e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended October 2, 2005
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-10317
LSI LOGIC CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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94-2712976 |
(State of Incorporation)
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(I.R.S. Employer Identification Number) |
1621 Barber Lane
Milpitas, California 95035
(Address of principal executive offices)
(Zip code)
(408) 433-8000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act) YES þ NO o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of November 4, 2005, there were 391,696,760 shares of the registrants Common Stock, $.01 par
value, outstanding.
LSI LOGIC CORPORATION
Form 10-Q
For the Quarter Ended September 30, 2005
INDEX
2
PART
I FINANCIAL INFORMATION
Item 1. Financial Statements
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
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September 30, |
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December 31, |
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2005 |
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2004 |
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(In thousands, except per-share amounts) |
Assets |
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Cash and cash equivalents |
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$ |
225,654 |
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$ |
218,723 |
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Short-term investments |
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619,380 |
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595,862 |
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Accounts receivable, less allowances of $11,892 and $12,545 |
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298,500 |
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272,065 |
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Inventories |
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189,133 |
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218,900 |
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Deferred tax assets |
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5,650 |
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5,661 |
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Prepaid expenses and other current assets |
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146,060 |
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54,076 |
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Total current assets |
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1,484,377 |
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1,365,287 |
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Property and equipment, net |
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97,856 |
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311,916 |
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Intangibles, net |
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57,539 |
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108,457 |
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Goodwill |
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965,468 |
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973,130 |
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Deferred tax assets |
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4,943 |
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5,044 |
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Other assets |
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108,340 |
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110,167 |
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Total assets |
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$ |
2,718,523 |
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$ |
2,874,001 |
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Liabilities and Stockholders Equity |
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Accounts payable |
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$ |
129,812 |
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$ |
122,422 |
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Accrued salaries, wages and benefits |
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74,560 |
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58,516 |
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Other accrued liabilities |
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142,877 |
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142,278 |
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Income taxes payable |
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82,370 |
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72,935 |
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Current portion of long-term obligations |
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129 |
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Total current liabilities |
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429,619 |
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396,280 |
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Long-term debt |
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624,802 |
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781,846 |
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Tax related liabilities and other |
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77,333 |
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77,570 |
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Total long-term obligations and other liabilities |
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702,135 |
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859,416 |
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Commitments and contingencies (Notes 11 and 12) |
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Minority interest in subsidiary |
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243 |
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259 |
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Stockholders equity: |
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Preferred shares; $.01 par value; 2,000 shares authorized, none outstanding |
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Common stock; $.01 par value; 1,300,000 shares authorized; 391,559 and
387,490 shares outstanding, respectively |
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3,916 |
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3,875 |
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Additional paid-in capital |
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2,997,184 |
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2,969,478 |
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Deferred stock compensation |
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(13,328 |
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(8,936 |
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Accumulated deficit |
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(1,427,734 |
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(1,384,321 |
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Accumulated other comprehensive income |
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26,488 |
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37,950 |
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Total stockholders equity |
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1,586,526 |
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1,618,046 |
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Total liabilities and stockholders equity |
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$ |
2,718,523 |
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$ |
2,874,001 |
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The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
3
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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(In thousands, except per share amounts) |
Revenues |
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$ |
481,716 |
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$ |
380,217 |
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$ |
1,413,015 |
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$ |
1,280,471 |
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Cost of revenues |
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271,511 |
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228,418 |
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800,782 |
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718,424 |
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Gross profit |
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210,205 |
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151,799 |
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612,233 |
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562,047 |
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Research and development |
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100,524 |
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108,134 |
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299,420 |
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327,173 |
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Selling, general and administrative |
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58,342 |
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63,460 |
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176,354 |
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188,375 |
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Restructuring of operations and other items, net |
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99,986 |
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228,624 |
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108,675 |
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231,055 |
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Amortization of non-cash deferred stock
compensation (*) |
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1,313 |
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2,593 |
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3,940 |
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6,422 |
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Amortization of intangibles |
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15,693 |
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19,212 |
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50,919 |
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56,884 |
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Loss from operations |
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(65,653 |
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(270,224 |
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(27,075 |
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(247,862 |
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Interest expense |
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(6,058 |
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(5,999 |
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(19,088 |
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(17,978 |
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Interest income and other, net |
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4,567 |
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(209 |
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21,500 |
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17,735 |
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Loss before income taxes |
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(67,144 |
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(276,432 |
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(24,663 |
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(248,105 |
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Provision for income taxes |
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6,250 |
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6,000 |
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18,750 |
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18,000 |
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Net loss |
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$ |
(73,394 |
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$ |
(282,432 |
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$ |
(43,413 |
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$ |
(266,105 |
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Net loss per share: |
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Basic |
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$ |
(0.19 |
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$ |
(0.73 |
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$ |
(0.11 |
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$ |
(0.69 |
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Diluted |
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$ |
(0.19 |
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$ |
(0.73 |
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$ |
(0.11 |
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$ |
(0.69 |
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Shares used in computing per share amounts: |
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Basic |
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391,017 |
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384,876 |
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389,247 |
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383,355 |
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Diluted |
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391,017 |
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384,876 |
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389,247 |
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383,355 |
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(*) |
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Amortization of non-cash deferred stock compensation, if not shown separately, would
have been included in cost of revenues, research and development and selling, general and
administrative expenses as shown below: |
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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(In thousands) |
Cost of revenues |
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$ |
186 |
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$ |
52 |
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$ |
511 |
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$ |
148 |
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Research and development |
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503 |
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2,085 |
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1,908 |
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4,796 |
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Selling, general and administrative |
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624 |
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456 |
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1,521 |
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1,478 |
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Total |
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$ |
1,313 |
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$ |
2,593 |
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$ |
3,940 |
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$ |
6,422 |
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The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
4
LSI
LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine Months Ended |
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September 30, |
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2005 |
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2004 |
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(In thousands) |
Operating activities: |
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Net loss |
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$ |
(43,413 |
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$ |
(266,105 |
) |
Adjustments: |
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Depreciation and amortization |
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120,468 |
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136,407 |
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Amortization of non-cash deferred stock compensation |
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3,940 |
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6,422 |
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Non-cash restructuring and other items |
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86,661 |
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214,058 |
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Gain on sale and exchange of equity securities |
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(824 |
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(2,113 |
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Gain on repurchase of Convertible Subordinated Notes |
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(4,123 |
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(1,767 |
) |
Gain on sale of property and equipment |
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(91 |
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(5,881 |
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Changes in deferred tax assets and liabilities |
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112 |
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238 |
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Changes in assets and liabilities, net of assets acquired and liabilities
assumed in business combinations: |
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Accounts receivable |
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(26,468 |
) |
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(32,855 |
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Inventories |
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29,767 |
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(46,032 |
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Prepaid expenses and other assets |
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(2,090 |
) |
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(2,068 |
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Accounts payable |
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6,118 |
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29,908 |
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Accrued and other liabilities |
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26,627 |
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34,343 |
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Net cash provided by operating activities |
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196,684 |
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64,555 |
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Investing activities: |
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Purchase of debt securities available-for-sale |
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(397,240 |
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(641,435 |
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Maturities and sales of debt securities available-for-sale |
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365,228 |
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568,178 |
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Purchases of equity securities |
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(2,250 |
) |
Proceeds from sales of equity securities |
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3,871 |
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10,518 |
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Purchases of property, equipment and software |
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(35,326 |
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(41,794 |
) |
Proceeds from sale of property and equipment |
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3,399 |
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8,597 |
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Adjustment to goodwill acquired in a prior year for resolution of
a pre-acquisition income tax contingency |
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7,662 |
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Increase in non-current assets and deposits |
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(313,013 |
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Decrease in non-current assets and deposits |
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369,464 |
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Acquisition of companies, net of cash acquired |
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(32,025 |
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Net cash used in investing activities |
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(52,406 |
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(73,760 |
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Financing activities: |
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Repurchase of Convertible Subordinated Notes |
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(148,126 |
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(68,117 |
) |
Issuance of common stock |
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20,073 |
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17,864 |
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Purchase of minority interest in subsidiary |
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(7,978 |
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Repayment of debt obligations |
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(129 |
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(297 |
) |
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Net cash used in financing activities |
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(128,182 |
) |
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(58,528 |
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Effect of exchange rate changes on cash and cash equivalents |
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(9,165 |
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678 |
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Increase/(decrease) in cash and cash equivalents |
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6,931 |
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(67,055 |
) |
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Cash and cash equivalents at beginning of period |
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218,723 |
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269,682 |
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Cash and cash equivalents at end of period |
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$ |
225,654 |
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$ |
202,627 |
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The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
5
LSI LOGIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
In the opinion of LSI Logic Corporation (the Company or LSI), the accompanying unaudited
consolidated condensed financial statements contain all adjustments (consisting only of normal
recurring adjustments and restructuring and other items, net as discussed in Note 4 to the
Unaudited Consolidated Condensed Financial Statements, hereafter referred to as the Notes),
necessary to state fairly the financial information included herein. While the Company believes
that the disclosures are adequate to make the information not misleading, it is suggested that
these financial statements be read in conjunction with the audited consolidated financial
statements and accompanying notes included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2004.
For financial reporting purposes, the Company reports on a 13 or 14-week quarter with a year
ending December 31. The current quarter ended October 2, 2005. For presentation purposes, the
consolidated condensed financial statements refer to the calendar quarters for convenience. The
results of operations for the quarter ended October 2, 2005, are not necessarily indicative of the
results to be expected for the full year. The first nine months of 2005 ended on October 2, 2005,
and consisted of approximately 39 weeks, while the first nine months of 2004 ended on October 3,
2004, and consisted of approximately 40 weeks. The third quarters of 2005 and 2004 consisted of 13
weeks each.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated condensed financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could differ significantly
from these estimates.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R).
This statement eliminates the alternative to use the intrinsic value method of accounting for stock
options issued to employees. This statement requires entities to recognize the cost of employee
services received in exchange for awards of equity instruments based on the grant date fair value
of those awards. This statement applies to all awards granted, modified, repurchased or cancelled
after the effective date. In addition, compensation cost will be recognized on or after the
effective date for the portion of outstanding awards for which the requisite service has not been
rendered, based on the grant date fair value of those awards calculated under SFAS No. 123 for pro
forma disclosures. This statement also requires additional disclosures in the notes to the
consolidated financial statements. On April 14, 2005, the Securities and Exchange Commission
(SEC) announced the adoption of a rule that defers the required effective date of SFAS No. 123R
until the beginning of the first fiscal year beginning after June 15, 2005. The Company expects to
apply this statement beginning in the first fiscal quarter of 2006. The Company is currently
evaluating the impact of adopting this statement; however, the Company expects that it will have a
significant impact on our consolidated balance sheet and statement of operations. The exact impact
on the Companys financial statements will be dependent on a number of factors including the
transition method, the option-pricing model used to compute fair value and the inputs to that model
such as volatility and expected life. The pro forma disclosures of the impact of SFAS No. 123
provided in Note 2 may not be representative of the impact of adopting this statement.
6
On March 29, 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107, Share-Based
Payment. This statement expresses views of the staff regarding the interaction between SFAS No.
123R and certain SEC rules and regulations and provides the staffs views regarding the valuation
of share-based payment arrangements for public companies. In particular, SAB No. 107 provides
guidance related to share-based payment transactions with non-employees, the transition from
nonpublic to public entity status, valuation methods (including assumptions such as expected
volatility and expected term), the accounting for certain redeemable financial instruments issued
under share-based payment arrangements, the classification of compensation expense, non-GAAP
financial measures, first-time adoption of SFAS No. 123R in an interim period, capitalization of
compensation cost related to share-based payment arrangements, the accounting for income tax
effects of share-based payment arrangements upon adoption of SFAS No. 123R, the modification of
employee share options prior to adoption of SFAS No. 123R and disclosures in Managements
Discussion and Analysis (MD&A) subsequent to adoption of SFAS No. 123R. The Company is currently
evaluating the impact of adopting this statement; however, the Company expects that the adoption of
SFAS No. 123R and the related interpretations in SAB No. 107 will have a significant impact on the
Companys consolidated balance sheet and statement of operations.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. This
statement replaces APB Opinion No. 20 and SFAS No. 3. This statement applies to all voluntary
changes in accounting principle and applies to changes required by an accounting pronouncement if
transition provisions are not provided. This statement requires retrospective application to prior
periods financial statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the change. This
statement is effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of this standard is not expected to have a
material impact on the Companys consolidated balance sheet or statement of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costsan amendment of ARB No. 43,
Chapter 4. This statement clarifies the accounting for abnormal amounts of facility expense,
freight, handling costs and wasted materials (spoilage) to require them to be recognized as
current-period charges. This statement is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The adoption of this standard will not have a material impact
on the Companys consolidated balance sheet or statement of operations.
On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the Act).
The Act introduced a special one-time dividends received deduction on the repatriation of certain
foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met.
The Company has yet to complete its evaluation of the foreign earnings repatriation provision
within the Act. At this time the Company has not been able to reasonably estimate the income tax
effect of the foreign earnings repatriation provision. The Company plans to complete its evaluation
in the fourth quarter of 2005.
NOTE 2 STOCK-BASED COMPENSATION
The following table provides pro forma disclosures as if the Company had
recorded compensation costs based on the estimated grant date fair value, as defined by SFAS No.
123, for awards granted under its stock option and stock purchase plans. The estimated
weighted-average grant date fair value, as defined by SFAS No. 123, 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. These models also require highly subjective assumptions,
including future stock price volatility and expected time until exercise, which greatly affect the
calculated grant date fair value.
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, except per share amounts) |
|
Net loss, as reported |
|
$ |
(73,394 |
) |
|
$ |
(282,432 |
) |
|
$ |
(43,413 |
) |
|
$ |
(266,105 |
) |
Add: Amortization of
non-cash deferred
stock compensation
determined under the
intrinsic value method
as reported * |
|
|
44 |
|
|
|
749 |
|
|
|
340 |
|
|
|
2,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Total
stock-based employee
compensation expense
determined under fair
value method for all
awards |
|
|
(17,362 |
) |
|
|
(27,038 |
) |
|
|
(60,876 |
) |
|
|
(97,635 |
) |
|
|
|
Pro forma net loss |
|
$ |
(90,712 |
) |
|
$ |
(308,721 |
) |
|
$ |
(103,949 |
) |
|
$ |
(360,969 |
) |
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic-as reported |
|
$ |
(0.19 |
) |
|
$ |
(0.73 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.69 |
) |
Basic-pro forma |
|
$ |
(0.23 |
) |
|
$ |
(0.80 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted-as reported |
|
$ |
(0.19 |
) |
|
$ |
(0.73 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.69 |
) |
Diluted-pro forma |
|
$ |
(0.23 |
) |
|
$ |
(0.80 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.94 |
) |
|
|
|
* |
|
This amount excludes amortization of non-cash deferred stock compensation on restricted stock awards. |
The pro forma disclosure provided above may not be representative of the effect of applying
SFAS No. 123R. See further discussion in Recent Accounting Pronouncements in Note 1.
NOTE 3
ENGENIO STOCK OPTION EXCHANGE PROGRAM
On September 16, 2005, Engenio stock options outstanding were exchanged for the Companys
options under the 1999 Non Statutory Stock Option Plan. The exchange occurred in accordance with
the terms of the Engenio Equity Incentive plan, which provided for the automatic exchange of the
options in the event it was determined that the Engenio initial public offering was not likely to
occur. The Company exchanged options to purchase an aggregate of 3,011,450 shares of Engenio
common stock for options to purchase an aggregate of 2,830,763 shares of the Companys common
stock. The exercise price per share of the new options was equal to the fair market value of the
Companys common stock on the grant date. The exchange program resulted in $3.9 million of
deferred stock compensation that will amortize on a straight-line basis over the vesting period of
the new awards of approximately 3 to 3.5 years. Amortization expense in the third quarter of 2005
was not significant.
NOTE 4 RESTRUCTURING AND OTHER ITEMS
The Company recorded charges of $100.0 million and $108.7 million in restructuring of
operations and other items for the three and nine months ended September 30, 2005, respectively,
primarily in the Semiconductor segment. The Company recorded charges of $228.6 million and $231.1
million in restructuring of operations and other items for the three and nine months ended
September 30, 2004, respectively. For a complete discussion of the 2004 restructuring
actions, please refer to the Companys Annual Report on Form 10-K for fiscal year 2004.
Restructuring and impairment of long-lived assets:
First quarter of 2005:
The Company recorded an expense of $0.8 million for the write-down of purchased software that
will not be used. An expense of $0.3 million was recorded to reflect the change in time value of
accruals for facility lease termination costs, net of adjustments for changes in sublease
assumptions for certain previously accrued facility lease termination costs.
8
Additional non-manufacturing facilities were consolidated during the first quarter of 2005 and an
expense of $0.4 million was recorded as the leased facilities ceased being used.
Second quarter of 2005:
The Company recorded restructuring charges of approximately $1.7 million, which included the
following items. An expense of $0.4 million for the write-down of equipment held for sale to
reflect a decline in fair market values. An expense of $0.4 million was recorded to reflect the
change in time value of accruals for facility lease termination costs. An additional
non-manufacturing facility was consolidated during the second quarter of 2005 and an expense of
$0.3 million was recorded as the leased facility ceased being used. An expense of $0.2 million was
recorded for severance and termination benefits for 10 employees. An expense of $0.4 million was
recorded for facility closure costs related to the Colorado fabrication facility as the expenses
were incurred.
Third quarter of 2005:
The Company recorded restructuring charges of approximately $100.0 million, which included the
following items.
On September 13, 2005, the Company announced its intention to sell its Gresham, Oregon
manufacturing facility as part of the Companys strategy to move to a fabless semiconductor model.
Accordingly, the Company recorded $91.1 million in charges directly associated with the decision to
sell the manufacturing facility in the third quarter of 2005. The asset impairment charge for the
Gresham disposal group was calculated in accordance with SFAS No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets and included a charge of $85.2 million for the Gresham
facility and $4.8 million in charges for estimated selling costs. The fair market values for the
Gresham facility were thoroughly researched and estimated by management. The impairment charges of
$85.2 million are non-cash charges and included as a non-cash restructuring item in the third
quarter cash flow statements. In addition, the Company announced workforce reductions for
approximately 80 positions in the Gresham facility and recorded a charge of $1.1 million for
severance and termination benefits. These actions and related charges are associated with the
Semiconductor segment. The Company is actively marketing the Gresham facility and expects to
complete a sale of the facility within the next twelve months.
An expense of $7.7 million was recorded for changes in sublease assumptions for certain
previously accrued facility lease termination costs. In addition, an expense of $0.5 million was
recorded to reflect the change in time value of accruals for facility lease termination costs. An
expense of $0.5 million was recorded for severance and termination benefits for approximately 17
employees primarily related to the broad-based reorganization that was announced in August of 2005.
Assets held for sale of $107.3 million and $11.0 million were included as a component of
prepaid expenses and other current assets as of September 30, 2005 and December 31, 2004,
respectively. During the third quarter of 2005, $98.5 million in assets associated with the
Gresham facility and surrounding land were reclassified to assets held for sale. Assets classified
as held for sale are not depreciated. The fair values of impaired equipment and facilities were
estimated by management. Given that current market conditions for the sale of older fabrication
facilities and related equipment may fluctuate, there can be no assurance that the Company will
realize the current net carrying value of the assets held for sale. The Company reassesses the
realizability of the carrying value of these assets at the end of each quarter until the assets are
sold or otherwise disposed of and additional adjustments may be necessary.
The following table sets forth the Companys restructuring reserves as of September 30, 2005, which are included in other accrued liabilities on the balance
sheet:
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
Utilized |
|
Restructuring |
|
Utilized |
|
Restructuring |
|
Utilized |
|
Balance |
|
|
Balance at |
|
Expense |
|
during Q1, |
|
Expense |
|
during Q2, |
|
Expense |
|
during Q3, |
|
At |
(In thousands) |
|
December 31, 2004 |
|
Q1, 2005 |
|
2005 |
|
Q2, 2005 |
|
2005 |
|
Q3, 2005 |
|
2005 |
|
September 30, 2005 |
|
|
|
Write-down of
excess assets and
decommissioning
costs (a) |
|
$ |
1,207 |
|
|
$ |
796 |
|
|
$ |
(1,271 |
) |
|
$ |
429 |
|
|
$ |
(451 |
) |
|
$ |
89,633 |
|
|
$ |
(85,311 |
) |
|
$ |
5,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease terminations
(b) |
|
|
20,065 |
|
|
|
738 |
|
|
|
(2,691 |
) |
|
|
727 |
|
|
|
(2,674 |
) |
|
|
8,207 |
|
|
|
(2,555 |
) |
|
|
21,817 |
|
Facility closure
and other exit
costs (c) |
|
|
543 |
|
|
|
|
|
|
|
(476 |
) |
|
|
404 |
|
|
|
(462 |
) |
|
|
488 |
|
|
|
(492 |
) |
|
|
5 |
|
Payments to
employees for
severance (d) |
|
|
7,408 |
|
|
|
(1 |
) |
|
|
(4,250 |
) |
|
|
160 |
|
|
|
(1,850 |
) |
|
|
1,658 |
|
|
|
(412 |
) |
|
|
2,713 |
|
|
|
|
Total |
|
$ |
29,223 |
|
|
$ |
1,533 |
|
|
$ |
(8,688 |
) |
|
$ |
1,720 |
|
|
$ |
(5,437 |
) |
|
$ |
99,986 |
|
|
$ |
(88,770 |
) |
|
$ |
29,567 |
|
|
|
|
|
|
|
(a) |
|
The amounts utilized in 2005 reflect $1.2 million of non-cash write-downs of long-lived
assets in the U.S. due to impairment and $0.5 million in cash payments to decommission and
sell assets. The write-downs of long-lived assets were accounted for as a reduction of the
assets and did not result in a liability. The charge of $89.6 million includes the impairment
charge for the Gresham facility of $85.2 million, related estimated Gresham facility selling
costs of $4.8 million and a credit of $0.4 million of net
of other miscellaneous items. The
$5.0 million balance as of September 30, 2005, relates to estimates for selling costs for
assets held for sale and is expected to be utilized during 2006. |
|
(b) |
|
An expense of $7.7 million was recorded for changes in sublease assumptions for certain
previously accrued facility lease termination costs. In addition, an expense of $0.5 million
was recorded to reflect the change in time value of accruals for facility lease termination
costs. Amounts utilized represent cash payments. The balance remaining for real estate lease
terminations will be paid during the remaining terms of these contracts, which extend through
2011. |
|
(c) |
|
An expense of $0.5 million was recorded for facility closure costs related to the Colorado
fabrication facility as the expenses were incurred. Amounts utilized represent cash payments.
The balance remaining for facility closure and other exit costs will be paid during 2005. |
|
(d) |
|
An expense of $1.1 million was recorded in connection with the Companys decision to sell the
Gresham facility. An expense of $0.5 million was recorded in connection with the Companys
reorganization. Amounts utilized represent cash severance payments to 126 employees during the
nine months ended September 30, 2005 for the action announced in the third quarter of 2004.
Amounts utilized also include cash severance payments for 14 employees for the action
announced in the third quarter of 2005 during the three months ended September 30, 2005. The
balance remaining for severance is expected to be paid by the end of 2005. |
Other Items:
Second quarter of 2005:
On May 23, 2005, Wilfred J. Corrigans status as an employee ceased and in connection with
this event, the Company recorded a charge of $5.3 million. The amount was paid to Mr. Corrigan in
the second quarter of 2005 and was made in accordance with Mr. Corrigans employment agreement
dated September 20, 2001. Mr. Corrigan was the
Companys former Chief Executive Officer.
10
NOTE 5
INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
Asset and mortgage-backed securities |
|
$ |
302,438 |
|
|
$ |
292,898 |
|
U.S. government and agency securities |
|
|
242,794 |
|
|
|
234,787 |
|
Corporate and municipal debt securities |
|
|
74,148 |
|
|
|
68,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
619,380 |
|
|
$ |
595,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments in equity securities |
|
|
|
|
|
|
|
|
Marketable equity securities available-for-sale |
|
$ |
26,241 |
|
|
$ |
28,372 |
|
Non-marketable equity securities |
|
|
7,820 |
|
|
|
9,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments in equity securities |
|
$ |
34,061 |
|
|
$ |
37,679 |
|
|
|
|
Accumulated other comprehensive income included unrealized gains on investments in
available-for-sale debt and equity securities of $10 million, net of the related tax effect of $5
million, and $12 million, net of the related tax effect of $6 million, as of September 30, 2005,
and December 31, 2004, respectively.
Realized losses on sales of investments in available-for-sale debt securities were $0.2
million and $1.0 million for the three and nine months ended September 30, 2005, respectively.
Realized gains on sales of investments in available-for-sale debt securities were $0.5 million and
$1.1 million for the three and nine months ended September 30, 2004.
The Company realized pre-tax gains of $2 million related to the following for the nine months
ended September 30, 2005:
A $1 million pre-tax gain related to the sale of certain marketable available-for-sale equity
securities in the second quarter of 2005; and
A $1 million pre-tax gain associated with marketable available-for-sale equity securities of a
certain technology company that was acquired by another technology company in the second quarter of
2005.
The Company realized pre-tax gains of $8 million related to the following for the nine months
ended September 30, 2004:
A $5 million pre-tax gain related to the sales of certain marketable available-for-sale equity
securities in the second quarter of 2004; and
A $3 million pre-tax gain associated with marketable available-for-sale equity securities of a
certain technology company that was acquired by another technology company in the first quarter of
2004.
The following table includes the details of pre-tax losses related to investments in equity
securities that the Company has recorded during the first nine months of 2005 and 2004,
respectively. Management believes that the declines in value were other than temporary.
11
|
|
|
|
|
|
|
|
|
|
|
Non-marketable |
|
Marketable |
|
|
equity |
|
equity |
|
|
investments |
|
investments |
|
|
(in millions) |
Pre-tax loss: |
|
|
|
|
|
|
|
|
Three months ended September 30, 2005 |
|
$ |
1.5 |
|
|
$ |
|
|
Nine months ended September 30, 2005 |
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss: |
|
|
|
|
|
|
|
|
Three months ended September 30, 2004 |
|
$ |
1.9 |
|
|
$ |
4.1 |
|
Nine months ended September 30, 2004 |
|
|
3.1 |
|
|
|
4.1 |
|
|
Total carrying value of impaired investments as of September 30, 2005 |
|
$ |
2.4 |
|
|
$ |
|
|
NOTE 6 BALANCE SHEET DETAIL
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash in financial institutions |
|
$ |
47,188 |
|
|
$ |
51,172 |
|
Cash equivalents |
|
|
178,466 |
|
|
|
167,551 |
|
|
|
|
|
|
|
$ |
225,654 |
|
|
$ |
218,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
23,360 |
|
|
$ |
20,022 |
|
Work-in-process |
|
|
89,099 |
|
|
|
106,818 |
|
Finished goods |
|
|
76,674 |
|
|
|
92,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
189,133 |
|
|
$ |
218,900 |
|
|
|
|
The changes in the carrying amount of goodwill for the nine months ended September 30, 2005
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor |
|
|
Storage Systems |
|
|
|
|
|
|
Segment* |
|
|
segment* |
|
|
Total |
|
|
|
|
Balance as of December 31, 2004* |
|
$ |
801,272 |
|
|
$ |
171,858 |
|
|
$ |
973,130 |
|
Adjustment to goodwill acquired in a
prior year for
cash received from the resolution of
a pre-acquisition income tax
contingency |
|
|
(7,662 |
) |
|
|
|
|
|
|
(7,662 |
) |
|
|
|
Balance as of September 30, 2005 |
|
$ |
793,610 |
|
|
$ |
171,858 |
|
|
$ |
965,468 |
|
|
|
|
|
|
|
* |
|
The information provided herein has been recast to include the RAID Storage Adapter (RSA)
business as part of the Storage Systems segment from the Semiconductor segment for all periods
presented. |
The Company monitors the recoverability of goodwill recorded in connection with acquisitions
annually or sooner if events or changes in circumstances indicate that the carrying amount may not
be recoverable. An impairment, if any, would be determined in accordance with SFAS No. 142, which
uses a fair value model for determining the carrying value of goodwill. See the Companys Annual
Report on Form 10-K for further discussion.
12
NOTE 7 DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion |
|
September 30, |
|
December 31, |
|
|
Maturity |
|
Interest Rate |
|
Price |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
2003 Convertible Subordinated Notes |
|
May 2010 |
|
|
4 |
% |
|
$ |
13.4200 |
|
|
$ |
350,000 |
|
|
$ |
350,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 Convertible Subordinated Notes |
|
November 2006 |
|
|
4 |
% |
|
$ |
26.3390 |
|
|
|
271,848 |
|
|
|
421,500 |
|
Deferred gain on terminated swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,954 |
|
|
|
10,346 |
|
Capital lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
624,802 |
|
|
|
781,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
624,802 |
|
|
$ |
781,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of 2005, the Company repurchased approximately $150
million of the 2001 Convertible Notes. A net pre-tax gain of approximately $4 million was
recognized in interest income and other, net for the repurchase. The pre-tax gain is net of the
write-off of debt issuance costs and a portion of the deferred gain on the terminated Swaps.
The 2001 Convertible Subordinate Notes will become current in November 2005, as the maturity
date is in November 2006. The Notes will be classified as current debt in the Companys 2005 Annual
Report on Form 10-K.
NOTE 8 RECONCILIATION OF BASIC AND DILUTED NET LOSS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted net loss per
share computations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Per-Share |
|
|
|
|
|
|
|
|
|
|
Per-Share |
|
|
|
Net loss* |
|
|
Shares+ |
|
|
Amount |
|
|
Net loss* |
|
|
Shares+ |
|
|
Amount |
|
|
|
(In thousands except per share amounts) |
|
Basic : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders |
|
$ |
(73,394 |
) |
|
|
391,017 |
|
|
$ |
(0.19 |
) |
|
$ |
(282,432 |
) |
|
|
384,876 |
|
|
$ |
(0.73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders |
|
$ |
(73,394 |
) |
|
|
391,017 |
|
|
$ |
(0.19 |
) |
|
$ |
(282,432 |
) |
|
|
384,876 |
|
|
$ |
(0.73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Per-Share |
|
|
|
|
|
|
|
|
|
|
Per-Share |
|
|
|
Net loss* |
|
|
Shares+ |
|
|
Amount |
|
|
Net loss* |
|
|
Shares+ |
|
|
Amount |
|
|
|
(In thousands except per share amounts) |
|
Basic : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders |
|
$ |
(43,413 |
) |
|
|
389,247 |
|
|
$ |
(0.11 |
) |
|
$ |
(266,105 |
) |
|
|
383,355 |
|
|
$ |
(0.69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders |
|
$ |
(43,413 |
) |
|
|
389,247 |
|
|
$ |
(0.11 |
) |
|
$ |
(266,105 |
) |
|
|
383,355 |
|
|
$ |
(0.69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Numerator
+ Denominator
13
Options to purchase 71,792,901 shares were outstanding as of September 30, 2005, but were
not included in the computation of diluted shares because of their antidilutive effect on net loss
per share for the three and nine months ended September 30, 2005. The exercise price of these
options ranged from $0.10 to $72.25 as of September 30, 2005. Options to purchase 70,078,980 shares
were outstanding as of September 30, 2004, but were not included in the computation of diluted
shares because of their antidilutive effect on net loss per share for the three and nine months
ended September 30, 2004. The exercise price of these options ranged from $0.06 to $72.25 as of
September 30, 2004.
Weighted average restricted common shares of 769,593 and 811,974 for the three and nine months
ended September 30, 2005, respectively, were excluded from the computation of diluted shares
because of their antidilutive effect on net loss per share. Weighted average restricted common
shares of 577,257 and 204,352 for the three and nine months ended September 30, 2004, respectively,
were excluded from the computation of diluted shares because of their antidilutive effect on net
loss per share.
For the three and nine months ended September 30, 2005, weighted average potentially dilutive
shares of 36,401,581 and 39,069,163, respectively, associated with the 2003 and 2001 Convertible
Notes were excluded from the calculation of diluted shares because of their antidilutive effect on
net loss per share. For the three and nine months ended September 30, 2004, weighted average
potentially dilutive shares of 43,413,634 and 44,266,694 shares associated with the 2003 and 2001
Convertible Notes were excluded from the calculation of diluted shares because of their
antidilutive effect on net loss per share.
NOTE 9 COMPREHENSIVE LOSS
Comprehensive loss is defined as a change in equity of a company during a period from
transactions and other events and circumstances, excluding transactions resulting from investments
by owners and distributions to owners. Comprehensive loss, net of taxes for the current reporting
period and comparable period in the prior year is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Net loss |
|
$ |
(73,394 |
) |
|
$ |
(282,432 |
) |
|
$ |
(43,413 |
) |
|
$ |
(266,105 |
) |
Change in unrealized gain/loss on derivative
instruments
designated as and qualifying as cash-flow hedges |
|
|
260 |
|
|
|
(3,473 |
) |
|
|
(275 |
) |
|
|
(2,003 |
) |
Change in unrealized gain/loss on available-for-sale
securities |
|
|
2,422 |
|
|
|
2,687 |
|
|
|
(1,851 |
) |
|
|
(8,725 |
) |
Change in foreign currency translation adjustments |
|
|
(2,546 |
) |
|
|
(1,109 |
) |
|
|
(9,336 |
) |
|
|
(5,597 |
) |
|
|
|
Comprehensive loss |
|
$ |
(73,258 |
) |
|
$ |
(284,327 |
) |
|
$ |
(54,875 |
) |
|
$ |
(282,430 |
) |
|
|
|
NOTE 10 SEGMENT REPORTING
The Company operates in two reportable segments Semiconductor and Storage Systems. Within
the Semiconductor segment, the Company offers three enabling system-on-a-chip technologiesstandard-cell
ASICs, Platform ASICs and application specific standard products. Within the Storage Systems
segment, the Company focuses on high-performance modular disk storage systems, sub-assemblies, storage
management software, RAID storage adapters and related software. Our products are marketed
primarily to OEMs that sell products targeted for applications in these markets.
The information provided herein has been recast to include the RAID Storage Adapter (RSA)
business as part of the Storage Systems segment from the Semiconductor segment for all periods
presented.
14
The following is a summary of operations by segment for the three and nine months ended
September 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor |
|
$ |
311,739 |
|
|
$ |
249,822 |
|
|
$ |
940,940 |
|
|
$ |
840,937 |
|
Storage Systems |
|
|
169,977 |
|
|
|
130,395 |
|
|
|
472,075 |
|
|
|
439,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
481,716 |
|
|
$ |
380,217 |
|
|
$ |
1,413,015 |
|
|
$ |
1,280,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor |
|
$ |
(78,999 |
) |
|
$ |
(266,763 |
) |
|
$ |
(50,083 |
) |
|
$ |
(273,516 |
) |
Storage Systems |
|
|
13,346 |
|
|
|
(3,461 |
) |
|
|
23,008 |
|
|
|
25,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(65,653 |
) |
|
$ |
(270,224 |
) |
|
$ |
(27,075 |
) |
|
$ |
(247,862 |
) |
|
|
|
Intersegment revenues for the periods presented above were not significant. For the three and
nine months ended September 30, 2005, restructuring of operations and other items, net of $100.0
million and $108.7 million, respectively, were primarily included in the Semiconductor segment.
For the three and nine months ended September 30, 2004, restructuring of operations and other
items, net of $228.6 million and $231.1 million, respectively, were primarily included in the
Semiconductor segment.
Significant Customers. The following table summarizes the number of our significant
customers, each of whom accounted for 10% or more of the Companys revenues, along with the
percentage of revenues they individually represent on a consolidated basis and by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Semiconductor segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant
customers |
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
Percentage of
segment revenues |
|
|
16%, 12 |
% |
|
|
14%, 12 |
% |
|
|
17 |
% |
|
|
10 |
% |
Storage Systems segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant
customers |
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
Percentage of segment
revenues |
|
|
46%, 11 |
% |
|
|
40%, 14%, 11 |
% |
|
|
43%, 13%, 10 |
% |
|
|
40%, 16%, 11 |
% |
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant
customers |
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
Percentage of
consolidated revenues |
|
|
17%, 11 |
% |
|
|
15 |
% |
|
|
15%, 11 |
% |
|
|
15 |
% |
15
The following is a summary of total assets by segment as of September 30, 2005, and
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Total assets: |
|
|
|
|
|
|
|
|
Semiconductor |
|
$ |
2,254,959 |
|
|
$ |
2,408,642 |
|
Storage Systems |
|
|
463,564 |
|
|
|
465,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,718,523 |
|
|
$ |
2,874,001 |
|
|
|
|
|
|
|
|
Revenues from domestic operations were $231 million, representing 48% of consolidated revenues
for the third quarter of 2005 compared to $185 million, representing 49% of consolidated revenues
for the same period of 2004.
Revenues from domestic operations were $666 million, representing 47% of consolidated
revenues, for the first nine months of 2005 compared to $644 million, representing 50% of
consolidated revenues, for the same period of 2004.
NOTE
11 COMMITMENTS AND CONTINGENCIES
The Company is a party to a variety of agreements pursuant to which it may be
obligated to indemnify the other party with respect to certain matters. Typically, these
obligations arise in connection with contracts and license agreements or the sale of assets, under
which the Company customarily agrees to hold the other party harmless against losses arising from a
breach of warranties, representations and covenants related to such matters as title to assets
sold, validity of certain intellectual property rights, non-infringement of third-party rights, and
certain income tax-related matters. In each of these circumstances, payment by the Company is
typically subject to the other party making a claim to and cooperating with the Company pursuant to
the procedures specified in the particular contract. This usually allows the Company to challenge
the other partys claims or, in case of breach of intellectual property representations or
covenants, to control the defense or settlement of any third-party claims brought against the other
party. Further, the Companys obligations under these agreements may be limited in terms of
activity (typically to replace or correct the products or terminate agreement with a refund to the
other party), duration and/or amounts. In some instances, the Company may have recourse against
third parties and/or insurance covering certain payments made by the Company.
NOTE 12 LEGAL MATTERS
In February 1999, a lawsuit alleging patent infringement was filed in the United States
District Court for the District of Arizona by the Lemelson Medical, Education & Research
Foundation, Limited Partnership (Lemelson) against 88 electronics industry companies, including
LSI. The case number is CIV990377PHXRGS. The patents involved in this lawsuit are alleged to
relate to semiconductor manufacturing and computer imaging, including the use of bar coding for
automatic identification of articles. The plaintiff has sought a judgment of infringement, an
injunction, treble damages, attorneys fees and further relief as the court may provide. In
September 1999, the Company filed an answer denying infringement and raising affirmative defenses.
In addition, the Company asserted a counterclaim for declaratory judgment of non-infringement,
invalidity and unenforceability of Lemelsons patents. In October of 2005, the court issued a
preliminary ruling on the claim construction following the hearing in December 2004. The court has
invited the parties to submit objections to the preliminary ruling. A final ruling on the claim
construction is anticipated to be issued sometime thereafter. No trial date has been set. While
the Company can give no assurances regarding the final outcome of this lawsuit, the Company
believes the allegations made by Lemelson are without merit and is defending the action vigorously.
The Company and its subsidiaries are parties to other litigation matters and claims that are
normal in the course of its operations. The Company aggressively defends all legal matters and
does not believe, based on currently available facts and circumstances, that the final outcome of
these matters, taken individually or as a whole, will have a material adverse effect on the
Companys consolidated results of operations and financial condition. However, the pending
unsettled lawsuits may involve complex questions of fact and law and will likely require the
expenditure of significant funds and the diversion of other resources to defend. From time to time
the Company may enter into confidential discussions regarding the potential settlement of such
lawsuits; however, there can be no assurance that any such discussions will occur or will result in
a
16
settlement. Moreover, the settlement of any pending litigation could require the Company to
incur substantial settlement payments and costs and, in the case of the settlement of any
intellectual property proceeding against the Company, may require the Company to obtain a license
under a third partys intellectual property rights that could require royalty payments in the
future and the Company to grant a license to certain of its intellectual property rights to a third
party under a cross-license agreement. The results of litigation are inherently uncertain, and
material adverse outcomes are possible.
NOTE 13 SUBSEQUENT EVENT
On November 4, 2005, the Company received $33 million in cash as a result of the conclusion of
a pre-acquisition income tax matter. The majority of this amount will
reduce goodwill in the Semiconductor segment.
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Form 10-Q contains forward-looking statements. In many cases you can identify
forward-looking statements by terminology such as may, will, should, expect, plan,
anticipate, believe, estimate, predict, potential, intend or continue, or the
negative of such terms and other comparable terminology. In addition, forward-looking statements
in this document include, but are not limited to, the following: projected net income per diluted
share in the fourth quarter of 2005, projected revenues in the fourth quarter of 2005, projections
of gross profit margins in the fourth quarter of 2005 and projected capital expenditures in 2005.
We assume no obligation to update any such forward-looking statements, and these statements involve
risks and uncertainties that could cause actual results to differ materially from those in the
forward-looking statements. For a summary of such risks and uncertainties, please see the
paragraphs located at the end of this Item 2 entitled Factors that May Affect Future Operating
Results and please also see the risk factors located in our Annual Report on Form 10-K for our
fiscal year ended December 31, 2004.
OVERVIEW
We design, develop, manufacture and market complex, high-performance integrated circuits and
storage systems. We operate in two reportable segments Semiconductor and Storage Systems.
Within the Semiconductor segment, we offer three enabling system-on-a-chip
technologiesstandard-cell ASICs, Platform ASICs and application specific standard products.
Within the Storage Systems segment, we focus on high-performance modular disk storage systems,
sub-assemblies, storage management software, RAID storage adapters (RSA) and related software. Our
products are marketed primarily to OEMs that sell products targeted for applications in these
markets.
On May 23, 2005, Abhijit Y. Talwalkar joined LSI as President and Chief Executive Officer and
Wilfred J. Corrigans status as an employee of LSI ceased. Since joining LSI, Mr. Talwalkar has
been in the process of assessing the strategic foundation and operational effectiveness of our
overall business. In the third quarter of 2005, we announced a broad-based reorganization as well
as the decision to move to a fabless semiconductor model. The reorganization is expected to better
position us to pursue increased growth in our primary markets: custom integrated circuits, consumer
products and storage platforms and products. We announced four major business groups Custom
Solutions Group (CSG), Consumer Products Group (CPG), Storage Components Group (SCG) and Engenio or
Storage Systems. CSG, CPG and SCG are part of the Semiconductor segment. Our RSA business,
formerly part of the Semiconductor segment is now included in the Storage Systems Segment. The
combination of RSA and Engenio, our majority owned subsidiary, will allow us to more efficiently
deliver a broad portfolio of software, storage products and platforms to meet original equipment
manufacturer (OEM) customer needs.
We had previously announced jointly with Engenio Technologies, Inc. the postponement of the
initial public offering of its common stock due to then current market conditions. We have since
decided to postpone any plans for an initial public offering indefinitely. On September 16, 2005,
Engenio stock options outstanding were exchanged for the LSIs options under the 1999 Non Statutory
Stock Option Plan. The exchange occurred in accordance with the terms of the Engenio Equity
Incentive plan, which provided for the automatic exchange of the options in the event it was
determined that the Engenio initial public offering was not likely to occur. We exchanged options
to purchase an aggregate of 3,011,450 shares of Engenio common stock for options to purchase an
aggregate of 2,830,763 shares of LSIs common stock. The exercise price per share of the new
options was equal to the fair market value of our common stock on the grant date. The exchange
program resulted in $3.9 million of deferred stock compensation that will amortize on a
straight-line basis over the vesting period of the new awards of
approximately 3 to 3.5 years. Amortization expense in the third
quarter of 2005 was not significant.
On September 13, 2005, we announced that we intend to sell our Gresham, Oregon manufacturing
facility as part of our strategy to move to a fabless semiconductor manufacturing model. Our new
strategy includes the expansion of our working relationships with major foundry partners and the
adoption of a roadmap leading to the production of advanced semiconductors utilizing 65-nanometer
and below process technology on 300-mm or 12inch wafers. We recorded $91.1 million in charges
directly associated with the decision to sell the manufacturing facility. The details of these
charges are included in the discussion on restructuring included under the results of operations
section of this MD&A and also in the Notes to the Unaudited Consolidated Condensed Financial
Statements.
Revenues on a consolidated basis for the three months ended September 30, 2005 of $481.7
million were relatively flat compared to revenues of $481.3 million for the three months ended June
30, 2005 and represented an increase of 27%
18
compared to revenues of $380.2 million for the three months ended September 30, 2004.
Revenues for the nine months ended September 30, 2005 were $1,413.0 million representing a 10%
increase as compared to $1,280.5 million in revenues for the nine months ended September 30, 2004.
The increases for the three and nine months ended September 30, 2005 represent increases in both
our Semiconductor and Storage Systems segments.
We reported a net loss of $73.4 million or $0.19 a diluted share for the three months ended
September 30, 2005 compared to net income of $25.3 million or $0.06 a diluted share for the three
months ended June 30, 2005 and a net loss of $282.4 million or $0.73 a diluted share for the three
months ended September 30, 2004. We reported a net loss of $43.4 million or $0.11 a diluted share
for the nine months ended September 30, 2005 compared to a net loss of $266.1 million or $0.69
cents a diluted share for the nine months ended September 30, 2004.
In the fourth quarter of 2005, we expect our consolidated revenues to be in the range of $475
million to $500 million.
Cash, cash equivalents and short-term investments were $845.0 million as of September 30, 2005
compared to $782.0 million as of June 30, 2005 and $814.6 million as of December 31, 2004. For the
nine months ended September 30, 2005, we generated $196.7 million in cash provided by operations
compared to $64.6 million in the same period of the previous year.
Our business is characterized by rapid technological change, competitive pricing pressures and
cyclical market patterns. Our financial results are affected by a wide variety of factors,
including general economic conditions worldwide, economic conditions specific to the semiconductor
and storage systems industries, the timely implementation of new technologies and the ability to
safeguard inventions and other intellectual property in a rapidly evolving market. In addition, the
semiconductor and storage systems markets have historically been cyclical and subject to
significant economic downturns at various times.
Where more than one significant factor contributed to changes in results from year to year, we
have quantified such factors throughout Managements Discussion & Analysis, where practicable. The
information provided herein for the Semiconductor and Storage Systems segments have been recast to
reflect the realignment of the RSA group to the Storage Systems segment from the Semiconductor
Segment for all periods presented.
RESULTS OF OPERATIONS
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
June 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(in millions) |
|
Semiconductor segment |
|
$ |
311.7 |
|
|
$ |
325.2 |
|
|
$ |
249.8 |
|
|
$ |
940.9 |
|
|
$ |
841.0 |
|
Storage Systems segment |
|
|
170.0 |
|
|
|
156.1 |
|
|
|
130.4 |
|
|
|
472.1 |
|
|
|
439.5 |
|
|
|
|
Consolidated |
|
$ |
481.7 |
|
|
$ |
481.3 |
|
|
$ |
380.2 |
|
|
$ |
1,413.0 |
|
|
$ |
1,280.5 |
|
|
|
|
There were no significant intersegment revenues during the periods presented.
Third quarter of 2005 compared to the second quarter of 2005
Total consolidated revenues remained relatively flat in the third quarter of 2005 as compared
to the second quarter of 2005.
19
Semiconductor segment:
Revenues for the Semiconductor segment decreased $13.5 million or 4% for the three months
ended September 30, 2005 as compared to the three months ended June 30, 2005. The decrease in
semiconductor revenues is attributable to the net effect of the following factors:
|
|
|
Revenues decreased for semiconductors used in storage product applications primarily
a result of lower demand for ASICs used in hard disk drives, Host Bus Adapters (HBA) and
storage subsystems; and |
|
|
|
|
Revenues decreased for semiconductors used in communications product applications due
to declines in demand for enterprise, wireless, military, aerospace and certain older
product applications. |
The above noted decreases in revenues were offset in part by increased revenues for
semiconductors used in consumer product applications such as DVD-recorders and digital audio
players, offset in part by declines in revenues for semiconductors used in consumer product
applications such as video games.
Storage Systems segment:
Revenues for the Storage Systems segment increased $13.9 million or 9% from the second quarter
of 2005. The increase in revenues is primarily attributable to increased demand for our new
high-end controller product introduced in the second quarter of 2005.
Three and nine months ended September 30, 2005 compared to the same period of 2004
Total consolidated revenues for the third quarter of 2005 increased $101.5 million or 27% as
compared to the third quarter of 2004. For the nine months ended September 30, 2005, revenues
increased $132.5 million or 10% as compared to the same period of the prior year.
Semiconductor segment:
Revenues for the Semiconductor segment increased $61.9 million or 25% for the third quarter of
2005 as compared to the same period of the previous year. The increase in revenues for the
three-month period is attributable to the following factors:
|
|
|
An increase in revenues for semiconductors used in consumer product applications
primarily a result of increased demand for digital audio players, DVD recorders and
cable set-top boxes, offset in part by decreases in demand for semiconductors used in
video games; and |
|
|
|
|
An increase in revenues for semiconductors used in storage product applications
primarily due to higher demand for ASICs used in hard disk drives , HBAs and storage
area networking products and ASSPs used in storage product applications such as the
Ultra 320 product. |
The above noted increases in revenues were offset in part by decreased demand for
semiconductors used in communications product applications such as wireless products.
Revenues for the Semiconductor segment increased $99.9 million or 12% for the nine months
ended September 30, 2005 as compared to the same period in 2004. The increase in revenues is
attributable to:
|
|
|
An increase in revenues for semiconductors used in consumer product applications
primarily a result of increased demand for digital audio players, DVD recorders, cable
set-top boxes and video games, offset in part by decreases in demand for semiconductors
used in DVD playback products; and |
|
|
|
|
An increase in revenues for semiconductors used in storage product applications
primarily due to higher demand for ASICs used in hard disk drives. |
20
The above noted increases in revenues were offset in part by decreased demand for semiconductors
used in communications product applications such as office automation, switch and WAN products.
Storage Systems segment:
Revenues for the Storage Systems segment increased $39.6 million or 30% for the third quarter
of 2005 and increased $32.6 million or 7% for the nine months ended September 30, 2005 as compared
to the same periods of 2004. The increase in revenues for the third quarter of 2005 as compared to
the same period of 2004 was primarily the result of increased demand for our new high-end
controller product introduced in the second quarter of 2005 as well as sales of related enclosures
(drive modules).
The increase in revenues for the nine months ended September 30, 2005 compared to the same
period of 2004 was also primarily driven by increased demand for our high-end controller product as
discussed above and increased revenues for command modules sold to one large customer.
Significant Customers. The following table summarizes the number of our significant
customers, each of whom accounted for 10% or more of our revenues, along with the percentage of
revenues they individually represent on a consolidated basis and by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Semiconductor segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers |
|
|
2 |
|
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
Percentage of segment revenues |
|
|
16%, 12 |
% |
|
|
14%, 12 |
% |
|
|
17 |
% |
|
|
10 |
% |
Storage Systems segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers |
|
|
2 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
Percentage of segment revenues |
|
|
46%, 11 |
% |
|
|
40%, 14%, 11 |
% |
|
|
43%, 13%, 10 |
% |
|
|
40%, 16%, 11 |
% |
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers |
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
Percentage of consolidated revenues |
|
|
17%, 11 |
% |
|
|
15 |
% |
|
|
15%, 11 |
% |
|
|
15 |
% |
Revenues by geography. The following table summarizes our revenues by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
June 30, 2005 |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
|
|
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(in millions) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America * |
|
$ |
230.7 |
|
|
$ |
228.1 |
|
|
$ |
185.1 |
|
|
$ |
666.3 |
|
|
$ |
644.2 |
|
Asia, including Japan |
|
|
193.1 |
|
|
|
195.4 |
|
|
|
156.7 |
|
|
|
583.8 |
|
|
|
486.2 |
|
Europe * |
|
|
57.9 |
|
|
|
57.8 |
|
|
|
38.4 |
|
|
|
162.9 |
|
|
|
150.1 |
|
|
|
|
Total |
|
$ |
481.7 |
|
|
$ |
481.3 |
|
|
$ |
380.2 |
|
|
$ |
1,413.0 |
|
|
$ |
1,280.5 |
|
|
|
|
|
|
|
* |
|
Revenues by geography are accumulated based on the revenues generated by our
subsidiaries located within the three geographic areas noted in the above table. In the
second half of 2004, Engenio formed new subsidiaries within Europe. As a result, the amounts
in the table above have been restated. All revenues generated by Engenio Europe were
previously reported in North America. |
21
Third quarter of 2005 compared to the second quarter of 2005
In the third quarter of 2005, revenues increased in North America and Europe and decreased in
Asia, including Japan, as compared to the second quarter of 2005. The increase in North America is
primarily attributable to higher demand for semiconductors used in consumer product applications
and higher revenues in the Storage Systems segment, offset in part by decreased demand for
semiconductors used in storage component and communications product applications. The decrease in
Asia, including Japan, is primarily the result of decreases in semiconductors used in storage
component and communications product applications, offset in part by increases in revenues for
semiconductors used in consumer product applications and increases in revenues for the Storage
Systems segment.
Three and nine months ended September 30, 2005 compared to the same periods of 2004
In the third quarter of 2005, revenues increased in North America, Asia, including Japan, and
Europe as compared to the third quarter of 2004. The increase in North America is attributable to
increases for semiconductors used in consumer product applications and ASICs used in storage
component applications and increases in revenues for the Storage Systems segment, offset in part by
decreases in demand for semiconductors used in storage components and communications product
applications. The increase in Asia, including Japan, is attributable to increased demand for
semiconductors used in storage component and communications product applications and increases in
revenues in the Storage Systems segment. These increases were offset in part by decreased demand
for semiconductors used in consumer product applications. The increase in Europe is primarily
attributable to increases in revenues in both the Semiconductor and Storage Systems segments.
During the nine months ended September 30, 2005, revenues increased in North America, Asia,
including Japan and Europe as compared to the same period of 2004. The increase in North America
is primarily attributable to an increase in demand for semiconductors used in consumer product
applications and increases in revenues in the Storage Systems segment. These increases were offset
in part by decreases in semiconductors used in storage component and communications product
applications in the Semiconductor segment. The increase in Asia, including Japan, is a result of a
higher demand for semiconductors used in storage component and consumer product applications and
increases in revenues in the Storage Systems segment, offset in part by decreased demand for
semiconductors used in communications product applications. The increase in Europe is primarily a
result of increases in semiconductors used in storage ASIC, storage components and consumer product
applications coupled with increases in revenues in the Storage Systems segment. These increases
were offset in part by decreases in semiconductors used in communications product applications.
Operating costs and expenses. Key elements of the consolidated statements of operations for
the respective segments are as follows:
Gross profit margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
June 30, 2005 |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
|
|
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(in millions) |
|
Semiconductor segment |
|
$ |
147.5 |
|
|
$ |
158.1 |
|
|
$ |
107.0 |
|
|
$ |
448.4 |
|
|
$ |
395.4 |
|
Percentage of
revenues |
|
|
47% |
|
|
|
49% |
|
|
|
43% |
|
|
|
48% |
|
|
|
47% |
|
Storage Systems segment |
|
$ |
62.7 |
|
|
$ |
53.6 |
|
|
$ |
44.8 |
|
|
$ |
163.8 |
|
|
$ |
166.6 |
|
Percentage of revenues |
|
|
37% |
|
|
|
34% |
|
|
|
34% |
|
|
|
35% |
|
|
|
38% |
|
|
|
|
Consolidated |
|
$ |
210.2 |
|
|
$ |
211.7 |
|
|
$ |
151.8 |
|
|
$ |
612.2 |
|
|
$ |
562.0 |
|
|
|
|
Percentage of revenues |
|
|
44% |
|
|
|
44% |
|
|
|
40% |
|
|
|
43% |
|
|
|
44% |
|
Third quarter of 2005 compared to the second quarter of 2005
The consolidated gross profit margin as a percentage of revenues remained relatively flat in
the third quarter of 2005 as compared to the second quarter of 2005.
22
Semiconductor segment:
The gross profit margin as a percentage of revenues for the Semiconductor segment decreased to
47% in the third quarter of 2005 from 49% in the second quarter of 2005. The decrease in gross
profit margin for the semiconductor segment was primarily attributable to unfavorable changes in
product mix for semiconductors used in consumer product applications such as video games, offset in
part by increases in gross profit margins stemming from lower inventory charges. The lower
inventory charges are associated with favorable manufacturing variances as a result of higher
utilization of our Gresham, Oregon manufacturing facility.
Storage Systems segment:
The gross profit margin as a percentage of revenues for the Storage Systems segment increased
to 37% in the third quarter of 2005 from 34% in the second quarter of 2005. The increase in gross
profit margin was primarily attributable to a favorable shift in product mix which began in the
second quarter of 2005 with the introduction of our new high-end controller product and material
cost reductions in the quarter.
We expect our consolidated gross profit margin to be in the range of 43% to 44% in the fourth
quarter of 2005. We expect future depreciation savings associated with the decision to sell the
Gresham facility to be fully offset by unfavorable manufacturing
variances related to decreased future loading of the Gresham facility.
Three and nine months ended September 30, 2005 compared to the same periods of 2004
The consolidated gross profit margin as a percentage of revenues increased to 44% in the third
quarter of 2005 from 40% in the third quarter of 2004. The consolidated gross profit margin as a
percentage of revenues decreased to 43% for the nine months ended September 30, 2005 as compared to
44% in the same period of 2004.
Semiconductor segment:
The gross profit margin as a percentage of revenues for the Semiconductor segment increased to
47% in the third quarter of 2005 from 43% in the third quarter of 2004. The increases in gross
profit margin for the Semiconductor segment were primarily attributable to improved operating
efficiencies and cost savings in 2005 associated with the restructuring actions undertaken in the
latter part of 2004, offset in part by the following factors:
|
|
|
Lower average selling prices for semiconductors used in some consumer product
applications and in storage applications such as hard disk drives; and |
|
|
|
|
An unfavorable shift in product mix which included selling fewer semiconductors used
in consumer product applications such as video games in 2005. |
The gross profit margin as a percentage of revenues for the Semiconductor segment increased
to 48% for the nine months ended September 30, 2005 as compared to 47% for the same period of
2004. The increase was primarily attributable to the following factors:
|
|
|
Improved operating efficiencies and cost savings in 2005 associated with the
restructuring actions undertaken in the latter part of 2004; and |
|
|
|
|
A favorable shift in product mix for semiconductors used in consumer product
applications such as video games. |
The above noted increases were partially offset by the following factors:
|
|
|
Lower average selling prices for semiconductors used in some consumer product
applications and storage applications such as hard disk drives; and |
23
|
|
|
Higher inventory charges in 2005 for consumer product applications such as DVD
products. |
Storage Systems segment:
The gross profit margin as a percentage of revenues for the Storage Systems segment increased
to 37% in the third quarter of 2005 from 34% in the third quarter of 2004. The increase in gross
profit margins is attributable to improved product mix associated with the introduction of our new
high-end controller product in the second quarter of 2005 and material cost reductions. These
increases were offset in part by lower selling prices on RSA products.
The gross profit margin as a percentage of revenues for the Storage Systems segment decreased
to 35% for the nine months ended September 30, 2005 from 38% for the same period in 2004. The
decline in gross profit margin in the Storage Systems segment for both periods is mainly
attributable to changes in product mix reflecting lower sales volumes for some of our higher-end
storage products and lower selling prices for RSA products and some of our older products. These
declines were only partially offset by margin improvements since the introduction of our new
high-end controller product introduced in the second quarter of 2005.
Factors that may affect gross profit margins
We have wafer-manufacturing operations in Gresham, Oregon, which is our primary manufacturing
site in our Semiconductor segment. On September 13, 2005, we announced that we intend to sell our
Gresham, Oregon manufacturing facility as part of our strategy to move to a fabless semiconductor
manufacturing model. Our new strategy includes the expansion of our working relationships with
major foundry partners and the adoption of a roadmap leading to the production of advanced
semiconductors utilizing 65-nanometer and below process technology on 300-mm or 12inch wafers. As
a result of our decision to hold the manufacturing facility for sale, depreciation of the operating
assets of the facility ceased as of September 13, 2005. See the restructuring discussion contained
herein and Note 4 to the Notes for further discussion.
We also own our Storage Systems segment manufacturing facility in Wichita, Kansas. In
addition, we acquire wafers, assembly and test services from vendors in Taiwan, Japan, Malaysia,
Korea and China and outsource a portion of our Storage Systems segment manufacturing to facilities
in Ireland, Mexico, Singapore and Thailand. Utilizing diverse manufacturing locations allows us
to better manage potential disruption in the manufacturing process due to economic and geographic
risks associated with each location.
Our operating environment, combined with the resources required to operate in the
Semiconductor and Storage Systems industries, requires that we manage a variety of factors. These
factors include, among other things:
|
|
Competitive pricing pressures; |
|
|
|
Product mix; |
|
|
|
Factory capacity and utilization; |
|
|
|
Geographic location of manufacturing; |
|
|
|
Manufacturing yields; |
|
|
|
Availability of certain raw materials; |
|
|
|
Implementation of new process technologies; |
|
|
|
Adoption of new industry standards; |
|
|
|
Terms negotiated with third-party subcontractors; and |
|
|
|
Foreign currency fluctuations. |
These and other factors could have a significant effect on our gross profit margin in future
periods.
24
Research and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
June 30, 2005 |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
|
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(in millions) |
|
Semiconductor segment |
|
$ |
75.4 |
|
|
$ |
77.1 |
|
|
$ |
87.5 |
|
|
$ |
230.8 |
|
|
$ |
266.2 |
|
Percentage of revenues |
|
|
24% |
|
|
|
24% |
|
|
|
35% |
|
|
|
25% |
|
|
|
32% |
|
Storage Systems segment |
|
$ |
25.1 |
|
|
$ |
22.6 |
|
|
$ |
20.6 |
|
|
$ |
68.6 |
|
|
$ |
61.0 |
|
Percentage of revenues |
|
|
15% |
|
|
|
14% |
|
|
|
16% |
|
|
|
15% |
|
|
|
14% |
|
|
|
|
Consolidated |
|
$ |
100.5 |
|
|
$ |
99.7 |
|
|
$ |
108.1 |
|
|
$ |
299.4 |
|
|
$ |
327.2 |
|
|
|
|
Percentage of revenues |
|
|
21% |
|
|
|
21% |
|
|
|
28% |
|
|
|
21% |
|
|
|
26% |
|
Third quarter of 2005 compared to the second quarter of 2005
Research and development (R&D) expenses remained relatively flat in the third quarter of
2005 as compared to the second quarter of 2005 on a consolidated basis.
Semiconductor segment:
R&D expenses in the Semiconductor segment decreased by $1.7 million or 2% in the third quarter
of 2005 as compared to the second quarter of 2005. R&D expenses as a percentage of Semiconductor
segment revenues remained flat at 24% when comparing the third quarter of 2005 with the second
quarter of 2005.
We develop advanced sub-micron product technologies for our ASIC and standard product
portfolios. We continued the build-out of the RapidChip Platform ASIC infrastructure in the third
quarter of 2005. Products utilizing RapidChip technology combine the high-density,
high-performance and proven intellectual property benefits of cell-based ASICs with the advantages
of lower development costs and faster time to market.
Storage Systems segment:
R&D expenses in the Storage Systems segment increased $2.5 million or 11% in the third quarter
of 2005 as compared to the second quarter of 2005. The increase is primarily due to increased
compensation-related expenditures that are based upon performance metrics and increased material
spending for future R&D projects. R&D expenses as a percentage of Storage Systems segment revenues
were 15% for the third quarter of 2005 compared to 14% for the second quarter of 2005.
Three and nine months ended September 30, 2005 compared to the same periods of 2004
R&D expenses, on a consolidated basis, decreased $7.6 million or 7% during the third quarter
of 2005 as compared to the third quarter of 2004. R&D expenses for the nine months ended September
30, 2005 decreased by $27.8 million or 8% as compared to the same period of 2004.
Semiconductor segment:
R&D expenses for the Semiconductor segment decreased $12.1 million or 14% in the third quarter
of 2005 and $35.4 million or 13% for the nine months ended September 30, 2005 as compared to the
same periods of 2004. The decrease in 2005 R&D expenses for the Semiconductor segment is primarily
the result of cost-cutting measures implemented as part of the restructuring actions taken during
2004, including lower compensation-related expenses as well as lower equipment and software
expenses. In addition, we spent less on design engineering programs during the first nine months
of 2005 as compared to the same period of 2004.
25
Storage Systems segment:
R&D expenses for the Storage Systems segment increased by $4.5 million or 22% in the third
quarter of 2005 and $7.6 million or 12% for the nine months ended September 30, 2005 as compared to
the same periods of 2004. As noted above, these increases are primarily due to increased
compensation-related expenditures that are based upon performance metrics and increased material
spending for future R&D projects.
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
June 30, 2005 |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
|
|
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(in millions) |
|
Semiconductor segment |
|
$ |
36.3 |
|
|
$ |
37.9 |
|
|
$ |
38.6 |
|
|
$ |
111.1 |
|
|
$ |
117.6 |
|
Percentage of revenue |
|
|
12% |
|
|
|
12% |
|
|
|
15% |
|
|
|
12% |
|
|
|
14% |
|
Storage Systems segment |
|
$ |
22.0 |
|
|
$ |
22.0 |
|
|
$ |
24.8 |
|
|
$ |
65.2 |
|
|
$ |
70.8 |
|
Percentage of revenue |
|
|
13% |
|
|
|
14% |
|
|
|
19% |
|
|
|
14% |
|
|
|
16% |
|
|
|
|
Consolidated |
|
$ |
58.3 |
|
|
$ |
59.9 |
|
|
$ |
63.4 |
|
|
$ |
176.3 |
|
|
$ |
188.4 |
|
|
|
|
Percentage of revenue |
|
|
12% |
|
|
|
12% |
|
|
|
17% |
|
|
|
12% |
|
|
|
15% |
|
Third quarter of 2005 compared to the second quarter of 2005
Selling, general and administrative (SG&A) expenses decreased $1.6 million or 3% during
the third quarter of 2005 from the second quarter of 2005 on a consolidated basis.
Semiconductor segment:
SG&A expenses for the Semiconductor segment decreased $1.6 million or 4% in the third quarter
of 2005 as compared to the second quarter of 2005. SG&A expenses as a percentage of Semiconductor
revenues in the third quarter of 2005 compared to the second quarter of 2005 were flat at 12%.
Storage Systems segment:
SG&A expenses for the Storage Systems segment remained relatively flat in the third quarter of
2005 as compared to the second quarter of 2005. SG&A expenses as a percentage of Storage Systems
revenues in the third quarter of 2005 and the second quarter of 2005 were 13% and 14%,
respectively. The decrease in SG&A expenses as a percentage of Storage Systems revenues in the
third quarter of 2005 from the second quarter of 2005 is attributable to higher revenues in the
third quarter of 2005.
Three and nine months ended September 30, 2005 compared to the same periods of 2004
Consolidated SG&A expenses decreased $5.1 million or 8% during the third quarter of 2005 and
$12.1 million or 6% for the nine months ended September 30, 2005 as compared to the same periods of
2004.
Semiconductor segment:
SG&A expenses for the Semiconductor segment decreased $2.3 million or 6% for the third quarter
of 2005 and $6.5 million or 6% for the nine months ended September 30, 2005 as compared to the same
periods of 2004. The decrease in the Semiconductor segment was primarily attributable to benefits
from the cost-cutting measures implemented as part of the restructuring actions taken during 2004,
including lower compensation-related expenses and benefits from the consolidation of our
non-manufacturing facilities. In addition, outside professional services declined in 2005 as
compared to the prior year. These decreases were offset in part by higher expenses from
commissions for sales representatives.
26
Storage Systems segment:
SG&A expenses for the Storage Systems segment decreased by $2.8 million or 11% in the third
quarter of 2005 and $5.6 million or 8% for the nine months ended September 30, 2005 as compared to
the same periods of 2004. The decrease in SG&A expenses for the third quarter of 2005 as
compared to the third quarter of 2004 is primarily attributable to spending in 2004 related to
Engenios proposed initial public offering that was not present in 2005.
The decrease in SG&A expenses from the nine months ended September 30, 2005 as compared to the
nine months ended September 30, 2004 is primarily attributable to spending in 2004 related to
Engenios proposed initial public offering, separation from LSI and set-up cost of experience
centers that was not present in 2005.
Restructuring of operations and other items: We recorded charges of $100.0 million and $108.7
million in restructuring of operations and other items for the three and nine months ended
September 30, 2005, respectively. We recorded charges of $228.6 million and $231.1 million in
restructuring of operations and other items for the three and nine months ended September 30, 2004,
respectively. These charges were primarily associated with the Semiconductor segment.
For a complete discussion of the 2004 restructuring actions, please refer to our Annual Report
on Form 10-K for fiscal year 2004.
Restructuring and impairment of long-lived assets:
First quarter of 2005:
We recorded an expense of $0.8 million for the write-down of purchased software that will not
be used. An expense of $0.3 million was recorded to reflect the change in time value of accruals
for facility lease termination costs, net of adjustments for changes in sublease assumptions for
certain previously accrued facility lease termination costs. Additional non-manufacturing
facilities were consolidated during the first quarter of 2005 and an expense of $0.4 million was
recorded as the leased facilities ceased being used.
Second quarter of 2005:
We recorded restructuring charges of approximately $1.7 million, which included the following
items. An expense of $0.4 million for the write-down of equipment held for sale to reflect a
decline in fair market values. An expense of $0.4 million was recorded to reflect the change in
time value of accruals for facility lease termination costs. An additional non-manufacturing
facility was consolidated during the second quarter of 2005 and an expense of $0.3 million was
recorded as the leased facility ceased being used. An expense of $0.2 million was recorded for
severance and termination benefits for 10 employees. An expense of $0.4 million was recorded for
facility closure costs related to the Colorado fabrication facility as the expenses were incurred.
Third quarter of 2005:
We recorded restructuring charges of approximately $100.0 million for the three months ended
September 30, 2005 as follows:
On September 13, 2005, we announced our intention to sell our Gresham, Oregon manufacturing
facility as part of our strategy to move to a fabless semiconductor manufacturing model.
Accordingly, we recorded $91.1 million in charges directly associated with the decision to sell the
manufacturing facility in the third quarter of 2005. The asset impairment charge for the Gresham
disposal group was calculated in accordance with SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets and included a charge of $85.2 million for the Gresham facility and
$4.8 million in charges for estimated selling costs. The fair market values for the Gresham
facility were thoroughly researched and estimated by management. The impairment charges of $85.2
million are non-cash charges and included as a non-cash restructuring item in the third quarter
cash flow statements. In addition, we announced workforce reductions for approximately 80
positions in the Gresham facility and recorded a charge of $1.1 million for severance and
termination benefits. These actions and related charges are associated with the Semiconductor
segment. We are actively marketing the Gresham facility and expect to complete a sale of the
facility within the next twelve months.
27
An expense of $7.7 million was recorded for changes in sublease assumptions for certain
previously accrued facility lease termination costs. In addition, an expense of $0.5 million was
recorded to reflect the change in time value of accruals for facility
lease termination costs. An
expense of $0.5 million was recorded for severance and termination benefits for approximately 17
employees primarily related to the broad-based reorganization that was announced in August of 2005.
Assets held for sale of $107.3 million and $11.0 million were included as a component of
prepaid expenses and other current assets as of September 30, 2005 and December 31, 2004,
respectively. During the third quarter of 2005, $98.5 million in assets associated with the
Gresham facility and surrounding land were reclassified to assets held for sale. Assets classified
as held for sale are not depreciated. The fair values of impaired equipment and facilities were
estimated by management. Given that current market conditions for the sale of older fabrication
facilities and related equipment may fluctuate, there can be no
assurance that we will
realize the current net carrying value of the assets held for sale. We reassess the
realizability of the carrying value of these assets at the end of each quarter until the assets are
sold or otherwise disposed of and additional adjustments may be necessary.
The following table sets forth our restructuring reserves as
of September 30, 2005, which are included in other accrued liabilities on the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
Utilized |
|
Restructuring |
|
Utilized |
|
Restructuring |
|
Utilized |
|
Balance |
|
|
Balance at |
|
Expense |
|
during Q1, |
|
Expense |
|
during Q2, |
|
Expense |
|
during Q3, |
|
at |
(In thousands) |
|
December 31, 2004 |
|
Q1, 2005 |
|
2005 |
|
Q2, 2005 |
|
2005 |
|
Q3, 2005 |
|
2005 |
|
September 30, 2005 |
|
|
|
Write-down of
excess assets and
decommissioning
costs (a) |
|
$ |
1,207 |
|
|
$ |
796 |
|
|
$ |
(1,271 |
) |
|
$ |
429 |
|
|
$ |
(451 |
) |
|
$ |
89,633 |
|
|
$ |
(85,311 |
) |
|
$ |
5,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease terminations
(b) |
|
|
20,065 |
|
|
|
738 |
|
|
|
(2,691 |
) |
|
|
727 |
|
|
|
(2,674 |
) |
|
|
8,207 |
|
|
|
(2,555 |
) |
|
|
21,817 |
|
Facility closure
and other exit
costs (c) |
|
|
543 |
|
|
|
|
|
|
|
(476 |
) |
|
|
404 |
|
|
|
(462 |
) |
|
|
488 |
|
|
|
(492 |
) |
|
|
5 |
|
Payments to
employees for
severance (d) |
|
|
7,408 |
|
|
|
(1 |
) |
|
|
(4,250 |
) |
|
|
160 |
|
|
|
(1,850 |
) |
|
|
1,658 |
|
|
|
(412 |
) |
|
|
2,713 |
|
|
|
|
Total |
|
$ |
29,223 |
|
|
$ |
1,533 |
|
|
$ |
(8,688 |
) |
|
$ |
1,720 |
|
|
$ |
(5,437 |
) |
|
$ |
99,986 |
|
|
$ |
(88,770 |
) |
|
$ |
(29,567 |
) |
|
|
|
|
|
|
(a) |
|
The amounts utilized in 2005 reflect $1.2 million of non-cash write-downs of long-lived
assets in the U.S. due to impairment and $0.5 million in cash payments to decommission and
sell assets. The write-downs of long-lived assets were accounted for as a reduction of the
assets and did not result in a liability. The charge of $89.6 million includes the impairment
charge for the Gresham facility of $85.2 million, related estimated Gresham facility selling
costs of $4.8 million and a credit of $0.4 million of net of other miscellaneous items. The $5.0
million balance as of September 30, 2005, relates to estimates for selling costs for assets
held for sale and is expected to be utilized during 2006. |
|
(b) |
|
An expense of $7.7 million was recorded for changes in sublease assumptions for certain
previously accrued facility lease termination costs. In addition, an expense of $0.5 million
was recorded to reflect the change in time value of accruals for facility lease termination
costs. Amounts utilized represent cash payments. The balance remaining for real estate lease
terminations will be paid during the remaining terms of these contracts, which extend through
2011. |
|
(c) |
|
An expense of $0.5 million was recorded for facility closure costs related to the Colorado
fabrication facility as the expenses were incurred. Amounts utilized represent cash payments.
The balance remaining for facility closure and other exit costs will be paid during 2005. |
|
(d) |
|
An expense of $1.1 million was recorded in connection with our decision to sell Gresham
facility. An expense of $0.5 million was recorded in connection with our reorganization.
Amounts utilized represent cash severance payments to 126 employees during the nine months
ended September 30, 2005 for the action announced in the third quarter of 2004. |
28
Amounts utilized also include cash severance payments for 14 employees for the action announced in the third quarter of 2005 during
the three months ended September 30, 2005. The balance remaining for severance is expected to be paid by the end of 2005.
We realized depreciation savings of approximately $0.2 million for the three and nine months ended September 30, 2005 as a
result of our decision to sell the Gresham facility. We expect future depreciation savings associated with the decision to sell
the Gresham facility to be fully offset by unfavorable manufacturing variances related to
decreased future loading of the Gresham facility.
Other Items:
Second quarter of 2005:
On May 23, 2005, Wilfred J. Corrigans status as an employee ceased and in connection with
this event, we recorded a charge of $5.3 million. The amount was paid to Mr. Corrigan in the
second quarter of 2005 and was made in accordance with Mr. Corrigans employment agreement dated
September 20, 2001. Mr. Corrigan was our former Chief
Executive Officer.
Amortization of non-cash deferred stock compensation: Amortization of non-cash deferred stock
compensation was $1.3 million for the three months ended September 30, 2005, $1.2 million for the
three months ended June 30, 2005 and $2.6 million for the three months ended September 30, 2004.
For the nine months ended September 30, 2005 and 2004, the amortization of non-cash deferred stock
compensation was $4.0 million and $6.4 million, respectively. The acquisitions for which
deferred stock compensation and related amortization were recorded consisted primarily of the
Accerant transaction in the second quarter of 2004, the Velio transaction in the first quarter of
2004, an acquisition in the fourth quarter of 2002, the acquisition of C-Cube and the RAID business
from AMI in 2001 and the acquisition of DataPath in 2000. We have also recorded non-cash deferred
stock compensation for restricted common shares issued to our employees, Engenio employees and the
non-employee directors of Engenio. We amortize deferred stock compensation ratably over the
related vesting periods. Deferred stock compensation is adjusted to reflect forfeitures prior to
vesting. At September 30, 2005, the deferred stock compensation that remained was $13.3 million,
and is expected to be amortized over the next four years.
On September 16, 2005, Engenio stock options outstanding were exchanged for LSIs options
under the 1999 Non Statutory Stock Option Plan. The exchange occurred in accordance with the terms
of the Engenio Equity Incentive plan, which provided for the automatic exchange of the options in
the event it was determined that the Engenio initial public offering was not likely to occur. The
Company exchanged options to purchase an aggregate of 3,011,450 shares of Engenio common stock for
options to purchase an aggregate of 2,830,763 shares of LSIs common stock. The exercise price per
share of the new options was equal to the fair market value of the Companys common stock on the
grant date. The exchange program resulted in $3.9 million of deferred stock compensation that
will amortize on a straight-line basis over the vesting period of the new awards of approximately 3
to 3.5 years. Amortization expense in the third quarter of 2005 was not significant.
Amortization of intangibles: Amortization of intangible assets was $15.7 million for the
third quarter of 2005 as compared to $17.6 million for the second quarter of 2005. The decrease is
primarily a result of the certain intangible assets becoming fully amortized during the third
quarter of 2005.
Amortization of intangible assets for the third quarter of 2005 decreased by $3.5 million from
$19.2 million for the same period in 2004. For the nine months ended September 30, 2005 and 2004,
amortization of intangible assets was $50.9 million and $56.9 million, respectively. Amortization
decreased as a result of the write-down during the fourth quarter of 2004 and certain intangible
assets becoming fully amortized, offset in part by amortization of intangible assets acquired
during the first and second quarters of 2004. As of September 30, 2005, we had approximately $57.5
million of intangible assets, net of accumulated amortization that will continue to amortize.
Interest expense: Interest expense decreased slightly to $6.1 million in the third quarter of
2005 from $6.3 million in the second quarter of 2005 due to lower average debt balance from the
repurchase of $149.7 million of the 2001 Convertible Notes during the second quarter of 2005.
Interest expense increased slightly in the third quarter of 2005 from $6.0 million during the same
period in 2004. Interest expense increased by $1.1 million to $19.1 million in the first nine
months of 2005 from $18.0 million in the same period of 2004. The increase is due to a lower
benefit from the amortization of the deferred gain on the previously terminated interest rate
swaps, offset in part by a decrease in interest expense due to the repurchase of
29
$68.5 million of Convertible Notes during the third quarter of 2004 and the additional
repurchase during the second quarter of 2005 discussed above.
Interest income and other, net: Interest income and other, net, was $4.6 million in the third
quarter of 2005 as compared to $11.5 million in the second quarter of 2005. Interest income
increased to $6.3 million in the third quarter of 2005 from $5.5 million in the second quarter of
2005. The increase in interest income is mainly due to higher returns and higher average cash and
short-term investment balances during the third quarter. Other expense, net of $1.7 million in the
third quarter of 2005 included a pre-tax loss of $1.5 million on impairment of certain
non-marketable available-for-sale equity securities (see Note 5 of the Notes) and other
miscellaneous items.
In the third quarter of 2004, interest income and other, net, was an expense of $0.2 million.
Interest income increased by $1.7 million in the third quarter of 2005 from $4.6 million in the
same period of 2004. The increase is due to higher returns on our cash and short-term investments.
Other expense, net of $4.8 million in the third quarter of 2004 included a net pre-tax gain of $1.8
million on the repurchase of 2001 Convertible Notes, a pre-tax loss of $6.0 million for the
impairment of certain marketable and non-marketable available-for-sale equity securities determined
by management to be other than temporary and other miscellaneous items.
Interest income and other, net increased to $21.5 million during the first nine months of 2005
from $17.7 million in the same period of 2004. Interest income increased by $4.3 million to $17.9
million during the first nine months of 2005 from $13.6 million in the same period of 2004. The
increase in interest income is mainly due to higher returns on our cash, cash equivalents and
short-term investments. Other income, net of $3.6 million in the first nine months of 2005
included a pre-tax gain of $4.1 million on the repurchase of the 2001 Convertible Notes, a pre-tax
gain of $2.9 million on sales of certain marketable available-for-sale equity securities in the
second quarter of 2005, a pre-tax loss of $1.5 million for the impairment of certain non-marketable
available-for-sale equity securities in the third quarter of 2005 as discussed above and other
miscellaneous items. Other income, net of $4.1 million in the first nine months of 2004 included a
pre-tax gain of $3.0 million associated with our investment in marketable available-for-sale equity
securities of a certain technology company that was acquired by another publicly traded technology
company during the first quarter of 2004, a pre-tax gain of $5.1 million on sales of certain
marketable available-for-sale equity securities in the second quarter of 2004, a pre-tax gain of
$1.8 million associated with the repurchase of the 2001 Convertible Notes, a pre-tax loss of $6.0
million on the impairment of certain marketable and non-marketable available-for-sale equity
securities and other miscellaneous items.
Provision for income taxes: During the three and nine months ended September 30, 2005 we
recorded income tax expense of $6.3 million and $18.8 million respectively. The expense primarily
relates to foreign income taxes. During the three months ended September 30, 2005, we concluded an
audit with the Internal Revenue Service for the year ended December 31, 2001, which resulted in an
increase to income tax expense of approximately $3.6 million. The increase in expense was
partially offset by a $2.5 million release of previously reserved foreign withholding taxes based
upon a favorable ruling received from a European country. For the three and nine months ended
September 30, 2004, we recorded an income tax expense of $6.0 million and $18.0 million,
respectively. The expense primarily relates to foreign income taxes.
Excluding certain foreign jurisdictions, the future benefit of temporary differences,
including operating losses, is not being recognized.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments increased to $845.0 million as of September
30, 2005, from $814.6 million at December 31, 2004. As described below, the increase is mainly due
to net cash inflows from operating activities and net cash outflows from investing and financing
activities.
Working capital. Working capital increased by $85.8 million to $1.1 billion at September 30,
2005, from $969.0 million at December 31, 2004. Working capital for the nine months ended September
30, 2005 was impacted by the following activities:
|
|
|
Prepaid expenses and other current assets increased by $92.0 million. The increase is
primarily attributable to a $96.2 million increase in other current assets as a result of the
reclassification of the Gresham, Oregon manufacturing facility |
30
|
|
|
and excess land from Property and Equipment, net to other current assets. We announced our
intention to sell the Gresham, Oregon manufacturing facility on September 13, 2005. (See Note
4 of the Notes). |
|
|
|
Cash, cash equivalents and short-term investments increased by $30.4 million. |
|
|
|
|
Accounts receivable increased by $26.4 million. The increase is mainly attributable to
higher revenues in the third quarter of 2005 as compared to the fourth quarter of 2004 and
the timing of sales in the last month of the third quarter of 2005 as compared to the last
month of the fourth quarter of 2004. |
The increase in working capital was offset, in part, by the following:
|
|
|
Inventories decreased by $29.8 million to $189.1 million as of September 30, 2005, from
$218.9 million as of December 31, 2004. The decline in inventory levels reflects our
continued focus on supply chain management. |
|
|
|
|
Accrued salaries, wages and benefits increased by $16.0 million primarily due to timing
differences in payment of salaries, benefits and performance based compensation. |
|
|
|
|
Income taxes payable increased by $9.4 million due to the timing of tax payments made and
the income tax provision recorded in the first nine months of 2005. |
|
|
|
|
Accounts payable increased by $7.4 million primarily due to the timing of invoice receipt
and payments. |
Cash and cash equivalents generated from operating activities. During the nine months ended
September 30, 2005, we generated $196.7 million of net cash and cash equivalents from operating
activities compared to $64.6 million generated in the same period of 2004. Cash and cash
equivalents generated by operating activities for the nine months ended September 30, 2005, were
the result of the following:
|
|
|
Income before depreciation and amortization, non-cash restructuring and other items,
amortization of non-cash deferred stock compensation, loss on write-down of equity
securities, gain on sale and exchange of equity securities, gain on repurchase of
convertible subordinated notes and gain on sale of property and equipment. The non-cash
items and other non-operating adjustments are quantified in our Consolidated Condensed
Statements of Cash Flows included in this Form 10-Q; and |
|
|
|
|
A net increase in liabilities, offset in part by a net increase in assets including
changes in working capital components from December 31, 2004 to September 30, 2005, as
discussed above. |
Cash and cash equivalents used in investing activities. Cash and cash equivalents used in
investing activities were $52.4 million for the nine months ended September 30, 2005, compared to
$73.8 million for the same period of 2004. The investing activities for the nine months ended
September 30, 2005 were as follows:
|
|
|
Purchases of debt and equity securities available for sale, net of sales and maturities; |
|
|
|
|
Purchases of property, equipment and software; |
|
|
|
|
Proceeds from the sale of property and equipment; and |
|
|
|
|
The receipt of an income tax refund for pre-acquisition tax matters associated with
C-Cube Microsystems Inc. C-Cube Microsystems was acquired in May of 2001. |
We expect capital expenditures to be approximately $60 million in 2005. In recent years we
have reduced our level of capital expenditures as a result of our focus on establishing strategic
supplier alliances with foundry semiconductor manufacturers, which enables us to have access to
advanced manufacturing capacity, and reduces our capital spending requirements.
31
Cash and cash equivalents used in financing activities. Cash and cash equivalents used in
financing activities for the nine months ended September 30, 2005, were $128.2 million as compared
to $58.5 million for the same period of 2004. The primary financing activities for the nine months
ended September 30, 2005 were as follows:
|
|
|
The repurchase of a portion of the Convertible Notes due in 2006; |
|
|
|
|
The issuance of common stock under our employee stock option and purchase plans; and |
|
|
|
|
The repayment of debt obligations. |
We may seek additional equity or debt financing from time to time. We believe that our
existing liquid resources and funds generated from operations, combined with funds from such
financing and our ability to borrow funds, will be adequate to meet our operating and capital
requirements and obligations for the foreseeable future. However, we cannot be certain that
additional financing will be available on favorable terms. Moreover, any future equity or
convertible debt financing will decrease the percentage of equity ownership of existing
stockholders and may result in dilution, depending on the price at which the equity is sold or the
debt is converted.
Contractual Obligations
The following table summarizes our contractual obligations at September 30, 2005, and the
effect these obligations are expected to have on our liquidity and cash flow in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 |
|
|
|
|
Contractual Obligations |
|
Less than 1 year |
|
|
1 - 3 years |
|
|
4 - 5 years |
|
|
years |
|
|
Total |
|
|
|
(in millions) |
|
Convertible Subordinated
Notes |
|
$ |
|
|
|
$ |
271.8 |
|
|
$ |
350.0 |
|
|
$ |
|
|
|
$ |
621.8 |
|
Operating lease obligations |
|
|
58.2 |
|
|
|
54.2 |
|
|
|
36.1 |
|
|
|
25.6 |
|
|
|
174.1 |
|
Purchase commitments |
|
|
275.1 |
|
|
|
9.9 |
|
|
|
0.8 |
|
|
|
|
|
|
|
285.8 |
|
|
|
|
Total |
|
$ |
333.3 |
|
|
$ |
335.9 |
|
|
$ |
386.9 |
|
|
$ |
25.6 |
|
|
$ |
1,081.7 |
|
|
|
|
Convertible Subordinated Notes
As of September 30, 2005, we had $271.8 million of Convertible Subordinated Notes due in
November 2006 (2001 Convertible Notes) and $350.0 million of Convertible Subordinated Notes due
in May 2010 (2003 Convertible Notes). All of the Convertible Notes are subordinated to all
existing and future senior debt and are convertible at the holders option, at any time prior to
the maturity date of the Convertible Notes, into shares of our common stock. The 2001 and 2003
Convertible Notes have conversion prices of approximately $26.34 per share and $13.42 per share,
respectively. The 2001 Convertible Notes are redeemable at our option, in whole or in part, on at
least 30 days notice at any time on or after the call date, which is two years before the due date.
We cannot elect to redeem the 2003 Convertible Notes prior to maturity. Each holder of the 2001
and 2003 Convertible Notes has the right to cause us to repurchase all of such holders convertible
notes at 100% of their principal amount plus accrued interest upon the occurrence of any
fundamental change to us, which includes a transaction or event such as an exchange offer,
liquidation, tender offer, consolidation, merger or combination. Interest is payable semiannually.
The 2001 Convertible Subordinate Notes will become current in November 2005, as the maturity
date is in November 2006. The Notes will be classified as current debt in the Companys 2005 Annual
Report on Form 10-K.
Fluctuations in our stock price impact the prices of our outstanding convertible securities
and the likelihood of the convertible securities being converted into cash or equity. If we are
required to redeem any of the Convertible Notes for cash, it may affect our liquidity position. In
the event they do not convert to equity, we believe that our current cash position and
32
expected future operating cash flows will be adequate to meet these obligations as they
mature. From time to time, we redeem or repurchase Convertible Notes.
Operating Lease Obligations
We lease real estate, certain non-manufacturing equipment and software under non-cancelable
operating leases.
Purchase Commitments
We maintain certain purchase commitments, primarily for raw materials, with suppliers and for
some non-production items. Purchase commitments for inventory materials are generally restricted
to a forecasted time-horizon as mutually agreed upon between the parties. This forecasted
time-horizon can vary among our different suppliers.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on
the consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires estimates and assumptions that affect the reported amounts and disclosures. For a
detailed discussion of our critical accounting policies, please see the Critical Accounting
Policies contained in Part II, Item 7 of the Managements Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December
31, 2004.
We monitor the recoverability of goodwill recorded in connection with acquisitions annually,
or sooner if events or changes in circumstances indicate that the carrying amount may not be
recoverable. Impairment, if any, would be determined in accordance with SFAS No. 142, which uses a
fair value model for determining the carrying value of goodwill. We plan to perform our next
annual impairment review in the fourth quarter of 2005.
Recent Accounting Pronouncements
The information contained in Item 1 in Note 1 of the Notes under the heading Recent
Accounting Pronouncements is hereby incorporated by reference into this Item 2.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
You are advised to keep the following risk factors, as well as other risk factors mentioned in
this report, in mind when you read forward-looking statements contained in this Form 10-Q and in
the documents incorporated herein by reference. These are statements that relate to our
expectations for future events and time periods. Generally, the words, anticipate, expect,
intend and similar expressions identify forward-looking statements. Forward-looking statements
involve risks and uncertainties, and actual results could differ materially from those anticipated
in the forward-looking statements.
We believe that our future operating results will continue to be subject to quarterly
variations based upon a wide variety of factors. Our actual results in future periods may be
significantly different from any future performance suggested in this report. Although we believe
that the expectations reflected in the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or achievements. While management
believes that the discussion and analysis in this report is adequate for a fair presentation of the
information, we recommend that you read this discussion and analysis in conjunction with the Annual
Report on Form 10-K. Risks and uncertainties that may affect our results include, among others:
General economic weakness and geopolitical factors may harm our operating results and
financial condition. The semiconductor industry is cyclical in nature and is characterized by wide
fluctuations in product supply and demand. In the past, the industry has experienced periods of
rapid expansion of production capacity followed by periods of significant downturn. Even when the
demand for our products remains constant, the availability of additional excess production capacity
in the industry created competitive pressures that can degrade pricing levels, which can reduce
revenues. In addition, our results of operations are dependent on the global economy. Any
geopolitical factors such as terrorist activities, armed conflict or global health conditions,
which adversely affect the global economy, may adversely impact our operating
33
results and financial condition. In addition, goodwill and other long-lived assets could be
impacted by a further decline in revenues because impairment is measured based upon estimates of
future cash flows. These estimates include assumptions about future conditions within our company
and industry.
Our target markets are characterized by rapid technological change. The Semiconductor and
Storage Systems segments in which we conduct business are characterized by rapid technological
change, short product cycles and evolving industry standards. We believe our future success
depends, in part, on our ability to improve on existing technologies and to develop and implement
new ones in order to continue to reduce semiconductor chip size and improve product performance and
manufacturing yields. We must also be able to adopt and implement emerging industry standards in a
timely manner and to adapt products and processes to technological changes. If we are not able to
implement new process technologies successfully or to achieve volume production of new products at
acceptable yields, our operating results and financial condition may be adversely impacted.
We operate in highly competitive markets. Our competitors include many large domestic and
foreign companies that have substantially greater financial, technical and management resources
than we do. Several major diversified electronics companies offer ASIC products and/or other
standard products that are competitive with our product lines. Other competitors are specialized,
rapidly growing companies that sell products into the same markets that we target. Some of our
large customers may develop internal design and production capabilities to manufacture their own
products, thereby displacing our products. There is no assurance that the price and performance of
our products will be superior relative to the products of our competitors. As a result, we may
experience a loss of competitive position that could result in lower prices, fewer customer orders,
reduced revenues, reduced gross profit margins and loss of market share.
We are dependent on a limited number of customers. Our concentrated customer base accounts
for a substantial portion of our revenues. For the nine months ended September 30, 2005, IBM and
Seagate represented 15% and 11% of our total consolidated revenues, respectively.
Our operating results and financial condition could be significantly affected if:
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we do not win new product designs from major existing customers; |
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major customers reduce or cancel their existing business with us; |
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major customers make significant changes in scheduled deliveries; or |
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there are declines in the prices of products that we sell to these customers. |
Our new products may not achieve market acceptance. We introduce many new products each year.
We must continue to develop and introduce new products that compete effectively on the basis of
price and performance and that satisfy customer requirements. We continue to emphasize engineering
development and acquisition of CoreWare building blocks and integration of our CoreWare libraries
into our design capabilities. Our cores and standard products are intended to be based upon
industry standard functions, interfaces, and protocols so that they are useful in a wide variety of
systems applications. Development of new products and cores often requires long-term forecasting
of market trends, development and implementation of new or changing technologies and a substantial
capital commitment. We cannot provide assurance that the cores or standard products that we select
for investment of our financial and engineering resources will be developed or acquired in a timely
manner or will enjoy market acceptance.
The manufacturing facilities we operate are highly complex and require high fixed costs. Our
wafer fabrication site is located in Gresham, Oregon. On September 13, 2005 we announced our
intention to adopt a fabless manufacturing strategy and to sell the Gresham, Oregon manufacturing
facility. We also own our Storage Systems segment manufacturing facility in Wichita, Kansas. The
manufacture and introduction of our products is a complicated process. We continually strive to
implement the latest process technologies and manufacture products in a clean and tightly
controlled environment. We confront challenges in the manufacturing process that require us to:
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maintain a competitive manufacturing cost structure; |
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implement the latest process technologies required to manufacture new products; |
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exercise stringent quality control measures to ensure high yields; |
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effectively manage the subcontractors engaged in the wafer fabrication, test and assembly of products; and |
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update equipment and facilities as required for leading edge production capabilities. |
We procure parts and raw materials from limited domestic and foreign sources. We do not
maintain an extensive inventory of parts and materials for manufacturing. We purchase a portion of
our requirements for parts and raw materials from a limited number of sources, primarily from
suppliers in Japan and their U.S. subsidiaries, and we obtain other material inputs on a local
basis. There is no assurance that, if we have difficulty in obtaining parts or materials in the
future, alternative suppliers will be available, or that these suppliers will provide parts and
materials in a timely manner or on favorable terms. As a result, we may be adversely affected by
delays in product shipments. If we cannot obtain adequate materials for manufacture of our
products or if such materials are not available at reasonable prices, there could be a material
adverse impact on our operating results and financial condition.
We utilize indirect channels of distribution over which we have limited control. Our
financial results could be adversely affected if our relationship with resellers or distributors
were to deteriorate or if the financial condition of these resellers or distributors were to
decline. In addition, as our business grows, we may have an increased reliance on indirect
channels of distribution. There can be no assurance that we will be successful in maintaining or
expanding these indirect channels of distribution. This could result in the loss of certain sales
opportunities. Furthermore, the partial reliance on indirect channels of distribution may reduce
our visibility with respect to future business, thereby making it more difficult to accurately
forecast orders.
We engage in acquisitions and alliances giving rise to economic and technological risks. We
are continually exploring strategic acquisitions that build upon our existing library of
intellectual property, human capital and engineering talent, and increase our leadership position
in the markets where we operate. We did not complete any material acquisitions or alliances in the
first nine months of 2005. We completed two acquisitions in 2004. Mergers and acquisitions of
high-technology companies bear inherent risks. No assurance can be given that our previous or
future acquisitions will be successful and will not materially adversely affect our business,
operating results or financial condition. We must continue manage any growth effectively. Failure
to manage growth effectively and to integrate acquisitions could adversely affect our operating
results and financial condition.
In addition, we intend to continue to make investments in companies, products and technologies
through strategic alliances. Investment activities often involve risks, including the need to
acquire timely access to needed capital for investments related to alliances and to invest in
companies and technologies that contribute to the growth of our business.
The price of our securities may be subject to wide fluctuations. Our stock has experienced
substantial price volatility, particularly as a result of quarterly variations in results, the
published expectations of analysts and announcements by our competitors and us. In addition, the
stock market has experienced price and volume fluctuations that have affected the market price of
many technology companies and that have often been unrelated to the operating performance of such
companies. The price of our securities may also be affected by general global, economic and market
conditions. While we cannot predict the individual effect that these and other factors may have on
the price of our securities, these factors, either individually or in the aggregate, could result
in significant variations in price during any given period of time. These fluctuations in our
stock price also impact the price of our outstanding convertible securities and the likelihood of
the convertible securities being converted into cash or equity.
If our stock price is below the conversion price of our convertible bonds on the date of
maturity, they may not convert into equity and we may be required to redeem our outstanding
convertible securities for cash. However, in the event they do not convert to equity, we believe
that our current cash position and expected future operating cash flows will be adequate to meet
these obligations as they mature.
We may rely on capital and bank markets to provide liquidity. In order to finance strategic
acquisitions, capital assets needed in our manufacturing facilities and other general corporate
needs, we may rely on capital and bank markets to provide
35
liquidity. As of September 30, 2005, we had convertible notes outstanding of approximately $
621.8 million. We may need to seek additional equity or debt financing from time to time.
Historically, we have been able to access capital and bank markets, but this does not necessarily
guarantee that we will be able to access these markets in the future or at terms that are
acceptable to us. The availability of capital in these markets is affected by several factors,
including geopolitical risk, the interest rate environment and the condition of the economy as a
whole. Moreover, any future equity or equity-linked financing may dilute the equity ownership of
existing stockholders. In addition, our own operating performance, capital structure and expected
future performance impact our ability to raise capital. We believe that our current cash, cash
equivalents, short-term investments and future cash provided by operations will be sufficient to
fund our needs in the foreseeable future. This includes repaying our existing convertible debt
when due. However, if our operating performance falls below expectations, we may need additional
funds.
We design and develop highly complex cell-based ASICs. As technology advances to 0.13 micron
and smaller geometries, there are increases in the complexity, time and expense associated with the
design, development and manufacture of ASICs. We must incur substantial research and development
costs to confirm the technical feasibility and commercial viability of any ASIC products that in
the end may not be successful. Therefore, we cannot guarantee that any new ASIC products will
result in market acceptance.
The high technology industry in which we operate is prone to intellectual property litigation.
Our success is dependent in part on our technology and other proprietary rights, and we believe
that there is value in the protection afforded by our patents, copyright rights and trademarks, or
other intellectual property rights. We have a program whereby we actively protect our intellectual
property by acquiring patent and other intellectual property rights. However, the industry is
characterized by rapidly changing technology and our future success depends primarily on the
technical competence and creative skills of our personnel.
As is typical in the high technology industry, from time to time we have received
communications from other parties asserting that certain of our products, processes, technologies
or information infringe upon their patent rights, copyrights, trademark rights or other
intellectual property rights. We regularly evaluate such assertions. In light of industry
practice, we believe, with respect to existing or future claims that any licenses or other rights
that may be necessary may generally be obtained on commercially reasonable terms. Nevertheless,
there is no assurance that licenses will be obtainable on acceptable terms or that a claim will not
result in litigation or other administrative proceedings. Resolution of whether our product or
intellectual property has infringed on valid rights held by others could have a material adverse
effect on our results of operation or financial position and may require material changes in
production processes and products.
See Legal Matters in Note 12 (Legal Matters) of the Notes regarding current patent
litigation.
Our manufacturing facilities are subject to disruption. Operations at any of our primary
manufacturing facilities may be disrupted for reasons beyond our control, including work stoppages,
fire, earthquake, tornado, floods or other natural disasters, which could have a material adverse
effect on our results of operation or financial position.
We depend on independent foundry subcontractors to manufacture a portion of our current
products, and any failure to secure and maintain sufficient foundry capacity could materially and
adversely affect our business. Outside foundry subcontractors, located in Asia, manufacture a
portion of our semiconductor devices in current production. On September 13, 2005, we announced
our intention to adopt a fabless manufacturing strategy and to sell the Gresham, Oregon
manufacturing facility, which would increase our reliance on foundry subcontractors in the future.
In order to minimize the impact of the sale of this facility on our customers, we will expand our
relationship with our foundry subcontractors.
Availability of foundry capacity has in the recent past been reduced due to strong demand. In
addition, the occurrence of a public health emergency could further affect the production
capabilities of our manufacturers by resulting in quarantines or closures. If we are unable to
secure sufficient capacity at our existing foundries, or in the event of a quarantine or closure at
any of these foundries, our revenues, cost of revenues and results of operations would be
negatively impacted. If any of our foundries experiences a shortage in capacity, or suffers any
damage to its facilities due to earthquakes or other natural disasters, experiences power outages,
encounters financial difficulties or any other disruption of foundry capacity, we may need to
qualify an alternative foundry in a timely manner. Even our current foundries need to have new
manufacturing processes qualified if there is a disruption in an existing process. We typically
require several months to qualify a new
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foundry or process before we can begin shipping products from it. If we cannot accomplish
this qualification in a timely manner, we may experience a significant interruption in supply of
the affected products.
Because we rely on outside foundries with limited capacity, we face several significant risks,
including:
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a lack of guaranteed wafer supply and potential wafer shortages and higher wafer prices; |
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limited control over delivery schedules, quality assurance, manufacturing yields and production costs; and |
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the unavailability of, or potential delays in obtaining access to, key process technologies. |
In addition, the manufacture of integrated circuits is a highly complex and technologically
demanding process. Although we work closely with our foundries to minimize the likelihood of
reduced manufacturing yields, our foundries have from time to time experienced lower than
anticipated manufacturing yields. This often occurs during the production of new products or the
installation and start-up of new process technologies. Poor yields from our foundries could result
in product shortages or delays in product shipments, which could seriously harm our relationships
with our customers and materially and adversely affect our results of operations.
The ability of each foundry to provide us with semiconductor devices is limited by its
available capacity and existing obligations. Although we have entered into contractual commitments
to supply specified levels of products to some of our customers, we do not have a long-term volume
purchase agreement or a significant guaranteed level of production capacity with any of our
foundries. Foundry capacity may not be available when we need it or at reasonable prices.
Availability of foundry capacity has in the recent past been reduced from time to time due to
strong demand. We place our orders on the basis of our customers purchase orders or our forecast
of customer demand, and the foundries can allocate capacity to the production of other companies
products and reduce deliveries to us on short notice. It is possible that foundry customers that
are larger and better financed than we are, or that have long-term agreements with our main
foundries, may induce our foundries to reallocate capacity to them. This reallocation could impair
our ability to secure the supply of components that we need. Although we use a number of
independent foundries to manufacture our semiconductor products, most of our components are not
manufactured at more than one foundry at any given time, and our products typically are designed to
be manufactured in a specific process at only one of these foundries. Accordingly, if one of our
foundries is unable to provide us with components as needed, we could experience significant delays
in securing sufficient supplies of those components. Also, our third party foundries typically
migrate capacity to newer, state-of-the-art manufacturing processes on a regular basis, which may
create capacity shortages for our products designed to be manufactured on an older process. We
cannot assure you that any of our existing or new foundries will be able to produce integrated
circuits with acceptable manufacturing yields, or that our foundries will be able to deliver enough
semiconductor devices to us on a timely basis, or at reasonable prices. These and other related
factors could impair our ability to meet our customers needs and have a material and adverse
effect on our operating results.
Although we may utilize new foundries for other products in the future, in using new foundries
we will be subject to all of the risks described in the foregoing paragraphs with respect to our
current foundries.
We depend on third party subcontractors to assemble, obtain packaging materials for, and test
substantially all of our current products. If we lose the services of any of our subcontractors or
if these subcontractors are unable to attain sufficient packaging materials, shipments of our
products may be disrupted, which could harm our customer relationships and adversely affect our net
sales. Third-party subcontractors located in Asia assemble, obtain packaging materials for, and
test substantially all of our current products. Because we rely on third-party subcontractors to
perform these functions, we cannot directly control our product delivery schedules and quality
assurance. This lack of control has in the past resulted, and could in the future result, in
product shortages or quality assurance problems that could delay shipments of our products or
increase our manufacturing, assembly or testing costs.
If our third party subcontractors are unable to obtain sufficient packaging materials for our
products in a timely manner, we may experience a significant product shortage or delay in product
shipments, which could seriously harm our customer relationships and materially and adversely
affect our net sales. If any of these subcontractors experiences capacity constraints or financial
difficulties, suffers any damage to its facilities, experiences power outages or any other
disruption of assembly or testing capacity, we may not be able to obtain alternative assembly and
testing services in a timely manner. Due to the amount of time that it usually takes us to qualify
assemblers and testers, we could experience significant delays in product shipments if we are
required to find alternative assemblers or testers for our components. Any problems that we may
encounter with the delivery, quality or cost of our products could damage our customer
relationships and materially and
37
adversely affect our results of operations. We are continuing to develop relationships with
additional third-party subcontractors to assemble and test our products. However, even if we use
these new subcontractors, we will continue to be subject to all of the risks described above.
We are increasingly exposed to various legal, business, political and economic risks
associated with our international operations. We currently obtain a substantial portion all of our
manufacturing, and all of our assembly and testing services from suppliers located outside the
United States. We also frequently ship products to our domestic customers international
manufacturing divisions and subcontractors. We also undertake design and development activities in
Canada, China, India, Taiwan and the United Kingdom. We intend to continue to expand our
international business activities and to open other design and operational centers abroad. The
recent war in Iraq and the lingering effects of terrorist attacks in the United States and abroad,
the resulting heightened security and the increasing risk of extended international military
conflicts may adversely impact our international sales and could make our international operations
more expensive. International operations are subject to many other inherent risks, including but
not limited to:
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political, social and economic instability; |
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exposure to different legal standards, particularly with respect to intellectual property; |
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natural disasters and public health emergencies; |
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nationalization of business and blocking of cash flows; |
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trade and travel restrictions; |
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the imposition of governmental controls and restrictions; |
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burdens of complying with a variety of foreign laws; |
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import and export license requirements and restrictions of the United States and each
other country in which we operate; |
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unexpected changes in regulatory requirements; |
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foreign technical standards; |
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changes in tariffs; |
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difficulties in staffing and managing international operations; |
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fluctuations in currency exchange rates; |
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difficulties in collecting receivables from foreign entities or delayed revenue recognition; and |
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potentially adverse tax consequences. |
Any of the factors described above may have a material adverse effect on our ability to
increase or maintain our foreign sales.
Additionally, public health emergencies may impact our operations, including, but not limited
to, disruptions at our third-party manufacturers that are primarily located in Asia, reduced sales
and increased supply chain costs. For example, if SARS recurs, or other similar public health
emergencies arise, our international sales and operations could be harmed.
We are exposed to fluctuations in foreign currency exchange rates. We have some exposure to
fluctuations in foreign currency exchange rates. We have international subsidiaries and
distributors that operate and sell our products globally. We routinely hedge these exposures in an
effort to minimize the impact of currency fluctuations. However, we may still be adversely
affected by changes in foreign currency exchange rates or declining economic conditions in these
countries.
We must attract and retain key employees in a highly competitive environment. Our employees
are vital to our success and our key management, engineering and other employees are difficult to
replace. We do not generally have employment contracts with our key employees. Despite the
economic slowdown of the last few years, competition for certain key technical and engineering
personnel remains intense. Our continued growth and future operating results will depend upon our
ability to attract, hire and retain significant numbers of qualified employees.
Future changes in financial accounting standards or practices or existing taxation rules or
practices may cause adverse unexpected fluctuations and affect our reported results of operations.
Financial accounting standards in the United States are constantly under review and may be changed
from time to time. We would be required to apply these changes
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when adopted. Once implemented, these changes could result in material fluctuations in our
financial results of operations and/or the way in which such results of operations are reported.
Similarly, we are subject to taxation in the United States and a number of foreign jurisdictions.
Rates of taxation, definitions of income, exclusions from income, and other tax policies are
subject to change over time. Changes in tax laws in a jurisdiction in which we have reporting
obligations could have a material impact on our results of operations.
We expect that the adoption of Statement of Financial Accounting Standard (SFAS) No. 123
(Revised 2004), entitled Share-Based Payment, effective for the beginning in the first quarter of
2006, will have a significant impact on our reported results as described under Recent Accounting
Pronouncements. Because the factors that will affect compensation expense we incur due to the
adoption of SFAS No. 123 (Revised 2004) are unknown, the impact on our operating results at the
point of adoption, or in the future, cannot be determined. Changes in these or other rules, or
modifications to our current practices, may have a significant adverse effect on our reported
operating results or in the way in which we conduct our business in the future.
We face uncertainties related to the effectiveness of internal controls. Public companies in
the United States are required to review their internal controls over financial reporting under
Section 404 of the Sarbanes-Oxley Act of 2002. It should be noted that any system of controls,
however well designed and operated, can provide only reasonable, and not absolute, assurance that
the objectives of the system are met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future events. Because of these and other
inherent limitations of control systems, there can be no assurance that any design will achieve its
stated goal under all potential future conditions, regardless of how remote.
Internal control deficiencies or weaknesses that are not yet identified could emerge. Over
time we may identify and correct deficiencies or weaknesses in our internal controls and, where and
when appropriate, report on the identification and correction of these deficiencies or weaknesses.
However, the internal control procedures can provide only reasonable, and not absolute, assurance
that deficiencies or weaknesses are identified. Deficiencies or weaknesses that are not yet
identified could emerge and the identification and corrections of these deficiencies or weaknesses
could have a material impact on the results of operations for the Company.
Internal control issues that appear minor now may later become reportable conditions. We are
required to publicly report on deficiencies or weaknesses in our internal controls that meet a
materiality standard as required by law. While the Company meets its statutory obligations,
management may, at a point in time, accurately categorize a deficiency or weakness as immaterial or
minor and therefore not be required to publicly report such deficiency or weakness. Such
determination, however, does not preclude a change in circumstances such that the deficiency or
weakness could, at a later time, become a reportable condition that could have a material impact on
our results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in the market risk disclosures during the nine months
ended September 30, 2005, as compared to the discussion in Part II, Item 7a of our Annual Report on
Form 10-K for the year ended December 31, 2004.
Item 4. Controls and Procedures
Our management evaluated, with the participation of our chief executive officer and our chief
financial officer, the effectiveness of our disclosure controls and procedures pursuant to Rule
13a-15 promulgated under the Securities Exchange Act of 1934 as of September 30, 2005. Based on
this evaluation, our chief executive officer and our chief financial officer have concluded that
our disclosure controls and procedures are effective to ensure that information we are required to
disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
In May of 2005, we completed the upgrade of the information systems that we use to accumulate
stand-alone financial data used in financial reporting for our majority-owned subsidiary, Engenio.
We utilized this new system upgrade to generate financial statements for our fiscal quarter ended
September 30 and June 30, 2005. This system upgrade served to enhance our system of internal
controls. We believe there was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably
39
likely to materially affect, our internal control over financial reporting. We are aware that
any system of control, however well designed and operated, can only provide reasonable, and not
absolute, assurance that the objectives of this system are met, and that maintenance of disclosure
controls and procedures is an ongoing process that may change over time.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
This information is included in Note 12 (Legal Matters) of the Notes to the Unaudited
Consolidated Condensed Financial Statements, which information is incorporated herein by reference
from Item 1 of Part I hereof.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 28, 2000, the Companys Board of Directors authorized a new stock repurchase program
in which up to 5 million shares of the Companys common stock may be repurchased in the open market
from time to time. There is no expiration date for the plan. No shares were repurchased under this
plan during the first nine months of 2005. There are 3.5 million shares available for repurchase
under this plan as of September 30, 2005. The Company did not repurchase shares during the three
months ended September 30, 2005.
Item 6. Exhibits
31.1 |
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Certification of the Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbarnes-Oxley Act of 2002. |
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31.2 |
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Certification of the Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.** |
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32.2 |
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Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.** |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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LSI LOGIC CORPORATION
(Registrant) |
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Date: November 14, 2005
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By
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/s/ Bryon Look |
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Bryon Look
Executive Vice President &
Chief Financial Officer |
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INDEX TO EXHIBITS
31.1 |
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Certification of the Chief Executive Officer pursuant to Securities
and Exchange Act Rules 13a-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of the Chief Financial Officer pursuant to Securities
and Exchange Act Rules 13-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.** |
|
32.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.** |
42