e10vk
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, 2006
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OR
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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 .
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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
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(State or other jurisdiction
of
incorporation or organization)
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(IRS Employer
Identification No.)
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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
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Preferred Share Purchase Rights
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New York Stock Exchange
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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 (check one):
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 as of
July 2, 2006 (the last day of the Registrants second
quarter of 2006), based upon the closing price of the Common
Stock on June 30, 2006, as reported on the New York Stock
Exchange (the NYSE), was approximately
$2,852,702,182. 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, 2005 shown on their
Schedules 13G filed in February 2006. This determination of
affiliate status is not necessarily a conclusive determination
for other purposes.
As of February 23, 2007, the Registrant had
404,414,200 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:
Registrants Proxy Statement to be filed for
Registrants 2007 Annual Meeting of Stockholders to be held
on May 10, 2007.
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 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, LSI
Logic or the Company and referred to as
we, us and our) designs,
develops and markets complex, high-performance semiconductors
and storage systems. We are a leading provider of
silicon-to-system
solutions that are used at the core of products that create,
store and consume digital information. We offer a broad
portfolio of semiconductors, including custom and standard
product integrated circuits, for use in consumer applications,
high-performance storage controllers, enterprise hard disk
controllers and a wide range of communication devices. We also
offer external storage systems and software applications for
storage area networks.
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 growth opportunities in the information
storage and consumer markets, increasing associated research and
development investments, while redirecting investments from
non-core areas and ceasing further development of our
RapidChip®
product platform. Consistent with our increased focus on
storage, in March 2006 we also announced the cancellation of the
previously announced initial public offering of our storage
systems business, Engenio Information Technologies. In May 2006,
we sold our Gresham, Oregon manufacturing facility as part of
our strategy to transition to a fabless semiconductor
manufacturing model. In November 2006, we acquired StoreAge
Networking Technologies Ltd., a privately held company based in
Nesher, Israel that provides SAN storage management and
multi-tiered data protection software for enterprises. Also in
November 2006, we acquired Metta Technology, a privately held
company based in Pune, India that develops multimedia
system-on-chip
technology and related software for consumer electronics
products. On December 4, 2006, we announced our proposed
merger with Agere Systems Inc. (together with its subsidiaries
collectively referred to as Agere), as further
discussed in the Recent Developments section below.
The proposed merger with Agere supports our strategy to increase
our penetration of the information storage and consumer markets,
and also provides us with complementary capabilities and
products to more effectively address the enterprise networking
market.
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.
For the year ended December 31, 2006, revenues from the
Semiconductor segment were $1,223.1 million (approximately
62% of total consolidated revenues) and its income from
operations was $96.2 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, 2006, revenues from the
Storage Systems segment were $759.0 million (approximately
38% of total consolidated revenues) and its income from
operations was $62.1 million. In the Storage Systems
segment, we design, manufacture and sell enterprise storage
systems. 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. The
Storage Systems segment product offerings also include host bus
adapters, RAID adapters (redundant array of independent
disks), software and related products and services.
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
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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.
Recent
Developments
Proposed Merger with Agere. On
December 3, 2006, we entered into an Agreement and Plan of
Merger with Agere and we publicly announced the signing of the
merger agreement on December 4, 2006. Agere is a provider
of integrated circuit solutions for a variety of computing and
communications applications. Some of Ageres solutions
include related software and reference designs. Ageres
solutions are used in products such as hard disk drives, mobile
phones, high-speed communications systems and personal
computers. Agere also licenses its intellectual property to
others.
Pursuant to the terms and subject to the conditions set forth in
the merger agreement, Agere will become a wholly owned
subsidiary of LSI. Upon completion of the merger, each share of
Agere common stock that is outstanding at the effective time of
the merger will be converted into the right to receive
2.16 shares of LSI common stock. Each outstanding option to
purchase Agere common stock, whether or not then vested or
exercisable, shall be assumed by LSI and will become exercisable
for a number of shares of LSI common stock at an exercise price
adjusted to reflect the exchange ratio in the merger.
The completion of the proposed merger with Agere is subject to
various customary conditions, including (i) obtaining the
approval of the LSI and Agere stockholders, (ii) absence of
any applicable law prohibiting the merger, (iii) certain
regulatory approvals, (iv) subject to certain exceptions,
the accuracy of the representations and warranties of each
party, and (v) performance in all material respects by each
party of its obligations under the merger agreement. LSI has
scheduled a special meeting of its stockholders for Thursday,
March 29, 2007 to vote on a proposal to approve matters
related to the proposed merger. Agere has scheduled its 2007
annual meeting of stockholders for Thursday, March 29,
2007, at which Agere stockholders will vote on a proposal to
approve the proposed merger, among other things. Subject to
obtaining the approval of the LSI and Agere stockholders at
these meetings and the satisfaction of other closing conditions,
we expect to complete the merger soon after the stockholder
meetings.
We believe that the proposed merger with Agere presents a unique
opportunity to create a combined entity that will offer a
comprehensive set of building block solutions, including
semiconductors, systems and related software for storage,
networking and consumer electronics products, and that the
merger should allow us to deliver significant benefits to our
customers, stockholders and employees. We believe that the
proposed merger offers the following strategic and financial
benefits:
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Complementary Businesses. The products and
development capabilities of LSI and Agere are complementary, and
should enable the combined company to compete more effectively
in their target markets. The combined company should be stronger
than either company on its own, with greater breadth and depth
in storage and networking/communications product offerings and a
greater ability to develop new product offerings in these market
segments. In addition, the combined company is expected to
benefit from access to large growth markets, such as those
served by the mobile products business of Agere and the consumer
products business of LSI.
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Customers. The combined company is expected to
have deep relationships with many of the market-leading
customers in our chosen markets. We expect to improve our
ability to expand current customer relationships, and expect to
increase the penetration of new customer accounts. We believe
that the combination of the two companies product lines
and engineering resources should enable the combined company to
meet customer needs more effectively and to deliver more
complete solutions to our customers. In addition, we believe
that the larger sales organization, greater marketing resources
and financial strength of the combined company may lead to
improved opportunities for marketing the combined companys
products.
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Engineering Talent. The combined company will
have over 4,200 engineers, including over 1,700 that hold
masters or doctorate degrees, which should enable the combined
company to compete more effectively by developing innovative
products and delivering greater value to customers more rapidly
than either company could do on a stand-alone basis.
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Intellectual Property Portfolio. The combined
company will have over 10,000 pending and issued
U.S. patents, which will be one of the largest intellectual
property portfolios in the semiconductor industry. This
portfolio is expected to provide the combined company with
additional licensing opportunities.
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Reduction in Operating Costs. The combined
company is expected to realize substantial cost savings
beginning in 2007, with annual cost savings reaching at least
$125 million in 2008 from increased efficiencies in
manufacturing and operating expenses. We expect the combined
company to achieve benefits from exercising greater purchasing
power with its suppliers, and consolidation and reduction of
areas of overlap in operating expenses, including the expenses
of maintaining two separate public companies.
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Stronger Financial Position. The combined
company will have greater scale and financial resources. We
expect that this stronger financial position will improve the
combined companys ability to support product development
strategies; to respond more quickly and effectively to customer
needs, technological change, increased competition and shifting
market demand; and to pursue strategic growth opportunities in
the future, including acquisitions.
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Stock-for-Stock
Transaction with Fixed Exchange Ratio. The
stockholders of each of LSI and Agere will share in the benefits
expected from the synergies and cost savings the combined
company will generate. The fact that the merger consideration is
based on a fixed exchange ratio provides certainty as to the
number of shares of LSI common stock that will be issued to
Agere stockholders.
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In connection with the proposed merger with Agere, LSI has filed
a Registration Statement on
Form S-4
with the SEC, which registration statement includes a joint
proxy statement/prospectus, dated February 5, 2007, and
related materials to register the shares of LSI common stock to
be issued in the merger. The registration statement and the
joint proxy statement/prospectus contain important information
about LSI, Agere, the proposed merger and related matters.
Investors and security holders are urged to read the
registration statement and the joint proxy statement/prospectus
carefully. Investors and security holders can obtain free copies
of the registration statement and the joint proxy
statement/prospectus and other documents filed with the SEC by
LSI and Agere through the website maintained by the SEC at
www.sec.gov. In addition, free copies of the registration
statement and the joint proxy statement/prospectus and other
documents are also available on the Agere website at
www.agere.com and on the LSI website at
www.lsi.com. The registration statement, the joint proxy
statement/prospectus and other relevant documents may also be
obtained free of charge from Agere by directing such request to
Investor Relations, Agere Systems Inc., 1110 American Parkway
N.E., Allentown Pennsylvania 18109 and from LSI by directing
such request to Investor Relations, LSI Logic Corporation, 1621
Barber Lane, Milpitas, California 95035. The contents of the
websites referenced above are not deemed to be incorporated by
reference into this Annual Report on
Form 10-K,
the registration statement or the joint proxy
statement/prospectus. Agere, LSI and their respective officers,
directors and employees may be deemed to be participants in the
solicitation of proxies from their respective stockholders with
respect to the proposed merger. Information regarding the
interests of these officers, directors and employees in the
proposed merger is included in the joint proxy
statement/prospectus.
Announcement of Stock Repurchase Program. On
December 4, 2006, we announced that our board of directors
authorized a stock repurchase program of up to $500 million
worth of shares of our common stock. Our board of directors
terminated the stock repurchase program previously authorized by
the Board on July 28, 2000. The repurchases are expected to
be funded from available cash and short-term investments.
Pending Acquisition of SiliconStor, Inc. In
February 2007, we entered into an agreement to acquire
SiliconStor, Inc. (SiliconStor), a privately held
company that provides silicon solutions for enterprise storage
networks. SiliconStor is headquartered in Fremont, California
and has approximately 30 employees. At the closing of the
acquisition, we expect to pay approximately $55 million in
cash for SiliconStor. The closing of the acquisition is subject
to the satisfaction of customary closing conditions and is
expected to occur in the first quarter of 2007.
5
Business
Strategy
We focus our business growth opportunities in the information
storage, enterprise connectivity and consumer electronics
markets. Following completion of our proposed merger with Agere,
we also expect to be in a position to address growth
opportunities in semiconductor applications for the networking
market and the wireless handset portion of the consumer market.
Semiconductor
Business Strategy
Our objective is to continue our industry leadership in the
design, development and marketing of highly 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 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. We completed the sale of this facility to
Semiconductor Components Industries, LLC, a wholly owned
subsidiary of ON Semiconductor Corporation (ON
Semiconductor), on May 15, 2006. Since announcing our
intention to sell this facility, our wafer manufacturing
strategy has been to expand our working relationships with major
foundry partners and to adopt 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. If we complete our proposed merger with
Agere, we will acquire Ageres 51% equity interest in
Silicon Manufacturing Partners, a joint venture with Chartered
Semiconductor Manufacturing Ltd. that operates a semiconductor
wafer manufacturing facility in Singapore, as well as
Ageres assembly and test facilities 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 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 our 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
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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 or
acquire additional premium software management and hardware
system features to enhance reliability, data availability and
serviceability of our products. For example, in November 2006,
we acquired StoreAge Networking Technologies Ltd. (together with
its subsidiaries collectively referred to as
StoreAge), a privately held company based in Nesher,
Israel that provides SAN storage management and multi-tiered
data protection software for enterprises. We also intend to
expand our LSI Storage 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 extensive training, customized
go-to-market
campaigns, product positioning, marketing materials, competitive
analysis and product support infrastructure. We maintain 16
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
continue to add additional demonstration capabilities 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.
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7
Products
and Services
Semiconductor
Products
In our semiconductor components business, we design and develop
custom solutions and standard products to customers competing in
global storage and consumer markets. The proposed merger with
Agere would bring additional semiconductor products into our
portfolio, including those targeting the networking market and
the wireless handset portion of the consumer market.
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 include Fibre Channel, Serial-Attached SCSI
(SAS), Serial ATA (SATA) 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. In February 2007, we
entered into an agreement to acquire SiliconStor, a privately
held company that provides storage technology focused on the
SATA and SAS markets and is shipping patent-pending products
that improve the performance, reliability, and manageability of
SATA drives when used in a SAS environment.
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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, we have 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.
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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
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
Zeviotm
architecture.
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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. We have ceased further development
of our RapidChip product platform. The proposed merger with
Agere would bring additional semiconductor products into our
portfolio, including those targeting the networking market and
the wireless handset portion of the consumer market.
Storage
Systems 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 storage IC and
adapter products and our 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, SATA,
SCSI and SAS interfaces, along with fully featured software and
utilities for robust storage configuration and management.
In November 2006, we acquired StoreAge, which provides SAN
storage management and multi-tiered data protection software for
enterprises. This acquisition augmented our product offerings in
the storage systems area.
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 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.
9
Marketing
and Distribution
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.
Storage
Systems Marketing and Distribution
Our storage systems 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 Atlanta, Georgia; Boulder, Colorado; Dallas,
Texas; Chicago, Illinois; Houston, Texas; Los Angeles and
Irvine, California; New York, New York; Parsippany, New Jersey;
Reston, Virginia; Wichita, Kansas; Westborough, Massachusetts;
Raleigh, North Carolina; and Renton, Washington. We also market
our products internationally in China, France, Germany, Italy,
Japan, Singapore, Sweden and the United Kingdom.
Customers
In 2006, International Business Machines Corporation and Seagate
Technology accounted for approximately 19% and 12%,
respectively, of our consolidated revenues. No other customer
accounted for more than 10% of our consolidated revenues in
2006. 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.
10
We expect that we will continue to derive a substantial portion
of our revenue from a highly concentrated customer base
following completion of our proposed merger with Agere.
Semiconductor
Customers
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.
Storage
Systems Customers
We deliver our storage systems products to OEMs who
independently resell or distribute OEM-branded or Engenio
co-branded products. The products sold by our OEM partners may
be integrated by the OEM with value-added services, hardware and
software and delivered as differentiated complete storage
solutions to enterprises. Our OEM partners receive basic
training services to enhance their abilities to sell and support
our products. After receiving our basic training services, most
of our OEM partners independently market, sell and support our
products, requiring limited ongoing product support from us. We
also assist some of our OEM partners with additional resources
that may provide tailored, account-specific education, training
and sales and marketing assistance, allowing these OEM partners
to leverage our storage products and industry expertise.
Manufacturing
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. Prior to 2006, our wafer manufacturing strategy included
a combination of internal and external fabrication. Prior to the
sale of our Gresham, Oregon semiconductor manufacturing facility
in May 2006, the majority of our wafers were fabricated
internally at the Gresham facility 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 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. We completed the sale
of this facility to ON Semiconductor on May 15, 2006. Since
announcing our intention to sell this facility, our wafer
manufacturing strategy has been to expand our working
relationships with major foundry partners and to adopt a roadmap
leading to the production of advanced semiconductors utilizing
65-nanometer and below process technology on
300-mm or
12-inch
wafers. If we complete our proposed merger with Agere, we will
acquire Ageres 51% equity interest in Silicon
Manufacturing Partners, a joint venture with Chartered
Semiconductor Manufacturing Ltd. that operates a semiconductor
wafer manufacturing facility in Singapore.
11
Our final assembly and test operations are performed by
independent subcontractors in South Korea, Taiwan, the
Philippines, Malaysia, Thailand and China. We have 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. Upon completion of our
proposed merger with Agere, we will acquire the assembly and
test facilities in Asia that are owned by Agere.
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.
We own a manufacturing facility in Wichita, Kansas at which we
assemble and test complete storage systems and
sub-assemblies
configured from modular components, such as our storage
controller modules and disk drive enclosure modules. We have
maintained ISO-9001 certification at our Wichita, Kansas
manufacturing facility since April 1992 and this facility has
been certified as ISO-9001:2000 compliant since October 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. We also use third
party contract manufacturers for manufacturing in Mexico.
Backlog
Semiconductor
Backlog
In the Semiconductor segment, we generally do not have long-term
volume purchase contracts with our customers. Instead, customers
place purchase orders that are subject to acceptance by us. The
timing of the design activities for which we receive payment and
the placement of orders included in our backlog at any
particular time is generally within the control of the customer.
For example, there could be a significant time lag between the
commencement of design work and the receipt of a purchase order
for the units of a developed product. Also, customers may from
time to time revise delivery quantities or delivery schedules to
reflect their changing needs. For these reasons, our backlog as
of any particular date may not be a meaningful indicator of
future annual sales.
Storage
Systems Backlog
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.
12
Competition
Semiconductor
Competitors
The semiconductor industry is intensely competitive and
characterized by constant technological change, rapid product
obsolescence, evolving industry standards and price erosion.
Many of our competitors are larger, diversified companies with
substantially greater financial resources. Some of our
competitors are also customers who have internal semiconductor
design and manufacturing capacity. We also compete with smaller
and emerging companies whose strategy is to sell products into
specialized markets or to provide only a portion of the products
and services that we offer, 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., Advanced Micro Devices Inc., Broadcom
Corporation, Genesis Microchip, Inc., Intel Corporation, Marvell
Technology Group, Ltd., MediaTek Incorporated, NEC Corporation,
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.
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It is possible that our competitors will develop 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 to reduce the costs of products through
product design changes, manufacturing process changes, yield
improvements and procurement of wafers from outsourced
manufacturing partners.
Storage
Systems Competitors
The market for our storage system products is highly
competitive, rapidly evolving and subject to changing
technology, customer needs and new product introductions. We
compete with products from storage system and component
providers such as Adaptec, Inc., Dot Hill Systems Corporation,
Infortrend Technology Inc., XIOtech Corporation, Xyratex Group
Limited. We also compete with the internal storage divisions of
existing and potential channel customers as well as with large
well-capitalized storage system companies such as EMC
Corporation, Hitachi Data Systems and Network Appliance, Inc.
with respect to sales to OEM customers.
The principal 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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13
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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.
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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
currently have more than 4,500 pending and issued
U.S. patents and additional pending and issued foreign
patents, some of which are in the Semiconductor segment and some
of which are in the Storage Systems segment. 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. Upon completion of our
proposed merger with Agere, we will substantially increase the
size and breadth of our intellectual property portfolio. We
expect that the combined company will have more than 10,000
issued and pending U.S. patents. Agere also derives revenue
and income from licensing its intellectual property to other
companies, and we expect the combined company to continue this
intellectual property licensing business in the future.
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 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
14
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 have ceased further development of our
RapidChip product platform.
In the United States, we operate R&D facilities in
California, Colorado, Georgia, Kansas, Maryland, Minnesota,
Oregon, Texas and selected other states. Internationally, we
have facilities in Canada, China, Dubai, Germany, India, Israel,
Italy, Russia, Taiwan, and the United Kingdom. During 2005 and
2006, 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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Year
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Amount
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Percent of Revenue
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2006
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$
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413,432
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21%
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2005
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$
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399,685
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21%
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2004
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$
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427,805
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25%
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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.
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
This information is included in Note 8 (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 conduct a
significant amount of activity outside of the United States, and
are exposed to legal, business, political and economic risks
associated with our international operations, and
(2) the section in Part II, Item 7A, entitled
Quantitative and Qualitative Disclosures about Market
Risk 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. We offer
products that comply with the requirements of the European Union
15
Restriction of Hazardous Substance Directive
2002/95/EC
(RoHS Directive) that was implemented on July 1, 2006 and
other international electronic equipment environmental
regulations. 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.
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Employees
As of December 31, 2006, we had 4,010 full-time
employees.
Our future success depends upon the continued service of our key
technical and management personnel and upon our ability to
continue to attract and retain qualified employees, particularly
those highly skilled design, process and test engineers involved
in the development of new products and processes. We currently
have favorable employee relations, but the competition for
technical personnel is intense, and the loss of key employees or
the inability to hire such employees when needed could have a
material adverse impact on our business and financial condition.
Seasonality
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 revenues in the second half of the year, although
we did not experience this trend in the second half of 2006 with
our consumer products.
We are subject to a number of risks. Some of the risks that
we face are endemic to the semiconductor industry, but the fact
that certain risks are endemic to our industry does not lessen
the significance of these risks. You should carefully consider
all of the following risk factors and the other information in
this Annual Report on
Form 10-K
in evaluating our business.
We are subject to a number of risks associated with our
pending merger with Agere. On December 3, 2006, we entered
into a merger agreement with Agere and we publicly announced the
signing of the merger agreement on December 4, 2006.
Pursuant to the terms and subject to the conditions set forth in
the merger agreement, at the effective time of the proposed
merger a wholly owned subsidiary of LSI will merge with and into
Agere, with Agere continuing as the surviving corporation of the
merger and becoming a wholly-owned subsidiary of LSI. Upon
completion of the merger, each share of Agere common stock that
is outstanding at the effective time of the merger will be
converted into the right to receive 2.16 (the Exchange
Ratio) shares of common stock of LSI. Each outstanding
option to purchase Agere common stock, whether or not then
vested or exercisable, shall be assumed by LSI and will be
exercisable for a number of shares of LSI common stock at an
exercise price adjusted to reflect the Exchange Ratio. The
completion of the proposed merger is subject to various
customary conditions, including (i) obtaining the approval
of the LSI and Agere stockholders, (ii) absence of any
applicable law prohibiting the merger, (iii) certain
regulatory approvals, (iv) subject to certain exceptions,
the accuracy of the representations and warranties of each
party, and (v) performance in all material respects by each
party of its obligations under the merger agreement. Our pending
merger with Agere is described in detail in the Registration
Statement on
Form S-4
that we have filed with the SEC in connection with the merger
and in the joint proxy statement/prospectus included in such
registration statement. You should read and consider the
information in such registration statement and joint proxy
statement/prospectus.
As a result of the many risks that we face, our business,
financial condition 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.
16
Please consider the following risk factors when you read
forward-looking statements elsewhere in this Annual
Report on
Form 10-K
and in the information 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.
Risk
Factors Relating to our Proposed Merger with Agere
The
issuance of shares of LSI common stock to Agere stockholders in
the proposed merger with Agere will substantially reduce the
percentage interests of LSI stockholders.
If the proposed merger with Agere is completed, we expect that
(i) approximately 365.8 million shares of LSI common
stock would be issued to Agere stockholders, (ii) upon
exercise of assumed equity awards, up to approximately
59.7 million additional shares will be issued to holders of
assumed options and restricted stock units and (iii) an
additional 23.6 million shares will be issuable upon
conversion of Ageres outstanding convertible notes. Based
on the number of shares of LSI and Agere common stock
outstanding on January 31, 2007, Agere stockholders before
the merger with Agere will own, in the aggregate, approximately
48% of the fully diluted shares of LSI common stock immediately
after the merger with Agere, excluding shares issuable upon
conversion of Ageres outstanding convertible notes. The
issuance of shares of LSI common stock to Agere stockholders in
the merger and to holders of assumed options and restricted
stock units will cause a significant reduction in the relative
percentage interest of current LSI stockholders in earnings,
voting, liquidation value and book and market value.
The
proposed merger with Agere is subject to the receipt of consents
and approvals from government entities that may impose
conditions that could have an adverse effect on LSI or Agere or
could cause abandonment of the merger.
Completion of the proposed merger with Agere is conditioned upon
the making of certain filings with and notices to, and the
receipt of consents, orders and approvals from, various local,
state, federal and foreign governmental entities. Certain of
these consents, orders and approvals will involve the relevant
governmental entitys consideration of the effect of the
merger on competition in various jurisdictions.
The reviewing authorities may not permit the proposed merger
with Agere at all or may impose restrictions or conditions on
the merger that may seriously harm the combined company if the
merger is completed. These conditions could include a complete
or partial license, divestiture, spin-off or the holding
separate of assets or businesses. Either LSI or Agere may refuse
to complete the merger if restrictions or conditions are
required by governmental authorities that would materially
adversely impact the combined companys results of
operations or the benefits anticipated to be derived by the
combined company. Any delay in the completion of the merger
could diminish the anticipated benefits of the merger or result
in additional transaction costs, loss of revenue or other
effects associated with uncertainty about the transaction.
LSI and Agere also may agree to restrictions or conditions
imposed by antitrust authorities in order to obtain regulatory
approval, and these restrictions or conditions could harm the
combined companys operations. No additional stockholder
approvals are expected to be required for any decision by LSI or
Agere, after the proposed annual meeting of Agere stockholders
and the proposed special meeting of LSI stockholders, to agree
to any terms and conditions necessary to resolve any regulatory
objections to the merger.
In addition, during or after the statutory waiting periods, and
even after completion of the proposed merger with Agere,
governmental authorities could seek to block or challenge the
merger as they deem necessary or desirable in the public
interest. In addition, in some jurisdictions, a competitor,
customer or other third party could initiate a private action
under the antitrust laws challenging or seeking to enjoin the
merger, before or after it is completed. We may not prevail, or
may incur significant costs, in defending or settling any action
under antitrust laws.
17
The
proposed merger with Agere may not be completed, and any delay
in completing the proposed merger with Agere may significantly
reduce the benefits expected to be obtained from the
merger.
In addition to the required regulatory clearances and approvals,
the proposed merger with Agere is subject to a number of other
conditions beyond the control of LSI and Agere that may prevent,
delay or otherwise materially adversely affect its completion.
We cannot predict whether and when these other conditions will
be satisfied. Further, the requirements for obtaining the
required clearances and approvals could delay the completion of
the merger for a significant period of time or prevent it from
occurring. Any delay in completing the merger may significantly
reduce the synergies and other benefits that we expect to
achieve if we successfully complete the merger within the
expected timeframe and integrate our businesses.
Customer
uncertainties related to the proposed merger with Agere could
adversely affect our business, revenues and gross
margins.
In response to the announcement of the proposed merger with
Agere or due to ongoing uncertainty about the merger, customers
of LSI or Agere may delay or defer purchasing decisions or elect
to switch to other suppliers. In particular, prospective
customers could be reluctant to purchase the products and
services of LSI, Agere or the combined company due to
uncertainty about the direction of the combined companys
offerings and willingness to support existing products. To the
extent that the merger creates uncertainty among those persons
and organizations contemplating purchases such that one large
customer, or a significant group of smaller customers, delays,
defers or changes purchases in connection with the planned
merger, the revenues of LSI, Agere or the combined company would
be adversely affected. Customer assurances may be made by LSI
and Agere to address their customers uncertainty about the
direction of the combined companys product and related
support offerings, which may result in additional obligations of
LSI, Agere or the combined company. In addition, the
announcement of the merger may cause prospective licensees of
Ageres intellectual property to delay or defer licensing
decisions, resulting in a decline in Ageres licensing
revenues, which could have a significant impact on the
profitability of Agere and the combined company. Quarterly
revenues and net earnings of LSI, Agere or the combined company
could be substantially below expectations of market analysts and
a decline in the companies respective stock prices could
result.
Provisions
of the merger agreement may deter alternative business
combinations and could negatively affect our stock price if the
merger agreement is terminated in certain
circumstances.
The merger agreement prohibits LSI and Agere from soliciting,
initiating, encouraging or facilitating certain alternative
acquisition proposals with any third party, subject to
exceptions set forth in the merger agreement. The merger
agreement also provides for the payment by LSI or Agere of a
termination fee of $120 million if the merger agreement is
terminated in certain circumstances in connection with a
competing third-party acquisition proposal for one of the
companies. These provisions limit our ability to pursue offers
from third parties that could result in greater value to our
stockholders. The obligation to pay the termination fee also may
discourage a third party from pursuing an alternative
acquisition proposal. If the merger is terminated and we
determine to seek another business combination, we can not
assure you that we will be able to negotiate a transaction with
another company on terms comparable to the terms of the merger,
or that we will avoid incurring fees associated with the
termination of the merger agreement.
In the event the merger is terminated by LSI or Agere in
circumstances that obligate either party to pay the termination
fee to the other party, including where either party terminates
the merger agreement because the other partys board of
directors withdraws its support of the merger, our stock price
may decline.
If the
proposed merger with Agere is not completed, we will have
incurred substantial costs that may adversely affect our results
of operations and the market price of our common
stock.
If the proposed merger with Agere is not completed, the price of
our common stock may decline to the extent that the current
market prices of our common stock reflect a market assumption
that the merger will be completed. In addition, we have incurred
and will incur substantial costs in connection with the proposed
merger. These costs are primarily associated with the fees of
attorneys, accountants and our financial advisor. In addition,
we have
18
diverted significant management resources in an effort to
complete the proposed merger and we are subject to restrictions
contained in the merger agreement on the conduct of our
business. If the merger is not completed, we will have incurred
significant costs, including the diversion of management
resources, for which we will have received little or no benefit.
Also, if the merger is not completed under certain circumstances
specified in the merger agreement, we may be required to pay a
termination fee of $120 million.
In addition, if the proposed merger with Agere is not completed,
we may experience negative reactions from the financial markets
and our suppliers, customers and employees. Each of these
factors may adversely affect the trading price of our common
stock and our results of operations.
Risk
Factors Relating to our Business and Risk Factors Relating to
the Business of the Combined Company if our Proposed Merger with
Agere is completed
We may
fail to realize the benefits expected from the proposed merger
with Agere, which could adversely affect the value of our common
stock.
The proposed merger involves the integration of LSI and Agere,
two companies that have previously operated independently. We
entered into the merger agreement with the expectation that,
among other things, the proposed merger would enable us to
consolidate support functions, leverage our research and
development, patents and services across a larger base, and
integrate our workforces to create opportunities to achieve cost
savings and to become a stronger and more competitive company.
Although we expect significant benefits to result from the
proposed merger, there can be no assurance that the combined
company will actually realize these or any other anticipated
benefits of the merger.
The value of our common stock following completion of the
proposed merger may be affected by the ability of the combined
company to achieve the benefits expected to result from the
merger. LSI and Agere currently operate in 20 countries, with a
combined workforce of approximately 9,100 employees. Achieving
the benefits of the merger will depend in part upon meeting the
challenges inherent in the successful combination and
integration of global business enterprises of the size and scope
of LSI and Agere. The challenges involved in this integration
include the following:
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Demonstrating to customers of LSI and Agere that the merger will
not result in adverse changes to the ability of the combined
company to address the needs of customers or the loss of
attention or business focus;
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Coordinating and integrating independent research and
development teams across technologies and product platforms to
enhance product development while reducing costs;
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Combining product offerings;
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Consolidating and integrating corporate, information technology,
finance, and administrative infrastructures;
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Coordinating sales and marketing efforts to effectively position
the capabilities of the combined company and the direction of
product development; and
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Minimizing the diversion of management attention from important
business objectives.
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If the combined company does not successfully manage these
issues and the other challenges inherent in integrating
businesses of the size and complexity of LSI and Agere, then the
combined company may not achieve the anticipated benefits of the
proposed merger and our revenues, expenses, operating results
and financial condition could be materially adversely affected.
For example, goodwill and other intangible assets could be
determined to be impaired, which could adversely affect our
financial results of operations. The successful integration of
the LSI and Agere businesses is likely to require significant
management attention both before and after the completion of the
proposed merger, and may divert the attention of our management
from business and operational issues.
19
We
must attract and retain key employees in a highly competitive
environment; uncertainties associated with the proposed merger
with Agere may cause a loss of employees and may otherwise
materially adversely affect the businesses of LSI and Agere, and
the future business and operations of the combined
company.
Our success depends in part upon our ability to retain key
employees. In some of the fields in which we operate, there are
only a limited number of people in the job market who possess
the requisite skills. We have experienced difficulty in hiring
and retaining sufficient numbers of qualified engineers in parts
of our business. Current and prospective employees of LSI and
Agere may experience uncertainty about their post-merger roles
with the combined company following the proposed merger. This
may materially adversely affect our ability to attract and
retain key management, sales, marketing, technical and other
personnel. In addition, key employees may depart because of
issues relating to the uncertainty and difficulty of integration
or a desire not to remain with us following the proposed merger.
The loss of services of any key personnel or the inability to
hire new personnel with the requisite skills could restrict our
ability to develop new products or enhance existing products in
a timely matter, to sell products to customers or to manage our
business effectively.
The
industries in which we operate are highly cyclical, and our
operating results may fluctuate.
We operate in the highly cyclical semiconductor device and
storage systems industries. These industries are characterized
by wide fluctuations in product supply and demand. In the past,
the semiconductor industry has experienced significant
downturns, often in connection with, or in anticipation of,
excess manufacturing capacity worldwide, maturing product cycles
and declines in general economic conditions. Even if demand for
our products remains constant, the availability of additional
excess production capacity in the semiconductor industry may
create competitive pressures that can degrade pricing levels and
reduce our revenues.
General
economic weakness and geopolitical factors may harm our
operating results and financial condition.
Our results of operations are, and the results of operations of
the combined company after the proposed merger with Agere will
be, dependent to a large extent upon the global economy.
Geopolitical factors such as terrorist activities, armed
conflict or global health conditions that adversely affect the
global economy may adversely affect our operating results and
financial condition.
We are
dependent upon a limited number of customers.
A limited number of customers will account for a substantial
portion of our revenues. For LSIs most recent fiscal year
ended December 31, 2006, International Business Machines
Corporation and Seagate Technology represented approximately 19%
and 12%, respectively, of LSIs consolidated revenues. If
any of our key customers were to decide to significantly reduce
or cancel its existing business, our operating results and
financial condition could be adversely affected. Because many of
our products have long product design and development cycles, it
may be difficult for us to replace key customers who reduce or
cancel existing business. In addition, we may not win new
product designs from major existing customers, major customers
may make significant changes in scheduled deliveries, or there
may be declines in the prices of products sold to these
customers, and our business may be adversely affected if any of
these events were to occur.
We
depend upon independent foundry subcontractors to manufacture
our semiconductor products; accordingly, any failure to secure
and maintain sufficient foundry capacity could materially and
adversely affect our business.
Since selling our Gresham, Oregon semiconductor manufacturing
facility in May 2006, we have relied entirely on independent
foundry subcontractors to manufacture our semiconductor
products. Because we rely on third party manufacturing
relationships, we face the following risks:
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a manufacturer may be unwilling to devote adequate capacity to
production of our products or may be unable to produce our
products;
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a manufacturer may not be able to develop manufacturing methods
appropriate for our products;
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manufacturing costs may be higher than planned;
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product reliability may decline;
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a manufacturer may not be able to maintain continuing
relationships with our suppliers; and
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we may have reduced control over delivery schedules, quality,
manufacturing yields and costs of products.
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If any of these risks were to be realized, we could experience
an interruption in supply or an increase in costs, which could
adversely affect our results of operations.
The ability of an independent foundry subcontractor to provide
us with semiconductor devices is limited by its available
capacity and existing obligations. Availability of foundry
capacity has in the recent past been reduced from time to time
due to strong demand. Although we have entered into contractual
commitments to supply specified levels of products to some of
our customers, other than a wafer supply agreement we have with
ON Semiconductor, we do not have long-term volume purchase
agreements or significant guaranteed level of production
capacity with any of our third-party foundry suppliers. Foundry
capacity may not be available when needed at reasonable prices.
We place orders on the basis of our customers purchase
orders or our forecast of customer demand, and the foundries can
allocate capacity to the production of other companies
products and reduce deliveries to us on short notice. It is
possible that other foundry customers that are larger and better
financed than us, or that have long-term agreements with the
foundry suppliers, may induce foundries to reallocate capacity
to them. This reallocation could impair our ability to secure
the supply of components that we need. Also, our foundry
suppliers migrate capacity to newer,
state-of-the-art
manufacturing processes on a regular basis, which may create
capacity shortages for products designed to be manufactured on
older processes. In addition, the occurrence of a public health
emergency or natural disaster could further affect the
production capabilities of our manufacturers by resulting in
quarantines or closures. If any of our foundry suppliers
experiences a shortage in capacity, suffers any damage to its
facilities due to earthquakes or other natural disasters,
experiences power outages, encounters financial difficulties or
experiences any other disruption of foundry capacity, we may
need to qualify an alternative foundry supplier, which may
require several months. As a result of all of these factors and
risks, we can not provide any assurances that any foundries will
be able to produce integrated circuits with acceptable
manufacturing yields, or that foundries will be able to deliver
enough semiconductor devices to us on a timely basis, or at
reasonable prices.
We
operate in intensely competitive markets.
Each of LSI and Agere derive significant revenue from the sale
of integrated circuits, and LSI also operates in the Storage
Systems segment. These industry segments are intensely
competitive and competition is expected to increase as existing
competitors enhance their product offerings and as new
participants enter the market. The competitors of LSI and Agere
include many large domestic and foreign companies that have
substantially greater financial, technical and management
resources than LSI or Agere. Several major diversified
electronics companies offer custom solutions
and/or other
standard products that are competitive with the products of LSI
and Agere. Other competitors are specialized, rapidly growing
companies that sell products into the same markets that LSI or
Agere target or that the combined company will target. Some of
our customers may also design and manufacture products that will
compete with our products. We can not provide any assurances
that the price and performance of our products will be superior
relative to the products of our competitors.
Increased competition may negatively affect our pricing, margins
and revenues. For example, competitors with greater financial
resources may be able to offer lower prices than us, or they may
offer additional products, services or other incentives that we
may not be able to match. Competitors may be in a stronger
position than us to respond quickly to new technologies and may
be able to undertake more extensive marketing campaigns. They
may also make strategic acquisitions or establish cooperative
relationships among themselves or with third parties to increase
their ability to gain market share. In addition, competitors may
sell commercial quantities of products before we do so,
establishing market share and creating a market position that we
may not be able to overcome once we introduce similar products
in commercial quantities.
21
Our
target markets are characterized by rapid technological
change.
The industry segments in which we currently operate, and in
which the combined company will operate, are characterized by
rapid technological change, changes in customer requirements,
limited ability to accurately forecast future customer orders,
frequent new product introductions and enhancements, short
product cycles and evolving industry standards. We believe that
our future success will depend, in part, upon our ability to
improve on existing technologies and to develop and implement
new ones, as well as upon our ability 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 successfully implement new process technologies or to
achieve volume production of new products at acceptable yields,
our operating results and financial condition may be adversely
affected. In addition, if we fail to make sufficient investments
in research and development programs in order to develop new and
enhanced products and technologies, or if we focus on
technologies that do not become widely adopted, new technologies
could render our current and planned products obsolete,
resulting in the need to change the focus of our research and
development and product strategies and disrupting our business
significantly.
In addition, the emergence of markets for integrated circuits
may be affected by factors beyond our control. In particular,
products are designed to conform to current specific industry
standards. Our customers may not adopt or continue to follow
these standards, which would make our products less desirable to
customers, and could negatively affect sales. Also, competing
standards may emerge that are preferred by our customers, which
could reduce sales and require us to make significant
expenditures to develop new products. To the extent that we are
not able to effectively and expeditiously adapt to new
standards, our business may be negatively affected.
Order
or shipment cancellations or deferrals could cause our revenue
to decline or fluctuate.
We sell, and expect to continue to sell, a significant amount of
products pursuant to purchase orders that customers may cancel
or defer on short notice without incurring a significant
penalty. Cancellations or deferrals could cause us to hold
excess inventory, which could adversely affect our results of
operations. If a customer cancels or defers product shipments or
refuses to accept shipped products, we may incur unanticipated
reductions or delays in revenue. If a customer does not pay for
products in a timely manner, we could incur significant charges
against income, which could materially and adversely affect our
results of operations.
We
design and develop highly complex products that require
significant investments.
Our products are highly complex and significant time and expense
are expected to be associated with the design, development and
manufacture of our products. We expect to incur substantial
research and development costs to confirm the technical
feasibility and commercial viability of our products, which in
the end may not be successful.
Our
products may contain defects.
Our products may contain undetected defects, errors or failures.
These products can only be fully tested when deployed in
commercial applications and other equipment. Consequently,
customers may discover errors after the products have been
deployed. The occurrence of any defects, errors or failures
could result in:
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cancellation of orders;
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product returns, repairs or replacements;
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diversion of our resources;
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legal actions by customers or customers end users;
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increased insurance costs; and
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other losses to us or to customers or end users.
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Any of these occurrences could also result in the loss of or
delay in market acceptance of products and loss of sales, which
could negatively affect our business and results of operations.
As our products become even more complex in the future, this
risk may intensify over time and may result in increased
expenses.
22
Our
manufacturing facilities have high fixed costs and involve
highly complex and precise processes.
LSI has a storage systems manufacturing facility in Wichita,
Kansas. If our proposed merger with Agere is completed, we will
acquire Ageres assembly and test facilities and its 51%
equity interest in Silicon Manufacturing Partners, a fabrication
facility joint venture with Chartered Semiconductor
Manufacturing Ltd. Operations at any of these facilities may be
disrupted for reasons beyond our control, including work
stoppages, supply shortages, fire, earthquake, tornado, floods
or other natural disasters, any of which could have a material
adverse effect on our results of operations or financial
position. In addition, if we do not experience adequate
utilization of, or adequate yields at, our manufacturing
facilities, our results of operations may be adversely affected.
We confront challenges in the manufacturing process that require
us to: maintain a competitive manufacturing cost structure;
exercise stringent quality control measures to obtain high
yields; effectively manage subcontractors engaged in the wafer
fabrication, test and assembly of products; and update equipment
and facilities as required for leading edge production
capabilities.
The manufacture of our products involves highly complex and
precise processes, requiring production in a clean and tightly
controlled environment. In addition, the manufacture of
integrated circuits is a highly complex and technologically
demanding process. Although we work closely with our foundry
suppliers to minimize the likelihood of reduced manufacturing
yields, such 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 foundry suppliers
could result in product shortages or delays in product
shipments, which could seriously harm relationships with our
customers and materially and adversely affect our business and
results of operations.
Failure
to qualify our products or our suppliers manufacturing
lines may adversely affect our results of
operations.
Some customers will not purchase any products, other than
limited numbers of evaluation units, until they qualify the
manufacturing line for the product. We may not always be able to
satisfy the qualification requirements of these customers.
Delays in qualification may cause a customer to discontinue use
of non-qualified products and result in a significant loss of
revenue.
We
depend upon third-party subcontractors to assemble, obtain
packaging materials for, and test certain
products.
Third-party subcontractors located in Asia assemble, obtain
packaging materials for, and test certain products of LSI.
Although Agere owns and operates its own semiconductor assembly
and test facilities, even if the proposed merger with Agere is
consummated, the combined company will continue to depend upon
third-party subcontractors to assemble and test some of the
combined companys semiconductor products or to perform
other services for the combined company. To the extent that we
rely upon third-party subcontractors to perform these functions,
we will not be able to control directly product delivery
schedules and quality assurance. This lack of control may result
in product shortages or quality assurance problems that could
delay shipments of products or increase manufacturing, assembly,
testing or other costs. In addition, if these third-party
subcontractors are unable to obtain sufficient packaging
materials for products in a timely manner, we may experience
product shortages or delays in product shipments, which could
materially and adversely affect customer relationships and
results of operations. 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 to qualify assemblers and testers, we could experience
significant delays in product shipments if we are required to
find alternative assemblers or testers for such components.
A
widespread outbreak of an illness or other health issue could
negatively affect our manufacturing, assembly and test, design
or other operations.
A widespread outbreak of an illness such as avian influenza, or
bird flu, or severe acute respiratory syndrome, or SARS, could
adversely affect our operations as well as demand from
customers. A number of countries in the
23
Asia/Pacific region have experienced outbreaks of bird flu
and/or SARS.
As a result of such an outbreak, businesses can be shut down
temporarily and individuals can become ill or quarantined. After
the proposed merger with Agere, we will have operations in
Singapore, Thailand and China, countries where outbreaks of bird
flu and/or
SARS have occurred. If operations are curtailed because of
health issues, we may need to seek alternate sources of supply
for manufacturing or other services and alternate sources can be
more expensive. Alternate sources may not be available or may
result in delays in shipments to customers, which would affect
results of operations. In addition, a curtailment of design
operations could result in delays in the development of new
products. If customers businesses are affected by health
issues, they might delay or reduce purchases, which could
adversely affect results of operations.
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 storage systems at our Wichita, Kansas
facility. We purchase, and expect that we will continue to
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 obtain
other material inputs on a local basis. If we have difficulty in
obtaining parts or materials in the future from our existing
suppliers, alternative suppliers may not be available, or
suppliers may not 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.
If our
new product development and expansion efforts are not
successful, our results of operations may be adversely
affected.
LSI is currently developing, and we expect that we will continue
to develop, products in new areas and we may seek to expand into
additional areas in the future. Our efforts to develop products
and expand into new areas may not result in sales that are
sufficient to recoup our investment, and we may experience
higher costs than anticipated. For example, we may not be able
to manufacture products at a competitive cost, we may need to
rely on new suppliers or we may find that our development
efforts are more costly or time consuming than anticipated.
Development of new products often requires long-term forecasting
of market trends, development and implementation of new or
changing technologies and a substantial capital commitment.
There can be no assurance that any 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. In addition, our products may support protocols that
are not widely adopted and we may have difficulties entering
markets where competitors have strong market positions.
We may
engage in acquisitions and alliances giving rise to financial
and technological risks.
We may explore strategic acquisitions that build upon or expand
our library of intellectual property, human capital and
engineering talent, and increase our ability to fully address
the needs of our customers. For example, in addition to the
proposed merger with Agere, in November 2006 we acquired
StoreAge Networking Technologies Ltd., a privately held software
company based in Nesher, Israel, for approximately
$50 million in cash. Also in November 2006, we acquired
Metta Technology, a privately held company based in Pune, India
that develops multimedia
system-on-chip
technology and related software for consumer electronics
products. In February 2007, we entered into an agreement to
acquire SiliconStor, a privately held company that provides
silicon solutions for enterprise storage networks. SiliconStor
is headquartered in Fremont, California and has approximately 30
employees. At the closing of the acquisition, we expect to pay
approximately $55 million in cash for SiliconStor. The
closing of the acquisition is subject to the satisfaction of
customary closing conditions and is expected to occur in the
first quarter of 2007. Mergers and acquisitions of
high-technology companies bear inherent risks. No assurance can
be given that our previous acquisitions or future acquisitions
will be successful and will not materially adversely affect our
business, operating results or financial condition. Failure to
manage growth effectively or to integrate acquisitions could
adversely affect our operating results and financial condition.
In addition, we may make investments in companies, products and
technologies through strategic alliances and otherwise.
Investment
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activities often involve risks, including the need for timely
access to needed capital for investments and to invest in
companies and technologies that will contribute to the growth of
our business.
The
semiconductor industry is prone to intellectual property
litigation.
As is typical in the semiconductor industry, we are frequently
involved in disputes regarding patent and other intellectual
property rights. We have in the past received, and we may in the
future receive, communications from third parties asserting that
certain of our products, processes or technologies infringe upon
their patent rights, copyrights, trademark rights or other
intellectual property rights, and we may also receive claims of
potential infringement if we attempt to license intellectual
property to others. Defending these claims may be costly and
time consuming, and may divert the attention of management and
key personnel from other business issues. Claims of intellectual
property infringement also might require us to enter into costly
royalty or license agreements. We may not be able to obtain
royalty or license agreements on acceptable terms. Resolution of
whether any of our products or intellectual property has
infringed upon 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.
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, upon
our ability to protect our intellectual property. We will
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. It is
possible that competitors or other unauthorized third parties
may obtain, copy, use or disclose proprietary technologies and
processes, despite our efforts to protect our proprietary
technologies and processes. While we hold a significant number
of patents, there can be no assurances that any additional
patents will be issued. Even if new patents are issued, the
claims allowed may not be sufficiently broad to protect our
technology. In addition, any of LSI or Ageres existing
patents, and any future patents issued to us, may be challenged,
invalidated or circumvented. As such, any rights granted under
these patents may not provide us with meaningful protection. LSI
and Agere may not have, and in the future we may not have,
foreign patents or pending applications corresponding to its
U.S. patents and applications. Even if foreign patents are
granted, effective enforcement in foreign countries may not be
available. If our patents do not adequately protect our
technology, competitors may be able to offer products similar to
our products. Our competitors may also be able to develop
similar technology independently or design around our patents.
Some or all of LSIs and Ageres patents have in the
past been licensed and likely will in the future be licensed to
certain of our competitors through cross-license agreements.
A
decline in the revenue that we expect to derive from the
licensing of intellectual property could have a significant
impact on net income.
Agere currently generates significant revenue from, and if we
complete the proposed merger with Agere, we expect to generate
revenue from, the licensing of intellectual property. The
revenue generated from the licensing of Ageres
intellectual property has a high gross margin compared to the
revenue generated from the sale of other products currently sold
by Agere, and a decline in this licensing revenue could have a
significant impact on the profitability of the combined company.
The combined companys licensing revenue is expected to
come from a limited number of transactions and the failure to
complete one or more transactions in a quarter could have a
material adverse impact on revenue and profitability.
We
conduct a significant amount of activity outside of the United
States, and are exposed to legal, business, political and
economic risks associated with our international
operations.
We derive, and it is expected that we will continue to derive, a
substantial portion of our revenue from sales of products
shipped to locations outside of the United States. In addition,
we manufacture, and it is expected that we will continue to
manufacture, a significant portion of our products outside of
the United States and we are dependent upon
non-U.S. suppliers
for many parts and services. We may also pursue growth
opportunities in sales, design and
25
manufacturing outside of the United States. Operations outside
of the United States are subject to a number of risks and
potential costs that could adversely affect our revenue and
results of operations, including:
|
|
|
|
|
political, social and economic instability;
|
|
|
|
fluctuations in foreign currency exchange rates;
|
|
|
|
exposure to different legal standards, particularly with respect
to intellectual property;
|
|
|
|
natural disasters and public health emergencies;
|
|
|
|
nationalization of businesses and blocking of cash flows;
|
|
|
|
trade and travel restrictions;
|
|
|
|
imposition of governmental controls and restrictions;
|
|
|
|
burdens of complying with a variety of foreign laws;
|
|
|
|
import and export license requirements and restrictions;
|
|
|
|
unexpected changes in regulatory requirements;
|
|
|
|
foreign technical standards;
|
|
|
|
difficulties in staffing and managing international operations;
|
|
|
|
international trade disputes;
|
|
|
|
difficulties in collecting receivables from foreign entities or
delayed revenue recognition; and
|
|
|
|
potentially adverse tax consequences.
|
We may
rely on the capital markets
and/or bank
markets to provide financing.
We may rely on the capital markets
and/or bank
markets to provide financing for strategic acquisitions, capital
expenditures and other general corporate needs. As of
December 31, 2006, LSI had approximately $350 million
of convertible notes outstanding. We may need to seek additional
equity financing or debt financing from time to time.
Historically, we have been able to access the capital markets
and the bank markets when deemed appropriate, but we may not be
able to access these markets in the future on acceptable terms.
The availability of capital in these markets may be 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 operating performance, capital structure and
expected future performance will affect our ability to raise
capital. We believe that our current cash, cash equivalents,
short-term investments and expected future cash from operations
will be sufficient to fund our needs in the foreseeable future.
We
utilize indirect channels of distribution over which we will
have limited control.
Financial results could be adversely affected if our
relationships 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, there may
be 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 visibility with respect to
future business, thereby making it more difficult to accurately
forecast orders.
We may
not be able to collect all of our accounts receivable from
customers.
A majority of our trade receivables have been, and it is
expected that a majority of our trade receivables will continue
to be, derived from sales of products to large multinational
computer, communication, networking, storage and consumer
electronics manufacturers. We can not provide any assurances
that our accounts receivable balances will be paid on time or at
all.
26
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 us and
our competitors, and our stock is likely to be subject to
similar volatility in the future. Many of the markets from which
we expect to derive a substantial portion of our revenues are
highly cyclical, and we may experience declines in our revenue
that are primarily related to industry conditions in general and
not to our business or prospects. 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 the our securities in the future, these
factors, either individually or in the aggregate, could result
in significant variations in our stock price during any given
period of time. Fluctuations in our stock price may also affect
the price of outstanding convertible securities of Agere and
LSI, and the likelihood of the convertible securities being
converted into cash or equity. If our stock price is below the
conversion price of the Agere or LSI convertible notes on the
date of maturity, they may not convert into equity and we may be
required to redeem the outstanding convertible securities for
cash. However, in the event they do not convert into equity, we
believe that our cash position and expected future operating
cash flows will be adequate to meet these obligations as they
mature.
In the past, securities class action litigation often has been
brought against a company following periods of volatility in the
market price of its securities. Companies in technology
industries are particularly vulnerable to this kind of
litigation due to the high volatility of their stock prices.
Accordingly, we may in the future be the target of securities
litigation. Any securities litigation could result in
substantial costs and could divert the attention and resources
of our management.
Future
changes in financial accounting standards or practices or
existing taxation rules or practices may cause adverse
unexpected fluctuations and affect 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 if adopted. Once
implemented, these changes could result in material fluctuations
in our results of operations
and/or the
way in which such results of operations are reported. For
example, on January 1, 2006, we adopted
SFAS 123-R.
In accordance with the modified prospective transition method,
we began recognizing compensation expense for all share-based
awards granted on or after January 1, 2006, plus unvested
awards granted prior to January 1, 2006. The adoption of
SFAS 123-R
had a significant impact on our operating results as share-based
compensation expense is charged directly against reported
earnings. Numerous judgments and estimates are involved in the
calculation of this expense and changes to those estimates or
different judgments could have a significant effect on our
reported earnings.
Similarly, we are subject to taxation in the United States and a
number of foreign jurisdictions. Rates of taxation, definitions
of income, exclusions from income, and other tax policies are
subject to change over time. Changes in tax laws in a
jurisdiction in which we have reporting obligations could have a
material impact on our results of operations.
We
face uncertainties related to the effectiveness of internal
controls.
Public companies in the United States are required to review
their internal controls over financial reporting under
Section 404 of the Sarbanes-Oxley Act of 2002. It should be
noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute,
assurance that the objectives of the system are met. In
addition, the design of any control system is based in part upon
certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control
systems, there can be no assurance that any design will achieve
its stated goal under all potential future conditions,
regardless of how remote.
Although our management has determined, and our independent
registered public accounting firm has attested, that our
internal controls were effective as of the end of our most
recent fiscal year, there can be no assurance that our internal
control systems and procedures, or the integration of LSI and
Agere and their respective internal control systems and
procedures, will not result in or lead to a future material
weakness in our internal
27
controls, or 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 internal
controls over financial reporting would require management and
our independent public accounting firm to evaluate our internal
controls as ineffective. If 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 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 by us could emerge and the identification
and correction of these deficiencies or weaknesses could have a
material impact on our results of operations.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
We lease approximately 460,000 square feet of real property
in Milpitas, California for our corporate headquarters,
administration and engineering offices. These leases expire from
2010 to 2014.
In May 2006, we completed the sale of our formerly-owned
semiconductor manufacturing facility in Gresham, Oregon to ON
Semiconductor. We continue to own approximately 200 acres
of land in Gresham, Oregon.
We also own approximately 150,000 square feet of sales and
engineering office space and approximately 85 acres of
unimproved land in Fort Collins, Colorado; we have agreed to
sell approximately 58 acres of that unimproved land. We
also own approximately 180,000 square feet of sales and
engineering office space in Colorado Springs, Colorado. These
facilities are used by both our Semiconductor segment and our
Storage Systems segment. We also own our logistics center in
Tsuen Wan, Hong Kong, which consists of approximately 27,000
square feet.
In the Storage Systems segment, we own our manufacturing,
engineering and executive office site in Wichita, Kansas, which
includes approximately 330,000 square feet of space, and we
lease a facility in Boulder, Colorado, which consists of
approximately 50,000 square feet.
We also lease space for executive offices, design centers and
sales offices for our Semiconductor segment and Storage Systems
segment in Norcross, Georgia, Bracknell, United Kingdom and
Tokyo, Japan. In addition, we lease space for sales and
engineering offices and design centers for our Semiconductor
segment and our Storage Systems segment at various other
locations in North America, Europe, Canada, China, Dubai, India,
Israel, Japan, Korea, Russia, Singapore and Taiwan (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 (Commitments
and Contingencies 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
|
During the fourth quarter of 2006, no matter was submitted to a
vote of our security holders.
28
Executive
Officers of LSI
Our executive officers as of March 1, 2007 are set forth
below. Our executive officers are elected by and serve at the
discretion of our Board of Directors. The ages set forth below
for our executive officers are as of March 1, 2007.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Abhijit Y. Talwalkar
|
|
|
42
|
|
|
President and Chief Executive
Officer
|
Philip G. Brace
|
|
|
36
|
|
|
Senior Vice President, Corporate
Planning and Marketing
|
Philip W. Bullinger
|
|
|
42
|
|
|
Senior Vice President, Engenio
Storage Group
|
Donald J. Esses
|
|
|
55
|
|
|
Executive Vice President,
Worldwide Operations
|
Jon R. Gibson
|
|
|
60
|
|
|
Vice President, Human Resources
|
Andrew S. Hughes
|
|
|
41
|
|
|
Vice President, General Counsel
and Corporate Secretary
|
Bryon Look
|
|
|
53
|
|
|
Executive Vice President and Chief
Financial Officer
|
Umesh Padval
|
|
|
49
|
|
|
Executive Vice President, Consumer
Products Group
|
D. Jeffrey Richardson
|
|
|
42
|
|
|
Executive Vice President, Custom
Solutions Group
|
Flavio Santoni
|
|
|
48
|
|
|
Executive Vice President,
Worldwide Storage Sales and Marketing
|
William J. Wuertz
|
|
|
49
|
|
|
Senior Vice President, Storage
Components Group
|
Abhijit Talwalkar was appointed President and Chief Executive
Officer and elected to the Companys Board of Directors in
May 2005. Prior to joining LSI, 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
LSI 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 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 LSI in August 2005 as Senior Vice
President, Corporate Planning and Marketing. He joined LSI 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 in 1998 as part of LSIs
acquisition of Symbios, Inc. 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 of Senior Vice President of our Engenio Storage Group.
Donald J. Esses was named Executive Vice President, Worldwide
Operations in December 2003. He joined LSI 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.
29
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.
Andrew S. Hughes was named Vice President, General Counsel and
Corporate Secretary in May 2006. Mr. Hughes joined LSI in
2000 and was manager of LSIs commercial law group and
assistant corporate secretary prior to being appointed to his
current position. Prior to joining LSI, Mr. Hughes was
division counsel for Harris Corporation from 1998 to 2000.
Bryon Look was named Executive Vice President and Chief
Financial Officer in November 2000. Mr. Look joined LSI in
March 1997 as Vice President, Corporate Development and
Strategic Planning. Prior to joining LSI, 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 LSIs Broadband Entertainment Division,
a position he held since June 2001, when LSI 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.
D. Jeffrey Richardson joined LSI 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.
Flavio Santoni was named Executive Vice President, Storage Sales
and Marketing in October 2006. Mr. Santoni joined LSI in
February 2001 as Vice President of Worldwide Marketing for the
companys Engenio storage systems subsidiary, becoming
additionally responsible for its worldwide sales and customer
support operations in October 2001. In August 2004, he was named
senior vice president and was elected an LSI Logic corporate
officer in December 2005. Previously, Mr. Santoni was
Executive Vice President and Chief Operating Officer at Sutmyn
Storage Corporation and held various senior management positions
with Memorex Telex in the United States, United Kingdom and
Italy.
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
LSIs Storage Standard Products division, a position he
held since joining LSI in 1998 as part of LSIs acquisition
of Symbios, Inc. Symbios was a storage company.
There are no family relationships among any executive officers
and directors.
In connection with our proposed merger with Agere, we expect
that we will make changes in the composition and roles of
certain of our executive officers, subject to and effective as
of completion of the pending merger. Immediately following the
proposed merger with Agere, Abhijit Talwalker will continue to
serve as our President and Chief Executive Officer and Bryon
Look will continue to serve as our Chief Financial Officer.
Although the exact composition of our executive management team
following the proposed merger with Agere has not been finalized
as of the date of this Annual Report on
Form 10-K,
it is currently expected that Phil Brace, Phil Bullinger, Jon
Gibson, Jeff Hoogenboom (Executive Vice President, LSI Sales),
Andy Micallef (Executive Vice President, Global Operations at
Agere), Umesh Padval, Jean Rankin (Executive Vice President,
General Counsel and Secretary at Agere), Denis Regimbal
(Executive Vice President and General Manager, Mobility Division
at Agere), Jeff Richardson, Flavio Santoni and Rudy Stroh
(Executive Vice President and General Manager, Storage Division
at Agere) will serve as part of the post-merger executive
management team.
30
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our stock trades on the 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 2, 2006, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
High Low
|
|
|
High Low
|
|
|
|
|
First Quarter
|
|
$
|
11.56 8.16
|
|
|
$
|
6.47 5.02
|
|
|
|
Second Quarter
|
|
$
|
11.66 8.46
|
|
|
$
|
8.69 5.11
|
|
|
|
Third Quarter
|
|
$
|
9.06 7.46
|
|
|
$
|
10.48 9.12
|
|
|
|
Fourth Quarter
|
|
$
|
10.94 8.05
|
|
|
$
|
9.91 7.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
$
|
11.66 7.46
|
|
|
$
|
10.48 5.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 23, 2007, there were 3,193 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
currently anticipate paying any cash dividends to stockholders
in the foreseeable future.
Equity
Compensation Plan Information
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
(a)
|
|
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
|
|
Securities
|
|
|
|
Securities to be
|
|
|
(b)
|
|
|
Remaining Available
|
|
|
|
Issued upon
|
|
|
Weighted-average
|
|
|
for Future Issuance
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Under Equity
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Compensation Plans
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
and Rights
|
|
|
and Rights
|
|
|
Reflected in Column (a))
|
|
|
Equity compensation plans approved
by security holders(1)
|
|
|
23,321,780
|
|
|
$
|
12.94
|
|
|
|
62,498,682
|
(3)
|
Equity compensation plans not
approved by security holders(2)
|
|
|
35,338,159
|
|
|
$
|
11.28
|
|
|
|
15,094,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
58,659,939
|
|
|
$
|
11.94
|
|
|
|
77,593,397
|
|
|
|
(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 16,684,068 shares
remaining available for future issuance under this plan, of
which 9,000,000 shares were added to the plan by
stockholder approval in 2006. 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 (the 2003
Plan) was approved by stockholders in May 2003. Under this
plan, the Company may grant stock options or restricted stock to
employees, officers and consultants. There are
5,691,593 shares remaining available for future issuance
under this plan, including 1,910,227 shares reserved for
restricted stock awards that have been granted, but will not be
issued until the awards have vested. Stock options have an
exercise price that is no less than the fair market value of the
stock on the date of grant.
31
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, is generally 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 1991
Plan), the Company may grant stock options to employees,
officers and consultants, with an exercise price that is no less
than the fair market value of the stock on the date of grant.
The term of each option is determined by the Board of Directors
and, for options granted on or after February 12, 2004, the
term of the options is generally 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
(1995 Director Plan), new directors receive an
initial grant of options to purchase 30,000 shares of
common stock and directors receive 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 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.
|
|
(2) |
Equity compensation plans not previously approved by security
holders are the following:
|
(i) Options to purchase an aggregate of
4,348,969 shares with a weighted-average exercise price of
$11.99 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
1999 Plan), the Company may grant stock options to
its employees, excluding officers, with an exercise price that
is no less than the fair market value of the stock on the date
of grant. The term of each option is determined by the Board of
Directors and, for options granted on or after February 12,
2004, the term of the options is generally 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
(IESPP), rights are granted to LSI Logic employees
(excluding executive officers) outside of the United States to
purchase shares of common stock at 85% of the lesser of the fair
market value of such shares at the beginning of a
12-month
offering period or the end of each six-month purchase period
within such an offering period. There are 1,773,302 shares
remaining available for future issuance under this plan, of
which 1.0 million shares were added to the plan by
stockholder approval in 2006.
|
|
(3) |
Of the 62,498,682 securities remaining available for future
issuance under equity compensation plans approved by security
holders, up to 5,691,593 could be issued in the form of
restricted stock awards (the number of securities that remain
available for issuance under the 2003 Plan, subject to the plan
limits on individual grants. See footnote (1)(ii) above.
|
On July 28, 2000, the Companys Board of Directors
authorized a stock repurchase program in which up to
5.0 million shares of the Companys common stock may
be repurchased in the open market from time to time. On
December 4, 2006, the Company announced that the Board of
Directors had authorized a stock repurchase program of up to
$500.0 million worth of shares of the Companys common
stock. Our Board of Directors terminated the stock repurchase
program authorized by the Board on July 28, 2000. The
repurchases are expected to be funded from available cash and
short-term investments. No shares were repurchased under this
plan during 2006.
32
PERFORMANCE
GRAPH
Comparison
of Five-year Cumulative Total Return
among LSI Logic Corporation, the S&P 500 Index
and the Philadelphia Semiconductor Index
The stock price performance shown on the following graph is not
necessarily indicative of future price performance.
CUMULATIVE
TOTAL RETURN
Based upon initial investment of $100 on December 31,
2001
with dividends reinvested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 31, 2001
|
|
|
Dec 31, 2002
|
|
|
Dec 31, 2003
|
|
|
Dec 31, 2004
|
|
|
Dec 31, 2005
|
|
|
Dec 31, 2006
|
LSI Logic Corporation
|
|
|
$
|
100
|
|
|
|
$
|
37
|
|
|
|
$
|
56
|
|
|
|
$
|
35
|
|
|
|
$
|
51
|
|
|
|
$
|
57
|
|
S&P
500®
|
|
|
$
|
100
|
|
|
|
$
|
78
|
|
|
|
$
|
100
|
|
|
|
$
|
111
|
|
|
|
$
|
117
|
|
|
|
$
|
135
|
|
Philadelphia Semiconductor Index
|
|
|
$
|
100
|
|
|
|
$
|
55
|
|
|
|
$
|
98
|
|
|
|
$
|
84
|
|
|
|
$
|
93
|
|
|
|
$
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
Item 6.
|
Selected
Financial Data
|
Five-Year
Consolidated Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
1,982,148
|
|
|
$
|
1,919,250
|
|
|
$
|
1,700,164
|
|
|
$
|
1,693,070
|
|
|
$
|
1,816,938
|
|
Cost of revenues
|
|
|
1,126,894
|
|
|
|
1,087,558
|
|
|
|
964,754
|
|
|
|
1,016,311
|
|
|
|
1,124,216
|
|
Additional excess inventory and
related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
1,126,894
|
|
|
|
1,087,558
|
|
|
|
964,754
|
|
|
|
1,016,311
|
|
|
|
1,169,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
855,254
|
|
|
|
831,692
|
|
|
|
735,410
|
|
|
|
676,759
|
|
|
|
647,196
|
|
Research and development
|
|
|
413,432
|
|
|
|
399,685
|
|
|
|
427,805
|
|
|
|
453,107
|
|
|
|
515,974
|
|
Selling, general and administrative
|
|
|
255,569
|
|
|
|
238,265
|
|
|
|
245,460
|
|
|
|
239,319
|
|
|
|
247,362
|
|
Acquired in-process research and
development
|
|
|
4,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,920
|
|
Restructuring of operations and
other items, net
|
|
|
(8,427
|
)
|
|
|
119,052
|
|
|
|
423,444
|
|
|
|
180,597
|
|
|
|
67,136
|
|
Amortization of intangibles
|
|
|
32,089
|
|
|
|
62,484
|
|
|
|
75,050
|
|
|
|
76,352
|
|
|
|
78,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations
|
|
|
158,307
|
|
|
|
12,206
|
|
|
|
(436,349
|
)
|
|
|
(272,616
|
)
|
|
|
(264,813
|
)
|
Interest expense
|
|
|
(24,263
|
)
|
|
|
(25,283
|
)
|
|
|
(25,320
|
)
|
|
|
(30,703
|
)
|
|
|
(51,977
|
)
|
Interest income and other, net
|
|
|
51,277
|
|
|
|
34,000
|
|
|
|
22,170
|
|
|
|
18,933
|
|
|
|
26,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
and minority interest
|
|
|
185,321
|
|
|
|
20,923
|
|
|
|
(439,499
|
)
|
|
|
(284,386
|
)
|
|
|
(290,404
|
)
|
Provision for income taxes
|
|
|
15,682
|
|
|
|
26,540
|
|
|
|
24,000
|
|
|
|
24,000
|
|
|
|
1,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before minority
interest
|
|
|
169,639
|
|
|
|
(5,617
|
)
|
|
|
(463,499
|
)
|
|
|
(308,386
|
)
|
|
|
(292,154
|
)
|
Minority interest in net income of
subsidiary
|
|
|
1
|
|
|
|
6
|
|
|
|
32
|
|
|
|
161
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
169,638
|
|
|
$
|
(5,623
|
)
|
|
$
|
(463,531
|
)
|
|
$
|
(308,547
|
)
|
|
$
|
(292,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income/(loss) per share
|
|
$
|
0.43
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(0.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income/(loss) per share
|
|
$
|
0.42
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(0.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,852,144
|
|
|
$
|
2,796,066
|
|
|
$
|
2,874,001
|
|
|
$
|
3,447,901
|
|
|
$
|
4,012,736
|
|
Long-term obligations
|
|
$
|
429,400
|
|
|
$
|
699,050
|
|
|
$
|
859,545
|
|
|
$
|
1,007,079
|
|
|
$
|
1,315,557
|
|
Stockholders equity
|
|
$
|
1,895,738
|
|
|
$
|
1,627,950
|
|
|
$
|
1,618,046
|
|
|
$
|
2,042,450
|
|
|
$
|
2,300,355
|
|
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 2 of the Notes in Item 8 of
Part II, which information is incorporated in this
Item 6 of Part II by reference. For a discussion of
recent acquisitions, see Note 4 of the Notes.
On January 1, 2006, the Company adopted the fair value
recognition provisions of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payments
(SFAS 123R), using the modified prospective
transition method. In accordance with the modified prospective
transition method, the Company began recognizing compensation
expense for all share-based awards granted on or after
January 1, 2006, plus unvested awards granted prior to
January 1, 2006. Under this method of implementation, no
restatement of prior periods has been made.
34
During the year ended December 31, 2006, LSI completed the
sale of the Gresham, Oregon semiconductor facility to ON
Semiconductor for approximately $105.0 million in cash.
On January 1, 2003, the Company adopted Statement of
Financial Accounting Standards No. 146, Accounting
for Exit or Disposal Activities
(SFAS 146). 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.
During 2002, the Company recorded $46.0 million in
additional excess inventory and related charges and
$67.0 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.
|
|
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. We are a leading provider of
silicon-to-system
solutions that are used at the core of products that create,
store and consume digital information. We offer a broad
portfolio of semiconductors, including custom and standard
product integrated circuits, for use in consumer applications,
high-performance storage controllers, enterprise hard disk
controllers and a wide range of communication devices. We also
offer external storage systems and software applications for
storage area networks.
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 OEMs that
sell products to our target markets.
In the second quarter of 2006, we completed the sale of our
Gresham, Oregon semiconductor manufacturing facility to ON
Semiconductor for approximately $105.0 million in cash.
Under the terms of the agreement, ON Semiconductor offered
employment to substantially all of the LSI manufacturing
employees based at the Gresham site, with the remaining
non-manufacturing workforce expected to continue their
employment with LSI. ON Semiconductor also entered into
additional agreements with LSI, including a multi-year wafer
supply and test agreement, intellectual property license
agreement, transition services agreement and a facilities use
agreement. We also completed the sale of our ZSP digital signal
processor technology during the second quarter of 2006 (See
Note 2 of the Notes).
Revenues for the year ended December 31, 2006 were
$1,982.1 million representing a 3.3% increase as compared
to $1,919.3 million in revenues for the year ended
December 31, 2005. The increase in revenues is due to
35
an increase in our Storage Systems segment revenues, partially
offset by a decline in revenues in our Semiconductor segment.
We reported net income of $169.6 million, or $0.42 a
diluted share, for the year ended December 31, 2006, as
compared to a net loss of $5.6 million, or $0.01 a diluted
share, for the year ended December 31, 2005.
Cash, cash equivalents and short-term investments were
$1.0 billion as of December 31, 2006, as compared to
$938.9 million at December 31, 2005. For the year
ended December 31, 2006, we generated $247.2 million
in cash provided by operations as compared to
$248.7 million for the year ended December 31, 2005.
On November 1, 2006, the 2001 Convertible Subordinated
Notes in the amount of $271.8 million became due and were
repaid in full.
Acquisitions. We continue to evaluate
strategic acquisitions that build upon our existing library of
intellectual property, provide additional human capital,
including engineering talent, and seek to increase our
leadership position in the markets in which we operate. We
acquired StoreAge and Metta Technology (Metta)
during the fourth quarter of 2006. StoreAge was accounted for as
a purchase of a business and Metta was accounted for as a
purchase of assets. 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 4 of the Notes.)
The transactions are summarized in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Assets/
|
|
|
|
|
Amortizable
|
|
|
In-Process
|
|
Entity Name; Segment Included in;
|
|
Acquisition
|
|
Purchase
|
|
|
Type of
|
|
|
(Liabilities)
|
|
|
|
|
Intangible
|
|
|
Research and
|
|
Description of Acquired Business
|
|
Date
|
|
Price
|
|
|
Consideration
|
|
|
Acquired
|
|
|
Goodwill
|
|
Assets
|
|
|
Development
|
|
|
StoreAge Networking Technologies,
Ltd.; Storage segment; SAN storage management and multi-tiered
data protection software applications
|
|
November 21,
2006
|
|
$
|
47.4
|
|
|
$
|
47.4 cash
|
|
|
|
$(4.6
|
)
|
|
$6.1
|
|
$
|
43.5
|
|
|
$
|
2.4
|
|
Metta Technology; Semiconductor
segment; Next generation digital video
|
|
November 10,
2006
|
|
$
|
6.7
|
|
|
$
|
6.7 cash
|
|
|
|
$(0.6
|
)
|
|
Not
applicable
asset
purchase
|
|
$
|
5.4
|
|
|
$
|
1.9
|
|
Proposed Merger with Agere. On
December 3, 2006, we entered into an Agreement and Plan of
Merger with Agere and we publicly announced the signing of the
merger agreement on December 4, 2006. Agere is a provider
of integrated circuit solutions for a variety of computing and
communications applications. Some of Ageres solutions
include related software and reference designs. Ageres
solutions are used in products such as hard disk drives, mobile
phones, high-speed communications systems and personal
computers. Agere also licenses its intellectual property to
others.
Pursuant to the terms and subject to the conditions set forth in
the merger agreement, Agere will become a wholly-owned
subsidiary of LSI. Upon completion of the merger, each share of
Agere common stock that is outstanding at the effective time of
the merger will be converted into the right to receive
2.16 shares of LSI common stock. Each outstanding option to
purchase Agere common stock, whether or not then vested or
exercisable, shall be assumed by LSI and will become exercisable
for a number of shares of LSI common stock at an exercise price
adjusted to reflect the exchange ratio in the merger.
The completion of the proposed merger with Agere is subject to
various customary conditions, including (i) obtaining the
approval of the LSI and Agere stockholders, (ii) absence of
any applicable law prohibiting the merger, (iii) certain
regulatory approvals, (iv) subject to certain exceptions,
the accuracy of the representations and warranties of each
party, and (v) performance in all material respects by each
party of its obligations under the merger agreement. LSI has
scheduled a special meeting of its stockholders for Thursday,
March 29, 2007 to vote on a proposal to approve matters
related to the proposed merger. Agere has scheduled its 2007
annual meeting of stockholders for Thursday, March 29,
2007, at which Agere stockholders will vote on a proposal to
approve the proposed merger, among other things. Subject to
obtaining the approval of the LSI and Agere stockholders at
these meetings and the satisfaction of other closing conditions,
we expect to complete the merger soon after the stockholder
meetings.
36
We believe that the proposed merger with Agere presents a unique
opportunity to create a combined entity that will offer a
comprehensive set of building block solutions, including
semiconductors, systems and related software for storage,
networking and consumer electronics products, and that the
merger should allow us to deliver significant benefits to our
customers, stockholders and employees.
In connection with the proposed merger with Agere, LSI has filed
a Registration Statement on
Form S-4
with the SEC, which registration statement includes a joint
proxy statement/prospectus and related materials to register the
shares of LSI common stock to be issued in the merger, and LSI
and Agere have mailed to their respective stockholders a joint
proxy statement/prospectus relating to the proposed merger. The
registration statement and the joint proxy statement/prospectus
contain important information about LSI, Agere, the proposed
merger and related matters. Investors and security holders are
urged to read the registration statement and the joint proxy
statement/prospectus carefully.
RESULTS
OF OPERATIONS
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.
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Semiconductor segment
|
|
$
|
1,223.1
|
|
|
$
|
1,244.3
|
|
|
$
|
1,095.1
|
|
Storage Systems segment
|
|
|
759.0
|
|
|
|
675.0
|
|
|
|
605.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
1,982.1
|
|
|
$
|
1,919.3
|
|
|
$
|
1,700.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant inter-segment revenues during the
periods presented.
2006
compared to 2005
Total consolidated revenues for 2006 increased
$62.8 million or 3.3% as compared to 2005, reflecting an
increase in revenues from the Storage Systems segment, offset in
part by a decline in revenues in the Semiconductor segment.
Semiconductor
segment:
Revenues for the Semiconductor segment decreased
$21.2 million or 1.7% in 2006 as compared to 2005.
Revenues decreased for semiconductors used in consumer product
applications primarily as a result of lower demand for video
game products, DVD-products and digital audio players.
This decrease was offset in part by increases in revenues for
semiconductors used in storage standard product applications
such as SAS products, higher demand for semiconductors used in
storage custom solutions product applications such as hard disk
drives, and increased demand for semiconductors used in
communication product applications such as office automation,
routers, switches and wide area network (WAN)
products.
Storage
Systems segment:
Revenues for the Storage Systems segment increased
$84.0 million or 12.4% in 2006 from 2005. The increase in
revenues in the Storage Systems segment is primarily
attributable to increased demand from certain large customers
for our new high performance controller and drive modules
introduced in the second quarter of 2006 and also for our
mid-range integrated storage modules.
We expect revenues to be lower in the first quarter of 2007 as a
result of normal seasonality in the storage and consumer end
markets.
37
2005
compared to 2004
Total consolidated revenues for 2005 increased
$219.1 million or 12.9% as compared to 2004.
Semiconductor
segment:
Revenues for the Semiconductor segment increased
$149.2 million or 13.6% 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.
Storage
Systems segment:
Revenues for the Storage Systems segment increased
$69.9 million or 11.6% 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.
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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Semiconductor segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Percentage of segment revenues
|
|
|
19
|
%
|
|
|
17
|
%
|
|
|
11
|
%
|
Storage Systems segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
2
|
|
|
|
2
|
|
|
|
3
|
|
Percentage of segment revenues
|
|
|
47%, 15
|
%
|
|
|
44%, 12
|
%
|
|
|
41%, 15%, 11
|
%
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
2
|
|
|
|
2
|
|
|
|
1
|
|
Percentage of consolidated revenues
|
|
|
19%, 12
|
%
|
|
|
16%, 11
|
%
|
|
|
16
|
%
|
Revenues by geography. The following table
summarizes our revenues by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America*
|
|
$
|
956.7
|
|
|
$
|
932.2
|
|
|
$
|
852.5
|
|
Asia, including Japan
|
|
|
797.1
|
|
|
|
756.0
|
|
|
|
655.1
|
|
EMEA**
|
|
|
228.3
|
|
|
|
231.1
|
|
|
|
192.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,982.1
|
|
|
$
|
1,919.3
|
|
|
$
|
1,700.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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
2005, Engenio formed new subsidiaries |
38
|
|
|
|
|
within EMEA. As a result, the amounts in the table reflect that
change as of June 21, 2005 and prior to that all revenues
generated by Engenio EMEA were previously reported in North
America. |
|
** |
|
EMEA refers to Europe, Middle East and Africa. Our business is
in Europe and the Middle East. |
2006
compared to 2005
In 2006, revenues increased in North America and Asia, including
Japan, and decreased in EMEA as compared to 2005. The increase
in North America is attributable to an increase in demand within
the Storage Systems segment, offset in part by declines in
demand for semiconductors used in consumer product applications
such as digital audio players and declines in demand for
semiconductors used in storage product applications due to the
continued shift in revenues to Asia and decreased revenues for
semiconductors used in communication product applications such
as wireless and WAN products. The increase in revenues in Asia,
including Japan, is attributable to increased demand for
semiconductors used in storage product applications such as hard
disk drives, Host Bus Adapters (HBA), server
products and storage standard product applications such as SAS
products as well as increased demand for semiconductors used in
communication product applications. The increase in revenues in
Asia, including Japan, is also attributable to our customers
transitioning their contract manufacturing to Asia from other
regions. The increase was offset in part by decreases in demand
for semiconductors used in consumer product applications such as
video game products and DVD-products. The decrease in EMEA is
primarily attributable to declines in revenues for
semiconductors used in consumer product applications such as
DVD-products and decreased demand within the Storage Systems
segment, offset in part by increases in revenues for
semiconductors used in storage product applications such as HBA
products and for semiconductors used in storage standard product
applications such as SAS products, and semiconductors used in
communication product applications.
2005
compared to 2004
In 2005, revenues increased in North America, Asia, including
Japan, and EMEA 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 EMEA revenues 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.
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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Semiconductor segment
|
|
$
|
588.2
|
|
|
$
|
589.4
|
|
|
$
|
511.9
|
|
Percentage of segment revenues
|
|
|
48.1
|
%
|
|
|
47.4
|
%
|
|
|
46.7
|
%
|
Storage Systems segment
|
|
$
|
267.1
|
|
|
$
|
242.3
|
|
|
$
|
223.5
|
|
Percentage of segment revenues
|
|
|
35.2
|
%
|
|
|
35.9
|
%
|
|
|
36.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
855.3
|
|
|
$
|
831.7
|
|
|
$
|
735.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenues
|
|
|
43.2
|
%
|
|
|
43.3
|
%
|
|
|
43.3
|
%
|
39
2006
compared to 2005
The consolidated gross profit margin as a percentage of revenues
was 43.2% and 43.3% in 2006 and 2005, respectively.
Semiconductor
segment:
The gross profit margin as a percentage of revenues for the
Semiconductor segment increased to 48.1% in 2006 from 47.4% in
2005. The following contributed to the improvement in the gross
margin for the Semiconductor segment in 2006 as compared to 2005:
|
|
|
|
|
A favorable shift in product mix toward more high-margin
semiconductors used in storage and communication product
applications and lower prices from our foundry partners.
|
This increase in gross margin was offset in part by:
|
|
|
|
|
Higher scrap costs in early 2006, mainly due to a manufacturing
issue with a vendor; and
|
|
|
|
Stock-based compensation expense associated with the adoption of
SFAS 123R as of January 1, 2006. (See Note 3 of
the Notes.)
|
Storage
Systems segment:
The gross profit margin as a percentage of revenues for the
Storage Systems segment decreased slightly to 35.2% in 2006 from
35.9% in 2005 mainly due to the following:
|
|
|
|
|
Higher product costs associated with the ramp of new integrated
storage products and drive modules beginning in mid 2006;
|
|
|
|
Higher expedite fees in the fourth quarter of 2006 as the result
of orders coming in later than expected; and
|
|
|
|
Stock-based compensation expense associated with the adoption of
SFAS 123R on January 1, 2006.
|
We expect our margins to be slightly lower in the first quarter
of 2007 as a result of unfavorable product mix in both
reportable segments.
2005
compared to 2004
The consolidated gross profit margin as a percentage of revenues
was 43.3% in 2005 and 2004.
Semiconductor
segment:
The gross profit margin as a percentage of revenues for the
Semiconductor segment increased to 47.4% in 2005 from 46.7% in
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 2 of the Notes). This favorable effect on gross
profit margin was offset by an unfavorable shift in the overall
mix.
Storage
Systems segment:
The gross profit margin as a percentage of revenues for the
Storage Systems segment decreased to 35.9% in 2005 from 36.9% 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.
40
Research
and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Semiconductor segment
|
|
$
|
315.9
|
|
|
$
|
307.7
|
|
|
$
|
346.0
|
|
Percentage of segment revenues
|
|
|
25.8
|
%
|
|
|
24.7
|
%
|
|
|
31.6
|
%
|
Storage Systems segment
|
|
$
|
97.5
|
|
|
$
|
92.0
|
|
|
$
|
81.8
|
|
Percentage of segment revenues
|
|
|
12.8
|
%
|
|
|
13.6
|
%
|
|
|
13.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
413.4
|
|
|
$
|
399.7
|
|
|
$
|
427.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenues
|
|
|
20.9
|
%
|
|
|
20.8
|
%
|
|
|
25.2
|
%
|
2006
compared to 2005
R&D expenses, on a consolidated basis, increased
$13.7 million or 3.4% during 2006 as compared to 2005.
Semiconductor
segment:
R&D expenses for the Semiconductor segment consist primarily
of employee salaries, costs related to third party design tools
and materials used in the design of custom silicon and standard
products, as well as depreciation of capital equipment and
facilities related expenditures.
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 increased
$8.2 million or 2.7% in 2006 as compared to 2005 and
increased as a percentage of revenues from 24.7% in 2005 to
25.8% in 2006. R&D expenses for the Semiconductor segment
increased primarily as the result of an increase in stock-based
compensation expense associated with the adoption of
SFAS 123R on January 1, 2006, offset in part by lower
depreciation and amortization related expenses, lower expenses
related to design tools, and lower spending on design
engineering programs.
Storage
Systems segment:
R&D expenses for the Storage Systems segment consist
primarily of employee salaries and materials used in product
development, as well as depreciation of capital equipment and
facilities. In addition to the significant resources required to
support hardware technology transitions, we devote significant
resources to developing and enhancing software features and
functionality to remain competitive.
R&D expenses for the Storage Systems segment increased by
$5.5 million or 6.0% in 2006 as compared to 2005. The
increase is primarily due to increased compensation-related
expenditures that are based upon an increase in headcount and
increased spending for future R&D projects, along with the
increased stock-based compensation expenses associated with the
adoption of SFAS 123R on January 1, 2006. As a
percentage of revenues, R&D expense declined from 13.6% in
2005 to 12.8% in 2006 as a result of higher revenues in 2006 as
compared to 2005.
2005
compared to 2004
R&D expenses, on a consolidated basis, decreased
$28.1 million or 6.6% during 2005 as compared to 2004 and
decreased as a percentage of revenues from 25.2% in 2004 to
20.8% in 2005.
Semiconductor
segment:
R&D expenses for the Semiconductor segment decreased
$38.3 million or 11.1% in 2005 as compared to 2004 and
decreased as a percentage of segment revenues from 31.6% in 2004
to 24.7% in 2005. 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 2 of the Notes),
including lower compensation-related
41
expenses as well as lower equipment and depreciation expenses.
In addition, we spent less on design engineering programs during
2005 as compared to 2004.
Storage
Systems segment:
R&D expenses for the Storage Systems segment increased by
$10.2 million or 12.5% in 2005 as compared to 2004 and
increased as a percentage of segment revenues from 13.5% in 2004
to 13.6% in 2005. The increase is primarily due to increased
compensation-related expenditures that are based upon an
increase in employees.
Selling,
general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Semiconductor segment
|
|
$
|
157.4
|
|
|
$
|
150.6
|
|
|
$
|
150.7
|
|
Percentage of segment revenues
|
|
|
12.9
|
%
|
|
|
12.1
|
%
|
|
|
13.8
|
%
|
Storage Systems segment
|
|
$
|
98.2
|
|
|
$
|
87.7
|
|
|
$
|
94.8
|
|
Percentage of segment revenues
|
|
|
12.9
|
%
|
|
|
13.0
|
%
|
|
|
15.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
255.6
|
|
|
$
|
238.3
|
|
|
$
|
245.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of revenues
|
|
|
12.9
|
%
|
|
|
12.4
|
%
|
|
|
14.4
|
%
|
2006
compared to 2005
Consolidated selling, general and administrative
(SG&A) expenses increased $17.3 million or
7.3% during 2006 as compared to 2005 and increased as a
percentage of revenues from 12.4% in 2005 to 12.9% in 2006. SGI,
a customer of ours, filed for bankruptcy protection under
Chapter 11 of the United States Bankruptcy Code on
May 8, 2006. On October 17, 2006, SGI emerged from
bankruptcy. Based on the court approved repayment plan, we
recognized approximately $1.8 million in bad debt expenses
related to this bankruptcy filing in 2006. We perform ongoing
credit evaluations of our customers financial condition
and require collateral as considered necessary.
Semiconductor
segment:
SG&A expenses for the Semiconductor segment increased
$6.8 million or 4.5% in 2006 as compared to 2005 and
increased as a percentage of segment revenues from 12.1% in 2005
to 12.9% in 2006. The increase in the Semiconductor segment was
primarily due to an increase in stock-based compensation
associated with the adoption of SFAS 123R (See Note 3
of the Notes), offset in part by lower compensation-related
expenses, and lower operating expenses for maintenance,
facilities and information technology costs in 2006.
Storage
Systems segment:
SG&A expenses for the Storage Systems segment increased
$10.5 million or 12.0% in 2006 as compared to 2005, but
remained relatively flat as a percentage of segment revenues.
The increase in dollar amount is primarily due to higher sales
expenses associated with the increase in revenues, the SGI
bankruptcy noted above and the stock-based compensation expense
associated with the adoption of SFAS 123R (See Note 3
of the Notes).
On March 6, 2006, we announced, among other things, that we
were canceling any plans for an initial public offering of its
wholly-owned storage systems subsidiary, Engenio Information
Technologies, Inc (Engenio).
2005
compared to 2004
Consolidated SG&A expenses decreased $7.2 million or
2.9% during 2005 as compared to 2004 and declined from 14.4% in
2004 to 12.4% in 2005 as a percentage of revenues.
42
Semiconductor
segment:
SG&A expenses for the Semiconductor segment remained
relatively flat in dollar amount for 2005 as compared to 2004.
However, SG&A expenses as a percentage of segment revenues
decreased from 13.8% in 2004 to 12.1% in 2005.
Storage
Systems segment:
SG&A expenses for the Storage Systems segment decreased
$7.1 million or 7.5% in 2005 as compared to 2004 and
decreased as a percentage of segment revenues from 15.7% in 2004
to 13.0% in 2005. 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.
Acquired
in-process research and development:
We recorded a charge of $4.3 million for the year ended
December 31, 2006 associated with acquired in-process
research and development (IPR&D) in connection
with the StoreAge and Metta acquisitions. See Note 4 of the
Notes for more detailed information.
There were no IPR&D charges for the year ended
December 31, 2005 and 2004.
The details for the acquisitions, at the acquisition dates, are
summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Projections
|
Company
|
|
Acquisition Date
|
|
IPR&D
|
|
|
Discount Rate
|
|
Extend Through
|
|
|
|
|
(Dollar amounts in millions)
|
|
|
|
StoreAge
|
|
November 2006
|
|
$
|
2.4
|
|
|
28%
|
|
2013
|
Metta
|
|
November 2006
|
|
$
|
1.9
|
|
|
Not applicable, used a variation
of the Cost Approach
|
|
Not applicable, used a variation
of the Cost Approach
|
The amounts of IPR&D were determined by identifying research
projects for which technological feasibility had not been
established and no alternative future uses existed as of the
respective acquisition dates. See Note 4 of the Notes.
Project
descriptions and estimates of completion by
acquisition.
StoreAge Networking Technologies Ltd. On
November 21, 2006, we acquired StoreAge. The acquisition
expanded our SAN storage management and multi-tiered data
protection software product offerings within the Storage
segment. The acquisition was accounted for as a purchase
business combination. As of the acquisition date, there was one
project that was in process for development of storage systems
software. The development of the project started in late 2003.
As of the acquisition date, the cost to complete this project
was estimated at $0.2 million in 2006 and $4.6 million
in 2007.
Metta Technology. On November 10, 2006,
we acquired Metta. The acquisition increased our focus on
delivering the advanced, feature-rich solutions required by next
generation digital video products. The acquisition was accounted
for as a purchase of productive assets. As of the acquisition
date, the Graphics and Audio intellectual property
(IP) were two technologies identified as in-process
technologies.
Restructuring
of operations and other items, net:
2006
We recorded a credit of $8.4 million in restructuring of
operations and other items for the year ended December 31,
2006. A credit of $9.6 million was recorded in the
Semiconductor segment and a charge of $1.2 million was
recorded in the Storage Systems segment. A complete discussion
of our restructuring actions in 2006, 2005 and 2004 is included
in Note 2 of the Notes.
We realized savings mainly on depreciation of approximately
$3.2 million for the twelve months ended December 31,
2005, respectively as a result of our September 13, 2005
decision to hold our Gresham, Oregon
43
manufacturing facility for sale. Depreciation savings in 2006
were fully offset by decreased loading for the Gresham facility.
We sold the Gresham facility in the second quarter of 2006.
2005
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.
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 was our former Chief
Executive Officer and former Chairman of the Board. These
charges were recorded in the Semiconductor segment.
2004
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 was recorded in the
Semiconductor segment and $3.2 million was recorded in the
Storage Systems segment.
Stock-based
compensation:
On January 1, 2006, we adopted SFAS 123R, using the
modified prospective transition method. Under this transition
method of adopting SFAS 123R, we began recognizing
compensation expense for all share-based awards granted after
January 1, 2006 plus unvested awards granted prior to
January 1, 2006. Under this method of implementation, no
restatement of prior periods has been made. Stock-based
compensation expense under SFAS 123R in the consolidated
condensed statements of operations for the year ended
December 31, 2006 was $47.0 million.
The estimated fair value of our equity-based awards, less
expected forfeitures, is amortized over the awards vesting
period on a straight-line basis. The implementation of
SFAS 123R did not have a significant impact on cash flows
from operations during the year ended December 31, 2006.
See Note 3 to the Notes for discussion on stock-based
compensation.
Amortization
of intangibles:
Amortization of intangibles decreased to $32.1 million in
2006 from $62.5 million in 2005. The decrease is primarily
a result of certain intangible assets becoming fully amortized
during 2006 and 2005 and also due to the write-off of certain
intangible assets acquired in a purchase business combination
during the second quarter of 2006. These decreases were offset
in part by amortization of intangible assets acquired in
connection with the acquisitions of StoreAge, which was added to
our Storage segment and Metta, which was added to our
Semiconductor segment during the fourth quarter of 2006. As of
December 31, 2006, we had $59.5 million of intangible
assets, net of accumulated amortization that will continue to
amortize.
Amortization of intangibles decreased to $62.5 million in
2005 from $75.1 million in 2004. Amortization decreased as
a result of a write-down during the fourth quarter of 2004 of
certain amortizing intangibles 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.
44
Interest
expense:
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 9 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 of the hedged Convertible Notes during 2005 and 2004.
On November 1, 2006, the 2001 Convertible Subordinated
Notes in the amount of $271.8 million became due and were
repaid in full. (See Note 10 of the Notes.)
Interest expense decreased by $1.0 million to
$24.3 million in 2006 from $25.3 million in 2005. The
decrease is mainly due to a lower average debt balance from the
repayment of $271.8 million of the 2001 Convertible Notes
in the fourth quarter of 2006 and the repurchase of
$149.7 million of the 2001 Convertible Notes during the
second quarter of 2005, offset by a lower benefit from the
amortization of the deferred gain on the terminated Swaps.
Interest expense remained flat at $25.3 million in 2005 as
compared to 2004. Interest expense declined as a result of a
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
income and other, net:
Interest income and other, net, was $51.3 million in 2006
as compared to $34.0 million in 2005. Interest income
increased by $21.4 million to $47.3 million in 2006
from $25.9 million in 2005. The increase in interest income
is mainly due to higher returns and higher average cash and
short-term investment balances for the year ended
December 31, 2006 as compared to the same period of 2005.
Other income, net of $4.0 million in 2006 included the
following:
|
|
|
|
|
A pre-tax gain of $6.7 million on sale of certain
marketable
available-for-sale
equity securities (see Note 7 of the Notes);
|
|
|
|
A $2.0 million gain related to a cash insurance settlement
originally associated with a manufacturing issue with a supplier
during the third quarter of 2006; and
|
|
|
|
A $4.7 million expense for points on foreign currency
forward contracts, which was offset in part by other
miscellaneous items.
|
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 7 of the Notes);
|
|
|
|
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 7 of the
Notes);
|
|
|
|
A pre-tax gain of $4.1 million on the repurchase of the
2001 Convertible Notes (see Note 10 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 7 of the Notes); and
|
45
|
|
|
|
|
A $3.0 million expense for points on foreign currency
forward contracts, which was offset in part by other
miscellaneous items.
|
Other income, net of $3.5 million in 2004 included the
following:
|
|
|
|
|
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;
|
|
|
|
A pre-tax gain of $1.8 million on repurchase of 2001
Convertible 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.
|
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.
Provision
for income taxes:
During 2006, we recorded a provision for income taxes of
$15.7 million, which represents an effective tax rate of
approximately 9%. This rate differs from the U.S. statutory
rate primarily due to the realization of deferred tax assets not
previously recognized in the U.S., which offsets the tax
expenses generated from U.S. sourced income as well as from
earnings of certain foreign subsidiaries taxed in the U.S. The
Company also benefits from lower tax rates in foreign
jurisdictions.
During 2006, the Company closed various audits which resulted in
a tax benefit of $3.1 million in the current tax provision.
These audits included the U.S. federal, various states and
certain foreign jurisdictions.
During 2005, we recorded an income tax provision 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.
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.
See Note 11 of the Notes.
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.
46
FINANCIAL
CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments increased to
$1.0 billion at December 31, 2006, from
$938.9 million at December 31, 2005. The increase is
mainly due to cash and cash equivalents provided by operating
and investing activities, partially offset by net cash outflows
for financing activities as described below.
Working capital. Working capital increased by
$231.6 million to $1.1 billion at December 31,
2006, from $877.4 million as of December 31, 2005.
Working capital increased in 2006 as a result of the following
activities:
|
|
|
|
|
Cash, cash equivalents and short-term investments increased by
$70.0 million.
|
|
|
|
Accounts receivable increased by $25.3 million to
$348.6 million as of December 31, 2006 from
$323.3 million at December 31, 2005. The increase is
mainly attributable to higher revenues in the fourth quarter of
2006.
|
|
|
|
Inventories increased by $14.7 million to
$209.5 million as of December 31, 2006, from
$194.8 million as of December 31, 2005. The increase
in inventory was required to meet the ramp up of new products in
early 2007 that were not in production in early 2006.
|
|
|
|
Current portion of long-term debt decreased by
$273.9 million due to the payment of the Convertible
Subordinated Notes on November 1, 2006.
|
The increase in working capital was offset, in part, by the
following:
|
|
|
|
|
Prepaid expenses and other current assets decreased by
$94.4 million primarily due to decreases in assets held for
sale due to the sale of our Gresham, Oregon manufacturing
facility and two Colorado facilities, and a decrease in prepaid
software maintenance.
|
|
|
|
Accounts payable increased by $28.6 million due to the
timing of payments.
|
|
|
|
Other accrued liabilities increased by $15.8 million due to
an increase in deferred tax liabilities, deferred revenues and
other miscellaneous items, offset in part by a decrease in the
restructuring reserve.
|
|
|
|
Income taxes payable increased by $9.0 million due to the
timing of income tax payments made and the income tax provision
recorded during 2006.
|
|
|
|
Accrued salaries, wages and benefits increased by
$4.6 million primarily due to timing differences in payment
of salaries, benefits and performance-based compensation.
|
Cash and cash equivalents generated from operating
activities. During 2006, we generated
$247.2 million of net cash and cash equivalents from
operating activities compared to $248.7 million generated
in 2005. Cash and cash equivalents generated from operating
activities for the year ended December 31, 2006 were the
result of the following:
|
|
|
|
|
Net income adjusted for non-cash transactions. The non-cash
items and other non-operating adjustments are quantified in our
Consolidated Statements of Cash Flows included in this Annual
Report on
Form 10-K;
|
|
|
|
A net decrease in assets and liabilities, net of assets acquired
and liabilities assumed in business combinations, including
changes in working capital components from December 31,
2006 as compared to December 31, 2005 as discussed above.
|
Cash and cash equivalents provided by/ (used in) investing
activities. Net cash and cash equivalents
provided by investing activities during 2006 were
$25.9 million as compared to $84.3 million used in
investing activities during 2005. The primary investing
activities or changes during 2006 were as follows:
|
|
|
|
|
Purchases of debt and equity securities available for sale, net
of sales and maturities;
|
|
|
|
Proceeds from the sale of the Gresham, Oregon manufacturing
facility, two Colorado facilities and intellectual property, net
of purchases of property, equipment and software.
|
|
|
|
Acquisition of companies;
|
|
|
|
The receipt of income tax refunds for pre-acquisition tax
matters associated with an acquisition in 2001.
|
47
Without considering additional capital expenditures that will be
required with respect to Agere following our proposed merger
with Agere, we expect capital expenditures to be approximately
$55.0 million in 2007. In recent years we have reduced our
level of capital expenditures as a result of our focus on
establishing strategic supplier alliances with foundry
semiconductor manufacturers, which enables us to have access to
advanced manufacturing capacity and reduces our capital spending
requirements.
Cash and cash equivalents used in financing
activities. Cash and cash equivalents used in
financing activities during 2006 were $210.8 million as
compared to $117.4 million in 2005. The primary financing
activities during 2006 were as follows:
|
|
|
|
|
The issuance of common stock under our employee stock option and
purchase plans; and
|
|
|
|
The repayment of debt obligations.
|
On December 4, 2006, we announced that our Board of
Directors had authorized a stock repurchase program of up to
$500.0 million worth of shares of our common stock. Our
Board of Directors terminated the stock repurchase program
authorized by the Board on July 28, 2000. The repurchases
are expected to be funded from available cash and short-term
investments. No shares were repurchased under this plan during
2006.
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, 2006, and the effect these obligations are
expected to have on our liquidity and cash flow in future
periods. The following table does not include any contractual
obligations of Agere, which we will assume upon completion of
the merger.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Less Than 1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
After 5 Years
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Convertible Subordinated Notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
350.0
|
|
|
$
|
|
|
|
$
|
350.0
|
|
Operating lease obligations
|
|
|
49.7
|
|
|
|
77.3
|
|
|
|
33.4
|
|
|
|
9.3
|
|
|
|
169.7
|
|
Purchase commitments
|
|
|
392.2
|
|
|
|
31.3
|
|
|
|
|
|
|
|
|
|
|
|
423.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
441.9
|
|
|
$
|
108.6
|
|
|
$
|
383.4
|
|
|
$
|
9.3
|
|
|
$
|
943.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Subordinated Notes
As of December 31, 2006, we have $350.0 million of the
4% Convertible Subordinated Notes due in May 2010
(2003 Convertible Notes). The 2003 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 2003 Convertible Notes, into shares of
our common stock. The 2003 Convertible Notes have conversion
prices of approximately $13.42 per share. We cannot elect
to redeem the 2003 Convertible Notes prior to maturity. Each
holder of the 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. The proposed
merger with Agere will not trigger the 2003 Convertible Note
holders right to cause us to repurchase the Notes.
Interest is payable semiannually.
48
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 2003 Convertible Notes for
cash, it may adversely affect our liquidity position. In the
event that the 2003 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
2003 Convertible Notes.
Operating
Lease Obligations
We lease real estate, certain non-manufacturing equipment and
software under non-cancelable operating leases.
Purchase
Commitments
We maintain certain purchase commitments, primarily for raw
materials with suppliers and for some non-production items.
Purchase commitments for inventory materials are generally
restricted to a forecasted time-horizon as mutually agreed upon
between the parties. This forecasted time-horizon can vary among
different suppliers.
In the second quarter of 2006, we completed the sale of our
Gresham, Oregon semiconductor manufacturing facility to ON
Semiconductor for approximately $105.0 million in cash.
Under the terms of the agreement, ON Semiconductor entered into
a multi-year wafer supply agreement (WSA) with LSI and LSI is a
customer of ON Semiconductor, whereby LSI has agreed to purchase
$198.8 million in wafers from ON Semiconductor during the
period from the date of sale of the Gresham facility in May 2006
to the end of LSIs second quarter of 2008. As of
December 31, 2006, LSI had yet to purchase
$113.7 million in wafers under this arrangement.
In February 2007, we entered into an agreement to acquire
SiliconStor, a privately held company that provides silicon
solutions for enterprise storage networks. SiliconStor is
headquartered in Fremont, California and has approximately 30
employees. At the closing of the acquisition, we expect to pay
approximately $55.0 million in cash for SiliconStor. The
closing of the acquisition is subject to the satisfaction of
customary closing conditions and is expected to occur in the
first quarter of 2007. This is not included in the summary table
above.
Standby
letters of credit
At December 31, 2006 and 2005, we had outstanding standby
letters of credit of $2.7 million and $2.4 million,
respectively. These instruments are off-balance sheet
commitments to extend financial guarantees for leases and
certain self-insured risks 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 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.
Stock-Based Compensation. On January 1,
2006, we adopted SFAS 123R, using the modified prospective
transition method. In accordance with the modified prospective
transition method, we began recognizing compensation expense for
all share-based awards granted on or after January 1, 2006
plus unvested awards granted prior
49
to January 1, 2006. Under this method of implementation, no
restatement of prior periods has been made. Stock-based
compensation expense under SFAS 123R in the consolidated
condensed statements of operations for the year ended
December 31, 2006 was $47.0 million. Stock-based
compensation costs capitalized to inventory and software for the
year ended December 31, 2006 were not significant. (See
Note 3 of the Notes for a description of our equity
compensation plans and a more detailed discussion of the
adoption of SFAS 123R.)
Stock
Options:
The fair value of each option grant is estimated on the date of
grant using a reduced form calibrated binomial lattice model
(the Lattice Model). This model requires the use of
historical data for employee exercise behavior and the use of
assumptions as follows:
|
|
|
|
|
Employee Stock Options Granted
|
|
2006
|
|
|
Weighted average estimated grant
date fair value per share
|
|
$
|
3.30
|
|
Weighted average assumptions in
calculation:
|
|
|
|
|
Expected life (years)
|
|
|
4.33
|
|
Risk-free interest rate
|
|
|
4.78
|
%
|
Volatility
|
|
|
48
|
%
|
Dividend yield
|
|
|
|
|
The expected life of employee stock options represents the
weighted-average period the stock options are expected to remain
outstanding and is a derived output of the Lattice Model. The
expected life of employee stock options is impacted by all of
the underlying assumptions and calibration of our model.
We used an equally weighted combination of historical and
implied volatilities as of the grant date. The historical
volatility is the standard deviation of the daily stock returns
for LSI from the date of our initial public offering in 1983. We
used implied volatilities of
near-the-money
LSI traded call options since stock options are call options
that are granted at the money. The historical and implied
volatilities were annualized and equally weighted to determine
the volatilities as of the grant date. Prior to January 1,
2006, we used historical implied stock price volatilities in
accordance with SFAS 123 for purposes of its pro forma
information. Our management believes that the equally weighted
combination of historical and implied volatilities is more
representative of future stock price trends than historical
implied volatilities.
The risk-free interest rate assumption is based upon observed
interest rates for constant maturity treasuries appropriate for
the term of our employee stock options.
The Lattice Model assumes that employees exercise behavior
is a function of the options remaining vested life and the
extent to which the option is
in-the-money.
The Lattice Model estimates the probability of exercise as a
function of these two variables based on the entire history of
exercises and cancellations on all past option grants made by us
since the initial public offering in 1983.
As stock-based compensation expense recognized in the
consolidated condensed statement of operations for the year
ended December 31, 2006 is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures.
SFAS 123R requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. Forfeitures were
estimated based on historical experience. For our pro forma
information required under SFAS 123 for the periods prior
to January 1, 2006, we accounted for forfeitures as they
occurred.
Employee
Stock Purchase Plans
We also have two employee stock purchase plans
(ESPPs US ESPP and IESPP) under which
rights are granted to all qualifying 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, typically in May and November.
Compensation expense is calculated using the fair value of
50
the employees purchase rights under the Black-Scholes
model. For disclosure purposes, we have included the assumptions
that went into the calculation of fair value for the May and
November 2006 grant as follows:
|
|
|
|
|
|
|
Year Ended
|
|
Grants under Employee Stock Purchase Plans
|
|
December 31, 2006
|
|
|
Weighted average estimated grant
date fair value per share
|
|
$
|
2.92
|
|
Weighted average assumptions in
calculation:
|
|
|
|
|
Expected life (years)
|
|
|
0.7
|
|
Risk-free interest rate
|
|
|
5
|
%
|
Volatility
|
|
|
35
|
%
|
Dividend yield
|
|
|
|
|
Restricted
Stock Awards
The cost of these awards is determined using the fair value of
our common stock on the date of the grant and compensation
expense is recognized over the vesting period on a straight-line
basis.
Our determination of fair value of share-based payment awards on
the date of grant using an option-pricing model is affected by
our stock price as well as assumptions regarding a number of
highly complex and subjective assumptions. We use third-party
consultants to assist in developing the assumptions used in as
well as calibrating the Lattice Model. We are responsible for
determining the assumptions used in estimating the fair value of
its share based payment awards. Option-pricing models were
developed for use in estimating the value of traded options that
have no vesting or hedging restrictions and are fully
transferable. Because our employee stock options have certain
characteristics that are significantly different from traded
options, and because changes in the subjective assumptions can
materially affect the estimated value, in managements
opinion, the existing valuation models may not provide an
accurate measure of the fair value of our employee stock
options. Although, the fair value of employee stock options is
determined in accordance with SFAS 123R and SAB 107
using an option-pricing model, that value may not be indicative
of the fair value observed in a willing buyer/willing seller
market transaction.
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
$209.5 million and $194.8 million as of
December 31, 2006, and 2005, respectively.
If market conditions are more favorable than expected, we could
experience more favorable gross profit margins going forward as
we sell inventory that was previously written down.
Valuation of long-lived assets, intangible assets and
goodwill. We have historically pursued the
acquisition of businesses, which has resulted in significant
goodwill and intangible assets. We assess the impairment of
long-lived assets, identifiable intangibles and related goodwill
annually or sooner if events or changes in circumstances
indicate that the carrying value may not be recoverable. 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
51
management estimates, and industry trends. See Notes 5 and
6 of the Notes for more details on long-lived assets, intangible
assets and goodwill.
As of December 31, 2006, we have a goodwill balance of
$932.3 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 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, 2006. 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 2007. 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, 2006: 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.
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.
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 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.
52
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest
rate sensitivity
In 2006, a 10% weighted-average worldwide interest rate movement
affecting our fixed and floating rate financial instruments as
of December 31, 2006, 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 2005, a 10% weighted-average worldwide interest rate movement
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.
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, 2006, there were no interest rate
swaps outstanding.
See Note 9 for a discussion of previously outstanding swaps.
Foreign currency exchange risk. We have
foreign subsidiaries that operate and sell our products in
various global markets. As a result, our cash flows and earnings
are exposed to fluctuations in foreign currency exchange rates.
We attempt to limit these exposures through operational
strategies and financial market instruments. We use various
hedge instruments, primarily forward contracts with maturities
of twelve months or less and currency option contracts, to
manage our exposure associated with net asset and liability
positions and cash flows denominated in non-functional
currencies. We did not enter into derivative financial
instruments for trading purposes during 2006 and 2005.
Based on our overall currency rate exposures at
December 31, 2006, 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 2005, 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
values as of December 31, 2006, it would increase or
decrease the investment values by $1.6 million. As of
December 31, 2005, a 10% increase or decrease in fair
values would have increased or decreased the investment values
by $2.6 million. We do not use any derivatives to hedge the
fair value of our marketable
available-for-sale
equity securities.
53
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
LSI Logic
Corporation
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
327,800
|
|
|
$
|
264,649
|
|
Short-term investments
|
|
|
681,137
|
|
|
|
674,260
|
|
Accounts receivable, less
allowances of $13,871 and $15,328
|
|
|
348,638
|
|
|
|
323,310
|
|
Inventories
|
|
|
209,470
|
|
|
|
194,814
|
|
Prepaid expenses and other current
assets
|
|
|
68,692
|
|
|
|
163,086
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,635,737
|
|
|
|
1,620,119
|
|
Property and equipment, net
|
|
|
86,045
|
|
|
|
98,285
|
|
Other intangible assets, net
|
|
|
59,484
|
|
|
|
45,974
|
|
Goodwill
|
|
|
932,323
|
|
|
|
928,542
|
|
Other assets
|
|
|
138,555
|
|
|
|
103,146
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,852,144
|
|
|
$
|
2,796,066
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Accounts payable
|
|
$
|
200,189
|
|
|
$
|
171,632
|
|
Accrued salaries, wages and
benefits
|
|
|
82,292
|
|
|
|
77,713
|
|
Other accrued liabilities
|
|
|
155,986
|
|
|
|
140,194
|
|
Income taxes payable
|
|
|
88,304
|
|
|
|
79,290
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
273,940
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
526,771
|
|
|
|
742,769
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
350,000
|
|
|
|
350,000
|
|
Tax-related liabilities and other
|
|
|
79,400
|
|
|
|
75,110
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations and
other liabilities
|
|
|
429,400
|
|
|
|
425,110
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 12)
|
|
|
|
|
|
|
|
|
Minority interest in subsidiary
|
|
|
235
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred shares; $.01 par
value; 2,000 shares authorized; none outstanding
|
|
|
|
|
|
|
|
|
Common stock; $.01 par value;
1,300,000 shares authorized; 403,680 and
394,015 shares outstanding
|
|
|
4,037
|
|
|
|
3,940
|
|
Additional paid-in capital
|
|
|
3,102,178
|
|
|
|
2,996,102
|
|
Accumulated deficit
|
|
|
(1,220,306
|
)
|
|
|
(1,389,944
|
)
|
Accumulated other comprehensive
income
|
|
|
9,829
|
|
|
|
17,852
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,895,738
|
|
|
|
1,627,950
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
2,852,144
|
|
|
$
|
2,796,066
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
54
LSI Logic
Corporation
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
1,982,148
|
|
|
$
|
1,919,250
|
|
|
$
|
1,700,164
|
|
Cost of revenues
|
|
|
1,126,894
|
|
|
|
1,087,558
|
|
|
|
964,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
855,254
|
|
|
|
831,692
|
|
|
|
735,410
|
|
Research and development
|
|
|
413,432
|
|
|
|
399,685
|
|
|
|
427,805
|
|
Selling, general and administrative
|
|
|
255,569
|
|
|
|
238,265
|
|
|
|
245,460
|
|
Restructuring of operations and
other items, net
|
|
|
(8,427
|
)
|
|
|
119,052
|
|
|
|
423,444
|
|
Acquired in-process research and
development
|
|
|
4,284
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
32,089
|
|
|
|
62,484
|
|
|
|
75,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations
|
|
|
158,307
|
|
|
|
12,206
|
|
|
|
(436,349
|
)
|
Interest expense
|
|
|
(24,263
|
)
|
|
|
(25,283
|
)
|
|
|
(25,320
|
)
|
Interest income and other, net
|
|
|
51,277
|
|
|
|
34,000
|
|
|
|
22,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
and minority interest
|
|
|
185,321
|
|
|
|
20,923
|
|
|
|
(439,499
|
)
|
Provision for income taxes
|
|
|
15,682
|
|
|
|
26,540
|
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before minority
interest
|
|
|
169,639
|
|
|
|
(5,617
|
)
|
|
|
(463,499
|
)
|
Minority interest in net income of
subsidiary
|
|
|
1
|
|
|
|
6
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
169,638
|
|
|
$
|
(5,623
|
)
|
|
$
|
(463,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.43
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.42
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing per share
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
398,551
|
|
|
|
390,135
|
|
|
|
384,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
405,163
|
|
|
|
390,135
|
|
|
|
384,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
55
LSI Logic
Corporation
Consolidated Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred Stock
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Accumulated Deficit
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
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 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 4)
|
|
|
147
|
|
|
|
1
|
|
|
|
(414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(413
|
)
|
Grants of restricted shares
(Note 3)
|
|
|
|
|
|
|
|
|
|
|
6,401
|
|
|
|
(6,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted shares and
stock options assumed in an acquisition (Note 3)
|
|
|
|
|
|
|
|
|
|
|
(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 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 4)
|
|
|
156
|
|
|
|
1
|
|
|
|
(686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(685
|
)
|
Grants of restricted shares
(Note 3)
|
|
|
|
|
|
|
|
|
|
|
13,427
|
|
|
|
(13,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted shares and
stock options assumed in an acquisition (Note 3)
|
|
|
|
|
|
|
|
|
|
|
(6,739
|
)
|
|
|
6,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engenio stock option exchange
(Note 3)
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,638
|
|
|
|
|
|
|
|
|
|
Change in foreign currency
translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
276
|
|
|
|
|
|
Change in unrealized loss on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of
FAS 123R reclassification of Deferred Stock
Compensation
|
|
|
|
|
|
|
|
|
|
|
(14,064
|
)
|
|
|
14,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of FAS 123R on
foreign entities
|
|
|
|
|
|
|
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
Issuance to employees under stock
option and purchase plans
|
|
|
8,944
|
|
|
|
90
|
|
|
|
60,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,013
|
|
Issuance of common stock pursuant
to restricted stock awards, net
|
|
|
721
|
|
|
|
7
|
|
|
|
(3,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,243
|
)
|
Amortization of stock-based
compensation related to restricted shares
|
|
|
|
|
|
|
|
|
|
|
6,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,094
|
|
Amortization of stock-based
compensation related to employee stock options
|
|
|
|
|
|
|
|
|
|
|
31,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,338
|
|
Amortization of stock-based
compensation related to employee stock purchases
|
|
|
|
|
|
|
|
|
|
|
10,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
403,680
|
|
|
$
|
4,037
|
|
|
$
|
3,102,178
|
|
|
$
|
|
|
|
$
|
(1,220,306
|
)
|
|
$
|
9,829
|
|
|
$
|
1,895,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of these Consolidated Financial Statements.
56
LSI Logic
Corporation
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
169,638
|
|
|
$
|
(5,623
|
)
|
|
$
|
(463,531
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
82,263
|
|
|
|
146,169
|
|
|
|
176,606
|
|
Stock-based compensation expense
|
|
|
47,049
|
|
|
|
5,449
|
|
|
|
8,449
|
|
Non-cash restructuring and other
items
|
|
|
(713
|
)
|
|
|
88,224
|
|
|
|
401,058
|
|
Acquired in-process research and
development
|
|
|
4,284
|
|
|
|
|
|
|
|
|
|
Gain on sale of intellectual
property
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of Gresham
manufacturing facility and associated intellectual property
|
|
|
(12,553
|
)
|
|
|
|
|
|
|
|
|
Write-off of intangible assets
acquired in a purchase business combination
|
|
|
3,325
|
|
|
|
|
|
|
|
|
|
Non-cash foreign exchange
(gain)/loss
|
|
|
(1,089
|
)
|
|
|
(11,491
|
)
|
|
|
3,322
|
|
Gain on sale of equity securities
|
|
|
(6,727
|
)
|
|
|
(6,475
|
)
|
|
|
(1,913
|
)
|
Gain on repurchase of Convertible
Subordinated Notes
|
|
|
|
|
|
|
(4,123
|
)
|
|
|
(1,767
|
)
|
Gain/(loss) on sale of property and
equipment, including assets
held-for-sale
|
|
|
(252
|
)
|
|
|
27
|
|
|
|
(6,348
|
)
|
Changes in deferred tax assets and
liabilities
|
|
|
(98
|
)
|
|
|
14,220
|
|
|
|
4,895
|
|
Changes in assets and liabilities,
net of assets acquired and liabilities assumed in business
combinations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(24,617
|
)
|
|
|
(51,305
|
)
|
|
|
(40,076
|
)
|
Inventories
|
|
|
(18,062
|
)
|
|
|
24,086
|
|
|
|
(20,660
|
)
|
Prepaid expenses and other assets
|
|
|
(24,858
|
)
|
|
|
(22,582
|
)
|
|
|
20,055
|
|
Accounts payable
|
|
|
23,338
|
|
|
|
46,998
|
|
|
|
21,056
|
|
Accrued and other liabilities
|
|
|
21,223
|
|
|
|
25,129
|
|
|
|
(10,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
247,151
|
|
|
|
248,703
|
|
|
|
90,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of debt securities
available-for-sale
|
|
|
(603,624
|
)
|
|
|
(550,912
|
)
|
|
|
(747,096
|
)
|
Proceeds from maturities and sales
of debt securities
available-for-sale
|
|
|
595,135
|
|
|
|
462,530
|
|
|
|
679,483
|
|
Purchases of equity securities
|
|
|
(8,150
|
)
|
|
|
(150
|
)
|
|
|
(2,250
|
)
|
Proceeds from sales of equity
securities
|
|
|
11,876
|
|
|
|
11,105
|
|
|
|
10,518
|
|
Purchases of property, equipment
and software
|
|
|
(58,671
|
)
|
|
|
(48,055
|
)
|
|
|
(52,776
|
)
|
Proceeds from sale of property and
equipment
|
|
|
118
|
|
|
|
4,894
|
|
|
|
10,936
|
|
Adjustment to goodwill acquired in
a prior year for resolution of a pre-acquisition income tax
contingency
|
|
|
2,282
|
|
|
|
36,307
|
|
|
|
|
|
Buyout of equipment operating lease
|
|
|
|
|
|
|
|
|
|
|
(332,396
|
)
|
Increase in non-current assets and
deposits
|
|
|
|
|
|
|
|
|
|
|
(313,013
|
)
|
Decrease in non-current assets and
deposits
|
|
|
|
|
|
|
|
|
|
|
688,994
|
|
Acquisitions of companies, net of
cash acquired
|
|
|
(55,328
|
)
|
|
|
|
|
|
|
(32,025
|
)
|
Proceeds from sale of intellectual
property
|
|
|
22,670
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of
Fort Collins facility
|
|
|
10,998
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of Colorado
Springs facility
|
|
|
7,029
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of Gresham
manufacturing facility
|
|
|
96,426
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of Gresham
manufacturing facility associated
intellectual property
|
|
|
5,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in)
investing activities
|
|
|
25,861
|
|
|
|
(84,281
|
)
|
|
|
(89,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of Convertible
Subordinated Notes
|
|
|
|
|
|
|
(148,126
|
)
|
|
|
(68,117
|
)
|
Issuance of common stock
|
|
|
61,014
|
|
|
|
30,862
|
|
|
|
27,988
|
|
Repayment of debt obligations
|
|
|
(271,848
|
)
|
|
|
(129
|
)
|
|
|
(438
|
)
|
Purchase of minority interest in
subsidiary
|
|
|
|
|
|
|
|
|
|
|
(8,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(210,834
|
)
|
|
|
(117,393
|
)
|
|
|
(48,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
973
|
|
|
|
(1,103
|
)
|
|
|
(3,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash and
cash equivalents
|
|
|
63,151
|
|
|
|
45,926
|
|
|
|
(50,959
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
264,649
|
|
|
|
218,723
|
|
|
|
269,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
327,800
|
|
|
$
|
264,649
|
|
|
$
|
218,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
57
LSI Logic
Corporation
Notes to Consolidated Financial Statements
|
|
Note 1
|
Significant
Accounting policies
|
Nature of the business. LSI designs, develops
and markets complex, high-performance semiconductors and storage
systems. The Company is a leading provider of
silicon-to-system
solutions that are used at the core of products that create,
store and consume digital information. The Company offers a
broad portfolio of semiconductors, including custom and standard
product integrated circuits, for use in consumer applications,
high-performance storage controllers, enterprise hard disk
controllers and a wide range of communication devices. The
Company also offers external storage systems and software
applications for storage area networks. In 2005, the
Companys operations were organized in four markets:
communications, consumer products, storage components and
storage systems. On March 6, 2006, the Company announced
plans to focus the Companys business on growth
opportunities in the storage and consumer markets.
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 OEMs that sell
products to the Companys target markets.
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, 2006, 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 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
58
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
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 where software is more than incidental to the
arrangement as a whole, which includes a combination of the
Companys hardware, and the Companys premium software
products that are also sold separately, the Company follows the
guidance in EITF
03-05 and
accounts for the entire arrangement as a sale of software and
software-related items because the software is essential to the
functionality of the hardware as the software provides the
majority of the value-added features and differentiated
performance of the Companys products.
Sales arrangements that include a combination of storage systems
hardware, software and/or services are multiple element
arrangements. Revenues from multiple element arrangements that
include software that is more than incidental to the product
being sold and include a combination of storage systems
hardware, premium software, services and post-contract customer
support, is allocated to the separate elements based on relative
fair values, which is determined based on the prices when the
items are sold separately.
Earnings per share. Basic earnings per share
(EPS) is computed by dividing net income/(loss)
available to common stockholders (numerator) by the weighted
average number of common shares outstanding (denominator) during
the period. Diluted 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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Per-Share
|
|
|
|
|
|
|
|
|
Per-Share
|
|
|
|
|
|
|
|
|
Per-Share
|
|
|
|
Income*
|
|
|
Shares+
|
|
|
Amount
|
|
|
(Loss)*
|
|
|
Shares+
|
|
|
Amount
|
|
|
(Loss)*
|
|
|
Shares+
|
|
|
Amount
|
|
|
|
(In thousands except per share amounts)
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) available to
common stockholders
|
|
$
|
169,638
|
|
|
|
398,551
|
|
|
$
|
0.43
|
|
|
$
|
(5,623
|
)
|
|
|
390,135
|
|
|
$
|
(0.01
|
)
|
|
$
|
(463,531
|
)
|
|
|
384,070
|
|
|
$
|
(1.21
|
)
|
Stock options, employee stock
purchase rights and restricted stock awards
|
|
|
|
|
|
|
6,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) available to
common stockholders
|
|
$
|
169,638
|
|
|
|
405,163
|
|
|
$
|
0.42
|
|
|
$
|
(5,623
|
)
|
|
|
390,135
|
|
|
$
|
(0.01
|
)
|
|
$
|
(463,531
|
)
|
|
|
384,070
|
|
|
$
|
(1.21
|
)
|
|
|
|
*
|
|
Numerator
|
|
+
|
|
Denominator
|
59
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
Options to purchase approximately 45,379,128, 70,618,481 and
67,733,073 shares outstanding at December 31, 2006,
2005 and 2004, respectively, were excluded from the computation
of diluted shares because of their antidilutive effect on net
income/(loss) per share.
A total of 34,676,681, 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 net
income/(loss) per share for the years ended December 31,
2006, 2005 and 2004, respectively.
Stock-Based Compensation Expense. On
January 1, 2006, the Company adopted SFAS 123R, using
the modified prospective transition method. In accordance with
the modified prospective transition method, the Company began
recognizing compensation expense for all share-based awards
granted after January 1, 2006 plus unvested awards granted
prior to January 1, 2006. Under this method of
implementation, no restatement of prior periods has been made.
Determining the fair value of stock-based awards at the grant
date requires considerable judgment, including estimating
expected volatility, expected term and risk-free rate. If
factors change and the Company employs different assumptions,
stock-based compensation expense may differ significantly from
what the Company has recorded in the prior years (see
Note 3 of the Notes).
Advertising. Advertising costs are charged to
expense in the period incurred. Advertising expense was
$5.0 million, $4.9 million and $5.4 million for
the years ended December 31, 2006, 2005 and 2004,
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
60
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
other causes. Reserves are established for excess inventory
generally based on inventory levels in excess of 12 months
of demand, as judged by management, for each specific product.
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 $13.8 million,
$14.2 million and $12.0 million was included in the
Companys results of operations during 2006, 2005 and 2004,
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
61
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
methodologies could have a significant effect on the estimated
fair value amounts. The fair value of investments, derivative
instruments and convertible debt are based on market data.
Carrying amounts of accounts receivable and accounts payable
approximate fair value due to the short maturity of these
financial instruments.
Derivative instruments. All of the
Companys derivative instruments are recognized as assets
or liabilities in the statement of financial position and
measured at fair value (see Note 9 of the Notes). 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.
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
62
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
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 that accounted for 24% and
13% of trade receivables as of December 31, 2006 and two
customers that accounted for 23% and 13% of trade receivables as
of December 31, 2005. Concentrations of credit risk with
respect to all other trade receivables are considered to be
limited due to the quantity of customers comprising the
Companys customer base and their dispersion across
industries and geographies. The Company performs ongoing credit
evaluations of its customers financial condition and
requires collateral as considered necessary. Write-offs of
uncollectible amounts have not been significant.
Product warranties. The Company warrants
finished goods against defects in material and workmanship under
normal use and service for periods of one to five years for
Semiconductor products and Storage Systems 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.
Income Taxes. The calculation of the
Companys tax provision involves the application of complex
tax rules and regulations within multiple jurisdictions
throughout the world. The Companys tax liabilities include
estimates for all income-related taxes that the Company believes
are probable and that can be reasonably estimated. To the extent
that the Companys estimates are understated, additional
charges to the provision for income taxes would be recorded in
the period in which the Company determines such understatement.
If the Companys income tax estimates are overstated,
income tax benefits will be recognized when realized.
Deferred tax assets and liabilities are recognized for temporary
differences between financial statement and income tax bases of
assets and liabilities. Valuation allowances are provided
against deferred tax assets when it is more likely than not that
some portion or all of the deferred tax asset will not be
realized.
Related party transactions. A member of the
Companys board of directors is also a director of Seagate
Technology. The Company sells semiconductors used in storage
product applications to Seagate Technology for prices the
Company believes unrelated third party would pay for such
products. Storage products include disk drives, RAID subsystems
and tape drives. Revenues from Seagate were $234.4 million,
$207.7 million and $121.7 million for the years ended
December 31, 2006, 2005 and 2004, respectively. The Company
had accounts receivable from Seagate of $45.8 million and
$41.2 million as of December 31, 2006 and 2005
respectively.
Recent
accounting pronouncements.
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB interpretation No. 48
(FIN No. 48), Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109
(FAS No. 109). This interpretation
prescribes a recognition threshold and measurement attribute for
tax positions taken or expected to be taken in a tax return.
This interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The evaluation of a tax
position in accordance with this interpretation is a two-step
process. In the first step, recognition, the Company determines
whether it is more-likely-than-not that a tax position will be
sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits
of the position. The second step addresses measurement of a tax
position that meets the more-likely-than-not criteria. The tax
position is measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon
ultimate settlement. Differences between tax positions taken in
a tax return and amounts recognized in the financial statements
will generally result in (a) an increase in a liability for
income taxes payable or a reduction of an income
63
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
tax refund receivable, (b) a reduction in a deferred tax
asset or an increase in a deferred tax liability or
(c) both a and b. Tax positions that previously failed to
meet the more-likely-than-not recognition threshold should be
recognized in the first subsequent financial reporting period in
which that threshold is met. Previously recognized tax positions
that no longer meet the more-likely-than-not recognition
threshold should be de-recognized in the first subsequent
financial reporting period in which that threshold is no longer
met. Use of a valuation allowance as described in
FAS No. 109 is not an appropriate substitute for the
de-recognition of a tax position. The requirement to assess the
need for a valuation allowance for deferred tax assets based on
sufficiency of future taxable income is unchanged by this
interpretation. This interpretation is effective for the Company
on January 1, 2007. The Company is currently evaluating the
impact of FIN No. 48 on its consolidated financial
statements.
In June 2006, the FASB Emerging Issues Task Force issued EITF
Issue
No. 06-2
(EITF
06-02),
Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43
(FAS No. 43), Accounting for Compensated
Absences. EITF
06-02
addresses the accounting for an employees right to a
compensated absence under a sabbatical or other similar benefit
arrangement that is unrestricted (that is, the employee is not
required to perform any services for or on behalf of the entity
during the absence) and that requires the completion of a
minimum service period and in which the benefit does not
increase with additional years of service. For sabbatical
arrangements meeting these criteria, EITF
06-02
concludes that the accumulated criteria have been met in
paragraph 6(b) of FAS No. 43 and that as long as
the remaining sections of paragraph 6 are met, the
sabbatical arrangement should be accrued over the requisite
service period, which for the Company would be 10 years.
The Company offers a sabbatical of 20 days to full-time
employees upon completion of 10 years of service. EITF
06-02 is
effective for the Company on January 1, 2007 and the
provisions of the EITF allow for either retrospective
application or a cumulative effect adjustment approach upon
adoption. The Company will adopt this EITF in the first quarter
of 2007 with a cumulative effect adjustment to retained earnings
of approximately $4.2 million.
In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB 108). SAB 108 gives guidance on how
errors, built up over time in the balance sheet, should be
considered from a materiality perspective and corrected.
SAB 108 provides interpretive guidance on how the effects
of the carryover or reversal of prior year misstatements should
be considered in quantifying a current year misstatement.
SAB 108 is effective for fiscal years ending after
November 15, 2006, and early application is encouraged. The
adoption of SAB 108 did not have a material impact on the
Companys consolidated balance sheet or statement of
operations.
In September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements (FAS 157).
FAS 157 establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value, and
expands on required disclosures about fair value measurement.
FAS 157 is effective for fiscal years beginning after
November 15, 2007 and will be applied prospectively. The
Company is currently evaluating the impact that the provisions
of FAS 157 will have on the Companys consolidated
balance sheet and statement of operations.
|
|
Note 2
|
Restructuring and other items
|
2006
The Company recorded a credit of $8.4 million in
restructuring of operations and other items for the year ended
December 31, 2006. A credit of $9.6 million was
recorded in the Semiconductor segment and a charge of
$1.2 million was included in the Storage Systems segment.
Restructuring
and impairment of long- lived assets:
First
quarter of 2006:
The Company recorded a $5.7 million charge in the first
quarter of 2006,which is related to the net effect of the
following items. An expense of $2.7 million was recorded
for changes in sublease assumptions for certain previously
accrued facility lease termination costs. An expense of
$0.5 million was recorded to reflect the
64
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
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
broad-based reorganization that was announced in August 2005.
Other exit costs of $1.4 million include contract
termination costs of $0.9 million related to the
Companys strategic realignment of the sales function and
an expense of $0.5 million for facility closure costs
related to the Colorado fabrication facility as the expenses
were incurred. Net gains of $4.6 million were recorded to
reflect (a) the increase in fair value for the
Companys Colorado Springs facility that was sold to a
third party subsequent to the first quarter of 2006, (b) a
gain for the sale of certain intellectual property to a third
party during the first quarter of 2006 that was written down to
zero due to impairment in a previous year and (c) the
write-down of certain equipment held for sale to fair market
value.
Second
quarter of 2006:
The Company recorded $21.6 million credit related to the
net effect of the following items:
|
|
|
|
|
$12.5 million net gain recorded for the sale of Gresham,
Oregon manufacturing facility and certain related manufacturing
process intellectual property to ON Semiconductor;
|
|
|
|
$15.0 million gain recorded for the sale of certain
intellectual property to a third party based on the sale of zero
basis intellectual property for $15.0 million in cash
proceeds;
|
|
|
|
$7.4 million gain recorded for the sale of the
Companys ZSP digital signal processor intellectual
technology;
|
|
|
|
$8.6 million charge recorded for severance and termination
benefits for employees primarily related to the broad-based
reorganization that was announced in August 2005;
|
|
|
|
$3.3 million charge recorded for the write-off of certain
intangible assets acquired in a purchase business
combination; and
|
|
|
|
$1.4 million net charge recorded primarily for changes in
sublease assumptions for certain previously accrued facility
lease termination costs.
|
Sale
of the Gresham facility:
In May 2006, the Company completed the sale of the
Companys Gresham, Oregon manufacturing facility to ON
Semiconductor for approximately $105.0 million in cash.
$90.0 million in cash was received in the second quarter of
2006 and $15.0 million was received early in the third
quarter of 2006. Under the terms of the agreement, ON
Semiconductor offered employment to substantially all of the LSI
manufacturing employees based at the Gresham site, with the
remaining non-manufacturing workforce expected to continue their
employment with LSI. ON Semiconductor also entered into
additional agreements with LSI, including a multi-year wafer
supply and test agreement, intellectual property license
agreement, transition services agreement and a facilities use
agreement.
The Company recognized a gain of $12.5 million associated
with the sale of the Gresham manufacturing facility. No amounts
were deferred pursuant to the transaction as any continuing
involvement with the Gresham manufacturing facility does not
carry with it the same risks and rewards as does ownership of
the property, nor would any portion of the sales price need to
be deferred due to the nature and fair market value pricing of
the ancillary agreements entered into as discussed below as they
represent separate earnings processes.
Under the terms of the wafer supply agreement, LSI is a customer
of ON Semiconductor, whereby LSI has agreed to purchase
$198.8 million in wafers from ON Semiconductor during the
period from the date of sale of the Gresham facility in May 2006
to the end of LSIs second quarter of 2008. Such wafer
supply agreements are customary with the sale of large wafer
manufacturing facilities and the wafer prices under the
agreement represent fair market values. The wafers purchased
from ON Semiconductor will be recognized by LSI as purchases of
inventory upon transfer of title of the inventory to LSI from ON
Semiconductor. Deliverables under the intellectual
65
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
property license agreement were completed upon sale of the
facility to ON Semiconductor in May 2006. The transition
services agreement was short-term in nature and priced
separately from the overall sale agreement. Services performed
by LSI under this agreement were primarily related to short-term
accounting system services and priced at fair market value. The
facility use agreement is for a term of 36 months whereby
LSI leases space from ON Semiconductor. LSI pays ON
Semiconductor fair market value for such space rental.
Third
quarter of 2006:
The Company recorded a $2.6 million charge related to the
net effect of the following items:
|
|
|
|
|
$1.7 million charge recorded for severance and termination
benefits for employees primarily related to the broad-based
reorganization that was announced in August 2005;
|
|
|
|
$0.4 million net charge recorded primarily for changes in
sublease assumptions for certain previously accrued facility
lease termination costs and additional $0.4 million
recorded to reflect the
change-in-time
value of accruals for facility lease termination costs; and
|
|
|
|
$0.1 million net charge recorded for other exit costs,
mainly related to the contract termination costs related to the
Companys strategic realignment of the sales function.
|
Fourth
quarter of 2006:
The Company recorded a $4.9 million charge related to the
net effect of the following items:
|
|
|
|
|
$1.3 million charge recorded for a write-down of leasehold
improvements, $0.6 million loss recorded from sale of
assets;
|
|
|
|
$1.5 million net charge recorded primarily for changes in
sublease assumptions for certain previously accrued facility
lease termination costs and an additional $0.4 million
recorded to reflect the
change-in-time
value of accruals for facility lease termination costs; and
|
|
|
|
$1.1 million charge recorded for severance and termination
benefits for employees primarily related to the broad-based
reorganization that was announced in August 2005.
|
Assets held for sale of $20.1 million and
$105.8 million were included as a component of prepaid
expenses and other current assets as of December 31, 2006
and December 31, 2005, respectively. During the three
months ended July 2, 2006, the Company sold the Gresham,
Oregon manufacturing facility and two Colorado facilities. The
gain from the Gresham facility is described above. The net loss
from the sale of the two Colorado facilities was insignificant.
Assets classified as
held-for-sale
are not depreciated. The fair values of impaired equipment and
facilities were thoroughly researched and estimated by
management using the assistance of third-party appraisers. Given
that current market conditions for the sale of older fabrication
facilities and related equipment may fluctuate, there can be no
assurance that the Company will realize the current net carrying
value of the assets held for sale. The Company reassesses the
realizability of the carrying value of these assets at the end
of each quarter until the assets are sold or otherwise disposed
of and additional adjustments may be necessary.
66
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
The following table sets forth the Companys restructuring
reserves as of December 31, 2006, 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,
|
|
|
|
2005
|
|
|
2006
|
|
|
Reserve
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Write-down of excess assets and
decommissioning costs(a)
|
|
$
|
4,993
|
|
|
$
|
(34,390
|
)
|
|
$
|
(188
|
)
|
|
$
|
29,585
|
|
|
$
|
|
|
Lease terminations and maintenance
contracts(b)
|
|
|
22,287
|
|
|
|
7,462
|
|
|
|
|
|
|
|
(6,580
|
)
|
|
|
23,169
|
|
Facility closure and other exit
costs(c)
|
|
|
|
|
|
|
1,510
|
|
|
|
|
|
|
|
(1,510
|
)
|
|
|
|
|
Payments to employees for
severance(d)
|
|
|
5,395
|
|
|
|
16,991
|
|
|
|
(422
|
)
|
|
|
(21,622
|
)
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,675
|
|
|
$
|
(8,427
|
)
|
|
$
|
(610
|
)
|
|
$
|
(127
|
)
|
|
$
|
23,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The credit includes the gain from the sale of the Gresham
facility, which is described above. The remaining balance was
utilized during the third quarter of 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 (i) cash severance payments to
190 employees during the year ended December 31, 2006 and
(ii) cash payments for one-time termination benefits for
512 employees associated with the sale of the Gresham
manufacturing facility. |
2005
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:
First
quarter of 2005:
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.
Second
quarter of 2005:
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
67
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
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.
Third
quarter of 2005:
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
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 stayed and rendered service
until the sale of the Gresham facility received a termination
benefit, which was paid after the sale of the facility. These
actions and related charges are associated with the
Semiconductor segment.
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.
Fourth
quarter of 2005:
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
68
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
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 the Companys 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 asset 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, related to estimates for selling costs
for assets held for sale and was 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 was
paid by the end of 2006. |
Other
Items:
Second
quarter of 2005:
The Company recorded a charge of $5.4 million, which was
primarily 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 would not stand for reelection to the
Companys board of directors (the Board) at the
2006 annual stockholders meeting. On May 11, 2006,
the Company announced that the Board had elected James H. Keyes
to serve as its Chairman, succeeding Mr. Corrigan in this
position.
69
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
2004
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:
First
quarter of 2004:
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.
Second
quarter of 2004:
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.
Third
quarter of 2004:
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
70
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
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.
Fourth
quarter of 2004:
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 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 a 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 EMEA and the United States due to changes in
estimates.
In the Companys Storage Systems segment, during the fourth
quarter, the Company initiated realignment of the Companys
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.
71
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
Other
Items
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 9 of the
Notes).
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.
Note 3
Common Stock, Stock-Based Compensation and Other Employee
Compensation Plans
On January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS 123R Share-Based
Payments, using the modified prospective transition
method. In accordance with the modified prospective transition
method, the Company began recognizing compensation expense for
all share-based awards granted on or after January 1, 2006,
plus unvested awards granted prior to January 1, 2006.
Under this method of implementation, no restatement of prior
periods has been made. The cumulative effect of adopting
SFAS 123R was not significant.
Description
of the Companys equity compensation plans:
The 2003 Equity Incentive Plan (the 2003
Plan): The 2003 Plan was approved by
stockholders in May 2003. Under the 2003 Plan, the Company may
grant stock options or restricted stock units to employees,
officers and consultants. Stock options will have an exercise
price that is no less than the fair market value of the stock on
the date of grant. No participant may be granted more than
0.5 million shares of restricted stock in any year. The
term of each option or restricted stock unit is determined by
the Board of Directors or its committee 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. As of
December 31, 2006, the 2003 Plan had approximately
6 million common shares available for future grants.
The 1991 Equity Incentive Plan (the 1991
Plan): Under the 1991 Plan, the Company may
grant stock options to employees, officers and consultants, with
an exercise price that is no less than the fair market value of
the stock on the date of grant. The term of each option is
determined by the Board of Directors or its committee and, for
options granted prior to February 12, 2004, was generally
ten years. For options granted on or after February 12,
2004, the term of the options generally is 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 the 1991 plan after March 2001. As
of December 31, 2006, the 1991 Plan had approximately
39.4 million common shares available for future grants.
The 1995 Director Option Plan (1995 Director
Plan): Under the 1995 Director Option
Plan, new directors receive an initial grant of options to
purchase 30,000 shares of common stock and directors
receive 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 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. As of December 31, 2006, there
were approximately 0.8 million shares available for future
grants under the 1995 Director Plan.
72
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
The 1999 Nonstatutory Stock Option Plan (the 1999
Plan): Under the 1999 Plan, the Company may
grant nonstatutory stock options to its employees, excluding
officers, with an exercise price that is no less than the fair
market value of the stock on the date of grant. The term of each
option is determined by the Board of Directors or its committee
and, for options granted prior to February 12, 2004, was
generally ten years. For options granted on or after
February 12, 2004, the term of the options is seven years.
Options generally vest in annual increments of 25% per year
commencing one year from the date of grant. As of
December 31, 2006, the 1999 Plan had approximately
13.3 million common shares available for future grants.
The Employee Stock Purchase Plan, as amended and restated
(US ESPP): Under the US ESPP, rights
are granted to LSI Logic employees in the United States to
purchase shares of common stock at 85% of the lesser of the fair
market value of such shares at the beginning of a
12-month
offering period or the end of each six-month purchase period
within such an offering period. The maximum number of shares
that can be purchased in a single purchase period is
1,000 shares per employee.
Sales under the US ESPP in 2006, 2005 and 2004 were
approximately 3.6 million, 4.3 million and
5.0 million shares of common stock at an average price of
$6.69, $4.49 and $4.60 per share, respectively.
There are 16,684,068 shares remaining available for future
issuance under the US ESPP, of which 9 million shares were
added to the plan by stockholder approval in 2006. The US ESPP
includes an annual replenishment calculated at 1.2% of the
Companys common stock issued and outstanding at fiscal
year end less the number of shares available for future grants
under the US ESPP. No shares have been added to the US ESPP from
the annual replenishment since January 2001.
International Employee Stock Purchase Plan
(IESPP): Under the IESPP, rights are
granted to LSI Logic employees (excluding executive officers)
outside of the United States to purchase shares of common stock
at 85% of the lesser of the fair market value of such shares at
the beginning of a
12-month
offering period or the end of each six-month purchase period
within such an offering period. There are 1,733,302 shares
remaining available for future issuance under the IESPP, of
which 1.0 million shares were added to the plan by
stockholder approval in 2006.
Stock-based
compensation expense under SFAS 123R:
Stock-based compensation expense under SFAS 123R in the
consolidated statements of operations for the year ended
December 31, 2006, 2005 and 2004 was $47.0 million,
$5.4 million and $8.4 million, respectively, as shown
in the table below. Stock-based compensation costs capitalized
to inventory and software for the year ended December 31,
2006 were not significant.
The estimated fair value of the Companys stock-based
awards, less expected forfeitures, is amortized over each award
vesting period (the requisite service period), on a
straight-line basis. The table below summarizes stock-based
compensation expense, related to employee stock options, the
stock purchase plans and restricted stock units under
SFAS 123R for the year ended December 31, 2006.
Prior to January 1, 2006, the Company accounted for
stock-based compensation awards using the intrinsic value method
under APB 25, Accounting for Stock Issued to
Employees, and related interpretations and followed the
disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), as amended. Such
disclosure-only provisions are also referred to herein as pro
forma financial information. Under APB 25 and related
interpretations, compensation costs for stock options, if any,
was measured as the excess of the quoted market price on the
date of grant over the exercise price and recognized over the
vesting period on a straight-line basis. The Companys
policy is to grant options with an exercise price no less than
the quoted closing market price of the Companys stock on
the date of grant.
73
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Stock-based Compensation Expense:
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
6,903
|
|
|
$
|
744
|
|
|
$
|
198
|
|
Research and development
|
|
|
17,397
|
|
|
|
2,373
|
|
|
|
6,289
|
|
Selling, general and administrative
|
|
|
22,749
|
|
|
|
2,332
|
|
|
|
1,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
47,049
|
|
|
$
|
5,449
|
|
|
$
|
8,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
The fair value of each option grant is estimated on the date of
grant using a reduced form calibrated binomial lattice model
(the Lattice Model). This model requires the use of
historical data for employee exercise behavior and the use of
assumptions outlined in the following table:
|
|
|
|
|
Employee Stock Options Granted
|
|
2006
|
|
|
Weighted average estimated grant
date fair value per share
|
|
$
|
3.30
|
|
Weighted average assumptions in
calculation:
|
|
|
|
|
Expected life (years)
|
|
|
4.33
|
|
Risk-free interest rate
|
|
|
4.78
|
%
|
Volatility
|
|
|
48
|
%
|
Dividend yield
|
|
|
|
|
The expected life of employee stock options represents the
weighted-average period the stock options are expected to remain
outstanding and is a derived output of the Lattice Model. The
expected life of employee stock options is affected by all of
the underlying assumptions and calibration of the Companys
model.
The Company used an equally weighted combination of historical
and implied volatilities as of the grant date. The historical
volatility is the standard deviation of the daily stock returns
for LSI from the date of the Companys initial public
offering in 1983. The Company used implied volatilities of
near-the-money
LSI traded call options, as stock options are call options that
are granted at the money. The historical and implied
volatilities were annualized and equally weighted to determine
the volatilities as of the grant date. Prior to January 1,
2006, the Company used historical implied stock price
volatilities in accordance with SFAS 123 for purposes of
its pro forma information. Company management believes that the
equally weighted combination of historical and implied
volatilities is more representative of future stock price trends
than sole use of historical implied volatilities.
The risk-free interest rate assumption is based upon observed
interest rates of constant maturity treasuries appropriate for
the term of the Companys employee stock options.
The Lattice Model assumes that employees exercise behavior
is a function of the options remaining vested life and the
extent to which the option is
in-the-money.
The Lattice Model estimates the probability of exercise as a
function of these two variables based on the entire history of
exercises and cancellations on all past option grants made by
the Company since the initial public offering in 1983.
As stock-based compensation expense recognized in the
consolidated statement of operations for the year ended
December 31, 2006 is based on awards ultimately expected to
vest, it has been reduced for estimated forfeitures.
SFAS 123R requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. Forfeitures were
estimated based on historical experience. For the Companys
pro forma information required under SFAS 123 for the
periods prior to January 1, 2006, the Company accounted for
forfeitures as they occurred.
74
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, 2006, 2005 and
2004 (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
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,
|
|
|
70,618
|
|
|
$
|
13.21
|
|
|
|
67,733
|
|
|
$
|
14.57
|
|
|
|
69,166
|
|
|
$
|
15.17
|
|
Options canceled
|
|
|
(16,130
|
)
|
|
|
(18.02
|
)
|
|
|
(11,555
|
)
|
|
|
(14.63
|
)
|
|
|
(7,993
|
)
|
|
|
(14.01
|
)
|
Options granted
|
|
|
7,781
|
|
|
|
9.17
|
|
|
|
16,493
|
|
|
|
7.67
|
|
|
|
7,450
|
|
|
|
7.39
|
|
Options exercised
|
|
|
(5,519
|
)
|
|
|
(6.71
|
)
|
|
|
(2,053
|
)
|
|
|
(5.68
|
)
|
|
|
(890
|
)
|
|
|
(5.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
December 31,
|
|
|
56,750
|
|
|
$
|
11.92
|
|
|
|
70,618
|
|
|
$
|
13.21
|
|
|
|
67,733
|
|
|
$
|
14.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31,
|
|
|
35,638
|
|
|
$
|
14.29
|
|
|
|
44,489
|
|
|
$
|
16.52
|
|
|
|
44,301
|
|
|
$
|
17.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the options outstanding and exercisable as of
December 31, 2006, the weighted average remaining
contractual term was 4.70 and 4.05 years, respectively, and
the average intrinsic value was $58.4 million and
$29.5 million, respectively.
During the second quarter of 2005, Abhijit Y. Talwalkar joined
the company as President and Chief Executive Officer. As part of
his initial stock option grants, Mr. Talwalkar was granted
non-statutory stock options to purchase 2,000,000 shares of
Company common stock under the 2003 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, subject to
Mr. Talwalkars continued employment with the Company
on each scheduled vesting date.
As of December 31, 2006, total unrecognized compensation
expense related to nonvested stock options, net of estimated
forfeitures, was approximately $70.1 million and is
expected to be recognized over the next 2.6 years on a
weighted average basis. The total intrinsic value of options
exercised for the year ended December 31, 2006 was
$17.9 million. Cash received from stock option exercises
for the year ended December 31, 2006 and 2005 was
$37.0 million and $11.6 million, respectively.
The Companys determination of fair value of share-based
payment awards on the date of grant using an option-pricing
model is affected by the Companys stock price as well a
number of highly complex and subjective assumptions. The Company
uses third-party consultants to assist in developing the
assumptions used in as well as calibrating the Lattice Model.
The Company is responsible for determining the assumptions used
in estimating the fair value of its share-based payment awards.
75
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
Employee
Stock Purchase Plans
Compensation expense for the Companys two employee stock
purchase plans (ESPPs US ESPP and IESPP)
is calculated using the fair value of the employees
purchase rights under the Black-Scholes model. For disclosure
purposes, the Company has included the assumptions that went
into the calculation of fair value for the May and November 2006
grant as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
Grants under Employee Stock Purchase Plans
|
|
2006
|
|
|
Weighted average estimated grant
date fair value per share
|
|
$
|
2.92
|
|
Weighted average assumptions in
calculation:
|
|
|
|
|
Expected life (years)
|
|
|
0.7
|
|
Risk-free interest rate
|
|
|
5
|
%
|
Volatility
|
|
|
35
|
%
|
Dividend yield
|
|
|
|
|
Restricted
Stock Awards
Under the 2003 Plan, the Company may grant restricted stock
awards. No participant may be granted more than 0.5 million
shares of restricted stock in any year. The vesting requirements
for the restricted stock awards are determined by the Board of
Directors. Typically, vesting of restricted stock awards is
subject to the employees continuing service to the
Company. The cost of these awards is determined using the fair
value of the Companys common stock on the date of grant
and compensation expense is recognized over the vesting period
on a straight-line basis.
A summary of the changes in restricted stock awards outstanding
for the year ended December 31, 2006 is presented below:
|
|
|
|
|
|
|
Number of
|
|
|
|
Shares
|
|
|
|
(In thousands)
|
|
|
Non-vested shares at
January 1, 2006
|
|
|
2,375
|
|
Granted
|
|
|
733
|
|
Vested
|
|
|
(928
|
)
|
Forfeited
|
|
|
(270
|
)
|
|
|
|
|
|
Non-vested shares at
December 31, 2006
|
|
|
1,910
|
|
|
|
|
|
|
Restricted stock awards of LSI common stock granted during the
years ended December 31, 2006, 2005 and 2004 are as follows
(share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
Weighted Average
|
|
|
|
Weighted Average
|
|
|
|
Weighted Average
|
|
|
Number of
|
|
Grant Date Fair
|
|
Number of
|
|
Grant Date Fair
|
|
Number of
|
|
Grant Date Fair
|
|
|
Shares
|
|
Value per Share
|
|
Shares
|
|
Value per Share
|
|
Shares
|
|
Value per Share
|
|
Restricted stock awards granted
|
|
|
733
|
|
|
$
|
9.45
|
|
|
|
2,125
|
|
|
$
|
6.32
|
|
|
|
892
|
|
|
$
|
6.75
|
|
As of December 31, 2006, the Company had approximately
$10.8 million of total unrecognized compensation expense,
net of estimated forfeitures, related to restricted stock
awards, which will be recognized over the weighted average
period of 2.2 years. The fair value of shares vested for
the year ended December 31, 2006 was $8.2 million.
76
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
There are a total of approximately 118 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 of the Companys
stock option plans.
Income
taxes
In November 2005, the FASB issued FASB Staff Position
No. FAS 123R-3,
Transition Election Related to Accounting for Tax Effects
of Share-Based Payment Awards. The Company has elected the
alternative transition method (short-cut method) as set forth in
the FASB Staff Position No. FAS 123R-3
Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards. In addition, in
accordance with SFAS 123R, SFAS No. 109,
Accounting for Income Taxes
(SFAS 109), and EITF Topic D-32,
Intraperiod Tax Allocation of the Effect of Pretax Income
from Continuing Operations, the Company has elected to
recognize excess income tax benefits from stock option exercises
in additional paid-in capital only if an incremental income tax
benefit would be realized after considering all other tax
attributes presently available to the Company.
The Company records its stock-based compensation expense in
multiple jurisdictions. In jurisdictions where an income tax
deduction is allowed and an income tax benefit is realizable,
the Company has recognized an income tax benefit. In
jurisdictions where an income tax deduction is not allowed or
where an income tax benefit is not realizable, an income tax
benefit has not been recognized.
Earnings
per share
Basic net income per share is computed using the
weighted-average number of common shares outstanding during the
period. Diluted net income per share is computed using the
weighted-average number of common shares outstanding and
dilutive potential common shares outstanding during the period.
Dilutive potential common shares consist of employee stock
options and restricted common stock. Under the treasury stock
method, the amount the employee must pay for exercising stock
options, employee stock purchase rights, the amount of
compensation cost for future service that the Company has not
yet recognized, and the amount of tax benefits that would be
recorded in additional paid-in capital when the award becomes
deductible are assumed to be used to repurchase the shares.
Pro
Forma Information under SFAS 123 for Periods Prior to
January 1, 2006:
Prior to January 1, 2006, the Company followed the
disclosure-only provisions of SFAS 123. The following table
provides pro forma disclosures as if the Company had recorded
compensation costs based on the estimated grant date fair value,
as defined by the SFAS 123, for awards granted under its
stock-based compensation plans. In such case, the Companys
net loss per share would have been adjusted to the pro forma
amounts below.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts
|
|
|
Net loss, as reported
|
|
$
|
(5,623
|
)
|
|
$
|
(463,531
|
)
|
Add: Amortization of non-cash
deferred stock compensation determined under the intrinsic value
method as reported in net income, net of related tax effects *
|
|
|
638
|
|
|
|
3,494
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value method for all
awards, net of related tax effects*
|
|
|
(70,028
|
)
|
|
|
(120,265
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(75,013
|
)
|
|
$
|
(580,302
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted as reported
|
|
$
|
(0.01
|
)
|
|
$
|
(1.21
|
)
|
Basic and diluted pro forma
|
|
$
|
(0.19
|
)
|
|
$
|
(1.51
|
)
|
|
|
|
* |
|
This amount excludes amortization of stock-based compensation on
restricted stock awards. |
77
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
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
|
|
|
Weighted average estimated grant
date fair value per share
|
|
$
|
3.98
|
|
|
$
|
4.39
|
|
Weighted average assumptions in
calculation:
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
3.88
|
|
|
|
3.90
|
|
Risk-free interest rate
|
|
|
3.30
|
%
|
|
|
3.03
|
%
|
Volatility
|
|
|
67.75
|
%
|
|
|
79.72
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
Engenio Stock Option Exchange Program. On
September 16, 2005, the Company 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.
Stock repurchase program. On July 28,
2000, the Companys Board of Directors authorized a stock
repurchase program in which up to 5.0 million shares of the
Companys common stock were authorized to be repurchased in
the open market from time to time. On December 4, 2006, the
Company announced that the LSI Board of Directors authorized a
stock repurchase program of up to $500.0 million worth of
shares of the Companys common stock. The Board of
Directors terminated the stock repurchase program authorized by
the Board on July 28, 2000. The repurchases are expected to
be funded from available cash and short-term investments. No
shares were repurchased under this plan during 2006.
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
$13.0 million, $11.0 million and $12.0 million
during 2006, 2005 and 2004, respectively.
Note 4
Business Combinations
The Company actively evaluates strategic acquisitions that build
upon the Companys existing library of intellectual
property, human capital and engineering talent, and seeks to
increase the Companys leadership position in the markets
in which the Company operates.
During 2006, the Company completed two acquisitions accounted
for under the purchase method of accounting. In addition, the
Company entered into an agreement to acquire Agere. The
transaction is expected
78
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
to close in the second quarter of 2007. There were no material
acquisitions in 2005. In 2004, the Company made two
acquisitions. Pro forma statements of earnings information have
not been presented because the effect of these acquisitions was
not material either on an individual or aggregate basis. See
summary below (in millions):
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Net
|
|
|
|
|
|
|
|
|
|
Entity Name;
|
|
|
|
|
Total
|
|
|
|
|
|
Assets/
|
|
|
|
|
|
|
|
In-Process
|
|
Segment Included in;
|
|
|
|
|
Purchase
|
|
|
Type of
|
|
|
(Liabilities)
|
|
|
|
|
Amortizable
|
|
|
Research and
|
|
Description of Acquired Business
|
|
Acquisition Date
|
|
|
Price
|
|
|
Consideration
|
|
|
Acquired
|
|
|
Goodwill
|
|
Intangible Assets
|
|
|
Development
|
|
|
StoreAge Networking Technologies,
Ltd.; Storage segment; SAN storage management and multi-tiered
data protection software applications
|
|
|
November 21, 2006
|
|
|
$
|
47.4
|
|
|
$
|
47.4 cash
|
|
|
$
|
(4.6
|
)
|
|
$6.1
|
|
$
|
43.5
|
|
|
$
|
2.4
|
|
Metta Technology; Semiconductor
segment; Next generation digital video
|
|
|
November 10, 2006
|
|
|
$
|
6.7
|
|
|
$
|
6.7 cash
|
|
|
$
|
(0.6
|
)
|
|
Not applicable
asset purchase
|
|
$
|
5.4
|
|
|
$
|
1.9
|
|
2005
There was no acquisition in 2005.
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entity Name;
|
|
|
|
|
|
|
|
|
Tangible Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Included in;
|
|
|
|
Total
|
|
|
|
|
Assets/
|
|
|
|
|
|
|
|
|
In-Process
|
|
|
Deferred
|
|
Description of Acquired
|
|
|
|
Purchase
|
|
|
Type of
|
|
(Liabilities)
|
|
|
|
|
|
Amortizable
|
|
|
Research and
|
|
|
Stock
|
|
Business
|
|
Acquisition Date
|
|
Price
|
|
|
Consideration
|
|
Acquired
|
|
|
Goodwill
|
|
|
Intangible Assets
|
|
|
Development
|
|
|
Compensation
|
|
|
Acerant Inc.;
Semiconductor segment;
Consumer product applications
|
|
May 11, 2004
|
|
$
|
15.9
|
|
|
$14.1 cash,
234,000 restricted
common shares
|
|
$
|
|
|
|
$
|
8.0
|
|
|
$
|
6.1
|
|
|
$
|
|
|
|
$
|
1.8
|
|
Velio Communications;
Semiconductor segment; High
speed interconnect and switch
fabric application
specific standard products
|
|
April 2, 2004
|
|
$
|
20.8
|
|
|
$19.8 cash;
100,000 restricted
common shares
|
|
$
|
1.5
|
|
|
$
|
|
|
|
$
|
18.3
|
|
|
$
|
|
|
|
$
|
1.0
|
|
Acquired in-process research and
development. The Company recorded acquired
IPR&D charges of $4.3 million for the year ended
December 31, 2006. The details for the 2006 acquisitions
are summarized in the table below (in millions).
79
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Projections
|
Entity Name
|
|
IPR&D
|
|
|
Discount Rate
|
|
Extended Through
|
|
StoreAge Networking Technologies,
Ltd.
|
|
$
|
2.4
|
|
|
28%
|
|
2013
|
Metta Technology
|
|
$
|
1.9
|
|
|
Not applicable, used Cost Approach
|
|
Not applicable, used Cost
Approach
|
The amounts of IPR&D were determined by identifying research
projects for which technological feasibility had not been
established and no alternative future uses existed as of the
respective acquisition dates.
For the StoreAge acquisition, the value of the projects
identified to be in progress was determined by estimating the
future cash flows from the projects once commercially feasible,
discounting the net cash flows back to their present value. The
net cash flows from the identified projects were based on
estimates of revenues, cost of revenues, research and
development costs, selling, general and administrative costs and
applicable income taxes for the projects. Total revenues for the
projects are expected to extend through the dates noted in the
table above by acquisition. These projections were based on
estimates of market size and growth, expected trends in
technology and the expected timing of new product introductions
by the Companys competitors and the Company. These
estimates did not account for any potential synergies realizable
as a result of the acquisition and were in line with industry
averages and growth estimates.
A discount rate is used for the projects to account for the
risks associated with the inherent uncertainties surrounding the
successful development of the IPR&D, market acceptance of
the technology, the useful life of the technology, the
profitability level of such technology and the uncertainty of
technological advances, which could impact the estimates
described above.
For the Metta acquisition, a variation of the Cost Approach was
used to value the in-process technologies. This approach takes
into account the cost to replace (or reproduce) the asset and
the effect on the assets value of physical, functional
and/or
economic obsolescence that has occurred with respect to the
asset.
There were no IPR&D charges recorded for the years ended
December 31, 2005 and 2004.
80
LSI Logic
Corporation
Notes to
Consolidated Financial Statements
(continued)
Note 5
Balance Sheet Detail
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
44,151
|
|
|
$
|
30,541
|
|
Work-in-process
|
|
|
52,497
|
|
|
|
62,167
|
|
Finished goods
|
|
|
112,822
|
|
|
|
102,106
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
209,470
|
|
|
$
|
194,814
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current
assets:
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
$
|
20,120
|
|
|
$
|
105,849
|
|
Prepaid expense and other current
assets
|
|
|
48,572
|
|
|
|