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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One) |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the Fiscal Year Ended December 31, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to . |
Commission File No. 1-10317
LSI LOGIC CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE |
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94-2712976 |
(State or other jurisdiction of |
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(IRS Employer |
incorporation or organization) |
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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:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
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Common Stock, $0.01 par value |
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New York Stock Exchange |
Preferred Share Purchase Rights |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
NONE
(Title of class)
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 the definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and
large accelerated filer in
Rule 12b-2 of the
Exchange Act.
Large Accelerated
Filer þ Accelerated
Filer o Non-Accelerated
Filer o
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
TABLE OF CONTENTS
The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the Registrant, based upon the
closing price of the Common Stock on July 1, 2005, as
reported on the New York Stock Exchange, was approximately
$2,677,795,562. Shares of Common Stock held by each executive
officer and director and by each person who owns more than 5% of
the outstanding Common Stock have been excluded in that such
persons may be deemed affiliates. In determining the number of
shares held by greater than 5% shareholders, the Registrant used
the ownership as of December 31, 2004 shown on their
Schedules 13G filed in February 2005. This determination of
affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 14, 2006, the Registrant had
395,454,623 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference
into Part III of this Annual Report on
Form 10-K: Proxy
Statement for Registrants 2006 Annual Meeting of
Stockholders to be held on May 11, 2006.
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. Actual
results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and
uncertainties, including the risk factors set forth below and
elsewhere in this Annual Report on
Form 10-K. See
Risk Factors in Part I, Item 1A.
Statements made herein are as of the date of the filing of this
Form 10-K with the
Securities and Exchange Commission and should not be relied upon
as of any subsequent date. We expressly disclaim any obligation
to update information presented herein, except as may otherwise
be required by law.
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PART I
General
LSI Logic Corporation (together with its subsidiaries
collectively referred to as LSI Logic,
LSI, or the Company and referred to as
we, us, and our) designs,
develops, and markets complex, high-performance semiconductors
and storage systems. In 2005, our operations were organized in
four markets: communications, consumer products, storage
components and storage systems. On March 6, 2006, we
announced our plans to focus our business growth opportunities
in the information storage and consumer markets.
We offer integrated circuit products, board-level products, and
software for use in consumer applications, high-performance
storage controllers, enterprise hard disk controllers, and
systems for storage area networks. Our integrated circuits are
also used in a wide range of communication devices.
We operate in two segments the Semiconductor segment
and the Storage Systems segment in which we offer
products and services for a variety of electronic systems
applications. Our products are marketed primarily to original
equipment manufacturers (OEMs) that sell products to
our target markets. The information provided herein has been
recast to include the RAID Storage Adapter (RSA)
business as part of the Storage Systems segment from the
Semiconductor segment for all periods presented.
For the year ended December 31, 2005, revenues from the
Semiconductor segment were $1,244 million (65% of total
consolidated revenues) and the loss from operations was
$26 million. In the Semiconductor segment, we use advanced
process technologies and comprehensive design methodologies to
design, develop, manufacture and market highly complex
integrated circuits (ICs). These
system-on-a-chip
solutions include both custom solutions and standard products.
Custom solutions are designed for a specific application defined
by the customer, whereas standard products are developed for
market applications that we define and are sold to multiple
customers. See also Managements Discussion and
Analysis of Financial Condition and Results of Operations
in Item 7 of Part II.
For the year ended December 31, 2005, revenues from the
Storage Systems segment were $675 million (35% of total
consolidated revenues) and the income from operations was
$38 million. In the Storage Systems segment, our enterprise
storage systems are designed, manufactured and sold by our
wholly-owned subsidiary Engenio Information
Technologies, Inc. (Engenio or Storage Systems
segment). Our high-performance, highly scalable open
storage area network systems and storage solutions are
distributed through leading OEMs and directly to a few selected
accounts. Products and solutions distributed through these
channels may be sold under the OEMs label rather than the
Engenio brand name. When sold under the Engenio brand,
Engenios brand may appear alone or in tandem with the
OEMs brand identification. The Storage Systems segment
product offerings also include host bus adapters, RAID adapters
(redundant array of independent disks) and related
products and services.
On May 23, 2005, Abhijit Y. Talwalkar joined LSI as
President and Chief Executive Officer and Wilfred J.
Corrigan became the non-executive Chairman of the Board of
Directors.
On September 13, 2005, we announced our intention to sell
our Gresham, Oregon manufacturing facility as part of our
strategy to transition to a fabless semiconductor manufacturing
model. Our new strategy includes the expansion of our working
relationships with major foundry partners and the adoption of a
roadmap leading to the production of advanced semiconductors
utilizing 65-nanometer and below process technology on 300-mm or
12-inch wafers. We are
actively marketing the facility and expect to complete a sale of
the facility by September 13, 2006, one year from the date
of the announcement.
On March 6, 2006, we announced plans to focus our business
on growth opportunities in the information storage and consumer
markets, increasing associated research and development
investments, while redirecting
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such investments from non-core areas and ceasing further
development of our
RapidChip®
product platform. Consistent with our increased focus on
storage, we also announced the cancellation of the previously
postponed initial public offering of our wholly-owned storage
systems subsidiary, Engenio Information Technologies, Inc. We
also announced the intention to sell our digital signal
processing licensing business.
LSI Logic Corporation was incorporated in California on
November 6, 1980, and was reincorporated in Delaware on
June 11, 1987. Our principal offices are located at 1621
Barber Lane, Milpitas, California 95035, and our telephone
number at that location is
(408) 433-8000.
Our home page on the Internet is www.lsi.com. The
contents of this website are not incorporated in or otherwise to
be regarded as part of this annual report on
Form 10-K. Copies
of this and other annual reports, quarterly reports on
Form 10-Q, current
reports on
Form 8-K and all
amendments to these reports are available free of charge on our
website as soon as reasonably practicable after such documents
are filed electronically with the Securities and Exchange
Commission (SEC). Any materials that the Company
files with the SEC can be read at the SECs website on the
Internet at http://www.sec.gov or read and copied at the
SECs Public Reference Room at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. The public
may obtain information on the operation of the Public Reference
Room by calling the SEC at (800) 732-0330.
Business Strategy
We plan to focus our business growth opportunities in the
information storage and consumer electronics markets.
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Semiconductor Business Strategy |
Our objective is to continue our industry leadership in the
design, development, and marketing of highly integrated, complex
integrated circuits, software, and system-level solutions in the
information storage and consumer electronics markets. To achieve
this objective, our business strategy includes the following key
elements:
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Target Growth Markets and Customers. We concentrate our
sales and marketing efforts on leading OEM customers in our
information storage and consumer targeted growth markets. Our
engineering expertise is focused on developing technologies that
will meet the product and service needs of our customers in
order to succeed in these market areas. |
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Promote Highly Integrated Design Technology. We use
proprietary and leading third-party electronic design
automation, or EDA, software design tools. We continually
evaluate and, as appropriate, develop expertise with third-party
EDA tools from leading and emerging suppliers of such products. |
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Provide Flexibility in Design Engineering. We engage with
customers of our semiconductor products under various
arrangements whereby the extent of the engineering support we
provide will be determined in accordance with the
customers requirements. For example, a customer may
primarily use its own engineers for substantial development of
its product design and retain our support for silicon-specific
engineering work. We also enter into engineering design
projects, including those on a turn-key basis. |
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Deploy a Fabless Semiconductor Manufacturing Model. On
September 13, 2005, we announced our intention to sell our
Gresham, Oregon manufacturing facility as part of our strategy
to transition to a fabless semiconductor manufacturing model.
Our new wafer manufacturing strategy includes the expansion of
our working relationships with major foundry partners and the
adoption of a roadmap leading to the production of advanced
semiconductors utilizing 65-nanometer and below process
technology on 300-mm or
12-inch wafers. This
model enables us to focus on developing innovative intellectual
property and products, while reducing capital and operating
infrastructure requirements. We perform substantially all of our
packaging, assembly and final test operations through
subcontractors in Asia. |
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Leverage Alliances with Key Partners. We are continually
seeking to establish relationships with key partners in a
diverse range of technologies to promote new products, services,
operating standards and |
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manufacturing capabilities and to avail ourselves of cost
efficiencies that may be obtained through collaborative
development. |
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Forge Successful Partnerships with Leading Distribution
Partners. Our partner program is designed to effectively
market the Companys host bus adapter product families and
integrated circuit products utilizing distribution and reseller
partnerships. Such partnerships help us to provide an extended
range of customers with the full spectrum of product offerings,
services and support needed to enable their success. |
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Develop and Drive Industry Standards to Achieve Market
Advantage. We are a leader in developing and promoting
important industry standard architectures, functions, protocols
and interfaces. We believe that this leadership will enable us
to quickly launch new standard-based products, allowing our
customers to achieve
time-to-market and
other competitive advantages. |
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Operate Worldwide. We market our products and engage with
our customers on a worldwide basis through direct sales,
marketing and field technical staff and through independent
sales representatives and distributors. Our network of design
centers located in major markets allows us to provide customers
with highly experienced engineers, to interact with customer
engineering management and system architects, to develop designs
for new products and to provide continuing after-sale customer
support. |
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Storage Systems Business Strategy |
Our objective is to be the leading provider to server and
storage OEMs of modular disk storage systems and sub-assemblies.
We intend to enhance our market position by:
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Continuing to Innovate and Extend Our Product Offering.
We intend to adopt and implement innovative storage system
technologies, interfaces, features and customer requirements. In
addition, we intend to define, design and develop products that
enable our channel customers to offer a broad storage system
product line, which incorporates their own intellectual
property, to address multiple markets. In this manner, we intend
to continue to expand our product offerings in the mid-range
markets and further into the entry-level markets. |
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Adding Feature Functionality to Meet Expanding Enterprise
Requirements. Implementation and management of storage
systems within the enterprise is increasingly complex. To
address this increasing complexity, we plan to develop
additional premium software management and hardware system
features to enhance reliability, data availability and
serviceability of our products. We also intend to expand our
Engenio Solutions program, which is designed to help our
customers rapidly implement our products for specific business
applications. |
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Enhancing Interoperability Among Our Products, Our
Customers Products and Other Leading Enterprise
Products. We provide significant value to our channel
customers and enterprises by testing and certifying our products
with the products of other leading enterprise information
technology vendors to ensure broad interoperability and
compatibility. We intend to work closely with our channel
customers and enterprises to extend and enhance the capabilities
of our storage sub-assemblies and storage management software.
We also seek to enhance our position in the storage industry by
actively participating in a variety of organizations focused on
developing standards for emerging technologies and facilitating
industry-wide interoperability. |
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Obtaining New Channel Customers. Our channel customers
sell storage solutions based on or incorporating our products
and technology through their direct sales forces and other
channels. We will continue to seek new customers in domestic and
international markets in order to expand the total marketing and
sales resources that are focused on our products. In this
manner, we intend to increase the market addressable by our
products. |
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Expanding Our Joint Marketing and Sales Efforts With Existing
and New Channel Customers. We seek to add value to our
customers sales, marketing and support initiatives through
the provision of |
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extensive training, customized
go-to-market campaigns,
product positioning, marketing materials, competitive analysis
and product support infrastructure. We maintain 15 Experience
Centers worldwide, which allow our channel customers to
demonstrate to enterprise users the performance and benefits of
storage deployments incorporating our products. We plan to open
additional centers to reach a broader customer base in the
future. |
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Promoting Our Brand. We believe that a strong association
of our brand with innovation and integrity is valuable in
achieving increased scale, market leadership and OEM acceptance
within our industry. Furthermore, we believe that brand
recognition and reputation will become more important as OEMs
increasingly outsource their storage system offerings and their
customers focus on the performance and reliability of the
storage systems or sub-assemblies integrated into OEM storage
solutions. We intend to continue to promote our brand and build
brand equity to establish and bolster our position in the disk
storage systems and related storage management software markets. |
Products and Services
In our semiconductor components business, we design and develop
custom solutions and standard products to customers competing in
global storage and consumer markets.
Custom solutions are semiconductors that are designed for
unique, customer-specified applications. Standard products are
developed for market applications we define and are targeted to
be sold to multiple customers. Both custom solutions and
standard products are sold to customers for incorporation into
system-level products and may incorporate our intellectual
property building blocks.
Storage Components. Our custom solutions and standard
product solutions offered to customers in worldwide storage
component markets make possible data transmission and storage
between a host computer and peripheral devices such as magnetic
and optical disk drives, scanners, printers and disk and
tape-based storage systems.
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Storage Standard Products. Our standard product solutions
offer Fibre Channel, Serial-Attached SCSI (SAS) and
SCSI standard products, including host adapter ICs for
motherboard and adapter applications, SCSI and SAS expander ICs,
storage adapter boards and our own
Fusion-MPTtm
software drivers for these product families. We are an industry
leader in the on-going development of new storage interface
standards and products, including SAS. |
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Storage Custom Solutions. We also offer custom solutions
to customers who develop Fibre Channel storage area network
(SAN) switches and host adapters, storage systems,
hard disk drives and tape peripherals. Through leveraging our
extensive experience in providing solutions for these
applications, LSI Logic has developed a full portfolio of
high-speed interface CoreWare that is employed for custom
solution platforms that provide a connection to the network, the
SAN, memory and host buses. Using these pre-verified interfaces,
our customers reduce development risk and achieve quicker time
to market. Our CoreWare offerings include the
GigaBlaze®
high performance SerDes Core supporting Fibre Channel, SATA,
Gigabit Ethernet, Infiniband, SAS, Serial RapidIO and
PCI-Express industry standards and a family of high-performance
Fibre Channel, RapidIO, PCI-E, SAS and SATA protocol controllers. |
Consumer Products. For the consumer market, we offer a
broad array of semiconductor products, including both standard
products and custom solutions.
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Consumer Standard Products. We design, develop,
manufacture and market semiconductor devices, along with
enabling software and reference system designs to enable a
variety of digital video and audio applications utilizing our
core competency in media processing. We are focused on providing
solutions for high-growth applications such as DVD recorders,
digital set-top boxes, and a variety of combination products
such as DVD recorder / VCR, DVD recorder/ PVR and DVD
recorder/digital set-top box as well as broadcast encoders. At
the center of our standard product strategy is our industry
leading |
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DoMiNo®
architecture. Products based on this flexible architecture
provide software programmable, cost effective solutions to our
customers in our target markets. |
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Consumer Custom Solutions. We offer
system-on-a-chip
solutions for consumer applications. We focus on consumer market
segments employing our intellectual property portfolio, media
processing expertise, system level knowledge, design methodology
and turn-key product offerings to provide customized solutions
to our customers. We are focused on providing solutions to
portable consumer appliances such as digital audio players,
portable media players, global positioning systems, edutainment
and electronic toys and other emerging multimedia applications
utilizing in many cases our newly announced
Zeviotm
architecture. |
Communications Products. Our highly integrated,
high-performance,
system-on-a-chip
silicon solutions are used in the design of communications
equipment. We deliver custom semiconductor solutions to
customers who develop devices used for wireless and broadband
data networking applications. As noted previously, we announced
our intention to focus our business on growth opportunities in
the information storage and consumer electronics markets. We
will cease further development of our RapidChip product
platform. RapidChip customer designs currently under development
will continue and are not affected by this action.
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Storage Systems or Engenio Products |
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 and related management software. The
modularity of our products provides channel customers with the
flexibility to integrate either 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 channel 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 software storage 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.
In addition, we offer a wide spectrum of direct-attach RAID
solutions, spanning from integrated RAID in our Fusion-MPT
storage IC and adapter products and our IDEal software-based
RAID products to our
MegaRAID®
product family. Our MegaRAID products include integrated
single-chip RAID on motherboard solutions and a broad family of
PCI and PCI Express RAID controller boards featuring ATA, Serial
ATA (SATA) SCSI and SAS interfaces, along with fully
featured software and utilities for robust storage configuration
and management.
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Semiconductor Design Services |
Our CoreWare design methodology offers a comprehensive design
approach for creating custom solutions efficiently, predictably
and rapidly. Our CoreWare libraries include high-level
intellectual property building blocks created around industry
standards. Our CoreWare cells are connected electronically with
other memory and logic elements to form an entire system on a
single chip.
Our software design tool environment supports and automatically
performs key elements of the design process from circuit concept
to physical layout of the circuit design. The design tool
environment features a combination of internally developed
proprietary software and third-party tools that are highly
integrated with our manufacturing process requirements. The
design environment includes expanded interface capabilities with
a range of third-party tools from leading EDA vendors and
features hardware/ software co-verification
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capability. We provide a suite of MIPS cores and ARM processors,
in addition to industry-standard interface cores such as USB,
PCI-Express, DDR1&2, QDR, SPI4, SFI, XAUI, XGXS and others.
After completion of the custom design effort, we produce and
test prototype circuits for shipment to the customer. We then
begin volume production of integrated circuits that have been
developed through one or more of the arrangements described
above in accordance with the customers quantity and
delivery requirements.
Marketing and Distribution
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Semiconductor Marketing and Distribution |
The highly competitive semiconductor industry is characterized
by rapidly changing technology, short product cycles and
emerging standards. Our marketing strategy requires that we
forecast trends in the evolution of product and technology
development. We must then act upon this knowledge in a timely
manner to develop competitively priced products offering
superior performance. As part of this strategy, we are active in
the formulation and adoption of critical industry standards that
influence the design specifications of our products. Offering
products with superior price and performance characteristics is
essential to satisfy the rapidly changing needs of our customers
in the dynamic storage and consumer electronics markets.
Our semiconductor products and design services are primarily
sold through our network of direct sales and marketing and field
engineering offices located in North America, Europe, Japan and
elsewhere in Asia. Our sites are interconnected by means of
advanced computer networking systems that allow for the
continuous, uninterrupted exchange of information that is vital
to the proper execution of our sales and marketing activities.
International sales are subject to risks common to export
activities, including governmental regulations, geopolitical
risks, tariff increases and other trade barriers, and currency
fluctuations.
We rely primarily on direct sales and marketing, but 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. Our agreements with distributors
generally grant limited rights to return standard product
inventory and we defer revenue for such inventory until the
distributor sells the product to a third party.
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Storage Systems Marketing and Distribution |
Our products are sold worldwide through our channel customers
and, to a smaller degree, to a limited installed base of
end-users. We closely develop and manage our channel customer
relationships to meet the diverse needs and requirements of
enterprises. By selling products through our channel customers,
we are able to address more markets, reach a greater number of
enterprises, and reduce our overall sales and marketing
expenditures.
Our marketing efforts are designed to support our channel
customers 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 roadmap,
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 at our headquarters in Milpitas, and also in
regional offices in Dallas, Texas; Chicago, Illinois; Houston,
Texas; Los Angeles and Irvine, California; New York, New York;
Parsippany, New Jersey; Reston, Virginia; and Wichita, Kansas.
We also market our products internationally in China, France,
Germany, Japan, Sweden, and the United Kingdom.
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Customers
In 2005, International Business Machines Corporation and Seagate
Technology accounted for approximately 16% and 11%,
respectively, of our consolidated revenues. No other customer
accounted for greater than 10% of consolidated revenues. 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. We are therefore dependent on a
limited number of customers for a substantial portion of our
revenues. 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.
We seek to leverage our expertise in the fields of consumer and
storage components by marketing our products and services
predominantly to market leaders. Our current strategic account
focus is on large, well-known companies that produce high-volume
products incorporating our semiconductors. We recognize that
this strategy may result in increased dependence on a limited
number of customers for a substantial portion of our revenues.
It is possible that we will not achieve anticipated sales
volumes from one or more of the customers we focus on. While
this could result in lower revenues, we believe this strategy
provides us with an opportunity to drive further growth in sales
and unit volumes.
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Storage Systems Customers |
We deliver products to our markets in the following manner:
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OEM Partners. These channel customers independently
resell or distribute OEM-branded or Engenio co-branded products,
which may be integrated with value-added services, hardware and
software and delivered as differentiated complete storage
solutions to enterprises. OEM Partners receive basic training
services to enhance their abilities to sell and support our
products. After receiving our basic training services, OEM
Partners independently market, sell and support our products,
requiring limited ongoing product support from us. |
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OEM+ Partners. In addition to providing our OEM+ Partners
with products and basic services as described above, we also
assist our OEM+ Partners with additional resources that may
provide tailored, account-specific education, training and sales
and marketing assistance, allowing our OEM+ Partners to leverage
our storage products and industry expertise. |
Manufacturing
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Semiconductor Manufacturing |
The semiconductor manufacturing cycle converts a product design
from the development stage into an integrated circuit.
Manufacturing begins with wafer fabrication, where the 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 using different standards and advanced
assembly technologies. This package encapsulates the circuit for
protection and allows for electrical connection to the printed
circuit board. The final step in the manufacturing process is
final test, where the finished devices undergo stringent and
comprehensive testing using computer systems.
The wafer fabrication operation 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. The Companys strategy in 2005 was a combination of
internal and external fabrication. In 2005, the majority of the
Companys wafers were fabricated internally at our only
semiconductor manufacturing facility located in Gresham, Oregon
and the remainder of our wafer fabrication was outsourced to a
variety of wafer foundries in Taiwan, Japan, China and Malaysia.
For the more advanced deep sub-micron technologies, we use a
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combination of standard foundry process technologies and process
technologies jointly developed with our foundry partners. These
joint development agreements provide us access to leading edge
technology and additional wafer capacity.
On September 13, 2005, we announced our intention to sell
our Gresham facility as part of our strategy to transition to a
fabless semiconductor manufacturing model. Our new strategy
includes the expansion of our working relationships with major
foundry partners and the adoption of a roadmap leading to the
production of advanced semiconductors utilizing 65-nanometer and
below process technology on 300-mm or
12-inch wafers. We are
actively marketing the facility and expect to complete a sale of
the facility by September 13, 2006, one year from the date
of the announcement.
Our final assembly and test operations are performed by
independent subcontractors in South Korea, Taiwan, the
Philippines, Malaysia, Thailand and China. The Company has a
long history of outsourcing these operations and can offer a
wide range of high-performance packaging solutions for
system-on-a-chip
designs, including flip chip technology.
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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 the majority of our product components,
such as printed circuit boards, in order to take advantage of
quality and cost benefits afforded by using third-party
manufacturing services. We believe that using outsourced
manufacturing services allows us to focus on product development
and increases operational flexibility, both in terms of
adjusting manufacturing capacity in response to customer demand
and rapidly introducing new products.
The assembly of our storage system products involves integrating
supplied 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 provide
channel customers with multiple manufacturing and delivery
alternatives that best complement their operations.
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United States Assembly. Our wholly-owned United States
manufacturing facility in Wichita, Kansas, assembles and tests
complete storage systems and sub-assemblies configured from
modular components, such as our storage controller modules and
disk drive enclosure modules. ISO-9001 certification at our
Kansas manufacturing facility has been maintained since April
1992. This facility has been certified as ISO-9001:2000
compliant since October of 2001. Product quality is achieved
through extensive employee training, exhaustive and automated
testing and sample auditing. Quality control and measurement is
extended through the subcomponent supplier and component
manufacturer base with continuous reporting and ongoing
qualification programs. |
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European Assembly. We outsource manufacturing in Cork,
Ireland, to a Flextronics International Ltd. facility.
ISO-9001:2000 certification at the Cork assembly facility has
been maintained since December 2001. This facility is capable of
the assembly and testing of complete storage systems and
sub-assemblies configured from modular components, such as our
storage controller modules and disk drive enclosure modules. The
site in Ireland was established to provide operational
flexibility in meeting surges in demand, to address growing
European demand and to serve as a backup site in the event of
natural or human-made disasters that could disrupt the
operations of our Wichita facility. |
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
10
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, our backlog as of any
particular date may not be a meaningful indicator of future
annual sales.
Due to the nature of our business, we maintain relatively low
levels of backlog in the Storage Systems segment. Consequently,
we believe that backlog is not a good indicator of future sales,
and our quarterly revenues depend largely on orders booked and
shipped in that quarter. Because lead times for delivery of our
products are relatively short, we must build 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
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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 these 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, or, if so, only at reduced prices.
Our major competitors in the Semiconductor segment include large
companies such as Agere Systems, Inc., International Business
Machines Corporation, Philips Electronics, N.V.,
STMicroelectronics, Texas Instruments, Inc. and Toshiba
Corporation. Other competitors in strategic markets include
Adaptec, Inc., ATI Technologies, Inc., Broadcom
Corporation, ESS Technology, Inc., Genesis
Microchip, Inc., Intel Corporation, Marvell Technology
Group, Ltd., MediaTek Incorporated, NEC Corporation,
Pixelworks, Inc., Sunplus Co. Technology Ltd., Samsung
Semiconductor, Trident Microsystems, Inc. and Zoran
Corporation.
The principal competitive factors in the semiconductor industry
include:
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design capabilities; |
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differentiating product features; |
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product performance characteristics; |
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time to market; |
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price; and |
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utilization of emerging industry standards. |
It is possible that our competitors will develop other design
solutions that could have a material adverse impact on our
competitive position. Our competitors may also decide from time
to time to aggressively reduce prices of products that compete
with our products in order to sell related products or achieve
strategic goals. Due to their customized nature, custom
solutions are not as susceptible to price fluctuations as
standard products. However, strategic pricing by competitors can
place strong pricing pressure on our products in certain
transactions, resulting in lower selling prices and lower gross
profit margins for those transactions.
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 continue
11
to reduce the costs of products through product design changes,
manufacturing process changes, yield improvements and
procurement of wafers from outsourced manufacturing partners.
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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., Dot Hill Systems
Corporation, Infortrend Technology Inc., XIOtech Corporation,
Xyratex Group Limited and the internal storage divisions of
existing and potential channel customers as well as large
well-capitalized storage system companies such as EMC
Corporation, Hitachi Data Systems and Network
Appliance, Inc. We also compete with internally developed
products and, indirectly, through our channel customers, with
third-party products being sold by major server vendors such as
Dell Inc., Hewlett-Packard Company, International Business
Machines Corporation and Sun Microsystems, Inc. The
competitive factors affecting the market for our storage system
products include:
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features and functionality; |
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product performance and price; |
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reliability, scalability and data availability; |
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interoperability with other networking devices; |
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support for emerging industry and customer standards; |
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levels of training, marketing and customer support; |
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level of easily customizable features; |
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quality and availability of supporting software; |
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quality of system integration; and |
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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 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 industry leadership in product
development and support.
Patents, Trademarks and Licenses
We maintain a patent program, and believe that our patents and
other intellectual property rights add value to our business. We
have filed a number of patent applications and currently hold
more than 3,290 issued United States (U.S.) patents
and additional issued foreign patents, expiring from 2006 to
2024, in both the Semiconductor and the Storage Systems segments
combined. In both segments, we also maintain trademarks for our
products and services and claim copyright protection for certain
proprietary software and documentation. Patents, trademarks and
other forms of protection for our intellectual property are
important, but we believe our future success principally depends
upon the technical competence and creative skills of our
employees.
We continue to expand our portfolio of patents and trademarks.
We offer a staged incentive to employees to identify, document
and submit invention disclosures. We have developed an internal
review procedure to maintain a high level of disclosure quality
and to establish criteria, priorities and plans for filings both
in the U.S. and abroad. The review process is based solely on
engineering, business, legal and management judgment, with no
assurance that a specific filing will issue or, if issued, will
deliver any lasting value to us. There is no assurance that the
rights granted under any patent will provide competitive
advantages to us or will be adequate to protect our innovations,
products or services. Moreover, the laws of certain countries in
which
12
our products are or may be manufactured or sold may not protect
our products and intellectual property rights to the same extent
as the U.S. legal system.
As is typical in the high technology industry, from time to
time, we have received communications from other parties
asserting that certain of our products or processes infringe
upon their patent rights, copyrights, trademark rights or other
intellectual property rights. We regularly evaluate such
assertions. In light of industry practice, we believe that, with
respect to existing or future claims, any licenses or other
rights that may be necessary may generally be obtained on
commercially reasonable terms. Nevertheless, there is no
assurance that licenses will be obtainable on acceptable terms
or that a claim will not result in litigation or other
administrative proceedings.
In the Semiconductor segment, we protect our know-how, trade
secrets and other proprietary information through
confidentiality agreements with our customers, suppliers,
employees and consultants, and through other security measures.
We have entered into certain patent cross-license agreements
that generally provide for the non-exclusive licensing of rights
to design, manufacture and sell products and, in some cases, for
cross-licensing of future improvements developed by either party.
In the Storage Systems segment, we own a portfolio of patents
and patent applications concerning a variety of storage
technologies. We also maintain trademarks for certain of our
products and services and claim copyright protection for certain
proprietary software and documentation. Similar to the
Semiconductor segment, we protect our trade secrets and other
proprietary information through agreements and other security
measures, and have implemented internal procedures to obtain
patent protection for inventions and pursue protection in
selected jurisdictions.
Please see Item 3, Legal Proceedings, for
information regarding pending patent litigation against the
Company. Please also refer to the additional risk factors set
forth in the Risk Factors section and Note 12 of the Notes
to the Consolidated Financial Statements (Notes) for
additional information.
Research and Development
Our industry is characterized by rapid changes in intellectual
property. We must continue to improve our existing intellectual
property and products and to develop new ones in a
cost-effective manner to meet changing customer requirements and
emerging industry standards. If we are not able to successfully
introduce new intellectual property and products, or to achieve
volume production of products, there could be a material adverse
impact on our operating results and financial condition.
On March 6, 2006, we announced plans to focus our business
on growth opportunities in the information storage and consumer
markets, increasing associated research and development
(R&D) investments, while redirecting R&D
from non-core areas. We will cease further development of our
RapidChip product platform. RapidChip customer designs currently
under development will continue and are not affected by this
action.
We operate the majority of our R&D facilities in Arizona,
California, Colorado, Georgia, Kansas, Maryland, Minnesota,
Oregon and Texas. Internationally, we also have facilities in
Canada, China, Dubai, Germany, India, Russia, Taiwan, and the
United Kingdom. During 2005, we significantly expanded
capabilities in India. The following table shows our
expenditures on research and development activities for each of
the last three fiscal years (in thousands).
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Percent of |
Year |
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Amount |
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Revenue |
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2005
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$ |
397,312 |
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21% |
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2004
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$ |
421,516 |
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25% |
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2003
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$ |
432,695 |
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26% |
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R&D activities primarily consist of materials expenses,
salaries and related costs of employees engaged in ongoing
research, design and development activities and subcontracting
costs.
13
Working Capital
Information regarding our working capital practices is
incorporated herein by reference from Item 7 of
Part II hereof under the heading Managements
Discussion and Analysis of Financial Condition and Results of
Operation Financial Condition, Capital Resources and
Liquidity.
Financial Information about Segments and Geographic Areas
The information is included in Note 4 (Segment and
Geographic Information) of the Notes, which information is
incorporated herein by reference from Item 8 of
Part II.
For a discussion of various risks attendant to foreign
operations, see (1) Risk Factors in
Part I, Item 1A, in particular, We are exposed
to fluctuations in foreign currency exchange rates,
We procure parts and raw materials from a limited number
of domestic and foreign sources, and We are
increasingly exposed to various legal, business, political and
economic risks associated with our international
operations, and (2) the section in Part II,
Item 7A, entitled Foreign Currency Exchange
Risk. This information is incorporated herein by reference.
Environmental Regulation
Federal, state and local regulations, in addition to those of
other nations, impose various environmental controls on the use
and discharge of certain chemicals and gases used in
semiconductor and storage product processing. Our facilities
have been designed to comply with these regulations through the
implementation of environmental management systems. However,
increasing public attention has been focused on the
environmental impact of electronics and semiconductor
manufacturing operations. 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 or
impermissible discharges of hazardous substances could result in:
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the need for additional capital improvements to comply with such
regulations or to restrict discharges; |
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liability to our employees and/or third parties; and/or |
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business interruptions as a consequence of permit suspensions or
revocations or as a consequence of the granting of injunctions
requested by governmental agencies or private parties. |
Employees
As of December 31, 2005, we had 4,322 full-time
employees.
Our future success depends upon the continued service of our key
technical and management personnel and on 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
The Companys business is largely focused on the
information technology and consumer products markets. Due to
seasonality in these markets, the Company typically expects to
see stronger growth in the last two quarters of the year.
14
We are subject to a number of risks. Some of these risks are
endemic to the semiconductor industry and are the same or
similar to those disclosed in our previous SEC filings, and some
new risks may arise in the future. The reader should carefully
consider all of these risks and other information in this
Form 10-K before
investing in us. The fact that certain risks are endemic to the
high-technology industry does not lessen the significance of
these risks.
As a result of theses risks, our business, financial
conditions or results of operations could be materially and
adversely affected. This could cause the trading price of our
common stock to decline, and stockholders might lose some or all
of their investment.
Please consider these risk factors when you read
forward-looking statements elsewhere in this
Form 10-K and in
the documents incorporated herein by reference. Forward-looking
statements are statements that relate to our expectations for
future events and time periods. Generally, the words,
anticipate, expect, intend
and similar expressions identify forward-looking statements.
Forward-looking statements involve risks and uncertainties, and
actual results could differ materially from those anticipated in
the forward-looking statements.
General economic weakness and geopolitical factors may harm
our operating results and financial condition. The
semiconductor industry is cyclical in nature and is
characterized by wide fluctuations in product supply and demand.
In the past, the industry has experienced periods of rapid
expansion of production capacity followed by periods of
significant downturn. Even when the demand for our products
remains constant, the availability of additional excess
production capacity in the industry creates competitive
pressures that can degrade pricing levels, which can reduce
revenues. In addition, our results of operations are dependent
on the global economy. Any geopolitical factors such as
terrorist activities, armed conflict or global health
conditions, which adversely affect the global economy, may
adversely impact our operating results and financial condition.
In addition, goodwill and other long-lived assets could be
impacted by a decline in revenues because impairment is measured
based upon estimates of future cash flows. These estimates
include assumptions about future conditions within our company
and industry.
Our target markets are characterized by rapid technological
change. The Semiconductor and Storage Systems segments in
which we conduct business are characterized by rapid
technological change, short product cycles and evolving industry
standards. We believe our future success depends, in part, on
our ability to improve on existing technologies and to develop
and implement new ones in order to continue to reduce
semiconductor chip size and improve product performance and
manufacturing yields. We must also be able to adopt and
implement emerging industry standards in a timely manner and to
adapt products and processes to technological changes. If we are
not able to implement new process technologies successfully or
to achieve volume production of new products at acceptable
yields, our operating results and financial condition may be
adversely impacted.
We operate in highly competitive markets. Our competitors
include many large domestic and foreign companies that have
substantially greater financial, technical and management
resources than we do. Several major diversified electronics
companies offer custom solutions and/or other standard products
that are competitive with our product lines. Other competitors
are specialized, rapidly growing companies that sell products
into the same markets that we target. Some of our large
customers may also design and manufacture products that compete
with our products. There is no assurance that the price and
performance of our products will be superior relative to the
products of our competitors. As a result, we may experience a
loss of competitive position that could result in lower prices,
fewer customer orders, reduced revenues, reduced gross profit
margins and loss of market share.
We are dependent on a limited number of customers. A
limited number of customers account for a substantial portion of
our revenues. International Business Machines Corporation and
Seagate Technology represented approximately 16% and 11%,
respectively, of our total consolidated revenues for the year
ended December 31, 2005.
15
Our operating results and financial condition could be
significantly affected if:
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we do not win new product designs from major existing customers; |
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major customers reduce or cancel their existing business with us; |
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major customers make significant changes in scheduled
deliveries; or |
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there are declines in the prices of products that we sell to
these customers. |
Our new products may not achieve market acceptance. We
introduce many new products each year. We must continue to
develop and introduce new products that compete effectively on
the basis of price and performance and that satisfy customer
requirements. Our cores and standard products are intended to be
based upon industry standard functions, interfaces, and
protocols so that they are useful in a wide variety of systems
applications. Development of new products and cores often
requires long-term forecasting of market trends, development and
implementation of new or changing technologies and a substantial
capital commitment. We cannot provide assurance that the cores
or standard products that we select for investment of our
financial and engineering resources will be developed or
acquired in a timely manner or will enjoy market acceptance.
The manufacturing facilities we operate are highly complex
and require high fixed costs. Our only wafer fabrication
site is located in Gresham, Oregon. On September 13, 2005,
we announced our intention to adopt a fabless manufacturing
strategy and to sell our wafer fabrication facility located in
Gresham. We also own our Storage Systems segment manufacturing
facility in Wichita, Kansas. The manufacture and introduction of
our products is a complicated process. We continually strive to
implement the latest process technologies and manufacture
products in a clean and tightly controlled environment. We
confront challenges in the manufacturing process that require us
to:
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maintain a competitive manufacturing cost structure; |
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implement the latest process technologies required to
manufacture new products; |
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exercise stringent quality control measures to ensure high
yields; |
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effectively manage the subcontractors engaged in the wafer
fabrication, test and assembly of products; and |
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update equipment and facilities as required for leading edge
production capabilities. |
We procure parts and raw materials from a limited number of
domestic and foreign sources. We do not maintain an
extensive inventory of parts and materials for manufacturing. We
purchase a portion of our requirements for parts and raw
materials from a limited number of sources, primarily from
suppliers in Japan and their U.S. subsidiaries, and we
obtain other material inputs on a local basis. There is no
assurance that, if we have difficulty in obtaining parts or
materials in the future, alternative suppliers will be
available, or that these suppliers will provide parts and
materials in a timely manner or on favorable terms. As a result,
we may be adversely affected by delays in product shipments. If
we cannot obtain adequate materials for manufacture of our
products or if such materials are not available at reasonable
prices, there could be a material adverse impact on our
operating results and financial condition.
We utilize indirect channels of distribution over which we
have limited control. Our financial results could be
adversely affected if our relationship with resellers or
distributors were to deteriorate or if the financial condition
of these resellers or distributors were to decline. In addition,
as our business grows, we may have an increased reliance on
indirect channels of distribution. There can be no assurance
that we will be successful in maintaining or expanding these
indirect channels of distribution. This could result in the loss
of certain sales opportunities. Furthermore, the partial
reliance on indirect channels of distribution may reduce our
visibility with respect to future business, thereby making it
more difficult to accurately forecast orders.
We engage in acquisitions and alliances giving rise to
financial and technological risks. We are continually
exploring strategic acquisitions that build upon our existing
library of intellectual property, human capital and engineering
talent, and increase our leadership position in the markets
where we operate. We did
16
not complete any material acquisitions or alliances in 2005. We
completed two acquisitions in 2004. Mergers and acquisitions of
high-technology companies bear inherent risks. No assurance can
be given that our previous or future acquisitions will be
successful and will not materially adversely affect our
business, operating results or financial condition. We must
continue to manage any growth effectively. Failure to manage
growth effectively and to integrate acquisitions could adversely
affect our operating results and financial condition.
In addition, we intend to continue to make investments in
companies, products and technologies through strategic
alliances. Investment activities often involve risks, including
the need to acquire timely access to needed capital for
investments related to alliances and to invest in companies and
technologies that contribute to the growth of our business.
On September 13, 2005, we announced our intention to sell
our Gresham, Oregon manufacturing facility as part of our
strategy to transition to a fabless semiconductor manufacturing
model. Our new strategy includes the expansion of our working
relationships with major foundry partners and the adoption of a
roadmap leading to the production of advanced semiconductors
utilizing 65-nanometer and below process technology on
300-mm or
12-inch wafers. We are
actively marketing the facility and expect to complete a sale of
the facility by September 13, 2006, one year from the date
of the announcement.
The price of our securities may be subject to wide
fluctuations. Our stock has experienced substantial price
volatility, particularly as a result of quarterly variations in
results, the published expectations of analysts and
announcements by our competitors and us. In addition, the stock
market has experienced price and volume fluctuations that have
affected the market price of many technology companies and that
have often been unrelated to the operating performance of such
companies. The price of our securities may also be affected by
general global, economic and market conditions. While we cannot
predict the individual effect that these and other factors may
have on the price of our securities, these factors, either
individually or in the aggregate, could result in significant
variations in price during any given period of time. These
fluctuations in our stock price also impact the price of our
outstanding convertible securities and the likelihood of the
convertible securities being converted into cash or equity. If
our stock price is below the conversion price of our convertible
bonds on the date of maturity, they may not convert into equity
and we may be required to redeem our outstanding convertible
securities for cash. However, in the event they do not convert
to equity, we believe that our current cash position and
expected future operating cash flows will be adequate to meet
these obligations as they mature.
We may rely on capital and bank markets to provide
liquidity. In order to finance strategic acquisitions,
capital assets needed in our manufacturing facilities and other
general corporate needs, we may rely on capital and bank markets
to provide liquidity. As of December 31, 2005, we had
convertible notes outstanding of approximately
$622 million. We may need to seek additional equity or debt
financing from
time-to-time.
Historically, we have been able to access capital and bank
markets, but we may not be able to access these markets in the
future or on terms that are acceptable to us. The availability
of capital in these markets is affected by several factors,
including geopolitical risk, the interest rate environment and
the condition of the economy as a whole. Moreover, any future
equity or equity-linked financing may dilute the equity
ownership of existing shareholders. In addition, our own
operating performance, capital structure and expected future
performance impact our ability to raise capital. We believe that
our current cash, cash equivalents, short-term investments and
future cash provided by operations will be sufficient to fund
our needs in the foreseeable future. This includes repaying our
existing convertible debt when due. However, if our operating
performance falls below expectations, we may need additional
funds.
We design and develop highly complex semiconductors and
storage systems. As technology advances to smaller
geometries, there are increases in the complexity, time and
expense associated with the design, development and manufacture
of semiconductors. We must incur substantial research and
development costs to confirm the technical feasibility and
commercial viability of any products that in the end may not be
successful. Therefore, we cannot guarantee that any new
semiconductor products will result in market acceptance.
17
The high technology industry in which we operate is prone to
intellectual property litigation. Our success is dependent
in part on our technology and other proprietary rights, and we
believe that there is value in the protection afforded by our
patents, copyright rights, trademarks and other intellectual
property rights. We have a program whereby we actively protect
our intellectual property by acquiring patent and other
intellectual property rights. However, the industry is
characterized by rapidly changing technology and our future
success depends primarily on the technical competence and
creative skills of our personnel.
As is typical in the high technology industry, from time to time
we have received communications from other parties asserting
that certain of our products, processes, technologies or
information infringe upon their patent rights, copyrights,
trademark rights or other intellectual property rights. We
regularly evaluate such assertions. In light of industry
practice, we believe, with respect to existing or future claims
that any licenses or other rights that may be necessary may
generally be obtained on commercially reasonable terms.
Nevertheless, there is no assurance that licenses will be
obtainable on acceptable terms or that a claim will not result
in litigation or other administrative proceedings. Resolution of
whether our product or intellectual property has infringed on
valid rights held by others could have a material adverse effect
on our results of operations or financial position and may
require material changes in production processes and products.
See Legal Matters in Note 12 (Legal
Matters) of the Notes regarding current patent litigation.
We may not be able to adequately protect or enforce our
intellectual property rights, which could harm our competitive
position. Our success and future revenue growth will depend,
in part, on our ability to protect our intellectual property. We
primarily rely on patent, copyright, trademark and trade secret
laws, as well as nondisclosure agreements and other methods, to
protect our proprietary technologies and processes. Despite our
efforts to protect our proprietary technologies and processes,
it is possible that competitors or other unauthorized third
parties may obtain, copy, use or disclose our technologies and
processes. We hold more than 3,290 U.S. patents. However,
we cannot assure you that any additional patents will be issued.
Even if a new patent is issued, the claims allowed may not be
sufficiently broad to protect our technology. In addition, any
of our existing or future patents may be challenged, invalidated
or circumvented. As such, any rights granted under these patents
may not provide us with meaningful protection. We may not have
foreign patents or pending applications corresponding to our
U.S. patents and applications. Even if foreign patents are
granted, effective enforcement in foreign countries may not be
available. If our patents do not adequately protect our
technology, our competitors may be able to offer products
similar to ours. Our competitors may also be able to develop
similar technology independently or design around our patents.
Some or all of our patents have in the past been licensed and
likely will in the future be licensed to certain of our
competitors through cross-license agreements.
Certain of our software (as well as that of our customers) may
be derived from so-called open source software that
is generally made available to the public by its authors and/or
other third parties. Such open source software is often made
available to us under licenses, such as the GNU General Public
License, or GPL, which impose certain obligations on us in the
event we were to distribute derivative works of the open source
software. These obligations may require us to make source code
for the derivative works available to the public, and/or license
such derivative works under a particular type of license, rather
than the forms of license customarily used to protect our
intellectual property. While we believe we have complied with
our obligations under the various applicable licenses for open
source software, in the event the copyright holder of any open
source software were to successfully establish in court that we
had not complied with the terms of a license for a particular
work, we could be required to release the source code of that
work to the public and/or stop distribution of that work. With
respect to our proprietary software, we generally license such
software under terms that prohibit combining it with open source
software as described above. Despite these restrictions, parties
may combine our proprietary software with open source software
without our authorization, in which case we might nonetheless be
required to release the source code of our proprietary software.
Our manufacturing facilities are subject to disruption.
Operations at any of our primary manufacturing facilities may be
disrupted for reasons beyond our control, including work
stoppages, fire, earthquake, tornado, floods or other natural
disasters, which could have a material adverse effect on our
results of operation or financial position.
18
We have announced our intention to sell our semiconductor
fabrication facility and to become entirely dependent on
independent foundry subcontractors to manufacture a portion of
our current product; accordingly, any failure to secure and
maintain sufficient foundry capacity could materially and
adversely affect our business. Outside foundry
subcontractors, located in Asia, manufacture a portion of our
semiconductor devices in current production. On
September 13, 2005, we announced our intention to adopt a
fabless manufacturing strategy and to sell our wafer fabrication
facility located in Gresham, Oregon. A fabless manufacturing
strategy will make us completely dependent on foundry
subcontractors upon the completion of the sale of the Gresham
facility.
Availability of foundry capacity has in the recent past been
reduced due to strong demand. In addition, the occurrence of a
public health emergency could further affect the production
capabilities of our manufacturers by resulting in quarantines or
closures. If we are unable to secure sufficient capacity at our
existing foundries, or in the event of a quarantine or closure
at any of these foundries, our revenues, cost of revenues and
results of operations would be negatively impacted. If any of
our foundries experiences a shortage in capacity, or suffers any
damage to its facilities due to earthquakes or other natural
disasters, experiences power outages, encounters financial
difficulties or any other disruption of foundry capacity, we may
need to qualify an alternative foundry in a timely manner. Even
our current foundries need to have new manufacturing processes
qualified if there is a disruption in an existing process. We
typically require several months to qualify a new foundry or
process before we can begin shipping products from it. If we
cannot accomplish this qualification in a timely manner, we may
experience a significant interruption in supply of the affected
products.
Because we rely on outside foundries with limited capacity, we
face several significant risks, including:
|
|
|
|
|
a lack of guaranteed wafer supply and potential wafer shortages
and higher wafer prices; |
|
|
|
limited control over delivery schedules, quality assurance,
manufacturing yields and production costs; and |
|
|
|
the unavailability of, or potential delays in obtaining access
to, key process technologies. |
In addition, the manufacture of integrated circuits is a highly
complex and technologically demanding process. Although we work
closely with our foundries to minimize the likelihood of reduced
manufacturing yields, our foundries have from time to time
experienced lower than anticipated manufacturing yields. This
often occurs during the production of new products or the
installation and
start-up of new process
technologies. Poor yields from our foundries could result in
product shortages or delays in product shipments, which could
seriously harm our relationships with our customers and
materially and adversely affect our results of operations.
The ability of each foundry to provide us with semiconductor
devices is limited by its available capacity and existing
obligations. Although we have entered into contractual
commitments to supply specified levels of products to some of
our customers, we do not have a long-term volume purchase
agreement or a significant guaranteed level of production
capacity with any of our foundries. Foundry capacity may not be
available when we need it or at reasonable prices. Availability
of foundry capacity has in the recent past been reduced from
time to time due to strong demand. We place our orders on the
basis of our customers purchase orders or our forecast of
customer demand, and the foundries can allocate capacity to the
production of other companies products and reduce
deliveries to us on short notice. It is possible that foundry
customers that are larger and better financed than we are, or
that have long-term agreements with our main foundries, may
induce our foundries to reallocate capacity to them. This
reallocation could impair our ability to secure the supply of
components that we need. Although we use a number of independent
foundries to manufacture our semiconductor products, most of our
components are not manufactured at more than one foundry at any
given time, and our products typically are designed to be
manufactured in a specific process at only one of these
foundries. Accordingly, if one of our foundries is unable to
provide us with components as needed, we could experience
significant delays in securing sufficient supplies of those
components. Also, our third party foundries typically migrate
capacity to newer,
state-of-the-art
manufacturing processes on a regular basis, which may create
capacity shortages for our products designed to be manufactured
on an older process. We
19
cannot assure you that any of our existing or new foundries will
be able to produce integrated circuits with acceptable
manufacturing yields, or that our foundries will be able to
deliver enough semiconductor devices to us on a timely basis, or
at reasonable prices. These and other related factors could
impair our ability to meet our customers needs and have a
material and adverse effect on our operating results.
Although we may utilize new foundries for other products in the
future, in using new foundries we will be subject to all of the
risks described in the foregoing paragraphs with respect to our
current foundries.
We depend on third-party subcontractors to assemble, obtain
packaging materials for, and test substantially all of our
current semiconductor products. If we lose the services of any
of our subcontractors or if these subcontractors are unable to
attain sufficient packaging materials, shipments of our products
may be disrupted, which could harm our customer relationships
and adversely affect our revenues. Third-party
subcontractors located in Asia assemble, obtain packaging
materials for, and test substantially all of our current
semiconductor products. Because we rely on third-party
subcontractors to perform these functions, we cannot directly
control our product delivery schedules and quality assurance.
This lack of control has in the past resulted, and could in the
future result, in product shortages or quality assurance
problems that could delay shipments of our products or increase
our manufacturing, assembly or testing costs.
If our third-party subcontractors are unable to obtain
sufficient packaging materials for our products in a timely
manner, we may experience a significant product shortage or
delay in product shipments, which could seriously harm our
customer relationships and materially and adversely affect our
net sales. If any of these subcontractors experiences capacity
constraints or financial difficulties, suffers any damage to its
facilities, experiences power outages or any other disruption of
assembly or testing capacity, we may not be able to obtain
alternative assembly and testing services in a timely manner.
Due to the amount of time that it usually takes us to qualify
assemblers and testers, we could experience significant delays
in product shipments if we are required to find alternative
assemblers or testers for our components. Any problems that we
may encounter with the delivery, quality or cost of our products
could damage our customer relationships and materially and
adversely affect our results of operations. We are continuing to
develop relationships with additional third-party subcontractors
to assemble and test our products. However, even if we use these
new subcontractors, we will continue to be subject to all of the
risks described above.
We depend on third-party subcontractors to manufacture all of
our current board products. Third-party subcontractors
manufacture all of our current board products. Because we rely
on third-party subcontractors to perform this function, we
cannot directly control our product delivery schedules and
quality assurance. This lack of control has in the past
resulted, and could in the future result, in product shortages
or quality assurance problems that could delay shipments of our
products or increase our manufacturing, assembly or testing
costs.
If our third-party subcontractors are unable to manufacture our
products in a timely manner, we may experience a significant
product shortage or delay in product shipments, which could
seriously harm our customer relationships and materially and
adversely affect our net sales. If any of these subcontractors
experiences capacity constraints or financial difficulties,
suffers any damage to its facilities, experiences power outages
or any other disruption of manufacturing capacity, we may not be
able to obtain alternative manufacturing services in a timely
manner. Due to the amount of time that it usually takes us to
qualify manufacturers, we could experience significant delays in
product shipments if we are required to find alternatives. Any
problems that we may encounter with the delivery, quality or
cost of our products could damage our customer relationships and
materially and adversely affect our results of operations. We
are continuing to develop relationships with additional
third-party manufacturers for our products. However, even if we
use these new subcontractors, we will continue to be subject to
all of the risks described above.
We are increasingly exposed to various legal, business,
political and economic risks associated with our international
operations. We currently obtain a substantial portion all of
our manufacturing, and all of our assembly and testing services
from suppliers located outside the United States. We also
frequently ship products to our domestic customers
international manufacturing divisions and subcontractors. We
also undertake design and development activities in Canada,
China, Dubai, Germany, India, Russia, Taiwan, and the United
Kingdom. We intend to continue to expand our international
business activities and to open other design and operational
centers abroad. The recent war in Iraq and the lingering effects
of terrorist attacks in
20
the United States and abroad, the resulting heightened security
and the increasing risk of extended international military
conflicts may adversely impact our international sales and could
make our international operations more expensive. International
operations are subject to many other inherent risks, including
but not limited to:
|
|
|
|
|
political, social and economic instability; |
|
|
|
exposure to different legal standards, particularly with respect
to intellectual property; |
|
|
|
natural disasters and public health emergencies; |
|
|
|
nationalization of business and blocking of cash flows; |
|
|
|
trade and travel restrictions; |
|
|
|
the imposition of governmental controls and restrictions; |
|
|
|
burdens of complying with a variety of foreign laws; |
|
|
|
import and export license requirements and restrictions of the
United States and each other country in which we operate; |
|
|
|
unexpected changes in regulatory requirements; |
|
|
|
foreign technical standards; |
|
|
|
changes in tariffs; |
|
|
|
difficulties in staffing and managing international operations; |
|
|
|
fluctuations in currency exchange rates; |
|
|
|
difficulties in collecting receivables from foreign entities or
delayed revenue recognition; and |
|
|
|
potentially adverse tax consequences. |
Any of the factors described above may have a material adverse
effect on our ability to increase or maintain our foreign sales.
Additionally, public health emergencies may impact our
operations, including, but not limited to, disruptions at our
third-party manufacturers that are primarily located in Asia,
reduced sales and increased supply chain costs.
We are exposed to fluctuations in foreign currency exchange
rates. We have some exposure to fluctuations in foreign
currency exchange rates. We have international subsidiaries and
distributors that operate and sell our products globally. We
routinely hedge these exposures in an effort to minimize the
impact of currency fluctuations. However, we may still be
adversely affected by changes in foreign currency exchange rates
or declining economic conditions in these countries.
We must attract and retain key employees in a highly
competitive environment. In May 2005, Abhijit Y.
Talwalkar joined us as President and Chief Executive Officer.
Mr. Talwalkar succeeded Wilfred J. Corrigan, whose
status as an employee ceased as of May 2005. On
February 13, 2006, Mr. Corrigan notified the Company
that he will not stand for reelection to the Companys
board of directors (the Board) at its next annual
stockholders meeting to be held on May 11, 2006.
Mr. Corrigan currently serves as the chairman of the Board,
and will continue to serve in that capacity through the end of
his current term. The Board will elect a new chairperson at that
time.
Our employees are vital to our success and our key management,
engineering and other employees are difficult to replace. We do
not generally have employment contracts with our key employees.
Despite the economic slowdown of the last few years, competition
for certain key technical and engineering personnel remains
intense. Our continued growth and future operating results will
depend upon our ability to attract, hire and retain significant
numbers of qualified employees.
21
Future changes in financial accounting standards or practices
or existing taxation rules or practices may cause adverse
unexpected fluctuations and affect our reported results of
operations. Financial accounting standards in the United
States are constantly under review and may be changed from time
to time. We would be required to apply these changes when
adopted. Once implemented, these changes could result in
material fluctuations in our financial results of operations
and/or the way in which such results of operations are reported.
Similarly, we are subject to taxation in the United States and a
number of foreign jurisdictions. Rates of taxation, definitions
of income, exclusions from income, and other tax policies are
subject to change over time. Changes in tax laws in a
jurisdiction in which we have reporting obligations could have a
material impact on our results of operations.
We expect that the adoption of Statement of Financial Accounting
Standard No. 123 (Revised 2004), entitled Share-Based
Payment (SFAS No. 123R), effective
for the periods commencing after December 31, 2005, will
have a significant impact on our reported results as described
under Recent Accounting Pronouncements. Because the
factors that will affect compensation expense we incur due to
the adoption of SFAS No. 123R are unknown, the impact
on our operating results at the point of adoption, or in the
future, cannot be determined. Changes in these or other rules,
or modifications to our current practices, may have a
significant adverse effect on our reported operating results or
in the way in which we conduct our business in the future.
We face uncertainties related to the effectiveness of
internal controls. Public companies in the United States are
required to review their internal controls over financial
reporting under Section 404 of the Sarbanes-Oxley Act of
2002. It should be noted that any system of controls, however
well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system are met.
In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control
systems, there can be no assurance that any design will achieve
its stated goal under all potential future conditions,
regardless of how remote.
Although our management has determined, and our independent
public accounting firm has attested, that our internal controls
were effective as of December 31, 2005, we cannot assure
you that we or our independent registered public accounting firm
will not identify a material weakness in our internal controls
in the future. A material weakness in our internal controls over
financial reporting would require management and our independent
public accounting firm to evaluate our internal controls as
ineffective. If our internal controls over financial reporting
are not considered adequate, we may experience a loss of public
confidence, which could have an adverse effect on our business
and our stock price.
Internal control deficiencies or weaknesses that are not yet
identified could emerge. Over time we may identify and
correct deficiencies or weaknesses in our internal controls and,
where and when appropriate, report on the identification and
correction of these deficiencies or weaknesses. However, the
internal control procedures can provide only reasonable, and not
absolute, assurance that deficiencies or weaknesses are
identified. Deficiencies or weaknesses that are not yet
identified could emerge and the identification and corrections
of these deficiencies or weaknesses could have a material impact
on the results of operations for the Company.
|
|
Item 1B. |
Unresolved Staff Comments |
Not applicable.
The Company leases approximately 527,000 square feet of
real property in Milpitas, California for its corporate
headquarters, administration and engineering offices. These
leases expire from 2010 to 2014.
The Company owns the land and buildings housing its
588,000 square foot manufacturing facilities for the
Semiconductor segment in Gresham, Oregon. The Company has
announced its intention to sell this facility by
September 13, 2006, one year from the date of the
announcement. The Company also owns the land
22
and buildings housing sales and engineering offices in
Fort Collins and Colorado Springs, Colorado, and owns the
logistics center in Tsuen Wan, Hong Kong.
In the Storage Systems segment, the Company owns the
manufacturing and executive offices site in Wichita, Kansas,
which includes approximately 330,000 square feet of space,
and leases a facility in Boulder, Colorado, which consists of
approximately 45,000 square feet.
The Company also maintains leased executive offices, design
centers and sales offices in Norcross, Georgia, Bracknell,
United Kingdom and Tokyo, Japan. In addition, the Company
maintains leased sales and engineering offices, regional office
space for its field sales, marketing and design center offices
for both its Semiconductor segment and its Storage Systems
segment at various other locations in North America, Europe,
Japan, China, India, Dubai, Canada, and Russia (See Note 12
of the Notes.)
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.
|
|
Item 3. |
Legal Proceedings |
This information is included in Note 12 (Legal
Matters) of the Notes, which information is incorporated
herein by reference from Item 8 of Part II hereof.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
Not applicable.
Executive Officers of the Company
The executive officers of the Company, who are elected by and
serve at the discretion of the Board of Directors, are as
follows. Their ages are as of December 31, 2005.
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Abhijit Y. Talwalkar
|
|
|
41 |
|
|
President and Chief Executive Officer |
Philip G. Brace
|
|
|
35 |
|
|
Senior Vice President, Corporate Planning and Marketing |
Philip W. Bullinger
|
|
|
41 |
|
|
Senior Vice President, Engenio Storage Group |
Donald J. Esses
|
|
|
54 |
|
|
Executive Vice President, Worldwide Operations |
Jon R. Gibson
|
|
|
58 |
|
|
Vice President, Human Resources |
Bryon Look
|
|
|
51 |
|
|
Executive Vice President and Chief Financial Officer |
Umesh Padval
|
|
|
48 |
|
|
Executive Vice President, Consumer Products Group |
David G. Pursel
|
|
|
60 |
|
|
Vice President, General Counsel and Corporate Secretary |
D. Jeffrey Richardson
|
|
|
40 |
|
|
Executive Vice President, Custom Solutions Group |
Flavio Santoni
|
|
|
47 |
|
|
Senior Vice President, Worldwide Sales |
Frank A. Tornaghi
|
|
|
51 |
|
|
Executive Vice President, Worldwide Sales |
William J. Wuertz
|
|
|
48 |
|
|
Senior Vice President, Storage Components Group |
Joseph M. Zelayeta
|
|
|
59 |
|
|
Executive Vice President, Corporate Initiatives |
Mr. Talwalkar was appointed LSI Logic President and Chief
Executive Officer, and elected to the Companys Board of
Directors in May 2005. Prior to joining the Company,
Mr. Talwalkar was employed by Intel Corporation, a
microprocessor manufacturer, most recently as Corporate Vice
President and Co-general Manager of the Digital Enterprise
Group, from January 2005 until he joined the Company in May
2005. Previously, from May 2004 to January 2005 he served as
Vice President and General Manager for Intels Enterprise
Platform Group. Prior to this role, from April 2002 to May 2004,
he served as Vice President and General Manager of Intels
Platform Products Group, within Intels Enterprise Platform
Group. Mr. Talwalkar served as Vice President and Assistant
General Manager of Intels Enterprise Platform Group
23
from June 2001 to March 2002. Prior to this position,
Mr. Talwalkar held the position of Vice President and
General Manager of the Enterprise Platform and Service Division
of Intel.
Philip G. Brace joined the Company in August 2005 as Senior Vice
President, Corporate Planning and Marketing. He joined the
Company from Intel Corporation, a microprocessor manufacturer,
where from November 2004 until his departure from Intel in
August 2005, he served as General Manager of Sever Platforms
Group Marketing within the Digital Enterprise Group.
Mr. Brace joined Intel in 1993, holding marketing, sales,
and applications engineering positions in both silicon and
systems products. From April 2004 to November 2004, he served as
Director of Volume Platform Marketing within Intels
Enterprise Platform Group. Prior to this role, he served as
Director of marketing for the Enterprise Platforms and Services
Division within Intels Enterprise Platform Group from
October 2001 until April 2004. From February 1999 to October
2001 he was Director of Marketing for the Fabric Components
Division within Intels Enterprise Platform Group.
Philip W. Bullinger joined LSI Logic in 1998 as part of the
Symbios, Inc. acquisition and served as Director of Product
Development until August 2001. Symbios was a storage company.
From September 2001, he has served as Vice President and General
Manager of LSI Logics RAID Storage Adapters division. In
August 2005, Mr. Bullinger was promoted to his current
position.
Donald J. Esses was named Executive Vice President, Worldwide
Operations in December 2003. He joined the Company in 1983 and
has held management positions in process and product
engineering. From July 1994 to November 2000, Mr. Esses
held the position of Vice President, U.S. Manufacturing.
From November 2000 to December 2003, he was Vice President of
Supply Chain Management.
Jon Gibson was named Vice President, Human Resources in November
2001. He joined LSI in September 1984 as Employee Relations
Manager. Mr. Gibson was named Director of Human Resources
in October 1987. From March 1999 until November 2001,
Mr. Gibson served as Senior Director of Human Resources.
Bryon Look was named Executive Vice President and Chief
Financial Officer in November 2000. Mr. Look joined the
Company in March 1997 as Vice President, Corporate Development
and Strategic Planning. Prior to joining the Company, he was
manager of business development at 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.
Umesh Padval was named Executive Vice President, Consumer
Products in August 2004. He served as Senior Vice President and
General Manager for LSI Logics Broadband Entertainment
Division, a position he held since June 2001, when LSI Logic
acquired C-Cube Microsystems Inc. Mr. Padval served as the
Chief Executive Officer of C-Cube from May 2000 until June 2001,
and President of C-Cubes semiconductor division from 1998
to 2000. Prior to joining C-Cube, Mr. Padval was Senior
Vice President and General Manager of the Consumer Digital
Entertainment and Computing Products Divisions at VLSI
Technology, Inc.
David G. Pursel serves as Vice President, General Counsel and
Corporate Secretary. He was named to this position in June 2000.
Mr. Pursel joined LSI Logic in February 1996 as Associate
General Counsel, Chief Intellectual Property Counsel and
Assistant Secretary.
D. Jeffrey Richardson joined the Company in June 2005 as
Executive Vice President, Customs Solutions Group. He joined
Intel Corporation, a microprocessor manufacturer, in November
1992, where he held a variety of management positions. From
February 2005 until his departure from Intel in June 2005, he
served as Vice President of the Digital Enterprise Group and
General Manager of the Server Platform Group. Earlier, from June
2001 to January 2005, Mr. Richardson was General Manager of
Intels Enterprise Platforms and Services Division.
From January 1999 to June 2001, he was Director of Product
Development of Intels Enterprise Platforms and Services
Division.
24
Flavio Santoni has directed the management of sales, marketing,
distribution and customer support for products developed by the
Engenio Storage Group since August 2005. Mr. Santoni joined
Engenio in February 2001 as Vice President of Worldwide Sales,
Marketing and Support and was promoted to Senior Vice President
of Worldwide Sales, Marketing and Customer Support in 2003.
Prior to working at LSI Logic, Mr. Santoni served as Chief
Operating Officer and Executive Vice President of Sales and
Marketing for Sutmyn Storage Corporation from July 1997 to
January 2001.
Frank A. Tornaghi was named Executive Vice President, Worldwide
Sales in July 2001. Since joining the Company in 1984,
Mr. Tornaghi has held several management positions in sales
at LSI Logic and was named a vice president in 1993. He served
as Vice President, North America Sales, from May 1993 to July
2001.
Prior to his promotion to his current position of Senior Vice
President, Storage Components Group, in August 2005, William J.
Wuertz was Senior Vice President and General Manager of LSI
Logics Storage Standard Products division, a position he
held since joining the Company in 1998 as part of the Symbios,
Inc. acquisition. Symbios was a storage company.
Joseph M. Zelayeta was named Executive Vice President, Corporate
Initiatives in August of 2005. He served as Executive Vice
President ASIC Technology and Methodology from December 2003 to
August 2005, and as Executive Vice President, Worldwide
Operations from September 1997 to December 2003.
Mr. Zelayeta joined LSI Logic in 1981 and has held various
management positions with the Company, including Senior Vice
President of U.S. Manufacturing and General Manager Gresham
Operations, Vice President of Research and Development and Vice
President of U.S. Operations.
There are no family relationships among any executive officers
and directors.
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
(NYSE) under the symbol LSI. The
Companys Chief Executive Officer has certified to the NYSE
that he is unaware of any violation by the Company of the
NYSEs corporate governance listing standards. On
June 13, 2005, the Company submitted its Annual CEO
Certification as required by Section 303A(12a) of the NYSE
Listed Company Manual. The high and low closing sales prices for
the stock for each full quarterly period within the two most
recent fiscal years as reported on the NYSE are:
|
|
|
|
|
|
|
|
|
|
|
2005 High Low | |
|
2004 High Low | |
|
|
| |
|
| |
First Quarter
|
|
$ |
6.47 5.02 |
|
|
$ |
11.45 8.64 |
|
Second Quarter
|
|
$ |
8.69 5.11 |
|
|
$ |
9.91 7.15 |
|
Third Quarter
|
|
$ |
10.48 9.12 |
|
|
$ |
6.80 4.03 |
|
Fourth Quarter
|
|
$ |
9.91 7.70 |
|
|
$ |
5.81 4.27 |
|
|
|
|
|
|
|
|
Year
|
|
$ |
10.48 5.02 |
|
|
$ |
11.45 4.03 |
|
|
|
|
|
|
|
|
At March 14, 2006, there were 3,320 owners of record of our
common stock.
We have never paid cash dividends on our common stock. It is
presently our policy to reinvest our earnings, and we do not
anticipate paying any cash dividends to stockholders in the
foreseeable future.
25
Equity Compensation Plan Information
As of December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
|
(a) |
|
(b) |
|
Number of |
|
|
Number of |
|
Weighted- |
|
Securities Remaining |
|
|
Securities to be |
|
Average |
|
Available for Future |
|
|
Issued upon |
|
Exercise Price |
|
Issuance Under |
|
|
Exercise of |
|
of Outstanding |
|
Equity Compensation |
|
|
Outstanding |
|
Options, |
|
Plans (Excluding |
|
|
Options, Warrants |
|
Warrants |
|
Securities Reflected |
Plan Category |
|
and Rights |
|
and Rights |
|
in Column (a)) |
|
|
|
|
|
|
|
Equity compensation plans approved by security holders(1)
|
|
|
33,346,241 |
|
|
$ |
14.24 |
|
|
|
49,467,728 |
|
Equity compensation plans not approved by security holders(2)
|
|
|
39,647,411 |
|
|
$ |
11.55 |
|
|
|
14,400,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
72,993,652 |
|
|
$ |
12.78 |
|
|
|
63,868,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Equity compensation plans approved by security holders are the
following: |
|
|
|
|
(i) |
The Employee Stock Purchase Plan, amended and restated
(US ESPP), under which rights are granted to
LSI Logic employees in the United States to purchase shares of
common stock at 85% of the lesser of the fair market value of
such shares at the beginning of a
12-month offering
period or the end of each six-month purchase period within such
an offering period. There are 10,906,846 shares remaining
available for future issuance under this plan. The US ESPP
includes an annual replenishment calculated at 1.15% of the
Companys common stock issued and outstanding at the fiscal
year end less the number of shares available for future grants
under the US ESPP. No shares have been added to the US ESPP
from the annual replenishment since January 2001. |
|
|
(ii) |
The 2003 Equity Incentive Plan was approved by stockholders in
May 2003. Under this plan, the Company may grant stock options
or restricted stock to employees, officers and consultants.
There are 6,154,516 shares remaining available for future
issuance under this plan, including 2,375,185 shares
reserved for restricted stock awards that have been granted, but
will not be issued until the awards have vested. Stock options
will have an exercise price that is no less than the fair market
value of the stock on the date of grant. The term of each option
or restricted stock award is determined by the Board of
Directors and for option grants on or after February 12,
2004, will generally be seven years. Options generally vest in
annual increments of 25% per year commencing one year from
the date of grant. Restricted stock awards may be granted with
the vesting requirements determined by the Board of Directors. |
|
|
(iii) |
Under the 1991 Equity Incentive Plan the Company may grant stock
options to employees, officers and consultants, with an exercise
price that is no less than the fair market value of the stock on
the date of grant. The term of each option is determined by the
Board of Directors and has generally been ten years. For options
granted on or after February 12, 2004, the term of the
options will generally be seven years. Options generally vest in
annual increments of 25% per year commencing one year from
the date of grant. With respect to shares previously approved by
stockholders, no incentive stock options may be granted under
this plan after March 2001. |
|
|
(iv) |
Under the 1995 Director Option Plan new directors receive
an initial grant of 30,000 options to purchase shares of common
stock and directors receive subsequent automatic grants of
30,000 options to purchase shares of common stock each year
thereafter. The initial grants vest in annual increments of
25% per year, commencing one year from the date of grant.
Subsequent option grants become exercisable in full six months
after the grant date. The term of each option is ten years. The
exercise price of the options granted is equal to the fair
market value of the stock on the date of grant. |
26
|
|
(2) |
Equity compensation plans not previously approved by security
holders are the following: |
|
|
|
|
(i) |
An aggregate of 5,678,908 options with a weighted-average
exercise price of $11.81 per share are outstanding that
were assumed in acquisitions. No further options may be granted
under these assumed plans. |
|
|
(ii) |
A total of 316,042 shares of common stock were reserved
under the 2001 Supplemental Stock Issuance Plan, of which
14,830 shares remain available for future issuance. Shares
of common stock may be issued under this plan pursuant to share
right awards, which entitle the recipients to receive those
shares upon the satisfaction of the following service
requirements: 20% of the shares subject to an award will be
issued upon completion of three months of continuous service
measured from the award date, an additional 30% of the shares
will be issued upon completion of 12 months of continuous
service measured from the award date and the remaining 50% of
the shares will be issued upon completion of 24 months of
continuous service measured from the award date. |
|
|
(iii) |
Under the 1999 Nonstatutory Stock Option Plan the Company may
grant stock options to its employees, excluding officers, with
an exercise price that is no less than the fair market value of
the stock on the date of grant. The term of each option is
determined by the Board of Directors and has generally been ten
years. For options granted on or after February 12, 2004,
the term of the options will be seven years. Options generally
vest in annual increments of 25% per year commencing one
year from the date of grant. |
|
|
(iv) |
Under the International Employee Stock Purchase Plan rights are
granted to LSI Logic employees (excluding executive officers)
outside of the United States to purchase shares of common stock
at 85% of the lesser of the fair market value of such shares at
the beginning of a
12-month offering
period or the end of each six-month purchase period within such
an offering period. There are 1,134,789 shares remaining
available for future issuance under this plan, of which
1,000,000 shares were added to the plan by stockholder
approval in 2004. |
On July 28, 2000, the Companys Board of Directors
authorized a stock repurchase program in which up to
5 million shares of the Companys common stock may be
repurchased in the open market from time to time. There is no
expiration date for the plan. No shares were repurchased under
this plan during 2005. There are 3.5 million shares
available for repurchase under this plan as of December 31,
2005.
27
|
|
Item 6. |
Selected Financial Data |
Five-Year Consolidated Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Revenues
|
|
$ |
1,919,250 |
|
|
$ |
1,700,164 |
|
|
$ |
1,693,070 |
|
|
$ |
1,816,938 |
|
|
$ |
1,784,923 |
|
Cost of revenues
|
|
|
1,086,814 |
|
|
|
964,556 |
|
|
|
1,015,865 |
|
|
|
1,122,696 |
|
|
|
1,160,432 |
|
Additional excess inventory and related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,526 |
|
|
|
210,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
1,086,814 |
|
|
|
964,556 |
|
|
|
1,015,865 |
|
|
|
1,168,222 |
|
|
|
1,370,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
832,436 |
|
|
|
735,608 |
|
|
|
677,205 |
|
|
|
648,716 |
|
|
|
413,927 |
|
Research and development
|
|
|
397,312 |
|
|
|
421,516 |
|
|
|
432,695 |
|
|
|
457,351 |
|
|
|
503,108 |
|
Selling, general and administrative
|
|
|
235,933 |
|
|
|
243,498 |
|
|
|
234,156 |
|
|
|
230,202 |
|
|
|
307,310 |
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,920 |
|
|
|
96,600 |
|
Restructuring of operations and other items, net
|
|
|
119,052 |
|
|
|
423,444 |
|
|
|
180,597 |
|
|
|
67,136 |
|
|
|
219,639 |
|
Amortization of non-cash deferred stock compensation
|
|
|
5,449 |
|
|
|
8,449 |
|
|
|
26,021 |
|
|
|
77,303 |
|
|
|
104,627 |
|
Amortization of intangibles
|
|
|
62,484 |
|
|
|
75,050 |
|
|
|
76,352 |
|
|
|
78,617 |
|
|
|
188,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations
|
|
|
12,206 |
|
|
|
(436,349 |
) |
|
|
(272,616 |
) |
|
|
(264,813 |
) |
|
|
(1,005,608 |
) |
Interest expense
|
|
|
(25,283 |
) |
|
|
(25,320 |
) |
|
|
(30,703 |
) |
|
|
(51,977 |
) |
|
|
(44,578 |
) |
Interest income and other, net
|
|
|
34,000 |
|
|
|
22,170 |
|
|
|
18,933 |
|
|
|
26,386 |
|
|
|
19,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes and minority interest
|
|
|
20,923 |
|
|
|
(439,499 |
) |
|
|
(284,386 |
) |
|
|
(290,404 |
) |
|
|
(1,030,355 |
) |
Provision for/ (benefit from) income taxes
|
|
|
26,540 |
|
|
|
24,000 |
|
|
|
24,000 |
|
|
|
1,750 |
|
|
|
(39,198 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority interest
|
|
|
(5,617 |
) |
|
|
(463,499 |
) |
|
|
(308,386 |
) |
|
|
(292,154 |
) |
|
|
(991,157 |
) |
Minority interest in net income of subsidiary
|
|
|
6 |
|
|
|
32 |
|
|
|
161 |
|
|
|
286 |
|
|
|
798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(5,623 |
) |
|
$ |
(463,531 |
) |
|
$ |
(308,547 |
) |
|
$ |
(292,440 |
) |
|
$ |
(991,955 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$ |
(0.01 |
) |
|
$ |
(1.21 |
) |
|
$ |
(0.82 |
) |
|
$ |
(0.79 |
) |
|
$ |
(2.84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share
|
|
$ |
(0.01 |
) |
|
$ |
(1.21 |
) |
|
$ |
(0.82 |
) |
|
$ |
(0.79 |
) |
|
$ |
(2.84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,796,066 |
|
|
$ |
2,874,001 |
|
|
$ |
3,447,901 |
|
|
$ |
4,012,736 |
|
|
$ |
4,525,077 |
|
|
Long-term obligations*
|
|
$ |
699,050 |
|
|
$ |
859,545 |
|
|
$ |
1,007,079 |
|
|
$ |
1,315,557 |
|
|
$ |
1,547,197 |
|
|
Stockholders equity
|
|
$ |
1,627,950 |
|
|
$ |
1,618,046 |
|
|
$ |
2,042,450 |
|
|
$ |
2,300,355 |
|
|
$ |
2,479,885 |
|
|
|
* |
includes current portion of long-term debt of $273,940 as of
December 31, 2005. |
The Companys fiscal years ended on December 31 for
each of the years presented above.
For a discussion of charges for restructuring of operations and
other items, net, see Note 3 of the Notes.
On January 1, 2003, the Company adopted
SFAS No. 146, Accounting for Exit or Disposal
Activities. SFAS No. 146 has been applied to
restructuring activities initiated after December 31, 2002
and changes the timing of when restructuring charges are
recorded to the date when the liabilities are incurred.
28
During 2002, the Company recorded $46 million in additional
excess inventory and related charges and $67 million in
charges for restructuring of operations and other items, net.
The Company adopted SFAS No. 142 Goodwill and
Other Intangible Assets on January 1, 2002, as a
result of which goodwill is no longer amortized.
During 2001, the Company recorded $211 million in
additional excess inventory and related charges, a
$97 million in-process research and development
(IPR&D) charge associated with the acquisitions
of C-Cube and AMI,
which were effective on May 11, 2001 and August 31,
2001, respectively. In addition, the Company recorded charges of
$220 million for restructuring of operations and other
items, net.
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Statements in this discussion and analysis include
forward-looking information within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. All forward-looking statements included in this
discussion and analysis are based on information available to us
on the date of filing of this Annual Report on
Form 10-K, and we
assume no obligation to update any such forward-looking
statements. These statements involve known and unknown risks and
uncertainties. Our actual results in future periods may be
significantly different from any future performance suggested in
this report. In some cases, you can identify forward-looking
statements by terminology such as may,
will, expects, plans,
anticipates, believes,
estimates, intends,
projects, predicts, or similar
expressions. For such statements, we claim the protection under
the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. Although we
believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. For a detailed
discussion of risk factors, refer to the Risk
Factors section set forth in Part I, Item 1A of
this Annual Report on
Form 10-K, which
is incorporated by reference into this Part II,
Item 7.
While management believes that the discussion and analysis in
this report is adequate for a fair presentation of the
information, we recommend that you read this discussion and
analysis in conjunction with the remainder of this Annual Report
on Form 10-K.
OVERVIEW
We design, develop, and market complex, high-performance
semiconductors and storage systems. In 2005, our operations were
organized in four markets: communications, consumer products,
storage components and storage systems. We offer integrated
circuit products, board-level products, and software for use in
consumer applications, high-performance storage controllers,
enterprise hard disk controllers, and systems for storage area
networks. Our integrated circuits are also used in a wide range
of communication devices. On March 6, 2006, we announced
plans to focus our business on growth opportunities in the
information storage and consumer markets, increasing associated
research and development (R&D) investments, while
redirecting R&D from non-core areas and reducing associated
selling, general and administrative (SG&A) expenditures.
Consistent with our increased focus on storage markets, we have
cancelled our previously postponed plan for an initial public
offering of our wholly-owned subsidiary Storage Systems
subsidiary, Engenio Information Technologies, Inc. We intend to
fund additional R&D investments in our focus markets by
redirecting ongoing investments in RapidChip platform ASIC
technology and by selling our ZSP digital signal processor
(DSP) unit. We will cease further RapidChip development and
realign our custom silicon capabilities to more deeply serve
customers in the information storage and consumer markets.
RapidChip customer designs currently in production or under
development will continue and are not affected by this action.
We operate in two segments the Semiconductor segment
and the Storage Systems segment in which we offer
products and services for a variety of electronic systems
applications. Our products are marketed primarily to original
equipment manufacturers (OEMs) that sell products to
our target markets. The information provided herein has been
recast to include the RAID Storage Adapter (RSA)
business as part of the Storage Systems segment from the
Semiconductor segment for all periods presented.
29
On May 23, 2005, Abhijit Y. Talwalkar joined LSI as
President and Chief Executive Officer and Wilfred J.
Corrigans status as an employee of LSI ceased. Since
joining LSI, Mr. Talwalkar has been in the process of
assessing the strategic foundation and operational effectiveness
of our overall business. In the third quarter of 2005, we
announced a broad-based reorganization as well as the decision
to move to a fabless semiconductor model. Our RSA business,
formerly part of the Semiconductor segment, is now included in
the Storage Systems segment. The combination of RSA and Engenio,
our wholly owned subsidiary, will allow us to more efficiently
deliver a broad portfolio of software, storage products and
platforms to meet original equipment manufacturer
(OEM) customer needs.
On September 13, 2005, we announced that we intend to sell
our Gresham, Oregon manufacturing facility as part of our
strategy to move to a fabless semiconductor manufacturing model.
Our new strategy includes the expansion of our working
relationships with major foundry partners and the adoption of a
roadmap leading to the production of advanced semiconductors
utilizing 65-nanometer and below process technology on
300-mm or
12-inch wafers. We
recorded $91.1 million in charges directly associated with
the decision to sell the Gresham manufacturing facility. The
details of these charges are included in the discussion on
restructuring included under the results of operations section
of this MD&A and also in the Notes to the Consolidated
Financial Statements.
Revenues for the year ended December 31, 2005 were
$1,919.3 million representing a 13% increase as compared to
$1,700.2 million in revenues for the year ended
December 31, 2004. The increase in revenues represents
increases in both our Semiconductor and Storage Systems segments.
We reported a net loss of $5.6 million or $0.01 a diluted
share for the year ended December 31, 2005 as compared to a
net loss of $463.5 million or $1.21 a diluted share for the
year ended December 31, 2004.
Cash, cash equivalents and short-term investments were
$938.9 million as of December 31, 2005 as compared to
$814.6 million at December 31, 2004. For the year
ended December 31, 2005, we generated $248.7 million
in cash provided by operations as compared to $90.8 million
for the year ended December 31, 2004.
Separation and stock option exchange program of our Storage
Systems business. On February 19, 2004, Engenio filed a
registration statement on
Form S-1 with the
Securities and Exchange Commission for the initial public
offering of its common stock. On July 29, 2004, LSI
announced jointly with Engenio the postponement of the initial
public offering of its common stock due to then current market
conditions. We have since decided not to move forward with an
initial public offering. On September 16, 2005, we
exchanged options to purchase an aggregate of
3,011,450 shares of Engenio common stock for options to
purchase an aggregate of 2,830,763 shares of LSIs
common stock. The exchange occurred in accordance with the terms
of the Engenio Equity Incentive plan, which provided for the
automatic exchange of the options in the event it was determined
that the Engenio initial public offering was not likely to
occur. The original exercise prices of the options were
multiplied by an exchange ratio equal to the relative fair
values of Engenio and LSI stock on the exchange date.
Significant acquisitions and other major transactions. We
continue to evaluate strategic acquisitions that build upon our
existing library of intellectual property, human capital,
including engineering talent, and seek to increase our
leadership position in the markets in which we operate. All of
our recent acquisitions were accounted for as purchases and
accordingly, the estimated fair value of assets acquired and
liabilities assumed and the results of operations were included
in our Consolidated Financial Statements as of the effective
date of each acquisition. The transactions are summarized below.
There were no significant differences between our accounting
policies and those of the companies acquired. (See Note 2
of the Notes.)
30
We acquired Velio Communications, Inc. (Velio)
during the first quarter of 2004 and Accerant Inc.
(Accerant) during the second quarter of 2004. The
transactions are summarized in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Tangible |
|
|
|
|
|
|
Entity Name; |
|
|
|
Total |
|
|
|
Net Assets/ |
|
|
|
Amortizable |
|
Deferred |
Segment Included in; |
|
Acquisition |
|
Purchase |
|
Type of |
|
(Liabilities) |
|
|
|
Intangible |
|
Stock |
Description of Acquired Business |
|
Date |
|
Price |
|
Consideration |
|
Acquired |
|
Goodwill |
|
Assets |
|
Compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Velio Communications, Inc.; Semiconductor segment; High-speed
interconnect and switch fabric application specific standard
products
|
|
April 2, 2004 |
|
$ |
20.8 |
|
|
$19.8 cash; and
0.1 million restricted common shares |
|
$ |
1.5 |
|
|
$ |
|
|
|
$ |
18.3 |
|
|
$ |
1.0 |
|
Accerant, Inc.;
Semiconductor segment;
Consumer product applications
|
|
May 11, 2004 |
|
$ |
15.9 |
|
|
$14.1 cash; and
0.2 million restricted common shares |
|
$ |
|
|
|
$ |
8.0 |
|
|
$ |
6.1 |
|
|
$ |
1.8 |
|
Where more than one significant factor contributed to changes in
results from year to year, we have quantified such factors
throughout Managements Discussion & Analysis
(MD&A) where practicable and useful to the
discussion. The information provided herein for the
Semiconductor and Storage Systems segments have been recast to
reflect the realignment of the RSA group to the Storage Systems
segment from the Semiconductor segment for all periods presented.
RESULTS OF OPERATIONS
On March 6, 2006, we announced plans to focus our business
on growth opportunities in the storage and consumer markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Semiconductor segment
|
|
$ |
1,244.3 |
|
|
$ |
1,095.1 |
|
|
$ |
1,124.1 |
|
Storage Systems segment
|
|
|
675.0 |
|
|
|
605.1 |
|
|
|
569.0 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
1,919.3 |
|
|
$ |
1,700.2 |
|
|
$ |
1,693.1 |
|
|
|
|
|
|
|
|
|
|
|
There were no significant inter-segment revenues during the
periods presented.
2005
compared to 2004
Total consolidated revenues for 2005 increased
$219.1 million or 13% as compared to 2004, reflecting
revenue increases in both segments.
Semiconductor
segment:
Revenues for the Semiconductor segment increased
$149.2 million or 14% in 2005 as compared to 2004. The
increase in revenues in the Semiconductor segment is primarily
attributable to the following factors:
|
|
|
|
|
An increase in revenues for semiconductors used in consumer
product applications as a result of increased demand for digital
audio players, DVD-recorders and cable set-top box solutions,
offset in part by decreases in demand for semiconductors used in
video game products; and |
|
|
|
An increase in revenues for semiconductors used in storage
product applications primarily attributable to higher demand for
custom silicon used in hard disk drives. |
The above noted increases in revenues were offset in part by
decreased revenues for semiconductors used in communications
product applications such as office automation, switch and
wireless products.
31
Revenues for the Storage Systems segment increased
$69.9 million or 12% in 2005 from 2004. The increase in
revenues in the Storage Systems segment is primarily
attributable to increased demand from one large customer for our
new high performance controller product introduced in the second
quarter of 2005 and also for our command module products.
We expect total consolidated revenues in the first quarter of
2006 to be within a range of $465 million to
$490 million.
Total consolidated revenues for 2004 increased $7.1 million
or less than one percent as compared to 2003.
Revenues for the Semiconductor segment decreased
$29.0 million or 3% in 2004 as compared to 2003. The
decrease in revenues for the Semiconductor segment is primarily
attributable to a decrease in average selling prices and demand
for semiconductors used in video game products, and a decrease
in demand for semiconductors used in office automation products
and enterprise switch products. These decreases were offset in
part by the following:
|
|
|
|
|
Increases in demand for semiconductors used in storage product
applications such as our Ultra320 SCSI and custom silicon used
in hard disk drives and host adapter boards. The Ultra320
product line was introduced in the latter part of 2003; |
|
|
|
An increase in demand for semiconductors used in consumer
product applications such as
DVD-recorders. We
introduced our DVD-recorder semiconductor product in the latter
part of 2003 and early 2004; and |
|
|
|
An increase in demand for semiconductors used in communication
product applications such as wireless solutions. |
Revenues for the Storage Systems segment increased
$36.1 million or 6% in 2004 from 2003. The increase in
revenues for the Storage Systems segment was primarily
attributable to increased demand for our entry-level controller
products that were introduced in late April 2003 and increased
demand for our other controller and disk enclosure related
products. In addition to our introduction of the new entry-level
controller product, we believe that the increased demand from
our largest customers was driven by the trend toward purchasing
modular storage systems, our increased focus on sales of our
products to our channel customers, the economic rebound that
began in the middle of 2003, increased spending on information
technology by organizations and increased outsourcing by OEMs.
32
Significant Customers. The following table summarizes the
number of our significant customers, each of whom accounted for
10% or more of our revenues, along with the percentage of
revenues they individually represent on a consolidated basis and
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Semiconductor segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
Percentage of segment revenues
|
|
|
17% |
|
|
|
11% |
|
|
|
20%, 10% |
|
Storage Systems segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
Percentage of segment revenues
|
|
|
44%, 12% |
|
|
|
41%, 15%, 11% |
|
|
|
39%, 17%, 10% |
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
Percentage of consolidated revenues
|
|
|
16%, 11% |
|
|
|
16% |
|
|
|
15%, 13% |
|
Revenues by geography. The following table summarizes our
revenues by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
(In millions) |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America*
|
|
$ |
932.2 |
|
|
$ |
852.5 |
|
|
$ |
863.6 |
|
Asia, including Japan
|
|
|
756.0 |
|
|
|
655.1 |
|
|
|
677.3 |
|
Europe*
|
|
|
231.1 |
|
|
|
192.6 |
|
|
|
152.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,919.3 |
|
|
$ |
1,700.2 |
|
|
$ |
1,693.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Revenues by geography are accumulated based on the revenues
generated by our subsidiaries located within the three
geographic areas noted in the above table. In the second half of
2004, Engenio formed new subsidiaries within Europe. As a
result, the amounts in the table reflect that change as of
June 21, 2004 and prior to that all revenues generated by
Engenio Europe were previously reported in North America. |
In 2005, revenues increased in North America, Asia, including
Japan and Europe as compared to 2004. The increase in revenues
in North America for 2005 is primarily attributable to an
increase in demand for semiconductors used in consumer product
applications such as digital audio players and set-top box
solutions and increases in revenues in the Storage Systems
segment. The increase was offset in part by decreased demand for
semiconductors used in storage product applications such as
custom silicon for the server market and communication product
applications. The increase in Asia, including Japan, is
attributable to higher demand for semiconductors used in storage
product applications such as hard disk drives. These increases
were offset in part by lower demand for semiconductors used in
consumer product applications such as video games and
communications product applications such as enterprise switches.
The increase in Europe is attributable to increased demand for
products in the Semiconductor segment such as Ultra320, tape
drives and DVD-recorders and also increases in demand for
products in the Storage System segment.
In 2004, revenues decreased in North America and Asia, including
Japan, while revenues increased in Europe as compared to 2003.
The decrease in revenues in North America is primarily
attributable to a decrease in demand for modular storage
products associated with Engenio as a result of the allocation
of revenues to the newly formed subsidiaries in Europe, as
discussed above, and a decrease in demand for semiconductors
used in storage and consumer product applications, such as cable
and set-top-box solutions.
33
The decrease in North America was offset in part by an increase
in demand for semiconductors used in communication product
applications such as routers, switches and wireless solutions.
The decrease in revenues in Asia, including Japan, is primarily
due to lower demand for semiconductors used in consumer product
applications, such as video game products, and semiconductors
used in communication product applications, such as office
automation products and switches. The decrease in Asia,
including Japan, was offset in part by an increase in demand for
semiconductors used in consumer product applications, such as
DVD-recorders, and semiconductors used in storage product
applications, such as hard disk drives and our Ultra320 product
line. The increase in Europe is a result of the allocation of
revenues to the newly formed subsidiaries in Europe for Engenio
as previously discussed, offset in part by decreased demand
across all semiconductor product applications.
Operating costs and expenses. Key elements of the
consolidated statements of operations for the respective
segments are as follows:
Gross profit margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Semiconductor segment
|
|
$ |
590.2 |
|
|
$ |
512.0 |
|
|
$ |
464.8 |
|
|
Percentage of segment revenues
|
|
|
47 |
% |
|
|
47 |
% |
|
|
41 |
% |
Storage Systems segment
|
|
$ |
242.2 |
|
|
$ |
223.6 |
|
|
$ |
212.4 |
|
|
Percentage of segment revenues
|
|
|
36 |
% |
|
|
37 |
% |
|
|
37 |
% |
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
832.4 |
|
|
$ |
735.6 |
|
|
$ |
677.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenues
|
|
|
43 |
% |
|
|
43 |
% |
|
|
40 |
% |
The consolidated gross profit margin as a percentage of revenues
was 43% in 2005 and 2004.
The gross profit margin as a percentage of revenues for the
Semiconductor segment was 47% in 2005 and 2004. In 2005, gross
profit margins included more favorable manufacturing variances
for the Gresham manufacturing facility associated with yield
improvements and operating cost savings attributable to
write-downs recorded in the second half of 2004 related to the
impairment of the Gresham manufacturing facility (See
Note 3 of the Notes). This favorable effect on gross profit
margin was offset by an unfavorable shift in the overall mix.
The gross profit margin as a percentage of revenues for the
Storage Systems segment decreased to 36% in 2005 from 37% in
2004 mainly due to changes in product mix reflecting lower sales
volumes for some of our higher-end storage products, and lower
selling prices for RSA products and some of our older products.
These declines were only partially offset by margin improvements
since the introduction of our new high-end controller product
introduced in the second quarter of 2005.
We expect gross profit margins to be in the 42.5% to 43.5% range
in the first quarter of 2006.
The consolidated gross profit margin as a percentage of revenues
increased to 43% in 2004 from 40% in 2003.
The gross profit margin, as a percentage of revenues for the
Semiconductor segment, increased to 47% in 2004 from 41% in
2003. The following factors contributed to the improvement in
the Semiconductor segments gross profit margins in 2004 as
compared to the prior year:
|
|
|
|
|
A favorable shift in the overall mix of products sold to
products with higher margins, including the introduction of new
products such as semiconductors used in consumer product
applications such as |
34
|
|
|
|
|
DVD-recorders and semiconductors used in storage product
applications such as our Ultra320 product line and custom
silicon used in hard disk drives, offset in part by lower
average selling prices for semiconductors used in video game
products for the year ended December 31, 2004, as compared
to the same period of 2003; |
|
|
|
Lower manufacturing variances for the Gresham manufacturing
facility associated with yield improvements and better factory
utilization; |
|
|
|
A reduction in cost of revenues as a result of the sale of our
Japan manufacturing facility in the fourth quarter of 2003; |
|
|
|
Lower period costs in 2004 as compared to 2003, as a result of
the implementation of our 130 nanometer manufacturing process
technology during 2003; and |
|
|
|
A reduction in compensation-related costs and equipment-related
depreciation and rent expense primarily as a result of the
restructuring actions and lease refinancing initiatives during
2004. |
The gross profit margin as a percentage of revenues for the
Storage Systems segment remained unchanged at 37% in 2004 and
2003.
|
|
|
Research and development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Semiconductor segment
|
|
$ |
305.3 |
|
|
$ |
339.7 |
|
|
$ |
365.8 |
|
|
Percentage of segment revenues
|
|
|
25 |
% |
|
|
31 |
% |
|
|
33 |
% |
Storage Systems segment
|
|
$ |
92.0 |
|
|
$ |
81.8 |
|
|
$ |
66.9 |
|
|
Percentage of segment revenues
|
|
|
14 |
% |
|
|
14 |
% |
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
397.3 |
|
|
$ |
421.5 |
|
|
$ |
432.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenues
|
|
|
21 |
% |
|
|
25 |
% |
|
|
26 |
% |
Research and development (R&D) expenses, on a
consolidated basis, decreased $24.2 million or 6% during
2005 as compared to 2004.
R&D expenses for the Semiconductor segment consist primarily
of employee salaries and materials used in the design of custom
silicon and standard products, as well as depreciation of
capital equipment and facilities. On March 6, 2006, we
announced that we will focus our R&D activities in the
storage and consumer markets and redirect R&D spending from
non-core areas.
R&D expenses for the Semiconductor segment decreased
$34.4 million or 10% in 2005 as compared to 2004. The
decrease in R&D expenses for the Semiconductor segment is
primarily the result of the cost-cutting measures implemented as
part of the restructuring actions taken during 2004 (See
Note 3 of the Notes), including lower compensation-related
expenses as well as lower equipment and depreciation expenses.
In addition, we spent less on design engineering programs during
2005 as compared to 2004.
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.
35
R&D expenses for the Storage Systems segment increased by
$10.2 million or 12% in 2005 as compared to 2004. The
increase is primarily due to increased compensation-related
expenditures that are based upon an increase in employees and
increased spending for future R&D projects.
R&D expenses, on a consolidated basis, decreased
$11.2 million or 3% during 2004 as compared to 2003.
R&D expenses for the Semiconductor segment decreased
$26.1 million or 7% in 2004 as compared to 2003. The
decrease is primarily a result of benefits from the cost-cutting
measures implemented as part of the restructuring actions taken
in 2003 and 2004 (see Note 3 of the Notes) including lower
compensation-related costs and benefits from the consolidation
of our non-manufacturing facilities. In addition, we had lower
equipment-related costs as a result of entering into two
equipment operating leases to replace two existing operating
leases for the same equipment in the third quarter of 2004, the
buyout and write-down of the purchased equipment from the new
operating leases in the fourth quarter of 2004, and certain
assets becoming fully depreciated during 2004.
R&D expenses for the Storage Systems segment increased by
$14.9 million or 22% in 2004 as compared to 2003. This is
primarily a result of increased compensation costs due to higher
headcount, higher expenses for outside service providers related
to development programs and higher depreciation expense related
to assets purchased for product development.
|
|
|
Selling, general and administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Semiconductor segment
|
|
$ |
148.3 |
|
|
$ |
148.7 |
|
|
$ |
154.2 |
|
|
Percentage of segment revenues
|
|
|
12 |
% |
|
|
14 |
% |
|
|
14 |
% |
Storage Systems segment
|
|
$ |
87.6 |
|
|
$ |
94.8 |
|
|
$ |
80.0 |
|
|
Percentage of segment revenues
|
|
|
13 |
% |
|
|
16 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
235.9 |
|
|
$ |
243.5 |
|
|
$ |
234.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenues
|
|
|
12 |
% |
|
|
14 |
% |
|
|
14 |
% |
Consolidated selling, general and administrative
(SG&A) expenses decreased $7.6 million or
3% during 2005 as compared to 2004.
SG&A expenses for the Semiconductor segment remained
relatively flat in 2005 as compared to 2004. SG&A expenses
as a percentage of revenues were 12% and 14% for each of the
twelve-month periods ended December 31, 2005 and 2004,
respectively.
SG&A expenses for the Storage Systems segment decreased
$7.2 million or 8% in 2005 as compared to 2004. The
decrease is primarily attributable to spending in 2004 related
to Engenios proposed initial public offering, separation
from LSI and set-up
costs for experience centers. These costs were not present in
2005. On March 6, 2006, we announced, among other things,
that the Company was canceling its previously
36
postponed plan for an initial public offering of its
wholly-owned storage systems subsidiary, Engenio Information
Technologies, Inc.
SG&A expenses increased $9.3 million or 4% during 2004
as compared to 2003.
SG&A expenses for the Semiconductor segment decreased
$5.5 million or 4% in 2004 as compared to 2003. The
decrease is primarily a result of benefits from the cost-cutting
measures implemented as part of the restructuring actions in
2003 and 2004 (see Note 3 of the Notes) including lower
compensation related costs, benefits from the consolidation of
our non-manufacturing facilities and other cost savings.
SG&A expenses for the Storage Systems segment increased
$14.8 million or 19% in 2004 as compared to 2003. On
July 29, 2004, we announced jointly with Engenio the
postponement of the initial public offering of its common stock
due to then current market conditions. The increase in SG&A
expenses in the Storage Systems segment is primarily due to
higher compensation-related costs due to an increase in
employees and higher legal, accounting and other professional
fees related to the initial public offering.
|
|
|
Restructuring of operations and other items, net: |
We recorded charges of $119.1 million in restructuring of
operations and other items for the year ended December 31,
2005, consisting of $113.7 million in charges for
restructuring of operations and impairment of long-lived assets
and a charge of $5.4 million for other items. Of these
charges, $115.9 million were recorded in the Semiconductor
segment and $3.2 million were recorded as part of the
Storage Systems segment. The majority of our 2005 restructuring
charges relate to asset impairment charges primarily associated
with our decision to sell our Gresham, Oregon manufacturing
facility as part of our strategy to move to a fabless
semiconductor manufacturing model. This strategy was announced
on September 13, 2005 and it is our intention to sell the
Gresham facility within one year from the date of this
announcement. The Gresham specific asset impairment charges were
$91.1 million. The remainder of the 2005 restructuring
charges relate to other asset write-downs, severance and other
termination benefits, lease exit costs, expenses to reflect the
change in time value of accruals for facility lease termination
costs, net of adjustments for changes in sublease assumptions. A
complete discussion of our restructuring actions is included in
Note 3 of the Notes to the Consolidated Financial
Statements.
We realized savings mainly on depreciation of approximately
$3.0 million and $3.2 million for the three and twelve
months ended December 31, 2005, respectively as a result of
our decision to sell the Gresham facility. We expect future
savings associated with depreciation to be fully offset by
decreased future loading for the Gresham facility.
We also recorded a $5.4 million charge related to other
items mainly related to the following. On May 23, 2005,
Wilfred J. Corrigans status as an employee ceased and in
connection with this event, we recorded a charge of
$5.3 million. The amount was paid to Mr. Corrigan in
the second quarter of 2005 and was made in accordance with
Mr. Corrigans employment agreement dated
September 20, 2001. Mr. Corrigan is our former Chief
Executive Officer. These charges were recorded in the
Semiconductor segment.
On February 13, 2006, Mr. Corrigan notified the
Company that he will not stand for reelection to the
Companys board of directors (the Board) at its
next annual stockholders meeting to be held on
May 11, 2006. Mr. Corrigan currently serves as the
chairman of the Board, and will continue to serve in that
capacity through the end of his current term. The Board will
elect a new chairperson at that time.
We recorded net charges of $423.4 million in restructuring
of operations and other items for the year ended
December 31, 2004, consisting of $433.5 million in
charges for restructuring of operations and impairment of
long-lived assets and a gain of $10.1 million for other
items. Of these charges, $420.2 million
37
was recorded in the Semiconductor segment and $3.2 million
was included in the Storage Systems segment. See Note 3 of
the Notes to the Consolidated Financial Statements for a
complete discussion of these charges and gains.
We recorded net charges of $180.6 million in restructuring
of operations and other items for the year ended
December 31, 2003 consisting of $182.8 million in
charges for restructuring of operations and a gain of
$2.2 million for other items. Of these charges,
$165.7 million was recorded in the Semiconductor segment
and $14.9 million was included in the Storage Systems
segment. See Note 3 of the Notes to the Consolidated
Financial Statements for a complete discussion of these charges
and gains.
|
|
|
Amortization of non-cash deferred stock
compensation: |
Amortization of non-cash deferred stock compensation of
$5.4 million, $8.4 million and $26.0 million was
recorded in 2005, 2004 and 2003, respectively. The acquisitions
for which deferred stock compensation and related amortization
were recorded consisted primarily of the Accerant transaction in
the second quarter of 2004, the Velio transaction in the first
quarter of 2004, an acquisition in the fourth quarter of 2002,
the acquisition of C-Cube and the RAID business from AMI in 2001
and the acquisition of DataPath in 2000. We have also recorded
non-cash deferred stock compensation for restricted common
shares issued to our employees, Engenio employees and the
non-employee directors of Engenio. We amortize deferred stock
compensation ratably over the related vesting periods. Deferred
stock compensation is adjusted to reflect forfeitures prior to
vesting. At December 31, 2005, the deferred stock
compensation that remained was $14.1 million, and is
expected to be amortized over the next four years.
On September 16, 2005, we exchanged options to purchase an
aggregate of 3,011,450 shares of Engenio common stock for
options to purchase an aggregate of 2,830,763 shares of
LSIs common stock. The exchange occurred in accordance
with the terms of the Engenio Equity Incentive plan, which
provided for the automatic exchange of the options in the event
it was determined that the Engenio initial public offering was
not likely to occur. The original exercise prices of the options
were multiplied by an exchange ratio equal to the relative fair
values of Engenio and LSI stock on the exchange date. The
exchange program resulted in approximately $3.9 million of
deferred stock compensation, which is being amortized on a
straight-line basis over the vesting period of the new awards of
approximately 3 to 3.5 years. Amortization expense in 2005
was approximately $0.3 million.
In December 2004, the Financial Accounting Standard Board
(FASB) issued a revision to Statement of Financial
Accounting Standard No. 123, Accounting for
Stock-Based Compensation (SFAS 123R). SFAS 123R
eliminates the Companys ability to use the intrinsic value
method of accounting under APB Opinion 25, Accounting
for Stock Issued to Employees, and generally requires a
public entity to reflect on its income statement, instead of pro
forma disclosures in its financial footnotes, the cost of
employee services received in exchange for an award of equity
based on the grant-date fair value of the award. The grant-date
fair value will be estimated using option-pricing models
adjusted for the unique characteristics of those equity
instruments. SFAS 123R amends SFAS No. 95,
Statement of Cash Flows, to require that excess tax
benefits be reported as a financing cash inflow rather than as a
reduction of taxes paid. We have adopted SFAS 123R as of
January 1, 2006. SFAS 123R applies to all unvested
awards and awards granted after January 1, 2006 and to
awards modified, repurchased, or cancelled after that date.
We have elected to adopt SFAS 123R using the modified
prospective method, which requires that compensation expense be
recognized for all share-based payments granted, modified or
settled after the date of adoption plus the current period
expense for unvested awards issued prior to the adoption of this
standard. No expense is recognized for awards vested in prior
periods. Although we have not determined the exact amount at
this time, we expect that the adoption of this Statement will
result in amortization of non-cash deferred stock compensation
of approximately $15 million for the three months ended
March 31, 2006. Beginning in 2006, we have changed the
method of valuation for share-based awards granted from the
Black-
38
Scholes option-pricing model, which was previously used for our
pro forma information required under SFAS 123, to a
binomial option-pricing model (see Note 1 and 2 of the
Notes).
|
|
|
Amortization of intangibles: |
Amortization of intangibles decreased to $62.5 million in
2005 from $75.1 million in 2004. Amortization decreased as
a result of the write-down during the fourth quarter of 2004 and
certain intangible assets becoming fully amortized during 2005,
offset in part by amortization of intangible assets acquired
during the first and second quarters of 2004. As of
December 31, 2005, we had $46.0 million of intangible
assets, net of accumulated amortization, that will continue to
amortize.
Amortization of intangibles decreased to $75.1 million in
2004 from $76.4 million in 2003. The decrease is due in
part to the write-down of intangible assets during 2003. In
addition, during the fourth quarter of 2004, we recorded a
charge in restructuring and other items to write-down
$4.7 million of intangible assets originally acquired in
connection with the acquisition of Datapath, which was added to
our Semiconductor segment during 2000. Certain intangible assets
became fully amortized during 2004. These decreases were offset
in part by amortization of intangible assets acquired in the
first and second quarters of 2004. As of December 31, 2004,
we had $108.5 million of intangible assets, net of
accumulated amortization that will continue to amortize.
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. In June 2002, we entered into interest rate swaps
(the Swaps) with various investment banks. The Swaps
effectively converted fixed interest payments on a portion of
our Convertible Subordinated Notes (Convertible
Notes) to LIBOR-based floating rates. The Swaps qualified
for hedge accounting treatment. (See Note 8 of the Notes.)
During the second quarter of 2003, we terminated the Swaps,
resulting in a deferred gain of $44.1 million that is being
amortized as a benefit to interest expense over the remaining
term of the hedged Convertible Notes. A portion of the deferred
gain was written off as part of the net gain or loss on the
repurchase/redemption of the hedged Convertible Notes during
2005, 2004 and 2003. As of December 31, 2005, a deferred
gain of $2.1 million was recorded as a component of the
Convertible Notes.
Interest expense remained flat at $25.3 million in 2005 as
compared to 2004. Interest expense declined as a result of lower
average debt balance from the repurchase of $149.7 million
of the 2001 Convertible Notes during the second quarter of 2005,
but was fully offset by a lower benefit from the amortization of
the deferred gain on the terminated Swaps.
Interest expense decreased by $5.4 million to
$25.3 million in 2004 from $30.7 million in 2003. The
decrease is due to the repurchase/redemption of
$710.0 million of Convertible Notes during 2003, an
additional repurchase of $68.5 million in the third quarter
of 2004 and changes in the benefit received from the Swaps prior
to termination and the benefit from the amortization of the
deferred gain after termination of the Swaps, offset by the
issuance of $350.0 million of Convertible Notes during the
second quarter of 2003 (see Note 9 of the Notes).
|
|
|
Interest income and other, net: |
Interest income and other, net, was $34.0 million in 2005
as compared to $22.2 million in 2004. Interest income
increased by $7.2 million to $25.9 million in 2005
from $18.7 million in 2004. The increase in interest income
is mainly due to higher returns on our investments during the
year ended December 31, 2005 as compared to the same period
of 2004.
Other income, net of $8.1 million in 2005 included the
following:
|
|
|
|
|
A pre-tax gain of $8.0 million on sale of certain
marketable available-for-sale equity securities (see Note 5
of the Notes); |
39
|
|
|
|
|
A pre-tax gain of $1.4 million associated with marketable
available-for-sale equity securities of a certain technology
company that was acquired by another technology company (see
Note 5 of the Notes); |
|
|
|
A pre-tax gain of $4.1 million on the repurchase of the
2001 Convertible Notes (see Note 9 of the Notes); |
|
|
|
A pre-tax loss of $2.4 million on impairment of certain
non-marketable available-for-sale equity securities. Management
considered the impairment to be other than temporary (see
Note 5 of the Notes); and |
|
|
|
A $3.0 million expense for points on foreign currency
forward contracts, which was offset in part by other
miscellaneous items. |
Interest income and other, net, was $22.2 million in 2004
as compared to $18.9 million in 2003. Interest income
decreased by $9.6 million to $18.7 million in 2004
from $28.3 million in 2003. The decrease in interest income
is mainly due to lower returns on our short-term investments
during the year ended December 31, 2004 as compared to the
same period of 2003.
Other income, net of $3.5 million in 2004 included the
following:
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|
|
|
|
A pre-tax gain of $3.0 million associated with our
investment in marketable available-for-sale equity securities of
a certain technology company that was acquired by another
publicly traded technology company; |
|
|
|
A pre-tax gain of $5.1 million on sales of certain
marketable available-for-sale equity securities; |
|
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|
A pre-tax gain of $1.8 million on repurchase of 2001
Convertible Notes (see Note 9 of the Notes); and |
|
|
|
A pre-tax loss of $6.2 million on impairment of our
investment in certain marketable and non-marketable
available-for-sale equity securities and other miscellaneous
items. Management considered the impairments to be other than
temporary (See Note 5 of the Notes). |
Other expenses net of $9.4 million in 2003 included
$8.5 million in charges associated with write-downs of
investments in marketable and non-marketable available-for-sale
equity securities due to impairments that were considered by
management to be other than temporary (See Note 5 of the
Notes), a net loss on the redemption/repurchase of Convertible
Notes of $3.9 million, and currency option premium
expenses, which were offset in part by net foreign exchange
gains, gains on sale of miscellaneous assets and other expenses
that were individually insignificant.
For all investment in debt and equity securities, unrealized
losses are evaluated to determine if they are other than
temporary. We frequently monitor the credit quality of our
investments in marketable debt securities. In order to determine
if 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.
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Provision for income taxes: |
During 2005, we recorded a provision for income taxes of
$26.5 million, which represents an effective tax rate of
approximately 127%. This rate differs from the
U.S. statutory rate primarily due to earnings of certain
foreign subsidiaries taxed in the U.S., which have been
partially offset by the benefit of net operating losses and
other deferred tax assets not previously recognized and lower
tax rates in foreign jurisdictions.
40
In 2005, the provision for income taxes was increased by a
$5.4 million charge related to the correction of an error
in a prior period associated with the carrying value of
$8.3 million in deferred tax liabilities that should have
been reclassified to goodwill upon adoption of
SFAS No. 142 Goodwill and Intangible
Assets in 2002. The deferred tax liabilities were instead
used as a reduction of our required valuation allowance in 2002.
This was offset by tax-related liabilities of $2.9 million
originally recorded in connection with these deferred tax
balances which are no longer required. We believe that this
amount is not material to previously reported financial
statements and have concluded that correcting such amounts in
the fourth quarter of 2005 and the 2005 fiscal year, as opposed
to restating prior periods, is appropriate in the circumstances.
Also in 2005, we recorded an income tax benefit for a state
income tax refund due to an amended return related to one of our
acquisitions as well as the release of previously reserved
foreign withholding taxes based upon a favorable ruling received
by a European country. The income tax benefit was partially
offset by additional income tax provision associated with the
conclusion of an audit by the Internal Revenue Service for the
year ended December 31, 2001. We operate in multiple
jurisdictions throughout the world. Our income tax expense is
primarily related to taxable income in certain foreign
jurisdictions.
During 2004, we recorded an income tax provision of
$24.0 million, which represents an effective tax rate of
approximately (5%). This rate differs from the
U.S. statutory rate primarily due to increases in net
deferred tax assets not currently benefited in the U.S., losses
of certain foreign subsidiaries that are benefited at lower
rates and earnings of certain foreign subsidiaries taxed in the
U.S. The Company operates in multiple jurisdictions
throughout the world. The Companys income tax expense was
primarily related to taxable income in certain foreign
jurisdictions, which were not reduced by separate losses in
other foreign jurisdictions.
During 2003, we recorded an income tax provision of
$24.0 million, which represents an effective tax rate of
approximately (8%). This rate differs from the
U.S. statutory rate primarily due to losses of our foreign
subsidiaries, which are not benefited or are benefited at lower
rates, earnings of certain foreign subsidiaries taxed in the
U.S., and alternative minimum taxes. The effect of these charges
has been partially offset by the benefit of foreign tax and
research and development tax credits.
See Note 11 of the Notes.
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Minority interest in net income of subsidiary: |
Minority interest in net income of subsidiary was not
significant for the periods presented. The changes in minority
interest were attributable to the composition of earnings and
losses in our majority-owned Japanese subsidiary for each of the
respective years.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments increased to
$938.9 million at December 31, 2005, from
$814.6 million at December 31, 2004. The increase is
mainly due to cash and cash equivalents provided by operating
activities, partially offset by net cash outflows for investing
and financing activities as described below.
Working capital. Working capital decreased by
$91.6 million to $877.4 million at December 31,
2005, from $969.0 million as of December 31, 2004.
Working capital declined in 2005 as a result of the following
activities:
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|
Current portion of long-term debt increased by
$273.8 million primarily due to the reclassification of the
Convertible Subordinated Notes that are due in November 2006
from long-term debt to current portion of long-term debt. |
|
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Accounts payable increased by $49.2 million due to the
timing of payments. |
|
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Inventories decreased by $24.1 million to
$194.8 million as of December 31, 2005, from
$218.9 million as of December 31, 2004. The decline in
inventory levels reflects our continued focus on supply chain
management. |
41
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|
Accrued salaries, wages and benefits increased by
$19.2 million primarily due to timing differences in
payment of salaries, benefits and performance-based compensation. |
|
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|
Income taxes payable increased by $6.4 million due to the
timing of income tax payments made and the income tax provision
recorded during 2005. |
|
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|
Current deferred tax assets, net of current deferred tax
liabilities decreased by $1.5 million due to net changes in
underlying temporary differences (see Note 11 of the Notes). |
The decrease in working capital was offset, in part, by the
following:
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|
Cash, cash equivalents and short-term investments increased by
$124.3 million. |
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|
Prepaid expenses and other current assets increased by
$104.8 million. Assets held for sale increased by
$94.8 million during 2005, primarily as a result of the
reclassification of the Gresham, Oregon manufacturing facility
and excess land from property and equipment to other current
assets. We announced our intention to sell the Gresham, Oregon
manufacturing facility on September 13, 2005 (see
Note 3 of the Notes). In addition, prepaid insurance, debt
issuance costs, prepaid software maintenance and other
miscellaneous items also increased. |
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Accounts receivable increased by $51.2 million to
$323.3 million as of December 31, 2005 from
$272.1 million at December 31, 2004. The increase is
mainly attributable to higher revenues in the fourth quarter of
2005 as compared to the fourth quarter of 2004. |
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Other accrued liabilities decreased by $2.1 million due to
decreases in sales and other tax liabilities and deferred
revenues, offset in part by increases in other miscellaneous
items. |
Cash and cash equivalents generated from operating
activities. During 2005, we generated $248.7 million of
net cash and cash equivalents from operating activities compared
to $90.8 million generated in 2004. Cash and cash
equivalents generated from operating activities for the year
ended December 31, 2005 were the results of the following:
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|
Net loss adjusted for non-cash transactions. The non-cash items
and other non-operating adjustments are quantified in our
Consolidated Statements of Cash Flows included in this Annual
Report on
Form 10-K; and |
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|
A net increase in assets and liabilities, net of assets acquired
and liabilities assumed in business combinations, including
changes in working capital components from December 31,
2005 to December 31, 2004, as discussed above. |
Cash and cash equivalents used in investing activities.
Cash and cash equivalents used in investing activities during
2005 were $84.3 million as compared to $89.6 million
used in 2004. The primary investing activities or changes during
2005 were as follows:
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|
|
Purchases of debt and equity securities available for sale, net
of sales and maturities; |
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Purchases of property, equipment and software; |
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|
Proceeds from the sale of property and equipment; and |
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The receipt of an income tax refund for pre-acquisition tax
matters associated with an acquisition in 2001. |
We expect capital expenditures to be approximately
$60 million in 2006. In recent years we have reduced our
level of capital expenditures as a result of our focus on
establishing strategic supplier alliances with foundry
semiconductor manufacturers, which enables us to have access to
advanced manufacturing capacity and reduces our capital spending
requirements.
42
Cash and cash equivalents used in financing activities.
Cash and cash equivalents used in financing activities during
2005 were $117.4 million as compared to $48.6 million
in 2004. The primary financing activities during 2005 were as
follows:
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The repurchase of a portion of the Convertible Notes due in 2006; |
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The issuance of common stock under our employee stock option and
purchase plans; and |
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The repayment of debt obligations. |
It is our policy to reinvest our earnings and we do not
anticipate paying any cash dividends to stockholders in the
foreseeable future.
We may seek additional equity or debt financing from time to
time. We believe that our existing liquid resources and funds
generated from operations, combined with funds from such
financing and our ability to borrow funds, will be adequate to
meet our operating and capital requirements and obligations for
the foreseeable future. However, we cannot be certain that
additional financing will be available on favorable terms.
Moreover, any future equity or convertible debt financing will
decrease the percentage of equity ownership of existing
stockholders and may result in dilution, depending on the price
at which the equity is sold or the debt is converted.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at
December 31, 2005, and the effect these obligations are
expected to have on our liquidity and cash flow in future
periods.
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Payments Due by Period | |
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| |
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Less Than | |
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1-3 | |
|
4-5 | |
|
After | |
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|
Contractual Obligations |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
|
Total | |
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| |
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| |
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| |
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| |
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| |
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|
(In millions) | |
Convertible Subordinated Notes
|
|
$ |
271.8 |
|
|
$ |
|
|
|
$ |
350.0 |
|
|
$ |
|
|
|
$ |
621.8 |
|
Operating lease obligations
|
|
|
61.9 |
|
|
|
58.4 |
|
|
|
34.1 |
|
|
|
22.7 |
|
|
|
177.1 |
|
Purchase commitments
|
|
|
261.9 |
|
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
269.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
|
|
$ |
595.6 |
|
|
$ |
66.3 |
|
|
$ |
384.1 |
|
|
$ |
22.7 |
|
|
$ |
1,068.7 |
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Convertible Subordinated Notes |
As of December 31, 2005, we have $272 million of
Convertible Notes due in November 2006
(2001 Convertible Notes) and $350 million
of the Convertible Notes due in May 2010 (2003 Convertible
Notes). All of the Convertible Notes are subordinated to
all existing and future senior debt and are convertible at the
holders option, at any time prior to the maturity date of
the Convertible Notes, into shares of our common stock. The 2001
and 2003 Convertible Notes have conversion prices of
approximately $26.34 per share and $13.42 per share,
respectively. The 2001 Convertible Notes are redeemable at our
option, in whole or in part, on at least 30 days notice at
any time on or after the call date, which is two years before
the due date. We cannot elect to redeem the 2003 Convertible
Notes prior to maturity. Each holder of the 2001 and 2003
Convertible Notes has the right to cause us to repurchase all of
such holders convertible notes at 100% of their principal
amount plus accrued interest upon the occurrence of any
fundamental change, which includes a transaction or event such
as an exchange offer, liquidation, tender offer, consolidation,
merger or combination. Interest is payable semiannually.
Fluctuations in our stock price affect the prices of our
outstanding convertible securities and the likelihood of the
convertible securities being converted into cash or equity. If
we are required to redeem any of the Convertible Notes for cash,
it may adversely affect our liquidity position. In the event
that the Convertible Notes are not converted to equity, we
believe that our current cash position and expected future
operating cash flows will be adequate to meet these obligations
as they mature. From time to time, we may repurchase or redeem
Convertible Notes as we did in 2005.
43
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Operating Lease Obligations |
We lease real estate, certain non-manufacturing equipment and
software under non-cancelable operating leases.
We maintain certain purchase commitments, primarily for raw
materials with suppliers and for some non-production items.
Purchase commitments for inventory materials are generally
restricted to a forecasted time-horizon as mutually agreed upon
between the parties. This forecasted time-horizon can vary among
different suppliers.
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Standby letters of credit |
At December 31, 2005 and 2004, we had outstanding standby
letters of credit of $2 million and $5 million,
respectively. These instruments are off-balance sheet
commitments to extend financial guarantees for leases and
certain self-insured risks, import/export taxes and performance
under contracts, and generally have one-year terms. The fair
value of the letters of credit approximates the contract amount.
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and
results of operations are based on the consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
Note 1 of the Notes describes the significant accounting
policies essential to the consolidated financial statements. 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 both important to the portrayal of our Companys
financial condition and results, and they require significant
management judgments and estimates about matters that 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, actual future
results may differ materially from our estimates.
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 approximately
$195 million and $219 million as of December 31,
2005, and 2004, 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. See
discussion in Gross Profit Margin section earlier in
this MD&A.
Valuation of long-lived assets, intangible assets and
goodwill. We currently operate our own wafer fabrication
facility. On September 13, 2005, we announced that we
intend to sell our Gresham, Oregon manufacturing facility as
part of our strategy to move to a fabless semiconductor
manufacturing model. 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
44
recoverable. 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) a significant
decline in our market capitalization, for an extended period of
time, relative to 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. These estimates include assumptions about future
conditions such as future revenues, gross margins, operating
expenses within our Company, the fair values of certain assets
based on thoroughly researched management estimates, and
industry trends. See Notes 6 and 7 to the Notes for more
details on long-lived assets, intangible assets and goodwill.
As of December 31, 2005, we have a goodwill balance of
$929 million. We monitor the recoverability of goodwill
recorded in connection with acquisitions annually or sooner if
events or changes in circumstances indicate that the carrying
amount may not be recoverable. Impairment, if any, would be
determined in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, which uses a fair value model for
determining the carrying value of goodwill.
The impairment testing is a two-step process and is performed by
reporting unit. 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. We concluded
that goodwill was not impaired under the first step as of
December 31, 2005. The second step is only performed if
impairment is indicated after the first step is performed, as it
involves measuring the actual impairment to goodwill. Our next
annual test for the impairment of goodwill will be performed in
our fourth fiscal quarter in 2006. We use management estimates
of future cash flows to perform the first step of the goodwill
impairment test. These estimates include assumptions about
future conditions such as future revenues, gross margins and
operating expenses within LSI. Two methodologies were used to
obtain the fair value for each reporting unit as of
December 31, 2005: Discounted Cash Flow and Market Multiple.
The Discounted Cash Flow and Market Multiple methodologies
include assumptions about future conditions within our reporting
units and related industries. These assumptions include
estimates of future market size and growth, expected trends in
technology, timing of new product introductions by our
competitors and us, and the nature of the industry in which
comparable companies and we operate. If significant changes to
these assumptions occur, goodwill could become impaired in the
future.
Restructuring reserves. We have recorded
reserves/accruals for restructuring costs related to the
restructuring of operations. The restructuring reserves include
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. See discussion in Restructuring of operations
and other items, net earlier in this MD&A for changes
in estimates made during 2005, 2004 and 2003.
Income taxes. We recognize deferred tax assets and
liabilities based on the differences between the financial
statement carrying amounts and the tax basis of the 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 11
of the Notes for more details about our deferred tax assets and
liabilities.
45
The calculation of our tax liabilities involves the application
of complex tax rules and regulations within multiple
jurisdictions throughout the world. Our tax liabilities include
estimates for all income and 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.
Recent Accounting Pronouncements
The information contained in Part II, Item 8 in
Note 1 of the Notes under the heading Recent
Accounting Pronouncements is hereby incorporated by
reference into this Part II, Item 7.
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|
Item 7A. |
Quantitative and Qualitative Disclosures about Market
Risk |
Interest rate sensitivity
In 2005, an interest rate move of 40 basis points (10% of
our weighted-average worldwide interest rate on outstanding debt
in 2005) affecting our fixed and floating rate financial
instruments as of December 31, 2005, 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. In 2004, an interest rate move of
40 basis points (10% of our weighted-average worldwide
interest rate on outstanding debt in 2004) affecting our fixed
and floating rate financial instruments as of December 31,
2004, 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, 2005, there were no interest rate
swaps outstanding.
In June 2002, we entered into interest rate swap transactions
(the Swaps) with several investment banks. The Swaps
effectively converted fixed interest payments on a portion of
our 4% and 4.25% Convertible Notes to LIBOR-based floating
rates. The Swaps qualified for hedge accounting as fair value
hedges, with changes in the fair value of the interest rate risk
on the Convertible Notes being offset by changes in the fair
values of the Swaps recorded as a component of interest expense.
(See Note 8 of the Notes.)
In the second quarter of 2003, we terminated Swaps with a
notional amount of $740 million. The termination resulted
in a deferred gain of $44 million being recorded as a
component of the Convertible Notes and to be amortized as a
benefit to interest expense over the remaining term of the
hedged Convertible Notes. A portion of the deferred gain was
written off as part of the net gain or loss on the
repurchase/redemption of the hedged Convertible Notes during
2003 and 2004. As of December 31, 2005, a deferred gain of
$2 million remains to be amortized. In 2003, before
termination, the difference between the changes in the fair
values of the derivative and the hedged risk resulted in a
benefit to interest expense of $1 million.
In May 2003, we entered into an interest rate swap transaction
to effectively convert the LIBOR-based floating rate interest
payments on the equipment operating lease, with an original
notional amount of $395 million, to a fixed interest rate
(Lease Swap). An expense of approximately
$2 million was recorded to cost of revenues in 2004 as the
lease payments were made. In August 2004, the Company entered
into two new equipment operating leases for the wafer
fabrication equipment that was previously on the above-mentioned
leases. As a result of entering into the new leases, the hedged
forecasted interest payments were no longer probable. Hedge
accounting treatment was discontinued prospectively and the
balance in accumulated comprehensive income was immediately
recorded as a gain of $4 million in restructuring and other
items in the statement of operations. In September 2004, the
Company terminated the Lease Swap.
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
46
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 2005 and 2004.
Based on our overall currency rate exposures at
December 31, 2005, 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 2004, 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
the investments were sold or that declines in value were
concluded by management to be other than temporary.
If prices of the available-for-sale equity securities increase
or decrease 10% from their fair value as of December 31,
2005, it would increase or decrease the investment values by
$3 million. As of December 31, 2004, a 10% increase or
decrease in fair value would have increased or decreased the
investment values by $4 million. We do not use any
derivatives to hedge the fair value of our marketable
available-for-sale equity securities.
47
|
|
Item 8. |
Financial Statements and Supplementary Data |
LSI Logic Corporation
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, except | |
|
|
per-share amounts) | |
ASSETS |
Cash and cash equivalents
|
|
$ |
264,649 |
|
|
$ |
218,723 |
|
Short-term investments
|
|
|
674,260 |
|
|
|
595,862 |
|
Accounts receivable, less allowances of $15,328 and $10,144
|
|
|
323,310 |
|
|
|
272,065 |
|
Inventories
|
|
|
194,814 |
|
|
|
218,900 |
|
Prepaid expenses and other current assets
|
|
|
163,086 |
|
|
|
59,737 |
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,620,119 |
|
|
|
1,365,287 |
|
Property and equipment, net
|
|
|
98,285 |
|
|
|
311,916 |
|
Other intangible assets, net
|
|
|
45,974 |
|
|
|
108,457 |
|
Goodwill
|
|
|
928,542 |
|
|
|
973,130 |
|
Other assets
|
|
|
103,146 |
|
|
|
115,211 |
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,796,066 |
|
|
$ |
2,874,001 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Accounts payable
|
|
$ |
171,632 |
|
|
$ |
122,422 |
|
Accrued salaries, wages and benefits
|
|
|
77,713 |
|
|
|
58,516 |
|
Other accrued liabilities
|
|
|
140,194 |
|
|
|
142,278 |
|
Income taxes payable
|
|
|
79,290 |
|
|
|
72,935 |
|
Current portion of long-term debt
|
|
|
273,940 |
|
|
|
129 |
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
742,769 |
|
|
|
396,280 |
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
350,000 |
|
|
|
781,846 |
|
Tax- related liabilities and other
|
|
|
75,110 |
|
|
|
77,570 |
|
|
|
|
|
|
|
|
|
Total long-term obligations and other liabilities
|
|
|
425,110 |
|
|
|
859,416 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Minority interest in subsidiary
|
|
|
237 |
|
|
|
259 |
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred shares; $.01 par value; 2,000 shares
authorized; none outstanding
|
|
|
|
|
|
|
|
|
Common stock; $.01 par value; 1,300,000 shares
authorized; 394,015 and 387,490 shares outstanding
|
|
|
3,940 |
|
|
|
3,875 |
|
Additional paid-in capital
|
|
|
3,010,166 |
|
|
|
2,969,478 |
|
Deferred stock compensation
|
|
|
(14,064 |
) |
|
|
(8,936 |
) |
Accumulated deficit
|
|
|
(1,389,944 |
) |
|
|
(1,384,321 |
) |
Accumulated other comprehensive income
|
|
|
17,852 |
|
|
|
37,950 |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,627,950 |
|
|
|
1,618,046 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
2,796,066 |
|
|
$ |
2,874,001 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
48
LSI Logic Corporation
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Revenues
|
|
$ |
1,919,250 |
|
|
$ |
1,700,164 |
|
|
$ |
1,693,070 |
|
Cost of revenues
|
|
|
1,086,814 |
|
|
|
964,556 |
|
|
|
1,015,865 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
832,436 |
|
|
|
735,608 |
|
|
|
677,205 |
|
Research and development
|
|
|
397,312 |
|
|
|
421,516 |
|
|
|
432,695 |
|
Selling, general and administrative
|
|
|
235,933 |
|
|
|
243,498 |
|
|
|
234,156 |
|
Restructuring of operations and other items, net
|
|
|
119,052 |
|
|
|
423,444 |
|
|
|
180,597 |
|
Amortization of non-cash deferred stock compensation(*)
|
|
|
5,449 |
|
|
|
8,449 |
|
|
|
26,021 |
|
Amortization of intangibles
|
|
|
62,484 |
|
|
|
75,050 |
|
|
|
76,352 |
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations
|
|
|
12,206 |
|
|
|
(436,349 |
) |
|
|
(272,616 |
) |
Interest expense
|
|
|
(25,283 |
) |
|
|
(25,320 |
) |
|
|
(30,703 |
) |
Interest income and other, net
|
|
|
34,000 |
|
|
|
22,170 |
|
|
|
18,933 |
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes and minority interest
|
|
|
20,923 |
|
|
|
(439,499 |
) |
|
|
(284,386 |
) |
Provision for income taxes
|
|
|
26,540 |
|
|
|
24,000 |
|
|
|
24,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority interest
|
|
|
(5,617 |
) |
|
|
(463,499 |
) |
|
|
(308,386 |
) |
Minority interest in net income of subsidiary
|
|
|
6 |
|
|
|
32 |
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(5,623 |
) |
|
$ |
(463,531 |
) |
|
$ |
(308,547 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$ |
(0.01 |
) |
|
$ |
(1.21 |
) |
|
$ |
(0.82 |
) |
|
|
|
|
|
|
|
|
|
|
Shares used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
390,135 |
|
|
|
384,070 |
|
|
|
377,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
Amortization of non-cash deferred stock compensation, if not
shown separately, would have been included in cost of revenues,
research and development, and selling, general and
administrative expenses, as shown below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cost of revenues
|
|
$ |
744 |
|
|
$ |
198 |
|
|
$ |
446 |
|
Research and development
|
|
|
2,373 |
|
|
|
6,289 |
|
|
|
20,412 |
|
Selling, general and administrative
|
|
|
2,332 |
|
|
|
1,962 |
|
|
|
5,163 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,449 |
|
|
$ |
8,449 |
|
|
$ |
26,021 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
49
LSI Logic Corporation
Consolidated Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
Common Stock | |
|
Additional | |
|
|
|
|
|
Comprehensive | |
|
|
|
|
| |
|
Paid-In | |
|
Deferred Stock | |
|
Accumulated | |
|
Income/ | |
|
|
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Deficit | |
|
(Loss) | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balances at December 31, 2002
|
|
|
375,096 |
|
|
$ |
3,751 |
|
|
$ |
2,954,282 |
|
|
$ |
(51,161 |
) |
|
$ |
(612,243 |
) |
|
$ |
5,726 |
|
|
$ |
2,300,355 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(308,547 |
) |
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,309 |
|
|
|
|
|
Change in unrealized gain on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,183 |
|
|
|
|
|
Change in unrealized gain on derivative instruments designated
and qualifying as cash-flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(280,060 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance to employees under stock option and purchase plans
|
|
|
6,386 |
|
|
|
64 |
|
|
|
30,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,950 |
|
Issuance or return from escrow of common stock in conjunction
with acquisitions (Note 2)
|
|
|
9 |
|
|
|
|
|
|
|
(6,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,816 |
) |
Forfeiture of restricted shares (Note 10)
|
|
|
|
|
|
|
|
|
|
|
(301 |
) |
|
|
301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for call spread options (Note 9)
|
|
|
|
|
|
|
|
|
|
|
(28,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,000 |
) |
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,021 |
|
|
|
|
|
|
|
|
|
|
|
26,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003
|
|
|
381,491 |
|
|
|
3,815 |
|
|
|
2,950,051 |
|
|
|
(24,839 |
) |
|
|
(920,790 |
) |
|
|
34,213 |
|
|
|
2,042,450 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(463,531 |
) |
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,948 |
|
|
|
|
|
Change in unrealized gain on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,784 |
|
|
|
|
|
Change in unrealized gain/(loss) on derivative instruments
designated and qualifying as cash-flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,995 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(459,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance to employees under stock option and purchase plans
|
|
|
5,852 |
|
|
|
59 |
|
|
|
27,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,987 |
|
Issuance or return from escrow of common stock in conjunction
with acquisitions (Note 2)
|
|
|
147 |
|
|
|
1 |
|
|
|
(414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(413 |
) |
Grants of restricted shares (Note 10)
|
|
|
|
|
|
|
|
|
|
|
6,401 |
|
|
|
(6,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted shares and stock options assumed in an
acquisition (Note 10)
|
|
|
|
|
|
|
|
|
|
|
(14,488 |
) |
|
|
14,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,816 |
|
|
|
|
|
|
|
|
|
|
|
7,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
387,490 |
|
|
|
3,875 |
|
|
|
2,969,478 |
|
|
|
(8,936 |
) |
|
|
(1,384,321 |
) |
|
|
37,950 |
|
|
|
1,618,046 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,623 |
) |
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,976 |
) |
|
|
|
|
Change in unrealized gain/(loss) on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,721 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance to employees under stock option and purchase plans
|
|
|
6,369 |
|
|
|
64 |
|
|
|
30,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,861 |
|
Issuance or return from escrow of common stock in conjunction
with acquisitions (Note 2)
|
|
|
156 |
|
|
|
1 |
|
|
|
(686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(685 |
) |
Grants of restricted shares (Note 10)
|
|
|
|
|
|
|
|
|
|
|
13,427 |
|
|
|
(13,427 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted shares and stock options assumed in an
acquisition (Note 10)
|
|
|
|
|
|
|
|
|
|
|
(6,739 |
) |
|
|
6,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Engenio stock option exchange (Note 10)
|
|
|
|
|
|
|
|
|
|
|
3,889 |
|
|
|
(3,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,449 |
|
|
|
|
|
|
|
|
|
|
|
5,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
394,015 |
|
|
$ |
3,940 |
|
|
$ |
3,010,166 |
|
|
$ |
(14,064 |
) |
|
$ |
(1,389,944 |
) |
|
$ |
17,852 |
|
|
$ |
1,627,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
50
LSI Logic Corporation
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(5,623 |
) |
|
$ |
(463,531 |
) |
|
$ |
(308,547 |
) |
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
146,169 |
|
|
|
176,606 |
|
|
|
262,728 |
|
|
|
Amortization of non-cash deferred stock compensation
|
|
|
5,449 |
|
|
|
8,449 |
|
|
|
26,021 |
|
|
|
Non-cash restructuring and other items
|
|
|
88,224 |
|
|
|
401,058 |
|
|
|
148,252 |
|
|
|
Non-cash foreign exchange (gain)/loss
|
|
|
(11,491 |
) |
|
|
3,322 |
|
|
|
8,917 |
|
|
|
(Gain) on sale of equity securities/loss on write-down
|
|
|
(6,475 |
) |
|
|
(1,913 |
) |
|
|
8,518 |
|
|
|
(Gain)/loss on redemption/repurchase of Convertible Subordinated
Notes
|
|
|
(4,123 |
) |
|
|
(1,767 |
) |
|
|
3,885 |
|
|
|
Loss/(gain) on sale of property and equipment, including assets
held-for-sale
|
|
|
27 |
|
|
|
(6,348 |
) |
|
|
(6,896 |
) |
|
|
Changes in deferred tax assets and liabilities
|
|
|
14,220 |
|
|
|
4,895 |
|
|
|
(646 |
) |
|
Changes in assets and liabilities, net of assets acquired and
liabilities assumed in business combinations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(51,305 |
) |
|
|
(40,076 |
) |
|
|
18,220 |
|
|
|
Inventories
|
|
|
24,086 |
|
|
|
(20,660 |
) |
|
|
(4,232 |
) |
|
|
Prepaid expenses and other assets
|
|
|
(22,582 |
) |
|
|
20,055 |
|
|
|
54,408 |
|
|
|
Accounts payable
|
|
|
46,998 |
|
|
|
21,056 |
|
|
|
1,684 |
|
|
|
Accrued and other liabilities
|
|
|
25,129 |
|
|
|
(10,329 |
) |
|
|
(22,559 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
248,703 |
|
|
|
90,817 |
|
|
|
189,753 |
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of debt securities available-for-sale
|
|
|
(550,912 |
) |
|
|
(747,096 |
) |
|
|
(2,219,484 |
) |
|
Proceeds from maturities and sales of debt securities
available-for-sale
|
|
|
462,530 |
|
|
|
679,483 |
|
|
|
2,203,313 |
|
|
Purchases of equity securities
|
|
|
(150 |
) |
|
|
(2,250 |
) |
|
|
(200 |
) |
|
Proceeds from sales of equity securities
|
|
|
11,105 |
|
|
|
10,518 |
|
|
|
1,060 |
|
|
Purchases of property, equipment and software
|
|
|
(48,055 |
) |
|
|
(52,776 |
) |
|
|
(78,189 |
) |
|
Proceeds from sale of property and equipment
|
|
|
4,894 |
|
|
|
10,936 |
|
|
|
24,737 |
|
|
Adjustment to goodwill acquired in a prior year for resolution
of a pre-acquisition income tax contingency
|
|
|
36,307 |
|
|
|
|
|
|
|
|
|
|
Buyout of equipment operating lease
|
|
|
|
|
|
|
(332,396 |
) |
|
|
|
|
|
Increase in non-current assets and deposits
|
|
|
|
|
|
|
(313,013 |
) |
|
|
(390,135 |
) |
|
Decrease in non-current assets and deposits
|
|
|
|
|
|
|
688,994 |
|
|
|
272,868 |
|
|
Acquisitions of companies, net of cash acquired
|
|
|
|
|
|
|
(32,025 |
) |
|
|
|
|
|
Proceeds from the sale-lease back of equipment
|
|
|
|
|
|
|
|
|
|
|
160,000 |
|
|
Proceeds from the sale of the Japan manufacturing facility
|
|
|
|
|
|
|
|
|
|
|
25,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(84,281 |
) |
|
|
(89,625 |
) |
|
|
(184 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption/repurchase of Convertible Subordinated Notes
|
|
|
(148,126 |
) |
|
|
(68,117 |
) |
|
|
(715,983 |
) |
|
Issuance of common stock
|
|
|
30,862 |
|
|
|
27,988 |
|
|
|
30,306 |
|
|
Repayment of debt obligations
|
|
|
(129 |
) |
|
|
(438 |
) |
|
|
(327 |
) |
|
Purchase of minority interest in subsidiary
|
|
|
|
|
|
|
(8,020 |
) |
|
|
|
|
|
Proceeds from borrowings
|
|
|
|
|
|
|
|
|
|
|
350,000 |
|
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(10,984 |
) |
|
Cash paid for call spread options
|
|
|
|
|
|
|
|
|
|
|
(28,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(117,393 |
) |
|
|
(48,587 |
) |
|
|
(374,988 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,103 |
) |
|
|
(3,564 |
) |
|
|
6,254 |
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash and cash equivalents
|
|
|
45,926 |
|
|
|
(50,959 |
) |
|
|
(179,165 |
) |
Cash and cash equivalents at beginning of year
|
|
|
218,723 |
|
|
|
269,682 |
|
|
|
448,847 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
264,649 |
|
|
$ |
218,723 |
|
|
$ |
269,682 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
51
LSI Logic Corporation
Notes to Consolidated Financial Statements
Note 1 Significant Accounting
policies
Nature of the business. LSI Logic Corporation (the
Company or LSI) designs, develops, and markets
complex, high-performance semiconductors and storage systems. In
2005, our operations were organized in four markets:
communications, consumer products, storage components and
storage systems. On March 6, 2006, we announced plans to
focus our business on growth opportunities in the storage and
consumer markets.
The Company offers integrated circuit products, board-level
products, and software for use in consumer applications,
high-performance storage controllers, enterprise hard disk
controllers, and systems for storage area networks. The
Companys integrated circuits are also used in a wide range
of communication devices.
The Company operates in two Reportable segments the
Semiconductor segment and the Storage Systems
segment in which the Company offers products and
services for a variety of electronic systems applications.
LSIs products are marketed primarily to original equipment
manufacturers (OEMs) that sell products to the
Companys target markets. The information provided herein
has been recast to include the RAID Storage Adapter
(RSA) business as part of the Storage Systems
segment from the Semiconductor segment for all periods presented.
The semiconductor and storage systems industries are
characterized by rapid technological change, competitive pricing
pressures and cyclical market patterns. The Companys
financial results are affected by a wide variety of factors,
including general economic conditions worldwide, economic
conditions specific to the semiconductor and storage systems
industries, the timely implementation of new technologies and
the ability to safeguard patents and intellectual property in a
rapidly evolving market. In addition, the semiconductor and
storage systems markets have historically been cyclical and
subject to significant economic downturns at various times.
Basis of presentation. The consolidated financial
statements include the accounts of the Company and all of its
subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.
Minority interest in a subsidiary represents the minority
stockholders proportionate share of the net assets and the
results of operations for one of the Companys
majority-owned Japanese subsidiaries. Sales of common stock of
the Companys subsidiary and purchases of such shares may
result in changes in the Companys proportionate share of
the subsidiarys net assets. During 2004, the Company
purchased a portion of the minority interest. At
December 31, 2005, the Company owned approximately 99.84%
of the Japanese affiliate.
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 remeasured 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. Gains and losses from foreign
currency translation are included as a separate component of
comprehensive income.
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 and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ materially 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 as of the effective date of
the purchase, through the end of the period. The total purchase
price is allocated to the
52
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
estimated fair value of assets acquired and liabilities assumed
based on management estimates using the assistance of third
party appraisers. The purchase price includes direct acquisition
costs consisting of investment banking, legal and accounting
fees.
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, 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 to return and revenue recognition is deferred
until the distributor sells the product to a third party.
Revenues from the licensing of the Companys design and
manufacturing technology is 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. Such
consideration 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 that include a combination of our hardware and
our software products that are also sold separately, where
software is essential to the functionality of the product being
sold, the Company accounts for the entire arrangement as a sale
of software and software-related items and follows the revenue
recognition applicable to software arrangements.
Earnings per share. Basic earnings per share
(EPS) is computed by dividing net income available
to common stockholders (numerator) by the weighted average
number of common shares outstanding (denominator) during
the period. Diluted EPS is computed using the weighted-average
number of common and dilutive potential 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. A reconciliation
of the numerators and denominators of the basic and diluted per
share amount computations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Per-Share | |
|
|
|
Per-Share | |
|
|
|
Per-Share | |
|
|
(Loss)* | |
|
Shares+ | |
|
Amount | |
|
(Loss)* | |
|
Shares+ | |
|
Amount | |
|
(Loss)* | |
|
Shares+ | |
|
Amount | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands except per share amounts) | |
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$ |
(5,623 |
) |
|
|
390,135 |
|
|
$ |
(0.01 |
) |
|
$ |
(463,531 |
) |
|
|
384,070 |
|
|
$ |
(1.21 |
) |
|
$ |
(308,547 |
) |
|
|
377,781 |
|
|
$ |
(0.82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$ |
(5,623 |
) |
|
|
390,135 |
|
|
$ |
(0.01 |
) |
|
$ |
(463,531 |
) |
|
|
384,070 |
|
|
$ |
(1.21 |
) |
|
$ |
(308,547 |
) |
|
|
377,781 |
|
|
$ |
(0.82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Numerator
+ Denominator
Options to purchase approximately 70,618,481, 67,733,073, and
69,165,802 shares were outstanding at December 31,
2005, 2004 and 2003, respectively, and were excluded from the
computation of diluted shares because of their antidilutive
effect on net loss per share. The exercise price of these
options ranged from $0.10 to $72.25 at December 31, 2005
and $0.06 to $72.25 at December 31, 2004 and 2003.
53
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
Weighted average restricted common shares of 1,770,625, 282,488,
and 100,599 were outstanding at December 31, 2005, 2004 and
2003, respectively, and were excluded from the computation of
diluted shares because of their antidilutive effect on net loss
per share.
A total of 38,411,403 and 43,728,665 weighted average
potentially dilutive shares associated with the 2003 and 2001
Convertible Notes were excluded from the calculation of diluted
shares because of their antidilutive effect on loss per share
for the years ended December 31, 2005 and 2004,
respectively. A total of 50,850,649 weighted average potentially
dilutive shares associated with the 2003, 2001, 2000 and 1999
Convertible Notes were excluded from the calculation of diluted
shares because of their antidilutive effect on loss per share
for the year ended December 31, 2003.
Advertising. Advertising costs are charged to expense in
the period incurred. Advertising expense was $5 million,
$5 million and $4 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
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 for estimated losses
resulting from receivables not considered to be collectible. The
allowance for doubtful accounts is estimated by evaluating
customers 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 with unrealized gains and
losses, net of related tax, 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 basis and consist primarily of
common and preferred stock of various non-marketable technology
companies. Gains and losses on securities sold are determined
based on the specific identification method and are included in
interest income in the statement 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 in the statement of operations. In order to determine if
an impairment has occurred, the Company reviews the financial
performance and outlook of each investee, industry performance,
the trading prices of marketable securities and pricing in
current rounds of financing for non-marketable equity
securities. For marketable equity securities, impairment losses
are measured using the closing market prices of the marketable
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 if there are no 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 reserves 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. Reserves are established for
excess inventory generally based on inventory levels in excess
of twelve months of demand, as judged by management, for each
specific product.
54
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
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 Companys facility
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 ready for general release to customers over the estimated
useful life of the product, typically an 18 to 24 month
period. Software amortization totaling $14 million,
$12 million and $25 million was included in the
Companys results of operations during 2005, 2004 and 2003,
respectively. On a quarterly basis, the Company assesses the
realizability of each 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, 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. Estimates made by management include
assumptions about future conditions such as future revenues,
gross margins and operating expenses. The second step is only
performed if impairment is indicated after the first step is
performed, as it involves measuring the actual impairment to
goodwill.
Fair value disclosures of financial instruments. The
estimated fair value of financial instruments is determined by
the Company, 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
presented herein 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
55
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
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 (see Note 8). The Company does not enter into
derivative financial instruments for speculative or trading
purposes. On the date a derivative contract is entered into, the
Company designates its 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 (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, as
discussed below.
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 hedge accounting is discontinued because the hedged 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. 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 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.
56
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
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. A majority of the Companys trade receivables
are derived from sales to large multinational computer,
communication, networking, storage and consumer electronics
manufacturers, with the remainder distributed across other
industries. There are two customers, each accounted for 23% and
13% of trade receivables as of December 31, 2005,
respectively and one customer that accounted for 22% of trade
receivables as of December 31, 2004. 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.
Self-insurance. The Company retains certain exposures in
its insurance plan under self-insurance programs. Reserves for
claims made and reserves for estimated claims incurred but not
yet reported are recorded as current liabilities.
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 for Semiconductor
products and Storage Systems hardware products and
90 days for Storage Systems software products. A
liability for estimated future costs under product warranties is
recorded when products are shipped (see Note 12).
Litigation and Settlement Costs. The Company is involved
in legal actions arising in the ordinary course of business. The
Company aggressively defends these legal actions. 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.
Stock-based compensation. The Company accounts for
stock-based compensation, including stock options granted,
restricted stock awards and shares issued under the Employee
Stock Purchase Plan, using the intrinsic value method.
Compensation cost for stock options, if any, is measured as the
excess of the quoted market price at grant date over the
exercise price and recognized ratably over the vesting period.
The Companys policy is to grant options with an exercise
price equal to the quoted market price of the Companys
stock on the grant date.
For all acquisitions that closed after July 2000, the intrinsic
value of the unvested options, restricted awards and warrants
assumed as part of the acquisitions as of the closing date of
the acquisitions was recorded as deferred stock compensation as
a component of the purchase price to be amortized over the
respective vesting periods of the options and awards. The
Company calculated the value of restricted shares issued using
the closing price of its common stock on the date of
consummation of the purchase. The fair value of the vested
options and warrants assumed was determined using the
Black-Scholes model. Deferred stock compensation is included as
a component of stockholders equity and is amortized
straight line over the vesting period of one to four years.
Forfeitures of acquisition related stock awards prior to vesting
would result in any recognized compensation cost being reduced
to zero in the period of forfeiture and any remaining unearned
compensation cost being reversed through equity.
57
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
The following table provides pro forma disclosures as if the
Company had recorded compensation costs based on the estimated
grant date fair value, as defined by SFAS No. 123, for
all awards granted under its stock-based compensation plans. In
such case, the Companys net loss per share would have been
adjusted to the pro forma amounts below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Net loss, as reported
|
|
$ |
(5,623 |
) |
|
$ |
(463,531 |
) |
|
$ |
(308,547 |
) |
Add: Amortization of non-cash deferred stock compensation
expense determined under the intrinsic value method as reported,
net of related tax effects *
|
|
|
638 |
|
|
|
3,494 |
|
|
|
9,243 |
|
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects
|
|
|
(70,028 |
) |
|
|
(120,265 |
) |
|
|
(200,470 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(75,013 |
) |
|
$ |
(580,302 |
) |
|
$ |
(499,774 |
) |
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted as reported
|
|
$ |
(0.01 |
) |
|
$ |
(1.21 |
) |
|
$ |
(0.82 |
) |
|
Basic and diluted pro forma
|
|
$ |
(0.19 |
) |
|
$ |
(1.51 |
) |
|
$ |
(1.32 |
) |
|
|
* |
This amount excludes amortization of non-cash deferred stock
compensation on restricted stock awards. |
The pro forma disclosure provided above may not be
representative of the effect of applying SFAS No. 123
(Revised 2004). (See further discussion in Recent
Accounting Pronouncements later in this Note 1.)
The stock-based compensation expense determined under the fair
value method, included in the table above, was calculated using
the Black-Scholes model. The Black-Scholes model was developed
to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which
significantly differ from the Companys stock option
awards. This model also requires highly subjective assumptions,
including future stock price volatility and expected time until
exercise, which greatly affect the calculated grant date fair
value. The following weighted average assumptions were used in
determining the estimated grant date fair values:
Employee Stock Options Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Weighted average estimated grant date fair value
|
|
$ |
3.98 |
|
|
$ |
4.39 |
|
|
$ |
4.95 |
|
Assumptions in calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
3.88 |
|
|
|
3.90 |
|
|
|
3.85 |
|
Risk-free interest rate
|
|
|
3.30 |
% |
|
|
3.03 |
% |
|
|
2.73 |
% |
Volatility
|
|
|
67.75 |
% |
|
|
79.72 |
% |
|
|
81.56 |
% |
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
58
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
Employee Stock Purchase Plan Right to Purchase Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Weighted average estimated grant date fair value
|
|
$ |
2.78 |
|
|
$ |
2.65 |
|
|
$ |
3.09 |
|
Assumptions in calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
0.75 |
|
|
|
0.91 |
|
|
|
0.87 |
|
Risk-free interest rate
|
|
|
3.71 |
% |
|
|
2.05 |
% |
|
|
1.18 |
% |
Volatility
|
|
|
75.69 |
% |
|
|
69.17 |
% |
|
|
88.59 |
% |
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and 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.
Related party transactions. A member of our board of
directors is also a director of Seagate Technology. The Company
sells semiconductors used in storage product applications to
Seagate Technology for prices an unrelated third party would pay
for such products. Revenues to Seagate were $207.7 million,
$121.7 million and $107.7 million for the years ended
December 31, 2005, 2004 and 2003, respectively. The Company
had accounts receivable from Seagate Technology of
$41.2 million and $28.1 million as of
December 31, 2005 and 2004 respectively.
Recent accounting pronouncements. In December 2004, the
Financial Accounting Standard Board (FASB) issued a
revision to Statement of Financial Accounting Standard
No. 123, Accounting for Stock-Based
Compensation (SFAS 123R). SFAS 123R eliminates
the Companys ability to use the intrinsic value method of
accounting under APB Opinion 25, Accounting for Stock
Issued to Employees, and generally requires a public
entity to reflect on its income statement, instead of pro forma
disclosures in its financial footnotes, the cost of employee
services received in exchange for an award of equity based on
the grant-date fair value of the award. The grant-date fair
value will be estimated using option-pricing models adjusted for
the unique characteristics of those equity instruments.
SFAS 123R amends SFAS No. 95, Statement of
Cash Flows, to require that excess tax benefits be
reported as a financing cash inflow rather than as a reduction
of taxes paid. We have adopted SFAS 123R as of
January 1, 2006. SFAS 123R applies to all unvested
awards and awards granted after January 1, 2006 and to
awards modified, repurchased, or cancelled after that date.
The Company has elected to adopt SFAS 123R using the
modified prospective method, which requires that compensation
expense be recognized for all share-based payments granted,
modified or settled after the date of adoption plus the current
period expense for unvested awards issued prior to the adoption
of this standard. No expense is recognized for awards vested in
prior periods. Although the Company has not determined the exact
amount at this time, the Company expects that the adoption of
this statement will result in amortization of non-cash deferred
stock compensation of approximately $15 million for the
three months ended March 31, 2006. Beginning in 2006, the
Company has changed the method of valuation for share-based
awards granted from the Black-Scholes option-pricing model,
which was previously used for the pro forma information required
under SFAS 123, to a binomial option-pricing model (see
Note 1 and 2 of the Notes).
59
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs an amendment of ARB
No. 43, Chapter 4. This statement clarifies the
accounting for abnormal amounts of facility expense, freight,
handling costs and wasted materials (spoilage) to require
them to be recognized as current-period charges. This statement
is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of this
standard did not have a material impact on the Companys
consolidated balance sheet or statement of operations.
On October 22, 2004, the President signed the American Jobs
Creation Act of 2004 (the Act). The Act introduced a
special one-time dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer
(repatriation provision), provided certain criteria are met. The
Company has determined that it will not participate in the
special one-time dividends received deduction.
In November 2005, FASB issued FSP FAS 115-1/
FAS 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments
(FSP 115-1/124-1).
FSP 115-1/124-1
provides guidance on determining when investments in certain
debt and equity securities are considered impaired, whether that
impairment is other-than-temporary, and on measuring such
impairment loss.
FSP 115-1/124-1
also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. This FSP is
required to be applied to reporting periods beginning after
December 15, 2005. The FSP did not have a material impact
on the Companys consolidated balance sheet or statement of
operations.
Note 2 Business Combinations
The Company actively evaluates strategic acquisitions that build
upon our existing library of intellectual property, human
capital and engineering talent, and seeks to increase our
leadership position in the markets in which we operate. Below is
a discussion of recent acquisitions and acquired in-process
research and development.
There were no material acquisitions during 2005.
Acquisition of Accerant Inc. On May 11, 2004, the
Company acquired Accerant Inc. (Accerant). The
acquisition expanded consumer product offerings within the
Semiconductor segment. The acquisition was accounted for as a
purchase of a business.
The Company paid approximately $14.1 million in cash for
the acquisition. In addition, as of the acquisition date, the
Company agreed to issue approximately 234,000 restricted common
shares to certain Accerant employees hired as part of the
transaction. The resulting deferred stock compensation is being
amortized to expense over a vesting period of two years using
the straight-line method. See Note 10 for
60
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
forfeitures of restricted shares prior to vesting. The total
purchase price was allocated to the estimated fair value of net
assets acquired based on management estimates as follows (in
thousands):
|
|
|
|
|
Fair value of tangible net assets acquired
|
|
$ |
31 |
|
Current technology
|
|
|
5,700 |
|
Non-compete agreements
|
|
|
400 |
|
Goodwill
|
|
|
7,972 |
|
|
|
|
|
Total purchase price excluding deferred stock compensation
|
|
|
14,103 |
|
Deferred stock compensation
|
|
|
1,765 |
|
|
|
|
|
Total purchase price
|
|
$ |
15,868 |
|
|
|
|
|
Useful life of intangible assets. The amounts allocated
to current technology and non-compete agreements are being
amortized over their estimated useful lives of five and two
years, respectively, using the straight-line method.
Acquisition of Velio Communications. On April 2,
2004, the Company acquired Velio Communications, Inc.
(Velio). The acquisition expanded product offerings
for high-speed interconnect and switch fabric application
specific standard products (ASSPs) for the
communications market within the Semiconductor segment. The
acquisition was accounted for as a purchase of a business.
The Company paid approximately $19.8 million in cash for
the acquisition. In addition, as of the acquisition date, the
Company agreed to issue approximately 100,000 restricted common
shares to certain Velio employees hired as part of the
transaction. The resulting deferred stock compensation is being
amortized to expense over a vesting period of two years using
the straight-line method. See Note 10 for forfeitures of
restricted shares prior to vesting. The total purchase price was
allocated to the estimated fair value of net assets acquired
based on management estimates as follows (in thousands):
|
|
|
|
|
Fair value of tangible net assets acquired
|
|
$ |
1,529 |
|
Current technology
|
|
|
8,788 |
|
Customer base
|
|
|
8,788 |
|
Non-compete agreements
|
|
|
450 |
|
Existing purchase orders
|
|
|
200 |
|
|
|
|
|
Total purchase price excluding deferred stock compensation
|
|
|
19,755 |
|
Deferred stock compensation
|
|
|
1,000 |
|
|
|
|
|
Total purchase price
|
|
$ |
20,755 |
|
|
|
|
|
Useful life of intangible assets. The amounts allocated
to current technology, customer base, non-compete agreements and
existing purchase orders are being amortized over their
estimated useful lives of nine months to five and one half years
using the straight-line method.
Pro forma statements of earnings information have not been
presented because the effect of these acquisitions was not
material either individually or on an aggregate basis.
61
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
There were no material acquisitions during 2003.
Note 3 Restructuring and other items
The Company recorded charges of $119.1 million in
restructuring of operations and other items for the year ended
December 31, 2005, consisting of $113.7 million in
charges for restructuring of operations and impairment of
long-lived assets and a charge of $5.4 million for other
items. Of these charges, $115.9 million was recorded in the
Semiconductor segment and $3.2 million was included in the
Storage Systems segment.
|
|
|
Restructuring and impairment of long-lived assets: |
The Company recorded restructuring charges of approximately
$1.5 million, which included the following items. An
expense of $0.8 million was recorded for the write-down of
purchased software that will not be used. An expense of
$0.3 million was recorded to reflect the change in time
value of accruals for facility lease termination costs, net of
adjustments for changes in sublease assumptions for certain
previously accrued facility lease termination costs. Additional
non-manufacturing facilities were consolidated during the first
quarter of 2005 and an expense of $0.4 million was recorded
as the leased facilities ceased being used.
The Company recorded restructuring charges of approximately
$1.7 million, which included the following items. An
expense of $0.4 million for the write-down of equipment
held for sale to reflect a decline in fair market values. An
expense of $0.4 million was recorded to reflect the change
in time value of accruals for facility lease termination costs.
An additional non-manufacturing facility was consolidated during
the second quarter of 2005 and an expense of $0.3 million
was recorded as the leased facility ceased being used. An
expense of $0.2 million was recorded for severance and
termination benefits for 10 employees. An expense of
$0.4 million was recorded for facility closure costs
related to the Colorado fabrication facility as the expenses
were incurred.
The Company recorded restructuring charges of approximately
$100.0 million for the three months ended
September 30, 2005 as follows:
On September 13, 2005, the Company announced its intention
to sell its Gresham, Oregon manufacturing facility as part of
the Companys strategy to move to a fabless semiconductor
manufacturing model. Accordingly, the Company recorded
$91.1 million in charges directly associated with the
decision to sell the manufacturing facility in the third quarter
of 2005. The asset impairment charge for the Gresham disposal
group was calculated in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets and included a charge of $85.2 million for the
Gresham facility and $4.8 million in charges for estimated
selling costs. The fair market values for the Gresham facility
were thoroughly researched and estimated by management using the
assistance of third party appraisers. The impairment charges of
$85.2 million are non-cash charges. In addition, the
Company announced workforce reductions for approximately 80
positions in the Gresham facility and recorded a charge of
$1.1 million for severance and termination benefits. The
Company also established a retention bonus arrangement for
approximately 500 employees to induce them to stay until the
facility is sold. Each employee who stays and renders service
until the sale of the Gresham facility will receive a
termination benefit, which is expected to be paid after the sale
of the facility. These actions and related charges are
associated with the Semiconductor
62
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
segment. The Company is actively marketing the Gresham facility
and expect to complete a sale of the facility by
September 13, 2006, one year from the date of the
announcement.
An expense of $7.7 million was recorded for changes in
sublease assumptions for certain previously accrued facility
lease termination costs. In addition, an expense of
$0.5 million was recorded to reflect the change in time
value of accruals for facility lease termination costs. An
expense of $0.5 million was recorded for severance and
termination benefits for approximately 17 employees primarily
related to the broad-based reorganization that was announced in
August 2005. An expense of $0.5 million was recorded for
facility closure costs related to the Colorado fabrication
facility as the expenses were incurred.
The Company recorded restructuring charges of approximately
$10.4 million for the three months ended December 31,
2005 as follows:
An expense of $2.2 million was recorded for changes in
sublease assumptions for certain previously accrued facility
lease termination costs. In addition, an expense of
$0.4 million was recorded to reflect the change in time
value of accruals for facility lease termination costs. An
expense of $5.7 million was recorded for severance and
termination benefits for employees primarily related to the
one-time termination benefits for employees affected by the
broad-based reorganization that was announced in August 2005. An
additional non-manufacturing facility was consolidated during
the fourth quarter of 2005 and an impairment charge of
$1.6 million was recorded for leasehold improvements as the
leased facility ceased being used. This was a non-cash charge
associated with the Companys Storage System segment. An
expense of $0.5 million was recorded for facility closure
costs related to the Colorado fabrication facility as the
expenses were incurred.
Assets held for sale of $105.8 million and
$11.0 million were included as a component of prepaid
expenses and other current assets as of December 31, 2005
and December 31, 2004, respectively. Assets classified as
held for sale are not depreciated. The fair values of impaired
equipment and facilities were estimated by management using the
assistance of third party appraisers. Given that current market
conditions for the sale of older fabrication facilities and
related equipment may fluctuate, there can be no assurance that
the Company will realize the current net carrying value of the
assets held for sale. The Company reassesses the realizability
of the carrying value of these assets at the end of each quarter
until the assets are sold or otherwise disposed of and
additional adjustments may be necessary.
The following table sets forth our restructuring reserves as of
December 31, 2005, which are included in other accrued
liabilities on the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
Restructuring | |
|
|
|
Utilized | |
|
Balance at | |
|
|
December 31, | |
|
Expense | |
|
Release of | |
|
During | |
|
December 31, | |
|
|
2004 | |
|
2005 | |
|
Reserve | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Write-down of excess assets and decommissioning costs(a)
|
|
$ |
1,207 |
|
|
$ |
92,421 |
|
|
$ |
(518 |
) |
|
$ |
(88,117 |
) |
|
$ |
4,993 |
|
Lease terminations and maintenance contracts(b)
|
|
|
20,065 |
|
|
|
12,241 |
|
|
|
|
|
|
|
(10,019 |
) |
|
|
22,287 |
|
Facility closure and other exit costs(c)
|
|
|
543 |
|
|
|
1,427 |
|
|
|
|
|
|
|
(1,970 |
) |
|
|
|
|
Payments to employees for severance(d)
|
|
|
7,408 |
|
|
|
7,527 |
|
|
|
(284 |
) |
|
|
(9,256 |
) |
|
|
5,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
29,223 |
|
|
$ |
113,616 |
|
|
$ |
(802 |
) |
|
$ |
(109,362 |
) |
|
$ |
32,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
|
|
(a) |
The amounts utilized in 2005 reflect non-cash write-downs of
long-lived assets in the U.S. due to impairment, primarily
related to the impairment charge for the Gresham facility of
$85.2 million, other assets write-downs of
$2.8 million, cash payments to decommission and sell assets
of $0.5 million and a credit of $0.4 million of net of
other miscellaneous items. The write-downs of long-lived assets
were accounted for as a reduction of the assets and did not
result in a liability. The $5.0 million balance as of
December 31, 2005, relates to estimates for selling costs
for assets held for sale and is expected to be utilized during
2006. |
|
|
|
(b) |
|
Amounts utilized represent cash payments. The balance remaining
for real estate lease terminations will be paid during the
remaining terms of these contracts, which extend through 2011. |
|
(c) |
|
Amounts utilized represent cash payments. |
|
(d) |
|
Amounts utilized represent cash severance payments to 126
employees during the year ended December 31, 2005 for the
action announced in the third quarter of 2004. Amounts utilized
also include cash severance payments for 124 employees for the
action announced in the third quarter of 2005 for the year ended
December 31, 2005. The balance remaining for severance is
expected to be paid by the end of 2006. |
The Company recorded $5.4 million related to other items
mainly related to the following. On May 23, 2005, Wilfred
J. Corrigans status as an employee ceased and, in
connection with this event, the Company recorded a charge of
$5.3 million. The amount was paid to Mr. Corrigan in
the second quarter of 2005 and was made in accordance with
Mr. Corrigans employment agreement dated
September 20, 2001. Mr. Corrigan was the
Companys former Chief Executive Officer.
On February 13, 2006, Mr. Corrigan notified the
Company that he will not stand for reelection to the
Companys board of directors (the Board) at its
next annual stockholders meeting to be held on
May 11, 2006. Mr. Corrigan currently serves as the
chairman of the Board, and will continue to serve in that
capacity through the end of his current term. The Board will
elect a new chairperson at that time.
The Company recorded net charges of $423.4 million in
restructuring of operations and other items for the year ended
December 31, 2004, consisting of $433.5 million in
charges for restructuring of operations and impairment of
long-lived assets and a gain of $10.1 million for other
items. Of these charges, $420.2 million was recorded in the
Semiconductor segment and $3.2 million was included in the
Storage Systems segment.
|
|
|
Restructuring and impairment of long-lived assets: |
The Company recorded a gain of $3.3 million on the sale of
fixed assets that had previously been held for sale and an
expense of $1.1 million for the abandonment of fixed assets
that had previously been held for sale. In addition, an expense
of $1.1 million was recorded for the write-down of fixed
assets due to impairment.
An expense of $0.3 million was recorded to reflect the
change in time value of accruals for facility lease termination
costs, net of adjustments for changes in sublease assumptions
for certain previously accrued facility lease termination costs.
An expense of $0.2 million was recorded primarily for
severance and termination benefits for four employees involved
in research and development.
64
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
The Company recorded a gain of $1.0 million on the sale of
fixed assets that had previously been held for sale and an
expense of $4.0 million primarily for the write-down of the
Colorado Springs fabrication facility to reflect a decline in
fair market value and to write down certain spare parts for
fixed assets.
An expense of $0.4 million was recorded to reflect the
change in time value of accruals for facility lease termination
costs, net of adjustments for changes in sublease assumptions
for certain previously accrued facility lease termination costs.
Previously accrued contract termination fees of
$0.4 million were reversed as the result of more favorable
than expected negotiations to terminate those contracts.
As a result of the decline in revenues in the semiconductor
industry and a corresponding decline in the Companys
outlook as of the latter part of the third quarter of 2004, the
Company initiated a comprehensive restructuring program, which
included asset impairments, a global reduction in workforce and
the consolidation of certain facilities as described further
below.
The Company concluded in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, that the Gresham manufacturing facility assets
were impaired. Accordingly, an asset write-down of
$205.5 million was recorded in the semiconductor segment
during the third quarter of 2004. The fair values of equipment
and facilities were researched and estimated by management using
the assistance of third party appraisers.
The Company announced workforce reductions of approximately 560
positions worldwide across all job functions and recorded a
charge of $14.6 million in the Semiconductor segment for
severance and termination benefits.
The Company recorded a gain of $1.9 million on the sale of
fixed assets that had previously been held for sale and an
expense of $3.4 million for the write-down of the Colorado
Springs fabrication facility to reflect a decline in fair market
value, the impairment of certain acquired intangible assets in
the Semiconductor segment and the write-down of leasehold
improvements related to the facility operating leases discussed
below.
In the third quarter of 2004, the Company consolidated
additional non-manufacturing facilities and recorded
$6.1 million for costs associated with exiting certain
operating leases for real estate as the facilities ceased being
used. An expense of $0.4 million was recorded to reflect
the change in time value of prior accruals for facility lease
termination costs. In addition, an expense of $1.8 million
was recorded for changes in sublease assumptions for certain
previously accrued facility lease termination costs.
In November 2004, the Company exercised its right to purchase
all of the wafer fabrication equipment that had previously been
under two operating lease and security agreements. The purchase
amount was $332 million. Cash collateral of
$311 million associated with the leases was returned to the
Company. Termination fees under the lease agreements were not
significant. The formerly leased equipment is part of the
Gresham manufacturing facility, but was not impaired in the
third quarter of 2004 because the Company did not own the
equipment until November 2004, as discussed above. Accordingly,
in the fourth quarter of 2004, after purchasing the previously
leased equipment, the Company recorded an additional impairment
charge of $177.7 million in restructuring of operations and
other items within the Semiconductor segment. The charge
includes a write-down of $247.7 million to reflect the
equipment at fair value, the reversal of a $56.0 million
deferred gain previously recorded in non-current liabilities
related to the sale-leaseback of
65
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
equipment during 2003, lease termination fees and the write-off
of capitalized lease fees and deferred rent. The fair values of
the impaired equipment were researched and estimated by
management.
In the Semiconductor segment, the Company recorded a gain of
$0.6 million on the sale of fixed assets that had
previously been held for sale; an expense of $11.4 million
for the write-down of the Colorado Springs fabrication facility
to reflect a decline in fair market value; and an expense of
$0.3 million for the write-down of leasehold improvements
related to the facility operating leases discussed below and
other fixed assets.
During the third quarter of 2004, the Company reclassified a
parcel of land in Japan with a book value of $1.4 million
from a long-term asset to a current asset held for sale. The
land was part of the total assets in the Semiconductor segment.
The land was sold in the fourth quarter of 2004 and a gain of
$0.2 million was recorded.
As part of the restructuring program initiated in the third
quarter, the Company decided to discontinue development of a
product line in the Semiconductor segment that had been acquired
in connection with the Datapath acquisition in 2000. As a
result, an analysis of the future net cash flows related to the
affected product line was performed and the Company determined
that certain acquired intangible assets were impaired. An
impairment charge of $4.7 million for the write-down of the
acquired intangible assets to fair market value was recorded in
the Semiconductor segment.
In the fourth quarter of 2004, the Company consolidated
additional non-manufacturing facilities and recorded
$1.9 million for costs associated with exiting certain
operating leases for real estate as the facilities ceased being
used. An expense of $0.5 million was recorded to reflect
the change in time value of accruals for facility lease
termination costs. Previously accrued lease termination fees of
$0.3 million were reversed as the result of favorable
negotiations to terminate those contracts.
The Company recorded $2.5 million for additional severance
and termination benefits in the Semiconductor segment related to
the workforce reductions described in the third quarter of 2004
above, primarily in Europe and the United States due to changes
in estimates.
In our Storage Systems segment, during the fourth quarter, we
initiated realignment of our product portfolio and overhead cost
structures driven by the future operating and financial
performance goals of the Storage Systems segment. In connection
with this action the Company recorded a $1.5 million charge
for severance and termination benefits for 70 employees across
multiple activities and functions. In addition, the Company
recorded a charge of $1.7 million for the write-off of
previously capitalized software development costs. The Company
cancelled the related project based upon the determination that
this project would not achieve the desired future financial
performance goals.
Assets held for sale of $11 million and $30 million
were included as a component of prepaid expenses and other
current assets as of December 31, 2004 and
December 31, 2003, respectively. Assets classified as held
for sale are not depreciated. The fair values of impaired
equipment and facilities were researched and estimated by
management using the assistance of third party appraisers. Given
that current market conditions for the sale of older fabrication
facilities and related equipment may fluctuate due to demand for
used semiconductor equipment, there can be no assurance that the
Company will realize the current net carrying value of the
assets held for sale. The Company reassesses the realizability
of the carrying value of these assets at the end of each quarter
until the assets are sold or otherwise disposed of and
additional adjustments may be necessary.
66
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
The following table sets forth our restructuring reserves as of
December 31, 2004, which are included in other accrued
liabilities on the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
Restructuring | |
|
|
|
Utilized | |
|
Balance at | |
|
|
December 31, | |
|
Expense | |
|
Release of | |
|
During | |
|
December 31, | |
|
|
2003 | |
|
2004 | |
|
Reserve 2004 | |
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Write-down of excess assets and decommissioning costs(a)
|
|
$ |
2,661 |
|
|
$ |
404,723 |
|
|
$ |
(760 |
) |
|
$ |
(405,417 |
) |
|
$ |
1,207 |
|
Lease terminations and maintenance contracts(b)
|
|
|
21,021 |
|
|
|
11,388 |
|
|
|
(665 |
) |
|
|
(11,679 |
) |
|
|
20,065 |
|
Facility closure and other exit costs(c)
|
|
|
2,136 |
|
|
|
64 |
|
|
|
|
|
|
|
(1,657 |
) |
|
|
543 |
|
Payments to employees for severance(d)
|
|
|
874 |
|
|
|
18,812 |
|
|
|
(18 |
) |
|
|
(12,260 |
) |
|
|
7,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
26,692 |
|
|
$ |
434,987 |
|
|
$ |
(1,443 |
) |
|
$ |
(431,013 |
) |
|
$ |
29,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
The amounts utilized in 2004 reflect $411.6 million of
non-cash write-downs of long-lived assets in the U.S. due
to impairment and $0.8 million in cash payments to
decommission and sell assets, offset by a $7.0 million
realized gain on the sale of fixed assets previously held for
sale. The write-downs of long-lived assets were accounted for as
a reduction of the assets and did not result in a liability. The
$1.2 million balance as of December 31, 2004, relates
to machinery and equipment decommissioning costs in the U.S. and
estimates of selling costs for assets held for sale. |
|
|
|
(b) |
|
Amounts utilized represent cash payments. The balance remaining
for primarily real estate lease terminations and maintenance
contracts will be paid during the remaining terms of these
contracts, which extend through 2011. |
|
(c) |
|
Amounts utilized represent cash payments. |
|
(d) |
|
Amounts utilized represent cash severance payments to 495
employees during the year ended December 31, 2004. The
balance remaining for severance benefits was paid during 2005. |
During the second quarter of 2004, the Company reclassified a
parcel of land in Colorado with a book value of
$1.4 million from a long-term asset to a current asset held
for sale. The land is part of total assets in the Semiconductor
segment. The Company expects to sell the property within the
next 12 months for an amount in excess of book value.
During the third quarter of 2004, the Company entered into two
new lease agreements for wafer fabrication equipment. The
equipment was previously on lease immediately prior to the
closing of the new lease agreements. The Company had capitalized
and was amortizing fees related to the previous lease
agreements. Upon entering into the new lease agreements,
$2.5 million in remaining unamortized fees for the previous
leases were recorded as an expense in the statement of
operations.
During the third quarter of 2004, the Company discontinued hedge
accounting treatment on the interest rate swap related to the
equipment operating leases that were refinanced and recorded the
$3.8 million balance in accumulated comprehensive income as
a gain in the statement of operations (see Note 8).
During the fourth quarter of 2004, the Company released
$8.8 million in accruals that were established in years
prior to 2004, because management determined that the accruals
were no longer necessary.
67
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
The Company recorded net charges of $181 million in
restructuring of operations and other items for the year ended
December 31, 2003 consisting of $183 million in
charges for restructuring of operations and a gain of
$2 million for other items. Of these charges,
$166 million was recorded in the Semiconductor segment and
$15 million was included in the Storage Systems segment.
|
|
|
Restructuring and impairment of long-lived assets: |
On January 1, 2003, the Company adopted
SFAS No. 146, Accounting for Exit or Disposal
Activities. SFAS No. 146 has been applied to
restructuring activities initiated after December 31, 2002
and changes the timing of when restructuring charges are
recorded to the date when the liabilities are incurred.
In February 2003, the Company downsized operations and recorded
$36 million in charges for restructuring of operations and
other items. Of this charge, $21 million was associated
with the Semiconductor segment and $15 million was
attributable to the Storage Systems segment. The charges
consisted of severance and termination benefits of
$5 million for 210 employees involved in manufacturing
operations, research and development and marketing and sales;
$1 million for costs associated with exiting certain
operating leases primarily for real estate; and write-downs of
$24 million for certain acquired intangible assets,
$4 million for capitalized software and $2 million for
fixed assets. During the year ended December 31, 2003,
payments related to the February 2003 restructuring actions
consisted of approximately $4 million for severance and
termination benefits and $1 million for lease and contract
terminations.
In April 2003, the Company announced a restructuring of its
operations that included a reduction in workforce and the
consolidation of certain non-manufacturing facilities. A charge
of $33 million was recorded in the Semiconductor segment
consisting of severance and termination benefits of
$9 million for 325 employees involved in manufacturing
operations, research and development, marketing, sales and
administration; $19 million for costs associated with
exiting certain operating leases primarily for real estate;
other exit costs of $0.2 million; and a write-down of
$5 million for fixed assets due to impairment. During the
year ended December 31, 2003, payments related to the April
2003 restructuring actions consisted of approximately
$9 million for severance and termination benefits,
$3 million for lease and contract terminations and
$0.1 million for other exit costs.
In June 2003, the Company announced the decision to sell the
Tsukuba, Japan manufacturing facility. During the second
quarter, a charge of $73 million was recorded in the
Semiconductor segment to write down fixed assets to their fair
market value. The fair value was reclassified from property,
plant and equipment to other current assets to reflect the
intention to dispose of the facility within the next twelve
months. In addition, approximately $2 million in
restructuring charges were recorded in the second quarter for
severance and other exit costs. See further discussion in the
third quarter below.
In June 2003, the Company also recorded $19 million of
additional fixed asset write-downs to reflect the decrease in
fair market value of the assets during the period. This
write-down included a reduction in the value of the Colorado
Springs fabrication facility of $16 million to reflect
continued and accelerated efforts to sell the facility.
68
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
|
|
|
Agreement to sell Japan fabrication facility: |
In September 2003, the Company entered into a definitive
agreement to sell the Tsukuba, Japan facility to Rohm Company
Ltd. (Rohm), a Japanese company. The sale closed
during November 2003 for 2.82 billion Yen (approximately
$26 million). As part of the definitive agreement, the
Company agreed to purchase a minimum amount of production wafers
from Rohm for a period of 15 months following the close of
the transaction. As a result, a charge of $4 million was
recorded in cost of revenues during the third quarter of 2003.
This charge is a result of the application of our policy to
accrue for non-cancelable inventory purchase commitments in
excess of 12 months of estimated demand. Included in the
$4 million charge to cost of revenues is a reclassification
of $3 million from restructuring expense originally
recorded in the second quarter of 2003 to better reflect the
terms of the definitive agreement. Also in the quarter,
$2 million was recorded for additional severance benefits
to be paid and for contract termination and other exit costs
associated with the definitive agreement. During the year ended
December 31, 2003, payments related to the Japan
restructuring actions consisted of approximately $1 million
for severance and termination benefits and $0.2 million for
lease and contract terminations.
|
|
|
Other third quarter 2003 restructuring actions: |
In the third quarter of 2003, the Company continued to
consolidate non-manufacturing facilities and recorded
$2 million for costs associated with exiting certain
operating leases for real estate as the facilities ceased being
used.
In September 2003, the Company decided to discontinue
development programs and to refocus sales and marketing efforts
for certain product lines in the Semiconductor segment. As a
result of an analysis of future net cash flows related to the
affected product lines, it was determined that certain acquired
intangible assets were impaired. An impairment charge of
$21 million related to the write-down of the acquired
intangible assets to fair market value was recorded in the third
quarter of 2003. These intangible assets were originally
acquired in connection with the acquisition of C-Cube
Microsystems in the second quarter of 2001. In addition,
$3 million in restructuring charges were recorded in the
third quarter of 2003. These charges related to severance and
termination benefits for 97 employees primarily involved in
research and development and for certain contract termination
costs and fixed asset write-downs due to impairment. The
severance benefits were paid during the third quarter of 2003.
In the fourth quarter of 2003, the Company reversed
approximately $2 million of previously accrued
restructuring expenses. The reversal was primarily due to the
combination of a favorable negotiation to terminate leases for
real property and severance payments that were lower than
expected due to the timing of the sale of the Japan
manufacturing facility to Rohm. An expense of $1 million
recorded to reflect the change in time value of accruals for
facility lease termination costs and the write-down of fixed
assets due to impairment. Certain other reclassifications were
made between asset decommissioning costs and other facility
closure costs to reflect changes in management estimates for the
remaining costs for these activities.
In December 2003, the Company recorded $2 million of
additional fixed asset write-downs to reflect the decrease in
fair market value of the assets during the period. The Company
also recorded a realized gain of $5 million on the sale of
fixed assets that had previously been held for sale.
69
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
The following table sets forth the Companys restructuring
reserves as of December 31, 2003, which are included in
other accrued liabilities on the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
Restructuring | |
|
Release of | |
|
Utilized | |
|
Balance at | |
|
|
December 31, | |
|
Expense | |
|
Reserve and | |
|
During | |
|
December 31, | |
|
|
2002 | |
|
2003 | |
|
Reclassifications | |
|
2003 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Write-down of excess assets and decommissioning costs(a)
|
|
$ |
6,008 |
|
|
$ |
147,454 |
|
|
$ |
(6,422 |
) |
|
$ |
(144,379 |
) |
|
$ |
2,661 |
|
Lease terminations and maintenance contracts(b)
|
|
|
6,757 |
|
|
|
23,444 |
|
|
|
(1,146 |
) |
|
|
(8,034 |
) |
|
|
21,021 |
|
Facility closure and other exit costs(c)
|
|
|
8,129 |
|
|
|
1,072 |
|
|
|
1,203 |
|
|
|
(8,268 |
) |
|
|
2,136 |
|
Payments to employees for severance(d)
|
|
|
1,391 |
|
|
|
18,095 |
|
|
|
(928 |
) |
|
|
(17,684 |
) |
|
|
874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
22,285 |
|
|
$ |
190,065 |
|
|
$ |
(7,293 |
) |
|
$ |
(178,365 |
) |
|
$ |
26,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
The amounts utilized in 2003 reflect $142 million of
non-cash write-downs of amortizable intangible and other
long-lived assets in the U.S. and Japan due to impairment, and
$2 million in cash payments to decommission and sell
assets. The write-downs of the intangible and other long-lived
assets were accounted for as a reduction of the assets and did
not result in a liability. The $3 million balance as of
December 31, 2003 relates to machinery and equipment
decommissioning costs in U.S. and estimates of selling costs for
assets held for sale. |
|
|
|
(b) |
|
Amounts utilized represent cash payments. The balance remaining
for primarily real estate lease terminations and maintenance
contracts will be paid during the remaining terms of these
contracts, which extend through 2011. |
|
(c) |
|
Amounts utilized represent cash payments. |
|
(d) |
|
Amounts utilized represent cash severance payments to 777
employees during 2003. The $0.9 million balance as of
December 31, 2003 was paid during 2004. |
A gain of approximately $2.2 million was recorded in
restructuring and other items, net during the second quarter of
2003 associated with additional sales of intellectual property
associated with the CDMA handset product technology.
Note 4 Segment and Geographic Information
The Company operates in two Reportable segments the
Semiconductor segment and the Storage Systems
segment in which the Company offers products and
services for a variety of electronic systems applications.
LSIs products are marketed primarily to original equipment
manufacturers (OEMs) that sell products to the
Companys target markets. The information provided herein
has been recast to include the RAID Storage Adapter
(RSA) business as part of the Storage Systems
segment from the Semiconductor segment for all periods presented.
70
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
Information about profit or loss and assets. The
following is a summary of operations by segment for the years
ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
|
|
$ |
1,244,248 |
|
|
$ |
1,095,091 |
|
|
$ |
1,124,037 |
|
|
Storage Systems
|
|
|
675,002 |
|
|
|
605,073 |
|
|
|
569,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,919,250 |
|
|
$ |
1,700,164 |
|
|
$ |
1,693,070 |
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
|
|
$ |
(25,728 |
) |
|
$ |
(447,988 |
) |
|
$ |
(285,956 |
) |
|
Storage Systems
|
|
|
37,934 |
|
|
|
11,639 |
|
|
|
13,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
12,206 |
|
|
$ |
(436,349 |
) |
|
$ |
(272,616 |
) |
|
|
|
|
|
|
|
|
|
|
Intersegment revenues for the periods presented above were not
significant. Restructuring of operations and other items were
included in both segments. Depreciation expense for the
Semiconductor and Storage Systems segments was
$51.4 million and $11.6 million for the year ended
December 31, 2005, $77.2 million and $8.4 million
for the year ended December 31, 2004 and
$141.7 million and $7.1 million for the year ended
December 31, 2003.
The following is a summary of total assets by segment as of
December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
|
|
$ |
2,285,913 |
|
|
$ |
2,394,952 |
|
|
$ |
2,948,084 |
|
|
Storage Systems
|
|
|
510,153 |
|
|
|
479,049 |
|
|
|
499,817 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,796,066 |
|
|
$ |
2,874,001 |
|
|
$ |
3,447,901 |
|
|
|
|
|
|
|
|
|
|
|
Significant Customers. The following table summarizes the
number of our significant customers, each of whom accounted for
10% or more of our revenues, along with the percentage of
revenues they individually represent on a consolidated basis and
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Semiconductor segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
Percentage of segment revenues
|
|
|
17% |
|
|
|
11% |
|
|
|
20%,10% |
|
Storage Systems segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
Percentage of segment revenues
|
|
|
44%, 12% |
|
|
|
41%, 15%, 11% |
|
|
|
39%, 17%, 10% |
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
Percentage of consolidated revenues
|
|
|
16%, 11% |
|
|
|
16% |
|
|
|
15%, 13% |
|
71
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
Information about geographic areas. The Companys
significant operations outside the United States include sales
offices in Europe, Asia, including Japan. The following is a
summary of revenues and long-lived assets by entities located
within the indicated geographic areas.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
932,190 |
|
|
$ |
852,453 |
|
|
$ |
863,620 |
|
|
Asia, including Japan
|
|
|
755,960 |
|
|
|
655,077 |
|
|
|
677,266 |
|
|
Europe
|
|
|
231,100 |
|
|
|
192,634 |
|
|
|
152,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,919,250 |
|
|
$ |
1,700,164 |
|
|
$ |
1,693,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
163,226 |
|
|
$ |
380,527 |
|
|
$ |
865,567 |
|
|
Asia, including Japan
|
|
|
34,833 |
|
|
|
37,870 |
|
|
|
50,471 |
|
|
Europe
|
|
|
2,785 |
|
|
|
3,686 |
|
|
|
4,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
200,844 |
|
|
$ |
422,083 |
|
|
$ |
920,661 |
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets consist of net property and equipment,
capitalized software and other long-term assets, excluding
long-term deferred tax assets.
72
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
Note 5 Cash, Cash Equivalents and
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Cash in financial institutions
|
|
$ |
85,641 |
|
|
$ |
51,172 |
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Overnight deposits and money market funds
|
|
|
148,665 |
|
|
|
146,292 |
|
|
Commercial paper
|
|
|
17,473 |
|
|
|
18,260 |
|
|
U.S. government and agency securities
|
|
|
10,870 |
|
|
|
2,999 |
|
|
Certificates of deposit
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
|
179,008 |
|
|
|
167,551 |
|
|
Total cash and cash equivalents
|
|
$ |
264,649 |
|
|
$ |
218,723 |
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
|
|
|
|
|
|
|
Asset and mortgage-backed securities
|
|
$ |
335,495 |
|
|
$ |
292,898 |
|
U.S. government and agency securities
|
|
|
266,077 |
|
|
|
234,787 |
|
Corporate and municipal debt securities
|
|
|
72,688 |
|
|
|
68,177 |
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$ |
674,260 |
|
|
$ |
595,862 |
|
|
|
|
|
|
|
|
Long-term investments in equity securities
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$ |
18,769 |
|
|
$ |
28,372 |
|
Non-marketable equity securities
|
|
|
7,070 |
|
|
|
9,307 |
|
|
|
|
|
|
|
|
|
|
Total long-term investments in equity securities
|
|
$ |
25,839 |
|
|
$ |
37,679 |
|
|
|
|
|
|
|
|
Contractual maturities of available-for-sale debt securities as
of December 31, 2005 were as follows (in thousands):
|
|
|
|
|
Due within one year
|
|
$ |
91,400 |
|
Due in 1-5 years
|
|
|
385,401 |
|
Due in 5-10 years
|
|
|
38,676 |
|
Due after 10 years
|
|
|
158,783 |
|
|
|
|
|
Total
|
|
$ |
674,260 |
|
|
|
|
|
The maturities of asset and mortgage-backed securities were
allocated based on contractual principal maturities assuming no
prepayments.
Net realized gains on sales of available-for-sale debt
securities were $1 million, $1 million and
$10 million for the years ended December 31, 2005,
2004 and 2003, respectively.
The Company realized pre-tax gains of $9 million related to
the following for the year ended December 31, 2005:
|
|
|
|
|
A $8 million pre-tax gain related to the sale of certain
marketable available-for-sale equity securities in the second
and fourth quarters of 2005; and |
|
|
|
A $1 million pre-tax gain associated with marketable
available-for-sale equity securities of a certain technology
company that was acquired by another technology company in the
second quarter of 2005. |
73
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
The Company realized pre-tax gains of $8 million related to
the following for the year ended December 31, 2004:
|
|
|
|
|
A $3 million pre-tax gain associated with marketable
available-for-sale equity securities of a certain technology
company that was acquired by another technology company in the
first quarter of 2004; and |
|
|
|
A $5 million pre-tax gain related to the sales of certain
marketable available-for-sale equity securities in the second
quarter of 2004. |
The above pre-tax gains were recorded in interest income and
other, net in Consolidated Statements of Operations.
The following table includes the details of pre-tax losses
related to investments in equity securities that the Company has
recorded. Management believed that the declines in value were
other than temporary.
|
|
|
|
|
|
|
|
|
|
|
|
Non-Marketable |
|
Marketable |
|
|
Equity |
|
Equity |
|
|
Investments |
|
Investments |
|
|
|
|
|
|
|
(In millions) |
Pre-tax loss:
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$ |
2.4 |
|
|
$ |
|
|
|
Year ended December 31, 2004
|
|
|
3.3 |
|
|
|
4.1 |
|
|
Year ended December 31, 2003
|
|
|
7.9 |
|
|
|
2.7 |
|
Total carrying value of impaired investments as of
December 31, 2005
|
|
$ |
4.8 |
|
|
$ |
2.6 |
|
|
|
|
Investments in available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
Gross Unrealized |
|
Gross Unrealized |
|
Estimated Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt securities
|
|
$ |
682,524 |
|
|
$ |
398 |
|
|
$ |
(8,662 |
) |
|
$ |
674,260 |
|
Long-term marketable equity securities
|
|
|
3,669 |
|
|
|
15,100 |
|
|
|
|
|
|
|
18,769 |
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt securities
|
|
$ |
600,527 |
|
|
$ |
728 |
|
|
$ |
(5,393 |
) |
|
$ |
595,862 |
|
Long-term marketable equity securities
|
|
|
5,912 |
|
|
|
22,460 |
|
|
|
|
|
|
|
28,372 |
|
The following table shows the gross unrealized losses and fair
values of the Companys short-term investments that have
been in a continuous unrealized loss position for less than and
greater than 12 months, aggregated by investment category
as of December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months | |
|
Greater Than 12 Months | |
|
|
| |
|
| |
|
|
|
|
Unrealized | |
|
|
|
Unrealized | |
|
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Asset and mortgage-backed securities
|
|
$ |
148,089 |
|
|
$ |
1,545 |
|
|
$ |
66,878 |
|
|
$ |
1,935 |
|
U.S. government and agency securities
|
|
|
115,385 |
|
|
|
1,241 |
|
|
|
106,925 |
|
|
|
2,981 |
|
Corporate and municipal debt securities
|
|
|
28,647 |
|
|
|
356 |
|
|
|
29,826 |
|
|
|
604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
292,121 |
|
|
$ |
3,142 |
|
|
$ |
203,629 |
|
|
$ |
5,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
The unrealized losses on the Companys investments in
short-term debt securities were primarily caused by rising
interest rates. The Company frequently monitors the credit
quality of its investments in marketable debt securities and, as
of December 31, 2005, there were no known material problems
with issuer credit quality. Since the unrealized losses were
primarily the result of changes in interest rates rather than
credit quality, the Company considered these unrealized losses
to be temporary as of December 31, 2005.
Note 6 Balance Sheet Detail
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Inventories:
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$ |
30,541 |
|
|
$ |
20,022 |
|
|
Work-in-process
|
|
|
62,167 |
|
|
|
106,818 |
|
|
Finished goods
|
|
|
102,106 |
|
|
|
92,060 |
|
|
|
|
|
|
|
|
|
|
$ |
194,814 |
|
|
$ |
218,900 |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
$ |
105,849 |
|
|
$ |
11,034 |
|
|
Prepaid expense and other current assets
|
|
|
57,237 |
|
|
|
48,703 |
|
|
|
|
|
|
|
|
|
|
$ |
163,086 |
|
|
$ |
59,737 |
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
6,128 |
|
|
$ |
31,305 |
|
|
Buildings and improvements
|
|
|
105,256 |
|
|
|
109,891 |
|
|
Equipment
|
|
|
403,696 |
|
|
|
463,271 |
|
|
Furniture and fixtures
|
|
|
29,787 |
|
|
|
30,608 |
|
|
Leasehold improvements
|
|
|
31,958 |
|
|
|
30,697 |
|
|
Construction in progress
|
|
|
7,812 |
|
|
|
10,622 |
|
|
|
|
|
|
|
|
|
|
|
584,637 |
|
|
|
676,394 |
|
|
Accumulated depreciation and amortization
|
|
|
(486,352 |
) |
|
|
(364,478 |
) |
|
|
|
|
|
|
|
|
|
$ |
98,285 |
|
|
$ |
311,916 |
|
|
|
|
|
|
|
|
75
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
Depreciation for property and equipment totaling
$63 million, $86 million and $149 million was
included in the Companys results of operations during
2005, 2004 and 2003, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$ |
90,210 |
|
|
$ |
87,094 |
|
|
Restructuring reserves
|
|
|
32,818 |
|
|
|
29,223 |
|
|
Warranty reserves (Note 12)
|
|
|
11,074 |
|
|
|
10,040 |
|
|
Sales tax payable
|
|
|
2,257 |
|
|
|
11,118 |
|
|
Interest payable
|
|
|
3,835 |
|
|
|
4,803 |
|
|
|
|
|
|
|
|
|
|
$ |
140,194 |
|
|
$ |
142,278 |
|
|
|
|
|
|
|
|
Tax related liabilities and other:
|
|
|
|
|
|
|
|
|
|
Other long-term tax-related liabilities
|
|
$ |
74,738 |
|
|
$ |
77,313 |
|
|
Other long-term liabilities
|
|
|
372 |
|
|
|
257 |
|
|
|
|
|
|
|
|
|
|
$ |
75,110 |
|
|
$ |
77,570 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on available-for-sale securities, net of
tax of $2,394 and $6,228
|
|
$ |
4,445 |
|
|
$ |
11,567 |
|
|
Foreign currency translation adjustments
|
|
|
13,407 |
|
|
|
26,383 |
|
|
|
|
|
|
|
|
|
|
$ |
17,852 |
|
|
$ |
37,950 |
|
|
|
|
|
|
|
|
Note 7 Intangible Assets and
Goodwill
Intangible assets by reportable segment are comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Gross Carrying | |
|
Accumulated | |
|
Gross Carrying | |
|
Accumulated | |
|
|
Amount* | |
|
Amortization* | |
|
Amount* | |
|
Amortization* | |
|
|
| |
|
| |
|
| |
|
| |
Semiconductor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current technology
|
|
$ |
244,301 |
|
|
$ |
(213,671 |
) |
|
$ |
244,302 |
|
|
$ |
(178,297 |
) |
|
Trademarks
|
|
|
26,285 |
|
|
|
(22,258 |
) |
|
|
26,285 |
|
|
|
(18,361 |
) |
|
Customer base
|
|
|
8,788 |
|
|
|
(2,796 |
) |
|
|
8,788 |
|
|
|
(1,198 |
) |
|
Non-compete agreements
|
|
|
849 |
|
|
|
(476 |
) |
|
|
849 |
|
|
|
(195 |
) |
|
Existing purchase orders
|
|
|
200 |
|
|
|
(200 |
) |
|
|
200 |
|
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
280,423 |
|
|
|
(239,401 |
) |
|
|
280,424 |
|
|
|
(198,251 |
) |
|
Storage Systems:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current technology
|
|
|
124,139 |
|
|
|
(120,909 |
) |
|
|
124,139 |
|
|
|
(103,100 |
) |
|
Trademarks
|
|
|
7,150 |
|
|
|
(6,189 |
) |
|
|
7,150 |
|
|
|
(5,085 |
) |
|
Customer base
|
|
|
5,010 |
|
|
|
(4,249 |
) |
|
|
5,010 |
|
|
|
(3,420 |
) |
|
Supply agreement
|
|
|
7,247 |
|
|
|
(7,247 |
) |
|
|
7,247 |
|
|
|
(5,657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
143,546 |
|
|
|
(138,594 |
) |
|
|
143,546 |
|
|
|
(117,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
423,969 |
|
|
$ |
(377,995 |
) |
|
$ |
423,970 |
|
|
$ |
(315,513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
76
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
Amortization expense and the weighted average lives of
intangible assets are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
Year Ended December 31, | |
|
|
Average | |
|
| |
|
|
Lives | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In months) | |
|
(In thousands) | |
Current technology
|
|
|
79 |
|
|
$ |
53,185 |
|
|
$ |
65,153 |
|
|
$ |
67,742 |
|
Trademarks
|
|
|
83 |
|
|
|
5,001 |
|
|
|
5,007 |
|
|
|
5,334 |
|
Customer base
|
|
|
68 |
|
|
|
2,427 |
|
|
|
2,078 |
|
|
|
856 |
|
Supply agreement
|
|
|
36 |
|
|
|
1,590 |
|
|
|
2,417 |
|
|
|
2,420 |
|
Non-compete agreements
|
|
|
46 |
|
|
|
281 |
|
|
|
195 |
|
|
|
|
|
Existing purchase orders
|
|
|
9 |
|
|
|
|
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
78 |
|
|
$ |
62,484 |
|
|
$ |
75,050 |
|
|
$ |
76,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated future amortization expense of intangible assets
as of December 31, 2005 is as follows (in millions):
|
|
|
|
|
|
|
Amount: | |
|
|
| |
Fiscal year:
|
|
|
|
|
2006
|
|
$ |
32 |
|
2007
|
|
|
7 |
|
2008
|
|
|
4 |
|
2009
|
|
|
3 |
|
|
|
|
|
|
|
$ |
46 |
|
|
|
|
|
The changes in the carrying amount of goodwill for the years
ended December 31, 2005 and 2004 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor | |
|
Storage Systems | |
|
|
|
|
Segment* | |
|
Segment* | |
|
Total | |
|
|
| |
|
| |
|
| |
Balance as of December 31, 2003*
|
|
$ |
796,767 |
|
|
$ |
171,716 |
|
|
$ |
968,483 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year
|
|
|
8,106 |
|
|
|
|
|
|
|
8,106 |
|
Adjustment to goodwill recorded in a prior year for the
resolution of a pre-acquisition income tax contingency
|
|
|
(4,463 |
) |
|
|
|
|
|
|
(4,463 |
) |
Adjustment to goodwill recorded in prior periods
|
|
|
|
|
|
|
142 |
|
|
|
142 |
|
Purchase of minority interest
|
|
|
862 |
|
|
|
|
|
|
|
862 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004*
|
|
$ |
801,272 |
|
|
$ |
171,858 |
|
|
$ |
973,130 |
|
|
|
|
|
|
|
|
|
|
|
Adjustment to goodwill recorded in a prior year for cash
received from the resolution of a pre-acquisition income tax
contingency
|
|
|
(36,307 |
) |
|
|
|
|
|
|
(36,307 |
) |
Adjustment to goodwill recorded in prior periods**
|
|
|
(5,984 |
) |
|
|
(2,297 |
) |
|
|
(8,281 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
$ |
758,981 |
|
|
$ |
169,561 |
|
|
$ |
928,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
The information provided herein has been recast to include the
RAID Storage Adapter (RSA) business as part of the Storage
Systems segment from the Semiconductor segment for all periods
presented. |
77
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
|
|
** |
In 2005, the provision for income taxes was increased by a
$5.4 million charge related to the correction of an error
in a prior period associated with the carrying value of
$8.3 million in deferred tax liabilities that should have
been reclassified to goodwill upon adoption of
SFAS No. 142 Goodwill and Intangible
Assets in 2002. The deferred tax liabilities were instead
used as a reduction of the Companys required valuation
allowance in 2002. This was offset by tax-related liabilities of
$2.9 million originally recorded in connection with these
deferred tax balances which are no longer required. The Company
believes that this amount is not material to previously reported
financial statements and has concluded that correcting such
amounts in the fourth quarter of 2005 and the 2005 fiscal year,
as opposed to restating prior periods, is appropriate in the
circumstances. |
The Company reviewed goodwill by reporting unit for impairment
as of December 31, 2005. The Company concluded that
goodwill was not impaired under the first step of the test for
impairment, as described in Note 1, as of December 31,
2005. The Companys next annual test for the impairment of
goodwill will be performed in the fourth fiscal quarter in 2006.
The annual impairment test performed as of December 31,
2004 indicated that goodwill was not impaired.
Note 8 Derivative Instruments
The Company has foreign subsidiaries that operate and sell the
Companys products in various global markets. As a result,
the Company is exposed to changes in foreign currency exchange
rates and interest rates. The Company utilizes various hedge
instruments, primarily forward contracts and currency option
contracts, to manage its exposure associated with firm
intercompany and third-party transactions and net asset and
liability positions denominated in non-functional currencies.
The Company enters into forward contracts that are designated as
foreign currency cash-flow hedges of forecasted payment in
Euros. Changes in the fair value of the forward contracts due to
changes in time value are excluded from the assessment of
effectiveness and are recognized in interest income and other.
There were no such hedges outstanding as of December 31,
2005 and 2004.
Forward contracts and options are also used to hedge certain
foreign currency-denominated assets or liabilities. These
derivatives do not qualify for SFAS No. 133 hedge
accounting treatment. Accordingly, the changes in fair value of
the hedges are recorded immediately in earnings to offset the
changes in fair value of the assets or liabilities being hedged.
The related gains and losses included in interest income and
other, net were not significant.
With the objective of protecting cash flows and earnings of the
Company from the impact of fluctuations in interest rates, while
minimizing the cost of capital, the Company may enter into or
terminate interest rate swaps, such as the transactions
described below. As of December 31, 2005 and 2004, there
were no interest rate swaps outstanding.
The Company entered into interest rate swap transactions (the
Swaps) with several investment banks in June 2002.
The Swaps were entered into to convert the fixed rate interest
expense on the Companys 4% and 4.25% Convertible
Subordinated Notes (Convertible Notes) to a floating
rate based on LIBOR (see Note 9). The Swaps qualified for
hedge accounting as fair value hedges, with changes in the fair
value of the interest rate risk on the Convertible Notes being
offset by changes in the fair values of the Swaps recorded as a
component of interest expense. Before the termination described
below, the difference between the changes in the fair values of
the derivative and the hedged risk resulted in a benefit to
interest expense of $1 million for the year ended
December 31, 2003.
78
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
In the second quarter of 2003, the Company terminated Swaps with
a notional amount of $740 million. The deferred gain of
$44 million from the termination of these Swaps was
included as a component of the Convertible Notes. Deferred gains
on terminated Swaps associated with Convertible Notes
repurchased or redeemed during 2005, 2004 and 2003 were
written-off as part of the net gain or loss on
repurchase/redemption of the Convertible Notes. As of
December 31, 2005, a deferred gain of $2 million was
included as a component of the Convertible Notes and is being
amortized as an adjustment to interest expense using the
effective-interest method over the remaining term of the hedged
Convertible Notes (see Note 9).
In the second quarter of 2003, the Company entered into an
interest rate swap transaction to effectively convert the
LIBOR-based floating rate interest payments on operating leases
for wafer fabrication equipment, with an initial notional amount
of $395 million, to a fixed interest rate (the Lease
Swap). The Lease Swap qualified to be accounted for as a
cash-flow hedge of the forecasted interest payments attributable
to the benchmark interest rate on the operating leases for the
wafer fabrication equipment through September 2006. An expense
of approximately $2 million was recorded to cost of
revenues as the lease payments were made in 2004. In August
2004, the Company entered into two new equipment operating
leases for the wafer fabrication equipment that was previously
on the above-mentioned leases. As a result of entering into the
new leases, the hedged forecasted interest payments were no
longer probable. Hedge accounting treatment was discontinued
prospectively and the balance in accumulated other comprehensive
income was immediately recorded as a gain of $3.8 million
in restructuring and other items in the statement of operations.
In September 2004, the Company terminated the Lease Swap.
Note 9 Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
|
|
Interest | |
|
Conversion | |
|
| |
|
|
Maturity | |
|
Rate * | |
|
Price | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
2003 Convertible Subordinated Notes
|
|
|
2010 |
|
|
|
4.00% |
|
|
$ |
13.4200 |
|
|
$ |
350,000 |
|
|
$ |
350,000 |
|
2001 Convertible Subordinated Notes
|
|
|
2006 |
|
|
|
4.00% |
|
|
$ |
26.3390 |
|
|
|
271,848 |
|
|
|
421,500 |
|
Deferred gain on terminated swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,092 |
|
|
|
10,346 |
|
Capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
623,940 |
|
|
|
781,975 |
|
Current portion of long-term debt and capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(273,940 |
) |
|
|
(129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
350,000 |
|
|
$ |
781,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
The weighted average interest rate on the Convertible Notes was
4.00% for the years ended December 31, 2005 and 2004. See
Note 8 for further discussion of deferred gain on
terminated swap. |
As of December 31, 2005, we have $272 million of
Convertible Subordinated Notes due in November 2006 (2001
Convertible Notes) and $350 million of Convertible
Subordinated Notes due in May 2010 (2003 Convertible
Notes). All of the Convertible Notes are subordinated to
all existing and future senior debt and are convertible at the
holders option, at any time prior to the maturity date of
the Convertible Notes, into shares of our common stock. The 2001
and 2003 Convertible Notes have conversion prices of
approximately $26.34 per share and $13.42 per share,
respectively. The 2001 Convertible Notes are redeemable at our
option, in whole or in part, on at least 30 days notice at
any time on or after the call date, which is two years before
the due date. We cannot elect to redeem the 2003 Convertible
Notes prior to maturity. Each holder of the 2001 and 2003
Convertible Notes has the right to cause us to repurchase all of
such holders Convertible Notes at 100% of their principal
amount plus accrued interest upon the occurrence
79
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
of any fundamental change to us, which includes a transaction or
event such as an exchange offer, liquidation, tender offer,
consolidation, merger or combination. Interest is payable
semiannually. The proceeds of the 2003 Convertible Notes were
used to repurchase $288 million of the 1999 and 2000
Convertible Notes during the second quarter of 2003. The Company
paid approximately $14 million and $11 million in debt
issuance costs related to the 2001 and 2003 Convertible Notes,
respectively, that are being amortized using the interest
method. As of December 31, 2005 and 2004, total debt
issuance costs, net are included in other current and long-term
assets.
Aggregate principal payments required on outstanding debt
obligations are $272 million for the year ending
December 31, 2006 and $350 million in 2010.
The Company paid $28 million, $33 million and
$42 million in interest during 2005, 2004 and 2003,
respectively.
At December 31, 2005, the estimated fair values of the 2001
and 2003 Convertible Notes were $269 million and
$333 million, respectively.
Approximately $28 million of the proceeds from issuance of
the 2003 Convertible Notes were used to purchase call spread
options on LSIs common stock (the Call Spread
Options). The Call Spread Options, including fees and
costs, have been accounted for as capital transactions in
accordance with EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock. The Call Spread Options cover approximately
26.1 million shares of Company common stock, which is the
number of shares that are initially issuable upon conversion of
the 2003 Convertible Notes in full. The Call Spread Options are
designed to mitigate dilution from conversion of the 2003
Convertible Notes in the event that the market price per share
of the Companys common stock upon exercise of the Call
Spread Options is greater than $13.42 and is less than or equal
to $23.875. The Call Spread Options may be settled at the
Companys option in either net shares or in cash and expire
in 2010. Settlement of the Call Spread Options in net shares on
the expiration date would result in the Company receiving a
number of shares, not to exceed 26.1 million shares, of our
common stock with a value equal to the amount otherwise
receivable on cash settlement. Should there be an early
unwinding of the Call Spread Options, the amount of cash or net
shares potentially receivable by the Company will be dependent
upon then existing overall market conditions, and on the
Companys stock price, the volatility of the Companys
stock and the amount of time remaining on the Call Spread
Options.
During 2005, the Company repurchased approximately
$150 million of the 2001 Convertible Notes. A net pre-tax
gain of approximately $4 million was recognized in interest
income and other, net for the repurchase. During 2004, the
Company repurchased approximately $69 million of the 2001
Convertible Notes. During 2003, the Company repurchased/redeemed
$325 million and $385 million of the 1999 and 2000
Convertible Notes, respectively. During 2004, a net pre-tax gain
of approximately $2 million and during 2003, a net pre-tax
loss of approximately $4 million was recognized in interest
income and other, net, for the repurchases/redemptions. The
pre-tax gain or loss is net of the write-off of debt issuance
costs and a portion of the deferred gain on the terminated Swaps
(see Note 8 of the Notes).
Note 10 Common Stock, Stock-Based
Compensation and Other Employee Compensation Plans
Stock option and restricted stock award plans. The
Company has stock-based compensation plans to grant stock
options or restricted stock awards to officers, employees and
consultants. Under these plans, the Company may grant stock
options with an exercise price that is no less than the fair
market value of the stock on the date of grant. The term of each
option is determined by the Board of Directors and has generally
been ten years. Options granted on or after February 12,
2004 will generally have a term of seven years. Options
generally vest in annual increments of 25% per year
commencing one year from the date of grant. Under the 2003
Equity Incentive Plan (2003 Plan), the Company may
also grant restricted stock awards. No
80
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
participant may be granted more than 0.5 million shares of
restricted stock in any year. The vesting requirements for the
restricted stock awards are determined by the Board of
Directors. As of December 31, 2005, the 2003 Plan, the 1999
Nonstatutory Stock Option Plan (1999 Plan) and the
1991 Equity Incentive Plan (1991 Plan) have
6 million, 13 million and 32 million common
shares available for future grants, respectively.
The 1995 Director Option Plan, as amended
(1995 Director Plan), provides for an initial
grant to new directors of options to
purchase 30,000 shares of common stock and subsequent
automatic grants of options to purchase 30,000 shares
of common stock each year thereafter. The initial grants vest in
annual increments of 25% per year, commencing one year from
the date of grant. Subsequent option grants become exercisable
in full six months after the grant date. The exercise price of
the options granted is equal to the fair market value of the
stock on the date of grant. As of December 31, 2005, there
are 0.7 million shares available for future grants under
the 1995 Director Plan.
During the second quarter of 2005, Mr. Talwalkar was
granted non-statutory stock options to
purchase 2,000,000 shares of Company common stock
under the 2003 Equity Incentive Plan at an exercise price equal
to the closing price per share on the NYSE for the common stock
of the Company on the date of grant. The shares subject to such
option will vest based on Mr. Talwalkar attaining certain
performance criteria determined by the Compensation Committee of
the Board of Directors. The shares subject to such option are
scheduled to fully vest six years after the date of grant
whether or not the performance goals are met and subject to
Mr. Talwalkars continued employment with the Company
on each scheduled vesting date.
There are a total of 125 million shares of common stock
reserved for issuance upon exercise of options and vesting of
restricted stock awards, including options available for future
grants, outstanding under all stock option plans.
Engenio Stock Option Exchange Program. On
September 16, 2005, the Company exchanged options to
purchase an aggregate of 3,011,450 shares of Engenios
common stock for options to purchase an aggregate of
2,830,763 shares of LSIs common stock. The exchange
occurred in accordance with the terms of the Engenio Equity
Incentive plan, which provided for the automatic exchange of the
options in the event it was determined that the Engenio initial
public offering was not likely to occur. The original exercise
prices of the options were multiplied by an exchange ratio equal
to the relative fair values of Engenio and LSI stock on the
exchange date. The exchange program resulted in
$3.9 million of deferred stock compensation which is being
amortized on a straight-line basis over the vesting period of
the new awards of approximately 3 to 3.5 years.
Amortization expense in 2005 was approximately $0.3 million.
Stock option exchange program. On August 20, 2002,
the Company filed with the Securities and Exchange Commission an
offer to exchange stock options outstanding under the 1991 Plan
and the 1999 Plan for new options. Under the exchange offer,
eligible employees had the opportunity to exchange eligible
stock options for the promise to grant new options under the
1999 Plan. Directors and executive officers of the Company were
not eligible to participate in this program. The exchange offer
expired on September 18, 2002, and the Company accepted
options to purchase an aggregate of 16,546,370 shares for
exchange. On March 20, 2003, the Company granted a new
option that covered two shares of LSI Logic common stock for
every three shares covered by an option that an employee had
elected to exchange. The exercise price per share of the new
options was equal to the fair market value of the Companys
common stock on the grant date. The Company granted options to
purchase 10,691,139 shares at an exercise price of
$5.06 per share. The exchange program did not result in the
recording of any compensation expense in the statement of
operations.
81
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
The following table summarizes the Companys stock options
for each of the years ended December 31, 2005, 2004 and
2003 (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
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,
|
|
|
67,733 |
|
|
$ |
14.57 |
|
|
|
69,166 |
|
|
$ |
15.17 |
|
|
|
57,065 |
|
|
$ |
18.24 |
|
Options canceled
|
|
|
(11,555 |
) |
|
|
(14.63 |
) |
|
|
(7,993 |
) |
|
|
(14.01 |
) |
|
|
(7,282 |
) |
|
|
(16.39 |
) |
Options granted
|
|
|
16,493 |
|
|
|
7.67 |
|
|
|
7,450 |
|
|
|
7.39 |
|
|
|
20,191 |
|
|
|
6.56 |
|
Options exercised
|
|
|
(2,053 |
) |
|
|
(5.68 |
) |
|
|
(890 |
) |
|
|
(5.87 |
) |
|
|
(808 |
) |
|
|
(5.94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31,
|
|
|
70,618 |
|
|
$ |
13.21 |
|
|
|
67,733 |
|
|
$ |
14.57 |
|
|
|
69,166 |
|
|
$ |
15.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31,
|
|
|
44,489 |
|
|
$ |
16.52 |
|
|
|
44,301 |
|
|
$ |
17.54 |
|
|
|
38,936 |
|
|
$ |
18.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2005, 2004 and 2003,
all options were granted at an exercise price equal to the
market value of the Companys common stock at the date of
grant.
Significant option groups outstanding as of December 31,
2005 are as follows (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding | |
|
Exercisable | |
|
|
| |
|
| |
|
|
|
|
Remaining | |
|
Weighted Average | |
|
|
|
Weighted Average | |
Options with Exercise |
|
Number of | |
|
Contractual | |
|
Exercise Price | |
|
Number of | |
|
Exercise Price | |
Prices Ranging from: |
|
Shares | |
|
Life (Years) | |
|
per Share | |
|
Shares | |
|
per Share | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.10 to $5.00
|
|
|
2,990 |
|
|
|
5.68 |
|
|
$ |
4.49 |
|
|
|
927 |
|
|
$ |
4.34 |
|
$5.01 to $10.00
|
|
|
34,972 |
|
|
|
6.03 |
|
|
|
7.31 |
|
|
|
14,443 |
|
|
|
7.53 |
|
$10.01 to $15.00
|
|
|
11,318 |
|
|
|
4.49 |
|
|
|
12.05 |
|
|
|
8,425 |
|
|
|
12.51 |
|
$15.01 to $20.00
|
|
|
8,281 |
|
|
|
4.40 |
|
|
|
17.20 |
|
|
|
7,637 |
|
|
|
17.26 |
|
$20.01 to $25.00
|
|
|
6,645 |
|
|
|
4.98 |
|
|
|
22.15 |
|
|
|
6,645 |
|
|
|
22.15 |
|
$25.01 to $30.00
|
|
|
2,697 |
|
|
|
3.85 |
|
|
|
29.25 |
|
|
|
2,697 |
|
|
|
29.25 |
|
$30.01 to $72.25
|
|
|
3,715 |
|
|
|
4.15 |
|
|
|
42.76 |
|
|
|
3,715 |
|
|
|
42.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,618 |
|
|
|
5.30 |
|
|
$ |
13.21 |
|
|
|
44,489 |
|
|
$ |
16.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards of LSI common stock granted during the
years ended December 31, 2005, 2004 and 2003 are as follows
(share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Weighted Average |
|
|
|
Weighted Average |
|
|
Number of |
|
Grant Date |
|
Number of |
|
Grant Date |
|
Number of |
|
Grant Date |
|
|
Shares |
|
Fair Value |
|
Shares |
|
Fair Value |
|
Shares |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards granted
|
|
|
2,125 |
|
|
$ |
6.32 |
|
|
|
892 |
|
|
$ |
6.75 |
|
|
|
|
|
|
$ |
|
|
Forfeitures of stock options and restricted stock awards
prior to vesting. During 2005, forfeitures were recorded
related to certain stock options assumed in connection with the
C-Cube acquisition that occurred in May 2001; certain restricted
shares issued in connection with the acquisition of Accerant in
May 2004 and certain restricted shares issued to employees of
the Company. During 2004, forfeitures were recorded related to
certain stock options assumed in connection with the Datapath
acquisition that occurred in July 2000 and
82
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
certain restricted shares issued in connection with the
acquisition of Velio in April 2004, the acquisition of Accerant
in May 2004 and restricted shares issued to employees of the
Company during 2004.
Stock purchase plans. The Company has Employee Stock
Purchase Plans under which rights are granted to all employees
to purchase shares of common stock at 85% of the lesser of the
fair market value of such shares at the beginning of a
12-month offering
period or the end of each six-month purchase period within such
an offering period. The maximum number of shares that can be
purchased in a single purchase period is 1,000 shares per
employee. Sales under the Employee Stock Purchase Plans in 2005,
2004 and 2003 were approximately 4.3 million,
5.0 million and 5.6 million shares of common stock at
an average price of $4.49, $4.60, and $4.85 per share,
respectively. In May 2004, the stockholders approved an increase
in the number of shares of common stock reserved for issuance
under the Companys Employee Stock Purchase Plan by
10 million shares. There were approximately 12 million
shares of common stock reserved for issuance under the Employee
Stock Purchase Plan as of December 31, 2005. The Employee
Stock Purchase Plan for employees in the United States (US
ESPP) includes an annual replenishment calculated at 1.15%
of the Companys common stock issued and outstanding at the
fiscal year end less the number of shares available for future
grants under the US ESPP. No shares have been added to the US
ESPP from the annual replenishment since January 2001.
Stock repurchase program. On July 28, 2000, the
Companys Board of Directors authorized a stock repurchase
program in which up to 5 million shares of the
Companys common stock were authorized to be repurchased in
the open market from time to time. There is no expiration date
for the program. There were no stock repurchases in 2005, 2004
or 2003. As of December 31, 2005, there are
3.5 million shares available for repurchase under this plan.
Stock purchase rights. In November 1988, the Company
implemented a plan to protect stockholders rights in the
event of a proposed takeover of the Company. The plan was
amended and restated in November 1998. Under the plan, each
share of the Companys outstanding common stock carries one
Preferred Share Purchase Right. Each Preferred Share Purchase
Right entitles 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 Preferred
Share Purchase Rights are redeemable by the Company and will
expire in 2008.
LSI 401(k) Defined Contribution Plan. Eligible employees
in the U.S. may participate in the LSI Logic
Corporation 401(k) Plan (LSI 401(k) Plan). The
Company provides a base matching contribution to employees of
100% of the first 2% of employee contributions. When the Company
achieves operating profitability during a quarter, as defined by
the Company, of 1% or greater of revenues, an additional
matching contribution of 50% of the next 3% of an
employees contribution is made during the following
quarter. Company contributions to the LSI 401(k) Plan were
$11 million, $12 million and $10 million during
2005, 2004 and 2003, respectively.
83
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
Note 11 Income Taxes
The provision for taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
(70 |
) |
|
$ |
3,815 |
|
|
$ |
8,679 |
|
|
State
|
|
|
451 |
|
|
|
615 |
|
|
|
600 |
|
|
Foreign
|
|
|
14,861 |
|
|
|
14,689 |
|
|
|
15,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,242 |
|
|
|
19,119 |
|
|
|
24,335 |
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
4,369 |
|
|
|
|
|
|
|
|
|
|
State
|
|
|
985 |
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
5,944 |
|
|
|
4,881 |
|
|
|
(335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,298 |
|
|
|
4,881 |
|
|
|
(335 |
) |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
26,540 |
|
|
$ |
24,000 |
|
|
$ |
24,000 |
|
|
|
|
|
|
|
|
|
|
|
The domestic and foreign components of income/(loss) before
income taxes and minority interest were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Domestic
|
|
$ |
(55,140 |
) |
|
$ |
(392,070 |
) |
|
$ |
(42,382 |
) |
Foreign
|
|
|
76,063 |
|
|
|
(47,429 |
) |
|
|
(242,004 |
) |
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes and minority interest
|
|
$ |
20,923 |
|
|
$ |
(439,499 |
) |
|
$ |
(284,386 |
) |
|
|
|
|
|
|
|
|
|
|
84
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
Significant components of the Companys deferred tax assets
and liabilities as of December 31, 2005 and 2004 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Tax credit carryovers
|
|
$ |
329,529 |
|
|
$ |
232,013 |
|
|
Net operating loss carryforwards
|
|
|
108,882 |
|
|
|
35,633 |
|
|
Future deductions for purchased intangible assets
|
|
|
82,352 |
|
|
|
85,043 |
|
|
Depreciation and amortization
|
|
|
65,531 |
|
|
|
116,192 |
|
|
Future deductions for reserves and other
|
|
|
50,214 |
|
|
|
51,163 |
|
|
Future deductions for inventory reserves
|
|
|
17,479 |
|
|
|
29,894 |
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
653,987 |
|
|
|
549,938 |
|
|
Valuation allowance
|
|
|
(649,220 |
) |
|
|
(539,233 |
) |
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
4,767 |
|
|
|
10,705 |
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Gain on unrealized investments
|
|
|
(2,394 |
) |
|
|
(6,228 |
) |
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$ |
2,373 |
|
|
$ |
4,477 |
|
|
|
|
|
|
|
|
Current and long-term net deferred taxes have been netted to the
extent they are in the same tax jurisdiction. Valuation
allowances reduce the deferred tax assets to the amount that,
based upon all available evidence, is more likely than not to be
realized. The deferred tax assets valuation allowance is
attributed to U.S. federal, state and certain foreign
deferred tax assets primarily consisting of reserves, other
one-time charges, purchased intangible assets, tax credit
carryovers and net operating loss carryovers that could not be
benefited under existing carry-back rules. Approximately
$102 million of the valuation allowance at
December 31, 2005 relates to tax benefits of stock option
deductions, which will be credited to equity if and when
realized.
As of December 31, 2005 and December 31, 2004, the
Company had net deferred tax liabilities of $2.4 million
and $6.2 million, respectively, associated with net
unrealized gains on available-for-sale securities, which are a
component of Accumulated Other Comprehensive Income. Due to the
uncertainty regarding the timing of the disposition of the
Companys available-for-sale securities, the Company does
not consider these deferred tax liabilities as a source of
future taxable income in determining net deferred tax assets.
At December 31, 2005, the Company had federal, state and
foreign net operating loss carryovers of approximately
$119 million, $276 million and $137 million,
respectively. The federal and state net operating losses will
expire beginning in 2005 through 2024. The foreign net operating
losses will expire beginning in 2009 through 2010. Approximately
$48 million of the federal net operating loss carryover and
$44 million of the state net operating loss carryover
relate to recent acquisitions and are subject to certain
limitations under the Internal Revenue Code of 1986, as amended,
Section 382. As of December 31, 2005, the Company had
tax credits of approximately $330 million, which will
expire beginning in 2006.
85
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
Differences between the Companys effective tax rate and
the federal statutory rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Federal statutory rate
|
|
$ |
7,324 |
|
|
|
35 |
% |
|
$ |
(153,825 |
) |
|
|
(35 |
)% |
|
$ |
(99,535 |
) |
|
|
(35 |
)% |
State taxes, net of federal benefit
|
|
|
294 |
|
|
|
1 |
% |
|
|
400 |
|
|
|
|
|
|
|
390 |
|
|
|
|
|
Foreign earnings taxed in the U.S.
|
|
|
29,904 |
|
|
|
143 |
% |
|
|
6,191 |
|
|
|
1 |
% |
|
|
59,539 |
|
|
|
21 |
% |
Benefit of net operating losses and deferred tax assets not
previously recognized
|
|
|
(11,067 |
) |
|
|
(53 |
)% |
|
|
(854 |
) |
|
|
|
|
|
|
(5,378 |
) |
|
|
(2 |
)% |
Change in valuation allowance from the correction of prior
period errors*
|
|
|
5,354 |
|
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference between U.S. and foreign tax rates
|
|
|
(3,206 |
) |
|
|
(15 |
)% |
|
|
35,148 |
|
|
|
8 |
% |
|
|
79,820 |
|
|
|
28 |
% |
State tax refund, net of federal affect
|
|
|
(2,837 |
) |
|
|
(14 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Release of foreign withholding taxes previously accrued
|
|
|
(2,500 |
) |
|
|
(12 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of federal income tax audit not previously accrued
|
|
|
2,345 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative minimum tax
|
|
|
302 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
8,679 |
|
|
|
3 |
% |
Nondeductible expenses
|
|
|
(14 |
) |
|
|
|
|
|
|
10,054 |
|
|
|
2 |
% |
|
|
7,055 |
|
|
|
3 |
% |
Net operating loss and future deductions not currently benefited
|
|
|
|
|
|
|
|
|
|
|
122,423 |
|
|
|
28 |
% |
|
|
19,590 |
|
|
|
7 |
% |
Foreign tax credits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,469 |
) |
|
|
(10 |
)% |
Research and development tax credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,905 |
) |
|
|
(6 |
)% |
Other
|
|
|
641 |
|
|
|
4 |
% |
|
|
4,463 |
|
|
|
1 |
% |
|
|
(2,786 |
) |
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
$ |
26,540 |
|
|
|
127 |
% |
|
$ |
24,000 |
|
|
|
5 |
% |
|
$ |
24,000 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
In 2005, the provision for income taxes was increased by a
$5.4 million charge related to the correction of an error
in a prior period associated with the carrying value of
$8.3 million in deferred tax liabilities that should have
been reclassified to goodwill upon adoption of
SFAS No. 142 Goodwill and Intangible
Assets in 2002. The deferred tax liabilities were instead
used as a reduction of the Companys required valuation
allowance in 2002. This was offset by tax-related liabilities of
$2.9 million originally recorded in connection with these
deferred tax balances which are no longer required. The Company
believes that this amount is not material to previously reported
financial statements and has concluded that correcting such
amounts in the fourth quarter of 2005 and the 2005 fiscal year,
as opposed to restating prior periods, is appropriate in the
circumstances. |
The Company paid/received (refunds) of $3 million,
$1 million and ($2 million) for income taxes in 2005,
2004 and 2003, respectively.
In 2005, the Internal Revenue Service (IRS) began an
income tax audit of the Companys 2002 federal income tax
return.
In 2004, the Inland Revenue Department of Hong Kong began an
income tax audit of certain foreign subsidiaries of the Company
for the years 1996 through 2000.
86
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
In 2003, the IRS began an income tax audit of the Companys
2001 federal income tax return. On February 16, 2005, the
Company received ratification from the IRS that its audit of the
2001 federal income tax return was closed as of that date. The
audit was finalized during the third quarter of 2005. As a
result of audit, the Company recorded a net income tax expense
of approximately $2.3 million.
Undistributed earnings of the Companys foreign
subsidiaries aggregate approximately $8 million at
December 31, 2005, and are indefinitely reinvested in
foreign operations or will be remitted free of additional tax.
Our Federal provision includes U.S. income tax on certain
foreign based income.
Note 12 Commitments and Contingencies
The Company leases the majority of its facilities, certain
non-manufacturing equipment and software under non-cancelable
operating leases, which expire through 2014. The facilities
lease agreements typically provide for base rental rates that
are increased at various times during the terms of the lease and
for renewal options at the fair market rental value. Future
minimum payments under the operating lease agreements for the
above-mentioned facilities, equipment and software are
$62 million, $33 million, $25 million,
$19 million, $15 million and $23 million for the
years ending December 31, 2006, 2007, 2008, 2009, 2010 and
thereafter, respectively.
Rental expense under all operating leases was $33 million,
$90 million and $121 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
The Company is a party to a variety of agreements pursuant to
which it may be obligated to indemnify others with respect to
certain matters. Typically, these obligations arise in
connection with licenses and other agreements, including those
for the sale of assets, under which the Company customarily
agrees to hold another party harmless against losses arising
from a breach of warranties, representations or covenants
related to such matters as title to assets sold, validity of
certain intellectual property rights, non-infringement of
third-party rights, and certain income tax-related matters. In
each of these circumstances, payment by the Company is typically
subject to the other party making a claim and their cooperation
with the Company pursuant to the procedures specified in the
particular agreement. These procedures usually allow the Company
to challenge the claims or, in case of an alleged breach of an
intellectual property representation or covenant, to control the
defense and settlement of any third-party claims. Further, the
Companys obligations under these agreements are usually
limited in terms of the actions that may be requested of the
Company (typically to replace or correct the products or
terminate the agreement with a refund to the other party),
duration and/or dollar amounts. In some instances, the Company
may have recourse against third parties and/or insurance
coverage with respect to the payments made by the Company.
87
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Balance at the beginning of the period
|
|
$ |
10,040 |
|
|
$ |
9,474 |
|
Accruals for warranties issued during the period
|
|
|
13,060 |
|
|
|
10,955 |
|
Accruals related to pre-existing warranties (including changes
in estimates)
|
|
|
(967 |
) |
|
|
(463 |
) |
Settlements made during the period (in cash or in kind)
|
|
|
(11,059 |
) |
|
|
(9,926 |
) |
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$ |
11,074 |
|
|
$ |
10,040 |
|
|
|
|
|
|
|
|
Standby letters of credit. At December 31, 2005 and
2004, the Company had outstanding standby letters of credit of
$2 and $5 million, respectively. These instruments are
off-balance sheet commitments to extend financial guarantees for
leases and certain self-insured risks, import/export taxes as
well as performance under contracts, and generally have one-year
terms. The fair value of the letters of credit approximates the
contract amount.
Purchase commitments. The Company maintains certain
purchase commitments primarily for raw materials with suppliers
and for some non-production items. Purchase commitments for
inventory materials are generally restricted to a forecasted
time-horizon as mutually agreed upon between the parties. This
forecasted time-horizon can vary among different suppliers. As
of December 31, 2005, total purchase commitments were
$270 million, which are due through 2008.
Legal Matters. In February 1999, a lawsuit alleging
patent infringement was filed in the United States District
Court for the District of Arizona by the Lemelson Medical,
Education & Research Foundation, Limited Partnership
(Lemelson) against 88 electronics industry
companies, including LSI. The case number is CIV990377PHXRGS.
The patents involved in this lawsuit are alleged to relate to
semiconductor manufacturing and computer imaging, including the
use of bar coding for automatic identification of articles. The
plaintiff has sought a judgment of infringement, an injunction,
treble damages, attorneys fees and further relief as the
court may provide. In September 1999, the Company filed an
answer denying infringement and raising affirmative defenses. In
addition, the Company asserted a counterclaim for declaratory
judgment of non-infringement, invalidity and unenforceability of
Lemelsons patents. In December 2005, Lemelson filed a
motion asking the Court to dismiss, with prejudice, all claims
related to the fourteen computer imaging patents. LSI did not
oppose the motion and the Court has indicated that those patents
will be dismissed, with prejudice. In October 2005, the court
issued a preliminary ruling on the claim construction of the
four remaining patents, following a hearing in December 2004. At
the Courts request, the parties have submitted objections
to the preliminary ruling. A final ruling on the claim
construction is anticipated to be issued; however, the Court has
not indicated when that will occur. No trial date has been set.
While the Company can give no assurances regarding the final
outcome of this lawsuit, the Company believes the allegations
made by Lemelson are without merit and is defending the action
vigorously.
The Company and its subsidiaries are parties to other litigation
matters and claims that are normal in the course of its
operations. The Company aggressively defends all legal matters
and does not believe, based on currently available facts and
circumstances, that the final outcome of these matters, taken
individually or as a whole, will have a material adverse effect
on the Companys consolidated results of operations and
financial condition. However, the pending unsettled lawsuits may
involve complex questions of fact and law and will likely
require the expenditure of significant funds and the diversion
of other resources to defend. From time to
88
LSI Logic Corporation
Notes to Consolidated Financial
Statements (Continued)
time the Company may enter into confidential discussions
regarding the potential settlement of such lawsuits; however,
there can be no assurance that any such discussions will occur
or will result in a settlement. Moreover, the settlement of any
pending litigation could require the Company to incur
substantial costs and, in the case of the settlement of any
intellectual property proceeding against the Company, may
require the Company to obtain a license under a third
partys intellectual property rights that could require
royalty payments in the future and the Company to grant a
license to certain of its intellectual property rights to a
third party under a cross-license agreement. The results of
litigation are inherently uncertain, and material adverse
outcomes are possible.
89
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of LSI Logic Corporation:
We have completed integrated audits of LSI Logic
Corporations 2005 and 2004 consolidated financial
statements and of its internal control over financial reporting
as of December 31, 2005, and an audit of its 2003
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement
schedule
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of LSI Logic
Corporation and its subsidiaries at December 31, 2005 and
2004, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Control Over Financial
Reporting appearing under Item 9A, that the Company
maintained effective internal control over financial reporting
as of December 31, 2005 based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control
Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
90
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
San Jose, California
March 15, 2006
91
Supplementary Financial Data
Interim Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter | |
|
|
| |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
450,007 |
|
|
$ |
481,292 |
|
|
$ |
481,716 |
|
|
$ |
506,235 |
|
Gross profit
|
|
|
190,267 |
|
|
|
211,761 |
|
|
|
210,205 |
|
|
|
220,203 |
|
Net income/(loss)
|
|
|
4,719 |
|
|
|
25,262 |
|
|
|
(73,394 |
) |
|
|
37,790 |
|
Basic income/(loss) per share:
|
|
$ |
0.01 |
|
|
$ |
0.06 |
|
|
$ |
(0.19 |
) |
|
$ |
0.10 |
|
Diluted income/(loss) per share:
|
|
$ |
0.01 |
|
|
|