
|
)
|
|
|
641,823
|
|
|
$
|
(3.87
|
)
|
|
$
|
169,638
|
|
|
|
405,163
|
|
|
$
|
0.42
|
|
50
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
Weighted average options to purchase 86,798,304, 93,011,016 and
45,379,128 shares were excluded from the computation of
diluted shares for the years ended December 31, 2008, 2007
and 2006, respectively, because of their antidilutive effect on
net (loss)/income per share.
For the years ended December 31, 2008, 2007 and 2006,
48,406,774, 43,810,596 and 34,676,681, respectively, weighted
average potentially dilutive shares associated with convertible
notes were excluded from the calculation of diluted shares
because of their antidilutive effect on net income or (loss) per
share.
Stock-Based Compensation Expense: On
January 1, 2006, the Company adopted FAS 123R, using
the modified prospective transition method. In accordance with
this transition method, the Company began recognizing
compensation expense for all share-based awards granted after
January 1, 2006 plus unvested awards granted on or prior to
January 1, 2006. The estimated fair value of the
equity-based awards, less expected forfeitures, is amortized
over the awards vesting period on a straight-line basis.
Determining the fair value of stock-based awards at the grant
date requires considerable judgment, including estimating
expected volatility, expected term and risk-free rate. If
factors change and the Company employs different assumptions,
stock-based compensation expense may differ significantly from
what the Company has recorded in prior years.
Advertising: Advertising costs are charged to
expense in the period incurred. Advertising expense was
$4.1 million, $8.1 million and $5.0 million for
the years ended December 31, 2008, 2007 and 2006,
respectively.
Sales and Value-Added Taxes: Taxes collected
from customers and remitted to governmental authorities are
presented on a net basis in the Companys statements of
operations.
Cash Equivalents: All highly liquid
investments purchased with an original maturity of 90 days
or less are considered to be cash equivalents. Cash equivalents
are reported at amortized cost plus accrued interest.
Accounts Receivable and Allowance for Doubtful Accounts:
Trade receivables are reported in the balance sheet reduced
by an allowance for doubtful accounts reflecting estimated
losses resulting from receivables not considered to be
collectible. The allowance for doubtful accounts is estimated by
evaluating customers payment history and credit worthiness
as well as current economic and market trends.
Investments: Available-for-sale investments
include marketable short-term investments and long-term
investments in marketable shares of technology companies.
Short-term investments in marketable debt securities are
reported at fair value and include all debt securities
regardless of their maturity dates. Long-term investments in
marketable equity securities are reported at fair value.
Unrealized gains and losses on marketable debt and equity
securities, net of related tax, are recorded as a separate
component of comprehensive income in stockholders equity
until realized. The investments in long-term non-marketable
equity securities are recorded at cost and consist primarily of
non-marketable common and preferred stock of various technology
companies. Gains and losses on securities sold are determined
based on the specific identification method and are included in
interest income and other, net, in the statements of operations.
The Company does not hold any of these securities for
speculative or trading purposes.
For all investment securities, unrealized losses that are
considered to be other than temporary are considered impairment
losses and recognized as a component of interest income and
other, net, in the statements of operations. For all investments
in debt and equity securities, unrealized losses are evaluated
to determine if they are other than temporary. In order to
determine if an impairment has occurred for marketable debt
securities, the Company monitors the credit quality, performance
of underlying collateral for asset and mortgage backed
securities, as well as the severity and duration of the
unrealized loss. In order to determine if an impairment has
occurred for equity securities, the Company reviews the
financial performance and outlook of each investee and industry
performance. For marketable equity securities, impairment losses
are measured using the closing trading prices of the marketable
51
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
securities on the date management determined that the
investments were impaired. For non-marketable equity securities,
impairment losses are generally measured by using pricing in
current rounds of financing. The fair values of the
Companys non-marketable equity investments are not
estimated unless there are identified events or changes in
circumstances that may have a significant adverse effect on the
investment.
Inventories: Inventories are stated at the
lower of cost or market. Cost is computed on a
first-in,
first-out basis for raw materials,
work-in-process
and finished goods. Inventory provisions are established when
conditions indicate that the selling price could be less than
cost due to physical deterioration, obsolescence, changes in
price levels, or other causes. Inventory provisions are
established for excess inventory generally based on inventory
levels in excess of 12 months of demand, as judged by
management, for each specific product. When inventory is written
down, a new cost basis is established.
Property and Equipment: Property and equipment
are recorded at cost. Depreciation and amortization for property
and equipment are calculated based on the straight-line method
over the estimated useful lives of the assets as presented below:
|
|
|
|
|
Buildings and improvements
|
|
|
20-40 years
|
|
Equipment
|
|
|
3-5 years
|
|
Furniture and fixtures
|
|
|
5 years
|
|
Amortization of leasehold improvements is computed using the
shorter of the remaining term of the related leases or the
estimated useful lives of the improvements. While the majority
of the Companys equipment is depreciated over a three- to
five-year period, some tools are being depreciated over a
seven-year period.
Software: The Company capitalizes both
purchased software and software development costs. Purchased
software primarily includes software and external consulting
fees related to the purchase and implementation of software
projects used for business operations and engineering design
activities. Capitalized software projects are amortized over the
estimated useful lives of the projects, typically a two- to
five-year period. Development costs for software that will be
sold to customers
and/or
embedded in certain hardware products are capitalized beginning
when a products technological feasibility has been
established. Prior to the establishment of technological
feasibility, software development costs are expensed as research
and development. Capitalized development costs are amortized on
a straight-line basis to cost of revenues when software is ready
for general release to customers over the estimated useful life
of the product, typically an 18- to
36-month
period. Software amortization totaling $25.8 million,
$19.1 million and $13.8 million was included in the
Companys results of operations for the years ended
December 31, 2008, 2007 and 2006, respectively. On a
quarterly basis, the Company assesses the realizability of each
software product. The amount by which the unamortized
capitalized software development costs exceed the estimated net
realizable value is written off immediately.
Impairment of Long-Lived Assets: The Company
evaluates the carrying value of long-lived assets whenever
events or changes in circumstances indicate the carrying value
of an asset may not be recoverable. The determination of
recoverability is based on an estimate of undiscounted cash
flows expected to result from the use and eventual disposition
of the asset. In the event such cash flows are not expected to
be sufficient to recover the recorded value of the assets, the
assets are written down to their estimated fair values. When
assets are removed from operations and held for sale, the
impairment loss is estimated as the excess of the carrying value
of the assets over their fair value.
Goodwill: The Company monitors the
recoverability of goodwill recorded in connection with
acquisitions, by reporting unit, annually in the fourth quarter
or sooner if events or changes in circumstances indicate that
the carrying amount may not be recoverable. The Companys
two reporting units are Semiconductor and Storage Systems.
Impairment, if any, would be determined based on an implied fair
value model for determining the carrying value of goodwill. The
impairment test is a two-step process. The first step requires
comparing the fair value of each reporting unit to its net book
value. The Company uses management estimates of future cash
flows to perform the first step of the goodwill impairment test.
Managements estimates include assumptions about future
52
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
conditions such as future revenues, gross margins, operating
expenses and industry trends. The second step is only performed
if impairment is indicated after the first step is performed,
which involves measuring the actual impairment to goodwill.
Fair Value Disclosures of Financial
Instruments: The Company determines the estimated
fair value of financial instruments using available market
information and valuation methodologies considered to be
appropriate. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates are not necessarily indicative of the
amounts that the Company could realize in a current market
exchange. The use of different market assumptions
and/or
estimation methodologies could have a significant effect on the
estimated fair value amounts. The fair value of investments,
derivative instruments and convertible debt are based on market
data. Carrying amounts of accounts receivable and accounts
payable approximate fair value due to the short maturity of
these financial instruments.
Derivative Instruments: All of the
Companys derivative instruments are recognized as assets
or liabilities in the statement of financial position and
measured at fair value. On the date a derivative contract is
entered into, the Company designates the derivative as either a
hedge of the fair value of a recognized asset or liability
(fair-value hedge), as a hedge of the variability of
cash flows to be received or paid (cash-flow hedge),
or as a foreign-currency hedge. Changes in the fair value of a
derivative that is highly effective and is designated and
qualifies as a fair-value hedge, along with the loss or gain on
the hedged asset or liability that is attributable to the hedged
risk (including losses or gains on firm commitments), are
recorded in current period earnings. Effective changes in the
fair value of a derivative that is highly effective and is
designated and qualifies as a cash-flow hedge are recorded in
other comprehensive income until earnings are affected by the
variability of the cash flows. Changes in the fair value of
derivatives that are highly effective and are designated and
qualify as a foreign-currency hedge are recorded in either
current period earnings or other comprehensive income, depending
on whether the hedge transaction is a fair-value hedge (e.g., a
hedge of a firm commitment that is to be settled in a foreign
currency) or a cash-flow hedge (e.g., a
foreign-currency-denominated forecasted transaction).
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management
objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives that
are designated as fair-value, cash-flow or foreign-currency
hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. The
Company also assesses, both at the hedges inception and on
an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes
in fair values or cash flows of the hedged items. If it were to
be determined that a derivative is not highly effective as a
hedge or that it has ceased to be a highly effective hedge, the
Company would discontinue hedge accounting prospectively.
The Company would discontinue hedge accounting prospectively
when (1) it is determined that the derivative is no longer
highly effective in offsetting changes in the fair value or cash
flows of a hedged item (including firm commitments or forecasted
transactions); (2) the derivative expires or is sold,
terminated or exercised; (3) the derivative is no longer
designated as a hedge instrument, because it is unlikely that a
forecasted transaction will occur; (4) the hedged firm
commitment no longer meets the definition of a firm commitment;
or (5) management determines that designation of the
derivative as a hedge instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined
that the derivative no longer qualifies as a highly effective
fair-value hedge, the derivative will continue to be carried on
the balance sheet at its fair value, and the hedged asset or
liability will no longer be adjusted for changes in fair value.
When a fair value hedge on an interest-bearing financial
instrument (such as an interest rate swap) is cancelled and
hedge accounting is discontinued, the hedged item is no longer
adjusted for changes in its fair value, and the remaining asset
or liability will be amortized to earnings over the remaining
life of the hedged item. When hedge accounting is discontinued
because it is probable that a forecasted transaction will not
occur, the derivative will continue to be carried on the balance
sheet at its fair value, and gains and losses that were
accumulated in other comprehensive income will be recognized
immediately in earnings. When hedge accounting is discontinued
because the hedged
53
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
item no longer meets the definition of a firm commitment, the
derivative will continue to be carried on the balance sheet at
its fair value, and any asset or liability that was previously
recorded pursuant to recognition of the firm commitment will be
removed from the balance sheet and recognized as a gain or loss
in current period earnings.
Concentration of Credit Risk of Financial
Instruments: Financial instruments that
potentially subject the Company to credit risk consist of cash
equivalents, short-term investments and accounts receivable.
Cash equivalents and short-term investments are maintained with
high quality institutions, the composition and maturities of
which are regularly monitored by management. The Company
diversifies its investments to reduce the exposure to loss from
any single issuer, sector, bank or mutual fund. A majority of
the Companys trade receivables are derived from sales to
large multinational computer, communication, networking and
storage manufacturers, with the remainder distributed across
other industries. As of December 31, 2008, two customers
accounted for 19% and 14% of trade receivables and as of
December 31, 2007, two customers accounted for 25% and 14%
of trade receivables. Concentrations of credit risk with respect
to all other trade receivables are considered to be limited due
to the quantity of customers comprising the Companys
customer base and their dispersion across industries and
geographies. The Company performs ongoing credit evaluations of
its customers financial condition and requires collateral
as considered necessary. Write-offs of uncollectible amounts
have not been significant.
Product Warranties: The Company warrants
finished goods against defects in material and workmanship under
normal use and service for periods of one to five years. A
liability for estimated future costs under product warranties is
recorded when products are shipped.
Litigation and Settlement Costs: The Company
is involved in legal actions arising in the ordinary course of
business. The Company records an estimated loss for a loss
contingency when both of the following conditions are met:
(i) information available prior to issuance of the
financial statements indicates that it is probable that an asset
had been impaired or a liability had been incurred at the date
of the financial statements, and (ii) the amount of loss
can be reasonably estimated.
Income Taxes: The calculation of the
Companys tax provision involves the application of complex
tax rules and regulations within multiple jurisdictions
throughout the world. The Companys tax liabilities include
estimates for all income-related taxes that the Company believes
are probable and that can be reasonably estimated. To the extent
that the Companys estimates are understated, additional
charges to the provision for income taxes would be recorded in
the period in which the Company determines such understatement.
If the Companys income tax estimates are overstated,
income tax benefits will be recognized when realized.
Deferred tax assets and liabilities are recognized for temporary
differences between financial statement and income tax bases of
assets and liabilities. Valuation allowances are provided
against deferred tax assets when it is more likely than not that
some portion or all of the deferred tax asset will not be
realized. The Company considers future taxable income and
ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. The Company uses
the flow-through method to account for investment tax credits.
Under this method, the credits are recognized as a reduction of
income tax expense in the year the credit is utilized.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157
(FAS 157), Fair Value Measurements.
FAS 157 establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value, and
expands on required disclosures about fair value measurements.
The adoption of FAS 157 for financial assets and financial
liabilities, effective January 1, 2008, had no material
impact on the Companys results of operations or financial
position. See Note 12: Fair Value Measurements
for further details on our fair value measurements In February
2008, the FASB issued Staff Position (FSP)
157-2,
Effective Date of FASB Statement No. 157, which
delays the effective date of FAS 157 for all nonrecurring
fair value measurements of non-financial assets and
non-financial liabilities until fiscal years beginning after
November 15, 2008. The Company is currently assessing the
impact of FAS 157 for non-financial assets and
non-financial liabilities on its results of operations and
financial position. In
54
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
October 2008, the FASB issued
FSP 157-3,
Determining the Fair Value of a Financial Asset When the
Market for that Asset Is Not Active, which amends
FAS 157 by incorporating an example to illustrate key
considerations in determining the fair value of a financial
asset in an inactive market.
FSP 157-3
is effective upon issuance and should be applied to prior
periods for which financial statements have not been issued. The
adoption of
FSP 157-3,
effective October 2008, had no impact on the Companys
results of operations or financial position.
In December 2007, the FASB issued SFAS No. 141
(Revised 2007) (FAS 141(R)), Business
Combinations. FAS 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in an acquiree
and the goodwill acquired in an acquisition. FAS 141(R)
also establishes disclosure requirements to evaluate the nature
and financial effects of a business combination. FAS 141(R)
is effective prospectively for fiscal years beginning on or
after December 15, 2008. The adoption of FAS 141(R)
will change the Companys accounting treatment for business
combinations on a prospective basis beginning January 1,
2009.
In March 2008, the FASB issued SFAS No. 161
(FAS 161), Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB
Statement No. 133. FAS 161 expands quarterly
disclosure requirements in SFAS No. 133 about an
entitys derivative instruments and hedging activities.
FAS 161 is effective for fiscal years beginning after
November 15, 2008. The adoption of FAS 161 will
require the Company to provide additional disclosures about
derivative instruments and hedging activities beginning
January 1, 2009.
In May 2008, the FASB issued SFAS No. 162
(FAS 162), The Hierarchy of Generally
Accepted Accounting Principles. This statement identifies
the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting
principles in the United States. This statement will be
effective 60 days following the Securities and Exchange
Commissions approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles. The adoption of FAS 162 is not
expected to have a significant impact on the Companys
results of operations and financial position.
In November 2008, the FASB Emerging Issues Task Force
(EITF) issued EITF Issue
No. 08-6
(EITF 08-06),
Equity Method Investment Accounting Considerations.
EITF 08-6
address questions that have arisen about the application of the
equity method of accounting for investments after the effective
date of both FAS 141(R), Business Combinations,
and SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements.
EITF 08-6
is effective for fiscal years beginning on or after
December 15, 2008. The adoption of FAS 162 is not
expected to have a significant impact on the Companys
results of operations and financial position.
|
|
Note 2
|
Restructuring
and Other Items
|
2008
The Company recorded a charge of $43.7 million in
restructuring of operations and other items, net, for the year
ended December 31, 2008, consisting of $35.5 million
in charges for restructuring of operations and $8.2 million
in charges for other items. A charge of $41.1 million was
recorded in the Semiconductor segment and a charge of
$2.6 million was recorded in the Storage Systems segment.
Restructuring
and Impairment of Long-lived Assets:
The $35.5 million restructuring charges included a charge
of $5.6 million related to the Agere merger. See further
discussion under Restructuring Actions Associated with the
Agere Merger below.
The remaining $29.9 million in charges primarily resulted
from the following:
|
|
|
|
|
A charge of $22.6 million for severance and termination
benefits for employees, primarily related to a reduction in
force and broad-based reorganization that was announced in
January 2009;
|
55
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
|
|
|
|
|
A charge of $9.0 million for lease termination costs, which
included $7.0 million primarily for U.S. lease
termination costs and a $2.0 million charge primarily for
the change in time value of accruals for previously accrued
facility lease exit costs; and
|
|
|
|
A gain of $2.0 million for the sale of land in Gresham,
Oregon.
|
The following table sets forth the Companys restructuring
reserves as of December 31, 2008, other than reserves
related to restructuring actions associated with the Agere
merger, which are included in other accrued liabilities and
other non-current liabilities in the balance sheet, and
activities affecting the accruals during the year ended
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Restructuring
|
|
|
Utilized
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
(Income)/Expense
|
|
|
During
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Write-down of excess assets and other liabilities(a)
|
|
$
|
225
|
|
|
$
|
(1,740
|
)
|
|
$
|
1,598
|
|
|
$
|
83
|
|
Lease terminations(b)
|
|
|
23,318
|
|
|
|
8,946
|
|
|
|
(13,997
|
)
|
|
|
18,267
|
|
Payments to employees for severance(c)
|
|
|
24,817
|
|
|
|
22,645
|
|
|
|
(21,781
|
)
|
|
|
25,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,360
|
|
|
$
|
29,851
|
|
|
$
|
(34,180
|
)
|
|
$
|
44,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amount utilized includes a gain from the sale of land in
Gresham, Oregon. |
|
(b) |
|
The amount utilized represents cash payments. The balance
remaining for real estate lease terminations is expected to be
paid during the remaining terms of the leases, which extend
through 2011. |
|
(c) |
|
The amount utilized includes $6.6 million related to stock
grants exercised or expired. The majority of the balance
remaining for severance is expected to be paid by the end of
2009. |
Restructuring
Actions Associated with the Agere Merger:
In connection with the Agere merger, management restructured
Ageres operations to eliminate certain duplicative
activities, reduce cost structure and better align product and
operating expenses with existing general economic conditions.
Agere restructuring costs were accounted for as liabilities
assumed as part of the purchase business combination as of
April 2, 2007 in accordance with EITF Issue
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination. Adjustments to the initial
restructuring cost estimates made before December 31, 2007
were recorded as an offset to goodwill and to restructuring
expense thereafter.
The Company recorded a charge of $5.6 million related to
other restructuring actions, consisting of the following:
|
|
|
|
|
A net charge of $5.4 million for lease termination costs,
which included $2.3 million for the change in time value of
accruals for previously accrued facility lease exit costs and
$3.1 million for changes in sublease assumptions for
previously accrued lease exit costs;
|
|
|
|
A charge of $2.8 million for severance and termination
benefits for employees primarily related to a change in
severance estimates; and
|
|
|
|
A credit of $2.6 million primarily related to a gain from
the sale of assets held for sale in Singapore.
|
56
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
The following table sets forth the Companys restructuring
reserves related to the Agere merger as of December 31,
2008, which are included in other accrued liabilities and other
non-current liabilities in the balance sheets, and the
activities affecting the accruals during the year ended
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Changes in
|
|
|
Utilized
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Estimates During
|
|
|
During
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Lease terminations(a)
|
|
$
|
33,439
|
|
|
$
|
5,436
|
|
|
$
|
(12,587
|
)
|
|
$
|
26,288
|
|
Payments to employees for severance(b)
|
|
|
18,926
|
|
|
|
2,756
|
|
|
|
(20,974
|
)
|
|
|
708
|
|
Stock compensation charges in accordance with FAS 123R(c)
|
|
|
20,860
|
|
|
|
|
|
|
|
(19,218
|
)
|
|
|
1,642
|
|
Write-down of excess assets and other liabilities(d)
|
|
|
|
|
|
|
(2,569
|
)
|
|
|
2,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
73,225
|
|
|
$
|
5,623
|
|
|
$
|
(50,210
|
)
|
|
$
|
28,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amount utilized includes $0.8 million for write-off of
leasehold improvements and the remaining utilized amount
represents cash payments. The balance remaining for real estate
lease terminations is expected to be paid during the remaining
terms of these contracts, which extend through 2013. |
|
(b) |
|
The amount utilized represents cash severance payments to
employees. The majority of the balance remaining for severance
is expected to be paid by the end of 2009. |
|
(c) |
|
The amount utilized represents stock grants exercised or
expired. The balance is expected to be utilized by the end of
2009. |
|
(d) |
|
The amount includes a gain on the sale of assets in Singapore. |
Other
Items:
The Company recorded a net charge of $8.2 million related
to other items for the year ended December 31, 2008. The
charge includes $12.5 million for the settlement of a legal
proceeding offset primarily by curtailment gains resulting from
the pension plan freeze effective April 6, 2009 and
termination of the post-retirement medical plans.
Assets
held for sale:
Assets held for sale are included as a component of prepaid
expenses and other current assets in the balance sheet as of
December 31, 2008 and 2007. Assets held for sale of
$17.3 million as of December 31, 2008 primarily
included $16.8 million related to land in Gresham, Oregon.
Assets held for sale of $26.1 million as of
December 31, 2007 included $17.7 million related to
land in Gresham, Oregon, $6.8 million related to
semiconductor assembly and test facilities in Singapore and
$0.9 million related to land in Colorado.
Assets classified as held for sale are recorded at the lower of
their carrying amount or fair value less costs to sell and are
not depreciated. The Company reassesses the ability to realize
the carrying value of these assets at the end of each reporting
period until the assets are sold or otherwise disposed of and,
therefore, additional adjustments may be necessary.
2007
The Company recorded a charge of $148.1 million in
restructuring of operations and other items, net, for the year
ended December 31, 2007, consisting of $142.9 million
in charges for restructuring of operations and a charge of
$5.2 million for other items. A charge of
$143.4 million was recorded in the Semiconductor segment
and a charge of $4.7 million was recorded in the Storage
Systems segment.
57
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
Restructuring
and impairment of long-lived assets:
The $142.9 million in restructuring charges were the result
of the following actions in 2007:
Sale of
the Mobility Products Group:
On October 24, 2007, the Company completed the sale of its
Mobility Products Group (MPG), to Infineon for
$450 million in cash, plus a potential performance-based
payment in the first quarter of 2009, which we do not expect to
receive. The MPG designed semiconductors and software for
cellular telephone handsets and complete chip-level solutions
for satellite digital audio radio applications. The Company is
obligated to provide operational handling services to Infineon
until October 2011 and is leasing space in its Allentown,
Pennsylvania facility to Infineon. The facility lease is for a
term of 36 months. Infineon pays LSI fair market value for
such space rental.
A charge of $95.4 million related to the sale of the MPG
consisted of the following:
|
|
|
|
|
A charge of $17.7 million for the difference between the
proceeds of $450.0 million received and the
$467.7 million net book value of MPG at closing;
|
|
|
|
A charge of $27.5 million for future credits the buyer was
expected to receive from the Company on purchases of finished
goods inventory;
|
|
|
|
A charge of $21.8 million for post-closing inventory
pricing benefits the buyer was expected to receive for products
manufactured at Silicon Manufacturing Partners Pte. Ltd.
(SMP), a joint venture LSI has with Chartered
Semiconductor Manufacturing Ltd. (Chartered
Semiconductor);
|
|
|
|
A charge of $14.4 million for the acceleration of stock
awards previously granted to MPG employees whose positions were
to be eliminated as part of the sale of MPG; and
|
|
|
|
A charge of $4.5 million for Mobility-related lease
termination costs not assumed by the buyer, a $4.5 million
charge for estimated transaction costs, a $3.2 million
charge for severance and termination benefits for employees and
a charge of $1.8 million for the write-off of MPG fixed
assets not acquired by the buyer.
|
Sale of
the Consumer Products Group:
On July 27, 2007, the Company completed the sale of its
Consumer Products Group (CPG or Consumer
Group), to Magnum Semiconductor for approximately
$22.6 million in cash, plus a promissory note for
$18 million due in 2010 and a warrant to purchase preferred
shares of Magnum Semiconductor stock.
A charge of $14.0 million related to the sale of the
Consumer Group consisted of the following:
|
|
|
|
|
A credit of $1.3 million for the difference between the
$22.6 million received and the $21.3 million net book
value of the assets as of the date the transaction closed;
|
|
|
|
A $12.8 million charge for severance and termination
benefits for employees; and
|
|
|
|
A $2.5 million charge related to facility lease termination
costs not assumed by the buyer.
|
Sale of
Thailand Semiconductor Assembly and Test Operations:
On October 2, 2007, the Company completed the sale of its
semiconductor assembly and test operations in Thailand to STATS
ChipPAC Ltd. (STATS ChipPAC) for approximately
$100 million, with $50 million due upon closing and a
$50 million note payable over four years. As of
December 31, 2008, the note payable balance was
$30 million. STATS ChipPAC offered employment to
substantially all of the LSI manufacturing employees associated
with the facility. The Company also entered into additional
agreements with STATS ChipPAC, including a multi-year wafer
assembly and test agreement and a transition services agreement.
58
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
Under the terms of the wafer assembly agreement, LSI is a
customer of STATS ChipPAC, whereby LSI has agreed to utilize
STATS ChipPAC for wafer assembly and testing for four years from
the date of sale. The wafer assembly and testing prices under
the agreement represent fair market values. The transition
services agreement was short-term in nature and priced
separately from the overall sale agreement. Services performed
by LSI under this agreement were primarily related to short-term
information system services and priced at fair market value.
A charge of $5.6 million related to the sale of Thailand
assembly and test operations consisted of the following:
|
|
|
|
|
A charge of $5.5 million to adjust the carrying value of
the assets held for sale to fair market value; and
|
|
|
|
A charge of $0.1 million for the difference between the net
proceeds of $99.6 million received and the
$99.7 million net book value at closing.
|
Other
Restructuring Actions and Charges:
On June 27, 2007, the Company announced a reduction in
workforce of approximately 900 positions (inclusive of the
Consumer Group), or 13 percent of the Companys
non-production workers across all business and functional areas
worldwide. On July 25, 2007, the Company also announced
that it would transition semiconductor and storage systems
assembly and test operations performed at its facilities in
Singapore and Wichita, Kansas to current manufacturing partners.
As part of these actions, the Company eliminated approximately
2,100 production positions worldwide. The Company recorded a
charge of $27.9 million related to the above actions and
other activities, consisting of the following:
|
|
|
|
|
A charge of $24.6 million for severance and termination
benefits for employees, of which $13.3 million related to
the general workforce reduction action announced on
June 27, 2007, $7.9 million related to workforce
reductions planned in 2008, and $3.4 million related to the
transition of the Kansas manufacturing operations to
manufacturing partners;
|
|
|
|
A charge of $7.4 million to adjust the carrying value of
the assets held for sale in Singapore to fair market values and
a charge of $1.0 million for certain other asset write-offs;
|
|
|
|
A charge of $1.5 million primarily for changes in sublease
assumptions for previously accrued facility lease terminations
and $2.0 million to reflect the change in time value of
accruals for facility lease terminations;
|
|
|
|
A charge of $1.8 million for the acceleration of stock
awards previously granted to employees whose positions were to
be eliminated as a result of the planned workforce reductions in
January 2008; and
|
|
|
|
A net gain of $10.4 million for the sale of land in
Colorado, which had a net book value of $2.0 million. Total
proceeds from the sale were $12.4 million.
|
The following table sets forth the Companys restructuring
reserves as of December 31, 2007, which are included in
other accrued liabilities in the balance sheet, and activities
affecting the accruals during the year ended December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Restructuring
|
|
|
Utilized
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Expense
|
|
|
During
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Write-down of excess assets and other liabilities(a)
|
|
$
|
|
|
|
$
|
75,344
|
|
|
$
|
(75,119
|
)
|
|
$
|
225
|
|
Lease terminations(b)
|
|
|
23,169
|
|
|
|
10,672
|
|
|
|
(10,523
|
)
|
|
|
23,318
|
|
Payments to employees for severance(c)
|
|
|
342
|
|
|
|
56,905
|
|
|
|
(32,430
|
)
|
|
|
24,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,511
|
|
|
$
|
142,921
|
|
|
$
|
(118,072
|
)
|
|
$
|
48,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
|
|
|
(a) |
|
The amount utilized includes reclassification of
$53.8 million to other liability accounts recorded during
the third quarter. |
|
(b) |
|
The amount utilized represents cash payments. The balance
remaining for real estate lease terminations is expected to be
paid during the remaining terms of the leases, which extend
through 2011. |
|
(c) |
|
The amount utilized represents cash severance payments to
employees. The majority of the balance remaining for severance
was paid by the end of 2008. |
Restructuring
Actions Associated with the Agere Merger:
The Company established a reserve of $93.4 million as of
April 2, 2007, consisting of the following items:
|
|
|
|
|
A reserve of $14.5 million for facility lease exit costs,
primarily in Singapore and Europe;
|
|
|
|
A reserve of $50.1 million for severance and termination
benefits for employees as a result of the restructuring actions
related to the Agere merger and the sale of the Thailand and
Singapore assembly and test facilities; and
|
|
|
|
A reserve of $28.8 million for stock-related compensation
expense associated with employees whose positions were
eliminated.
|
From April 2, 2007 through December 31, 2007, the
Company recorded a net charge of $3.3 million to reflect
changes in estimates, resulting from the following items:
|
|
|
|
|
A charge of $1.3 million for changes in assumptions for
previously accrued facility lease termination costs;
|
|
|
|
A charge of $1.2 million to reflect a change in time value
of accruals previously recorded for facility lease termination
costs;
|
|
|
|
A charge of $1.0 million for additional stock compensation
charges for employees whose positions were eliminated; and
|
|
|
|
A credit of $0.2 million for changes in estimated payments
to employees for severance previously recorded for Thailand and
other restructuring actions.
|
The following table sets forth restructuring reserves related to
the Agere merger as of December 31, 2007, that are included
in other accrued liabilities and in other non-current
liabilities in the balance sheet, and the activities affecting
the accruals during the period from April 2, 2007 to
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Adjustment
|
|
|
Changes in
|
|
|
Utilized
|
|
|
Balance at
|
|
|
|
April 2,
|
|
|
to Opening
|
|
|
Estimates During
|
|
|
During
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Balance sheet
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Lease terminations(a)
|
|
$
|
14,464
|
|
|
$
|
21,931
|
|
|
$
|
2,496
|
|
|
$
|
(5,452
|
)
|
|
$
|
33,439
|
|
Payments to employees for severance(b)
|
|
|
50,087
|
|
|
|
|
|
|
|
(167
|
)
|
|
|
(30,994
|
)
|
|
|
18,926
|
|
Stock compensation charges in accordance with FAS 123R(c)
|
|
|
28,841
|
|
|
|
|
|
|
|
951
|
|
|
|
(8,932
|
)
|
|
|
20,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
93,392
|
|
|
$
|
21,931
|
|
|
$
|
3,280
|
|
|
$
|
(45,378
|
)
|
|
$
|
73,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amount utilized represents cash payments. The balance
remaining for real estate lease terminations is expected to be
paid during the remaining terms of these contracts, which extend
through 2013. The adjustment to the opening balance sheet
consists of $21.9 million in termination costs for leases
related to Ageres restructuring plans that existed prior
to its acquisition by the Company. |
60
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
|
|
|
(b) |
|
The amount utilized represents cash severance payments to
employees. The majority of the balance remaining for severance
was paid by the end of 2008. |
|
(c) |
|
The amount utilized represents stock options exercised or
expired. The amounts accrued represent the value of stock
options and restricted units LSI expected to accelerate upon
termination of the holders employment. The balance is
expected to be utilized by the end of 2009. |
Other
Items:
During the fourth quarter of 2007, the Company recorded
$5.2 million of litigation charges in connection with
ongoing litigation matters.
2006
The Company recorded a credit of $8.4 million in
restructuring of operations and other items for the year ended
December 31, 2006. A credit of $9.6 million was
recorded in the Semiconductor segment and a charge of
$1.2 million was included in the Storage Systems segment.
The $8.4 million credit of restructuring expenses resulted
from the following:
|
|
|
|
|
Net gains of $38.9 million from the sale of certain zero
basis intellectual property, the sale of the Gresham, Oregon
manufacturing facility and related manufacturing process
intellectual property to ON Semiconductor, and sale of the
Companys ZSP digital signal processor technology;
|
|
|
|
A charge of $6.0 million primarily for the write-off of
intangible assets acquired in a purchase business combination
and other exit costs including contract termination costs;
|
|
|
|
A charge of $6.0 million primarily for changes in sublease
assumptions for previously accrued facility lease termination
costs and additional $1.5 million to reflect the change in
time value of accruals for facility lease termination
costs; and
|
|
|
|
A charge of $17.0 million for severance and termination
benefits for employees, primarily related to the broad-based
reorganization that was announced in August 2005.
|
Sale
of the Gresham Facility:
In May 2006, the Company completed the sale of its Gresham,
Oregon manufacturing facility to ON Semiconductor for
approximately $105.0 million in cash. Under the terms of
the agreement, ON Semiconductor offered 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. The facility use agreement was
terminated at December 31, 2008.
The Company recognized a gain of $12.5 million associated
with the sale of the Gresham manufacturing facility. No amounts
were deferred pursuant to the transaction as any continuing
involvement with the Gresham manufacturing facility did not
carry with it the same risks and rewards as does ownership of
the property, nor would any portion of the sales price need to
be deferred due to the nature and fair market value pricing of
the ancillary agreements entered into as discussed below, as
they represent separate earnings processes.
Under the terms of the wafer supply agreement, LSI agreed to
purchase $198.8 million in wafers from ON Semiconductor
during the period from the date of sale of the Gresham facility
in May 2006 to the end of LSIs second quarter of 2008.
Such wafer supply agreements are customary with the sale of
large wafer manufacturing facilities and the wafer prices under
the agreement represent fair market values. The wafers purchased
from ON Semiconductor were to be recognized by LSI as purchases
of inventory upon transfer of title of the inventory to LSI
61
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
from ON Semiconductor. Deliverables under the intellectual
property license agreement were completed upon sale of the
facility to ON Semiconductor in May 2006. The transition
services agreement was short-term in nature and priced
separately from the overall sale agreement. Services performed
by LSI under this agreement were primarily related to short-term
accounting system services and priced at fair market value.
In the fourth quarter of 2007, the wafer supply agreement was
amended to increase the total wafer purchase amount by
$3.8 million to a total of $202.6 million and to
extend the wafer supply agreement ending date to the fourth
quarter of 2008. In September 2008, this wafer supply agreement
was further amended to extend the ending period for the
commitment to the end of LSIs second quarter of 2009.
|
|
Note 3
|
Stock-Based
Compensation and Common Stock
|
On January 1, 2006, the Company adopted the fair value
recognition provisions of FAS 123R, Share-Based
Payments, 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 on or 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
FAS 123R was not significant.
Description
of the Companys Equity Compensation Plans
At the Companys annual meeting on May 14, 2008, the
stockholders approved amendments to the 2003 Equity Incentive
Plan (2003 Plan) and the Employee Stock Purchase
Plan (US ESPP). The principal changes to the 2003
Plan were:
|
|
|
|
|
Making a total of 45 million shares available for future
grants under the 2003 Plan after May 14, 2008. Of that
amount, 15 million shares are available for grants of
restricted stock and restricted stock units;
|
|
|
|
Allowing non-employee directors to be eligible to participate in
the 2003 Plan;
|
|
|
|
Including stock appreciation rights as a permitted type of award
under the 2003 Plan;
|
|
|
|
Increasing the limits on the size of awards that can be granted
under the 2003 Plan to any person in one year from two million
to four million shares for stock options and from
0.5 million to one million shares for restricted stock and
restricted stock units; and
|
|
|
|
Allowing incentive stock options to be granted under the 2003
Plan until May 14, 2018.
|
The Company will no longer award stock options, stock
appreciation rights, restricted stock or restricted stock units
under any other existing plans.
The principal changes to the US ESPP were:
|
|
|
|
|
Making a total of 25 million shares available for purchase
under the US ESPP after May 14, 2008;
|
|
|
|
Consolidating the Companys International Employee Stock
Purchase Plan (IESPP, and together with the US ESPP,
the ESPP) into the US ESPP; and
|
|
|
|
Extending the term of the US ESPP through May 14, 2018.
|
2003
Plan:
Under the 2003 Plan, the Company may grant stock options,
restricted stock units and stock appreciation rights to
employees, officers, non-employee directors and consultants with
an exercise price that is no less than the fair market value of
the stock on the date of grant. No participant may be granted
stock options covering more than four million shares of stock or
more than one million shares of restricted stock and restricted
stock units in any year. The
62
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
term of each option or restricted stock unit is determined by
the Board of Directors or its delegate and, for option grants on
or after February 12, 2004, is generally seven years.
Options generally vest in annual increments of 25% per year
commencing one year from the date of grant. As of
December 31, 2008, the 2003 Plan had approximately
38.5 million common shares available for future grants.
Employee
Stock Purchase Plan:
Under the ESPP, rights are granted to LSI 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. The maximum number of shares
that can be purchased in a single purchase period is
1,000 shares per employee. As of December 31, 2008,
there were approximately 23.5 million shares available for
future purchase under the ESPP.
Sales under the ESPP in 2008, 2007 and 2006 were approximately
4.6 million, 4.0 million and 3.6 million shares
of common stock at an average price of $3.80, $6.03 and $6.69
per share, respectively.
Stock-Based
Compensation Expense
The following table summarizes stock-based compensation expense
related to the Companys stock options, ESPP and restricted
stock unit awards for the years ended December 31, 2008,
2007 and 2006. Stock-based compensation costs capitalized to
inventory and software for the years ended December 31,
2008, 2007 and 2006 were not significant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Stock-based Compensation Expense Included In:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
9,269
|
|
|
$
|
10,711
|
|
|
$
|
6,903
|
|
Research and development
|
|
|
29,214
|
|
|
|
31,743
|
|
|
|
17,397
|
|
Selling, general and administrative
|
|
|
33,800
|
|
|
|
34,813
|
|
|
|
22,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
72,283
|
|
|
$
|
77,267
|
|
|
$
|
47,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated fair value of the stock-based awards, less
expected forfeitures, is amortized over each awards
vesting period on a straight-line basis.
Stock
Options:
The fair value of each option grant is estimated on the date of
grant using a reduced form calibrated binomial 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average estimated grant date fair value per share
|
|
$
|
2.04
|
|
|
$
|
3.05
|
|
|
$
|
3.30
|
|
Weighted average assumptions in calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
4.36
|
|
|
|
4.29
|
|
|
|
4.33
|
|
Risk-free interest rate
|
|
|
2.51
|
%
|
|
|
4.50
|
%
|
|
|
4.78
|
%
|
Volatility
|
|
|
52
|
%
|
|
|
47
|
%
|
|
|
48
|
%
|
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 affected by all of
the underlying assumptions and calibration of the Companys
model.
63
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
The risk-free interest rate assumption is based upon observed
interest rates of constant maturity U.S. Treasury
securities appropriate for the term of the Companys
employee stock options.
The Company uses 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 initial public offering of its
common stock in 1983. For the implied volatilities, the Company
uses near-the-money exchange-traded call options, as stock
options are call options that are granted at-the-money. The
historical and implied volatilities are annualized and equally
weighted to determine the volatilities as of the grant date.
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 or implied
volatilities.
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 for all past option grants made by the Company
since the initial public offering.
Because stock-based compensation expense recognized is based on
awards ultimately expected to vest, it has been reduced for
estimated forfeitures. Forfeitures are estimated at the time of
grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures are
estimated based on historical experience.
The following table summarizes changes in stock options
outstanding during each of the years ended December 31,
2008, 2007 and 2006 (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Shares
|
|
|
Per Share
|
|
|
Shares
|
|
|
Per Share
|
|
|
Options outstanding at January 1
|
|
|
100,242
|
|
|
$
|
16.12
|
|
|
|
56,750
|
|
|
$
|
11.92
|
|
|
|
70,618
|
|
|
$
|
13.21
|
|
Options assumed in Agere Acquisition
|
|
|
|
|
|
|
|
|
|
|
48,884
|
|
|
|
22.41
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(29,074
|
)
|
|
|
(21.41
|
)
|
|
|
(17,295
|
)
|
|
|
(15.56
|
)
|
|
|
(16,130
|
)
|
|
|
(18.02
|
)
|
Options granted
|
|
|
18,627
|
|
|
|
5.68
|
|
|
|
15,628
|
|
|
|
8.61
|
|
|
|
7,781
|
|
|
|
9.17
|
|
Options exercised
|
|
|
(4,682
|
)
|
|
|
(5.41
|
)
|
|
|
(3,725
|
)
|
|
|
(5.91
|
)
|
|
|
(5,519
|
)
|
|
|
(6.71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31
|
|
|
85,113
|
|
|
$
|
12.62
|
|
|
|
100,242
|
|
|
$
|
16.12
|
|
|
|
56,750
|
|
|
$
|
11.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31
|
|
|
49,446
|
|
|
$
|
16.72
|
|
|
|
67,124
|
|
|
$
|
20.12
|
|
|
|
35,638
|
|
|
$
|
14.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the options outstanding and exercisable as of
December 31, 2008, the weighted average remaining
contractual term was 4.09 and 3.04 years, respectively, and
the average intrinsic value was $0.1 million and
$0.02 million, respectively.
As of December 31, 2008, the total unrecognized
compensation expense related to nonvested stock options, net of
estimated forfeitures, was $81.9 million and is expected to
be recognized over the next 2.6 years on a weighted average
basis. The total intrinsic value of options exercised in 2008
was $7.2 million. Cash received from stock option exercises
was $25.3 million in 2008.
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 a
number of highly complex and subjective
64
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
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 Plan:
Compensation expense for the Companys ESPP is calculated
using the fair value of the employees purchase rights
under the Black-Scholes model. For disclosure purposes, the
assumptions that went into the calculation of fair value for the
May and November 2008, 2007 and 2006 grants were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average estimated grant date fair value per share
|
|
$
|
1.37
|
|
|
$
|
2.09
|
|
|
$
|
2.92
|
|
Weighted average assumptions in calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
0.7
|
|
Risk-free interest rate
|
|
|
1
|
%
|
|
|
4
|
%
|
|
|
5
|
%
|
Volatility
|
|
|
84
|
%
|
|
|
42
|
%
|
|
|
35
|
%
|
Cash received from ESPP issuances was $17.6 million in 2008.
Restricted
Stock Awards:
Under the 2003 Plan, the Company may grant restricted stock and
restricted stock unit awards. No participant may be granted more
than a total of one million shares of restricted stock or
restricted stock units in any year. The Company typically grants
restricted stock units. The vesting requirements for restricted
stock units are determined at the time of grant, and typically
vesting of restricted stock units is 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 grant and
compensation expense is recognized over the vesting period on a
straight-line basis.
The following table summarizes changes in restricted stock units
outstanding during each of the years ended December 31,
2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Number of Shares
|
|
|
|
(In thousands)
|
|
|
Non-vested shares at January 1
|
|
|
9,177
|
|
|
|
1,910
|
|
|
|
2,375
|
|
Assumed in Agere Acquisition
|
|
|
|
|
|
|
9,141
|
|
|
|
|
|
Granted
|
|
|
1,779
|
|
|
|
4,337
|
|
|
|
733
|
|
Vested
|
|
|
(4,026
|
)
|
|
|
(5,555
|
)
|
|
|
(928
|
)
|
Forfeited
|
|
|
(539
|
)
|
|
|
(656
|
)
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares at December 31
|
|
|
6,391
|
|
|
|
9,177
|
|
|
|
1,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes restricted stock units granted
during the years ended December 31, 2008, 2007 and 2006
(share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant Date Fair
|
|
|
Number of
|
|
|
Grant Date Fair
|
|
|
Number of
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Value per Share
|
|
|
Shares
|
|
|
Value per Share
|
|
|
Shares
|
|
|
Value per Share
|
|
|
Restricted stock units granted
|
|
|
1,779
|
|
|
$
|
5.02
|
|
|
|
4,337
|
|
|
$
|
8.20
|
|
|
|
733
|
|
|
$
|
9.45
|
|
65
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
As of December 31, 2008, the total unrecognized
compensation expense related to restricted stock units, net of
estimated forfeitures, was $39.5 million and is expected to
be recognized over the next 1.7 years on a weighted average
basis. The fair value of shares vested during the year ended
December 31, 2008 was $18.6 million.
As of December 31, 2008, there were a total of
approximately 130.0 million shares of common stock reserved
for issuance upon exercise of outstanding options and upon
vesting of outstanding restricted stock units and for use in
connection with future equity awards under the 2003 plan.
Income
Taxes:
In November 2005, the FASB issued FASB Staff Position
No. FAS 123R-3
(FSP 123R-3), Transition Election Related
to Accounting for Tax Effects of Share-Based Payment
Awards. The Company has elected the alternative transition
method (short-cut method) as set forth in the FSP 123R-3.
In addition, in accordance with FAS 123R,
SFAS No. 109 (FAS 109),
Accounting for Income Taxes, 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.
Common
Stock
Stock
Repurchase Programs:
On December 4, 2006, the Company announced that its Board
of Directors had authorized a stock repurchase program of up to
$500.0 million worth of shares of the Companys common
stock and terminated the prior stock repurchase program
authorized by the Board of Directors on July 28, 2000. In
July 2007, the Company completed the repurchase program
announced on December 4, 2006. On August 20, 2007, the
Company announced that its Board of Directors had authorized a
repurchase program of up to an additional $500.0 million
worth of shares of the Companys common stock. During the
year ended December 31, 2008, the Company repurchased
44.6 million shares for $229.2 million in cash, which
together with the repurchases in 2007, effectively completed the
authorization announced on August 20, 2007. The repurchased
shares were retired immediately after the repurchases were
complete. Retirement of the repurchased shares is recorded as a
reduction of common stock and additional
paid-in-capital.
Stock
Purchase Rights:
In November 1988, the Company implemented a plan to protect
stockholder value in the event of a proposed takeover of the
Company. Under the plan, each share of the Companys
outstanding common stock carried one Preferred Share Purchase
Right. Each Preferred Share Purchase Right entitled the holder,
under certain circumstances, to purchase one-thousandth of a
share of Preferred Stock of the Company or its acquirer at a
discounted price. The plan expired in 2008.
66
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
|
|
Note 4
|
Business
Combinations
|
During 2008, the Company completed one acquisition accounted for
under the purchase method of accounting. During 2007 and 2006,
the Company made three and two acquisitions, respectively. Set
forth below is information about material acquisitions (dollars
in millions):
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entity Name or Type of Technology;
|
|
|
|
|
Total
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
Amortizable
|
|
|
In-Process
|
|
Segment Included in;
|
|
Acquisition
|
|
|
Purchase
|
|
|
Type of
|
|
|
Other Assets
|
|
|
|
|
|
Intangible
|
|
|
Research and
|
|
Description of Acquired Business
|
|
Date
|
|
|
Price
|
|
|
Consideration
|
|
|
Acquired
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Development
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
HDD semiconductor business of Infineon; Semiconductor segment;
Silicon solutions for hard disk drive makers
|
|
|
April 25, 2008
|
|
|
$
|
95.1
|
|
|
|
Cash
|
|
|
$
|
10.3
|
|
|
$
|
6.6
|
|
|
$
|
78.2
|
|
|
|
None
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
|
Entity Name;
|
|
|
|
|
Total
|
|
|
|
|
|
Tangible Net
|
|
|
|
|
|
Amortizable
|
|
|
In-Process
|
|
Segment Included in;
|
|
Acquisition
|
|
|
Purchase
|
|
|
Type of
|
|
|
Assets
|
|
|
|
|
|
Intangible
|
|
|
Research and
|
|
Description of Acquired Business
|
|
Date
|
|
|
Price
|
|
|
Consideration
|
|
|
Acquired
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Development
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Tarari, Inc.; Semiconductor segment; Silicon and software
solutions for security and network control
|
|
|
October 3, 2007
|
|
|
$
|
93.0
|
|
|
|
Cash
|
|
|
$
|
6.3
|
|
|
$
|
57.4
|
|
|
$
|
23.3
|
|
|
$
|
6.0
|
|
Agere Systems Inc.; Semiconductor segment; Integrated circuit
solutions for communications and computing applications
|
|
|
April 2, 2007
|
|
|
$
|
3,720.1
|
|
|
|
368 million
shares of LSI
common stock
|
|
|
$
|
231.8
|
|
|
$
|
1,584.2
|
|
|
$
|
1,727.7
|
|
|
$
|
176.4
|
|
SiliconStor, Inc.; Semiconductor segment; Silicon solutions for
enterprise storage network based on SAS and
FC-SATA
|
|
|
March 13, 2007
|
|
|
$
|
56.4
|
|
|
|
Cash
|
|
|
$
|
1.5
|
|
|
$
|
37.8
|
|
|
$
|
10.6
|
|
|
$
|
6.5
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
|
Entity Name;
|
|
|
|
|
Total
|
|
|
|
|
|
Tangible Net
|
|
|
|
|
|
Amortizable
|
|
|
In-Process
|
|
Segment Included in;
|
|
Acquisition
|
|
|
Purchase
|
|
|
Type of
|
|
|
(Liabilities)
|
|
|
|
|
|
Intangible
|
|
|
Research and
|
|
Description of Acquired Business
|
|
Date
|
|
|
Price
|
|
|
Consideration
|
|
|
Acquired
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Development
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
StoreAge Networking Technologies, Ltd.; Storage segment; SAN
storage management and multi-tiered data protection software
applications
|
|
|
November 21, 2006
|
|
|
$
|
47.4
|
|
|
|
Cash
|
|
|
$
|
(4.6
|
)
|
|
$
|
6.1
|
|
|
$
|
43.5
|
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metta Technology; Semiconductor segment; Next generation digital
video
|
|
|
November 10, 2006
|
|
|
$
|
6.7
|
|
|
|
Cash
|
|
|
$
|
(0.6
|
)
|
|
|
Not applicable
asset purchase
|
|
|
$
|
5.4
|
|
|
$
|
1.9
|
|
Acquisition
of Hard Disk Drive Semiconductor Business of Infineon
On April 25, 2008, the Company completed the acquisition of
the assets of the hard disk drive (HDD)
semiconductor business of Infineon. The acquisition was intended
to enhance the Companys competitive position in the
desktop and enterprise HDD space. The acquisition was accounted
for under the purchase method of accounting. Accordingly, the
estimated fair value of assets acquired and liabilities assumed
and the results of
67
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
operations of the acquired business were included in our
financial statements from the effective date of the acquisition.
In connection with the acquisition, the Company also entered
into additional agreements with Infineon, including a supply
agreement and a transition service agreement. Under the terms of
the supply agreement, Infineon was to provide the Company
operations handling and wafer supply services for a period of up
to six months from the date of acquisition. These services are
priced separately and at fair market values. Under the terms of
the transition services agreement, Infineon provides the Company
engineering services in support of the existing HDD business
products through December 31, 2009. These services are
priced separately and at fair market values.
The following table sets forth the components of the
identifiable intangible assets associated with this acquisition,
which are being amortized over the estimated usage periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Fair Value
|
|
|
Average Life
|
|
|
|
(In millions)
|
|
|
(In years)
|
|
|
Current technology
|
|
$
|
46.5
|
|
|
|
4
|
|
Customer base
|
|
|
31.7
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
78.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger
with Agere
On April 2, 2007, the Company completed the acquisition of
Agere. Agere was a provider of integrated circuit solutions for
a variety of computing and communications applications. Some of
Ageres solutions included related software and reference
designs. Ageres solutions were used in products such as
hard disk drives, mobile phones, high-speed communications
systems and personal computers. Agere also licensed its
intellectual property to others. The purpose of the acquisition
was to enable the Company to expand its comprehensive set of
building block solutions including semiconductors, systems and
related software for storage, networking and consumer
electronics products that enable businesses and consumers to
store, protect and stay connected to their information and
digital content and expand its intellectual property portfolio
and integrated workforce in the Semiconductor segment.
Upon completion of the merger, each share of Agere common stock
outstanding at the effective time of the merger was converted
into the right to receive 2.16 shares of LSI common stock.
As a result, approximately 368 million shares of LSI common
stock were issued to former Agere stockholders. The fair value
of the common stock issued was determined using a share price of
$9.905 per share, which represented the average closing price of
LSI common shares for the period commencing two trading days
before and ending two trading days after December 4, 2006,
the date that the merger was agreed to and announced. LSI
assumed stock options and restricted stock units covering a
total of approximately 58 million shares of LSI common
stock. The fair value of options assumed was estimated using a
reduced form calibrated binomial lattice model and a share price
of $9.905 per share, which represents the average closing price
of LSI common shares for two trading days before and ending two
trading days after December 4, 2006. The value of the
options and restricted stock units assumed was reduced by the
fair value of unvested options and restricted stock units
assumed, based on the price of a share of LSI common stock on
April 2, 2007. LSI also guaranteed Ageres
6.5% Convertible Subordinated Notes due December 15,
2009, the fair value of which was $370.2 million as of
April 2, 2007.
The merger was accounted for as a purchase. Accordingly, the
results of operations of Agere and the estimated fair value of
assets acquired and liabilities assumed were included in the
Companys consolidated financial statements from the
acquisition date.
68
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
The following table sets forth the total purchase price of the
acquisition (in thousands):
|
|
|
|
|
Fair value of LSI common shares issued
|
|
$
|
3,647,021
|
|
(a) Fair value of stock awards assumed
|
|
|
218,713
|
|
(b) Fair value of unvested stock awards assumed
|
|
|
(168,555
|
)
|
|
|
|
|
|
(a) (b) Fair value of the vested options assumed
|
|
|
50,158
|
|
Direct transaction costs
|
|
|
22,970
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
3,720,149
|
|
|
|
|
|
|
Purchase
Price Allocation:
The allocation of the purchase price to Ageres tangible
and identifiable intangible assets acquired and liabilities
assumed was based on their estimated fair values. The excess of
the purchase price over the tangible and identifiable intangible
assets acquired and liabilities assumed was allocated to
goodwill. None of the goodwill recorded is expected to be
deductible for tax purposes except the tax deductible goodwill
LSI inherited from Agere. The purchase price was allocated as
follows as of April 2, 2007 (in thousands):
|
|
|
|
|
Cash
|
|
$
|
540,140
|
|
Accounts receivable
|
|
|
222,169
|
|
Inventory
|
|
|
120,848
|
|
Assets held for sale
|
|
|
122,756
|
|
Property and equipment
|
|
|
162,047
|
|
Accounts payable
|
|
|
(167,947
|
)
|
Pension and post-retirement liabilities
|
|
|
(214,607
|
)
|
Convertible notes
|
|
|
(370,249
|
)
|
Other liabilities
|
|
|
(183,359
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
231,798
|
|
Identifiable intangible assets
|
|
|
1,727,700
|
|
In-process research and development
|
|
|
176,400
|
|
Goodwill
|
|
|
1,584,251
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
3,720,149
|
|
|
|
|
|
|
Note 2 contains information related to the cost of
restructuring programs related to Agere. The costs were included
as part of other liabilities assumed as of April 2, 2007.
The following table sets forth the components of the
identifiable intangible assets, which are being amortized over
their estimated useful lives, some on a straight-line basis and
others on an accelerated basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Identifiable Intangible Assets
|
|
Fair Value
|
|
|
Average Life
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
Current technology
|
|
$
|
844,500
|
|
|
|
8.5
|
|
Customer base
|
|
|
513,000
|
|
|
|
10
|
|
Patent licensing
|
|
|
317,200
|
|
|
|
10
|
|
Order backlog
|
|
|
53,000
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
1,727,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
Acquired
In-Process Research and Development
The Company recorded acquired in-process research and
development, or IPR&D, charges of $188.9 million and
$4.3 million for the years ended December 31, 2007 and
2006, respectively. There were no IPR&D charges recorded in
the year ended December 31, 2008. The following table
summarizes the details of IPR&D by acquisition (dollars in
millions).
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Cost To
|
|
|
|
|
|
Revenue Projections
|
|
Entity Name
|
|
IPR&D
|
|
|
Complete
|
|
|
Discount Rate
|
|
|
Extended Through
|
|
|
Tarari, Inc.
|
|
$
|
6.0
|
|
|
$
|
2.9
|
|
|
|
22.7
|
%
|
|
|
2013
|
|
Agere Systems Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage read channel and preamps
|
|
$
|
36.2
|
|
|
$
|
17.8
|
|
|
|
13.8
|
%
|
|
|
2016
|
|
Mobility HSPDA for 3G
|
|
$
|
31.2
|
|
|
|
|
*
|
|
|
13.8
|
%
|
|
|
|
|
Networking modems, Firewire, serdes, media gateway,
VoIP, network processors, Ethernet, mappers and framers
|
|
$
|
109.0
|
|
|
$
|
68.0
|
|
|
|
13.8
|
%
|
|
|
2021
|
|
SiliconStor, Inc.
|
|
$
|
6.5
|
|
|
$
|
4.4
|
|
|
|
27.0
|
%
|
|
|
2017
|
|
|
|
* |
During the fourth quarter of 2007, the Company sold the Mobility
Products Group and therefore no costs will be incurred to
complete the acquired Mobility-HSPDA for 3G project.
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Projections
|
Entity Name
|
|
IPR&D
|
|
Discount Rate
|
|
Extended Through
|
|
StoreAge Networking Technologies, Ltd
|
|
$
|
2.4
|
|
|
28%
|
|
2013
|
Metta Technology
|
|
$
|
1.9
|
|
|
Not applicable,
used cost approach
|
|
Not applicable,
used cost approach
|
The Companys methodology for allocating the purchase price
in purchase acquisitions to IPR&D involves established
valuation techniques in the high-technology industry. The fair
value of each project in process is determined by discounting
forecasted cash flows directly related to the products expected
to result from the subject research and development once
commercially feasible, net of returns on contributory assets
including working capital, fixed assets, customer relationships,
trade name, and assembled workforce. The net cash flows from the
identified projects are based on estimates of revenues, cost of
revenues, research and development costs, selling, general and
administrative costs and applicable income taxes for the
projects. Total revenues for the projects are expected to extend
through the dates noted in the table above. These projections
are based on estimates of market size and growth, expected
trends in technology and the expected timing of new product
introductions by the Company and its competitors.
A discount rate is used for the projects to account for the
risks associated with the inherent uncertainties surrounding the
successful development of the IPR&D, market acceptance of
the technology, the useful life of the technology, the
profitability level of such technology and the uncertainty of
technological advances, which could impact the estimates
recorded. The discount rates used in the present value
calculations are typically derived from a weighted-average cost
of capital analysis. These estimates do not account for any
potential synergies realizable as a result of the acquisition
and are in line with industry averages and growth estimates.
70
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
IPR&D is expensed upon acquisition because technological
feasibility had not been established and no future alternative
uses existed.
For the Metta acquisition, a variation of a cost approach was
used to value the in-process technologies. This approach takes
into account the cost to replace (or reproduce) the asset and
the effect on the assets value of physical, functional
and/or
economic obsolescence that has occurred with respect to the
asset.
The actual development timelines and costs were in line with
original estimates as of December 31, 2008. However,
development of the technology remains a substantial risk to the
Company due to factors including the remaining effort to achieve
technical feasibility, rapidly changing customer needs and
competitive threats from other companies. Failure to bring these
products to market in a timely manner could adversely affect
sales and profitability of the Company in the future.
Additionally, the value of other intangible assets acquired may
become impaired.
Pro Forma
Results (Unaudited)
The following pro forma summary combines the results of
operations of the Company and Agere as if Agere had been
acquired as of the beginning of the earliest period presented.
Pro forma statements of earnings information for the remaining
acquisitions have not been presented because the effect of these
acquisitions on the Companys results of operations was not
material either on an individual or aggregate basis. The summary
is provided for illustrative purposes only and is not
necessarily indicative of the consolidated results of operations
for future periods or results that actually would have been
realized had the Company and Agere been a consolidated entity
during the periods presented.
The summary includes the impact of certain adjustments such as
amortization of intangibles, stock compensation charges and
interest expense related to Ageres convertible notes that
the Company guaranteed. Additionally, IPR&D associated with
the Agere acquisition has been excluded from the periods
presented. The $142.9 million of restructuring charges
recorded in the year ended December 31, 2007 and referred
to in Note 2 did not relate to the merger with Agere and
accordingly were included.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands except per share amounts)
|
|
|
Revenues
|
|
$
|
2,938,487
|
|
|
$
|
3,412,151
|
|
Net loss
|
|
$
|
(2,307,572
|
)
|
|
$
|
(118,904
|
)
|
Basic loss per share
|
|
$
|
(2.29
|
)
|
|
$
|
(0.16
|
)
|
Diluted loss per share
|
|
$
|
(2.29
|
)
|
|
$
|
(0.16
|
)
|
|
|
Note 5
|
Benefit
Obligations
|
Pension
and Post-Retirement Benefit Plans
The Company has pension plans covering substantially all former
Agere U.S. employees, excluding management employees hired
after June 30, 2003. Retirement benefits are offered under
a defined benefit plan and are based on either an adjusted
career average pay or dollar per month formula or on a cash
balance plan. The cash balance plan provides for annual company
contributions based on a participants age and compensation
and interest on existing balances and covers employees of
certain companies acquired by Agere since 1996 and management
employees hired after January 1, 1999 and before
July 1, 2003. The Company also has a non-qualified
supplemental pension plan in the U.S. that provides
benefits based on compensation in excess of amounts that can be
considered under a tax qualified plan. The Company also has
post-retirement benefit plans that include healthcare benefits
and life insurance coverage for former Agere employees.
Participants in the cash balance plan and management
71
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
employees hired after June 30, 2003 are not entitled to
Company paid benefits under the post-retirement benefit plans.
The Company also has pension plans covering certain
international employees.
Effective April 6, 2009, the Company will freeze the
U.S. management pension plan. Active participants under the
adjusted career average pay plan will not earn any future
accruals after that date. Active participants under the cash
balance plan will not earn any future service accruals, but will
continue to earn 4% interest per year on their cash balance
accounts. Effective January 1, 2009, the Company will no
longer provide postretirement medical benefits. Third-party
insurance companies will directly provide a voluntary
non-employer fully insured plan for pre-65 and post-65 retirees.
The liability as of December 31, 2008 for the
postretirement medical plan represents managements best
estimate for runoff claims from 2008.
Net
Periodic Benefit Cost/(Credit):
The following table sets forth the components of the net
periodic benefit credit for the years ended December 31,
2008 and 2007. The amounts reported for the year ended
December 31, 2007 reflect costs from the merger date of
April 2, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
(In thousands)
|
|
|
Service cost
|
|
$
|
5,694
|
|
|
$
|
101
|
|
|
$
|
5,523
|
|
|
$
|
118
|
|
Interest cost
|
|
|
75,016
|
|
|
|
3,024
|
|
|
|
55,361
|
|
|
|
2,776
|
|
Expected return on plan assets
|
|
|
(82,575
|
)
|
|
|
(5,033
|
)
|
|
|
(62,804
|
)
|
|
|
(3,669
|
)
|
Amortization of prior service cost
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain recognized
|
|
|
(5
|
)
|
|
|
(119
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit credit
|
|
|
(1,831
|
)
|
|
|
(2,027
|
)
|
|
|
(1,920
|
)
|
|
|
(787
|
)
|
Curtailment gain*
|
|
|
(771
|
)
|
|
|
(2,652
|
)
|
|
|
(414
|
)
|
|
|
(281
|
)
|
Settlement credit
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit cost/(credit)
|
|
$
|
(2,634
|
)
|
|
$
|
(4,679
|
)
|
|
$
|
(2,334
|
)
|
|
$
|
(1,068
|
)
|
|
|
|
|
|
|
|