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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2007
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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 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
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See definition of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act (check one):
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Large Accelerated
Filer þ
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Accelerated
Filer o
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Non-accelerated
Filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting
company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant as of
July 1, 2007 was approximately $5.5 billion, based on
the reported last sale price on the New York Stock Exchange of
such equity on the last business day of the fiscal quarter
ending on such date.
As of February 20, 2008, 661,081,102 shares of common
stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain information required by Part III of this report is
incorporated by reference from the registrants proxy
statement to be filed pursuant to Regulation 14A with
respect to the registrants 2008 annual meeting of
stockholders.
LSI
Corporation
Form 10-K
For the Year Ended December 31, 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. The
words estimate, plan,
intend, expect, anticipate,
believe and similar words are intended to identify
forward-looking statements. Although we believe our expectations
are based on reasonable assumptions, our actual results could
differ materially from those projected in the forward-looking
statements. We have described in Part I,
Item 1A-Risk
Factors a number of factors that could cause our actual
results to differ from our projections or estimates. Except
where otherwise indicated, the statements made in this report
are made as of the date we filed this report with the Securities
and Exchange Commission and should not be relied upon as of any
subsequent date. We expressly disclaim any obligation to update
the information this report, except as may otherwise be required
by law.
PART I
General
We design, develop and market complex, high-performance
semiconductors and storage systems. We provide
silicon-to-system
solutions that are used at the core of products that create,
store, consume and transport digital information. We offer a
broad portfolio of capabilities including custom and standard
product integrated circuits used in hard disk drives, high-speed
communications systems, computer servers, storage systems and
personal computers. We also offer external storage systems, host
adapter boards and software applications for attaching storage
devices to computer servers and for storage area networks.
Integrated circuits, also called semiconductors or chips, are
made using semiconductor wafers imprinted with a network of
electronic components. They are designed to perform various
functions such as processing electronic signals, controlling
electronic system functions and processing and storing data.
Our business is currently focused on providing integrated
circuits for storage and networking applications and on
providing storage systems and related boards and software. Since
the beginning of 2007, we have completed the following
significant actions:
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On March 13, 2007, we completed the acquisition of
SiliconStor, Inc., a provider of semiconductor solutions for
enterprise storage networks. SiliconStors products support
the serial attached-SCSI, or SAS, and serial advanced technology
attachment, or SATA, standards for connecting hard disks to
computers and enabled our Storage semiconductor business to
offer a more complete line of products.
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On April 2, 2007, we acquired Agere Systems Inc., a
provider of integrated circuit solutions for a variety of
communications and computing applications. Ageres
customers included manufacturers of hard disk drives, mobile
phones, advanced communications and networking equipment and
personal computers. Agere also generated revenues from the
licensing of intellectual property. As a result of the Agere
acquisition, we believe that our Storage semiconductor business
has a broader product line and additional resources, enabling it
to be a stronger competitor. The acquisition also resulted in
the addition of new products and resources for our Networking
semiconductor business. We also expect that Ageres
intellectual property licensing capabilities will allow us to
generate more revenue from our pre-existing patents than we had
generated as a stand-alone company.
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Because our Consumer business no longer had the scale necessary
to be a strong competitor, we sold that business to Magnum
Semiconductor, Inc., completing the sale on July 27, 2007.
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We saw risk in Ageres Mobility business because of the
transition from one generation of technology, 2G products based
on the Global Systems for Mobile Communications, or GSM,
standard, to the next, 3G products based on the wideband Code
Division Multiple Access, or W-CDMA, standard, and because
of its limited customer base. We chose to sell that business,
completing the sale to Infineon Technologies AG on
October 24, 2007.
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On July 25, 2007, we announced our intention to exit our
semiconductor and storage systems assembly and test operations.
This will allow us to focus our resources and attention on our
efforts to design leading-edge semiconductor and storage
solutions. It will also allow us to have a more variable cost
structure and avoid the capital expenses needed for facility
upgrades. We have sold our semiconductor assembly and test
facility in Thailand and are discontinuing operations at our
Singapore semiconductor assembly and test facility and our
Wichita, Kansas storage systems assembly and test facility. We
are transitioning the activities conducted at those facilities
to third party contract manufacturers.
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On October 3, we acquired Tarari, Inc., a maker of silicon
and software that provides content and application awareness in
packet and message processing, enabling advanced security and
network control for service provider and enterprise networks. We
believe these capabilities will become increasingly important as
network operators seek additional billing and security
capabilities.
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Following the Agere acquisition, we have discontinued a number
of development projects and have been reducing headcount in
areas with overlap as we have sought to achieve significant cost
synergies from the acquisition.
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We operate in two segments the Semiconductor segment
and the Storage Systems segment. We market our products
primarily to original equipment manufacturers, or OEMs, that
sell products to our target end customers. In 2007, the
Semiconductor segment accounted for approximately 68% of our
revenue and the Storage Systems segment accounted for
approximately 32% of our revenue. You can find additional
financial information about our segments and geographic
financial information in Note 9 to our financial statements
in Item 8. See Item 1A Risk
Factors for information about risks we face as a result of
our operations outside the United States.
Our Semiconductor segment designs, develops and markets highly
complex integrated circuits for storage and networking
applications. These solutions include both custom solutions and
standard products. Custom solutions are designed for a specific
application defined by the customer. Standard products are
developed for market applications that we define and are sold to
multiple customers. Our Storage Systems segment designs,
manufactures and sells enterprise storage systems. Our
high-performance, highly scalable open storage area network
systems and storage solutions are distributed through OEMs. The
Storage Systems segment also offers host bus adapters; redundant
array of independent disks, or RAID, adapters; software and
related products and services.
LSI Logic Corporation was incorporated in California on
November 6, 1980, and was reincorporated in Delaware on
June 11, 1987. Shortly after the Agere acquisition, we
changed our name to LSI Corporation.
We maintain an Internet website at www.lsi.com. We make
available free of charge on our website our annual report on
Form 10-K,
our quarterly reports on
Form 10-Q,
our current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file such
material with, or furnish it to, the U.S. Securities and
Exchange Commission. You can read any materials that we file
with the Commission at the Commissions Public Reference
Room at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You can obtain information on the
operation of the Public Reference Room by calling the Commission
at
(800) 732-0330.
Information on our website is not incorporated by reference into
this report.
Products
SEMICONDUCTOR
SEGMENT
Storage
Products
Hard Disk and Tape Drive Electronics. We sell
integrated circuits for hard disk and tape drive solutions,
which are used to store and retrieve data in personal computers,
corporate network servers, archive/back-up devices and consumer
electronics products such as digital video recorders, game
consoles and digital media players. A disk drive contains
physical media, one or more platters that store
data, a motor that spins the media, drive heads that read data
from and write data to the media and electronics that process
the data and control the disk drive. Tape drives store data on
magnetic tape and provide a high capacity, cost effective tiered
data storage
back-up
solution.
Our
TrueStore®
family of storage electronics products includes
systems-on-a-chip,
read channels,
pre-amplifiers,
serial physical interfaces and hard disk controllers as well as
custom firmware. These are the critical chips required to read,
write and protect data. We offer products that can be used in a
variety of hard disk applications, including hard drives
intended for notebook computers, desktop computers and
enterprise computers, and in tape drives.
A storage
system-on-a-chip,
or SoC, is an integrated circuit that combines the functionality
of a read channel, serial interface, memory and a hard disk
controller in a small, high-performance, low-power and
cost-effective package.
Read channels convert analog signals that are generated by
reading the stored data on the physical media into digital
signals. Analog refers to a transmission technique employing a
continuous signal that varies in amplitude, frequency or phase
of the transmission. Digital refers to a method of transmitting,
storing and processing data that uses distinct electronic or
optical pulses to represent the binary digits 0 and 1. We also
sell
pre-amplifiers,
or
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preamps, which are used to amplify the initial signal to and
from the hard disk heads so the signal can be processed by the
read channel. We provide similar technology for tape drives. Our
hard disk controllers are used to control signal processing and
communications functions within the disk drive.
Consumers are increasingly in need of more storage to manage
their digital content digital music, photographs and
video. As disk drives reach a capacity ceiling using current
horizontal recording techniques, which record data in one layer
on the surface of the media, new techniques and electronics are
being developed to increase the capacity of hard disks. One
method to increase storage capacities is to use perpendicular
recording, which stores data in multiple layers on the media.
Over the last two fiscal years, we have introduced a number of
storage integrated circuits that support both horizontal and
perpendicular recording, with what we believe to be attractive
performance characteristics compared to competing solutions.
Together, these TrueStore products are critical to determining
the overall performance of hard disk and tape drive solutions.
Storage Interface Products. We also offer
solutions that make possible data transmission and storage
between a host computer and peripheral devices such as magnetic
and optical disk drives and disk and tape-based storage systems.
These products include:
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Storage Standard Products. Our standard
product solutions include Fibre Channel; SAS; SATA; and small
computer system interface, or SCSI, standard products, including
host adapter integrated circuits for motherboard and adapter
applications, SCSI and SAS expander integrated circuits, storage
adapter boards and our own
Fusion-MPTtm
software drivers for these product families.
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Storage Custom Solutions. We also offer custom
solutions to customers who develop Fibre Channel and Fibre
Channel over Ethernet storage area network, or SAN, switches and
host adapters, storage systems, hard disk drives and tape
peripherals. By leveraging our extensive experience in providing
solutions for these applications, we have developed a full
portfolio of high-speed interface intellectual property that is
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 intellectual property
offerings include high performance SerDes cores supporting Fibre
Channel, SAS, SATA, 10-Gigabit Ethernet, Gigabit Ethernet,
Infiniband, SAS, Serial RapidIO and PCI-Express industry
standards and a family of high-performance Fibre Channel,
Ethernet, RapidIO, PCI-E, SAS and SATA protocol controllers.
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Networking
Products
We offer comprehensive solutions that allow networking service
providers to deliver a variety of highly reliable communications
services to homes, businesses and mobile users over Internet
Protocol, or IP, networks. IP networks are packet based. In an
IP network, packets of data that are part of the same telephone
conversation or video program can be routed over different
paths. Traditional telephone networks are circuit-based where
all data packets follow the same dedicated path or circuit.
Historically, the dedicated paths in circuit-based networks have
provided greater reliability than packet-based networks,
although at the cost of flexibility.
Our networking solutions are designed to enable IP networks to
provide reliability similar to that of circuit-based networks
and incorporate quality of service features that allow more
critical data to receive priority over less critical data. For
example, packets containing data about a television picture,
where a delayed packet can mean a noticeable flaw in the
picture, can be delivered before packets containing web-page
data being downloaded to a personal computer, where a slight
delay is less likely to be noticed.
Our networking portfolio includes solutions for carrier-managed
gateways that would be used in residential, small office, home
office and
small-to-medium
business applications. The portfolio also includes solutions for
multi-service wired and wireless access systems found in carrier
networks. Multi-service systems can handle traffic such as data
and video in addition to voice. Our networking solutions include
chips such as our network processors, digital signal processors,
content-inspection processors, traffic shaping devices and
physical layer devices as well as software, evaluation systems
and reference designs.
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Network
Processors
Network processors are typically used in switching and routing
systems to classify, prioritize and forward packets as they move
through a carriers network. We offer network processors
with the ability to handle a range of data throughputs, from 200
megabits per second up to 6 gigabits per second. Megabits and
gigabits are units of measurement for data. A megabit is equal
to approximately one million bits and a gigabit is equal to
approximately 1,000 megabits. For example, our
PayloadPlus®
APP2200 family provides a lower cost solution intended for
systems located between the customers premises and the
carriers local central office, where data throughput
demands are lower, but the need to prioritize the packets is
still critical for all services to be delivered successfully.
Our PayloadPlus APP600 is a higher throughput solution designed
for use in systems that are closer to the core of a
carriers IP network, where data throughput demands are
higher.
Digital
Signal Processors
Digital signal processors, or DSPs, transform analog signals
into digitally-encoded bitstreams and perform advanced
algorithms on these bitstreams. Our DSPs perform audio, video
and speech signal processing, compression and transcoding and
can be used in applications including
Voice-over-IP,
or VoIP, business and enterprise gateways, video delivery, media
gateways and wired and wireless access network equipment.
Content
Inspection Processors
Through the acquisition of Tarari, we enhanced our networking
portfolio with a family of content-inspection processors, which
are available as silicon chips, boards and software acceleration
components designed for network equipment, appliance and server
vendors. Our Tarari content inspection processors perform deep
packet inspection at wire speeds, ranging from 100 megabits per
second to over 10 gigabits per second. These products offload
and accelerate applications such as anti-virus, anti-spam,
intrusion prevention/detection systems, compliance,
content-based routing and XML processing.
Network
Traffic Aggregation and Framing Solutions
In addition to the networking products described above, we offer
chips with supporting software that are designed for equipment
used in metropolitan and wide area backbone telecommunications
networks. That equipment can be used in both wired and wireless
networks.
Broadband Aggregation Devices. Broadband is a
general term that refers to high-speed data transmission. Our
broadband access integrated circuits, or mappers, support data
transport between central offices and enterprise sites by
aggregation and termination. Aggregation refers to the combining
of many low-speed, or tributary, data signals from enterprises
into higher speed, or trunk, data signals for transmission to a
central office. Termination refers to the separation of trunk
data signals into lower-speed, tributary data signals.
Our products support data transport for T-carrier data transport
in North America. T-carrier is a digital transmission service
from a common carrier. We support similar services worldwide.
These services are referred to as J-carrier in Japan and
E-carrier in
Europe. T-carrier services such as T1 and T3 lines are widely
used to create
point-to-point
networks for use by enterprises. T1 and T3 lines refer to
different levels of T-carrier service that transmit data at
1.544 megabits per second and 44.736 megabits per second,
respectively.
SONET/SDH Network Devices. Synchronous optical
networks, which are typically referred to as SONET, and
synchronous digital hierarchy standard networks, or SDH, carry
data, voice and video traffic through a network by combining
lines carrying traffic at slower speeds with lines carrying
traffic at higher speeds. This process is known as multiplexing,
and involves directing traffic from the individual lines into
designated time slots in the higher speed lines, and directing
those lines into still higher speed lines. The SONET/SDH
equipment that handles the directing of traffic into slower
speed and faster speed lines is the add-drop multiplexer.
Add-drop multiplexers handle the addition and removal of traffic
from a SONET/SDH communication transmission. We offer
single-chip integrated circuit solutions called framers, for
add-drop multiplexing of data and voice traffic. In addition,
our framers are used in high-speed routers within optical
networks. A router is an interface, or link, between two
networks.
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Personal
Connectivity Solutions
We sell high speed input/output products primarily to
manufacturers of computers, peripheral equipment and
communications equipment. Input/output refers to the transfer of
data within and between computers; peripheral equipment, such as
printers, scanners and digital cameras; and data networks. Our
products support established connectivity and transmission
standards known as Gigabit Ethernet, IEEE-1394, and Universal
Serial Bus or USB.
In addition, we sell integrated circuits and associated software
for modem products, primarily to leading manufacturers of
personal computers, notebook computers,
point-of-sale
terminals, facsimile machines, multi-function printers, cable
and satellite set-top boxes and other electronic equipment.
Other
Networking Products
We also sell integrated circuits that are custom developed for
our customers. These integrated circuits incorporate our vast
storage and networking intellectual property or combine our
intellectual property with the intellectual property of our
customers or other third parties to create a customized solution
for these customers. For some customers, we design and
manufacture the integrated circuit while the key intellectual
property belongs solely to our customers.
We believe that our systems-level knowledge and integrated
circuit design methodologies allow us to turn our
customers design concepts into a systems solution quickly
and effectively. Our intellectual property gives our customers
the flexibility to customize their products to meet their
individual cost and performance objectives.
STORAGE
SYSTEMS SEGMENT
We offer a broad line of open, modular storage products
comprised of complete systems and
sub-assemblies
configured from modular components, such as our storage
controller modules, disk drive enclosure modules, related
management software and advanced data protection software for
creating local and remote copies of critical data. The
modularity of our products provides our original equipment
manufacturer, or OEM, customers with the flexibility to
integrate 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 OEM customers to create highly customized
storage systems that can then be integrated with value-added
software and services and delivered as a complete,
differentiated data storage solution to enterprises. In late
2006, we introduced a line of entry-level storage systems to
complement our existing mid-level storage system offerings. In
early 2007, we began offering software virtualization
technology. This technology, which we obtained through the
acquisition of StoreAge Networking Technologies Ltd. in November
2006, enables advanced data replication capabilities.
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 redundant
array of independent disks, or 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 SATA and
SAS interfaces, along with fully featured software and utilities
for robust storage configuration and management.
We deliver our storage systems products to OEMs who
independently resell or distribute OEM-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. We
provide our OEM partners with training services to enhance their
abilities to sell and support our products. After receiving our
training services, most of our OEM partners independently
market, sell and support our products, requiring limited ongoing
product support from us. We also assist some of our OEM partners
with additional resources that may
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provide tailored, account-specific education, training,
technical support and sales and marketing assistance, allowing
these partners to leverage our storage products and industry
expertise.
Marketing
and Distribution
Semiconductor
Marketing and Distribution
The semiconductor industry is highly competitive and is
characterized by rapidly changing technology, short product
cycles and emerging standards. Our marketing strategy requires
that we forecast trends in the evolution of product and
technology development. We must then act upon this knowledge in
a timely manner to develop competitively priced products
offering superior performance or integration. As part of this
strategy, we are active in the formulation and adoption of
critical industry standards that influence the design
specifications of our products.
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. We also work with independent component and
commercial distributors and manufacturers representatives
or other channel partners in North America, Europe, Japan and
elsewhere in Asia. Some of our distributors possess engineering
capabilities, and design and purchase both custom solutions and
standard products from us for resale to their customers. Other
distributors focus solely on the sale of standard products.
Storage
Systems Marketing and Distribution
We sell our storage systems products to our OEM customers who
sell them worldwide under their own brand identities using their
sales and distribution channels. We work closely with our OEM
customers and tailor these relationships to meet the diverse
needs and requirements of end customers worldwide. By selling
products through our OEM customers and leveraging their brand
marketing and worldwide sales channels, we are able to address
more markets, reach a greater number of enterprises, and achieve
better leverage of our sales and marketing expenditures.
Our marketing efforts are designed to support our OEM 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
roadmaps, developing product positioning and pricing, creating
product launch support materials and assisting in closing the
sales process. These marketing teams carefully coordinate joint
product development and marketing efforts between our customers
and us to ensure that we address and effectively target
enterprise requirements. We maintain sales and marketing
organizations in the United States and internationally in China,
France, Germany, Italy, Japan, Singapore, Sweden and the United
Kingdom.
Customers
In 2007, Seagate Technology accounted for approximately 19% and
International Business Machines Corporation accounted for
approximately 15% of our total revenues. No other customer
accounted for more than 10% of our total revenues in 2007. We
currently have a highly concentrated customer base as a result
of our strategy to focus our marketing and sales efforts on
select, large-volume customers. Our top 10 end customers in
2007, based on revenue, accounted for approximately 74% of our
revenue. The loss of any of our significant customers, any
substantial decline in sales to these customers, or any
significant change in the timing or volume of purchases by our
customers could result in lower revenues and could harm our
business, financial condition or results of operations.
Manufacturing
Semiconductor
Manufacturing
The semiconductor manufacturing process 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
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into a package that encapsulates the integrated circuit for
protection and allows for electrical connection to a printed
circuit board. The final step in the manufacturing process is
final test, where the finished devices undergo stringent and
comprehensive testing.
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. We have a joint venture, Silicon Manufacturing Partners,
with Chartered Semiconductor Manufacturing Ltd., that provides
some wafer fabrication services for us. All of our other wafer
fabrication is performed by third-party foundries. Our primary
foundry partners are Taiwan Semiconductor Manufacturing
Corporation and Chartered Semiconductor.
We also use third-party suppliers to perform final assembly and
test operations for us. In 2007, we sold Ageres assembly
and test facility in Thailand and we are in the process of
transitioning assembly and test work performed at Ageres
facility in Singapore to third-party suppliers.
We believe that using third-party 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. It also reduces our capital requirements as we do not
need to spend large amounts to build and upgrade manufacturing
facilities, particularly in the area of wafer fabrication, where
facilities must be upgraded periodically and each upgrade tends
to cost significantly more than the preceding upgrade.
Storage
Systems Manufacturing
We use third-party suppliers for standard components, such as
disk drives and standard computer processors, which are designed
and incorporated into our products. Additionally, we outsource
the manufacturing of 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 also use third-party suppliers to
assemble and test our storage systems products. Although we
currently have a manufacturing facility in Wichita, Kansas at
which we assemble and test complete storage systems and
sub-assemblies,
we are transitioning the work performed there to third-party
suppliers.
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.
Backlog
Semiconductor
Backlog
In the Semiconductor segment, we generally do not have long-term
volume purchase contracts with our customers. Instead, customers
place purchase orders that are subject to acceptance by us. The
timing of the design activities for which we receive payment and
the placement of orders included in our backlog at any
particular time is generally within the control of the customer.
For example, there could be a significant time lag between the
commencement of design work and the receipt of a purchase order
for the units of a developed product. Also, customers may from
time to time revise delivery quantities or delivery schedules to
reflect their changing needs. For these reasons, we do not
believe that our backlog as of any particular date is a
meaningful indicator of future annual sales.
Storage
Systems Backlog
Due to the nature of our business, we 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 within the same 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
7
that expected sales will not materialize, leading to excess
inventory, which we may be unable to sell to our customers.
Competition
Semiconductor
Competitors
The semiconductor industry is intensely competitive and
characterized by constant technological change, rapid product
obsolescence, evolving industry standards and price erosion.
Many of our competitors are larger, diversified companies with
substantially greater financial resources. Some of our
competitors are also customers who have internal semiconductor
design and manufacturing capacity. We also compete with smaller
and emerging companies whose strategy is to sell products into
specialized markets or to provide only a portion of the products
and services that we offer.
Our competitors in the Semiconductor segment include Adaptec,
Inc., Broadcom Corporation, Freescale, Inc., International
Business Machines Corporation, Marvell Technology Group, Ltd.,
NEC Corporation, NetLogic Microsystems, Inc., NXP
Semiconductors, PMC-Sierra, Inc., STMicroelectronics N.V. and
Texas Instruments, Inc.
The principal competitive factors in the semiconductor industry
include:
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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;
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breadth of product line;
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customer support;
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logistics and planning systems; and
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utilization of emerging industry standards.
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While we believe we are competitive on the basis of all the
factors listed above, we believe some of our competitors compete
more favorably on the basis of price and on delivering products
to market more quickly. However, we feel we are particularly
strong in offering integrated solutions, our broad product
lines, our customer support and our logistics and planning
systems. In addition, existing suppliers tend to have an
advantage when competing for designs, which can make it
difficult for us to win designs at new customers, even if we
compete favorably on the factors identified above.
The markets into which we sell our semiconductor products are
subject to severe price competition. We expect to continue to
experience declines in the selling prices of our semiconductor
products over the life cycle of each product. In order to offset
or partially offset declines in the selling prices of our
products, we continually strive to reduce the costs of products
through product design changes, manufacturing process changes,
yield improvements and procurement of wafers from outsourced
manufacturing partners.
Storage
Systems Competitors
The market for our storage system products is highly
competitive, rapidly evolving and subject to changing
technology, customer needs and new product introductions. We
compete with products from storage system and component
providers such as Adaptec, Inc., Dot Hill Systems Corporation,
Infortrend Technology Inc., XIOtech Corporation, and Xyratex
Group Limited. We also compete with the internal storage
divisions of existing and potential OEM customers, with large
well-capitalized storage system companies such as EMC
Corporation, Hitachi Data Systems and Network Appliance, Inc.
and with newer competitors such as such as 3Par Inc., Compellent
Technologies Inc. and ISILON Systems Inc.
8
The principal competitive factors for storage system products
include:
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features and functionality;
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product performance and price;
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reliability, scalability and data availability;
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interoperability with other server, storage networking and
storage system platforms;
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interoperability with industry applications, including database,
email, and internet content delivery systems;
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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 and maintain industry leadership
in product development and support.
Patents,
Trademarks and Licenses
We own or have rights to a number of patents, trademarks,
copyrights, trade secrets and other intellectual property
directly related to and important to our business. As of
December 31, 2007, we had approximately 10,600
U.S. patents and patent applications and a number of
related foreign patents and patent applications. These patents
include patents related to the following technologies:
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Integrated circuit and optoelectronic manufacturing processes;
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A number of technologies related to storage systems;
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Consumer electronics products such as digital cameras, digital
audio players, DVD players, digital televisions and personal
computers;
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Modems, digital signal processors, wireless communications,
network processors and communication protocols; and
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Optoelectronic products including lasers, optical modulators,
optical receivers and optical amplifiers.
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We have patents of all ages ranging from pending applications,
which will have a duration of 20 years from their filing
dates, through patents soon to expire.
We indemnify our customers for some of the costs and damages of
patent infringement in circumstances where our product is the
primary factor creating the customers infringement
exposure. We generally exclude coverage where infringement
arises out of the combination of our products with products of
others.
We protect our products and processes by asserting our
intellectual property rights where appropriate and prudent. We
also obtain licenses to patents, copyrights and other
intellectual property rights used in connection with our
business when practicable and appropriate.
Companies in the technology industry are often subject to claims
of intellectual property infringement. You can find information
about the impact of these types of claims in
Item 1A Risk Factors. You can also
find
9
information about several legal proceedings against us that
involve intellectual property claims in Note 14 to our
financial statements in Item 8.
Research
and Development
Our industry experiences rapid change and we must continually
develop new products to remain competitive. Our research and
development expenditures were $655 million,
$413 million and $400 million for fiscal 2007, 2006
and 2005, respectively. Our research and development
expenditures increased significantly in 2007 as a result of the
Agere Systems acquisition. We anticipate that we will continue
to make significant research and development expenditures to
maintain our competitive position with a continuing flow of
innovative products and technology.
Working
Capital
Information about our working capital practices is included in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operation
under the heading Financial Condition, Capital Resources
and Liquidity and is incorporated herein by reference.
Environmental
Regulation
Federal, state and local regulations, in addition to those of
other nations, impose various environmental controls on 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, health and safety management
systems. We offer products that comply with the requirements of
the European Union Restriction of Hazardous Substances Directive
2002/95/EC (RoHS Directive) that was implemented on July 1,
2006 and other international 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, 2007, we had 6,193 full-time
employees.
Our future success depends upon the continued service of our key
technical and management personnel and upon our ability to
continue to attract and retain qualified employees, particularly
those highly skilled design, process and test engineers involved
in the development of new products and processes. We currently
have favorable employee relations, but the competition for
technical personnel is intense, and the loss of key employees or
the inability to hire such employees when needed could have a
material adverse impact on our business and financial condition.
Seasonality
Our business is largely focused on the information technology
industry. Due to seasonality in this industry, we typically
expect to see stronger revenues in the second half of the year.
Set forth below are risks and uncertainties that, if they were
to occur, could materially adversely affect our business or that
could cause our actual results to differ materially from the
results contemplated by the forward-looking statements in this
report and other public statements we make.
10
We
depend on a small number of customers. The loss of, or a
significant reduction in revenue from, any of these customers
would harm our results of operations.
A limited number of customers accounts for a substantial portion
of our revenues. In 2007, Seagate and IBM, our two largest
customers, represented approximately 19% and 15%, respectively,
of our total revenues. If any of our key customers reduced
significantly or canceled its orders, our business and operating
results could be significantly harmed. Because many of our
products have long product design and development cycles, it may
be difficult for us to replace key customers that reduce or
cancel their existing orders. In addition, we may not win new
product designs from major customers, major customers may make
significant changes in scheduled deliveries, or major customers
may decide to pursue the internal development of the products we
sell to them, and our business and results of operations may be
seriously harmed if any of these events were to occur.
If we
fail to keep pace with technological advances, or if we pursue
technologies that do not become commercially accepted, customers
may not buy our products and our results of operations may be
harmed.
The industry segments in which we operate are characterized by
rapid technological change, changes in customer requirements,
frequent new product introductions and enhancements, short
product cycles and evolving industry standards. We believe that
our future success will depend, in part, on our ability to
improve on existing technologies and to develop and implement
new ones, as well as on our ability to adopt and implement
emerging industry standards in a timely manner and to adapt
products and processes to technological changes. If we fail to
make sufficient investments in research and development programs
in order to develop new and enhanced products and technologies,
if we focus on technologies that do not become widely adopted,
or if new technologies that we do not offer and that compete
with our technologies become widely accepted, new technologies
could reduce demand for our current and planned products.
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 adapt effectively and expeditiously to new
standards, our business may be harmed.
We
operate in intensely competitive markets, and our failure to
compete effectively would harm our results of
operations.
We derive significant revenue from the sale of integrated
circuits as well as storage systems. These industries are
intensely competitive, and competition may increase as existing
competitors enhance their product offerings and as new
participants enter the market. Our competitors include many
large domestic and foreign companies that have substantially
greater financial, technical and management resources than us.
Several major diversified electronics companies offer products
that compete with our products. Other competitors are
specialized, rapidly growing companies that sell products into
the same markets that we target. Some of our customers may also
design and manufacture products internally that compete with our
products. We can not provide any assurances that the price and
performance of our products will be superior relative to the
products of our competitors.
Increased competition may harm our revenues and margins. For
example, competitors with greater financial resources may be
able to offer lower prices than us, or they may offer additional
products, services or other incentives that we may not be able
to match. Competitors may be better able than us to respond
quickly to new technologies and may undertake more extensive
marketing campaigns than we do. They may also make strategic
acquisitions or establish cooperative relationships among
themselves or with third parties to increase their market share.
In addition, competitors may sell commercial quantities of
products before we do, establishing a market position that we
may not be able to overcome once we introduce similar products
in commercial quantities. If we are unable to develop and market
competitive products on a timely basis, we will likely fail to
maintain or expand our market share and our revenues will likely
decline.
11
We may
fail to realize benefits expected from our merger with Agere,
which could harm our stock price.
We acquired Agere with the expectation that, among other things,
we would be able to leverage our research and development,
patents and services across a larger base, and to become a
stronger and more competitive company. We have achieved some of
these benefits; however, there are some benefits that we have
not yet achieved and hope to achieve in the future, for example
cost savings and operational efficiencies that we expect to
experience when we migrate to a single enterprise resource
planning, or ERP, system. We can give no assurance that we will
achieve any of these benefits or any other additional benefits
from the merger. Our ability to achieve any further benefits
from the merger will depend in part upon our continuing to meet
the ongoing challenges inherent in the successful combination
and integration of global business enterprises of the size and
scope of LSI and Agere.
Customer
orders and ordering patterns can change quickly, making it
difficult for us to predict our revenues and making it possible
that our actual revenues may vary materially from our
expectations, which could harm our results of operations and
stock price.
We sell a significant amount of product pursuant to purchase
orders that customers may cancel or defer on short notice
without incurring a significant penalty. In addition, the period
of time between order and product shipment can be very short. If
customers reduce the rate at which they place new orders,
whether because of changing market conditions for their products
or other reasons, or if they cancel or defer previously placed
orders, the impact on our revenue can occur quickly and could
cause us to experience revenues that are lower than we may have
indicated in any forecast of our future revenue that we may have
made publicly. Reductions in new order rates as well as
cancellations or deferrals of existing orders could also cause
us to hold excess inventory, which could adversely affect our
results of operations.
We
depend increasingly on outside suppliers to manufacture,
assemble, package and test our products; accordingly, any
failure to transition successfully our manufacturing, assembly,
packaging and test operations to suppliers, to secure and
maintain sufficient manufacturing capacity or to maintain the
quality of our products could harm our business and results of
operations.
We depend to a large extent on third-party foundries to
manufacture integrated circuits for us. We also depend
increasingly on outside suppliers to assemble and test many of
our semiconductor products and to assemble our storage systems
products. As such, we face the following risks:
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a supplier may be unwilling to devote adequate capacity to the
production of our products or may be unable to produce our
products;
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a supplier may fail to develop, or may discontinue,
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 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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The ability of an independent foundry to provide us with
integrated circuits is limited by its available capacity and
existing obligations. We generally do not enter into contracts
to reserve foundry capacity. Availability of foundry capacity
has in the recent past been reduced from time to time due to
strong demand and may not be available when needed at reasonable
prices. If foundry capacity is limited, it is possible that one
of our foundries may allocate capacity to the production of
other companies products. This reallocation could impair
our ability to obtain sufficient wafers. We may also use a
second foundry for a particular product when capacity at the
main foundry is limited, but the cost of integrated circuits at
the second foundry may be higher, which would reduce our margins.
To the extent that we rely on outside suppliers to manufacture
or assemble and test our products, we may have a reduced ability
to control directly product delivery schedules and quality
assurance. This lack of control may result in product shortages
or quality assurance problems that could delay shipments of
products or increase manufacturing, assembly, testing or other
costs. In addition, if these outside suppliers are unable to
obtain sufficient raw
12
materials in a timely manner, we may experience product
shortages or delays in product shipments, which could harm our
customer relationships and results of operations.
If any of our manufacturing suppliers experiences capacity
constraints, encounters financial difficulties, or experiences
any other major disruption of its operations, we may need to
qualify an alternate supplier, which may take several months and
could result in delays in product shipments. These delays could
cause our customers to seek alternate suppliers, which could
adversely impact our business.
As a result of all of these factors and risks, and although we
carefully monitor and plan for capacity and other issues, we can
not provide any assurances that we can obtain products from our
suppliers on a timely basis or at reasonable prices.
We are in the process of transitioning semiconductor assembly
and test operations in Singapore and our storage systems
manufacturing operations in Wichita, Kansas to third-party
suppliers. If a disruption in production occurs because of these
transitions, we may sell fewer products and our revenue and
results of operations would be affected.
Failure
to qualify our semiconductor products or our suppliers
manufacturing lines with key customers could harm our business
and results of operations.
Some customers will not purchase any products, other than
limited numbers of evaluation units, until they qualify the
products or the manufacturing line for the product. We may not
always be able to satisfy the qualification requirements of
these customers. Delays in qualification may cause a customer to
discontinue use of non-qualified products and result in a
significant loss of revenue.
Any
defects in our products could harm our reputation, customer
relationships and results of operations.
Our products may contain undetected defects, errors or failures,
which may not become apparent until the products are deployed in
commercial applications and other equipment. Consequently,
customers may discover errors after the products have been
deployed. The occurrence of any defects, errors or failures
could result in:
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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.
As
part of our integration efforts with Agere, we intend to
transition Ageres operation to our enterprise resource
planning system. Any issues that may arise with this transition
could interfere with our business and harm our operating results
or our ability to produce accurate and timely financial
statements.
We have commenced a project to consolidate our business onto a
single global ERP system. Ageres business utilizes a
different ERP system than the system we have used historically.
To streamline operations, we are in the process of converting
Ageres business to our ERP system. Converting Ageres
business processes, data and applications is a complex and
time-consuming task. During this transition period, we are
exposed to the possibility that we may not combine information
correctly from the two systems, impacting our financial
statements or our planning processes.
Although we are planning the conversion carefully and expect to
perform extensive testing before the actual conversion, it is
possible that we may not convert all information or processes
correctly or that some other problem
13
could arise. Any problems that arise could impair our ability to
process customer orders, ship products, provide services and
support to our customers, bill and track orders, fulfil
contractual obligations, file reports with the Securities and
Exchange Commission in a timely manner and otherwise run our
business. Even if we do not encounter these adverse effects, the
transition to a single ERP system may be much more costly than
we anticipated, which would adversely affect our future
operating results.
We may
be subject to intellectual property infringement claims and
litigation, which could cause us to incur significant expenses
or prevent us from selling our products.
As is typical in the semiconductor industry, we are frequently
involved in disputes regarding patent and other intellectual
property rights. We have in the past received, and we may in the
future receive, communications from third parties asserting that
our products, processes or technologies infringe on the patent
or other intellectual property rights of third parties, and we
may also receive claims of potential infringement if we attempt
to license intellectual property to others. Intellectual
property litigation, regardless of the outcome, may be costly
and time consuming, and may divert the attention of management
and key personnel from other business issues. Claims of
intellectual property infringement also might require us to
enter into costly royalty or license agreements. We may not be
able to obtain royalty or license agreements on acceptable
terms. If any of our products or intellectual property infringes
on valid rights held by others our results of operations or
financial position may suffer and we may have to make material
changes in production processes or products.
If we
are unable to protect or assert our intellectual property
rights, our business and results of operations may be
harmed.
Our future success will depend, in part, upon our ability to
protect and assert our intellectual property rights. We will
rely primarily on patent and other intellectual property laws,
as well as nondisclosure agreements and other methods, to
protect our proprietary technologies and processes. It is
possible that competitors or other unauthorized third parties
may obtain, copy, use or disclose proprietary technologies and
processes, despite our efforts to protect them.
While we hold a significant number of patents, we can give you
no assurance that any additional patents will be issued. Even if
new patents are issued, the claims allowed may not be
sufficiently broad to protect our technology. In addition, any
of our existing patents, and any future patents issued to us,
may be challenged, invalidated or circumvented, or changes in
law may result in us having less protection than we may have
experienced historically. As such, any rights granted under
these patents may not provide us with meaningful protection. We
may not have foreign patents or pending applications
corresponding to our U.S. patents and applications. Even if
foreign patents are granted, effective enforcement in foreign
countries may not be available.
If our patents do not adequately protect our technology,
competitors may be able to offer products similar to our
products more easily. Our competitors may also be able to
develop similar technology independently or design around our
patents. Some or all of our patents have in the past been
licensed and likely will in the future be licensed to certain of
our competitors through cross-license agreements.
A
decline in the revenue that we derive from the licensing of
intellectual property could have a significant impact on our net
income.
The revenue we generate from the licensing of our intellectual
property has a higher gross margin compared to the revenue we
generate from the sale of other products. Although we derive a
relatively small percentage of our total revenue from the
licensing of intellectual property, a decline in this licensing
revenue would have a greater impact on our profitability than a
similar decline in revenues from the sale of our other products.
Our licensing revenue tends to come from a limited number of
transactions and the failure to complete one or more
transactions in a quarter could have a material adverse impact
on our revenue and profitability.
14
We are
exposed to legal, business, political and economic risks
associated with our international operations.
We derive, and we expect to continue to derive, a substantial
portion of our revenue from sales of products shipped to
locations outside of the United States. In 2007, approximately
67% of our total revenue was derived from sales outside the
United States. In addition, we manufacture a significant portion
of our products outside of the United States and we rely on
non-U.S. suppliers
for many parts and services. Operations outside of the United
States are subject to a number of risks and potential costs that
could harm our business and results of operations, including:
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political, social and economic instability;
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fluctuations in foreign currency exchange rates;
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exposure to different legal standards, particularly with respect
to intellectual property;
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natural disasters and public health emergencies;
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nationalization of businesses and blocking of cash flows;
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trade and travel restrictions;
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imposition of governmental controls and restrictions;
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burdens of complying with a variety of foreign laws;
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import and export license requirements and restrictions;
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unexpected changes in regulatory requirements;
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foreign technical standards;
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difficulties in staffing and managing international operations;
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international trade disputes;
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difficulties in collecting receivables from foreign entities or
delayed revenue recognition; and
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potentially adverse tax consequences.
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We use
indirect channels of product distribution over which we have
limited control.
Although we have in the past sold our storage systems products
directly to end customers, we have discontinued this practice
and now sell only to other companies that may or may not add
features or functionality to our products before reselling them
to end customers. We also sell some of our semiconductor
products through distributors. A deterioration in our
relationships with our distributors or resellers, or a decline
in their business, could harm our operating results. In
addition, as our business grows, our reliance on indirect
channels of distribution may increase. We may not successfully
maintain or expand these indirect channels of distribution, and
our failure to do so could result in the loss of sales
opportunities. Furthermore, our reliance on indirect channels of
distribution may reduce visibility with respect to future
business opportunities, thereby making it more difficult to
forecast orders.
Our
failure to attract, retain and motivate key employees could harm
our business.
In some of our fields of operation, there are only a limited
number of people in the job market who possess the requisite
skills. In the past we have experienced difficulty in
identifying and hiring sufficient numbers of qualified engineers
in parts of our business as well as in retaining employees. The
loss of the services of any key personnel or our inability to
hire new personnel with the requisite skills could restrict our
ability to develop new products or enhance existing products in
a timely manner, to sell products to our customers or to manage
our business effectively.
15
We may
engage in acquisitions and strategic alliances, which may not be
successful and could harm our business and operating
results.
We expect to continue to explore strategic acquisitions that
build upon or expand our library of intellectual property, human
capital and engineering talent, and increase our ability to
address the needs of our customers. For example, in 2007, in
addition to our merger with Agere, we acquired SiliconStor, a
privately held company that provided silicon solutions for
enterprise storage networks, and Tarari, a privately-held maker
of silicon and software that provides content and application
awareness in packet and message processing. Mergers and
acquisitions of high-technology companies have inherent risks.
No assurance can be given that our previous acquisitions or
future acquisitions will be successful and will not harm our
business and operating results. In addition, we may make
investments in companies, products and technologies through
strategic alliances and otherwise. If these investments are not
successful, our results of operation may suffer.
The
semiconductor industry is highly cyclical, which may cause our
operating results to fluctuate.
We operate in the highly cyclical semiconductor industry. This
industry is characterized by wide fluctuations in product supply
and demand. In the past, the semiconductor industry has
experienced significant downturns, often in connection with, or
in anticipation of, excess manufacturing capacity worldwide,
maturing product cycles and declines in general economic
conditions. Even if demand for our products remains constant, a
lower level of available foundry capacity could increase our
costs, which would likely have an adverse impact on our results
of operations.
Our
operations and our suppliers operations are subject to
natural disasters and other events outside of our control that
may disrupt our business and harm our operating
results.
Our operations and those of our suppliers are subject to natural
disasters and other events outside of our control that may
disrupt our business and harm our operating results. For
example, a widespread outbreak of an illness such as avian
influenza, or bird flu, or severe acute respiratory syndrome, or
SARS, could harm our operations and those of our suppliers as
well as decrease demand from customers. We have operations in
Singapore, Thailand and China, countries where outbreaks of bird
flu and/or
SARS have occurred. Also, we have substantial operations in
parts of California that have experienced major earthquakes and
in parts of Asia that have experienced both typhoons and
earthquakes. If our operations or those of our suppliers are
curtailed because of health issues or natural disasters, our
business may be disrupted and we may need to seek alternate
sources of supply for manufacturing or other services. Alternate
sources may not be available, may be more expensive or may
result in delays in shipments to customers, which would affect
our results of operations. In addition, a curtailment of design
operations could result in delays in the development of new
products. If our customers businesses are affected by
health issues or natural disasters, they might delay or reduce
purchases, which could harm our business and results of
operations.
We are
subject to various environmental laws and regulations that could
impose substantial costs on us and may harm our
business.
Our business is subject to various environmental laws and
regulations. For example, countries have begun to require
companies selling a broad range of electrical equipment to
conform to regulations such as the Waste Electrical and
Electronic Equipment directive and the Restriction of Hazardous
Substances directive. Environmental standards such as these
could require us to redesign our products in order to comply
with the standards and require the development of compliance
administration systems. Redesigned products could be more costly
to manufacture or require more costly or less efficient raw
materials, making our products more costly or less desirable. In
addition, under certain environmental laws, we could be held
responsible, without regard to fault, for costs relating to any
contamination at our past facilities and at third party waste
disposal sites. We could also be held liable for consequences
arising out of human exposure to such substances or other
environmental damage. If we cannot develop compliant products on
a timely basis or properly administer our compliance programs,
our revenues may also decline due to lower sales, which may harm
our business.
16
Our
stockholder rights plan and Delaware law contain provisions that
may inhibit potential acquisition bids, which may harm our stock
price, discourage merger offers or prevent changes in our
management.
We have a stockholder rights plan that could dilute the
ownership interest of a potential acquirer in a transaction that
our board of directors has not approved. In addition, our board
has the authority to issue preferred stock and to determine the
rights, preferences, privileges and restrictions, including
voting rights, of the shares without any further vote or action
by our stockholders. If we issue any of these shares of
preferred stock in the future, the rights of stockholders of our
common stock may be negatively affected. Although we have no
current plans to issue shares of preferred stock, if we issue
preferred stock, a change of control of our company could be
delayed, deferred or prevented. Furthermore, Section 203 of
the Delaware General Corporation Law restricts certain business
combinations with any interested stockholder as
defined by that statute.
These provisions are designed to encourage potential acquirers
to negotiate with our board of directors and give our board an
opportunity to consider various alternatives to increase
stockholder value. These provisions are also intended to
discourage certain tactics that may be used in proxy contests.
However, the potential issuance of preferred stock, the
restrictions in Section 203 of the Delaware General
Corporation Law and our stockholder rights plan could discourage
potential acquisition proposals and could delay or prevent a
change in control, which may adversely affect the market price
of our stock. These provisions and plans may also have the
effect of preventing changes in our management or board of
directors.
Class
action litigation due to stock price volatility or other factors
could cause us to incur substantial costs and divert our
managements attention and resources.
In the past, securities class action litigation often has been
brought against a company following periods of volatility in the
market price of its securities. Companies in the technology
industry are particularly vulnerable to this kind of litigation
due to the high volatility of their stock prices. Our stock has
experienced substantial price volatility in the past. This may
be a result of quarterly variations in our results of
operations, the published expectations of security analysts and
announcements by us and our competitors as well as general
economic conditions and our stock price may continue to
experience substantial volatility. Accordingly, we may in the
future be the target of securities litigation. Any securities
litigation could result in substantial costs and could divert
the attention and resources of our management.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
We lease office space in several buildings in Milpitas,
California for our corporate headquarters, administration and
engineering offices. We also own a 600,000 square foot
office complex in Allentown, Pennsylvania that we use for
administration and engineering offices. We have leased out
approximately 69,000 square feet of space in that facility
in connection with the sale of our mobility business.
In our Storage Systems business, we own our manufacturing,
engineering and executive office site in Wichita, Kansas, which
includes approximately 330,000 square feet of space.
We also own approximately 170,000 square feet of sales and
engineering office space in Fort Collins, Colorado and
approximately 180,000 square feet of sales and engineering
office space in Colorado Springs, Colorado. These facilities are
used by both our Semiconductor segment and our Storage Systems
segment.
We own or lease additional space in the United States and in
various other countries, and use that space for sales,
marketing, engineering, general corporate and assembly and test
purposes.
We believe that our existing facilities and equipment are well
maintained, in good operating condition, suitable for our
operations and are adequate to meet our current requirements.
17
|
|
Item 3.
|
Legal
Proceedings
|
This information is included in Note 14 (Commitments,
Contingencies And Legal Matters) to our financial
statements in Item 8 and is incorporated herein by
reference.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
During the fourth quarter of 2007, no matter was submitted to a
vote of our security holders.
Executive
Officers of LSI
Set forth below is information about our executive officers.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Abhijit Y. Talwalkar
|
|
|
43
|
|
|
President and Chief Executive Officer
|
Philip G. Brace
|
|
|
37
|
|
|
Senior Vice President, Corporate Planning and Marketing
|
Philip W. Bullinger
|
|
|
43
|
|
|
Executive Vice President, Engenio Storage Group
|
Jon R. Gibson
|
|
|
62
|
|
|
Vice President, Human Resources
|
Bryon Look
|
|
|
54
|
|
|
Executive Vice President and Chief Financial Officer
|
Andrew Micallef
|
|
|
43
|
|
|
Executive Vice President, Worldwide Manufacturing Operations
|
Jean F. Rankin
|
|
|
49
|
|
|
Executive Vice President, General Counsel and Secretary
|
D. Jeffrey Richardson
|
|
|
43
|
|
|
Executive Vice President, Network and Storage Products Group
|
Flavio Santoni
|
|
|
49
|
|
|
Executive Vice President, Server and Storage Customer Sales
|
Claudine Simson
|
|
|
54
|
|
|
Executive Vice President, Chief Technology Officer
|
Ruediger Stroh
|
|
|
45
|
|
|
Executive Vice President, Storage Peripherals Group
|
Mr. Talwalkar has been our President and Chief Executive
Officer and a member of our Board of Directors since May 2005.
Prior to joining LSI, Mr. Talwalkar was employed by Intel
Corporation, a microprocessor manufacturer. At Intel, he was
Corporate Vice President and Co-general Manager of the Digital
Enterprise Group from January 2005 until May 2005, Vice
President and General Manager of Intels Enterprise
Platform Group from May 2004 to January 2005, and Vice President
and General Manager of Intels Platform Products Group,
within Intels Enterprise Platform Group, from April 2002
through May 2004. Mr. Talwalkar also served as Vice
President and Assistant General Manager of Intels
Enterprise Platform Group from June 2001 to March 2002.
Mr. Brace has been our Senior Vice President, Corporate
Planning and Marketing, since he joined LSI in August 2005. From
1993 though August 2005, Mr. Brace held a number of
marketing, sales and applications engineering positions at Intel.
Mr. Bullinger has been the leader of our Storage Systems
business since August 2005. From September 2001, through August
2005, he served as Vice President and General Manager of our
RAID Storage Adapters division. He joined LSI in 1998, following
LSIs acquisition of Symbios, Inc., a storage company, and
served as Director of Product Development until August 2001.
Mr. Gibson has been the leader of our Human Resources
organization since November 2001. Between 1984 and 2001, he held
a number of managerial positions in our Human Resources
organization.
Mr. Look has been Executive Vice President and Chief
Financial Officer since November 2000. Between March 1997 and
November 2000, he was our Vice President, Corporate Development
and Strategic Planning. Prior to joining LSI, he was manager of
business development in Hewlett-Packards corporate
development department.
18
During a
21-year
career at Hewlett-Packard, Mr. Look held a variety of
management positions in finance and research and development.
Mr. Micallef has been in charge of our manufacturing, real
estate and supply chain operations since April 2007.
Mr. Micallef joined LSI in April 2007 following our
acquisition of Agere Systems. At Agere, he held a number of
senior management positions in manufacturing and supply chain
operations from 2000 through April 2007.
Ms. Rankin has been our Executive Vice President, General
Counsel and Secretary since April 2007. Ms. Rankin joined
LSI in 2007 following the acquisition of Agere Systems. At
Agere, she had been Executive Vice President, General Counsel
and Secretary since 2000.
Mr. Richardson has been the leader of our Network and
Storage Products Group since April 2007. That group includes our
Networking and Storage Interfaces businesses. From September
2005 through April 2007, he was the leader of our Custom
Solutions Group, and from June 2005 through September 2005, he
lead our Corporate Strategy function. From 1992 through June
2005, he held a variety of management positions at Intel,
including positions as Vice President of the Digital Enterprise
Group and General Manager of the Server Platform Group from
February 2005 through June 2005 and General Manager of
Intels Enterprise Platforms and Services Division from
June 2001 to January 2005. From January 1999 to June 2001, he
was Director of Product Development of Intels Enterprise
Platforms and Services Division.
Mr. Santoni has been the leader of our Storage Systems
sales organization since October 2006. From February 2001
through October 2006, he held a number of senior sales and
marketing positions for our Storage Systems business. Before
joining LSI in 2001, Mr. Santoni was Executive Vice
President and Chief Operating Officer at Sutmyn Storage
Corporation and held various senior management positions with
Memorex Telex in the United States, United Kingdom and Italy.
Dr. Simson has been our Chief Technology Officer since
April 2007. From 2003 through 2006, she was chief technology
officer at Motorola, Inc.s Semiconductor Products Sector
and its spin-off, Freescale Semiconductor, a supplier of
semiconductors. Prior to joining Motorola, Dr. Simson held
senior executive positions at Nortel Networks over a
23-year
period, including general manager of Nortels semiconductor
business and vice president in charge of all technology
research. Dr. Simson was inducted into the Hall of Fame of
Women in Technology International in 1999 and is a Fellow of the
Royal Society of Canada (Academy of Science) and a Distinguished
Fellow of the Fields Institute. She was named Chevalier de
lOrdre National du Mérite by the President of France
in 1998, honoring her contributions to the worldwide advancement
of science and technology. Since November 2006, she has served
on the Board of Directors of Verigy, Inc., a spin-off from
Agilent Technologies. Since November 2007, she has served on the
Board of Directors of the Alliance for Telecommunications
Industry Solutions (ATIS), a United States-based body that
develops and promotes technical and operations standards for the
communications and related information technologies industry
worldwide.
Mr. Stroh has been the leader of our Storage Products Group
since April 2007. That group includes our hard disk and tape
drive electronics business. Before joining LSI following the
Agere acquisition, Mr. Stroh was the head of Ageres
Storage group from November 2005 until April 2007. Since August
2004, he has been a director, and from August 2004 until
November 2005, he was Chief Executive Officer, of Intematix
Inc., a nano and thin film materials design and manufacturing
company. From November 2003 to November 2005, he was an active
principal of RST Partners, a technology consulting firm. From
February 2003 through November 2003, he was President and Chief
Executive Officer and a director of Trebia Networks Inc., a
storage area networking chipset company. From April 2001 to
January 2003, Mr. Stroh was President and Chief Executive
Officer of Systemonic AG, a wireless local area networking
chipset company. Prior to that, he held a number of management
positions at Infineon Technologies Corporation, including
General Manager and Senior Vice President of the Storage
Business Unit as well as the Consumer and DataComm Business Unit.
Officers are not elected for a fixed term of office but hold
office until their successors have been elected. There are no
family relationships among the executive officers and directors
of LSI.
19
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our stock trades on the New York Stock Exchange under the symbol
LSI. In May 2007, our Chief Executive Officer
submitted to the Exchange an annual certification stating that
he was not aware of any violations of the Exchanges
corporate governance listing standards.
The table below shows the high and low sales prices for our
common stock for each quarter during our last two full fiscal
years, as reported in the consolidated transaction reporting
system.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
High Low
|
|
|
High Low
|
|
|
|
|
|
First Quarter
|
|
$
|
10.67 8.78
|
|
|
$
|
11.81 7.96
|
|
|
|
|
|
Second Quarter
|
|
$
|
10.68 7.40
|
|
|
$
|
11.79 8.41
|
|
|
|
|
|
Third Quarter
|
|
$
|
8.37 5.99
|
|
|
$
|
9.17 7.41
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
7.80 5.06
|
|
|
$
|
11.08 8.01
|
|
|
|
|
|
At February 20, 2008, there were 362,300 holders of record of
our common stock. We believe that we have a greater number of
additional stockholders who own their shares through brokerage
firms and other nominees.
We have never paid cash dividends on our common stock. It is
presently our policy to reinvest our earnings, and we do not
currently anticipate paying any cash dividends to stockholders
in the foreseeable future.
Issuer
Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate Dollar
|
|
|
|
Total Number
|
|
|
|
|
|
Shares (or Units)
|
|
|
Value) of Shares (or
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Purchased as Part of
|
|
|
Units) that May Yet
|
|
|
|
(or Units)
|
|
|
Paid per Share
|
|
|
Publicly Announced
|
|
|
Be Purchased Under
|
|
Period
|
|
Purchased
|
|
|
(or Unit)
|
|
|
Plans or Programs
|
|
|
the Plans or Programs
|
|
|
October 1 October 31, 2007
|
|
|
6,250,000
|
|
|
$
|
6.61
|
|
|
|
6,250,000
|
|
|
$
|
409,561,970
|
|
November 1 November 30, 2007
|
|
|
22,620,700
|
|
|
$
|
6.30
|
|
|
|
22,620,700
|
|
|
$
|
267,069,888
|
|
December 1 December 31, 2007
|
|
|
6,500,000
|
|
|
$
|
5.82
|
|
|
|
6,500,000
|
|
|
$
|
229,247,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
35,370,700
|
|
|
$
|
6.27
|
|
|
|
35,370,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On August 20, 2007, we announced that our Board of
Directors had authorized the repurchase of up to
$500 million of our common stock. The repurchases reported
in the table above were all pursuant to this authorization.
20
PERFORMANCE
GRAPH
The following graph compares the cumulative total stockholder
return on our common stock to that of the S&P 500 Index,
the S&P 500 Semiconductors Index and the Philadelphia
Semiconductor Index. The graphs assume that a $100 investment
was made in our common stock and each of the indices at
December 31, 2002, and that dividends, if any, were
reinvested in all cases except for the Philadelphia
Semiconductor Index. In previous years, we have used the
Philadelphia Semiconductor Index in our performance graphs. We
are switching the comparison from the Philadelphia Semiconductor
Index to the S&P 500 Semiconductors Index because of the
difficulty of assuming the reinvestment of dividends in the
Philadelphia Semiconductor Index. The stock price performance
shown on the graphs is not necessarily indicative of future
price performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 31, 2002
|
|
Dec 31, 2003
|
|
Dec 31, 2004
|
|
Dec 31, 2005
|
|
Dec 31, 2006
|
|
Dec 31, 2007
|
LSI Corporation
|
|
$
|
100
|
|
|
$
|
153.73
|
|
|
$
|
94.97
|
|
|
$
|
138.65
|
|
|
$
|
155.98
|
|
|
$
|
92.03
|
|
S&P 500 Index
|
|
$
|
100
|
|
|
$
|
128.68
|
|
|
$
|
142.69
|
|
|
$
|
149.70
|
|
|
$
|
173.34
|
|
|
$
|
182.86
|
|
S&P 500 Semiconductors Index
|
|
$
|
100
|
|
|
$
|
197.49
|
|
|
$
|
156.24
|
|
|
$
|
175.24
|
|
|
$
|
159.62
|
|
|
$
|
178.74
|
|
Philadelphia Semiconductor Index
|
|
$
|
100
|
|
|
$
|
187.74
|
|
|
$
|
151.34
|
|
|
$
|
172.14
|
|
|
$
|
159.60
|
|
|
$
|
171.98
|
|
21
|
|
Item 6.
|
Selected
Financial Data
|
Five-Year
Consolidated Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
2,603,643
|
|
|
$
|
1,982,148
|
|
|
$
|
1,919,250
|
|
|
$
|
1,700,164
|
|
|
$
|
1,693,070
|
|
Cost of revenues
|
|
|
1,699,785
|
|
|
|
1,158,983
|
|
|
|
1,150,042
|
|
|
|
1,039,804
|
|
|
|
1,092,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
903,858
|
|
|
|
823,165
|
|
|
|
769,208
|
|
|
|
660,360
|
|
|
|
600,407
|
|
Research and development
|
|
|
655,224
|
|
|
|
413,432
|
|
|
|
399,685
|
|
|
|
427,805
|
|
|
|
453,107
|
|
Selling, general and administrative
|
|
|
381,409
|
|
|
|
255,569
|
|
|
|
238,265
|
|
|
|
245,460
|
|
|
|
239,319
|
|
Restructuring of operations and other items, net
|
|
|
148,121
|
|
|
|
(8,427
|
)
|
|
|
119,052
|
|
|
|
423,444
|
|
|
|
180,597
|
|
Goodwill and intangible impairment charges
|
|
|
2,021,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
188,872
|
|
|
|
4,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income from operations
|
|
|
(2,491,231
|
)
|
|
|
158,307
|
|
|
|
12,206
|
|
|
|
(436,349
|
)
|
|
|
(272,616
|
)
|
Interest expense
|
|
|
(31,020
|
)
|
|
|
(24,263
|
)
|
|
|
(25,283
|
)
|
|
|
(25,320
|
)
|
|
|
(30,703
|
)
|
Interest income and other, net
|
|
|
46,762
|
|
|
|
51,277
|
|
|
|
34,000
|
|
|
|
22,170
|
|
|
|
18,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before income taxes and minority interest
|
|
|
(2,475,489
|
)
|
|
|
185,321
|
|
|
|
20,923
|
|
|
|
(439,499
|
)
|
|
|
(284,386
|
)
|
Provision for income taxes
|
|
|
11,326
|
|
|
|
15,682
|
|
|
|
26,540
|
|
|
|
24,000
|
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before minority interest
|
|
|
(2,486,815
|
)
|
|
|
169,639
|
|
|
|
(5,617
|
)
|
|
|
(463,499
|
)
|
|
|
(308,386
|
)
|
Minority interest in net income of subsidiary
|
|
|
4
|
|
|
|
1
|
|
|
|
6
|
|
|
|
32
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(2,486,819
|
)
|
|
$
|
169,638
|
|
|
$
|
(5,623
|
)
|
|
$
|
(463,531
|
)
|
|
$
|
(308,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss)/income per share
|
|
$
|
(3.87
|
)
|
|
$
|
0.43
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(0.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss)/income per share
|
|
$
|
(3.87
|
)
|
|
$
|
0.42
|
|
|
$
|
(0.01
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(0.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,396,390
|
|
|
$
|
2,852,144
|
|
|
$
|
2,796,066
|
|
|
$
|
2,874,001
|
|
|
$
|
3,447,901
|
|
Long-term obligations
|
|
$
|
1,148,689
|
|
|
$
|
429,400
|
|
|
$
|
699,050
|
|
|
$
|
859,545
|
|
|
$
|
1,007,079
|
|
Stockholders equity
|
|
$
|
2,484,996
|
|
|
$
|
1,895,738
|
|
|
$
|
1,627,950
|
|
|
$
|
1,618,046
|
|
|
$
|
2,042,450
|
|
Amortization of intangibles, which was previously reported as a
separate component of operating expenses, has been reclassified
to cost of revenues for 2003 through 2006 to conform to the
current period presentation.
On April 2, 2007, we acquired Agere through the merger of
Agere and a subsidiary of ours. The merger was accounted for as
a purchase. Accordingly, the results of operations of Agere and
estimated fair value of assets acquired and liabilities assumed
were included in our consolidated financial statements from
April 2, 2007.
For a discussion of charges for restructuring of operations,
sale of business units and other items, see Note 2 to our
financial statements in Item 8, which information is
incorporated by reference in this Item 6. For a discussion
of recent acquisitions, see Note 4 to our financial
statements in Item 8.
We monitor 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. During the year ended
December 31, 2007, we determined that based on the current
market conditions in the semiconductor industry, the carrying
amount of our goodwill was no longer recoverable. We recognized
a goodwill
22
impairment charge of $2,019.9 million in the Semiconductor
segment. The fair value of the Semiconductor segment was
estimated using the present value of estimated future cash
flows. In addition, we recognized $1.6 million in charges
for the impairment of certain amortizable intangible assets in
the Semiconductor segment for the year ended December 31,
2007.
On January 1, 2006, we adopted the fair value recognition
provisions of Statement of Financial Accounting Standards
No. 123(R) (FAS 123R), Share-Based
Payment, 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 to January 1, 2006. Under this method
of implementation, no restatement of prior periods has been made.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This Managements discussion and analysis should be read
in conjunction with the other sections of this
Form 10-K,
including Part 1, Item 1: Business;
Part II, Item 6: Selected Financial Data;
and Part II, Item 8: Financial Statements and
Supplementary Data.
OVERVIEW
We design, develop and market complex, high-performance
semiconductors and storage systems. We provide silicon-to-system
solutions that are used at the core of products that create,
store, consume and transport digital information. We offer a
broad portfolio of capabilities including custom and standard
product integrated circuits used in hard disk drives, high-speed
communication systems, computer servers, storage systems and
personal computers. We also offer external storage systems, host
adapter boards and software applications for attaching storage
devices to computer servers and for storage area networks. Our
business is currently focused on providing integrated circuits
for storage and networking applications and on providing storage
systems and related boards and software.
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, or OEMs, that sell products to our
target end customers.
On April 2, 2007, we completed the acquisition of Agere
Systems Inc. through the merger of Agere and a subsidiary of
ours. As a result of the merger, each share of Agere common
stock issued and outstanding immediately prior to the effective
time of the merger was converted into the right to receive
2.16 shares of LSI common stock. Approximately
368 million shares of LSI common stock were issued to
former Agere stockholders in connection with the merger.
As a result of the merger, LSI acquired the business and assets
of Agere. Agere was a provider of integrated circuit solutions
for a variety of communications and computing applications. Some
of its solutions included related software and reference
designs. Ageres customers included manufacturers of hard
disk drives, mobile phones, advanced communications and
networking equipment and personal computers. Agere also
generated revenues from the licensing of intellectual property.
Our revenues for the year ended December 31, 2007 were
$2,603.6 million, representing a 31.4% increase from
$1,982.1 million for the year ended December 31, 2006.
The increase in revenues was primarily attributable to the Agere
acquisition included in our results of operations from
April 2, 2007, the date of acquisition.
We reported a net loss of $2,486.8 million, or $3.87 per
diluted share, for the year ended December 31, 2007, as
compared to net income of $169.6 million, or $0.42 per
diluted share, for the year ended December 31, 2006. For
the year ended December 31, 2007, we recorded a charge for
an impairment to goodwill and certain amortizable intangible
assets of $2,021.5 million, a $188.9 million charge
for acquired in-process research and development primarily
associated with the Agere acquisition, and charges for
restructuring of operations and other items, net of
$148.1 million relating primarily to the sale of the
Mobility Products Group.
23
On June 27, 2007, we announced the signing of a definitive
agreement to sell our Consumer Products Group to Magnum
Semiconductor and a reduction in our workforce by approximately
900 positions or 13 percent of our non-production
workforce. We completed the sale of the Consumer Products Group
on July 27, 2007.
On October 2, 2007, we completed the sale of our
semiconductor assembly and test operations in Thailand to STATS
ChipPAC Ltd. We also plan to transition semiconductor and
storage systems assembly and test operations performed at our
facilities in Singapore and Wichita, Kansas to current
manufacturing partners. As part of these actions, we expect to
eliminate approximately 2,100 production positions worldwide.
On October 24, 2007, we completed the sale of the Mobility
Products Group to Infineon Technologies AG.
We monitor 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. During the fourth quarter of
2007, we determined that based on the current market conditions
in the semiconductor industry, the carrying amount of our
goodwill was no longer recoverable. We recognized a goodwill
impairment charge of $2,019.9 million in the Semiconductor
segment. The fair value of the Semiconductor segment was
estimated using the present value of estimated future cash
flows. In addition, we recognized $1.6 million in charges
for the impairment of certain amortizable intangible assets in
the Semiconductor segment for the year ended December 31,
2007.
Cash, cash equivalents and short-term investments were
$1,397.6 million as of December 31, 2007, as compared
to $1,008.9 million as of December 31, 2006. For the
year ended December 31, 2007, we generated
$295.0 million in cash provided by operations as compared
to $247.2 million for the year ended December 31, 2006.
We actively evaluate strategic acquisitions that build upon our
existing library of intellectual property, human capital and
engineering talent, and seek to increase our leadership position
in the areas in which we operate. The following table summarizes
the acquisitions we completed during the year ended
December 31, 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets/
|
|
|
|
|
Amortizable
|
|
|
In-Process
|
|
Entity Name; Segment Included in;
|
|
Acquisition
|
|
Total
|
|
|
Type of
|
|
|
(Liabilities)
|
|
|
|
|
Intangible
|
|
|
Research and
|
|
Description of Acquired Business
|
|
Date
|
|
Consideration
|
|
|
Consideration
|
|
|
Acquired
|
|
|
Goodwill
|
|
Assets
|
|
|
Development
|
|
|
Tarari, Inc.; Semiconductor segment; Silicon and software
solutions for security and network control
|
|
October 3, 2007
|
|
$
|
93.0
|
|
|
$
|
93.0 cash
|
|
|
$
|
6.3
|
|
|
$57.4
|
|
$
|
23.3
|
|
|
$
|
6.0
|
|
Agere Systems Inc.; Semiconductor segment; Integrated circuit
solutions for communications and computing applications
|
|
April 2, 2007
|
|
$
|
3,720.1
|
|
|
|
368 million
shares of LSI
common stock
|
|
|
$
|
231.8
|
|
|
$1,584.2
|
|
$
|
1,727.7
|
|
|
$
|
176.4
|
|
SiliconStor, Inc.; Semiconductor segment; Silicon solutions for
enterprise storage based on SAS and FC-SATA
|
|
March 13, 2007
|
|
$
|
56.4
|
|
|
$
|
56.4 cash
|
|
|
$
|
1.5
|
|
|
$37.8
|
|
$
|
10.6
|
|
|
$
|
6.5
|
|
The transactions were each accounted for as a purchase of a
business. Accordingly, the estimated fair value of assets
acquired and liabilities assumed and the results of operations
of each acquired company were included in our financial
statements from the effective date of the acquisition.
RESULTS
OF OPERATIONS
Where more than one significant factor contributed to changes in
results from year to year, we have quantified those factors
throughout Managements Discussion & Analysis of
Financial Condition and Results of Operations where practicable
and useful to the discussion.
24
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Semiconductor segment
|
|
$
|
1,778.9
|
|
|
$
|
1,223.1
|
|
|
$
|
1,244.3
|
|
Storage Systems segment
|
|
|
824.7
|
|
|
|
759.0
|
|
|
|
675.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
2,603.6
|
|
|
$
|
1,982.1
|
|
|
$
|
1,919.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant inter-segment revenues during the
periods presented.
2007
compared to 2006
Total consolidated revenues for 2007 increased
$621.5 million or 31.4% as compared to 2006, primarily due
to the Agere acquisition.
Semiconductor
Segment
Revenues for the Semiconductor segment increased
$555.8 million or 45.4% in 2007 as compared to 2006. The
increase in semiconductor revenues was primarily due to revenues
attributable to Agere of $821.5 million and, to a lesser
extent, increased demand for semiconductors used in storage
product applications associated with the ramping of our Serial
Attached SCSI, or SAS, products.
The increase was partially offset by:
|
|
|
|
|
A decrease in revenues from consumer products due to the sale of
the Consumer Products Group;
|
|
|
|
A decrease in demand for semiconductors used in consumer product
applications such as digital audio players where our
customers solution was not included in the new generation
of its customers products and a decrease in demand for
semiconductors used in DVD products and cable set-top box
solutions;
|
|
|
|
A decrease in demand for semiconductors used in storage
interface connect products; and
|
|
|
|
A decrease in demand for semiconductors used in communication
product applications such as enterprise networking,
telecommunications and printing.
|
Storage
Systems Segment:
Revenues for the Storage Systems segment increased
$65.7 million or 8.7% in 2007 as compared to 2006. The
increase was primarily attributable to:
|
|
|
|
|
An increase in sales from the ramp of our entry level storage
products, which were introduced in the fourth quarter of 2006;
|
|
|
|
An increase in demand for our premium feature software
products; and
|
|
|
|
Continued strength in our mid-range class products.
|
The increase was partially offset by decreased revenues for our
RAID storage adapters due to lower hardware sales.
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.
25
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.
The 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, or WAN, products.
Storage
Systems Segment:
Revenues for the Storage Systems segment increased
$84.0 million or 12.4% in 2006 from 2005. The increase was
primarily attributable to increased demand from certain large
customers for our high performance controller and drive modules
introduced in the second quarter of 2006 and also for our
mid-range integrated storage modules.
See Note 9 to our financial statements in Item 8 for
information about our significant customers.
Revenues
by Geography:
The following table summarizes our revenues by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
North America*
|
|
$
|
858.7
|
|
|
$
|
956.7
|
|
|
$
|
932.2
|
|
Asia including Japan
|
|
|
1,401.3
|
|
|
|
797.1
|
|
|
|
756.0
|
|
EMEA**
|
|
|
343.6
|
|
|
|
228.3
|
|
|
|
231.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total***
|
|
$
|
2,603.6
|
|
|
$
|
1,982.1
|
|
|
$
|
1,919.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Primarily the United States. |
|
** |
|
EMEA refers to Europe, Middle East and Africa. Our business is
in Europe and the Middle East. |
|
*** |
|
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, our Storage Systems business formed new subsidiaries
within EMEA. As a result, the amounts in the table reflect that
change as of June 21, 2005. Prior to that, all revenues
generated by our Storage Systems business in EMEA were reported
in North America. |
2007
compared to 2006:
North America: Revenues in North America
decreased $98.0 million or 10.2% in 2007 as compared to
2006. The decrease was primarily attributable to a decline in
demand for semiconductors used in consumer product applications
such as digital audio players, storage interface connect
products, and communication products. The decrease was offset in
part by increased storage systems revenues due to the ramp of
our entry level SAS storage product introduced in the
fourth quarter of 2006, increased demand for semiconductors used
in SAS storage product applications, and increased revenues due
to the Agere acquisition.
Asia including Japan: Revenues in Asia,
including Japan, increased $604.2 million or 75.8% in 2007
as compared to 2006. The increase was primarily attributable to
the Agere acquisition and increased demand for storage
semiconductors used in SAS applications, offset in part by
decreased demand for consumer semiconductors used in DVD
products, the sale of the Consumer Products Group and a decrease
in demand for semiconductors used in communication product
applications such as telecommunications and printing.
EMEA: Revenues in EMEA increased
$115.3 million or 50.5% in 2007 as compared to 2006. The
increase was primarily attributable to the Agere acquisition,
increased storage systems revenues due to the ramp of our entry
26
level SAS storage product introduced in the fourth quarter
of 2006, and increased revenues from custom semiconductors used
in tape drive applications and storage semiconductors used in
SAS applications. The increase was offset in part by decreased
demand for semiconductors used in communication products such as
telecommunications, decreased demand for semiconductors used in
consumer product applications such as set-top boxes and DVD
products, and the sale of the Consumer Products Group.
2006
compared to 2005:
North America: Revenues in North America
increased $24.5 million or 2.6% in 2006 as compared to
2005. The increase was attributable to increased demand within
the Storage Systems segment. The increase was offset in part by
declines in demand for semiconductors used in consumer product
applications such as digital audio players, declines in domestic
demand for semiconductors used in storage product applications,
and decreased revenues for semiconductors used in communication
product applications such as wireless and WAN products.
Asia including Japan: Revenues in Asia,
including Japan, increased $41.1 million or 5.4% in 2006 as
compared to 2005. The increase was attributable to increased
demand for semiconductors used in storage product applications
such as hard disk drives, Host Bus Adapters, or HBAs, and server
products, semiconductors used in storage standard product
applications such as SAS products, and the shift in
semiconductors used in communication product applications. The
increase was 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.
EMEA: Revenues in EMEA decreased
$2.8 millions or 1.2% in 2006 as compared to 2005. The
decrease was 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, semiconductors used in storage standard product
applications such as SAS products, and semiconductors used in
communication product applications.
Gross
Profit Margin, Operating Costs and Expenses
The following are key elements of the consolidated statements of
operations for the respective segments:
Gross
Profit Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Semiconductor segment
|
|
$
|
603.7
|
|
|
$
|
561.7
|
|
|
$
|
548.3
|
|
Percentage of segment revenues
|
|
|
33.9
|
%
|
|
|
45.9
|
%
|
|
|
44.1
|
%
|
Storage Systems segment
|
|
$
|
300.2
|
|
|
$
|
261.5
|
|
|
$
|
220.9
|
|
Percentage of segment revenues
|
|
|
36.4
|
%
|
|
|
34.5
|
%
|
|
|
32.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
903.9
|
|
|
$
|
823.2
|
|
|
$
|
769.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
34.7
|
%
|
|
|
41.5
|
%
|
|
|
40.1
|
%
|
Amortization of intangibles, which was previously reported as a
separate component of operating expenses, has been reclassified
to cost of revenues for the years ended December 31, 2006
and 2005 to conform to the current period presentation.
2007
compared to 2006:
The consolidated gross profit margin as a percentage of revenues
declined from 41.5% in 2006 to 34.7% in 2007. This primarily
reflects a decrease in Semiconductor segment gross margins
caused in large part by the Agere acquisition.
27
Semiconductor
Segment:
The gross profit margin as a percentage of segment revenues for
the Semiconductor segment decreased to 33.9% in 2007 from 45.9%
in 2006. The decline was primarily attributable to:
|
|
|
|
|
An increase of $143.2 million in the amortization of
intangible assets primarily related to the acquisition of Agere;
|
|
|
|
Inventory charges of $47.9 million related to fair valuing
the inventory acquired from Agere; and
|
|
|
|
$19.0 million in charges related to required purchases
under a wafer supply agreement with ON Semiconductor that were
in excess of what we believed we could sell.
|
Storage
Systems Segment:
The gross profit margin as a percentage of segment revenues for
the Storage Systems segment increased to 36.4% in 2007 from
34.5% in 2006. This increase was driven by higher demand for
premium feature software products, which have higher margins,
and lower manufacturing costs across our mid-range product line.
2006
compared to 2005:
The consolidated gross profit margin as a percentage of revenues
was 41.5% and 40.1% in 2006 and 2005, respectively.
Semiconductor
Segment:
The gross profit margin as a percentage of segment revenues for
the Semiconductor segment increased to 45.9% in 2006 from 44.1%
in 2005. The increase was attributable to a favorable shift in
product mix towards higher margin semiconductors used in storage
and communication product applications and lower prices from our
foundry partners.
The increase 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
FAS 123R as of January 1, 2006.
|
Storage
Systems Segment:
The gross profit margin as a percentage of segment revenues for
the Storage Systems segment increased to 34.5% in 2006 from
32.7% in 2005. This increase was primarily attributable to
decreased amortization of intangible assets of
$15.7 million as a result of certain intangible assets
becoming fully amortized during 2006 and 2005 and the write-off
of certain intangible assets acquired in a purchase business
combination during the second quarter of 2006.
The increase was offset in part by:
|
|
|
|
|
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
FAS 123R.
|
28
Research
and Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Semiconductor segment
|
|
$
|
525.4
|
|
|
$
|
315.9
|
|
|
$
|
307.7
|
|
Percentage of segment revenues
|
|
|
29.5
|
%
|
|
|
25.8
|
%
|
|
|
24.7
|
%
|
Storage Systems segment
|
|
$
|
129.8
|
|
|
$
|
97.5
|
|
|
$
|
92.0
|
|
Percentage of segment revenues
|
|
|
15.7
|
%
|
|
|
12.8
|
%
|
|
|
13.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
655.2
|
|
|
$
|
413.4
|
|
|
$
|
399.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
25.2
|
%
|
|
|
20.9
|
%
|
|
|
20.8
|
%
|
2007
compared to 2006:
Consolidated Research and Development, or R&D, expenses
increased $241.8 million or 58.5% during 2007 as compared
to 2006. This reflects increases in R&D expenditures, both
in dollar amounts and as a percentage of revenues, in both
segments, primarily as a result of the Agere acquisition.
Semiconductor
Segment:
R&D expenses for the Semiconductor segment consist
primarily of employee salaries, costs related to third party
design tools and materials used in the design of custom silicon
and standard products, as well as depreciation of capital
equipment and facilities related expenditures. In 2007, we
focused our R&D efforts in the storage and networking
markets.
R&D expenses for the Semiconductor segment increased
$209.5 million or 66.3% in 2007 as compared to 2006 and
increased as a percentage of segment revenues from 25.8% in 2006
to 29.5% in 2007. The increase was primarily due to the
acquisition of Agere, SiliconStor and Tarari during 2007. The
increase was partially offset by reduced expenditures from the
sale of the Consumer Products Group and a decrease in expenses
as a result of headcount reductions from our restructuring
actions during 2007.
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
$32.3 million or 33.1% in 2007 as compared to 2006 and
increased as a percentage of segment revenues from 12.8% in 2006
to 15.7% in 2007. The increase was attributable to the
acquisition of StoreAge and to increased compensation-related
expenditures due to an increase in headcount, increased spending
for R&D projects associated with new product lines and
expenses related to a contract with a significant customer.
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:
In early 2006, we focused our R&D activities in the storage
and consumer markets and redirected 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 segment revenues from 24.7% in 2005
to 25.8% in 2006. The increase was primarily the result of an
increase in stock-based compensation expense associated with the
adoption of FAS 123R,
29
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 increased
$5.5 million or 6.0% in 2006 as compared to 2005. The
increase was primarily due to increased compensation-related
expenditures based upon an increase in headcount and increased
spending for future products, along with increased stock-based
compensation expenses associated with the adoption of
FAS 123R. As a percentage of segment 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.
Selling,
General and Administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Semiconductor segment
|
|
$
|
264.1
|
|
|
$
|
157.4
|
|
|
$
|
150.6
|
|
Percentage of segment revenues
|
|
|
14.8
|
%
|
|
|
12.9
|
%
|
|
|
12.1
|
%
|
Storage Systems segment
|
|
$
|
117.3
|
|
|
$
|
98.2
|
|
|
$
|
87.7
|
|
Percentage of segment revenues
|
|
|
14.2
|
%
|
|
|
12.9
|
%
|
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
381.4
|
|
|
$
|
255.6
|
|
|
$
|
238.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
14.6
|
%
|
|
|
12.9
|
%
|
|
|
12.4
|
%
|
2007
compared to 2006:
Consolidated selling, general and administrative, or SG&A,
expenses increased $125.8 million or 49.2% during 2007 as
compared to 2006 and increased as a percentage of revenues from
12.9% in 2006 to 14.6% in 2007.
Semiconductor
Segment:
SG&A expenses for the Semiconductor segment increased
$106.7 million or 67.8% in 2007 as compared to 2006 and
increased as a percentage of segment revenues from 12.9% in 2006
to 14.8% in 2007. The increase in amount and as a percentage of
segment revenues was primarily due to the acquisition of Agere,
partially offset by a decrease in expenses as a result of
headcount reductions from our restructuring activities and
decreased selling expenses due to the sale of the Consumer
Products Group.
Storage
Systems Segment:
SG&A expenses for the Storage Systems segment increased
$19.1 million or 19.5% in 2007 as compared to 2006 and
increased as a percentage of segment revenues from 12.9% in 2006
to 14.2% in 2007. The increase in amount and as a percentage of
revenues was mainly due to the additional expenses resulting
from the acquisition of StoreAge, increased compensation-related
expenses based on increased headcount and an increase in sales
commissions due to increased revenues.
2006
compared to 2005:
Consolidated 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.
Silicon Graphics, Inc., or 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.
30
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 FAS 123R, 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 was primarily due to higher sales
expenses associated with the increase in revenues, the SGI
bankruptcy noted above and stock-based compensation expense
associated with the adoption of FAS 123R.
Restructuring
of Operations:
A complete discussion of our restructuring actions in 2007, 2006
and 2005 is included in Note 2 to our financial statements
in Item 8.
2007:
We recorded charges of $148.1 million in restructuring of
operations and other items for the year ended December 31,
2007. Of these charges, $143.4 million were recorded in the
Semiconductor segment and $4.7 million were recorded in the
Storage Systems segment. We completed the sale of our Consumer
Products Group in the third quarter of 2007 and the sales of our
semiconductor assembly and test operations in Thailand and our
Mobility Products Group in the fourth quarter of 2007. We also
announced the elimination of approximately 900 non-production
positions, inclusive of the Consumer Products Group, across all
business and functional areas worldwide in the second quarter of
2007, and in the third quarter of 2007 announced the elimination
of approximately 2,100 production positions worldwide associated
with the sale of our assembly and test operations in Thailand
and our plan to transition assembly and test operations
performed at our facilities in Singapore and Wichita, Kansas to
current manufacturing partners.
As a result of the restructuring actions taken in 2007, we
expect to realize operating expense savings of approximately
$53.8 million per quarter. We expect any savings in cost of
revenues to be fully offset by additional costs from purchasing
services through contract manufacturers. Suspended depreciation
amounted to $16.8 million for the period from April 2,
2007 to October 2, 2007 associated with holding the
Thailand assembly and test facilities for sale. Suspended
depreciation amounted to $5.4 million for the period from
April 2, 2007 to December 31, 2007 associated with
holding the Singapore assembly and test facilities for sale.
Suspended depreciation and amortization of intangible assets
amounted to $11.9 million for the period from
August 16, 2007 to October 24, 2007 associated with
holding the Mobility Product Group assets for sale.
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. 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.
31
Goodwill
impairment charge:
We monitor 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. During the year ended
December 31, 2007, we determined that based on the current
market conditions in the semiconductor industry, the carrying
amount of our goodwill was no longer recoverable. We recognized
a goodwill impairment charge of $2,019.9 million in the
Semiconductor segment. The fair value of the Semiconductor
segment was estimated using the present value of estimated
future cash flows. There was no impairment of goodwill for the
years ended December 31, 2006 and 2005. For additional
details, see Valuation of Long-Lived Assets, Intangible
Assets and Goodwill under Critical Accounting
Estimates.
Acquired
In-process Research and Development:
The actual development timelines and costs for the in-process
research and development, or IPR&D, projects described
below were in line with original estimates as of
December 31, 2007. However, development of the technology
remains a substantial risk to us due to a number of factors
including the remaining effort to achieve technical feasibility,
rapidly changing customer needs and competitive threats from
other companies. Failure to bring these products to market in a
timely manner could adversely affect our sales and profitability
in the future. Additionally, the value of other intangible
assets acquired may become impaired.
2007:
We recorded a charge of $188.9 million for the year ended
December 31, 2007 associated with IPR&D in connection
with the Tarari, Agere and SiliconStor acquisitions.
Our methodology for allocating the purchase price relating to
purchase acquisitions to IPR&D uses established valuation
techniques in the high-technology industry. IPR&D was
expensed upon acquisition because technological feasibility had
not been established and no future alternative uses existed. The
fair value of technology under development is determined using
the income approach, which discounts expected future cash flows
to present value. A discount rate is used for the projects to
account for the risks associated with the inherent uncertainties
surrounding the successful development of the technology, market
acceptance of the technology, the useful life of the technology,
the profitability level of such technology and the uncertainty
of technological advances, which could impact the estimates
recorded. The discount rates used in the present value
calculations are typically derived from a weighted-average cost
of capital analysis. These estimates do not account for any
potential synergies realizable as a result of the acquisition
and are in line with industry averages and growth estimates.
Details for the 2007 acquisitions, at the acquisition dates, are
summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Cost
|
|
|
|
|
|
Revenue Projections
|
|
Company
|
|
Acquisition Date
|
|
Projects
|
|
IPR&D
|
|
|
to Complete
|
|
|
Discount Rate
|
|
|
Extend Through
|
|
|
|
|
|
|
|
(Dollar amounts in millions)
|
|
|
|
|
|
|
|
|
Tarari
|
|
October 3, 2007
|
|
Content
Inspection-Abraxas-5 Gbps;
Abraxas-10Gbps; Electra
|
|
$
|
6.0
|
|
|
$
|
2.9
|
|
|
|
22.7
|
%
|
|
|
2013
|
|
Agere
|
|
April 2, 2007
|
|
Storage read channel and preamps; Mobility HSPDA
for 3G; Networking modems, Firewire, serdes, media
gateway, VoIP, network processors, Ethernet, mappers and framers
|
|
$
|
176.4
|
|
|
$
|
85.8
|
*
|
|
|
13.8
|
%
|
|
|
2021
|
|
SiliconStor
|
|
March 13, 2007
|
|
Storage SATA/SAS multiplexers
|
|
$
|
6.5
|
|
|
$
|
4.4
|
|
|
|
27.0
|
%
|
|
|
2017
|
|
|
|
|
* |
|
This amount excludes estimated cost of $144.2 million to
complete the Mobility-HSPDA for 3G project due to the sale of
the Mobility Products Group to Infineon Technologies during the
fourth quarter of 2007. |
32
2006:
We recorded a charge of $4.3 million for the year ended
December 31, 2006 associated with IPR&D in connection
with the StoreAge and Metta acquisitions.
Details for the 2006 acquisitions, at the acquisition dates, are
summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Projections
|
Company
|
|
Acquisition Date
|
|
Projects
|
|
IPR&D
|
|
|
Discount Rate
|
|
Extend Through
|
(Dollar amounts in millions)
|
|
StoreAge
|
|
November 2006
|
|
Storage systems software
|
|
$
|
2.4
|
|
|
28%
|
|
2013
|
Metta
|
|
November 2006
|
|
Graphics and Audio intellectual property
|
|
$
|
1.9
|
|
|
Not applicable, used a variation of the Cost Approach
|
|
Not applicable, used a variation of the Cost Approach
|
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 Systems
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
and was completed in December 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 were two
technologies identified as in-process technologies. The Company
discontinued the development of these two in-process
technologies during 2007.
2005:
There were no IPR&D charges for the year ended
December 31, 2005.
Interest
Expense:
Interest expense increased by $6.7 million to
$31.0 million in 2007 from $24.3 million in 2006. The
increase was mainly due to the interest on Ageres
convertible notes, offset in part by lower interest expense due
to the repayment at maturity of $271.8 million of
convertible notes in the fourth quarter of 2006.
Upon the completion of merger with Agere, we guaranteed
Ageres 6.5% Convertible Subordinated Notes. The face value
of these notes was adjusted to the fair value of approximately
$370.2 million as of April 2, 2007, the purchase date.
The accrued debt premium will be fully amortized by the December
2009 maturity date of the notes.
Interest expense decreased by $1.0 million to
$24.3 million in 2006 from $25.3 million in 2005. The
decrease was mainly due to a lower average debt balance from the
repayment of $271.8 million of convertible notes in the
fourth quarter of 2006 and the repurchase of $149.7 million
of convertible notes during the second quarter of 2005, offset
by a lower benefit from the amortization of the deferred gain on
terminated swaps.
Interest
Income and Other, Net:
Interest income and other, net, was $46.8 million in 2007
as compared to $51.3 million in 2006. Interest income
increased to $58.6 million in 2007 from $47.3 million
in 2006. The increase in interest income was mainly due to
higher interest rates and higher cash and investment balances in
2007 as compared to 2006. In addition, $2.0 million was
recorded to interest income in 2007 representing the change in
time value of the deferred revenue from intellectual property
licenses recorded at the time of the Agere acquisition. Interest
income of $1.4 million was also recorded in 2007 from notes
receivable related to the sales of the Thailand manufacturing
facility and the Consumer Products Group. Other expenses, net,
of $11.8 million in 2007 included a $7.0 million
charge for points
33
on foreign currency forward contracts, a pre-tax loss of
$2.4 million on the impairment of certain non-marketable
available-for-sale equity securities, foreign exchange losses of
$3.3 million offset by $0.9 million of other
miscellaneous items.
Interest income and other, net, was $51.3 million in 2006
as compared to $34.0 million in 2005. Interest income
increased to $47.3 million in 2006 from $25.9 million
in 2005. The increase in interest income was mainly due to
higher returns and higher average cash and short-term investment
balances in 2006 as compared to 2005. Other income, net, of
$4.0 million in 2006 included a net pre-tax gain of
$6.7 million on the sale of certain marketable
available-for-sale equity securities, a $4.7 million charge
for points on foreign currency forward contracts, a
$2.0 million gain related to a cash insurance settlement
originally associated with a manufacturing issue with a
supplier, and other miscellaneous items.
Other income, net, of $8.1 million in 2005 included a
pre-tax gain of $8.0 million on sale of certain marketable
available-for-sale equity securities, a pre-tax gain of
$4.1 million on the repurchase of convertible notes, a
$3.0 million charge for points on foreign currency forward
contracts, a pre-tax loss of $2.4 million on impairment of
certain non-marketable available-for-sale equity securities, a
pre-tax gain of $1.4 million associated with marketable
available-for-sale equity securities of a certain technology
company that was acquired, and other miscellaneous items.
For all investments 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 2007, we recorded an income tax provision of
$11.3 million, which represents an effective tax rate of
approximately 0%. This rate differs from the U.S. statutory
rate primarily due to a full valuation allowance recorded
against U.S. and certain
non-U.S. net
deferred tax assets. The Company also benefits from lower tax
rates in foreign jurisdictions. The provision for income taxes
for 2007 reflected the release of a $5.4 million
FIN 48 liability due to the expiration of the applicable
period under a statute of limitations and a reduction of
previous years uncertain tax positions. Fiscal 2007 also
includes the impact of recording a $26.1 million tax
benefit as a result of a $67.9 million reduction to the
pension benefit and other obligations.
During 2006, we recorded a provision for income taxes of
$15.7 million, which represents an effective tax rate of
approximately 8%. This rate differs from the U.S. statutory
rate primarily due to the realization of deferred tax assets not
previously recognized in the U.S., which offset the tax expenses
generated from U.S. sourced income as well as from earnings
of certain foreign subsidiaries taxed in the U.S. We also
benefited from lower tax rates in foreign jurisdictions. During
2006, we closed various audits, which resulted in a tax benefit
of $3.1 million in 2006 tax provision. These audits
included the U.S. federal, various state and certain
foreign audits.
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.
Excluding certain foreign jurisdictions, management believes
that the future benefit of deferred tax assets is not more
likely than not to be realized.
34
Minority
Interest in Net Income of Subsidiary:
Minority interest in net income of subsidiary was not
significant for the periods presented. The changes in minority
interest were attributable to the composition of earnings and
losses in our majority-owned Japanese subsidiary for each of the
respective years.
FINANCIAL
CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments increased to
$1.4 billion as of December 31, 2007 from
$1.0 billion as of December 31, 2006. The increase was
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
$321.1 million to $1.4 billion as of December 31,
2007 from $1.1 billion as of December 31, 2006. The
increase in working capital was attributable to the following:
|
|
|
|
|
Cash, cash equivalents and short-term investments increased by
$388.7 million;
|
|
|
|
Prepaid expenses and other current assets increased
$79.1 million, primarily due to the acquisition of Agere, a
$20.0 million short term note receivable in connection with
the sale of semiconductor assembly and test operations in
Thailand to STATS ChipPAC in the fourth quarter of 2007, a
$6.5 million prepayment on a minimum supply agreement, and
a $5.4 million increase in a deferred tax asset;
|
|
|
|
Income taxes payable decreased by $72.6 million due to the
adoption of FIN 48 in the first quarter of 2007, offset in
part by an increase in the tax provision less tax payments;
|
|
|
|
Accounts receivable increased $57.7 million primarily due
to the acquisition of Agere, offset in part by improved
collections; and
|
|
|
|
Inventories increased $31.4 million primarily due to the
acquisition of Agere, offset in part by decreases relating to
sale of the Consumer Products Group.
|
These increases in working capital were offset, in part, by the
following:
|
|
|
|
|
Accrued salaries, wages and benefits increased
$36.7 million primarily due to the acquisition of Agere,
slightly offset by timing differences in payment of salaries,
benefits and performance-based compensation;
|
|
|
|
Accounts payable increased $129.3 million primarily due to
the acquisition of Agere, offset by a decrease due to the timing
of invoice receipts and payments; and
|
|
|
|
Other accrued liabilities increased by $142.4 million
primarily due to the acquisition of Agere, in addition to an
increase in restructuring reserves, merger related accruals, and
an increase in liabilities with third party manufacturers,
offset in part by a decrease in deferred taxes, and other
accruals and liabilities.
|
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:
|
|
|
|
|
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; and
|
|
|
|
Current portion of long-term debt decreased by
$273.9 million due to the repayment of Convertible
Subordinated Notes on November 1, 2006.
|
35
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; and
|
|
|
|
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 provided by operating activities. During
2007, we generated $295.0 million of cash from operating
activities compared to $247.2 million generated in 2006.
Cash generated by operating activities in 2007 was the result of
the following:
|
|
|
|
|
A net loss adjusted for non-cash transactions, the largest of
which was a $2,019.9 million charge for goodwill
impairment. The non-cash items and other non-operating
adjustments are quantified in our Consolidated Statements of
Cash Flows included in Item 8; and
|
|
|
|
A net increase in assets and liabilities, net of assets acquired
and liabilities assumed in business acquisitions, net of assets
and liabilities sold in business divestitures, including changes
in working capital components from December 31, 2006 to
December 31, 2007, as discussed above.
|
Cash and cash equivalents provided by investing
activities. Cash and cash equivalents provided by
investing activities during 2007 were $1.1 billion as
compared to $25.9 million during 2006. The primary
investing activities during 2007 were:
|
|
|
|
|
Cash acquired from the acquisition of Agere, net of acquisition
costs;
|
|
|
|
Proceeds from the sales of the Consumer Products Group, our
semiconductor assembly and test operations in Thailand, and the
Mobility Products Group. See Note 2 to the financial
statements in Item 8;
|
|
|
|
Proceeds from maturities and sales of debt and equity securities
available for sale, net of purchases;
|
|
|
|
Acquisition of other companies, net of cash acquired;
|
|
|
|
Purchases of property, equipment and software, net of
sales; and
|
|
|
|
The receipt of income tax refund for pre-acquisition tax matters
associated with an acquisition in 2001.
|
We expect capital expenditures to be approximately
$50 million in 2008. 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 reduce our capital spending
requirements.
Cash and cash equivalents used in financing
activities. The primary financing activities
during 2007 were the purchase of common stock under our
repurchase programs and the issuance of common stock under our
employee stock plans. Cash and cash equivalents used in
financing activities during 2007 were $724.5 million as
compared to $210.8 million in 2006.
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 and
terminated the prior stock repurchase program authorized by the
Board of Directors on July 28, 2000. In July 2007, we
completed the repurchase program announced on December 4,
2006. On August 20, 2007, we announced that our Board of
Directors had authorized a repurchase program of up to an
additional $500.0 million worth of shares of our common
stock. These repurchases
36
are expected to be funded from our available cash and short-term
investments. During 2007, we repurchased approximately
102.6 million shares for approximately $770.8 million
in cash.
It is our policy to reinvest our earnings, and we do not
anticipate paying any cash dividends to stockholders in the
foreseeable future.
Cash generated by operations is our primary source of liquidity.
We may, however, 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, will be adequate to meet our operating and capital
requirements and obligations for the foreseeable future. We
cannot be certain that additional financing will be available on
favorable terms. Moreover, any future equity or convertible debt
financing may decrease the percentage of equity ownership of
existing stockholders and may result in dilution, depending on
the price at which the equity is sold or the debt is converted.
CONTRACTUAL
OBLIGATIONS
The following table summarizes our contractual obligations at
December 31, 2007, and the effect these obligations are
expected to have on our liquidity and cash flow in future
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less Than 1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
After 5 Years
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Convertible Subordinated Notes
|
|
$
|
|
|
|
$
|
711.7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
711.7
|
|
Operating lease obligations
|
|
|
104.7
|
|
|
|
144.5
|
|
|
|
35.1
|
|
|
|
8.5
|
|
|
|
292.8
|
|
Purchase commitments
|
|
|
379.2
|
|
|
|
40.9
|
|
|
|
439.2
|
|
|
|
|
|
|
|
859.3
|
|
Pension and post-retirement contributions
|
|
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.0
|
|
FIN 48 tax liability
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
503.1
|
|
|
$
|
897.1
|
|
|
$
|
474.3
|
|
|
$
|
8.5
|
|
|
$
|
1,883.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Subordinated Notes
As of December 31, 2007, we had outstanding
$350.0 million of 4% Convertible Subordinated Notes
due May 15, 2010. Interest on these notes is payable
semiannually on May 15 and November 15 of each year. These
convertible notes are subordinated to all existing and future
senior debt and are convertible at the holders option at
any time prior to maturity into shares of our common stock at a
conversion price of approximately $13.42 per share. We cannot
elect to redeem these notes prior to maturity. Each holder of
these notes has the right to cause us to repurchase all of such
holders convertible notes at 100% of their principal
amount plus accrued interest upon the occurrence of any
fundamental change, which includes a transaction or an event
such as an exchange offer, liquidation, tender offer,
consolidation, certain mergers or combination. The merger with
Agere did not trigger this right.
As part of the merger with Agere, we guaranteed Ageres
6.5% Convertible Subordinated Notes due December 15,
2009 with a book value of $361.7 million and a fair value
of approximately $370.2 million as of April 2, 2007.
Interest on these notes is payable semiannually on June 15 and
December 15 of each year. These convertible notes are
convertible at the holders option into shares of our
common stock at a current conversion price of $15.3125 per
share, subject to adjustment in certain events, at any time
prior to maturity, unless previously redeemed or repurchased. We
may redeem these notes in whole or in part at any time. We may
be required to repurchase these notes at a price equal to 100%
of their principal amount plus any accrued and unpaid interest
if our stock is no longer approved for public trading, if our
stockholders approve our liquidation or if a specified change in
control occurs. These notes are unsecured and subordinated
obligations and are subordinated in right of payment to all of
Ageres existing and future senior debt.
37
Fluctuations in our stock price impact the prices of our
outstanding convertible securities and the likelihood of the
convertible securities being converted into equity. If we are
required to redeem any of the convertible notes for cash, it may
adversely affect our liquidity position. In the event they 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.
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 and manufacturing services 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.
Standby
Letters of Credit
At December 31, 2007 and 2006, we had outstanding standby
letters of credit of $11.1 million and $2.7 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 to those financial statements describes our
significant accounting policies. The preparation of these
financial statements requires estimates and assumptions that
affect the reported amounts and disclosures.
We believe the following to be critical accounting estimates.
They are important to the portrayal of our financial condition
and results, and they require significant management 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, different amounts could have been reported if different
estimates were made.
Stock-Based Compensation. On January 1,
2006, we adopted FAS 123R, using the modified prospective
transition method. Under this method of implementation, no
restatement of prior periods has been made. Determining the fair
value of stock-based awards at the grant date requires
considerable judgment, including estimating expected volatility,
expected term and risk-free rate. If factors change and we
employ different assumptions, stock-based compensation expense
may differ significantly from what we have recorded in the prior
years. Our stock-based compensation expense under FAS 123R
in 2007 and 2006 was $77.3 million and $47.0 million,
respectively. Stock-based compensation costs capitalized to
inventory and software for 2007 and 2006 were not significant.
(See Note 3 to the financial statements in Item 8 for
a description of our equity compensation plans and a more
detailed discussion of the adoption of FAS 123R.)
38
Stock
Options:
The fair value of each option grant is estimated on the date of
grant using a reduced form calibrated binomial lattice model.
This model requires the use of historical data for employee
exercise behavior and the use of assumptions included in the
following table:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average estimated grant date fair value per share
|
|
$
|
3.05
|
|
|
$
|
3.30
|
|
Weighted average assumptions in calculation:
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
4.29
|
|
|
|
4.33
|
|
Risk-free interest rate
|
|
|
4.50
|
%
|
|
|
4.78
|
%
|
Volatility
|
|
|
47
|
%
|
|
|
48
|
%
|
The expected life of employee stock options represents the
weighted-average period the stock options are expected to remain
outstanding and is a derived output of the lattice model. The
expected life of employee stock options is impacted by all of
the underlying assumptions and calibration of our model.
The risk-free interest rate assumption is based upon observed
interest rates for constant maturity U.S. Treasury
securities appropriate for the term of our employee stock
options.
We used an equally weighted combination of historical and
implied volatilities as of the grant date. The historical
volatility is the standard deviation of our daily stock returns
from the date of our initial public offering in 1983. We used
implied volatilities of near-the-money exchange traded call
options as stock options are call options that are granted
at-the-money. The historical and implied volatilities are
annualized and equally weighted to determine the volatilities as
of the grant date. Prior to January 1, 2006, we used
historical implied stock price volatilities in accordance with
FAS 123 for purposes of its pro forma information. We
believe that the equally weighted combination of historical and
implied volatilities is more representative of future stock
price trends than use of historical implied volatilities alone.
The lattice model assumes that employees exercise behavior
is a function of the options remaining life and the extent
to which the option is in-the-money. The lattice model estimates
the probability of exercise as a function of these two variables
based on the entire history of exercises and cancellations for
all option grants made by us since our initial public offering.
Because stock-based compensation expense recognized is based on
awards ultimately expected to vest, it has been reduced for
estimated forfeitures. Forfeitures are estimated at the time of
grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures were
estimated based on historical experience. Prior to
January 1, 2006, we accounted for forfeitures as they
occurred for the pro forma information required under
FAS 123.
Employee
Stock Purchase Plans:
We also have two employee stock purchase plans, one for
U.S. employees and one for employees outside the U.S.,
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 the
employees purchase rights under the Black-Scholes model.
The assumptions that went into the calculation of fair value for
the May and November 2007 and 2006 grants are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average estimated grant date fair value per share
|
|
$
|
2.09
|
|
|
$
|
2.92
|
|
Weighted average assumptions in calculation:
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
0.7
|
|
|
|
0.7
|
|
Risk-free interest rate
|
|
|
4%
|
|
|
|
5%
|
|
Volatility
|
|
|
42%
|
|
|
|
35%
|
|
39
Restricted
Stock Awards:
The cost of these awards is determined using the fair value of
our common stock on the date of the grant and compensation
expense is recognized over the vesting period on a straight-line
basis.
Our determination of fair value of share-based payment awards on
the date of grant using an option-pricing model is affected by
our stock price as well as a number of highly complex and
subjective assumptions. We use third-party consultants to assist
in developing the assumptions used in as well as calibrating the
lattice model. We are responsible for determining the
assumptions used in estimating the fair value of our share-based
payment awards. Option-pricing models were developed for use in
estimating the value of traded options that have no vesting or
hedging restrictions and are fully transferable. Because our
employee stock options have certain characteristics that are
significantly different from traded options, and because changes
in the subjective assumptions can materially affect the
estimated value, in managements opinion, the existing
valuation models may not provide an accurate measure of the fair
value of our employee stock options. Although, the fair value of
employee stock options is determined in accordance with
FAS 123R and 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 $240.8 million and
$209.5 million as of December 31, 2007 and 2006,
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. See
Notes 6 and 7 to our financial statements in Item 8
for more details on long-lived assets, intangible assets and
goodwill.
As of December 31, 2007, we had a goodwill balance of
$499.6 million. An impairment of goodwill is determined in
accordance with FAS No. 142, Goodwill and Other
Intangible Assets, which uses an implied 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. The second
step is only performed if impairment is indicated after the
first step is performed, as it involves measuring the actual
impairment. On December 31, 2007, we determined that based
on the current market conditions in the semiconductor industry,
the carrying amount of our goodwill was no longer recoverable
under the first step of the test for impairment. We recognized a
goodwill impairment charge of $2,019.9 million in the
Semiconductor segment during 2007 under the second step of the
test for impairment. Our next annual test for the impairment of
goodwill is expected to be performed in our fourth quarter of
2008.
40
We use 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, operating expenses, and industry trends. Two
methodologies were used to obtain the fair value for each
reporting unit as of December 31, 2007: 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.
As of December 31, 2007, we had an intangible balance of
$1,225.2 million. We recognized an intangible assets
impairment charge of $1.6 million in the Semiconductor
segment during the fourth quarter of 2007. The fair value of the
Semiconductor segment was estimated using the present value of
estimated cash flows. There was no impairment charge of
intangible assets for the years ended December 31, 2006 and
2005.
Restructuring reserves. We have recorded
reserves/accruals for restructuring costs related to our
restructuring of operations. The restructuring reserves include
estimated payments to employees for severance, termination fees
associated with leases and other contracts, decommissioning and
selling costs associated with assets held for sale, and other
costs related to the closure of facilities. Reserves are
recorded when management has approved a plan to restructure
operations and a liability has been incurred. The restructuring
reserves are based upon management estimates at the time they
are recorded. These estimates can change depending upon changes
in facts and circumstances subsequent to the date the original
liability was recorded. For example, existing accruals for
severance may be modified if employees are redeployed due to
circumstances not foreseen when the original plans were
initiated, accruals for outplacement services may not be fully
utilized by former employees, and severance accruals could
change for statutory reasons in countries outside the United
States. Accruals for facility leases under which we ceased using
the benefits conveyed to us under the lease may change if market
conditions for subleases change or if we later negotiate a
termination of the lease.
Income taxes. Deferred tax assets and
liabilities are recognized for temporary differences between
financial statement and income tax bases of assets and
liabilities. We have recorded a valuation allowance to reduce
the deferred tax assets to the amount that is more likely than
not to be realized. We have considered future taxable income and
ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. See Note 12
to the financial statements in Item 8 for more details
about our deferred tax assets and liabilities.
The calculation of our tax liabilities involves the application
of complex tax rules and regulations 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.
Retirement Benefits: Post-retirement liabilities are our
estimates of benefits that we expect to pay to eligible
retirees. We consider various factors in determining our
post-retirement liability, including the number of employees
that we expect to receive benefits, the type and length of
benefits they will receive, trends in health care costs and
other actuarial assumptions. If the actual post-retirement
benefits paid differ from our current estimate, we may be over-
or under- accrued.
We also have pension plans covering substantially all former
Agere U.S. employees, excluding management employees hired
after June 30, 2003, and pension plans covering certain
international employees. We consider various factors in
determining our pension liability, including the number of
employees that we expect to receive benefits, their salary
levels and years of service, the expected return on plan assets,
the discount rate used to determine the benefit obligation, the
timing of the payment of benefits, and other actuarial
assumptions. If the actual results and events of our pension
plan differ from our current assumptions, our benefit
obligations may be over- or under- valued.
As a result of the acquisition of Agere, we remeasured the
pension and post-retirement liabilities, and adopted
FAS 158, Employers Accounting for Defined
Benefit Pension and Other Post-retirement Plans, effective
April 2, 2007. The key benefit plan assumptions are the
discount rate and the expected rate of return on plan assets.
These
41
assumptions are discussed below for our U.S. retirement
benefit plans. For our international plans, we chose assumptions
specific to each country.
The discount rate we use is based on a cash flow analysis using
the Citigroup Pension Discount Curve and the Citigroup Above
Median Pension Discount Curve as of the measurement date. For
the year ended December 31, 2007, we used two discount
rates to determine our net periodic benefit cost for our
management plans, since we were required to re-measure our
post-retirement plans due to a curtailment. The rates used prior
to and after the curtailment effect taken in the fourth quarter
of 2007, were 6.00%, and 6.25%, respectively. The rate used to
determine our net periodic benefit cost for our represented
plans and our non-qualified pension plan was 6.00%. The discount
rate used to determine the benefit obligation as of
December 31, 2007 was 6.50%.
We base our salary increase assumptions on historical experience
and future expectations. The expected rate of return for our
retirement benefit plans represents the average rate of return
expected to be earned on plan assets over the period that the
benefit obligations are expected to be paid. In developing the
expected rate of return, we consider long-term compound
annualized returns based on historical market data, historical
and expected returns on the various categories of plan assets,
and the target investment portfolio allocation between debt and
equity securities. The weighted average investment portfolio
allocation for our U.S. management and represented pension
plans as of December 31, 2007 was 53% in equity and 47% in
debt investments as compared to the target investment portfolio
allocation of 53% equity and 47% debt. The portfolios
equity weighting is consistent with the long-term nature of the
plans benefit obligations. For 2007, we used an expected
rate of return on plan assets of 8.25% and 8.00% for the
management and represented pension plans, respectively,
consistent with the target investment portfolio allocation. For
our U.S. post- retirement benefit plans, we used a
weighted-average long-term rate of return on assets of 7.75%.
Actuarial assumptions are based on our best estimates and
judgment. Material changes may occur in retirement benefit costs
in the future if these assumptions differ from actual events or
experience. We performed a sensitivity analysis on the discount
rate, which is the key assumption in calculating the pension and
post-retirement benefit obligations. Each change of
25 basis points in the discount rate assumption would have
an estimated $0.6 million impact on annual net retirement
benefit costs and a $36 million impact on benefit
obligations. Each change of 25 basis points in the expected
rate of return assumption would have an estimated
$2.7 million annual impact on net retirement benefit costs.
Recent
Accounting Pronouncements
The information contained in Part II, Item 8 in
Note 1 under the heading Recent Accounting
Pronouncements is hereby incorporated by reference into
this Part II, Item 7.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest
Rate Sensitivity
A 10% weighted-average worldwide interest rate movement
affecting our fixed and floating rate financial instruments as
of December 31, 2007 and, 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.
A 10% weighted-average worldwide interest rate movement
affecting our fixed and floating rate financial instruments as
of December 31, 2006 and, 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, 2007, there were no interest rate
swaps outstanding.
Foreign currency exchange risk. We have
foreign subsidiaries that operate and sell our products in
various global markets. As a result, our cash flows and earnings
are exposed to fluctuations in foreign currency exchange
42
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 2007 and 2006.
Based on our overall currency rate exposures at
December 31, 2007, 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 2006, a near-term 10% appreciation or
depreciation of the U.S. dollar would also not have had a
significant effect.
Equity price risk. We have investments in
available-for-sale equity securities included in long-term
assets. The fair values of these investments are sensitive to
equity price changes. Changes in the value of these investments
are ordinarily recorded through accumulated comprehensive
income. The increase or decrease in the fair value of the
investments would affect our results of operations to the extent
that the investments were sold or that declines in value were
concluded by management to be other than temporary.
If the prices of our available-for-sale equity securities were
to increase or decrease 10% from their fair values as of
December 31, 2007, it would increase or decrease the
investment values by $0.2 million. As of December 31,
2006, a 10% increase or decrease in fair values would have
increased or decreased the investment values by
$0.3 million. We do not use any derivatives to hedge the
fair value of our marketable available-for-sale equity
securities.
43
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
LSI
Corporation
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
1,021,569
|
|
|
$
|
327,800
|
|
Short-term investments
|
|
|
376,028
|
|
|
|
681,137
|
|
Accounts receivable, less allowances of $10,192 and $13,871
|
|
|
406,368
|
|
|
|
348,638
|
|
Inventories
|
|
|
240,842
|
|
|
|
209,470
|
|
Prepaid expenses and other current assets
|
|
|
147,751
|
|
|
|
68,692
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,192,558
|
|
|
|
1,635,737
|
|
Property and equipment, net
|
|
|
229,732
|
|
|
|
86,045
|
|
Other intangible assets, net
|
|
|
1,225,196
|
|
|
|
59,484
|
|
Goodwill
|
|
|
499,551
|
|
|
|
932,323
|
|
Other assets
|
|
|
249,353
|
|
|
|
138,555
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,396,390
|
|
|
$
|
2,852,144
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Accounts payable
|
|
$
|
329,444
|
|
|
$
|
200,189
|
|
Accrued salaries, wages and benefits
|
|
|
118,990
|
|
|
|
82,292
|
|
Other accrued liabilities
|
|
|
298,343
|
|
|
|
155,986
|
|
Income taxes payable
|
|
|
15,679
|
|
|
|
88,304
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
762,456
|
|
|
|
526,771
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
717,967
|
|
|
|
350,000
|
|
Pension, post-retirement and other benefits
|
|
|
137,543
|
|
|
|
|
|
Income taxes payable non-current
|
|
|
185,036
|
|
|
|
|
|
Other non-current liabilities
|
|
|
108,143
|
|
|
|
79,400
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations and other liabilities
|
|
|
1,148,689
|
|
|
|
429,400
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
Minority interest in subsidiary
|
|
|
249
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred shares; $.01 par value; 2,000 shares
authorized; none outstanding
|
|
|
|
|
|
|
|
|
Common stock; $.01 par value; 1,300,000 shares
authorized; 680,595 and 403,680 shares outstanding
|
|
|
6,806
|
|
|
|
4,037
|
|
Additional paid-in capital
|
|
|
6,152,421
|
|
|
|
3,102,178
|
|
Accumulated deficit
|
|
|
(3,738,522
|
)
|
|
|
(1,220,306
|
)
|
Accumulated other comprehensive income
|
|
|
64,291
|
|
|
|
9,829
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,484,996
|
|
|
|
1,895,738
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
4,396,390
|
|
|
$
|
2,852,144
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
44
LSI
Corporation
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
2,603,643
|
|
|
$
|
1,982,148
|
|
|
$
|
1,919,250
|
|
Cost of revenues
|
|
|
1,699,785
|
|
|
|
1,158,983
|
|
|
|
1,150,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
903,858
|
|
|
|
823,165
|
|
|
|
769,208
|
|
Research and development
|
|
|
655,224
|
|
|
|
413,432
|
|
|
|
399,685
|
|
Selling, general and administrative
|
|
|
381,409
|
|
|
|
255,569
|
|
|
|
238,265
|
|
Restructuring of operations and other items, net
|
|
|
148,121
|
|
|
|
(8,427
|
)
|
|
|
119,052
|
|
Goodwill and intangible impairment charges
|
|
|
2,021,463
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
188,872
|
|
|
|
4,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income from operations
|
|
|
(2,491,231
|
)
|
|
|
158,307
|
|
|
|
12,206
|
|
Interest expense
|
|
|
(31,020
|
)
|
|
|
(24,263
|
)
|
|
|
(25,283
|
)
|
Interest income and other, net
|
|
|
46,762
|
|
|
|
51,277
|
|
|
|
34,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before income taxes and minority interest
|
|
|
(2,475,489
|
)
|
|
|
185,321
|
|
|
|
20,923
|
|
Provision for income taxes
|
|
|
11,326
|
|
|
|
15,682
|
|
|
|
26,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before minority interest
|
|
|
(2,486,815
|
)
|
|
|
169,639
|
|
|
|
(5,617
|
)
|
Minority interest in net income of subsidiary
|
|
|
4
|
|
|
|
1
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(2,486,819
|
)
|
|
$
|
169,638
|
|
|
$
|
(5,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3,87
|
)
|
|
$
|
0.43
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(3,87
|
)
|
|
$
|
0.42
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
641,823
|
|
|
|
398,551
|
|
|
|
390,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
641,823
|
|
|
|
405,163
|
|
|
|
390,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
45
LSI
Corporation
Consolidated
Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred Stock
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
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
|
|
|
156
|
|
|
|
1
|
|
|
|
(686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(685
|
)
|
Grants of restricted shares
|
|
|
|
|
|
|
|
|
|
|
13,427
|
|
|
|
(13,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture of restricted shares and stock options assumed in an
acquisition
|
|
|
|
|
|
|
|
|
|
|
(6,739
|
)
|
|
|
6,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engenio stock option exchange
|
|
|
|
|
|
|
|
|
|
|
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 employee
stock options
|
|
|
|
|
|
|
|
|
|
|
31,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,338
|
|
Amortization of stock-based compensation related to employee
stock purchases
|
|
|
|
|
|
|
|
|
|
|
10,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,842
|
|
Amortization of stock-based compensation related to restricted
shares
|
|
|
|
|
|
|
|
|
|
|
6,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
403,680
|
|
|
|
4,037
|
|
|
|
3,102,178
|
|
|
|
|
|
|
|
(1,220,306
|
)
|
|
|
9,829
|
|
|
|
1,895,738
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,486,819
|
)
|
|
|
|
|
|
|
|
|
Cumulative effect adjustment to accumulated deficit with respect
to the adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,193
|
)
|
|
|
|
|
|
|
|
|
Adoption of EITF
06-02
sabbatical leave
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,204
|
)
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,982
|
|
|
|
|
|
Change in unrealized gain on available-for-sale securities, net
of tax $197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,682
|
|
|
|
|
|
Actuarial gain on pension and post-retirement plan, net of tax
$26,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,463,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with Agere merger
|
|
|
368,002
|
|
|
|
3,680
|
|
|
|
3,641,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,645,064
|
|
Agere restricted stock units & options vested as of
acquisition date
|
|
|
|
|
|
|
|
|
|
|
50,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,158
|
|
Repurchase of shares
|
|
|
(102,642
|
)
|
|
|
(1,026
|
)
|
|
|
(769,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(770,752
|
)
|
Issuance to employees under stock option and purchase plans
|
|
|
7,176
|
|
|
|
71
|
|
|
|
46,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,309
|
|
Issuance of common stock pursuant to restricted stock awards, net
|
|
|
4,379
|
|
|
|
44
|
|
|
|
(11,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,825
|
)
|
Amortization of stock-based compensation related to employee
stock options
|
|
|
|
|
|
|
|
|
|
|
47,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,127
|
|
Amortization of stock-based compensation related to employee
stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
11,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,757
|
|
Amortization of stock-based compensation related to restricted
shares
|
|
|
|
|
|
|
|
|
|
|
35,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
680,595
|
|
|
$
|
6,806
|
|
|
$
|
6,152,421
|
|
|
$
|
|
|
|
$
|
(3,738,522
|
)
|
|
$
|
64,291
|
|
|
$
|
2,484,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
46
LSI
Corporation
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(2,486,819
|
)
|
|
$
|
169,638
|
|
|
$
|
(5,623
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
278,542
|
|
|
|
82,263
|
|
|
|
146,169
|
|
Stock-based compensation expense
|
|
|
77,267
|
|
|
|
47,049
|
|
|
|
5,449
|
|
Non-cash restructuring and other items
|
|
|
98,909
|
|
|
|
(713
|
)
|
|
|
88,224
|
|
Goodwill and intangible impairment charges
|
|
|
2,021,463
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
188,872
|
|
|
|
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
|
|
|
|
|
|
Gain on repurchase of Convertible Subordinated Notes
|
|
|
|
|
|
|
|
|
|
|
(4,123
|
)
|
Loss on write-down of equity securities/(gain) on sale of equity
securities
|
|
|
2,396
|
|
|
|
(6,727
|
)
|
|
|
(6,475
|
)
|
(Gain)/loss on sale of property and equipment, including assets
held-for-sale
|
|
|
(9,399
|
)
|
|
|
(252
|
)
|
|
|
27
|
|
Non-cash foreign exchange loss/(gain)
|
|
|
4,207
|
|
|
|
(1,089
|
)
|
|
|
(11,491
|
)
|
Changes in deferred tax assets and liabilities
|
|
|
(3,619
|
)
|
|
|
(98
|
)
|
|
|
14,220
|
|
Changes in assets and liabilities, net of assets acquired and
liabilities assumed in business combinations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
174,962
|
|
|
|
(24,617
|
)
|
|
|
(51,305
|
)
|
Inventories
|
|
|
74,708
|
|
|
|
(18,062
|
)
|
|
|
24,086
|
|
Prepaid expenses and other assets
|
|
|
21,557
|
|
|
|
(24,858
|
)
|
|
|
(22,582
|
)
|
Accounts payable
|
|
|
(39,162
|
)
|
|
|
23,338
|
|
|
|
46,998
|
|
Accrued and other liabilities
|
|
|
(108,885
|
)
|
|
|
21,223
|
|
|
|
25,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
294,999
|
|
|
|
247,151
|
|
|
|
248,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of debt securities available-for-sale
|
|
|
(303,407
|
)
|
|
|
(603,624
|
)
|
|
|
(550,912
|
)
|
Proceeds from maturities and sales of debt securities
available-for-sale
|
|
|
616,224
|
|
|
|
595,135
|
|
|
|
462,530
|
|
Purchases of convertible notes/equity securities
|
|
|
(10,500
|
)
|
|
|
(8,150
|
)
|
|
|
(150
|
)
|
Proceeds from sales of equity securities
|
|
|
|
|
|
|
11,876
|
|
|
|
11,105
|
|
Purchases of property, equipment and software
|
|
|
(102,823
|
)
|
|
|
(58,671
|
)
|
|
|
(48,055
|
)
|
Proceeds from sale of property and equipment
|
|
|
16,166
|
|
|
|
118
|
|
|
|
4,894
|
|
Proceeds from sale of Consumer Group
|
|
|
22,555
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of Mobility Products Group, net of
transaction costs
|
|
|
445,500
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of semiconductor operations in Thailand, net
of transaction costs
|
|
|
49,600
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of intellectual property
|
|
|
|
|
|
|
22,670
|
|
|
|
|
|
Proceeds from sale of Fort Collins facility
|
|
|
|
|
|
|
10,998
|
|
|
|
|
|
Proceeds from sale of Colorado Springs facility
|
|
|
|
|
|
|
7,029
|
|
|
|
|
|
Proceeds from sale of Gresham manufacturing facility
|
|
|
|
|
|
|
96,426
|
|
|
|
|
|
Proceeds from sale of intellectual property associated with the
Gresham manufacturing facility
|
|
|
|
|
|
|
5,100
|
|
|
|
|
|
Cash acquired from acquisition of Agere, net of acquisition costs
|
|
|
517,712
|
|
|
|
|
|
|
|
|
|
Acquisitions of other companies, net of cash acquired
|
|
|
(132,830
|
)
|
|
|
(55,328
|
)
|
|
|
|
|
Adjustment to goodwill acquired in a prior year for resolution
of a pre-acquisition income tax contingency
|
|
|
3,230
|
|
|
|
2,282
|
|
|
|
36,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) investing activities
|
|
|
1,121,427
|
|
|
|
25,861
|
|
|
|
(84,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of Convertible Subordinated Notes
|
|
|
|
|
|
|
|
|
|
|
(148,126
|
)
|
Repayment of debt obligations
|
|
|
|
|
|
|
(271,848
|
)
|
|
|
(129
|
)
|
Issuance of common stock
|
|
|
46,280
|
|
|
|
61,014
|
|
|
|
30,862
|
|
Purchase of common stock under repurchase programs
|
|
|
(770,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(724,472
|
)
|
|
|
(210,834
|
)
|
|
|
(117,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,815
|
|
|
|
973
|
|
|
|
(1,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
693,769
|
|
|
|
63,151
|
|
|
|
45,926
|
|
Cash and cash equivalents at beginning of year
|
|
|
327,800
|
|
|
|
264,649
|
|
|
|
218,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
1,021,569
|
|
|
$
|
327,800
|
|
|
$
|
264,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
47
LSI
Corporation
Notes to
Consolidated Financial Statements
|
|
Note 1
|
Significant
Accounting Policies
|
Nature of the business: LSI Corporation
(LSI or the Company) designs, develops
and markets complex, high-performance semiconductors and storage
systems. The Company provides silicon-to-system solutions that
are used at the core of products that create, store, consume and
transport digital information. The Company offers a broad
portfolio of capabilities including custom and standard product
integrated circuits used in hard disk drives, high-speed
communication systems, computer servers, storage systems, and
personal computers. The Company also offers external storage
systems, host adapter boards and software applications for
attaching storage devices to computer servers and for storage
area networks.
The Company operates in two reportable segments the
Semiconductor segment and the Storage Systems
segment 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 end customers.
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.
On April 2, 2007, the Company acquired Agere Systems Inc.
(Agere) through the merger of Agere and a subsidiary
of the Company.
Minority interest in a subsidiary represents the minority
stockholders proportionate share of the net assets and the
results of operations for a majority-owned subsidiary in Japan.
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. At December 31, 2007, 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.
Amortization of intangibles, which was previously included in
operating expenses, has been reclassified to cost of revenues
for the years ended December 31, 2006 and 2005 to conform
to the current year presentation.
Use of estimates: The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the 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 from the
effective date of the purchase. The total purchase price is
allocated to the estimated fair value of assets acquired and
liabilities assumed based on management estimates. The purchase
price includes direct acquisition costs consisting of investment
banking, legal and accounting fees.
Revenue recognition: The majority of the
Companys product revenues are recognized upon shipment,
when persuasive evidence of a sales arrangement exists, the
price is fixed or determinable, title has transferred and
collection of resulting receivables is reasonably assured (or
probable in the case of software). Standard products sold to
distributors are subject to specific rights of 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 are
recognized when the significant contractual obligations have
been fulfilled. Royalty revenues are
48
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
recognized upon the sale of products subject to royalties. All
amounts billed to a customer related to shipping and handling
are classified as revenues, while all costs incurred by the
Company for shipping and handling are classified as cost of
revenues. Consideration given to customers, when offered, is
primarily in the form of discounts and rebates, and is accounted
for as a reduction to revenues in the period the related sale is
made. Reserves for estimated sales returns are established based
on historical returns experience. The Company has substantial
historical experience to form a basis for estimating returns
when products are shipped.
In arrangements where software is more than incidental to the
arrangement as a whole, which includes a combination of the
Companys hardware and premium software products that are
also sold separately, the Company follows the guidance in
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 that include a
combination of storage systems hardware, premium software,
services and post-contract customer support, are allocated to
the separate elements based on relative fair values, which are
determined based on the prices when the items are sold
separately.
Earnings per share: Basic earnings per share
(EPS) is computed by dividing net (loss)/income
available to common stockholders (numerator) by the weighted
average number of common shares outstanding (denominator) during
the period. Diluted EPS is computed using the weighted-average
number of common and potentially dilutive common shares
outstanding during the period using the treasury-stock method
for outstanding stock options and restricted stock awards and
the if-converted method for convertible notes. Under the
treasury stock method, the amount the employee must pay for
exercising stock options and employee stock purchase rights, the
amount of compensation cost for future service that the Company
has not yet recognized, and the amount of tax benefits that
would be recorded in additional paid-in capital when the award
becomes deductible are assumed to be used to repurchase shares.
A reconciliation of the numerators and denominators of the basic
and diluted per share amount computations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Per-Share
|
|
|
|
|
|
|
|
|
Per-Share
|
|
|
|
|
|
|
|
|
Per-Share
|
|
|
|
(Loss)*
|
|
|
Shares+
|
|
|
Amount
|
|
|
Income*
|
|
|
Shares+
|
|
|
Amount
|
|
|
(Loss)*
|
|
|
Shares+
|
|
|
Amount
|
|
|
|
(In thousands except per share amounts)
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income available to common stockholders
|
|
$
|
(2,486,819
|
)
|
|
|
641,823
|
|
|
$
|
(3.87
|
)
|
|
$
|
169,638
|
|
|
|
398,551
|
|
|
$
|
0.43
|
|
|
$
|
(5,623
|
)
|
|
|
390,135
|
|
|
$
|
(0.01
|
)
|
Stock options, employee stock purchase rights and restricted
stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income available to common stockholders
|
|
$
|
(2,486,819
|
)
|
|
|
641,823
|
|
|
$
|
(3.87
|
)
|
|
$
|
169,638
|
|
|
|
405,163
|
|
|
$
|
0.42
|
|
|
$
|
(5,623
|
)
|
|
|
390,135
|
|
|
$
|
(0.01
|
)
|
|
|
|
*
|
|
Numerator
|
|
+
|
|
Denominator
|
Options to purchase 93,011,016, 45,379,128 and
70,618,481 shares outstanding for the years ended
December 31, 2007, 2006 and 2005, respectively, were
excluded from the computation of diluted shares because of their
antidilutive effect on net (loss)/income per share.
49
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
For the year ended December 31, 2007, 43,810,596 weighted
average potentially dilutive shares associated with convertible
notes were excluded from the calculation of diluted shares
because of their antidilutive effect on net loss per share. For
the years ended December 31, 2006 and 2005, 34,676,681 and
38,411,403 weighted average potentially dilutive shares,
respectively, associated with convertible notes were excluded
from the calculation of diluted shares because of their
antidilutive effect on net income/(loss) per share.
Stock-Based Compensation Expense: On
January 1, 2006, the Company adopted FAS 123R, using
the modified prospective transition method. In accordance with
this transition method, the Company began recognizing
compensation expense for all share-based awards granted after
January 1, 2006 plus unvested awards granted on or prior to
January 1, 2006. No restatement of prior periods has been
made. The estimated fair value of the equity-based awards, less
expected forfeitures, is amortized over the awards vesting
period on a straight-line basis. Determining the fair value of
stock-based awards at the grant date requires considerable
judgment, including estimating expected volatility, expected
term and risk-free rate. If factors change and the Company
employs different assumptions, stock-based compensation expense
may differ significantly from what the Company has recorded in
the prior years.
Advertising: Advertising costs are charged to
expense in the period incurred. Advertising expense was
$8.1 million, $5.0 million and $4.9 million for
the years ended December 31, 2007, 2006 and 2005,
respectively.
Sales and value added taxes: Taxes collected
from customers and remitted to governmental authorities are
presented on a net basis in the Companys consolidated
statements of operations.
Cash equivalents: All highly liquid
investments purchased with an original maturity of 90 days
or less are considered to be cash equivalents. Cash equivalents
are reported at amortized cost plus accrued interest.
Accounts receivable and allowance for doubtful accounts:
Trade receivables are reported in the balance sheet reduced
by an allowance for doubtful accounts reflecting estimated
losses resulting from receivables not considered to be
collectible. The allowance for doubtful accounts is estimated by
evaluating customers payment history and credit worthiness
as well as current economic and market trends.
Investments: Available-for-sale investments
include marketable short-term investments and long-term
investments in marketable shares of technology companies.
Short-term investments in marketable debt securities are
reported at fair value and include all debt securities
regardless of their maturity dates. Long-term investments in
marketable equity securities are reported at fair value 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 and
consist primarily of non-marketable common and preferred stock
of various technology companies. Gains and losses on securities
sold are determined based on the specific identification method
and are included in interest income and other, net in the
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, net in the statement of operations. In order to determine
if impairment has occurred, the Company reviews the financial
performance and outlook of each investee and industry
performance. For marketable equity securities, impairment losses
are measured using the closing trading prices of the marketable
securities on the date management determined that the
investments were impaired. For non-marketable equity securities,
impairment losses are generally measured by using pricing in
current rounds of financing. The fair values of the
Companys non-marketable equity investments are not
estimated unless there are identified events or changes in
circumstances that may have a significant adverse effect on the
investment.
Inventories: Inventories are stated at the
lower of cost or market. Cost is computed on a
first-in,
first-out basis for raw materials,
work-in-process
and finished goods. Inventory 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
50
LSI
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 related leases or the
estimated useful lives of the improvements. While the majority
of the Companys equipment is depreciated over a three- to
five-year period, some tools are being depreciated over a
seven-year period.
Software: The Company capitalizes both
purchased software and software development costs. Purchased
software primarily includes software and external consulting
fees related to the purchase and implementation of software
projects used for business operations and engineering design
activities. Capitalized software projects are amortized over the
estimated useful lives of the projects, typically a two- to
five-year period. Development costs for software that will be
sold to customers
and/or
embedded in certain hardware products are capitalized beginning
when a products technological feasibility has been
established. Prior to the establishment of technological
feasibility, software development costs are expensed as research
and development. Capitalized development costs are amortized on
a straight-line basis to cost of revenues when software is ready
for general release to customers over the estimated useful life
of the product, typically an 18- to
24-month
period. Software amortization totaling $19.1 million,
$13.8 million and $14.2 million was included in the
Companys results of operations during 2007, 2006 and 2005,
respectively. On a quarterly basis, the Company assesses the
realizability of each software product. The amount by which the
unamortized capitalized software development costs exceed the
estimated net realizable value is written off immediately.
Impairment of long-lived assets: The Company
evaluates the carrying value of long-lived assets whenever
events or changes in circumstances indicate the carrying value
of an asset may not be recoverable. The determination of
recoverability is based on an estimate of undiscounted cash
flows expected to result from the use and eventual disposition
of the asset. In the event such cash flows are not expected to
be sufficient to recover the recorded value of the assets, the
assets are written down to their estimated fair values. When
assets are removed from operations and held for sale, the
impairment loss is estimated as the excess of the carrying value
of the assets over their fair value.
Goodwill: The Company monitors the
recoverability of goodwill recorded in connection with
acquisitions, by reporting unit, annually or sooner if events or
changes in circumstances indicate that the carrying amount may
not be recoverable. The Companys two reporting units are
Semiconductor and Storage Systems. Impairment, if any, would be
determined based on an implied fair value model for determining
the carrying value of goodwill. The impairment test is a
two-step process. The first step requires comparing the fair
value of each reporting unit to its net book value. The Company
uses management estimates of future cash flows to perform the
first step of the goodwill impairment test. Managements
estimates include assumptions about future 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, and involves measuring the actual
impairment to goodwill.
Fair value disclosures of financial
instruments: The estimated fair value of
financial instruments is determined by the Company, using
available market information and valuation methodologies
considered to be appropriate. However, considerable judgment is
required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different
market assumptions
and/or
estimation methodologies could have a significant effect on the
estimated fair value amounts. The fair value of investments,
derivative
51
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
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. 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 a fair value hedge on an
interest-bearing financial instrument (such as an interest rate
swap) is cancelled and hedge accounting is discontinued, the
hedged item is no longer adjusted for changes in its fair value,
and the remaining asset or liability will be amortized to
earnings over the remaining life of the hedged item. When hedge
accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will
continue to be carried on the balance sheet at its fair value,
and gains and losses that were accumulated in other
comprehensive income will be recognized immediately in earnings.
Concentration of credit risk of financial
instruments: Financial instruments that
potentially subject the Company to credit risk consist of cash
equivalents, short-term investments and accounts receivable.
Cash equivalents and short-term investments are maintained with
high quality institutions, the composition and maturities of
which are regularly monitored by management. A majority of the
Companys trade receivables are derived from sales to large
multinational computer, communication, networking and storage
manufacturers,
52
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
with the remainder distributed across other industries. There
were two customers that accounted for 25% and 14% of trade
receivables as of December 31, 2007 and two customers that
accounted for 24% and 13% of trade receivables as of
December 31, 2006. Concentrations of credit risk with
respect to all other trade receivables are considered to be
limited due to the quantity of customers comprising the
Companys customer base and their dispersion across
industries and geographies. The Company performs ongoing credit
evaluations of its customers financial condition and
requires collateral as considered necessary. Write-offs of
uncollectible amounts have not been significant.
Product warranties: The Company warrants
finished goods against defects in material and workmanship under
normal use and service for periods of one to five years. A
liability for estimated future costs under product warranties is
recorded when products are shipped.
Litigation and settlement costs: The Company
is involved in legal actions arising in the ordinary course of
business. The Company records an estimated loss for a loss
contingency when both of the following conditions are met:
(i) information available prior to issuance of the
financial statements indicates that it is probable that an asset
had been impaired or a liability had been incurred at the date
of the financial statements, and (ii) the amount of loss
can be reasonably estimated.
Income taxes: The calculation of the
Companys tax provision involves the application of complex
tax rules and regulations within multiple jurisdictions
throughout the world. The Companys tax liabilities include
estimates for all income-related taxes that the Company believes
are probable and that can be reasonably estimated. To the extent
that the Companys estimates are understated, additional
charges to the provision for income taxes would be recorded in
the period in which the Company determines such understatement.
If the Companys income tax estimates are overstated,
income tax benefits will be recognized when realized.
Deferred tax assets and liabilities are recognized for temporary
differences between financial statement and income tax bases of
assets and liabilities. Valuation allowances are provided
against deferred tax assets when it is more likely than not that
some portion or all of the deferred tax asset will not be
realized. The Company considers future taxable income and
ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance.
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) issued interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109 (FAS 109). FIN 48
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 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 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.
53
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
The Company adopted the provisions of FIN 48 as of
January 1, 2007. The Company recognized the cumulative
effect of adoption as a $3.4 million increase to the
opening balance of accumulated deficit as of January 1,
2007. During the fourth quarter of 2007, the Company recorded an
additional increase to the opening balance of the accumulated
deficit as of January 1, 2007 of $23.8 million
relating to the cumulative effect of adopting FIN 48, with
the offset to deferred tax liability. The amount of unrecognized
tax benefit as of the date of adoption after the FIN 48
adjustment was $132.9 million. See Note 12.
The Company recognizes interest and penalties accrued in
relation to unrecognized tax benefits in tax expense. As of the
date of adoption, the Company had accrued approximately
$32.3 million for the payment of interest and penalties.
The amount of the unrecognized tax benefit acquired from Agere
on April 2, 2007 was $65.2 million. Acquired accrued
interest and penalties from Agere were approximately
$10.7 million.
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 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 which is unrestricted (that is, the employee is not
required to perform any services for or on behalf of the entity
during the absence) and which 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 43 and that if 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. The Company adopted
EITF 06-02
in the first quarter of 2007, with a cumulative effect
adjustment to accumulated deficit of $4.2 million.
The impact of the adoption of FIN 48 and
EITF 06-02
on the opening balance of accumulated deficit as of
January 1, 2007 is as follows (in thousands):
|
|
|
|
|
Accumulated deficit as of December 31, 2006
|
|
$
|
(1,220,306
|
)
|
Impact of adoption of FIN 48
|
|
|
(27,193
|
)
|
Impact of adoption of EITF
06-02
|
|
|
(4,204
|
)
|
|
|
|
|
|
Accumulated deficit as of January 1, 2007
|
|
$
|
(1,251,703
|
)
|
|
|
|
|
|
In September 2006, the FASB issued Statement No. 157
(FAS 157), Fair Value Measurements.
FAS 157 establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value, and
expands on required disclosures about fair value measurement.
FAS 157 is effective for fiscal years beginning after
November 15, 2007 and will be applied prospectively. In
February 2008, the FASB issued FASB Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP157-2), which delays the effective date of SFAS 157 for
all nonrecurring fair value measurements of nonfinancial assets
and nonfinancial liabilities until fiscal years beginning after
November 15, 2008.
FSP 157-2
is effective upon issuance. As of January 1, 2008, the
Company adopted FAS 157 and the adoption had no material
impact to the Companys consolidated balance sheet and
statement of operations.
In September 2006, the FASB issued Statement No. 158
(FAS 158), Employers Accounting for
Defined Benefit Pension and Other Post-retirement Plans,
which amends FAS No. 87, Employers
Accounting for Pensions, FAS No. 88,
Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, FAS No. 106,
Employers Accounting for Post-retirement Benefits
Other than Pensions, and FAS No. 132(R),
Employers Disclosure about Pensions and Other
Post-retirement Benefits an amendment of FASB
Statements No. 87, 88 and 106. FAS 158 requires
an entity to recognize the overfunded or underfunded status of a
defined benefit post-retirement plan as an asset or liability in
its balance sheet and to recognize changes in that funded status
through comprehensive income in the year in which the changes
54
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
occur. This Statement requires an entity to measure the funded
status of a plan as of the date of an entity year-end statement
of financial position, with limited exceptions. As a result of
the Agere merger, the Company acquired Ageres pension
plans and post-retirement benefit plans. See Note 5.
In February 2007, the FASB issued Statement No. 159
(FAS 159), The Fair Value Option for
Financial Assets and Financial Liabilities including
an amendment of FASB Statement No. 115. FAS 159
permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard
requires that unrealized gains and losses on items for which the
fair value option has been elected to be reported in earnings.
FAS 159 is effective for fiscal years beginning after
November 15, 2007 and will be applied prospectively,
although earlier adoption is permitted. As of January 1,
2008, the Company adopted FAS 159 and the adoption had no
material impact on the Companys consolidated financial
statements.
In December 2007, the FASB issued Statement No. 141
(revised 2007), Business Combinations
(FAS 141(R)). FAS 141(R) establishes
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest
in the acquiree and the goodwill acquired in acquisition.
FAS 141(R) also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the
business combination. FAS 141(R) is effective for fiscal
years beginning after December 15, 2008. The Company is
currently evaluating the potential impact, if any, of the
adoption of FAS 141(R) on the Companys consolidated
financial statements.
In December 2007, the FASB issued Emerging Issues Task Force
(EITF) Issue
No. 07-1
Accounting for Collaborative Arrangements
(EITF 07-1).
EITF 07-1
defines collaborative agreements as contractual arrangements
that involve a joint operating activity. These arrangements
involve two (or more) parties who are both active participants
in the activity and that are exposed to significant risks and
rewards dependent on the commercial success of the activity.
EITF 07-1
provides that a company should report the effects of adoption as
a change in accounting principle through retrospective
application to all periods and requires additional disclosures
about a companys collaborative arrangements.
EITF 07-1
is effective for annual periods beginning after
December 15, 2007. As of January 1, 2008, the Company
adopted
EITF 07-1
and the adoption had no material impact on the Companys
consolidated financial statements.
|
|
Note 2
|
Restructuring
and other items
|
2007
The Company recorded a charge of $148.1 million in
restructuring of operations and other items, net for the year
ended December 31, 2007, consisting of $142.9 million
in charges for restructuring of operations and a charge of
$5.2 million for other items. A charge of
$143.4 million was recorded in the Semiconductor segment
and a charge of $4.7 million was recorded in the Storage
Systems segment.
Restructuring
and impairment of long-lived assets:
The $142.9 million in restructuring charges were the result
of the following actions in 2007:
Sale
of the Mobility Products Group:
A charge of $95.4 million related to the sale of the
Mobility Products Group (MPG), consisting of the
following:
|
|
|
|
|
A charge of $17.7 million for the difference between the
proceeds of $450 million received and the
$467.7 million net book value of MPG at closing;
|
|
|
|
A charge of $27.5 million for future credits the buyer will
receive from the Company on purchases of finished goods
inventory;
|
55
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
|
|
|
|
|
A charge of $21.8 million for future inventory pricing
benefits the buyer will receive for products manufactured at
Silicon Manufacturing Partners Pte. Ltd. (SMP), a
joint venture LSI has with Chartered Semiconductor Manufacturing
Ltd. (Chartered Semiconductor);
|
|
|
|
A charge of $14.4 million for the acceleration of stock
awards previously granted to MPG employees whose positions will
be eliminated as part of the sale of MPG; and
|
|
|
|
A charge of $4.5 million for Mobility-related lease
termination costs not assumed by Infineon, a $4.5 million
charge for estimated transaction costs, a $3.2 million
charge for severance and termination benefits for employees and
a charge of $1.8 million for the write-off of MPG fixed
assets not acquired by the buyer.
|
On October 24, 2007, the Company completed the sale of its
MPG to Infineon Technologies AG for $450 million in cash,
plus a performance-based payment of up to $50 million
payable in the first quarter of 2009. The Mobility Products
Group designed semiconductors and software for cellular
telephone handsets and complete chip-level solutions for
satellite digital audio radio applications. The Company will be
providing operational handling services to Infineon for four
years from the date of sale in October 2007 to October 2011,
short-term transition services and will be leasing space in its
Allentown, PA facility to Infineon. Services performed by LSI
during the transition period were primarily related to
short-term information system services and priced at fair market
value. The facility lease is for a term of 36 months.
Infineon pays LSI fair market value for such space rental.
Sale
of the Consumer Products Group:
A charge of $14.0 million related to the sale of the
Consumer Products Group, (CPG or Consumer
Group) consisting of the following:
|
|
|
|
|
A credit of $1.3 million for the difference between the
$22.6 million received and the $21.3 million net book
value of the assets as of the date the transaction closed;
|
|
|
|
A $12.8 million charge for severance and termination
benefits for employees; and
|
|
|
|
A $2.5 million charge related to facility lease termination
costs not assumed by Magnum.
|
On July 27, 2007, the Company completed the sale of its
Consumer Group to Magnum Semiconductor for approximately
$22.6 million in cash received on July 27, 2007, plus
a promissory note for $18 million due in 2010 and a warrant
to purchase preferred shares of Magnum Semiconductor stock.
Sale
of Thailand semiconductor assembly and test
operations:
A charge of $5.6 million related to the sale of Thailand
assembly and test operations, consisting of the following:
|
|
|
|
|
A charge of $5.5 million to adjust the carrying value of
the assets held for sale to fair market value; and
|
|
|
|
A charge of $0.1 million for the difference between the net
proceeds of $99.6 million received and the
$99.7 million net book value at closing
|
On October 2, 2007, the Company completed the sale of its
semiconductor assembly and test operations in Thailand to STATS
ChipPAC Ltd. (STATS ChipPAC) for approximately
$100 million with $50 million due upon closing and a
$50 million note payable over four years. STATS ChipPAC
offered employment to substantially all of the LSI manufacturing
employees associated with the facility. The Company also entered
into additional agreements with STATS ChipPAC, including a
multi-year wafer assembly and test agreement and a transition
services agreement.
Under the terms of the wafer assembly agreement, LSI is a
customer of STATS ChipPAC, whereby LSI has agreed to utilize
STATS ChipPAC for wafer assembly and testing for four years from
the date of sale in October
56
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
2007. The wafer assembly and testing prices under the agreement
represent fair market values. The transition services agreement
was short-term in nature and priced separately from the overall
sale agreement. Services performed by LSI under this agreement
were primarily related to short-term information system services
and priced at fair market value.
Other
restructuring actions and charges
On June 27, 2007, the Company announced a reduction in
workforce of approximately 900 positions (inclusive of the
Consumer Group) or 13 percent of the Companys
non-production workers across all business and functional areas
worldwide. On July 25, 2007, the Company also announced
that it would transition semiconductor and storage systems
assembly and test operations performed at its facilities in
Singapore and Wichita, Kansas to current manufacturing partners.
As part of these actions, the Company expects to eliminate
approximately 2,100 production positions worldwide. The Company
recorded a charge of $27.9 million related to the above
actions and other activities, consisting of the following:
|
|
|
|
|
A charge of $24.6 million for severance and termination
benefits for employees, of which $13.3 million related to
the general workforce reduction action announced on
June 27, 2007, $7.9 million related to workforce
reductions planned in 2008, and $3.4 million related to the
transition of the Kansas manufacturing operations to
manufacturing partners;
|
|
|
|
A charge of $7.4 million to adjust the carrying value of
the assets held for sale in Singapore to fair market values and
a charge of $1.0 million for certain other asset write-offs;
|
|
|
|
A charge of $1.5 million primarily for changes in sublease
assumptions for previously accrued facility lease terminations
and $2.0 million to reflect the change in time value of
accruals for facility lease terminations;
|
|
|
|
A charge of $1.8 million for the acceleration of stock
awards previously granted to employees whose positions will be
eliminated related to the planned workforce reductions in
January 2008; and
|
|
|
|
A net gain of $10.4 million for the sale of land in
Colorado, which had a net book value of $2.0 million. Total
proceeds from the sale were $12.4 million.
|
The following table sets forth the Companys restructuring
reserves as of December 31, 2007, which are included in
other accrued liabilities in the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Restructuring
|
|
|
Utilized
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Expense
|
|
|
During
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Write-down of excess assets and other liabilities(a)
|
|
$
|
|
|
|
$
|
75,344
|
|
|
$
|
(75,119
|
)
|
|
$
|
225
|
|
Lease terminations(b)
|
|
|
23,169
|
|
|
|
10,672
|
|
|
|
(10,523
|
)
|
|
|
23,318
|
|
Payments to employees for severance(c)
|
|
|
342
|
|
|
|
56,905
|
|
|
|
(32,430
|
)
|
|
|
24,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,511
|
|
|
$
|
142,921
|
|
|
$
|
(118,072
|
)
|
|
$
|
48,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Utilization includes reclassification of $53.8 million to
other liability accounts recorded during third quarter. |
|
(b) |
|
The amount utilized represents cash payments. The balance
remaining for real estate lease terminations is expected to be
paid during the remaining terms of the leases, which extend
through 2011. |
|
(c) |
|
The amount utilized represents cash severance payments to
employees. The balance remaining for severance is expected to be
paid by the end of 2008. |
57
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
Assets
held for sale:
Assets held for sale were included as a component of prepaid
expenses and other current assets in the balance sheet for the
years ending December 31, 2007 and 2006. Assets held for
sale of $26.1 million as of December 31, 2007 included
$17.7 million related to land in Gresham, Oregon,
$6.8 million related to semiconductor assembly and test
facilities in Singapore and $0.9 million related to land
held for sale in Colorado. Assets held for sale of
$20.1 million as of December 31, 2006 included
$17.7 million related to Gresham land held for sale and
$2.0 million for land held for sale in Colorado that was
sold during the year.
Assets classified as held for sale were recorded at the lower of
their carrying amount or fair value less costs to sell and are
not depreciated. The fair values of impaired equipment and
facilities were researched and estimated by management. The
Company reassesses the ability to realize the carrying value of
these assets at the end of each quarter until the assets are
sold or otherwise disposed of, and therefore, additional
adjustments may be necessary.
Restructuring
Actions Associated with the Agere Merger:
In connection with the Agere merger, management approved and
initiated plans to restructure the operations of Agere to
eliminate duplicative activities, reduce cost structure and
better align product and operating expenses with existing
general economic conditions. Agere restructuring costs were
accounted for as liabilities assumed as part of the purchase
business combination as of April 2, 2007, in accordance
with
EITF 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination.
The Company established a reserve of $93.4 million as of
April 2, 2007, consisting of the following items:
|
|
|
|
|
A reserve of $50.1 million for severance and termination
benefits for employees as a result of the restructuring actions
related to the Thailand and Singapore assembly and test
facilities;
|
|
|
|
A reserve of $14.5 million for facility lease exit costs,
primarily in Singapore and Europe; and
|
|
|
|
A reserve of $28.8 million for stock-related compensation
expense associated with employees whose positions were
eliminated.
|
From April 2, 2007 through December 31, 2007, the
Company recorded a net charge of $3.3 million to reflect
changes in estimates, resulting from the following items:
|
|
|
|
|
A charge of $1.3 million for changes in assumptions for
Singapore lease termination costs;
|
|
|
|
A charge of $1.2 million to reflect a change in time value
of accruals for previously recorded facility lease termination
costs;
|
|
|
|
A charge of $1.0 million for additional stock compensation
charges for employees whose positions were eliminated; and
|
|
|
|
A credit of $0.2 million for changes in estimated payments
to employees for severance previously recorded for Thailand and
other restructuring actions;
|
58
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
The following table sets forth restructuring reserves related to
the Agere merger as of December 31, 2007, which are
included in other accrued liabilities and in other non-current
liabilities in the balance sheet, and the activities affecting
the reserves during the period from April 2, 2007 to
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Adjustment
|
|
|
Changes in
|
|
|
Utilized
|
|
|
Balance at
|
|
|
|
April 2,
|
|
|
to Opening
|
|
|
Estimates During
|
|
|
During
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Balance sheet
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Lease terminations(a)
|
|
$
|
14,464
|
|
|
$
|
21,931
|
|
|
$
|
2,496
|
|
|
$
|
(5,452
|
)
|
|
$
|
33,439
|
|
Payments to employees for severance(b)
|
|
|
50,087
|
|
|
|
|
|
|
|
(167
|
)
|
|
|
(30,994
|
)
|
|
|
18,926
|
|
Stock compensation charges in accordance with FAS 123R(c)
|
|
|
28,841
|
|
|
|
|
|
|
|
951
|
|
|
|
(8,932
|
)
|
|
|
20,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
93,392
|
|
|
$
|
21,931
|
|
|
$
|
3,280
|
|
|
$
|
(45,378
|
)
|
|
$
|
73,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amount utilized represents cash payments. The balance
remaining for real estate lease terminations is expected to be
paid during the remaining terms of these contracts, which extend
through 2013. The adjustment to the opening balance sheet
consists of $21.9 million in termination costs for leases
related to Ageres restructuring plans that existed prior
to its acquisition by the Company. |
|
(b) |
|
The amount utilized represents cash severance payments to
employees. The majority of the balance remaining for severance
is expected to be paid by the end of 2008. |
|
(c) |
|
The amount utilized represents stock options exercised or
expired. Amounts accrued represent the value of stock options
and restricted units LSI expects to accelerate upon termination
of the holders employment whose positions are to be
eliminated. The balance is expected to be utilized by the end of
2009. |
Other
Items:
During the fourth quarter of 2007, the Company recorded
$5.2 million of litigation charges in connection with
ongoing litigation matters.
2006
The Company recorded a credit of $8.4 million in
restructuring of operations and other items for the year ended
December 31, 2006. A credit of $9.6 million was
recorded in the Semiconductor segment and a charge of
$1.2 million was included in the Storage Systems segment.
The $8.4 million credit of restructuring expenses resulted
from the following:
|
|
|
|
|
Net gains of $38.9 million from the sale of certain zero
basis intellectual property, the sale of the Gresham, Oregon
manufacturing facility and related manufacturing process
intellectual property to ON Semiconductor, and from the sale of
the Companys ZSP digital signal processor technology;
|
|
|
|
A charge of $17.0 million for severance and termination
benefits for employees, primarily related to the broad-based
reorganization that was announced in August 2005;
|
|
|
|
A charge of $6.0 million primarily for the write-off of
some intangible assets acquired in a purchase business
combination and other exit costs including contract termination
costs; and
|
|
|
|
A charge of $6.0 million primarily for changes in sublease
assumptions for previously accrued facility lease termination
costs and additional $1.5 million to reflect the change in
time value of accruals for facility lease termination costs.
|
59
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
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, of
which $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 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.
In the fourth quarter of 2007, the wafer supply agreement was
amended to increase the total wafer purchase amount by
$3.8 million to a total of $202.6 million and to
extend the wafer supply agreement ending date to the fourth
quarter of 2008.
The following table sets forth the Companys restructuring
reserves as of December 31, 2006, which are included in
other accrued liabilities in 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
|
|
|
(a) |
|
The credit includes the gain from the sale of the Gresham
facility described above. The remaining balance was utilized
during the third quarter of 2006. |
|
(b) |
|
The amount utilized represents 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) |
|
The amounts utilized represents cash payments. |
|
(d) |
|
The amount utilized represents (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, net for the year
ended December 31, 2005, consisting of $113.7 million
in charges for restructuring of operations and impairment of
long-lived assets and a charge of $5.4 million for other
items. Of these charges, $115.9 million was recorded in the
Semiconductor segment and $3.2 million was included in the
Storage Systems segment.
Restructuring
and impairment of long-lived assets:
The Company recorded an asset impairment charge in connection
with the announcement of the sale of its Gresham manufacturing
facility calculated in accordance with FAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. The fair market values for the Gresham facility
were thoroughly researched and estimated by management. In
addition, the Company announced workforce reductions for
approximately 80 positions in the Gresham facility. The Company
also established a retention bonus arrangement for approximately
500 employees to induce them to stay until the facility was
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 were associated with the Semiconductor segment.
The $113.7 million in charges resulted from the following:
|
|
|
|
|
A charge of $91.1 million directly associated with the
decision to sell the Gresham manufacturing facility, consisting
of the following:
|
|
|
|
|
|
A charge of $85.2 million for write-down of assets;
|
|
|
|
A charge of $4.8 million for estimated selling
costs; and
|
|
|
|
A charge of $1.1 million for severance and termination
benefits for employees.
|
|
|
|
|
|
A charge of $9.9 million primarily for changes in sublease
assumptions for previously accrued facility lease termination
costs and additional $1.6 million to reflect the change in
time value of accruals for facility lease termination costs;
|
|
|
|
A charge of $6.2 million for severance and termination
benefits for employees, primarily related to the broad-based
reorganization that was announced in August 2005; and
|
|
|
|
A charge of $4.9 million primarily for the write-down of
assets and facility closure costs as a result of consolidation
of additional non-manufacturing facilities.
|
Other
Items:
During the second quarter of 2005, the Company recorded a charge
of $5.4 million in other items, primarily resulting from
the departure of the Companys former Chief Executive
Officer.
61
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
|
|
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 FAS 123R Share-Based
Payments, using the modified prospective transition
method. In accordance with the modified prospective transition
method, the Company began recognizing compensation expense for
all share-based awards granted on or after January 1, 2006,
plus unvested awards granted prior to January 1, 2006.
Under this method of implementation, no restatement of prior
periods has been made. The cumulative effect of adopting
FAS 123R was not significant.
Description
of the Companys Equity Compensation Plans
2003 Equity Incentive Plan (the 2003
Plan): Under the 2003 Plan, the Company may
grant stock options or restricted stock units 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. No
participant may be granted more than 0.5 million of
restricted stock units in any year. The term of each option or
restricted stock unit is determined by the Board of Directors or
its delegate and, for option grants on or after
February 12, 2004, is generally seven years. Options
generally vest in annual increments of 25% per year commencing
one year from the date of grant. As of December 31, 2007,
the 2003 Plan had approximately 1.8 million common shares
available for future grants.
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 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 the 1991 plan after March 2001. As of
December 31, 2007, the 1991 Plan had approximately
40.2 million common shares available for future grants.
1995 Director Option Plan (the 1995 Director
Plan): Under the 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
exercise price of the options granted is equal to the fair
market value of the stock on the date of grant. The term of each
option is ten years. 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. As of December 31, 2007, the
1995 Director Plan had approximately 0.8 million
common shares available for future grants.
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 delegate
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 generally
seven years. Options generally vest in annual increments of 25%
per year commencing one year from the date of grant. As of
December 31, 2007, the 1999 Plan had approximately
8.0 million common shares available for future grants.
Employee Stock Purchase Plan, as amended and restated
(US ESPP): Under the US ESPP, rights
are granted to LSI 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. There are 13.2 million
shares remaining available for future issuance under this plan,
of which 9 million shares were added to the plan by
stockholder approval in 2006. The US ESPP includes an annual
replenishment calculated at 1.15% of the Companys common
stock issued and outstanding at the fiscal year
62
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
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 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 approximately
1.2 million shares remaining available for future issuance
under the IESPP.
Sales under the US ESPP and IESPP in 2007, 2006, and 2005 were
approximately 4.0 million, 3.6 million and
4.3 million shares of common stock at an average price of
$6.03, $6.69 and $4.49 per share, respectively.
Stock-Based
Compensation Expense under FAS 123R
Stock-based compensation expense related to the Companys
employee stock options, stock purchase plans and restricted
stock unit awards under FAS 123R in the consolidated
statements of operations for the years ended December 31,
2007, 2006 and 2005 was $77.3 million, $47.0 million
and $5.4 million, respectively, as shown in the table
below. Stock-based compensation costs capitalized to inventory
and software for the year ended December 31, 2007 were not
significant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Stock-based Compensation Expense Included In:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
10,711
|
|
|
$
|
6,903
|
|
|
$
|
744
|
|
Research and development
|
|
|
31,743
|
|
|
|
17,397
|
|
|
|
2,373
|
|
Selling, general and administrative
|
|
|
34,813
|
|
|
|
22,749
|
|
|
|
2,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
77,267
|
|
|
$
|
47,049
|
|
|
$
|
5,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007 and 2006, the
estimated fair value of the stock-based awards, less expected
forfeitures, was amortized over each awards vesting period
(the requisite service period) on a straight-line basis.
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 FAS 123, Accounting for
Stock-Based Compensation, 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, were 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 stock
options with an exercise price no less than the quoted closing
market price of the Companys stock on the date of grant.
63
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
Stock
Options:
The fair value of each option grant is estimated on the date of
grant using a reduced form calibrated binomial lattice model
(the lattice model). This model requires the use of
historical data for employee exercise behavior and the use of
assumptions outlined in the following table:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average estimated grant date fair value per share
|
|
$
|
3.05
|
|
|
$
|
3.30
|
|
Weighted average assumptions in calculation:
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
4.29
|
|
|
|
4.33
|
|
Risk-free interest rate
|
|
|
4.50
|
%
|
|
|
4.78
|
%
|
Volatility
|
|
|
47
|
%
|
|
|
48
|
%
|
The expected life of employee stock options represents the
weighted-average period the stock options are expected to remain
outstanding and is a derived output of the lattice model. The
expected life of employee stock options is affected by all of
the underlying assumptions and calibration of the Companys
model.
The risk-free interest rate assumption is based upon observed
interest rates of constant maturity U.S. Treasury
securities appropriate for the term of the Companys
employee stock options.
The Company uses an equally weighted combination of historical
and implied volatilities as of the grant date. The historical
volatility is the standard deviation of the daily stock returns
for LSI from the date of the Companys initial public
offering in 1983. For the implied volatilities, the Company uses
near-the-money exchange-traded call options, as stock options
are call options that are granted at-the-money. The historical
and implied volatilities are annualized and equally weighted to
determine the volatilities as of the grant date. Prior to
January 1, 2006, the Company used historical implied stock
price volatilities in accordance with FAS 123 for purposes
of pro forma disclosures under FAS 123. 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 lattice model assumes that employees exercise behavior
is a function of the options remaining vested life and the
extent to which the option is in-the-money. The lattice model
estimates the probability of exercise as a function of these two
variables based on the entire history of exercises and
cancellations for all past option grants made by the Company
since the initial public offering of its common stock in 1983.
Because stock-based compensation expense recognized is based on
awards ultimately expected to vest, it has been reduced for
estimated forfeitures. FAS 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 are estimated based on historical
experience. For the Companys pro forma information
required under FAS 123 for the periods prior to
January 1, 2006, the Company accounted for forfeitures as
they occurred.
64
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
The following table summarizes changes in stock options
outstanding during each of the years ended December 31,
2007, 2006 and 2005 (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
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,
|
|
|
56,750
|
|
|
$
|
11.92
|
|
|
|
70,618
|
|
|
$
|
13.21
|
|
|
|
67,733
|
|
|
$
|
14.57
|
|
Options assumed in Agere Acquisition
|
|
|
48,884
|
|
|
|
22.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(17,295
|
)
|
|
|
(15.56
|
)
|
|
|
(16,130
|
)
|
|
|
(18.02
|
)
|
|
|
(11,555
|
)
|
|
|
(14.63
|
)
|
Options granted
|
|
|
15,628
|
|
|
|
8.61
|
|
|
|
7,781
|
|
|
|
9.17
|
|
|
|
16,493
|
|
|
|
7.67
|
|
Options exercised
|
|
|
(3,725
|
)
|
|
|
(5.91
|
)
|
|
|
(5,519
|
)
|
|
|
(6.71
|
)
|
|
|
(2,053
|
)
|
|
|
(5.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31,
|
|
|
100,242
|
|
|
$
|
16.12
|
|
|
|
56,750
|
|
|
$
|
11.92
|
|
|
|
70,618
|
|
|
$
|
13.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31,
|
|
|
67,124
|
|
|
$
|
20.12
|
|
|
|
35,638
|
|
|
$
|
14.29
|
|
|
|
44,489
|
|
|
$
|
16.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the options outstanding and exercisable as of
December 31, 2007, the weighted average remaining
contractual term was 3.66 and 2.71 years, respectively, and
the average intrinsic value was $3.6 million and
$2.9 million, respectively.
As of December 31, 2007, the total unrecognized
compensation expense related to nonvested stock options, net of
estimated forfeitures, was $100.9 million and is expected
to be recognized over the next 2.6 years on a weighted
average basis. The total intrinsic value of options exercised
during the year ended December 31, 2007 was
$7.7 million. Cash received from stock option exercises
during the year ended December 31, 2007 was
$22.0 million.
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.
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 2007
and 2006 grants as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average estimated grant date fair value per share
|
|
$
|
2.09
|
|
|
$
|
2.92
|
|
Weighted average assumptions in calculation:
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
0.7
|
|
|
|
0.7
|
|
Risk-free interest rate
|
|
|
4
|
%
|
|
|
5
|
%
|
Volatility
|
|
|
42
|
%
|
|
|
35
|
%
|
65
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
Restricted
Stock Awards:
Under the 2003 Plan, the Company may grant restricted stock
awards. No participant may be granted more than a total of
0.5 million shares of restricted stock or restricted stock
units in any year. The Company typically grants restricted stock
units. The vesting requirements for the restricted stock awards
are determined by the Board of Directors, and 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
is presented below:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Number of Shares
|
|
|
|
(In thousands)
|
|
|
Non-vested shares at January 1
|
|
|
1,910
|
|
|
|
2,375
|
|
Assumed in Agere Acquisition
|
|
|
9,141
|
|
|
|
|
|
Granted
|
|
|
4,337
|
|
|
|
733
|
|
Vested
|
|
|
(5,555
|
)
|
|
|
(928
|
)
|
Forfeited
|
|
|
(656
|
)
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
Non-vested shares at December 31
|
|
|
9,177
|
|
|
|
1,910
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards of the Companys common stock
granted during the years ended December 31, 2007, 2006 and
2005 are as follows (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
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
|
|
|
4,337
|
|
|
$
|
8.20
|
|
|
|
733
|
|
|
$
|
9.45
|
|
|
|
2,125
|
|
|
$
|
6.32
|
|
As of December 31, 2007, the total unrecognized
compensation expense related to restricted stock awards, net of
estimated forfeitures, was $61.2 million and is expected to
be recognized over the next 2.4 years on a weighted average
basis. The fair value of shares vested during the year ended
December 31, 2007 was $37.0 million.
There are a total of approximately 160.2 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 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.
In addition, in accordance with FAS 123R,
FAS No. 109, Accounting for Income Taxes,
and EITF Topic D-32, Intraperiod Tax Allocation of the
Effect of Pretax Income from Continuing Operations, the
Company has elected to recognize excess income tax benefits from
stock option exercises in additional paid-in capital only if an
incremental income tax benefit would be realized after
considering all other tax attributes presently available to the
Company.
The Company records its stock-based compensation expense in
multiple jurisdictions. In jurisdictions where an income tax
deduction is allowed and an income tax benefit is realizable,
the Company has recognized an income tax benefit. In
jurisdictions where an income tax deduction is not allowed or
where an income tax benefit is not realizable, an income tax
benefit has not been recognized.
66
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
Pro
Forma Information under FAS 123 for Periods Prior to
January 1, 2006
Prior to January 1, 2006, the Company followed the
disclosure-only provisions of FAS 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 FAS 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 (in thousands, except per share amounts):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31.
|
|
|
|
2005
|
|
|
Net loss, as reported
|
|
$
|
(5,623
|
)
|
Add: Amortization of non-cash deferred stock compensation
determined under the intrinsic value method as reported in net
loss, net of related tax effects*
|
|
|
638
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects*
|
|
|
(70,028
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(75,013
|
)
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
Basic and diluted as reported
|
|
$
|
(0.01
|
)
|
Basic and diluted pro forma
|
|
$
|
(0.19
|
)
|
|
|
|
* |
|
This amount excludes amortization of stock-based compensation on
restricted stock awards. |
The stock-based compensation expense determined under the fair
value method, included in the table above, was calculated using
the Black-Scholes model. The Black-Scholes model was developed
to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which
significantly differ from the Companys stock option
awards. This model also requires highly subjective assumptions,
including future stock price volatility and expected time until
exercise, which greatly affect the calculated grant date fair
value. The following weighted average assumptions were used in
determining the estimated grant date fair values of employee
stock options:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31.
|
|
|
|
2005
|
|
|
Weighted average estimated grant date fair value per share
|
|
$
|
3.98
|
|
Weighted average assumptions in calculation:
|
|
|
|
|
Expected life (years)
|
|
|
3.88
|
|
Risk-free interest rate
|
|
|
3.30
|
%
|
Volatility
|
|
|
67.75
|
%
|
Dividend yield
|
|
|
|
|
Forfeitures of stock options and restricted stock awards
prior to vesting: During 2005, forfeitures were
recorded related to certain stock options assumed in connection
with the C-Cube acquisition that occurred in May 2001, certain
restricted shares issued in connection with the acquisition of
Accerant in May 2004 and certain restricted shares issued to
employees of the Company.
Common
Stock
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 may be repurchased in the open
market from time to time. On December 4, 2006, the Company
announced that its Board of Directors
67
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
terminated this program and had authorized a stock repurchase
program of up to $500.0 million worth of shares of the
Companys common stock. The Company completed this
repurchase program in 2007. On August 20, 2007, the Company
announced that its Board of Directors had authorized a
repurchase program of up to an additional $500.0 million
worth of shares of the Companys common stock. These
repurchases are expected to be funded from the Companys
available cash and short-term investments. During 2007 the
Company repurchased approximately 102.6 million shares for
approximately $770.8 million in cash.
Stock purchase rights: In November 1988, the
Company implemented a plan to protect stockholder value in the
event of a proposed takeover of the Company. Under the plan,
each share of the Companys outstanding common stock
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.
|
|
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 areas in
which the Company operates.
During 2007, the Company completed three acquisitions accounted
for under the purchase method of accounting. During 2006, the
Company made two acquisitions. There were no material
acquisitions in 2005. Set forth below is information about
material acquisitions (dollars in millions):
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Net
|
|
|
|
|
|
|
|
|
|
|
Entity Name;
|
|
|
|
|
Total
|
|
|
|
|
|
Assets/
|
|
|
|
|
|
Amortizable
|
|
|
In-Process
|
|
Segment Included in;
|
|
Acquisition
|
|
|
Purchase
|
|
|
Type of
|
|
|
(Liabilities)
|
|
|
|
|
|
Intangible
|
|
|
Research and
|
|
Description of Acquired Business
|
|
Date
|
|
|
Price
|
|
|
Consideration
|
|
|
Acquired
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Development
|
|
|
Tarari, Inc.; Semiconductor segment; Silicon and software
solutions for security and network control
|
|
|
October 3, 2007
|
|
|
$
|
93.0
|
|
|
$
|
93.0 cash
|
|
|
$
|
6.3
|
|
|
$
|
57.4
|
|
|
$
|
23.3
|
|
|
$
|
6.0
|
|
Agere Systems Inc.; Semiconductor segment; Integrated circuit
solutions for communications and computing applications
|
|
|
April 2, 2007
|
|
|
$
|
3,720.1
|
|
|
|
368 million
shares of LSI
common
stock
|
|
|
$
|
231.8
|
|
|
$
|
1,584.2
|
|
|
$
|
1,727.7
|
|
|
$
|
176.4
|
|
SiliconStor, Inc.; Semiconductor segment; Silicon solutions for
enterprise storage network based on SAS and FC-SATA
|
|
|
March 13, 2007
|
|
|
$
|
56.4
|
|
|
$
|
56.4 cash
|
|
|
$
|
1.5
|
|
|
$
|
37.8
|
|
|
$
|
10.6
|
|
|
$
|
6.5
|
|
68
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Net
|
|
|
|
|
|
|
|
|
|
|
Entity Name;
|
|
|
|
|
Total
|
|
|
|
|
|
Assets/
|
|
|
|
|
|
Amortizable
|
|
|
In-Process
|
|
Segment Included in;
|
|
Acquisition
|
|
|
Purchase
|
|
|
Type of
|
|
|
(Liabilities)
|
|
|
|
|
|
Intangible
|
|
|
Research and
|
|
Description of Acquired Business
|
|
Date
|
|
|
Price
|
|
|
Consideration
|
|
|
Acquired
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Development
|
|
|
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
|
|
Merger with Agere. On April 2, 2007, the
Company completed the acquisition of Agere. Agere was a provider
of integrated circuit solutions for a variety of computing and
communications applications. Some of Ageres solutions
included related software and reference designs. Ageres
solutions were used in products such as hard disk drives, mobile
phones, high-speed communications systems and personal
computers. Agere also licensed its intellectual property to
others. The purpose of the acquisition was to enable the Company
to expand its comprehensive set of building block solutions
including semiconductors, systems and related software for
storage, networking and consumer electronics products that
enable businesses and consumers to store, protect and stay
connected to their information and digital content and expand
its intellectual property portfolio and integrated workforce in
the Semiconductor segment.
Upon completion of the merger, each share of Agere common stock
outstanding at the effective time of the merger was converted
into the right to receive 2.16 shares of LSI common stock.
As a result, approximately 368 million shares of LSI common
stock were issued to former Agere stockholders. The fair value
of the common stock issued was determined using a share price of
$9.905 per share, which represented the average closing price of
LSI common shares for the period commencing two trading days
before and ending two trading days after December 4, 2006,
the date that the merger was agreed to and announced. LSI
assumed stock options and restricted stock units covering a
total of approximately 58 million shares of LSI common
stock. The fair value of options assumed was estimated using a
reduced form calibrated binomial lattice model and a share price
of $9.905 per share, which represents the average closing price
of LSI common shares for two trading days before and ending two
trading days after December 4, 2006. The value of the
options and restricted stock units assumed was reduced by the
fair value of unvested options and restricted stock units
assumed, based on the price of a share of LSI common stock on
April 2, 2007. LSI also guaranteed Ageres
6.5% Convertible Subordinated Notes due December 15,
2009, the fair value of which was $370.2 million as of
April 2, 2007.
The merger was accounted for as a purchase. Accordingly, the
results of operations of Agere and estimated fair value of
assets acquired and liabilities assumed were included in the
Companys consolidated financial statements from
April 2, 2007, the acquisition date.
The total purchase price of the acquisition was as follows (in
thousands):
|
|
|
|
|
Fair value of LSI common shares issued
|
|
$
|
3,647,021
|
|
(a) Fair value of stock awards assumed
|
|
|
218,713
|
|
(b) Fair value of unvested stock awards assumed
|
|
|
(168,555
|
)
|
|
|
|
|
|
(a) (b) Fair value of the vested options assumed
|
|
|
50,158
|
|
Direct transaction costs
|
|
|
22,970
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
3,720,149
|
|
|
|
|
|
|
69
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
Purchase
Price Allocation:
The allocation of the purchase price to Ageres tangible
and identifiable intangible assets acquired and liabilities
assumed was based on their estimated fair values. The excess of
the purchase price over the tangible and identifiable intangible
assets acquired and liabilities assumed has been allocated to
goodwill. None of the goodwill recorded is expected to be
deductible for tax purposes except the tax deductible goodwill
LSI inherited from Agere. The purchase price has been allocated
as follows as of April 2, 2007 (in thousands):
|
|
|
|
|
Cash
|
|
$
|
540,140
|
|
Accounts receivable
|
|
|
222,169
|
|
Inventory
|
|
|
120,848
|
|
Assets held for sale
|
|
|
122,756
|
|
Property and equipment
|
|
|
162,047
|
|
Accounts payable
|
|
|
(167,947
|
)
|
Pension and post-retirement liabilities
|
|
|
(214,607
|
)
|
Convertible notes
|
|
|
(370,249
|
)
|
Other liabilities
|
|
|
(183,359
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
231,798
|
|
Identifiable intangible assets
|
|
|
1,727,700
|
|
In-process research and development
|
|
|
176,400
|
|
Goodwill
|
|
|
1,584,251
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
3,720,149
|
|
|
|
|
|
|
Note 2 contains information related to the cost of
restructuring programs related to Agere. The costs were included
as part of other liabilities assumed as of April 2, 2007.
The following table sets forth the components of the
identifiable intangible assets, which are being amortized over
their estimated useful lives, some on a straight-line basis and
others on an accelerated basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
Identifiable Intangible Assets
|
|
Fair Value
|
|
|
Useful Life
|
|
|
(In thousands)
|
|
|
(In years)
|
|
Current technology
|
|
$
|
844,500
|
|
|
|
8.5
|
|
Customer base
|
|
|
513,000
|
|
|
|
10
|
|
Patent licensing
|
|
|
317,200
|
|
|
|
10
|
|
Order backlog
|
|
|
53,000
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
Total acquired identifiable intangible assets
|
|
$
|
1,727,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired In-Process Research and
Development. The Company recorded acquired
in-process research and development, or IPR&D, charges of
$188.9 million and $4.3 million for the years ended
December 31, 2007 and 2006, respectively. There were no
IPR&D charges recorded for the year ended December 31,
2005. The details of IPR&D by acquisition are summarized in
the table below (Dollars in millions).
70
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Cost To
|
|
|
|
|
|
Revenue Projections
|
|
Entity Name
|
|
IPR&D
|
|
|
Complete
|
|
|
Discount Rate
|
|
|
Extended Through
|
|
|
Tarari, Inc.
|
|
$
|
6.0
|
|
|
$
|
2.9
|
|
|
|
22.7
|
%
|
|
|
2013
|
|
Agere Systems Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage read channel and preamps
|
|
$
|
36.2
|
|
|
$
|
17.8
|
|
|
|
13.8
|
%
|
|
|
2016
|
|
Mobility HSPDA for 3G
|
|
$
|
31.2
|
|
|
|
|
*
|
|
|
13.8
|
%
|
|
|
|
|
Networking modems, Firewire, serdes, media gateway,
VoIP, network processors, Ethernet, mappers and framers
|
|
$
|
109.0
|
|
|
$
|
68.0
|
|
|
|
13.8
|
%
|
|
|
2021
|
|
SiliconStor, Inc.
|
|
$
|
6.5
|
|
|
$
|
4.4
|
|
|
|
27.0
|
%
|
|
|
2017
|
|
|
|
* |
During the fourth quarter of 2007, the Company sold the Mobility
Products Group and therefore no costs will be incurred to
complete the acquired Mobility-HSPDA for 3G project.
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Projections
|
Entity Name
|
|
IPR&D
|
|
|
Discount Rate
|
|
Extended Through
|
|
StoreAge Networking Technologies, Ltd
|
|
$
|
2.4
|
|
|
28%
|
|
2013
|
Metta Technology
|
|
$
|
1.9
|
|
|
Not applicable,
used Cost Approach
|
|
Not applicable,
used Cost Approach
|
The Companys methodology for allocating the purchase price
in purchase acquisitions to IPR&D involves established
valuation techniques in the high-technology industry with the
assistance of third-party service providers. The fair value of
each project in process is determined by discounting forecasted
cash flows directly related to the products expected to result
from the subject research and development once commercially
feasible, net of returns on contributory assets including
working capital, fixed assets, customer relationships, trade
name, and assembled workforce. The net cash flows from the
identified projects are based on estimates of revenues, cost of
revenues, research and development costs, selling, general and
administrative costs and applicable income taxes for the
projects. Total revenues for the projects are expected to extend
through the dates noted in the table above. These projections
are based on estimates of market size and growth, expected
trends in technology and the expected timing of new product
introductions by the Companys competitors and the Company.
A discount rate is used for the projects to account for the
risks associated with the inherent uncertainties surrounding the
successful development of the IPR&D, market acceptance of
the technology, the useful life of the technology, the
profitability level of such technology and the uncertainty of
technological advances, which could impact the estimates
recorded. The discount rates used in the present value
calculations are typically derived from a weighted-average cost
of capital analysis. These estimates do not account for any
potential synergies realizable as a result of the acquisition
and are in line with industry averages and growth estimates.
IPR&D is expensed upon acquisition because technological
feasibility had not been established and no future alternative
uses existed.
For the Metta acquisition, a variation of 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.
The actual development timelines and costs were in line with
original estimates as of December 31, 2007. However,
development of the technology remains a substantial risk to the
Company due to factors including the
71
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
remaining effort to achieve technical feasibility, rapidly
changing customer needs and competitive threats from other
companies. Failure to bring these products to market in a timely
manner could adversely affect sales and profitability of the
Company in the future. Additionally, the value of other
intangible assets acquired may become impaired.
Pro
Forma Results (Unaudited)
The following pro forma summary combines the results of
operations as if Agere had been acquired as of the beginning of
the earliest period presented. Pro forma statements of earnings
information for the remaining acquisitions have not been
presented because the effect of these acquisitions was not
material either on an individual or aggregate basis. The summary
is provided for illustrative purposes only and is not
necessarily indicative of the consolidated results of operations
for future periods or results that actually would have been
realized had the Company and Agere been a consolidated entity
during the periods presented.
The summary includes the impact of certain adjustments such as
amortization of intangibles, stock compensation charges and
charges in interest expense because of Ageres notes that
the Company guaranteed. Additionally, IPR&D associated with
the Agere acquisition has been excluded from the periods
presented. The $142.9 million of restructuring charges
recorded in the year ended December 31, 2007 and referred
to in Note 2 did not relate to the merger with Agere and
accordingly were included.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands except per share amounts)
|
|
|
Revenues
|
|
$
|
2,938,487
|
|
|
$
|
3,412,151
|
|
Net loss
|
|
$
|
(2,307,572
|
)
|
|
$
|
(118,904
|
)
|
Basic loss per share
|
|
$
|
(2.29
|
)
|
|
$
|
(0.16
|
)
|
Diluted loss per share
|
|
$
|
(2.29
|
)
|
|
$
|
(0.16
|
)
|
|
|
Note 5
|
Benefit
Obligations
|
The Company has pension plans covering substantially all former
Agere U.S. employees, excluding management employees hired
after June 30, 2003. Retirement benefits are offered under
a defined benefit plan and are based on either an adjusted
career average pay or dollar per month formula or on a cash
balance plan. The cash balance plan provides for annual company
contributions based on a participants age and compensation
and interest on existing balances and covers employees of
certain companies acquired by Agere since 1996 and management
employees hired after January 1, 1999 and before
July 1, 2003. The Company also has post-retirement benefit
plans that include healthcare benefits and life insurance
coverage for former Agere employees. Participants in the cash
balance plan and management employees hired after June 30,
2003 are not entitled to Company paid benefits under the
post-retirement benefit plans. The Company also has pension
plans covering certain international employees.
Effective April 2, 2007, the date of the Agere merger, the
Company adopted SFAS 158, Employers Accounting
for Defined Benefit Pension and Other Post-retirement
Plans.
72
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
Net
Periodic Benefit Cost /(Credit)
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2007
|
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
(In thousands)
|
|
|
Service cost
|
|
$
|
5,523
|
|
|
$
|
118
|
|
Interest cost
|
|
|
55,361
|
|
|
|
2,776
|
|
Expected return on plan assets
|
|
|
(62,804
|
)
|
|
|
(3,669
|
)
|
Amortization of prior service cost
|
|
|
|
|
|
|
|
|
Recognized net actuarial gain
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
Net periodic benefit credit
|
|
|
(1,920
|
)
|
|
|
(787
|
)
|
Curtailment gain
|
|
|
(414
|
)
|
|
|
(281
|
)
|
Settlement charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit credit
|
|
$
|
(2,334
|
)
|
|
$
|
(1,068
|
)
|
|
|
|
|
|
|
|
|
|
Within the net periodic benefit cost, the curtailments reflect
accelerated recognition of gains resulting from the sale of the
Mobility Products Group.
Benefit
Obligation
The following table sets forth the benefit obligations as of
December 31, 2007 measurement date:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2007
|
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
(In thousands)
|
|
|
Benefit obligation at April 2, 2007
|
|
$
|
1,269,441
|
|
|
$
|
72,987
|
|
Service cost
|
|
|
5,523
|
|
|
|
118
|
|
Interest cost
|
|
|
55,361
|
|
|
|
2,776
|
|
Employee contributions
|
|
|
|
|
|
|
6,924
|
|
Amendments
|
|
|
170
|
|
|
|
|
|
Actuarial gain
|
|
|
(68,861
|
)
|
|
|
(6,037
|
)
|
Benefits paid
|
|
|
(73,942
|
)
|
|
|
(20,364
|
)
|
Curtailments
|
|
|
1,944
|
|
|
|
(281
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31, 2007
|
|
$
|
1,189,636
|
|
|
$
|
56,123
|
|
|
|
|
|
|
|
|
|
|
The pension benefit obligation as of December 31, 2007
includes $8.3 million for the Companys international
plans.
73
LSI
Corporation
Notes to
Consolidated Financial Statements
(continued)
Fair
Value of Plan Assets
The following table sets forth the fair value of plan assets as
of December 31, 2007 measurement date:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2007
|
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
(In thousands)
|
|
|
Fair value of plan assets as at April 2, 2007
|
|
$
|
1,073,580
|
|
|
$
|
63,206
|
|
Actual gain on plan assets
|
|
|
58,595
|
|
|
|
3,514
|
|
Employer contributions
|
|
|
2,113
|
|
|
|
12,474
|
|
Employee contributions
|
|
|
|
|
|
|
6,924
|
|