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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REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended April 1, 2007
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 CORPORATION
(Exact name of registrant as specified in its charter
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Delaware
(State of Incorporation)
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94-2712976
(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)
LSI Logic Corporation (Former Name)
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 a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer þ Accelerated Filer o
Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of May 4, 2007, there were 767,901,169 shares of the registrants Common Stock, $.01 par
value, outstanding.
LSI CORPORATION
Form 10-Q
For the Quarter Ended April 1, 2007
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
LSI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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April 1, |
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December 31, |
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2007 |
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2006 |
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(In thousands, except |
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per share amounts) |
ASSETS |
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Cash and cash equivalents |
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$ |
445,521 |
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$ |
327,800 |
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Short-term investments |
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571,121 |
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681,137 |
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Accounts receivable, less allowances of $9,027 and $13,871 |
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303,369 |
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348,638 |
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Inventories |
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229,067 |
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209,470 |
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Prepaid expenses and other current assets |
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62,315 |
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68,692 |
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Total current assets |
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1,611,393 |
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1,635,737 |
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Property and equipment, net |
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89,246 |
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86,045 |
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Other intangible assets, net |
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64,799 |
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59,484 |
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Goodwill |
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932,978 |
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932,323 |
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Other assets |
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103,413 |
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138,555 |
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Total assets |
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$ |
2,801,829 |
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$ |
2,852,144 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Accounts payable |
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$ |
162,904 |
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$ |
200,189 |
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Accrued salaries, wages and benefits |
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72,347 |
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82,292 |
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Other accrued liabilities |
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136,614 |
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155,986 |
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Income taxes payable |
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11,820 |
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88,304 |
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Total current liabilities |
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383,685 |
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526,771 |
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Long-term debt |
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350,000 |
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350,000 |
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Tax-related liabilities and other |
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131,540 |
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79,400 |
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Total long-term obligations and other liabilities |
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481,540 |
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429,400 |
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Commitments and contingencies (Note 10) |
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Minority interest in subsidiary |
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235 |
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235 |
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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; $.01 par value; 1,300,000 shares authorized;
404,763 and 403,680 shares outstanding |
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4,048 |
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4,037 |
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Additional paid-in capital |
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3,116,902 |
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3,102,178 |
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Accumulated deficit |
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(1,198,079 |
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(1,220,306 |
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Accumulated other comprehensive income |
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13,498 |
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9,829 |
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Total stockholders equity |
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1,936,369 |
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1,895,738 |
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Total liabilities and stockholders equity |
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$ |
2,801,829 |
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$ |
2,852,144 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial
Statements.
3
LSI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended |
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April 1, 2007 |
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April 2, 2006 |
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(In thousands, except per share amounts) |
Revenues |
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$ |
465,415 |
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$ |
475,884 |
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Cost of revenues |
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265,614 |
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271,395 |
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Gross profit |
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199,801 |
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204,489 |
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Research and development |
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103,847 |
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102,274 |
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Selling, general and administrative |
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61,610 |
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68,878 |
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Restructuring of operations and other items, net |
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(8,080 |
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5,650 |
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Acquired in-process research and development |
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6,500 |
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Amortization of intangibles |
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5,285 |
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11,216 |
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Income from operations |
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30,639 |
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16,471 |
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Interest expense |
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(3,890 |
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(6,330 |
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Interest income and other, net |
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10,531 |
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9,527 |
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Income before income taxes |
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37,280 |
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19,668 |
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Provision for income taxes |
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7,456 |
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6,500 |
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Net income |
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$ |
29,824 |
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$ |
13,168 |
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Net income per share: |
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Basic |
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$ |
0.07 |
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$ |
0.03 |
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Diluted |
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$ |
0.07 |
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$ |
0.03 |
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Shares used in computing per share amounts: |
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Basic |
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404,230 |
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394,851 |
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Diluted |
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409,808 |
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402,189 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
LSI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months Ended |
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April 1, 2007 |
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April 2, 2006 |
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(In thousands) |
Operating activities: |
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Net income |
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$ |
29,824 |
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$ |
13,168 |
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Adjustments: |
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Depreciation and amortization |
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18,576 |
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25,335 |
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Stock-based compensation expense |
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11,184 |
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11,831 |
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Non-cash restructuring and other items |
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228 |
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(2,958 |
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Acquired in-process research and development |
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6,500 |
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Non-cash foreign exchange loss/(gain) |
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389 |
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(588 |
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Gain on sale of equity securities |
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(1,429 |
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Gain on sale of property and equipment |
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(9,662 |
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Changes in deferred tax assets and liabilities |
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31 |
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(3 |
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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, net |
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45,450 |
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56,889 |
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Inventories |
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(19,654 |
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8,693 |
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Prepaid expenses and other assets |
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24,565 |
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9,404 |
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Accounts payable |
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(36,469 |
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(23,008 |
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Accrued and other liabilities |
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(14,980 |
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2,226 |
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Net cash provided by operating activities |
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55,982 |
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99,560 |
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Investing activities: |
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Purchase of debt securities available-for-sale |
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(60,630 |
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(166,193 |
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Proceeds from maturities and sales of debt securities available-for-sale |
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174,392 |
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108,166 |
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Purchases of equity securities |
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(150 |
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Proceeds from sale of equity securities |
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1,555 |
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Purchases of property, equipment and software |
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(20,503 |
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(15,978 |
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Proceeds from sale of property and equipment |
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12,511 |
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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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2,442 |
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Acquisitions of companies, net of cash acquired |
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(52,079 |
) |
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Net cash provided by/(used in) investing activities |
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56,133 |
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(72,600 |
) |
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Financing activities: |
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Issuance of common stock |
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5,671 |
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11,988 |
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Net cash provided by financing activities |
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5,671 |
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11,988 |
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Effect of exchange rate changes on cash and cash equivalents |
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(65 |
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233 |
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Increase in cash and cash equivalents |
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117,721 |
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39,181 |
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Cash and cash equivalents at beginning of year |
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327,800 |
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264,649 |
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Cash and cash equivalents at end of period |
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$ |
445,521 |
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$ |
303,830 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial
Statements.
5
LSI CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
For financial reporting purposes, LSI Corporation (the Company or LSI) reports on a 13 or
14-week quarter with a year ending December 31. The current quarter ended April 1, 2007. The
results of operations for the quarter ended April 1, 2007, are not necessarily indicative of the
results to be expected for the full year. The first quarter in each of 2007 and 2006 consisted of
13 weeks.
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 condensed consolidated financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could differ significantly
from these estimates.
In managements opinion, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring adjustments and
restructuring and other items, net as discussed in Note 3), 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, 2006.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No.
109 (FAS 109). FIN 48 prescribes a recognition threshold and measurement attribute for tax
positions taken or expected to be taken in a tax return. This interpretation also provides guidance
on de-recognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. The evaluation of a tax position in accordance with this interpretation
is a two-step process. In the first step, recognition, the Company determines whether it is
more-likely-than-not that a tax position will be sustained upon examination, including resolution
of any related appeals or litigation processes, based on the technical merits of the position. The
second step addresses measurement of a tax position that meets the more-likely-than-not criteria.
The tax position is measured at the largest amount of benefit that is greater than 50 percent
likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax
return and amounts recognized in the financial statements will generally result in (a) an increase
in a liability for income taxes payable or a reduction of an income tax refund receivable, (b) a
reduction in a deferred tax asset or an increase in a deferred tax liability or (c) both (a) and
(b). Tax positions that previously failed to meet the more-likely-than-not recognition threshold
should be recognized in the first subsequent financial reporting period in which that threshold is
met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition
threshold should be de-recognized in the first subsequent financial reporting period in which that
threshold is no longer met. Use of a valuation allowance as described in FAS 109 is not an
appropriate substitute for the de-recognition of a tax position. The requirement to assess the need
for a valuation allowance for deferred tax assets based on sufficiency of future taxable income is
unchanged by this interpretation.
As of January 1, 2007, the Company adopted the provisions of FIN 48. The Company recognized
the cumulative effect of $3.4 million increase to the opening balance of accumulated deficit as of
January 1, 2007. The amount of unrecognized tax benefit as of January 1, 2007 after the FIN 48
adjustment was $132.6 million. The entire unrecognized tax benefit as of January 1, 2007 of $102.6
million relates to unrecognized tax positions that, if recognized, would affect the annual
effective tax rate of the Company. As of the date of adoption, the Company did not expect any
uncertain tax benefits to significantly increase or decrease within the next 12 months.
The Company files income tax returns at the U.S. federal level and in various states and
foreign jurisdictions. The Company is no longer subject to U.S. federal, state and local, or
non-U.S. income tax examinations by tax authorities for years before 2002. The Companys
subsidiary in Hong Kong is currently under audit for the years 1997 to 2001.
The Company recognizes interest and penalties accrued in relation to unrecognized tax benefits
in tax expense. At January 1, 2007, the Company had accrued approximately $32.3 million for the
payment of interest and penalties.
In June 2006, the FASB Emerging Issues Task Force issued EITF Issue No. 06-2 (EITF 06-02),
Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43 (FAS
43), Accounting for Compensated Absences. EITF
6
06-02 addresses the accounting for an employees right to a compensated absence under a
sabbatical or other similar benefit arrangement that is unrestricted (that is, the employee is not
required to perform any services for or on behalf of the entity during the absence) and that
requires the completion of a minimum service period and in which the benefit does not increase with
additional years of service. For sabbatical arrangements meeting these criteria, EITF 06-02
concludes that the accumulated criteria have been met in paragraph 6(b) of FAS 43 and that if the
remaining sections of paragraph 6 are met, the sabbatical arrangement should be accrued over the
requisite service period, which for the Company would be 10 years. The Company offers a sabbatical
of 20 days to full-time employees upon completion of 10 years of service. EITF 06-02 is effective
for the Company on January 1, 2007, and the provisions of EITF 06-02 allow for either retrospective
application or a cumulative effect adjustment upon adoption. The Company adopted EITF 06-02 in the
first quarter of 2007, with a cumulative effect adjustment to retained earnings of $4.2 million.
The impact of the adoption of FIN. 48 and EITF 06-02 on the opening balance of accumulated
deficit as of January 1, 2007 is as follows (in thousands):
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Accumulated deficit as of December 31, 2006 |
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$ |
(1,220,306 |
) |
Impact of adoption of FIN 48 on accumulated deficit as of January 1, 2007 |
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(3,393 |
) |
Impact of adoption of EITF 06-02 on accumulated deficit as of January 1, 2007 |
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(4,204 |
) |
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Accumulated deficit as of January 1, 2007 |
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$ |
(1,227,903 |
) |
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|
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS 157). FAS
157 establishes a single authoritative definition of fair value, sets out a framework for measuring
fair value, and expands on required disclosures about fair value measurement. FAS 157 is effective
for fiscal years beginning after November 15, 2007, and will be applied prospectively. The Company
is currently evaluating the impact that the provisions of FAS 157 will have on the Companys
consolidated balance sheet and statement of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure certain
financial instruments and certain other items at fair value. The standard requires that unrealized
gains and losses on items for which the fair value option has been elected be reported in earnings.
SFAS 159 is effective for the Company beginning in the first quarter of 2008, although earlier
adoption is permitted. The Company is currently evaluating the impact that SFAS 159 will have on
its consolidated financial statements.
NOTE 2 STOCK-BASED COMPENSATION
Stock-based compensation expense under Statement of Financial Accounting Standards No. 123(R),
Share-Based Payments (SFAS 123R) for the three months ended April 1, 2007 and for the three
months ended April 2, 2006 was $11.2 million and $11.8 million, respectively. Stock-based
compensation costs capitalized to inventory and software for the three months ended April 1, 2007
are not significant.
The estimated fair value of the Companys stock-based awards, less expected forfeitures, is
amortized over the awards vesting period (the requisite service period), on a straight-line basis.
The table below summarizes stock-based compensation expense, related to employee stock options,
Employee Stock Purchase Plan (ESPP) and restricted stock unit awards under SFAS 123R for the
three months ended April 1, 2007 and April 2, 2006, respectively.
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Three months ended |
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Stock-based compensation expense: |
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April 1, 2007 |
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April 2, 2006 |
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(In thousands) |
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Cost of revenues |
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$ |
1,944 |
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$ |
1,525 |
|
Research and development |
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|
4,717 |
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|
4,522 |
|
Selling, general and administrative |
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|
4,523 |
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|
5,784 |
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Total stock-based compensation expense |
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$ |
11,184 |
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$ |
11,831 |
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7
Stock Options
The fair value of each option grant is estimated on the date of grant using a reduced form
calibrated binominal lattice model (the lattice model). This model requires the use of historical
data for employee exercise behavior and the use of assumptions outlined in the following table:
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Three months ended |
|
Three months ended |
Employee Stock Options Granted |
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April 1, 2007 |
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April 2, 2006 |
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Weighted average estimated grant date fair value |
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$ |
3.35 |
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$ |
3.37 |
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Weighted average assumptions in calculation: |
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Expected life (years) |
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4.35 |
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4.25 |
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Risk-free interest rate |
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4.73 |
% |
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4.59 |
% |
Volatility |
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46.27 |
% |
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|
47.84 |
% |
The expected life of employee stock options represents the weighted-average period the stock
options are expected to remain outstanding and is a derived output of the lattice model. The
expected life of employee stock options is affected by all of the underlying assumptions and
calibration of the Companys model.
The Company used an equally weighted combination of historical and implied volatilities as of
the grant date. The historical volatility is the standard deviation of the daily stock returns for
LSI from the date of the Companys initial public offering in 1983. The Company used implied
volatilities of near-the-money LSI traded call options as stock options are call options that are
granted at- the-money. The historical and implied volatilities were annualized and equally weighted
to determine the volatilities as of the grant date. Management believes that the equally weighted
combination of historical and implied volatilities is more representative of future stock price
trends than sole use of historical implied volatilities.
The risk-free interest rate assumption is based upon observed interest rates of constant
maturity U.S. Treasury securities appropriate for the term of the Companys employee stock options.
The lattice model assumes that employees exercise behavior is a function of the options
remaining life and the extent to which the option is in-the-money. The lattice model estimates the
probability of exercise as a function of these two variables based on the entire history of
exercises and cancellations on all past option grants made by the Company since the initial public
offering in 1983.
Because stock-based compensation expense recognized is based on awards ultimately expected to
vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. Forfeitures were estimated based on historical experience.
A summary of the changes in stock options outstanding under the Companys equity-based
compensation plans during the three months ended April 1, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Intrinsic |
|
|
|
Number of |
|
|
Exercise |
|
|
Remaining |
|
|
Value |
|
|
|
Shares |
|
|
Price Per |
|
|
Contractual |
|
|
(In |
|
|
|
(In thousands) |
|
|
Share |
|
|
Term (In years) |
|
|
thousands) |
|
|
|
|
Options outstanding at December 31, 2006 |
|
|
56,750 |
|
|
$ |
11.92 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
9,107 |
|
|
|
9.33 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(853 |
) |
|
|
(6.65 |
) |
|
|
|
|
|
|
|
|
Options canceled |
|
|
(1,194 |
) |
|
|
(15.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at April 1, 2007 |
|
|
63,810 |
|
|
$ |
11.56 |
|
|
|
4.82 |
|
|
$ |
110,664 |
|
|
|
|
Options exercisable at April 1, 2007 |
|
|
36,675 |
|
|
$ |
13.85 |
|
|
|
3.93 |
|
|
$ |
56,553 |
|
|
|
|
As of April 1, 2007, total unrecognized compensation expense related to nonvested stock
options, net of estimated forfeitures, was approximately $87.9 million and is expected to be
recognized over the next 3.0 years calculated on a weighted average basis. The total intrinsic
value of options exercised in the first quarter of 2007 was $2.8 million. Cash received from stock
option exercises was $5.7 million for the three months ended April 1, 2007.
The Companys determination of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Companys stock price as well as a number of
highly complex and subjective assumptions. The Company uses third-party consultants to assist in
developing the assumptions used in, as well as calibrating, the lattice model. The Company is
responsible for determining the assumptions used in estimating the fair value of its share-based
payment awards.
Employee Stock Purchase Plans
8
The Company also has two employee stock purchase plans (ESPPs), one for U.S. employees and
one for employees outside the U.S., under which rights are granted to employees to purchase shares
of common stock at 85% of the lesser of the fair market value of such shares at the beginning of a
12-month offering period or the end of each six-month purchase period within such an offering
period. Compensation expense is calculated using the fair value of the employees purchase rights
under the Black-Scholes model. No shares were issued under the ESPPs during the quarter ended April
1, 2007.
Restricted Stock Awards
Under the 2003 Equity Incentive Plan (2003 Plan), the Company may grant restricted stock or
restricted stock units. No participant may be granted more than a total of 0.5 million shares of
restricted stock or restricted stock units in any year. The vesting requirements for the these
awards are determined by the Compensation Committee of the Board of Directors. The Company
typically grants restricted stock units, vesting of which is subject to the employees continuing
service to the Company. The cost of these awards is determined using the fair value of the
Companys common stock on the date of grant and compensation expense is recognized over the vesting
period on a straight-line basis.
A summary of the changes in restricted stock unit awards outstanding during the three months
ended April 1, 2007 is presented below:
|
|
|
|
|
|
|
Number of |
|
|
Shares |
|
|
(In thousands) |
Non-vested shares at December 31, 2006 |
|
|
1,910 |
|
Granted |
|
|
1,600 |
|
Vested |
|
|
(450 |
) |
Forfeited |
|
|
(48 |
) |
|
|
|
|
|
Non-vested shares at April 1, 2007 |
|
|
3,012 |
|
|
|
|
|
|
As of April 1, 2007, the Company had approximately $23.7 million of total unrecognized
compensation expense, net of estimated forfeitures, related to restricted stock unit awards, which
will be recognized over the weighted average period of 3.18 years. The fair value of shares vested
in the first quarter of 2007 was $4.6 million.
NOTE 3 RESTRUCTURING AND OTHER ITEMS
The Company recorded a net credit of $8.1 million in restructuring of operations and other
items for the three months ended April 1, 2007. A credit of $8.2 million was recorded in the
Semiconductor segment and a charge of $0.1 million was recorded in the Storage Systems segment. The
Company recorded charges of $5.7 million in restructuring of operations and other items during the
three months ended April 2, 2006. Of these charges, $4.7 million was recorded in the Semiconductor
segment and $1.0 million was recorded in the Storage Systems segment. For a complete discussion of
the 2006 restructuring actions, please refer to the Companys Annual Report on Form 10-K for the
year ended December 31, 2006.
Restructuring and impairment of long-lived assets:
First quarter of 2007:
The credit of $8.1 million resulted from the following items:
|
|
|
$10.4 million net gain was recorded for the sale of land in Colorado, which had a net
book value of $2.0 million. Total proceeds from the sale were $12.4 million. The gain
was offset in part by a charge of $0.2 million associated with certain other asset
write-offs; |
|
|
|
|
A credit of $0.5 million was recorded for changes in sublease assumptions for certain
previously accrued facility lease termination costs; |
9
|
|
|
An expense of $0.7 million was recorded to reflect the change in time value of
accruals for facility lease termination costs; and |
|
|
|
|
An expense of $1.9 million was recorded for severance and termination benefits for
employees. |
Assets held for sale of $18.0 million and $20.1 million were included as a component of
prepaid expenses and other current assets as of April, 1, 2007, and December 31, 2006,
respectively. Assets classified as held for sale are recorded at the lower of their carrying amount
or fair value less cost to sell and not depreciated. The fair values of impaired equipment and
facilities were researched and estimated by management using the assistance of third party
appraisers. Given that current market conditions for the sale of older fabrication facilities and
related equipment may fluctuate, 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 December 31, 2006
and April 1, 2007, which are included in other accrued liabilities on the balance sheet, and the
activity affecting the reserves during the three months ended April 1, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Restructuring |
|
Utilized |
|
Balance at |
|
|
December 31, |
|
Expense |
|
during Q1 |
|
April 1, |
|
|
2006 |
|
Q1 2007 |
|
2007 |
|
2007 |
|
|
|
|
|
(In thousands) |
Write-down of excess assets (a) |
|
$ |
|
|
|
$ |
(10,143 |
) |
|
$ |
10,143 |
|
|
$ |
|
|
Lease terminations (b) |
|
|
23,169 |
|
|
|
189 |
|
|
|
(2,952 |
) |
|
|
20,406 |
|
Payments to employees for severance (c) |
|
|
342 |
|
|
|
1,874 |
|
|
|
(449 |
) |
|
|
1,767 |
|
|
|
|
Total |
|
$ |
23,511 |
|
|
$ |
(8,080 |
) |
|
$ |
6,742 |
|
|
$ |
22,173 |
|
|
|
|
|
|
|
(a) |
|
The credit includes the gain from the sale of the land in Colorado, offset in part by a
charge of $0.2 million associated with certain asset write-offs. |
|
(b) |
|
Amounts utilized represent cash payments. The balance remaining for real estate lease
terminations is expected to be paid during the remaining terms of these contracts, which
extend through 2011. |
|
(c) |
|
Amounts utilized represent cash severance payments to 6 employees during the three months
ended April 1, 2007. The balance remaining for severance is expected to be paid by the end of
2007. |
NOTE 4 BUSINESS COMBINATIONS
The Company actively evaluates strategic acquisitions that build upon the Companys existing
library of intellectual property, human capital and engineering talent, and seeks to increase the
Companys leadership position in the markets in which the Company operates.
On March 13, 2007, the Company completed the acquisition of SiliconStor, Inc., which was
accounted for under the purchase method of accounting. There were no material acquisitions for the
three months ended April 2, 2006. Pro forma statements of earnings information has not been
presented because the effect of this acquisition was not material. The table below provides
information about this acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Net |
|
|
|
|
|
|
|
|
|
|
Entity Name; |
|
|
|
|
|
Total |
|
|
|
|
|
Assets/ |
|
|
|
|
|
|
|
|
|
In-Process |
Segment Included in; |
|
|
|
|
|
Purchase |
|
Type of |
|
(Liabilities) |
|
|
|
|
|
Amortizable |
|
Research and |
Description of Acquired Business |
|
Acquisition Date |
|
Price |
|
Consideration |
|
Acquired |
|
Goodwill |
|
Intangible Assets |
|
Development |
|
|
|
(dollars in millions) |
SiliconStor, Inc.;
Semiconductor segment; silicon
solutions for enterprise
storage based on SAS and
FC-SATA |
|
March 13, 2007 |
|
$ |
56.4 |
|
|
$56.4 cash |
|
$ |
1.5 |
|
|
$ |
37.8 |
|
|
$ |
10.6 |
|
|
$ |
6.5 |
|
10
Merger with Agere.On December 3, 2006, the Company entered into an Agreement and Plan
of Merger with Agere. Agere is a provider of integrated circuit solutions for a variety of
computing and communications applications. Some of Ageres solutions include related software and
reference designs. Ageres solutions are used in products such as hard disk drives, mobile phones,
high-speed communications systems and personal computers. Agere also licenses its intellectual
property to others.
On March 29, 2007, the stockholders of LSI and Agere approved proposals relating to the merger
with Agere Systems at special meetings held on the same day. The merger closed on April 2, 2006.
See Note 11.
NOTE 5 BALANCE SHEET DETAIL
|
|
|
|
|
|
|
|
|
|
|
April 1, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
|
|
|
(In thousands) |
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash in financial institutions |
|
$ |
37,235 |
|
|
$ |
50,478 |
|
Cash equivalents |
|
|
408,286 |
|
|
|
277,322 |
|
|
|
|
|
|
$ |
445,521 |
|
|
$ |
327,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
Asset and mortgage-backed securities |
|
$ |
291,906 |
|
|
$ |
363,723 |
|
U.S. government and agency securities |
|
|
240,310 |
|
|
|
272,287 |
|
Corporate and municipal debt securities |
|
|
38,905 |
|
|
|
45,127 |
|
|
|
|
Total short-term investments |
|
$ |
571,121 |
|
|
$ |
681,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments in equity securities: |
|
|
|
|
|
|
|
|
Marketable equity securities available-for-sale |
|
$ |
2,815 |
|
|
$ |
2,827 |
|
Non-marketable equity securities |
|
|
9,976 |
|
|
|
12,973 |
|
|
|
|
Total long-term investments in equity securities |
|
$ |
12,791 |
|
|
$ |
15,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
48,301 |
|
|
$ |
44,151 |
|
Work-in-process |
|
|
54,670 |
|
|
|
52,497 |
|
Finished goods |
|
|
126,096 |
|
|
|
112,822 |
|
|
|
|
|
|
$ |
229,067 |
|
|
$ |
209,470 |
|
|
|
|
NOTE 6 RECONCILIATION OF BASIC AND DILUTED INCOME PER SHARE
A reconciliation of the numerators and denominators used in the basic and diluted net income
per share computations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 1, 2007 |
|
|
April 2, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Per-Share |
|
|
|
|
|
|
|
|
|
|
Per-Share |
|
|
|
Income* |
|
|
Shares+ |
|
|
Amount |
|
|
Income* |
|
|
Shares+ |
|
|
Amount |
|
|
|
|
|
|
|
(In thousands except per share amounts) |
|
|
|
|
|
|
|
|
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
29,824 |
|
|
|
404,230 |
|
|
$ |
0.07 |
|
|
$ |
13,168 |
|
|
|
394,851 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, employee stock purchase
rights and restricted stock unit
awards |
|
|
|
|
|
|
5,578 |
|
|
|
|
|
|
|
|
|
|
|
7,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
29,824 |
|
|
|
409,808 |
|
|
$ |
0.07 |
|
|
$ |
13,168 |
|
|
|
402,189 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Numerator |
|
+ |
|
Denominator |
11
Options to purchase 42,304,732 and 45,195,499 shares during the three months ended April 1,
2007 and April 2, 2006, respectively, were excluded from the computation of diluted shares because
of their antidilutive effect on net income per share.
For the three months ended April 1, 2007, a weighted average of 26,080,460 potentially
dilutive shares associated with the 2003 Convertible Notes were excluded from the calculation of
diluted shares because of their antidilutive effect on net income per share. For the three months
ended April 2, 2006, a weighted average of 36,401,581 potentially dilutive shares associated with
the 2003 and 2001 Convertible Notes were excluded from the calculation of diluted shares because of
their antidilutive effect on net income per share.
NOTE 7 SEGMENT REPORTING
The Company operates in two reportable segments the Semiconductor segment and the Storage
Systems segment in which the Company offers products and services for a variety of electronic
systems applications. LSIs products are marketed primarily to original equipment manufacturers
(OEMs) that sell products to the Companys target markets.
The following is a summary of operations by segment for the three months ended April 1, 2007
and April 2, 2006:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
April 1, 2007 |
|
|
April 2, 2006 |
|
|
|
(In thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
Semiconductor |
|
$ |
272,374 |
|
|
$ |
298,374 |
|
Storage Systems |
|
|
193,041 |
|
|
|
177,510 |
|
|
|
|
|
|
|
|
Total |
|
$ |
465,415 |
|
|
$ |
475,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations: |
|
|
|
|
|
|
|
|
Semiconductor |
|
$ |
27,159 |
|
|
$ |
3,529 |
|
Storage Systems |
|
|
3,480 |
|
|
|
12,942 |
|
|
|
|
|
|
|
|
Total |
|
$ |
30,639 |
|
|
$ |
16,471 |
|
|
|
|
|
|
|
|
Intersegment revenues for the periods presented above were not significant. For the three
months ended April 1, 2007, restructuring of operations and other items for the Semiconductor and
Storage Systems segments were a net credit of $8.2 million and a charge of $0.1 million,
respectively. For the three months ended April 2, 2006, restructuring of operations and other
items for the Semiconductor and Storage Systems segments were $4.7 million and $1.0 million,
respectively.
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 |
|
|
April 1, 2007 |
|
April 2, 2006 |
Semiconductor segment: |
|
|
|
|
|
|
|
|
Number of significant customers |
|
|
2 |
|
|
|
1 |
|
Percentage of segment revenues |
|
|
20%, |
14% |
|
|
|
19% |
Storage Systems segment: |
|
|
|
|
|
|
|
|
Number of significant customers |
|
|
2 |
|
|
|
2 |
|
Percentage of segment revenues |
|
|
45%, |
20% |
|
|
43%, |
15% |
Consolidated: |
|
|
|
|
|
|
|
|
Number of significant customers |
|
|
2 |
|
|
|
2 |
|
Percentage of consolidated revenues |
|
|
19%, |
12% |
|
|
17%, |
12% |
12
The following is a summary of total assets by segment as of April 1, 2007 and December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
April 1, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Total Assets: |
|
|
|
|
|
|
|
|
Semiconductor |
|
$ |
2,147,557 |
|
|
$ |
2,212,711 |
|
Storage Systems |
|
|
654,272 |
|
|
|
639,433 |
|
|
|
|
Total |
|
$ |
2,801,829 |
|
|
$ |
2,852,144 |
|
|
|
|
Revenues from domestic operations were $210.7 million, representing 45.3% of consolidated
revenues for the three months ended April 1, 2007 compared to $236.9 million, representing 49.8% of
consolidated revenues for the three months ended April 2, 2006.
NOTE 8 COMPREHENSIVE INCOME
Comprehensive income 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 income, net of taxes for the current reporting
period and comparable period in the prior year is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
April 1, |
|
|
April 2, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
29,824 |
|
|
$ |
13,168 |
|
Change in unrealized gain/loss on available-for-sale
securities |
|
|
3,264 |
|
|
|
(3,011 |
) |
Change in foreign currency translation adjustments |
|
|
405 |
|
|
|
(366 |
) |
|
|
|
Comprehensive income |
|
$ |
33,493 |
|
|
$ |
9,791 |
|
|
|
|
NOTE 9 RELATED PARTY TRANSACTIONS
A member of our board of directors is also a member of the board of directors of Seagate
Technology. The Company sells semiconductors used in storage product applications to Seagate
Technology for prices an unrelated third party would pay for such products. Revenues from sales to
Seagate Technology were $55.6 million and $56.4 million for the three months ended April 1, 2007
and April 2, 2006, respectively. The Company had accounts receivable from Seagate Technology of
$44.7 million and $45.8 million as of April 1, 2007 and December 31, 2006, respectively.
NOTE 10 COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS
The Company is a party to a variety of agreements pursuant to which it may be obligated to
indemnify the other party. 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 payments
made by the Company.
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
13
semiconductor manufacturing and computer imaging, including the use of bar coding for
automatic identification of articles. The plaintiff sought a judgment of infringement, an
injunction, treble damages, attorneys fees and further relief as the court may provide. On January
17, 2007, the Company entered into an agreement with Lemelson that provided for a dismissal, with
prejudice, of the entire lawsuit. Although the terms of the agreement are confidential, the
agreement did not have a material adverse effect on the consolidated results of operations or the
Companys financial condition.
On December 6, 2006, Sony Ericsson Mobile Communications USA Inc. filed a lawsuit against
Agere in Wake County Superior Court in North Carolina, alleging unfair and deceptive trade
practices, fraud and negligent misrepresentation in connection with Ageres engagement with Sony
Ericsson to develop a wireless data card for personal computers. The complaint claims an
unspecified amount of damages and seeks damages, treble damages and attorneys fees. Based on the
information currently available, LSI intends to contest this matter vigorously. No liability has
been recorded since any possible loss or range of possible loss cannot be estimated at this time.
Agere has a take or pay agreement with SMP under which it has agreed to purchase 51% of the
managed wafer capacity from SMPs integrated circuit manufacturing facility and Chartered
Semiconductor agreed to purchase the remaining 49% of the managed wafer capacity. SMP determines
its managed wafer capacity each year based on forecasts provided by Agere and Chartered
Semiconductor. If Agere fails to purchase its required commitments, it will be required to pay SMP
for the fixed costs associated with the unpurchased wafers. Chartered Semiconductor is similarly
obligated with respect to the wafers allotted to it. The agreement may be terminated by either
party upon two years written notice. The agreement may also be terminated for material breach,
bankruptcy or insolvency.
The Company and its subsidiaries are parties to other litigation matters and claims in the
normal course of its operations. The Company typically defends legal matters aggressively and does
not believe, based on currently available facts and circumstances, that the final outcome of these
other 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 settlement. Moreover, the settlement of any pending litigation could require the Company to incur
substantial costs and, in the case of the settlement of any intellectual property proceeding
against the Company, may require the Company to obtain a license under a third partys intellectual
property rights that could require royalty payments in the future and the Company to grant a
license to certain of its intellectual property rights to a third party under a cross-license
agreement. The results of litigation are inherently uncertain, and material adverse outcomes are
possible.
NOTE 11 SUBSEQUENT EVENTS
On December 3, 2006, the Company entered into an Agreement and Plan of Merger with Agere.
Agere is a provider of integrated circuit solutions for a variety of computing and communications
applications. Some of Ageres solutions include related software and reference designs. Ageres
solutions are used in products such as hard disk drives, mobile phones, high-speed communications
systems and personal computers. Agere also licenses its intellectual property to others. The
purpose of the acquisition is to offer a comprehensive set of building block solutions including
semiconductors, systems and related software for storage, networking and consumer electronics
products that enable businesses and consumers to store, protect and stay connected to their
information and digital content by expanding intellectual property portfolio and integrated
workforce.
On April 2, 2007, the Company completed the merger of a wholly owned subsidiary and Agere,
resulting in Agere becoming a wholly owned subsidiary of the Company.
Upon completion of the merger, each share of Agere common stock outstanding at the effective
time of the merger was converted into the right to receive 2.16 shares of LSI common stock. As a
result, approximately 368 million shares of LSI common stock were issued to former Agere
stockholders. LSI assumed stock options and restricted stock units covering a total of
approximately 58 million shares of LSI common stock. LSI also guaranteed Ageres 6.5% Convertible
Subordinated Notes due December 15, 2009, the fair value of which was $370 million as of April 2,
2007. The total estimated purchase price of the acquisition was as follows (in thousands):
14
|
|
|
|
|
|
|
Amounts |
|
Estimated fair value of LSI common shares issued |
|
$ |
3,647,021 |
|
Estimated fair value of options and restricted stock units assumed |
|
|
206,916 |
|
Estimated direct transaction costs |
|
|
22,400 |
|
|
|
|
|
Total estimated purchase price |
|
$ |
3,876,337 |
|
|
|
|
|
Preliminary Estimated Purchase Price Allocation
The preliminary allocation of the purchase price to Ageres tangible and identifiable
intangible assets acquired and liabilities assumed was based on their estimated fair values. The
fair value of options assumed was estimated using a reduced form calibrated binomial lattice model
and a share price of $9.905 per share, which represents the average closing price of LSI common
shares for two trading days before and ending two trading days after December 4, 2006, the date by
which the merger was agreed to and announced. The fair value of unearned stock compensation was
based on the price of LSI common share on April 2, 2007. The valuation of these tangible and
identifiable intangible assets and liabilities is subject to further management review and may
change materially from the preliminary valuation. Further adjustments to these estimates may be
included in the final allocation of the purchase price of Agere, if the adjustments are determined
within the purchase price allocation period (up to twelve months from the closing date). The excess
of the purchase price over the tangible and identifiable intangible assets acquired and liabilities
assumed has been allocated to goodwill. None of the goodwill recorded is expected to be deductible
for tax purposes because there is no tax basis in goodwill acquired in a stock transaction. The
total purchase price of approximately $3.9 billion does not include the effect of restructuring
activities because it cannot be estimated at this time. The estimated purchase price has been
allocated as follows (in thousands):
|
|
|
|
|
|
|
As of |
|
|
|
April 2, |
|
|
|
2007 |
|
Tangible net assets acquired |
|
$ |
484,886 |
|
Identifiable intangible assets |
|
|
1,797,500 |
|
In-process research and development |
|
|
193,300 |
|
Unearned stock compensation |
|
|
168,005 |
|
Goodwill |
|
|
1,232,646 |
|
|
|
|
|
Total estimated purchase price |
|
$ |
3,876,337 |
|
|
|
|
|
15
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. 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 Item 1A-Risk Factors in Part II.
OVERVIEW
We are a leading provider of silicon-to-system solutions that are used at the core of products
that create, store and consume digital information. We offer a broad portfolio of capabilities
including custom and standard product integrated circuits, host bus and RAID adapters, storage area
network solutions and software applications. Our products enable leading technology companies in
the Storage and Consumer markets to deliver some of the most advanced and well-known electronic
systems in the market today.
We operate in two segments the Semiconductor segment and the Storage Systems segment in
which we offer products and services for a variety of electronic systems applications. Our products
are marketed primarily to original equipment manufacturers (OEMs) that sell products to our
target markets.
Revenues for the three months ended April 1, 2007 were $465.4 million representing a 2%
decrease from $475.9 million for the three months ended April 2, 2006. The decrease is attributable
to lower revenues in our Semiconductor segment, offset in part by an increase in revenues in our
Storage Systems segment.
We reported net income of $29.8 million or $0.07 per diluted share for the three months ended
April 1, 2007, compared to net income of $13.2 million or $0.03 per diluted share for the three
months ended April 2, 2006.
Cash, cash equivalents and short-term investments were $1.02 billion as of April 1, 2007 as
compared to $1.01 billion as of December 31, 2006. For the three months ended April 1, 2007, we
generated $56.0 million in cash provided by operations as compared to $99.6 million in the same
period of 2006.
Acquisitions. We continue to evaluate strategic acquisitions that build upon our existing
library of intellectual property, provide additional human capital, including engineering talent,
and increase our leadership position in the spaces in which we operate. We acquired SiliconStor
during the first quarter of 2007 for $56.4 million in cash. The acquisition was accounted for as a
purchase of a business. Accordingly, the estimated fair value of assets acquired and liabilities
assumed and the results of operations were included in our financial statements from the date of
the acquisition. See Note 4 to our financial statements in Item 1.
Merger with Agere. On April 2, 2007, pursuant to the Agreement and Plan of Merger, dated as
of December 3, 2006, by and among LSI, Agere Systems and Atlas Acquisition Corp., a wholly owned
subsidiary of LSI, Atlas Acquisition merged with and into Agere with Agere surviving the merger. As
a result of the merger, each share of Agere common stock issued and outstanding immediately prior
to the effective time of the merger (other than shares owned by LSI, Atlas Acquisition or Agere, or
any wholly owned subsidiary of any of them) was converted into the right to receive 2.16 shares of
LSI common stock. Approximately 368 million shares of LSI common stock were issued to former Agere
stockholders in connection with the merger.
As a result of the merger, LSI has acquired the business and assets of Agere. Agere was a
leading provider of integrated circuit solutions for a variety of communications and computing
applications. Some of its solutions included related software and reference designs. Ageres
customers included manufacturers of hard disk drives, mobile phones, advanced communications and
networking equipment and personal computers. Agere also generated revenue from the licensing of
intellectual property.
Where more than one significant factor contributed to changes in results from year to year, we
have quantified such factors throughout Managements Discussion and Analysis, where practicable.
16
RESULTS OF OPERATIONS
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 1, |
|
April 2, |
|
|
2007 |
|
2006 |
Semiconductor segment |
|
$ |
272.4 |
|
|
$ |
298.4 |
|
Storage Systems segment |
|
|
193.0 |
|
|
|
177.5 |
|
|
|
|
Consolidated |
|
$ |
465.4 |
|
|
$ |
475.9 |
|
|
|
|
There were no significant intersegment revenues during the periods presented.
Total consolidated revenues for the three months ended April 1, 2007 decreased $10.5 million
or 2.2% as compared to the three months ended April 2, 2006.
Semiconductor segment:
Revenues for the Semiconductor segment decreased $26.0 million or 8.7% for the three months
ended April 1, 2007 compared to the three months ended April 2, 2006. The decrease in semiconductor
revenues is attributable to the net effect of the following factors:
|
|
Decreases in demand for semiconductors used in consumer product applications such as digital
audio players, where our customers solution has not been included in the new generation of a
customers products, DVD products and cable set-top box solutions; |
|
|
|
Decreases in demand for semiconductors used in communication product applications such as
telecommunications and printing. |
|
|
|
These decreases were offset in part by increased demand for semiconductors used in storage
products associated with the ramping of our SAS (Serial Attached SCSI) products and also from
increased demand for Host Bus Adapters. |
Storage Systems segment:
Revenues for the Storage Systems segment increased $15.5 million or 8.7% for the three months
ended April 1, 2007 from the three months ended April 2, 2006. The increase in revenues is
primarily attributable to increased demand for our mid-range
integrated storage modules, premium
feature software, and the ramp of our entry level SAS storage product introduced in the fourth
quarter of 2006.
See Note 7 to the financial statements in Item 1 for information about our significant customers.
Revenues by geography. The following table summarizes our revenues by geography:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 1, 2007 |
|
April 2, 2006 |
Revenues: |
|
|
|
|
|
|
|
|
North America |
|
$ |
210.7 |
|
|
$ |
236.9 |
|
Asia, including Japan |
|
|
188.9 |
|
|
|
186.4 |
|
Europe and Middle East (EMEA) |
|
|
65.8 |
|
|
|
52.6 |
|
|
|
|
Total |
|
$ |
465.4 |
|
|
$ |
475.9 |
|
|
|
|
In the first quarter of 2007, revenues decreased in North America compared to the first
quarter of 2006. The decrease in North America is attributable to decrease in demand for
semiconductors used in consumer product applications such as digital audio players, custom storage
products used in server applications and telecommunication products used in routers and switches.
The decrease was offset in part by increased demand for semiconductors used in SAS storage product
applications. Revenues in Asia, including Japan, increased in the first quarter of 2007 as compared
to the first quarter of 2006. The increase in revenues in Asia, including Japan, is attributable to
increased demand for storage semiconductors used in SAS applications, increased demand for Host Bus
Adapters, offset in part by decreased demand for DVD products. The increase in EMEA is primarily
attributable to increases in revenues for
17
custom semiconductors used in tape drive applications and storage semiconductors used in SAS
applications. These increases were offset in part by decreased demand for semiconductors used in
consumer product applications such as set-top boxes and DVDs.
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 |
|
|
April 1, 2007 |
|
April 2, 2006 |
Semiconductor segment |
|
$ |
134.3 |
|
|
$ |
139.4 |
|
Percentage of revenues |
|
|
49.3 |
% |
|
|
46.7 |
% |
Storage Systems segment |
|
$ |
65.5 |
|
|
$ |
65.1 |
|
Percentage of revenues |
|
|
33.9 |
% |
|
|
36.7 |
% |
|
|
|
Consolidated |
|
$ |
199.8 |
|
|
$ |
204.5 |
|
|
|
|
Percentage of revenues |
|
|
42.9 |
% |
|
|
43.0 |
% |
The consolidated gross profit margin as a percentage of revenues remained relatively flat for
the three months ended April 1, 2007 as compared to the three months ended April 2, 2006.
Semiconductor segment:
The gross profit margin as a percentage of revenues for the Semiconductor segment increased to
49.3% for the three months ended April 1, 2007 from 46.7% for the three months ended April 2, 2006.
The improvement in gross margin percentage reflects:
|
|
Improved wafer pricing for our .11 micron process products, |
|
|
|
Lower scrap costs; and |
|
|
|
A favorable shift in product mix in the first quarter of 2007. |
Storage Systems segment:
The gross profit margin as a percentage of revenues for the Storage Systems segment decreased
to 33.9% for the three months ended April 1, 2007 from 36.7% for the three months ended April 2,
2006. The decrease in gross profit margins is attributable to changes
in product mix, a ramp in subsequent generation mid-range product
offerings, and the
introduction of our entry level SAS storage products that were introduced in the last quarter of
2006.
We 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.
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.
Research and development:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 1, 2007 |
|
April 2, 2006 |
Semiconductor segment |
|
$ |
73.7 |
|
|
$ |
81.6 |
|
Percentage of revenues |
|
|
27.1 |
% |
|
|
27.3 |
% |
Storage Systems segment |
|
$ |
30.1 |
|
|
$ |
20.7 |
|
Percentage of revenues |
|
|
15.6 |
% |
|
|
11.7 |
% |
|
|
|
Consolidated |
|
$ |
103.8 |
|
|
$ |
102.3 |
|
|
|
|
Percentage of revenues |
|
|
22.3 |
% |
|
|
21.5 |
% |
Research and development, or R&D expenses, increased $1.5 million or 1.5% during the three
months ended April 1, 2007 as compared to the three months ended April 2, 2006.
18
Semiconductor segment:
R&D expenses in the Semiconductor segment decreased by $7.9 million or 9.7% for the three
months ended April 1, 2007 as compared to the three months ended April 2, 2006. The decrease in R&D
expenses for the Semiconductor segment is primarily the result of our historical restructuring
activities associated with our more focused strategy which lowered our labor, facility and
information technology costs.
Storage Systems segment:
R&D expenses in the Storage Systems segment increased by $9.4 million or 45.4% for the three
months ended April 1, 2007 as compared to the three months ended April 2, 2006. The increase in R&D
expenses for the Storage Systems segment is due to increased compensation expenditures due to an
increase in headcount, increased spending for R&D projects associated with new product lines and
expenses related to a contract with a significant customer.
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 1, 2007 |
|
April 2, 2006 |
Semiconductor segment |
|
$ |
32.3 |
|
|
$ |
40.3 |
|
Percentage of revenues |
|
|
11.9 |
% |
|
|
13.5 |
% |
Storage Systems segment |
|
$ |
29.3 |
|
|
$ |
28.6 |
|
Percentage of revenues |
|
|
15.2 |
% |
|
|
16.1 |
% |
|
|
|
Consolidated |
|
$ |
61.6 |
|
|
$ |
68.9 |
|
|
|
|
Percentage of revenues |
|
|
13.2 |
% |
|
|
14.5 |
% |
Consolidated SG&A expenses decreased $7.3 million or 10.6% during the three months ended April
1, 2007 as compared to the three months ended April 2, 2006. A customer of ours, Silicon Graphics,
filed for protection under chapter 11 of the United States Bankruptcy Code on May 8, 2006. As a
result of this action, we recorded a $5.6 million charge in the first quarter of 2006 because we
did not believe the receivable balance as of April 2, 2006 was collectible. Of this charge, $5.4
million related to the Storage Systems segment and $0.2 million related to the Semiconductor
segment.
Semiconductor segment:
SG&A expenses for the Semiconductor segment decreased $8.0 million or 19.9% for the three
months ended April 1, 2007 as compared to the three months ended April 2, 2006. The decrease in the
Semiconductor segment was primarily due to a decrease in labor related expenses as a result of
reduced headcount from restructuring activities and lower stock-based compensation expense.
Storage Systems segment:
SG&A expenses for the Storage Systems segment increased $0.7 million or 2.4% for the three
months ended April 1, 2007 as compared to the three months ended April 2, 2006. The increase in
SG&A expenses for the three months ended April 1, 2007 as compared to the three months ended April
2, 2006 is mainly due to the net impact of the following:
|
|
An increase in sales commissions due to increased revenues; |
|
|
|
Increased compensation related expenses based on increased headcount; |
|
|
|
A $5.4 million charge recorded in the first quarter of 2006 to reduce
a receivable balance following the Silicon Graphics bankruptcy filing. |
Acquired in-process research and development: We recorded a charge of $6.5 million for the
three months ended April 1, 2007 associated with acquired in-process research and development in
connection with the SiliconStor acquisition. See Note 4 for more detail information.
We expect to incur significant charges for acquired in-process research and development,
stock-based compensation and amortization of intangibles associated with the merger with Agere
starting in the second quarter of 2007.
19
Restructuring
of operations and other items: We recorded a net credit of $8.1 million in
restructuring of operations and other items for the three months ended April 1, 2007. A credit of
$8.2 million was recorded in the Semiconductor segment and a charge of $0.1 million was recorded in
the Storage Systems segment. We recorded charges of $5.7 million in restructuring of operations and
other items during the three months ended April 2, 2006. Of these charges, $4.7 million was
recorded in the Semiconductor segment and $1.0 million was recorded in the Storage Systems segment.
See Note 3 to the financial statements in Item 1. For a complete discussion of the 2006
restructuring actions, please refer to our Annual Report on Form 10-K for the year ended December
31, 2006.
Stock-based compensation: Stock-based compensation expense in the condensed consolidated
statements of operations for the three months ended April 1, 2007 was $11.2 million as compared to
$11.8 million for the three months ended April 2, 2006. See Note 2 to the financial statements in
Item 1 for a further discussion on stock-based compensation.
Amortization of intangibles: Amortization of intangible assets was $5.3 million for the three
months ended April 1, 2007 as compared to $11.2 million for the three months ended April 2, 2006.
The decrease is primarily a result of certain intangible assets becoming fully amortized during
2006, offset in part by the intangible assets acquired in connection with the SiliconStor
acquisition during the three months ended April 1, 2007 and the StoreAge and Metta acquisitions
during the three months ended December 31, 2006. As of April 1, 2007, we had approximately $64.8
million of intangible assets, net of accumulated amortization that will continue to amortize.
Interest expense: Interest expense decreased by $2.4 million to $3.9 million for the three
months ended April 1, 2007 from $6.3 million for the three months ended April 2, 2006. The decrease
is mainly due to a lower average debt balance from the repayment at maturity of $271.8 million of
the 2001 Convertible Notes in the fourth quarter of 2006.
Interest income and other, net: Interest income and other, net, was $10.5 million for the
three months ended April 1, 2007 as compared to $9.5 million for the three months ended April 2,
2006. Interest income increased to $12.3 million for the three months ended April 1, 2007 from $9.2
million for the three months ended April 2, 2006. The increase in interest income is mainly due to
higher returns during the three months ended April 1, 2007 as compared to the three months ended
April 2, 2006. Other expenses, net of $1.8 million in the first quarter of 2007, included $1.2
million in expense for points on foreign currency forward contracts and a pre-tax loss of $0.7
million on the sale of property and equipment, offset in part by other miscellaneous items. Other
income, net of $0.3 million in the first quarter of 2006, included a pre-tax gain of $1.4 million
on the sale of certain marketable available-for-sale equity securities during the three months
ended April 2, 2006, offset in part by $1.1 million in expense for points on foreign currency
forward contracts and other miscellaneous items.
Provision for income taxes: During the three months ended April 1, 2007 and April 2, 2006, we
recorded an income tax provision of $7.5 million and $6.5 million, respectively.
The provision for income taxes for the three months ended April 1, 2007 includes tax benefits
of $1.2 million relating to a tax refund in a foreign jurisdiction which was recognized during
three months ended April 1, 2007.
Excluding certain foreign jurisdictions, our management believes that the future benefit of
deferred tax assets, including stock based compensation awards, is not more likely than not to be
realized.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments increased to $1.02 billion at April 1, 2007,
from $1.01 billion at December 31, 2006. The increase is mainly due to cash and cash equivalents
provided by operating, investing and financing activities as described below.
Working capital. Working capital increased by $118.7 million to $1.2 billion at April 1, 2007,
from $1.1 billion as of December 31, 2006. The increase in working capital is attributable to the
following:
|
|
Income taxes payable decreased by $76.5 million due to the adoption of FIN 48 in the first quarter of 2007, offset in part
by an increase in the tax provision. They did not have a cash impact. |
|
|
|
Accounts payable decreased by $37.3 million due to the timing of invoice receipt and payments. |
20
|
|
Inventories increased by $19.6 million to $229.1 million as of April 1, 2007, from $209.5
million as of December 31, 2006. The increase in inventory levels reflects the need to build
inventory to support the ending of a supply agreement and support the initiation of new product
lines. |
|
|
|
Other accrued liabilities decreased by $19.4 million due to the payment of liabilities and a decrease in our
restructuring reserves, offset in part by an increase in interest payable. |
|
|
|
Accrued salaries, wages and benefits decreased by $9.9 million primarily due to timing differences in payment of
salaries, benefits and performance-based compensation. |
|
|
|
Cash, cash equivalents and short-term investments increased by $7.7 million. |
|
|
|
These increases in working capital were offset, in part, by the following: |
|
|
|
Prepaid expenses and other current assets decreased by $6.4 million primarily due to decreases in VAT and consumption
tax and other miscellaneous receivables, a decrease in assets held following the sale from the sale of land in
Colorado, offset by an increase in deferred tax assets. |
|
|
|
Accounts receivable decreased by $45.3 million to $303.3 million as of April 1, 2007 from $348.6 million at December
31, 2006. The decrease is mainly attributed to lower revenues and improved collections in the first quarter of 2007 as
compared to the fourth quarter of 2006. |
Cash and cash equivalents generated from operating activities. During the three months ended
April 1, 2007, we generated $56.0 million of cash and cash equivalents from operating activities
compared to $99.6 million generated in the same period of 2006. Cash and cash equivalents generated
by operating activities for the three months ended April 1, 2007, were the result of the following:
|
|
Net income adjusted for non-cash transactions. The non-cash items and
other non-operating adjustments are quantified in our Condensed
Consolidated Statements of Cash Flows included in this Form 10-Q; and |
|
|
|
A net decrease in assets and liabilities, including changes in working
capital components from December 31, 2006 to April 1, 2007, as
discussed above. |
Cash and cash equivalents provided by/(used in) investing activities. Cash and cash
equivalents provided by investing activities were $56.1 million for the three months ended April 1,
2007, compared to $72.6 million used in investing activities for the same period of 2006. The
primary investing activities for the three months ended April 1, 2007 were as follows:
|
|
Proceeds from maturities and sales of debt securities available for sale, net of purchases; |
|
|
|
The receipt of an income tax refund for pre-acquisition tax matters associated with an acquisition in 2001; |
|
|
|
Purchases of property, equipment and software; |
|
|
|
The acquisition of SiliconStor, Inc. and |
|
|
|
Proceeds from the sale of land in Colorado. |
We expect capital expenditures to be approximately $95 million in 2007. In recent years, we
have reduced our level of capital expenditures as a result of our focus on establishing strategic
supplier alliances with foundry semiconductor manufacturers, which enables us to have access to
advanced manufacturing capacity, and reduces our capital spending requirements.
Cash and cash equivalents provided by financing activities. Cash and cash equivalents provided
by financing activities for the three months ended April 1, 2007, was $5.7 million as compared to
$12.0 million for the same period of 2006. The primary financing activities for the three months
ended April 1, 2007 were the issuance of common stock under our employee stock option plans.
21
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, will be adequate to meet our operating and capital requirements and obligations for the
foreseeable future.
Contractual Obligations
The following table summarizes our contractual obligations as of April 1, 2007, and the effect
these obligations are expected to have on our liquidity and cash flow in future periods. This table
does not include contractual obligations assumed as part of the merger with Agere Systems, which
closed on April 2, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
Less than |
|
1 3 |
|
4 5 |
|
After 5 |
|
|
Contractual Obligations |
|
1 year |
|
years |
|
years |
|
years |
|
Total |
|
|
|
|
|
(in millions) |
Convertible Subordinated Notes |
|
$ |
|
|
|
$ |
|
|
|
$ |
350.0 |
|
|
$ |
|
|
|
$ |
350.0 |
|
Operating lease obligations |
|
|
45.5 |
|
|
|
72.8 |
|
|
|
29.0 |
|
|
|
8.0 |
|
|
|
155.3 |
|
Purchase commitments |
|
|
345.4 |
|
|
|
13.8 |
|
|
|
|
|
|
|
|
|
|
|
359.2 |
|
|
|
|
Total |
|
$ |
390.9 |
|
|
$ |
86.6 |
|
|
$ |
379.0 |
|
|
$ |
8.0 |
|
|
$ |
864.5 |
|
|
|
|
Convertible Subordinated Notes
As of April 1, 2007, we had outstanding $350.0 million of the 4% Convertible Subordinated
Notes due in May 2010 (2003 Convertible Notes). The 2003 Convertible Notes are subordinated to
all existing and future senior debt and are convertible at the holders option, at any time prior
to maturity into shares of our common stock. The 2003 Convertible Notes have a conversion price of
approximately $13.42 per share. We cannot elect to redeem the 2003 Convertible Notes prior to
maturity. Each holder of the 2003 Convertible Notes has the right to cause us to repurchase all of
such holders convertible notes at 100% of their principal amount plus accrued interest upon the
occurrence of any fundamental change, which includes a transaction or event such as an exchange
offer, liquidation, tender offer, consolidation, certain mergers or combination. The merger with
Agere did not trigger the 2003 Convertible Note holders right to cause us to repurchase the Notes.
Interest is payable semiannually.
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 are not converted to equity, we believe that our current cash position and expected
future operating cash flows will be adequate to meet these obligations as they mature.
As part of the merger with Agere, LSI guaranteed Ageres 6.5% Convertible Subordinated Notes
due December 15, 2009 with a fair value of approximately $370 million as of April 2, 2007.
Interest on the Notes accrues at the rate of 6.5% per annum and is payable semi-annually on June 15
and December 15 of each year. 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
varies among different suppliers.
In the second quarter of 2006, we completed the sale of our Gresham, Oregon semiconductor
manufacturing facility to ON Semiconductor for approximately $105.0 million in cash. Under the
terms of the agreement, ON Semiconductor entered into a multi-year wafer supply agreement (WSA)
with LSI, whereby LSI agreed to purchase $198.8 million in wafers from ON Semiconductor during the
period from the date of sale of the Gresham facility in May 2006 to the end of LSIs second quarter
of 2008. As of April 1, 2007, LSI had yet to purchase $93.2 million in wafers under this arrangement.
22
Critical Accounting Policies
For a detailed discussion of our critical accounting policies, please see the Critical
Accounting Policies contained in the Managements Discussion and Analysis of Financial Condition
and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2006.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in the market risk disclosures during the three months
ended April 1, 2007, as compared to the discussion in Part II, Item 7a of our Annual Report on Form
10-K for the year ended December 31, 2006.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: The Securities and Exchange Commission
defines the term disclosure controls and procedures to mean a companys controls and other
procedures that are designed to ensure that information required to be disclosed in the reports
that it files or submits under the Securities Exchange Act of 1934 (Exchange Act) is recorded,
processed, summarized and reported, within the time periods specified in the Commissions rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in our reports filed under the
Exchange Act is accumulated and communicated to management, including our chief executive officer
and chief financial officer, as appropriate to allow timely decisions regarding required or
necessary disclosures. Our chief executive officer and chief financial officer have concluded,
based on the evaluation of the effectiveness of the disclosure controls and procedures by our
management, with the participation of our chief executive officer and chief financial officer, as
of the end of the period covered by this report, that our disclosure controls and procedures were
effective for this purpose.
Changes in Internal Controls: During the fiscal quarter covered by this report, we did not
make any change in our internal control over financial reporting that materially affected or is
reasonably likely to materially affect our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
This information is included in Note 10 to the financial statements in Item 1 of Part I.
Item 1A. Risk Factors
This report contains forward-looking statements that are based on current expectations,
estimates, forecasts and projections about the industry in which we operate, managements beliefs
and assumptions made by management. Words such as expects, anticipates, intends, plans,
estimates, believes, seeks, variations of such words and similar expressions are intended to
identify such forward looking statements. These statements are not guarantees of future performance
and involve risks, uncertainties and assumptions which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted in such
forward-looking statements. Except as required under the federal securities laws and the rules and
regulations of the Securities and Exchange Commission, we do not have any intention or obligation
to update publicly any forward-looking statements whether as a result of new information, future
events or otherwise.
The following factors, many of which are discussed in greater detail in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2006, could affect our future performance and the
price of our stock.
|
|
|
We may fail to realize the benefits expected from our recent merger with Agere Systems,
which could adversely affect the value of our common stock. |
23
The merger involves the integration of LSI and Agere, two companies that previously operated
independently. We agreed to the merger with the expectation that, among other things, the merger
would enable us to consolidate support functions, leverage our research and development, patents
and services across a larger base, and integrate our workforces to create opportunities to achieve
cost savings and to become a stronger and more competitive company. Although we expect significant
benefits to result from the merger, there can be no assurance that we will actually realize these
or any other anticipated benefits of the merger.
The value of our common stock may be affected by our ability to achieve the benefits we
expected to achieve in the merger. At the time of the merger agreement, LSI and Agere had a
combined workforce of over 9,000 employees. Achieving the benefits of the merger will depend in
part on meeting the challenges inherent in the successful combination and integration of global
business enterprises, including the following:
|
|
|
Demonstrating to our customers that the merger will not result in adverse changes to our
ability to address their needs or loss of attention or business focus; |
|
|
|
|
Coordinating and integrating independent research and development teams across
technologies and product platforms to enhance product development while reducing costs; |
|
|
|
|
Combining product offerings; |
|
|
|
|
Consolidating and integrating corporate, information technology, finance and administrative infrastructures; |
|
|
|
|
Coordinating sales and marketing efforts to effectively position our capabilities and
the direction of product development; and |
|
|
|
|
Minimizing the diversion of management attention from important business objectives. |
If we do not successfully manage these issues and other challenges inherent in integrating
complex businesses, then we may not achieve the anticipated benefits of the proposed merger and our
revenues, expenses, operating results and financial condition could be materially adversely
affected. For example, goodwill and other intangible assets could be determined to be impaired,
which could result in a charge to earnings. The successful integration of the two businesses is
likely to require significant management attention, and may divert the attention of our management
team from business and operational issues.
|
|
|
We must attract and retain key employees in a highly competitive environment;
uncertainties associated with the Agere merger may cause a loss of employees and may
otherwise materially adversely affect our business. |
|
|
|
|
The industries in which we operate are highly cyclical, and our operating results may fluctuate. |
|
|
|
|
General economic weakness and geopolitical factors may harm our operating results and financial condition. |
|
|
|
|
We are dependent on a limited number of customers. |
|
|
|
|
We depend to a large extent on independent foundry subcontractors to manufacture our
semiconductor products; accordingly, any failure to secure and maintain sufficient foundry
capacity could materially and adversely affect our business. |
Except for a semiconductor manufacturing facility in Singapore that we jointly own with
Chartered Semiconductor Manufacturing, we rely entirely on independent foundries to manufacture our
semiconductor products. To the extent we rely on third party manufacturing relationships, we face
risks, including:
|
|
|
a manufacturer may be unwilling to devote adequate capacity to production of our
products or may be unable to produce our products; |
|
|
|
|
a manufacturer may not be able to develop manufacturing methods appropriate for our products; |
|
|
|
|
manufacturing costs may be higher than planned; |
|
|
|
|
product reliability may decline; |
|
|
|
|
a manufacturer may not be able to maintain continuing relationships with our suppliers; and |
|
|
|
|
we may have reduced control over delivery schedules, quality, manufacturing yields and costs of products. |
If any of these risks were to be realized, we could experience an interruption in supply or an
increase in costs, which could adversely affect our results of operations.
The ability of an independent foundry subcontractor to provide us with semiconductor devices
is limited by its available capacity and existing obligations. Availability of foundry capacity has
in the recent past been reduced from time to time due to strong
24
demand. Foundry capacity may not be available when needed at reasonable prices. We place
orders on the basis of our customers purchase orders or our forecast of customer demand, and the
foundries can allocate capacity to the production of other companies products and reduce
deliveries to us on short notice. It is possible that other foundry customers that are larger and
better financed than we, or that have long-term agreements with the foundry suppliers, may induce
foundries to reallocate capacity to them. This reallocation could impair our ability to secure the
supply of components that we need. Also, our foundry suppliers migrate capacity to newer,
state-of-the-art manufacturing processes on a regular basis, which may create capacity shortages
for products designed to be manufactured on older processes. In addition, the occurrence of a
public health emergency or natural disaster could further affect the production capabilities of our
manufacturers by resulting in quarantines or closures. If any of our foundry suppliers experiences
a shortage in capacity, suffers any damage to its facilities due to earthquakes or other natural
disasters, experiences power outages, encounters financial difficulties or experiences any other
disruption of foundry capacity, we may need to qualify an alternative foundry supplier, which may
require several months. In addition, we can not provide any assurances that any foundries will be
able to produce integrated circuits with acceptable manufacturing yields, or that foundries will be
able to deliver enough semiconductor devices to us on a timely basis, or at reasonable prices.
|
|
|
We operate in intensely competitive markets. |
|
|
|
|
Our target markets are characterized by rapid technological change. |
|
|
|
|
Order or shipment cancellations or deferrals could cause our revenue to decline. |
|
|
|
|
We design and develop highly complex products that require significant investments. |
|
|
|
|
Our products may contain defects. |
|
|
|
|
Our manufacturing facilities have high fixed costs and involve highly complex and precise processes. |
We have a storage systems manufacturing facility in Wichita, Kansas; assembly and test
facilities in Singapore and Thailand and a 51% equity interest in a joint venture with Chartered
Semiconductor Manufacturing Ltd., which owns a semiconductor manufacturing facility in Singapore.
Operations at any of these facilities may be disrupted for reasons beyond our control, including
work stoppages, supply shortages, fire, earthquake, tornado, floods or other natural disasters, any
of which could have a material adverse effect on our results of operations or financial position.
In addition, if we do not experience adequate utilization of, or adequate yields at, these
facilities, our results of operations may be adversely affected. We confront challenges in the
manufacturing and assembly and test processes that require us to: maintain a competitive cost
structure; exercise stringent quality control measures to obtain high yields; effectively manage
subcontractors engaged in the wafer fabrication, test and assembly of products; and update
equipment and facilities as required for leading edge production capabilities.
The manufacture of our products involves highly complex and precise processes, requiring
production in a clean and tightly controlled environment. In addition, the manufacture of
integrated circuits is a highly complex and technologically demanding process. Although we work
diligently to minimize the likelihood of reduced manufacturing yields, from time to time, we have
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 could result
in product shortages or delays in product shipments, which could seriously harm relationships with
our customers and materially and adversely affect our business and results of operations.
|
|
|
Failure to qualify our products or our suppliers manufacturing lines may adversely
affect our results of operations. |
|
|
|
We depend in part upon third-party subcontractors to assemble, obtain packaging
materials for, and test certain products. |
We own two semiconductor assembly and test facilities. We also rely on third-party
subcontractors located in Asia to assemble, obtain packaging materials for, and test for us. To the
extent that we rely on third-party subcontractors to assemble and test semiconductor products for
us or conduct other services, we will not be able to control directly product delivery schedules
and quality assurance. This lack of control may result in product shortages or quality assurance
problems that could delay shipments of products or increase manufacturing, assembly, testing or
other costs. In addition, if we or these third-party subcontractors are unable to obtain sufficient
packaging materials for products in a timely manner, we may experience product shortages or delays
in product shipments, which could materially and adversely affect customer relationships and
results of operations. If we or 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.
25
Due to the amount of time that it usually takes to qualify assemblers and testers, we could
experience significant delays in product shipments if we are required to find alternative
assemblers or testers for such components.
|
|
|
A widespread outbreak of an illness or other health issue could negatively affect our
manufacturing, assembly and test, design or other operations. |
|
|
|
|
We procure parts and raw materials from a limited number of domestic and foreign
sources. |
|
|
|
|
If our new product development and expansion efforts are not successful, our results of
operations may be adversely affected. |
|
|
|
|
We may engage in acquisitions and alliances giving rise to financial and technological risks. |
|
|
|
|
The semiconductor industry is prone to intellectual property litigation. |
|
|
|
|
We may not be able to adequately protect or enforce our intellectual property rights,
which could harm our competitive position. |
|
|
|
|
A decline in the revenue that we derive from the licensing of intellectual property
could have a significant impact on net income. |
We currently generate revenue from the licensing of intellectual property. This revenue has a
high gross margin compared to the revenue generated from the sale of other products we sell, and a
decline in this licensing revenue could have a significant impact on our profitability. Our
licensing revenue typically comes from a limited number of transactions and the failure to complete
one or more transactions in a quarter could have a material adverse impact on our revenue and
profitability. In addition, changes in patent laws and changes in interpretations of patent laws
may affect our ability to obtain new patents and to enforce existing patents, which may have an
adverse impact on our intellectual property licensing revenue.
|
|
|
We conduct a significant amount of activity outside of the United States, and are
exposed to legal, business, political and economic risks associated with our international
operations. |
|
|
|
|
We may rely on the capital markets and/or bank markets to provide financing. |
|
|
|
|
We utilize indirect channels of distribution over which we will have limited control. |
|
|
|
|
The price of our securities may be subject to wide fluctuations. |
|
|
|
|
Future changes in financial accounting standards or practices or existing taxation rules
or practices may cause adverse unexpected fluctuations and affect reported results of
operations. |
|
|
|
|
Internal control deficiencies or weaknesses that are not yet identified could emerge. |
As part of our integration of Agere, we must combine two previously separate internal control
environments. Each control environment contains a significant number of individual controls that
must operate separately until we are able to combine the two environments. We anticipate that the
combination of the two control environments will be a complex and time-consuming process. We may
make errors or fail to properly or timely integrate all internal control elements, which could have
an adverse impact on our ability to accurately produce financial statements. The disclosure of such
errors or failures could have an adverse impact on our stock price.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On December 4, 2006, we announced that our board of directors had authorized the repurchase of
up to $500 million worth of our common stock. Our board of directors terminated the stock
repurchase program previously authorized by the Board on July 28, 2000. The repurchases are
expected to be funded from available cash and short-term investments. We did not repurchase any
shares during the three months ended April 1, 2007.
26
Item 4. Submission of Matters to a Vote of Security Holders
LSI held a Special Meeting of Stockholders on March 29, 2007. At that meeting, stockholders
approved the issuance of shares of LSI common stock in connection with the merger of Atlas
Acquisition Corp. with and into Agere Systems Inc. contemplated by the Agreement and Plan of
Merger, dated as of December 3, 2006, among LSI, Atlas Acquisition Corp. and Agere.
The results of the voting were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes For |
|
Votes Against |
|
Abstain |
|
Issuance of shares of common stock in connection with the Agere merger |
|
|
204,451,968 |
|
|
|
32,422,738 |
|
|
|
2,533,235 |
|
There were no broker non-votes.
Item 6. Exhibits
|
|
|
|
|
|
4.1 |
|
|
Specimen Common Stock certificate |
|
|
|
|
|
|
4.2 |
|
|
Indenture for Ageres 6.5% Convertible Subordinated Notes due 2009 (incorporated by reference to Exhibit 10.1 to Ageres Quarterly Report on Form 10-Q, filed August 9, 2002) |
|
|
|
|
|
|
4.3 |
|
|
Supplemental Indenture No. 1 to the Indenture for Ageres 6.5% Convertible Subordinated Notes due 2009 (incorporated by reference to Exhibit 4.5 to Ageres Current Report on Form 8-K, filed June 1, 2005) |
|
|
|
|
|
|
4.4 |
|
|
Supplemental Indenture No. 2 to the Indenture for Ageres 6.5% Convertible Subordinated Notes due 2009 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed April 6, 2007) |
|
|
|
|
|
|
10.1 |
|
|
Patent and Technology License Agreement (incorporated by reference to Exhibit 10.13 to Ageres Registration Statement on Form S-1, File No. 333-51594) |
|
|
|
|
|
|
10.2 |
|
|
Joint Venture Agreement with Chartered Semiconductor Manufacturing Ltd. (incorporated by reference to Exhibit 10.19 to Ageres Registration Statement on Form S-1, File No. 333-51594) |
|
|
|
|
|
|
10.3 |
|
|
Amendment to Joint Venture Agreement with Chartered Semiconductor Manufacturing Ltd. (incorporated by reference to Exhibit 10.1 to Ageres Current Report on Form 8-K, filed September 23, 2004) |
|
|
|
|
|
|
10.4 |
|
|
Agreement of Sale with AG Semi-Conductor Limited, Maxim/Dallas Direct, Inc. and Texas Instruments Incorporated (incorporated by reference to Exhibit 10 to Ageres Current Report on Form 8-K, filed September 19, 2005) |
|
|
|
|
|
|
10.5 |
|
|
Agere Systems Inc. Short Term Incentive Plan (incorporated by reference to Exhibit 10.9 to Ageres Annual Report on Form 10-Q, filed December 1, 2006) |
|
|
|
|
|
|
10.6 |
|
|
Agere Systems Inc. 2001 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to Ageres Quarterly Report on Form 10-Q, filed May 5, 2006) |
|
|
|
|
|
|
10.7 |
|
|
Form of Agere Systems Inc. 2001 Long Term Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.7 to Ageres Registration Statement on Form S-1, File No. 333- 51594) |
|
|
|
|
|
|
10.8 |
|
|
Form of Agere Performance-vested RSU Award Agreement Total Stockholder Return (incorporated by reference to Exhibit 10.2 to Ageres Current Report on Form 8-K/A, filed November 3, 2005) |
|
|
|
|
|
|
10.9 |
|
|
Form of Agere Performance-vested RSU Award Agreement Earnings per share (incorporated by reference to Exhibit 10.13 to Ageres Annual Report on Form 10-K, filed December 1, 2006) |
|
|
|
|
|
|
10.10 |
|
|
Form of Agere Systems Inc. 2001 Long Term Incentive Plan Nonstatutory Stock Option Agreement (incorporated by reference to Exhibit 10.8 to Ageres Registration Statement on Form S-1, File No. 333- 51594) |
|
|
|
|
|
|
10.11 |
|
|
Agere Systems Inc. Non-Employee Director Stock Plan (incorporated by reference to Exhibit 10.2 to Ageres Quarterly Report on Form 10-Q, filed May 5, 2006) |
|
|
|
|
|
|
10.12 |
|
|
Agere Systems Inc. Supplemental Pension Plan (incorporated by reference to Exhibit 10.10 to Ageres Registration Statement on Form S-1, File No. 333-51594) |
|
|
|
|
|
|
10.13 |
|
|
Agere Systems Inc. Officer Severance Policy (incorporated by reference to Exhibit 10.26 to Ageres Annual Report on Form 10-K, filed December 12, 2002) |
|
|
|
|
|
|
10.14 |
|
|
1996 Lucent Long Term Incentive Program For Agere Employees (incorporated by reference to Exhibit 10.28 to Ageres Annual Report on Form 10-K, filed December 12, 2002) |
|
|
|
|
|
|
10.15 |
|
|
1997 Lucent Long Term Incentive Plan For Agere Employees (incorporated by reference to Exhibit 10.29 to Ageres Annual Report on Form 10-K, filed December 12, 2002) |
|
|
|
|
|
|
10.16 |
|
|
1998 Global Stock Option Plan For Agere Employees (incorporated by reference to Exhibit 10.30 to Ageres Annual Report on Form 10-K, filed December 12, 2002) |
|
|
|
|
|
|
10.17 |
|
|
Employment Agreement with Ruediger Stroh (incorporated by reference to Exhibit 10.27 to our Annual Report on Form 10-K, filed December 12, 2005) |
|
|
|
|
|
27
|
|
|
|
|
|
10.18 |
|
|
Retention Agreement with Andrew Micallef |
|
|
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|
10.19 |
|
|
Retention Agreement with Jean Rankin |
|
|
|
|
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|
10.20 |
|
|
Retention Agreement with Denis Regimbal |
|
|
|
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|
|
10.21 |
|
|
Retention Agreement with Ruediger Stroh |
|
|
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|
|
10.22 |
|
|
Employment Agreement with Jeffrey Hoogenboom |
|
|
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|
|
10.23 |
|
|
Employment Agreement with Claudine Simson |
|
|
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|
10.24 |
|
|
Separation Agreement with Donald Esses |
|
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|
|
31.1 |
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 |
|
|
|
|
|
|
32.2 |
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 |
Note: The Securities and Exchange Commission file number for Agere Systems is: 001-16397
28
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 CORPORATION
(Registrant)
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Date: May 11, 2007 |
By |
/s/ Bryon Look
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Bryon Look |
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Executive Vice President &
Chief Financial Officer |
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INDEX TO EXHIBITS
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4.1 |
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Specimen Common Stock certificate |
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4.2 |
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Indenture for Ageres 6.5% Convertible Subordinated Notes due 2009 (incorporated by reference to Exhibit 10.1 to Ageres Quarterly Report on Form 10-Q, filed August 9, 2002) |
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4.3 |
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Supplemental Indenture No. 1 to the Indenture for Ageres 6.5% Convertible Subordinated Notes due 2009 (incorporated by reference to Exhibit 4.5 to Ageres Current Report on Form 8-K, filed June 1, 2005) |
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4.4 |
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Supplemental Indenture No. 2 to the Indenture for Ageres 6.5% Convertible Subordinated Notes due 2009 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed April 6, 2007) |
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10.1 |
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Patent and Technology License Agreement (incorporated by reference to Exhibit 10.13 to Ageres Registration Statement on Form S-1, File No. 333-51594) |
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10.2 |
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Joint Venture Agreement with Chartered Semiconductor Manufacturing Ltd. (incorporated by reference to Exhibit 10.19 to Ageres Registration Statement on Form S-1, File No. 333-51594) |
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10.3 |
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Amendment to Joint Venture Agreement with Chartered Semiconductor Manufacturing Ltd. (incorporated by reference to Exhibit 10.1 to Ageres Current Report on Form 8-K, filed September 23, 2004) |
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10.4 |
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Agreement of Sale with AG Semi-Conductor Limited, Maxim/Dallas Direct, Inc. and Texas Instruments Incorporated (incorporated by reference to Exhibit 10 to Ageres Current Report on Form 8-K, filed September 19, 2005) |
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10.5 |
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Agere Systems Inc. Short Term Incentive Plan (incorporated by reference to Exhibit 10.9 to Ageres Annual Report on Form 10-Q, filed December 1, 2006) |
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10.6 |
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Agere Systems Inc. 2001 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to Ageres Quarterly Report on Form 10-Q, filed May 5, 2006) |
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10.7 |
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Form of Agere Systems Inc. 2001 Long Term Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.7 to Ageres Registration Statement on Form S-1, File No. 333- 51594) |
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10.8 |
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Form of Agere Performance-vested RSU Award Agreement Total Stockholder Return (incorporated by reference to Exhibit 10.2 to Ageres Current Report on Form 8-K/A, filed November 3, 2005) |
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10.9 |
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Form of Agere Performance-vested RSU Award Agreement Earnings per share (incorporated by reference to Exhibit 10.13 to Ageres Annual Report on Form 10-K, filed December 1, 2006) |
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10.10 |
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Form of Agere Systems Inc. 2001 Long Term Incentive Plan Nonstatutory Stock Option Agreement (incorporated by reference to Exhibit 10.8 to Ageres Registration Statement on Form S-1, File No. 333- 51594) |
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10.11 |
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Agere Systems Inc. Non-Employee Director Stock Plan (incorporated by reference to Exhibit 10.2 to Ageres Quarterly Report on Form 10-Q, filed May 5, 2006) |
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10.12 |
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Agere Systems Inc. Supplemental Pension Plan (incorporated by reference to Exhibit 10.10 to Ageres Registration Statement on Form S-1, File No. 333-51594) |
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10.13 |
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Agere Systems Inc. Officer Severance Policy (incorporated by reference to Exhibit 10.26 to Ageres Annual Report on Form 10-K, filed December 12, 2002) |
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10.14 |
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1996 Lucent Long Term Incentive Program For Agere Employees (incorporated by reference to Exhibit 10.28 to Ageres Annual Report on Form 10-K, filed December 12, 2002) |
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10.15 |
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1997 Lucent Long Term Incentive Plan For Agere Employees (incorporated by reference to Exhibit 10.29 to Ageres Annual Report on Form 10-K, filed December 12, 2002) |
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10.16 |
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1998 Global Stock Option Plan For Agere Employees (incorporated by reference to Exhibit 10.30 to Ageres Annual Report on Form 10-K, filed December 12, 2002) |
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10.17 |
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Employment Agreement with Ruediger Stroh (incorporated by reference to Exhibit 10.27 to our Annual Report on Form 10-K, filed December 12, 2005) |
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10.18 |
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Retention Agreement with Andrew Micallef |
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10.19 |
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Retention Agreement with Jean Rankin |
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10.20 |
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Retention Agreement with Denis Regimbal |
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10.21 |
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Retention Agreement with Ruediger Stroh |
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10.22 |
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Employment Agreement with Jeffrey Hoogenboom |
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10.23 |
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Employment Agreement with Claudine Simson |
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10.24 |
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Separation Agreement with Donald Esses |
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31.1 |
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) |
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31.2 |
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) |
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32.1 |
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Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 |
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32.2 |
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Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 |
Note: The Securities and Exchange Commission file number for Agere Systems is: 001-16397