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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to .
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Commission File
No. 1-10317
LSI CORPORATION
(Exact name of registrant as
specified in its charter)
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DELAWARE
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94-2712976
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(State or other jurisdiction
of
incorporation or organization)
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(IRS Employer
Identification No.)
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1621 Barber Lane
Milpitas, California 95035
(Address of principal executive
offices) (Zip Code)
Registrants telephone number, including area code:
(408) 433-8000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See definition of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act (check one):
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Large Accelerated
Filer þ
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Accelerated
Filer o
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Non-accelerated
Filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting
company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant as of
July 5, 2009 was approximately $3.1 billion, based on
the reported last sale price on the New York Stock Exchange of
such equity on the last business day of the fiscal quarter
ending on such date.
As of February 22, 2010, 656,539,243 shares of common
stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain information required by Part III of this report is
incorporated by reference from the registrants proxy
statement to be filed pursuant to Regulation 14A with
respect to the registrants 2010 annual meeting of
stockholders.
LSI
Corporation
Form 10-K
For the Year Ended December 31, 2009
FORWARD-LOOKING
STATEMENTS
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The
words estimate, plan,
intend, expect, anticipate,
believe and similar words are intended to identify
forward-looking statements. Although we believe our expectations
are based on reasonable assumptions, our actual results could
differ materially from those projected in the forward-looking
statements. We have described in Part I,
Item 1A-Risk
Factors a number of factors that could cause our actual
results to differ materially from our projections or estimates.
Except where otherwise indicated, the statements made in this
report are made as of the date we filed this report with the
Securities and Exchange Commission and should not be relied upon
as of any subsequent date. We expressly disclaim any obligation
to update the information in this report, except as may
otherwise be required by law.
PART I
General
We design, develop and market complex, high-performance storage
and networking semiconductors and storage systems. We provide
silicon-to-system
solutions that are used at the core of products that create,
store, consume and transport digital information. We offer a
broad portfolio of capabilities including custom and standard
product integrated circuits used in hard disk drives, solid
state drives, high-speed communications systems, computer
servers, storage systems and personal computers. We also offer
external storage systems, storage systems software, redundant
array of independent disks, or RAID, adapters for computer
servers, and RAID software applications.
Integrated circuits, also called semiconductors or chips, are
made using semiconductor wafers imprinted with a network of
electronic components. They are designed to perform various
functions such as processing electronic signals, controlling
electronic system functions and processing and storing data.
Since the beginning of 2007, we have changed the focus of our
business to providing integrated circuits for storage and
networking applications and providing storage systems and
related boards and software. Some of the significant steps we
have taken include:
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merging with Agere Systems to strengthen our position in storage
and networking semiconductors;
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selling our consumer and mobile handset chipset businesses,
where we felt the company did not have the scale to be a strong
competitor;
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engaging in several strategic acquisitions, such as the
acquisition in 2007 of Tarari, Inc., a provider of content
processors, the acquisition in 2008 of the assets of
Infineons hard disk drive semiconductor business, and the
acquisition in 2009 of the
3ware®
RAID server adapter assets and of ONStor, Inc., a provider of
network attached storage solutions; and
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selling our manufacturing operations so that we could avoid the
associated capital costs and focus our efforts on product
development.
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We also changed the focus of our storage systems business to
providing products for leading original equipment manufacturer,
or OEM, storage companies, rather than selling to direct-end
customers, and refocused our semiconductor business on a smaller
number of designs with leading customers.
Segment
Information
We operate in two segments the Semiconductor segment
and the Storage Systems segment.
Our Semiconductor segment designs, develops and markets highly
complex integrated circuits for storage and networking
applications. These solutions include both custom solutions and
standard products. We design custom solutions for a specific
application defined by the customer. We develop standard
products for market applications that we define and sell them to
multiple customers. We sell our integrated circuits for storage
applications principally to makers of hard disk drives, solid
state drives and computer servers. We sell our integrated
circuits for networking applications principally to makers of
devices used in computer and telecommunications networks and, to
a lesser extent, to makers of personal computers. We also
generate revenue by licensing other entities to use our
intellectual property.
Our Storage Systems segment designs and sells enterprise storage
systems and storage software applications that enable storage
area networks. We also offer RAID adapters for computer servers
and associated software for attaching storage devices to
computer servers. We sell our storage systems and storage
solutions primarily to OEMs who resell these products to end
customers under their own brand name.
In 2009, the Semiconductor segment accounted for approximately
64.1% of our revenue and the Storage Systems segment accounted
for approximately 35.9% of our revenue. You can find additional
financial information
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about our segments and geographic financial information in
Note 9 to our financial statements in Item 8. See
Item 1A Risk Factors for
information about risks we face as a result of our operations
outside the United States.
Company
Information
Shortly after the Agere acquisition, we changed our name to LSI
Corporation from LSI Logic Corporation. LSI Logic Corporation
was incorporated in California on November 6, 1980, and was
reincorporated in Delaware on June 11, 1987.
We maintain an Internet website at www.lsi.com. We make
available free of charge on our website our annual reports on
Form 10-K,
our quarterly reports on
Form 10-Q,
our current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file such
material with, or furnish it to, the U.S. Securities and
Exchange Commission. You can read any materials that we file
with the Commission at the Commissions Public Reference
Room at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You can obtain information on the
operation of the Public Reference Room by calling the Commission
at
(800) 732-0330.
Information on our website is not incorporated by reference into
this report.
Products
SEMICONDUCTOR
SEGMENT
Storage
Products
Hard Disk, Solid State and Tape Drive
Electronics. We sell integrated circuits for hard
disk, solid state and tape drive solutions, which are used to
store and retrieve data in personal computers, corporate network
servers, archive/back-up devices and consumer electronics
products such as digital video recorders, game consoles and
digital media players. A hard disk drive contains physical
media, one or more platters that store data, a motor
that spins the media, drive heads that read data from and write
data to the media and electronics that process the data and
control the disk drive. A solid state drive stores data in flash
memory instead of on a hard disk, providing high speed access to
stored data. Tape drives store data on magnetic tape and provide
a high-capacity, cost-effective tiered data storage
back-up
solution.
Our
TrueStore®
family of storage electronics products includes
systems-on-a-chip,
read channels,
pre-amplifiers,
serial physical interfaces and hard disk controllers as well as
custom firmware. These are the critical chips required to read,
write and protect data. We offer products that can be used in a
variety of storage applications, including hard drives and solid
state drives intended for notebook computers, desktop computers
and enterprise computers, and in tape drives.
A storage
system-on-a-chip,
or SoC, is an integrated circuit that combines the functionality
of a read channel, serial interface, memory and a hard disk
controller in a small, high-performance, low-power and
cost-effective package. Read channels convert analog signals
that are generated by reading the stored data on the physical
media into digital signals. Analog refers to a transmission
technique employing a continuous signal that varies in
amplitude, frequency or phase of the transmission. Digital
refers to a method of transmitting, storing and processing data
that uses distinct electronic or optical pulses to represent the
binary digits 0 and 1. We also sell
pre-amplifiers,
or preamps, which are used to amplify the initial signal to and
from the drive disk heads so the signal can be processed by the
read channel. We provide similar technology for tape drives. Our
hard disk controllers are used to control signal processing and
communications functions within the disk drive.
Storage Interface Products. We also offer
solutions that make possible data transmission between a host
computer and storage peripheral devices such as magnetic, solid
state and optical disk drives and disk and tape-based storage
systems. These products include:
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Storage Standard Products. Our product line
includes SAS, SATA and
RAID-On-Chip,
or RoC, integrated circuits combined with our
Fusion-MPTtm
firmware and drivers to form intelligent storage interface
solutions primarily for server and storage system motherboard
applications. Additionally, our product line
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includes SCSI, SAS and SATA bus expander integrated circuits,
Fibre Channel integrated circuits, SAS switches, and disk drive
bridging or interposer circuits used primarily in storage
systems. We sell our integrated circuit solutions both in an
integrated circuit plus software form or as a complete solution
including the host bus adapter board itself.
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Storage Custom Solutions. We also offer custom
solutions to customers who develop Fibre Channel and Fibre
Channel over Ethernet storage area network, or SAN, switches and
host bus adapters, storage systems, hard disk drives and tape
peripherals. By leveraging our extensive experience in providing
solutions for these applications, we have developed a full
portfolio of high-speed interface intellectual property that is
combined with our customers intellectual property to form
custom solutions that provide a connection to the network, the
SAN, memory systems and host buses. Using these pre-verified
interfaces, our customers can reduce development risk and
achieve quicker time to market. Our intellectual property
offerings include high performance SerDes cores supporting Fibre
Channel, SAS, SATA, 10-Gigabit Ethernet, Gigabit Ethernet,
Infiniband, SAS, Serial RapidIO and PCI-Express industry
standards and a family of high-performance Fibre Channel,
Ethernet, RapidIO, PCI-E, SAS and SATA protocol controllers.
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Networking
Products
We offer comprehensive solutions that allow networking service
providers to deliver a variety of highly reliable communications
services over Internet Protocol, or IP, networks. IP networks
are packet based. In an IP network, packets of data that are
part of the same telephone conversation or video program can be
routed over different paths. Traditional telephone networks are
circuit-based where all data packets follow the same dedicated
path or circuit. Historically, the dedicated paths in
circuit-based networks have provided greater reliability than
packet-based networks, although at the cost of flexibility.
Our networking solutions are designed to enable IP networks to
provide reliability similar to that of circuit-based networks
and incorporate quality of service features that allow more
critical data to receive priority over less critical data. For
example, packets containing data about a television picture,
where a delayed packet can mean a noticeable flaw in the
picture, can be delivered before packets containing web-page
data being downloaded to a personal computer, where a slight
delay is less likely to be noticed.
Our networking portfolio includes solutions for carrier-managed
gateways that would be used in small office, home office and
small-to-medium
business applications. The portfolio also includes solutions for
multi-service wired and wireless access systems found in carrier
networks. Multi-service systems can handle traffic such as data
and video in addition to voice. Our networking solutions include
chips such as our network processors, digital signal processors,
content-inspection processors, traffic shaping devices and
physical layer devices as well as software, evaluation systems
and reference designs. Our development efforts are focused on
multicore processor SoCs to deliver solutions for wireline and
wireless access, media gateway, service provider and enterprise
networks.
We offer both custom and standard networking product solutions.
Custom
Networking Products
We sell integrated circuits that are custom developed for our
customers. These integrated circuits incorporate our
intellectual property or combine our intellectual property with
the intellectual property of our customers or other third
parties to create a customized solution for these customers. For
some customers, we design and manufacture the integrated circuit
while the key intellectual property belongs solely to our
customers.
Network
Processors and Communication Processors
Network processors are typically used in switching and routing
systems to classify, prioritize and forward packets as they move
through a carriers network. Communication processors
handle the setup and operation of the network itself. We offer
network processors and communication processors with the ability
to handle a range of data throughputs, from 200 megabits per
second up to 6 gigabits per second. Megabits and gigabits are
units of measurement for data. A megabit is equal to
approximately one million bits and a gigabit is equal to
approximately 1,000 megabits. For example, our APP2200
communication processor family provides a lower cost solution
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intended for systems located between the customers
premises and the carriers local central office, where data
throughput demands are lower, but the need to prioritize the
packets is still critical for all services to be delivered
successfully. Our APP650 network processor is a higher
throughput solution designed for use in systems that are closer
to the core of a carriers IP network, where data
throughput demands are higher.
Digital
Signal Processors
Digital signal processors, or DSPs, perform advanced algorithms
on analog signals that have been transformed into
digitally-encoded bitstreams. Our DSPs perform audio, video and
speech signal processing, compression, transcoding and
transrating and can be used in applications including
Voice-over-IP,
or VoIP, business and enterprise gateways, video delivery, media
gateways and wired and wireless access network equipment.
Content
Inspection Processors
We offer a family of content inspection processors, which are
available as integrated circuits, boards and software
acceleration components designed for network equipment,
appliance and server vendors. Our
Tarari®
content inspection processors perform deep packet inspection at
wire speeds, ranging from 100 megabits per second to over 10
gigabits per second. These products offload and accelerate
applications such as anti-virus, anti-spam, intrusion
prevention/detection systems, compliance, content-based routing
and XML processing.
Multi-Service
Processors
In addition to the networking products described above, we offer
integrated circuits and supporting software designed for
equipment used in access, metropolitan, and wide-area backbone
telecommunications and packet networks. Our products can be used
in equipment in both wired and wireless networks.
Broadband Aggregation Devices. Broadband is a
general term that refers to high-speed data transmission. Our
broadband access integrated circuits, or mappers, support data
transport between central offices and enterprise sites by
aggregation and termination. Aggregation refers to the combining
of many low-speed, or tributary, data signals from enterprises
into higher speed, or trunk, data signals for transmission to a
central office. Termination refers to the separation of trunk
data signals into lower-speed, tributary data signals.
Our products support data transport for T-carrier data transport
in North America. T-carrier is a digital transmission service
from a common carrier. We support similar services worldwide.
These services are referred to as J-carrier in Japan and
E-carrier in
Europe. T-carrier services such as T1 and T3 lines are used to
create
point-to-point
networks for use by enterprises. T1 and T3 lines refer to
different levels of T-carrier service that transmit data at
1.544 megabits per second and 44.736 megabits per second,
respectively.
SONET/SDH Network Devices. Synchronous optical
networks, which are typically referred to as SONET, and
synchronous digital hierarchy standard networks, or SDH, carry
data, voice and video traffic through a network by combining
lines carrying traffic at slower speeds with lines carrying
traffic at higher speeds. This process is known as multiplexing,
and involves directing traffic from the individual lines into
designated time slots in the higher speed lines, and directing
those lines into still higher speed lines. The SONET/SDH
equipment that handles the directing of traffic into slower
speed and faster speed lines is the add-drop multiplexer.
Add-drop multiplexers also handle the addition and removal of
traffic from a SONET/SDH communication transmission. We offer
single-chip integrated circuit solutions called framers, for
add-drop multiplexing of data and voice traffic. In addition,
our framers are used in high-speed routers within optical
networks. A router is an interface, or link, between two
networks.
Personal
Connectivity Solutions
We sell high speed input/output products primarily to
manufacturers of computers, peripheral equipment and
communications equipment. Input/output refers to the transfer of
data within and between computers; peripheral equipment, such as
printers, scanners and digital cameras; and data networks. Our
products support established connectivity and transmission
standards known as Gigabit Ethernet, IEEE-1394, and Universal
Serial Bus or USB.
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In addition, we sell integrated circuits and associated software
for modem products, primarily to manufacturers of personal
computers, notebook computers,
point-of-sale
terminals, facsimile machines, multi-function printers, cable
and satellite set-top boxes and other electronic equipment.
We believe that our systems-level knowledge and integrated
circuit design methodologies allow us to turn our
customers design concepts into systems solutions quickly
and effectively. Our intellectual property gives our customers
the flexibility to customize their products to meet their
individual cost and performance objectives.
STORAGE
SYSTEMS SEGMENT
We offer a wide range of products for the storage markets in
three main areas: external storage systems hardware and
associated software, internal storage products and software, and
value added storage software. All of these products are sold
primarily through our OEM customers. The modularity of our
products provides these OEMs with the flexibility to integrate
our
sub-assemblies
with third-party components, such as disk drives or software, to
form their own storage system products. Our modular product
approach allows OEMs to create highly customized storage systems
that can then be integrated with value-added software and
services and delivered as complete, differentiated data storage
solutions to their target markets.
External Storage Systems We offer a broad line of
open, modular storage products comprised of complete systems and
sub-assemblies
configured from modular components, such as our storage
controller modules, disk drive enclosure modules, related
management software and advanced data protection software for
creating local and remote copies of critical data. These storage
systems provide connectivity to single or multiple servers
connected in a storage area network, or SAN, providing block
data services. The acquisition of ONStor in July 2009 has
expanded our offerings to include network attached storage
gateway products which provide file data services. These
gateways can be combined with LSI storage systems or others to
provide complete network attached storage systems or to add
network attached storage capabilities to existing systems.
Our external storage systems product family includes entry level
and mid-range storage systems, including the Engenio 4900
introduced in 2009 which is an upgradeable mid-range system,
allowing flexibility for enhanced performance, reliability and
scalability. We offer a suite of software to enable system
administrators to easily manage and better utilize their storage
systems operations. We also offer advanced copy services
such as snapshot, volume copy and remote volume mirroring, to
provide increased levels of data protection. We design and
develop storage management software that operates within all
major open operating systems, including Windows, UNIX and UNIX
variants and Linux environments, and server virtualization
offerings including VMware and Hyper-V.
Internal Storage Products. We offer a variety
of direct-attach RAID solutions as part of our
MegaRAID®
product family. RAID products store data using multiple drives
and various data replication strategies to minimize the impact
of the failure of any one drive. Our MegaRAID products include
single-chip
RAID-on-motherboard
solutions, a broad family of PCI-X and PCI Express RAID
controller boards featuring SATA and SAS interfaces, and
software-based RAID products for entry level RAID data
protection. All of these solutions utilize MegaRAIDs fully
featured RAID software and management utilities for robust
storage configuration and deployment. In addition to the OEM
channel, we offer MegaRAID branded products through a network of
distributors and resellers. In 2009, we acquired the 3ware RAID
server adapter business to add additional products and channel
capabilities to our storage product offerings.
Value Added Storage Software. Through our
StoreAgetm
SVM suite of hardware and software products, we offer storage
virtualization and advanced copy services that can be delivered
as host software, reside in a network element, or be embedded in
storage systems. These advanced capabilities enable our OEM
customers to create unique and customized solutions to simplify
and improve storage operations, deliver enhanced recovery
solutions, and better manage storage connected to virtual
servers.
We test and certify our products, both independently and jointly
with our customers, with those of other hardware, networking and
storage software vendors to ensure a high level of
interoperability and performance. Our products are targeted at a
wide variety of data storage applications, including
Internet-based applications such as cloud computing, online
transaction processing and
e-commerce,
data warehousing, file serving, video editing and
post-production and high-performance computing.
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Marketing
and Distribution
Semiconductor
Marketing and Distribution
The semiconductor industry is highly competitive and is
characterized by rapidly changing technology, short product
cycles and emerging standards. Our marketing strategy requires
that we forecast trends in the evolution of products and
technology. We must then act upon this knowledge in a timely
manner to develop competitively priced products offering
superior features, performance or levels of integration. As part
of this strategy, we are actively involved in the formulation
and adoption of critical industry standards that influence the
design specifications of our products.
Our semiconductor products and design services are sold
primarily through our network of direct sales, marketing and
field engineering offices located in North America, Europe,
Japan and elsewhere in Asia. We also work with independent
industrial and commercial distributors and manufacturers
representatives or other channel partners in North America,
Europe, Japan and elsewhere in Asia. Some of our distributors
possess engineering capabilities, and design and purchase both
custom solutions and standard products from us for resale to
their customers. Other distributors focus solely on the sale of
standard products.
Storage
Systems Marketing and Distribution
We sell our storage systems products, value-added storage
software, and MegaRAID products to our OEM customers who sell
them worldwide under their own brand identities using their
sales and distribution channels. We also distribute our MegaRAID
products, 3ware RAID server adapters, and ONStor network
attached storage gateways through a network of resellers and
distributors, who resell the products to end users with
additional hardware, software and services, or on a standalone
basis for use with existing equipment.
The products we sell to our OEM customers may be integrated by
the OEM with value-added services, hardware and software and
delivered as differentiated complete storage solutions to
enterprises. We work closely with our OEM customers and tailor
these relationships to meet the diverse needs and requirements
of end customers worldwide. We also provide our OEM customers
with training services to enhance their abilities to sell and
support our products. After receiving our training services,
most of our OEM customers independently market, sell and support
our products, requiring limited ongoing product support from us.
We assist some of our OEM customers further by providing
additional resources such as tailored, account-specific
education, training, technical support and sales and marketing
assistance, allowing these customers to leverage our storage
products and industry expertise. By selling products through our
OEM customers and leveraging their brand marketing and worldwide
sales channels, we are able to address more markets, reach a
greater number of enterprises, and achieve better leverage of
our sales and marketing expenditures.
Our marketing efforts support our OEM customers, as well as our
distributors and reseller channels, with programs targeted at
developing differentiated
go-to-market
strategies and increasing sales effectiveness. Depending on the
nature of our channel customer engagement, our marketing teams
offer various levels of assistance in assessing and analyzing
the competitive landscape, defining product strategy and
roadmaps, developing product positioning and pricing, creating
product launch support materials and closing the sales process.
These marketing teams carefully coordinate joint product
development and marketing efforts with our customers to ensure
that we address and effectively target enterprise requirements.
We maintain sales and marketing organizations in the United
States and internationally in China, France, Germany, Italy,
Japan, Singapore, Sweden and the United Kingdom.
Customers
In 2009, International Business Machines Corporation accounted
for approximately 19.3% and Seagate Technology accounted for
approximately 15.5% of our total revenues. No other customer
accounted for more than 10% of our total revenues in 2009. We
currently have a highly concentrated customer base as a result
of our strategy to focus our marketing and sales efforts on
select, large-volume customers. Our top 10 end customers in
2009, based on revenue, accounted for approximately 65.8% of our
revenue. The loss of any of our significant customers, any
substantial decline in sales to these customers, or any
significant change in the timing or volume of purchases by
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these customers could result in substantially lower revenues and
could materially harm our business, financial condition or
results of operations.
Manufacturing
Semiconductor
Manufacturing
The semiconductor manufacturing process begins with wafer
fabrication, where a design is transferred to silicon wafers
through a series of processes, including photolithography, ion
implantation, deposition of numerous films and the etching of
these various films and layers. Each circuit on the wafer is
tested in the wafer sort operation. The good circuits are
identified and the wafer is then separated into individual die.
Each good die is then assembled into a package that encapsulates
the integrated circuit for protection and allows for electrical
connection to a printed circuit board. The final step in the
manufacturing process is final test, where the finished devices
undergo stringent and comprehensive testing.
Wafer fabrication is very complex and costly, and the industry
trend has been towards outsourcing all or a portion of this
operation to silicon foundries located throughout the world. Our
wafer fabrication is performed by third-party foundries,
including Taiwan Semiconductor Manufacturing Corporation, our
primary foundry partner, and other foundries such as IBM and
Silicon Manufacturing Partners, a joint venture owned by
GLOBALFOUNDRIES and LSI.
We also use third-party suppliers, including STATS ChipPAC and
Amkor Technology, to perform final assembly and test operations
for us.
We believe that using third-party manufacturing services allows
us to focus on product development and increases our operational
flexibility, by improving our ability to adjust manufacturing
capacity in response to customer demand and to introduce new
products rapidly. It also reduces our capital requirements as we
do not need to spend large amounts to build and upgrade
manufacturing facilities, particularly in the area of wafer
fabrication, where facilities must be upgraded periodically and
each upgrade tends to cost significantly more than the preceding
upgrade.
Storage
Systems Manufacturing
We use third-party suppliers for standard components, such as
disk drives and standard computer processors, which are designed
and incorporated into our products. Additionally, we outsource
the manufacturing of our product components, such as printed
circuit boards, chassis assemblies and enclosures, in order to
take advantage of scale, quality and cost benefits afforded by
using third-party manufacturing services. We also use
third-party suppliers to assemble and test our storage systems
products.
The assembly of our storage system products involves integrating
components and manufactured
sub-assemblies
into final products, which are configured and tested before
being delivered to our customers. The highly modularized nature
of our storage system products allows for flexible assembly and
delivery models, which include
build-to-order,
configure-to-order,
direct shipment, bulk shipment and local fulfillment services.
We have implemented these models in an effort to reduce lead
times for delivery of our products and to enable channel
customers to select from among multiple manufacturing and
delivery alternatives, the methods that best complement their
operations.
Our RAID server adapter products incorporate a variety of
standard industry components and LSI-designed components,
mounted on printed circuit board assemblies. The manufacturing,
assembly and test operations for LSIs RAID server adapters
are all fully outsourced to third-party suppliers to take
advantage of the scale, quality and cost benefits afforded by
third-party manufacturing services. Our RAID server adapter and
interposer boards are produced in configurations ranging from
bulk packaging of high volume units sold to the major server and
workstation OEMs, to low volume products for indirect channels
featuring retail packaging with software media, documentation
and interconnect cables. LSIs RAID server adapters are
shipped from our third-party suppliers to our worldwide
inventory hubs, directly to OEM factories, or to distributors
who supply them to a variety of indirect channels in the market.
7
Backlog
Semiconductor
Backlog
In the Semiconductor segment, we generally do not have long-term
volume purchase contracts with our customers. Instead, customers
place purchase orders that are subject to acceptance by us. The
timing of the design activities for which we receive payment and
the placement of orders included in our backlog at any
particular time is generally within the control of the customer.
For example, there could be a significant time lag between our
commencement of design work and the receipt of a purchase order
from a customer for the units of a developed product. Also,
customers may from time to time revise delivery quantities or
delivery schedules to reflect their changing needs. For these
reasons, we do not believe that our backlog as of any particular
date is a meaningful indicator of future annual sales.
Storage
Systems Backlog
Due to the nature of our business, we generally have relatively
low levels of backlog in the Storage Systems segment and our
quarterly revenues depend largely on orders booked and shipped
within the same quarter. Consequently, we believe that backlog
is not a good indicator of future sales. Because lead times for
delivery of our storage systems products are relatively short,
we must build products in advance of orders. This subjects us to
certain risks, most notably the possibility that expected sales
will not materialize, leading to excess inventory, which we may
be unable to sell to our customers.
Competition
Semiconductor
Competitors
The semiconductor industry is intensely competitive and
characterized by continuing technological change, rapid product
obsolescence, evolving industry standards and price erosion.
Many of our competitors are larger, diversified companies with
substantially greater financial resources than us. Some of our
competitors are also customers of ours who have internal
semiconductor design and manufacturing capacity. We also compete
with smaller and emerging companies whose strategy is to sell
products into specialized markets or to provide only a portion
of the range of products and services that we offer.
Our principal competitors in the Semiconductor segment include
Avago Technologies Limited, Broadcom Corporation, Cavium
Networks, Inc., Freescale, Inc., International Business Machines
Corporation, Marvell Technology Group, Ltd., NetLogic
Microsystems, Inc., NXP Semiconductors, PMC-Sierra, Inc.,
STMicroelectronics N.V. and Texas Instruments, Inc.
The principal competitive factors in the semiconductor industry
include:
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design capabilities;
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differentiating product features;
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product performance characteristics;
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time to market;
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price;
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breadth of product line;
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customer support;
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logistics and planning systems; and
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utilization of emerging industry standards.
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While we believe we are competitive on the basis of all the
factors listed above, we believe some of our competitors compete
more favorably on the basis of price and on delivering products
to market more quickly. However, we feel we are particularly
strong in offering integrated solutions, broad product lines,
product
8
performance, customer support and logistics and planning
systems. In addition, existing suppliers tend to have an
advantage when competing for designs, which can make it
difficult for us to win designs at new customers, even if we
compete favorably on the factors identified above.
The markets into which we sell our semiconductor products are
subject to intense price competition. We expect to continue to
experience declines in the selling prices of our semiconductor
products over the life cycle of each product. In order to offset
or partially offset declines in the selling prices of our
products, we continually strive to reduce the costs of products
through product design changes, manufacturing process changes,
yield improvements and procurement of wafers from outsourced
manufacturing partners.
Storage
Systems Competitors
The market for our storage systems products is highly
competitive, rapidly evolving and subject to changing
technology, customer needs and new product introductions. We
compete with products from storage system and component
providers such as Adaptec, Inc., Dot Hill Systems Corporation,
Infortrend Technology Inc., Promise Technology Inc., and Xyratex
Group Limited. We also face competition from internal divisions
of several of our OEM customers, such as IBM and Dell, who must
choose whether to develop products internally or obtain them
from companies such as LSI. We also compete indirectly with
large, well-capitalized storage systems companies such as EMC
Corporation, Hitachi Data Systems and Network Appliance, Inc.,
and with newer competitors such as 3Par Inc., Compellent
Technologies Inc. and ISILON Systems Inc., who sell to the same
end-customers as our OEM customers.
The principal competitive factors for storage system products
include:
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features and functionality;
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product performance and price;
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reliability, scalability and data availability;
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interoperability with other server, storage networking and
storage system platforms;
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interoperability with industry applications, including database,
email and internet content delivery systems;
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support for emerging industry and customer standards;
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levels of training, marketing and customer support;
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level of easily customizable features;
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quality and availability of supporting software;
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quality of system integration; and
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technical services and support.
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Our ability to remain competitive will depend largely upon our
ongoing performance in the areas of product development and
customer support. To be successful in the future, we believe
that we must respond promptly and effectively to the challenges
of technological change and our competitors innovations by
continually innovating and enhancing our product offerings. We
must also continue to aggressively recruit and retain employees
highly qualified and technically experienced in hardware and
software development in order to achieve and maintain industry
leadership in product development and support.
Patents,
Trademarks and Licenses
We own or have rights to a number of patents, trademarks,
copyrights, trade secrets and other intellectual property
directly related to and important to our business. As of
December 31, 2009, we had approximately 11,075
9
U.S. patents and patent applications and a number of
related foreign patents and patent applications. These patents
include patents related to the following technologies:
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Integrated circuit and optoelectronic manufacturing processes;
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A number of technologies related to storage systems;
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Consumer electronics products such as digital cameras, digital
audio players, DVD players, digital televisions and personal
computers;
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Modems, digital signal processors, wireless communications,
network processors and communication protocols; and
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Optoelectronic products including lasers, optical modulators,
optical receivers and optical amplifiers.
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We have patents of all ages ranging from pending applications,
which, if awarded, will have a duration of 20 years from
their filing dates, through patents soon to expire.
We indemnify our customers for some of the costs and damages of
patent infringement in circumstances where our product is the
primary factor creating the customers infringement
exposure. We generally exclude coverage where infringement
arises out of the combination of our products with products of
others.
We protect our products and processes by asserting our
intellectual property rights where appropriate and prudent. We
also obtain licenses to patents, copyrights and other
intellectual property rights used in connection with our
business when practicable and appropriate.
Companies in the technology industry are often subject to claims
of intellectual property infringement. You can find information
about the impact of these types of claims in
Item 1A Risk Factors. You can also
find information about several legal proceedings against us that
involve intellectual property claims in Note 14 to our
financial statements in Item 8.
Research
and Development
Our industry experiences rapid change and we must continually
develop new products to remain competitive. Our research and
development expenditures were $608 million,
$673 million and $655 million for fiscal 2009, 2008
and 2007, respectively. We anticipate that we will continue to
make significant research and development expenditures to
maintain our competitive position with a continuing flow of
innovative products and technology.
Working
Capital
Information about our working capital practices is included in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operation
under the heading Financial Condition, Capital Resources
and Liquidity and is incorporated herein by reference.
Environmental
Regulation
Federal, state and local regulations, in addition to those of
other nations, impose various environmental controls on certain
chemicals and restricted substances used in the manufacture of
semiconductor and storage products. To comply with these
regulations, we have implemented environmental, health and
safety management system processes. For example, we offer
products that comply with the requirements of the European Union
Restriction of Hazardous Substances Directive 2002/95/EC (RoHS
Directive) that was implemented on July 1, 2006 and other
international environmental regulations impacting electronic
equipment and components. We also work internally and with our
suppliers and customers to develop a pro-active approach to
emerging concerns such as those associated with climate change.
While to date we have not experienced any material adverse
impact on our business from environmental regulations, such
regulations might be adopted or amended so as to impose
expensive obligations on us in the future.
10
In addition, violations of environmental regulations including
alleged historic chemical releases into the environment or use
of restricted substances could result in:
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the need for additional capital or other material improvements
to comply with such regulations;
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liability to our employees
and/or third
parties; and/or
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business interruptions as a consequence of environmental permit
suspensions or revocations, the granting of injunctions
requested by governmental agencies or private parties, or the
unintentional presence of restricted substances in our products.
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Employees
As of December 31, 2009, we had 5,397 full-time
employees.
Our future success depends upon the continued service of our key
technical and management personnel and upon our ability to
continue to attract and retain qualified employees, particularly
those highly skilled design, process and test engineers involved
in the development of new products and processes. We currently
have favorable employee relations, but the competition for
technical personnel is intense, and the loss of key employees or
the inability to hire such employees when needed could have a
material adverse impact on our business and financial condition.
Seasonality
Our business is largely focused on the information technology
industry. Due to seasonality in this industry, we typically
expect to see stronger revenues in the second half of the year.
Set forth below are risks and uncertainties that, if they were
to occur, could materially adversely affect our business or
could cause our actual results to differ materially from the
results contemplated by the forward-looking statements in this
report and other public statements we make.
We
depend on a small number of customers. The loss of, or a
significant reduction in revenue from, any of these customers
would harm our results of operations.
A limited number of customers account for a substantial portion
of our revenues. In 2009, IBM and Seagate, our two largest
customers, represented approximately 19.3% and 15.5%,
respectively, of our total revenues, and our 10 largest
customers accounted for approximately 65.8% of our revenue. If
any of our key customers reduced significantly or canceled its
orders, our business and operating results could be
significantly harmed. Because many of our semiconductor products
are designed for specific customers and have long product design
and development cycles, it may be difficult for us to replace
key customers that reduce or cancel their existing orders for
these products.
In addition, if we fail to win new product designs from our
major customers, our business and results of operations may be
harmed. Further, if our major customers make significant changes
in scheduled deliveries, decide to pursue the internal
development of the products we sell to them or are acquired, our
business and results of operations may be harmed. For example,
business combinations such as Oracles recent acquisition
of Sun Microsystems, a customer of our Storage Systems business,
could result in changes in the competitive environment we face.
These combinations could have a positive or negative impact on
our business.
If we
fail to keep pace with technological advances, or if we pursue
technologies that do not become commercially accepted, customers
may not buy our products and our results of operations may be
harmed.
Many of the industry segments in which we operate are
characterized by rapid technological change, changes in customer
requirements, frequent new product introductions and
enhancements, short product cycles and evolving industry
standards. We believe that our future success will depend, in
part, on our ability to improve on existing technologies and to
develop and implement new ones, as well as on our ability to
adopt and implement emerging
11
industry standards in a timely manner and to adapt products and
processes to technological changes. If we fail to develop new
and enhanced products and technologies, if we focus on
technologies that do not become widely adopted, or if new
technologies that we do not offer and that compete with our
technologies become widely accepted, demand for our current and
planned products may be reduced.
In addition, the emergence of markets for integrated circuits
may be affected by factors beyond our control. For example, we
design some products to conform to current specific industry
standards. If a competitor offers a product based on a standard
before we are able to do so, our customers may buy our
competitors product rather than our product. Our customers
may not adopt or continue to follow the standards that we have
chosen, which would make our products less desirable to
customers, and could negatively affect sales. Also, competing
standards may emerge that are preferred by our customers, which
could reduce sales and require us to make significant
expenditures to develop new products. To the extent that we are
not able to adapt effectively and expeditiously to new
standards, our business may be harmed.
We
operate in intensely competitive markets, and our failure to
compete effectively would harm our results of
operations.
We derive significant revenue from the sale of integrated
circuits as well as storage systems. These industries are
intensely competitive, and competition may increase as existing
competitors enhance their product offerings and as new
participants enter the market. Our competitors include large
domestic and foreign companies that have substantially greater
financial, technical and management resources than us. Several
major diversified electronics companies offer products that
compete with our products. Other competitors are specialized,
rapidly growing companies that sell products into the same
markets that we target. Some of our customers may also design
and manufacture products internally that compete with our
products. We cannot provide any assurances that the price and
performance of our products will be superior relative to the
products of our competitors or will be sufficient to obtain
business.
Increased competition may harm our revenues and margins. For
example, competitors with greater financial resources may be
able to offer lower prices than us, or they may offer additional
products, services or other incentives that we may not be able
to match. Competitors may be better able than us to respond
quickly to new technologies and may undertake more extensive
marketing campaigns than we do. They may also make strategic
acquisitions or establish cooperative relationships among
themselves or with third parties to increase their market share.
In addition, competitors may sell commercial quantities of new
products before we do, establishing a market position that we
may not be able to overcome once we introduce similar products
in commercial quantities. If we are unable to develop and market
competitive products on a timely basis, we will likely fail to
maintain or expand our market share and our revenues will likely
decline.
Customer
orders and ordering patterns can change quickly, making it
difficult for us to predict our revenues and making it possible
that our actual revenues may vary materially from our
expectations, which could harm our results of operations and
stock price.
We sell a significant amount of product pursuant to purchase
orders that customers may cancel or defer on short notice
without incurring a significant penalty. In addition, the period
of time between order and product shipment can be very short. If
customers reduce the rate at which they place new orders,
whether because of changing market conditions for their products
or other reasons, or if they cancel or defer previously placed
orders, the impact on our revenue can occur quickly and could
cause us to experience revenues that are lower than we may have
indicated in any forecast of our future revenue that we may have
made publicly. For example, as economic conditions deteriorated
in the fourth quarter of 2008, our sales declined below the
expectations we had publicly announced earlier that quarter
because our customers orders declined to a level below
that which we had anticipated. Reductions in new order rates as
well as cancellations or deferrals of existing orders could also
cause us to hold excess inventory, which could adversely affect
our results of operations.
12
A
prolonged economic downturn could have a material negative
impact on our results of operations and financial
condition.
As a result of the global economic downturn that began in late
2008, we experienced significant revenue declines in late 2008
and early 2009. While we saw renewed demand in some parts of our
business toward the end of the third quarter of 2009, if these
declines persist or get worse, they could negatively affect our
business in several ways, in addition to resulting in lower
demand for our products and causing potential disruptions at
customers or suppliers that might encounter financial
difficulties.
We have defined benefit pension plans under which we are
obligated to make future payments to participants. We have set
aside funds to meet our anticipated obligations under these
plans and have invested them principally in equity and fixed
income securities. The value of these securities declined
significantly in late 2008 and early 2009 and has not fully
recovered. At December 31, 2009, our projected benefit
obligations under our pension plans exceeded the value of the
assets of those plans by approximately $455 million.
U.S. law provides that we must make contributions to the
pension plans in 2010 of at least $31 million, and we
currently anticipate making contributions of between
$31 million and $37 million. We may be required to
make additional contributions to the plans in later years if the
value of the plan assets does not increase, and these amounts
could be significantly larger than the required contributions in
2010. We may also choose to make additional, voluntary
contributions to the plans.
At December 31, 2009, we had contractual purchase
commitments with suppliers, primarily for raw materials and
manufacturing services and for some non-production items, of
approximately $559.6 million. If our actual revenues in the
future are lower than our current expectations, we may not meet
all of our buying commitments. As a result, it is possible that
we will have to make penalty-type payments under these
contracts, even though we are not obtaining any products that we
can sell.
While we believe we currently have sufficient cash and short
term investments to fund our operations for the near term, we
may find it desirable to obtain additional debt or equity
financing or seek to refinance our existing convertible notes in
the event of a prolonged or worsening downturn. Financing may
not be available to us at all or on acceptable terms if we
determine that it would be desirable to obtain additional
financing. Moreover, any future equity or convertible debt
financing may decrease the percentage of equity ownership of
existing stockholders and may result in dilution, depending on
the price at which the equity is sold or the debt is converted.
We
depend on outside suppliers to manufacture, assemble, package
and test our products; accordingly, any failure to secure and
maintain sufficient manufacturing capacity or to maintain the
quality of our products could harm our business and results of
operations.
We depend on third-party foundries to manufacture integrated
circuits for us and on outside suppliers to assemble and test
our semiconductor products and to assemble our storage systems
products. As such, we face the following risks:
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a supplier may be unwilling to devote adequate capacity to the
production of our products or may be unable to produce our
products;
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a supplier may fail to develop, or may discontinue,
manufacturing methods or technologies appropriate for our
products;
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manufacturing costs may be higher than planned;
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product reliability may decline;
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a manufacturer may not be able to maintain continuing
relationships with its suppliers; and
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we may have reduced control over delivery schedules, quality,
manufacturing yields and costs of products.
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The ability of an independent foundry to provide us with
integrated circuits is limited by its available capacity and
existing obligations. We generally do not enter into contracts
to reserve foundry capacity. Availability of foundry capacity
has in the past been reduced from time to time due to strong
demand and may not be available when needed at reasonable
prices. If foundry capacity is limited, it is possible that one
of our foundries may allocate capacity to the production of
other companies products. This reallocation could impair
our ability to obtain
13
sufficient wafers. We may also use a second foundry for a
particular product when capacity at the main foundry is limited,
but the cost of integrated circuits at the second foundry may be
higher, which would reduce our margins.
By relying on outside suppliers to manufacture, assemble and
test our products, we may have a reduced ability to control
directly product delivery schedules and quality assurance. This
lack of control may result in product shortages or quality
assurance problems that could delay shipments of products or
increase manufacturing, assembly, testing or other costs. In
addition, if these outside suppliers are unable to obtain
sufficient raw materials in a timely manner, we may experience
product shortages or delays in product shipments, which could
harm our customer relationships and results of operations.
If any of our manufacturing suppliers experiences capacity
constraints, encounters financial difficulties, or experiences
any other major disruption of its operations, we may need to
qualify an alternate supplier, which may take several months and
could result in delays in product shipments. These delays could
cause our customers to seek alternate suppliers, which could
adversely impact our business.
As a result of all of these factors and risks, and although we
carefully monitor and plan for capacity and other issues, we
cannot provide any assurances that we can obtain products from
our suppliers on a timely basis or at reasonable prices.
Failure
to qualify our semiconductor products or our suppliers
manufacturing lines with key customers could harm our business
and results of operations.
Some customers will not purchase any products, other than
limited numbers of evaluation units, until they qualify the
products or the manufacturing line for the product. We may not
always be able to satisfy the qualification requirements of
these customers. Delays in qualification may cause a customer to
discontinue use of non-qualified products and result in a
significant loss of revenue.
Any
defects in our products could harm our reputation, customer
relationships and results of operations.
Our products may contain undetected defects, errors or failures,
which may not become apparent until the products are deployed in
commercial applications and other equipment. Consequently,
customers may discover errors after the products have been
deployed. The occurrence of any defects, errors or failures
could result in:
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cancellation of orders;
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product returns, repairs or replacements;
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diversion of our resources;
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legal actions by customers or customers end users;
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increased insurance costs; and
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other losses to us or to customers or end users.
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Any of these occurrences could also result in the loss of or
delay in market acceptance of products and loss of sales, which
could negatively affect our business and results of operations.
As our products become even more complex in the future, this
risk may intensify over time and may result in increased
expenses.
We may
be subject to intellectual property infringement claims and
litigation, which could cause us to incur significant expenses
or prevent us from selling our products.
As is typical in the semiconductor industry, we are frequently
involved in disputes regarding patent and other intellectual
property rights. We have in the past received, and we may in the
future receive, communications from third parties asserting that
our products, processes or technologies infringe on the patent
or other intellectual property rights of third parties, and we
may also receive claims of potential infringement if we attempt
to license intellectual property to others. Intellectual
property litigation, regardless of the outcome, may be costly
and time consuming, and may divert the attention of management
and key personnel from other business issues. Claims of
intellectual property infringement also might require us to
enter into costly royalty or license agreements. We may
14
not be able to obtain royalty or license agreements on
acceptable terms. If any of our products or intellectual
property infringes on valid rights held by others, our results
of operations or financial position may suffer and we may have
to make material changes in production processes or products.
If we
are unable to protect or assert our intellectual property
rights, our business and results of operations may be
harmed.
Our future success will depend, in part, upon our ability to
protect and assert our intellectual property rights. We rely
primarily on patent and other intellectual property laws, as
well as nondisclosure agreements and other methods, to protect
our proprietary technologies and processes. It is possible that
competitors or other unauthorized third parties may obtain,
copy, use or disclose proprietary technologies and processes,
despite our efforts to protect them.
While we hold a significant number of patents, we can give you
no assurance that any additional patents will be issued. Even if
new patents are issued, the claims allowed may not be
sufficiently broad to protect our technology. In addition, any
of our existing patents, and any future patents issued to us,
may be challenged, invalidated or circumvented, or changes in
law may result in us having less protection than we may have
experienced historically. As such, any rights granted under
these patents may not provide us with meaningful protection. We
may not have foreign patents or pending applications
corresponding to our U.S. patents and applications. Even if
foreign patents are granted, effective enforcement in foreign
countries may not be available.
If our patents do not adequately protect our technology,
competitors may be able to offer products similar to our
products more easily. Our competitors may also be able to
develop similar technology independently or design around our
patents. Some or all of our patents have in the past been
licensed and likely will in the future be licensed to certain of
our competitors through cross-license agreements.
We are
exposed to legal, business, political and economic risks
associated with our international operations.
We derive, and we expect to continue to derive, a substantial
portion of our revenue from sales of products shipped to
locations outside of the United States. In 2009, approximately
76.6% of our total revenue was derived from sales outside the
United States. In addition, we perform a significant amount of
our development work outside the United States and most of our
products are manufactured outside of the United States.
Operations outside of the United States are subject to a number
of risks and potential costs that could harm our business and
results of operations, including:
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political, social and economic instability;
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fluctuations in foreign currency exchange rates;
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exposure to different legal standards, particularly with respect
to intellectual property;
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natural disasters, civil unrest, terrorism and public health
emergencies;
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nationalization of businesses and blocking of cash flows;
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trade and travel restrictions;
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imposition of governmental controls and restrictions;
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burdens of complying with a variety of foreign laws;
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import and export license requirements and restrictions;
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unexpected changes in regulatory requirements;
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foreign technical standards;
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difficulties in staffing and managing international operations;
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international trade disputes;
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difficulties in collecting receivables from foreign entities or
delayed revenue recognition; and
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potentially adverse tax consequences, including adverse impacts
from changes in United States tax laws.
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We use
indirect channels of product distribution over which we have
limited control.
We sell our storage systems products primarily to other
companies that may or may not add features or functionality to
them before reselling them to end customers. We also sell some
of our semiconductor products through distributors and our RAID
server adapters and network attached storage gateways through
resellers and distributors. A deterioration in our relationships
with our resellers or distributors, or a decline in their
business, could harm our sales. In addition, we may increase our
reliance on indirect channels of distribution in the future. We
may not successfully maintain or expand these indirect channels
of distribution, and our failure to do so could result in the
loss of sales opportunities. Furthermore, our reliance on
indirect channels of distribution may reduce visibility with
respect to future business opportunities, thereby making it more
difficult to forecast orders.
We may
engage in acquisitions and strategic alliances, which may not be
successful and could harm our business and operating
results.
We expect to continue to explore strategic acquisitions that
build upon or expand our library of intellectual property, human
capital and engineering talent, and that could increase our
ability to address the needs of our customers. For example, in
2009 we acquired ONStor, Inc. to add network attached storage
capabilities to our product offerings and the 3ware assets which
included a RAID server adapter distribution channel business.
Acquisitions of high-technology companies have inherent risks.
No assurance can be given that our previous acquisitions or
future acquisitions will be successful and will not harm our
business or operating results. In addition, we may make
investments in companies, products and technologies through
strategic alliances and otherwise. If these investments are not
successful, our results of operations may suffer.
The
semiconductor industry is highly cyclical, which may cause our
operating results to fluctuate.
We operate in the highly cyclical semiconductor industry. This
industry is characterized by wide fluctuations in product supply
and demand. In the past, the semiconductor industry has
experienced significant downturns, often in connection with, or
in anticipation of, excess manufacturing capacity worldwide,
maturing product cycles and declines in general economic
conditions. Even if demand for our products remains constant, a
lower level of available foundry capacity could increase our
costs, which would likely have an adverse impact on our results
of operations.
Our
failure to attract, retain and motivate key employees could harm
our business.
In some of our fields of operation, there are only a limited
number of people in the job market who possess the requisite
skills. In the past, we have experienced difficulty in
identifying and hiring sufficient numbers of qualified engineers
in parts of our business as well as in retaining qualified
employees. The loss of the services of any key personnel or our
inability to hire new personnel with the requisite skills could
restrict our ability to develop new products or enhance existing
products in a timely manner, to sell products to our customers
or to manage our business effectively. In light of economic
conditions in early 2009, we implemented several cost-saving
measures that directly affected employee compensation. These
measures, or others that we may take in the future, may
negatively impact our ability to recruit and retain qualified
personnel.
Our
operations and our suppliers operations are subject to
natural disasters and other events outside of our control that
may disrupt our business and harm our operating
results.
Our operations and those of our suppliers are subject to natural
disasters and other events outside of our control that may
disrupt our business and harm our operating results. For
example, a widespread outbreak of an illness such as H1N1 flu,
avian flu, or bird flu, or severe acute respiratory syndrome, or
SARS, could harm our operations and those of our suppliers as
well as decrease demand from customers. We also have substantial
operations in parts of California that have experienced major
earthquakes and in parts of Asia that have experienced both
typhoons and earthquakes. If our operations or those of our
suppliers are curtailed because of health issues or natural
disasters, our
16
business may be disrupted and we may need to seek alternate
sources of supply for manufacturing or other services. Alternate
sources may not be available, may be more expensive or may
result in delays in shipments to customers, which would affect
our results of operations. In addition, a curtailment of design
operations could result in delays in the development of new
products. If our customers or suppliers and
manufacturers businesses are affected by health issues,
natural disasters or other events outside of our control, our
business and results of operations may be harmed.
We are
subject to various environmental laws and regulations that could
impose substantial costs on us and may harm our
business.
Our business is subject to or may be impacted by various
environmental laws and regulations. For example, some countries
have begun to require companies selling a broad range of
electrical equipment to conform to legislation such as the Waste
Electrical and Electronic Equipment (WEEE) Directive, the
Restriction of the use of certain Hazardous Substances in
Electrical & Electronic Equipment (RoHS) Directive,
and the Registration, Evaluation, Authorization and Restriction
of Chemicals (REACH) Regulation in the European Union.
Environmental legislation such as these could require us to
redesign our products in order to comply with the standards and
require the development of compliance administration systems.
Redesigned products could be more costly to manufacture or
require more costly or less efficient raw materials, making our
products more costly or less desirable. If we cannot develop
compliant products on a timely basis or properly administer our
compliance programs, our revenues may also decline due to lower
sales. In addition, under certain environmental laws, we could
be held responsible, without regard to fault, for costs relating
to any contamination at our current or past facilities and at
third party waste disposal sites. We could also be held liable
for consequences arising out of human exposure to such
substances or other environmental damage.
Our
blank check preferred stock and Delaware law contain provisions
that may inhibit potential acquisition bids, which may harm our
stock price, discourage merger offers or prevent changes in our
management.
Our board has the authority to issue preferred stock and to
determine its rights, preferences, privileges and restrictions,
including voting rights, without any further vote or action by
our stockholders. If we issue any of these shares of preferred
stock in the future, the rights of holders of our common stock
may be negatively affected. Although we have no current plans to
issue shares of preferred stock, if we issue preferred stock, a
change of control of our company could be delayed, deferred or
prevented. Furthermore, Section 203 of the Delaware General
Corporation Law restricts certain business combinations with any
interested stockholder as defined by that statute.
These provisions are designed to encourage potential acquirers
to negotiate with our board of directors and give our board an
opportunity to consider various alternatives to increase
stockholder value. These provisions are also intended to
discourage certain tactics that may be used in proxy contests.
However, the potential issuance of preferred stock or the
restrictions in Section 203 of the Delaware General
Corporation Law could discourage potential acquisition proposals
and could delay or prevent a change in control, which may
adversely affect the market price of our stock. These provisions
may also have the effect of preventing changes in our management
or board of directors.
Class
action litigation due to stock price volatility or other factors
could cause us to incur substantial costs and divert our
managements attention and resources.
In the past, securities class action litigation often has been
brought against a company following periods of volatility in the
market price of its securities. Companies in the technology
industry are particularly vulnerable to this kind of litigation
due to the high volatility of their stock prices. Our stock has
experienced substantial price volatility in the past. This may
be a result of quarterly variations in our results of
operations, the published expectations of security analysts and
announcements by us and our competitors as well as general
economic conditions and our stock price may continue to
experience substantial volatility. Accordingly, we may in the
future be the target of securities litigation. Any securities
litigation could result in substantial costs and could divert
the attention and resources of our management.
17
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
We lease office space in two buildings in Milpitas, California
for our corporate headquarters, administration and engineering
offices. We also own a 600,000 square foot office complex
in Allentown, Pennsylvania that we use for administration and
engineering offices. We have leased out approximately
69,000 square feet of space in that facility to a tenant.
In our Storage Systems business, we own approximately
330,000 square feet of space in Wichita, Kansas which
includes engineering, administrative offices and systems
training.
We also own approximately 150,000 square feet of sales and
engineering office space in Fort Collins, Colorado and
approximately 180,000 square feet of sales and engineering
office space in Colorado Springs, Colorado. These facilities are
used by both our Semiconductor segment and our Storage Systems
segment.
We own or lease additional space in the United States and in
various other countries, and use that space for sales,
marketing, engineering, general corporate and test purposes.
We believe that our existing facilities and equipment are well
maintained, in good operating condition, suitable for our
operations and are adequate to meet our current requirements.
|
|
Item 3.
|
Legal
Proceedings
|
This information is included in Note 14 (Commitments,
Contingencies and Legal Matters Legal Matters)
to our financial statements in Item 8 and is incorporated
herein by reference.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
During the fourth quarter of 2009, no matter was submitted to a
vote of our security holders.
Executive
Officers of LSI
Set forth below is information about our executive officers.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Abhijit Y. Talwalkar
|
|
|
45
|
|
|
President and Chief Executive Officer
|
Philip W. Bullinger
|
|
|
45
|
|
|
Executive Vice President and General Manager, Engenio Storage
Group
|
Bryon Look
|
|
|
56
|
|
|
Executive Vice President, Chief Financial Officer and Chief
Administrative Officer
|
Jean F. Rankin
|
|
|
51
|
|
|
Executive Vice President, General Counsel and Secretary
|
D. Jeffrey Richardson
|
|
|
45
|
|
|
Executive Vice President and General Manager, Semiconductor
Solutions Group
|
Mr. Talwalkar has been our President and Chief Executive
Officer and a member of our Board of Directors since May 2005.
Prior to joining LSI, Mr. Talwalkar was employed by Intel
Corporation, a microprocessor manufacturer. At Intel, he was
Corporate Vice President and Co-general Manager of the Digital
Enterprise Group from January 2005 until May 2005, Vice
President and General Manager of Intels Enterprise
Platform Group from May 2004 to January 2005, and Vice President
and General Manager of Intels Platform Products Group,
within Intels Enterprise Platform Group, from April 2002
through May 2004. Mr. Talwalkar also served as Vice
President and Assistant General Manager of Intels
Enterprise Platform Group from June 2001 to March 2002.
Mr. Bullinger has been the leader or a co-leader of our
Storage Systems business since August 2005. From September 2001
through August 2005, he served as Vice President and General
Manager of our RAID Storage
18
Adapters division. He joined LSI in 1998, following LSIs
acquisition of Symbios, Inc., a storage company, and served as
Director of Product Development until August 2001.
Mr. Look has been Executive Vice President, Chief Financial
Officer and Chief Administrative Officer since January 2009.
From November 2000 through January 2009, he served as Executive
Vice President and Chief Financial Officer. Between March 1997
and November 2000, he was our Vice President, Corporate
Development and Strategic Planning. Prior to joining LSI, he was
manager of business development in Hewlett-Packards
corporate development department. During a
21-year
career at Hewlett-Packard, Mr. Look held a variety of
management positions in finance and research and development.
Ms. Rankin has been our Executive Vice President, General
Counsel and Secretary since April 2007. Ms. Rankin joined
LSI in 2007 following our acquisition of Agere Systems. At
Agere, she had been Executive Vice President, General Counsel
and Secretary since 2000.
Mr. Richardson has been the leader of our Semiconductor
Solutions Group since January 2009. From April 2007 through
January 2009, he led our Network and Storage Products Group,
which included our Networking and Storage Interfaces businesses.
From September 2005 through April 2007, he was the leader of our
Custom Solutions Group, and from June 2005 through September
2005, he led our Corporate Strategy function. From 1992 through
June 2005, he held a variety of management positions at Intel,
including positions as Vice President of the Digital Enterprise
Group and General Manager of the Server Platform Group from
February 2005 through June 2005 and General Manager of
Intels Enterprise Platforms and Services Division from
June 2001 to January 2005. From January 1999 to June 2001, he
was Director of Product Development of Intels Enterprise
Platforms and Services Division.
Officers are not elected for a fixed term of office but hold
office until their successors have been elected. There are no
family relationships among the executive officers and directors
of LSI.
19
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our stock trades on the New York Stock Exchange under the symbol
LSI. In May 2009, our Chief Executive Officer
submitted to the Exchange an annual certification stating that
he was not aware of any violations of the Exchanges
corporate governance listing standards.
The table below shows the high and low sales prices for our
common stock for each quarter during our last two full fiscal
years, as reported in the consolidated transaction reporting
system.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
3.93
|
|
|
$
|
2.39
|
|
|
$
|
5.57
|
|
|
$
|
3.79
|
|
Second Quarter
|
|
$
|
5.20
|
|
|
$
|
3.29
|
|
|
$
|
7.53
|
|
|
$
|
4.73
|
|
Third Quarter
|
|
$
|
5.78
|
|
|
$
|
4.35
|
|
|
$
|
7.87
|
|
|
$
|
5.12
|
|
Fourth Quarter
|
|
$
|
6.14
|
|
|
$
|
4.88
|
|
|
$
|
5.70
|
|
|
$
|
2.36
|
|
At February 22, 2010, there were 336,237 holders of record
of our common stock. We believe that we have a greater number of
additional stockholders who own their shares through brokerage
firms and other nominees.
We have never paid cash dividends on our common stock. It is
presently our policy to reinvest our earnings, and we do not
currently anticipate paying any cash dividends to stockholders
in the foreseeable future.
PERFORMANCE
GRAPH
The following graph compares the cumulative total stockholder
return on our common stock to that of the S&P 500 Index and
the S&P 500 Semiconductors Index. The graph assumes that a
$100 investment was made in our common stock and each of the
indices at December 31, 2004, and that dividends, if any,
were reinvested in all cases. The stock price performance shown
on the graph is not necessarily indicative of future price
performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 31, 2004
|
|
|
Dec 31, 2005
|
|
|
Dec 31, 2006
|
|
|
Dec 31, 2007
|
|
|
Dec 31, 2008
|
|
|
Dec 31, 2009
|
|
|
LSI Corporation
|
|
$
|
100
|
|
|
$
|
145.99
|
|
|
$
|
164.23
|
|
|
$
|
96.90
|
|
|
$
|
60.04
|
|
|
$
|
109.67
|
|
S&P 500 Index
|
|
$
|
100
|
|
|
$
|
104.91
|
|
|
$
|
121.48
|
|
|
$
|
128.16
|
|
|
$
|
80.74
|
|
|
$
|
102.11
|
|
S&P 500 Semiconductors Index
|
|
$
|
100
|
|
|
$
|
112.16
|
|
|
$
|
102.16
|
|
|
$
|
114.40
|
|
|
$
|
62.07
|
|
|
$
|
99.93
|
|
20
|
|
Item 6.
|
Selected
Financial Data
|
Five-Year
Consolidated Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
2,219,159
|
|
|
$
|
2,677,077
|
|
|
$
|
2,603,643
|
|
|
$
|
1,982,148
|
|
|
$
|
1,919,250
|
|
Cost of revenues
|
|
|
1,375,758
|
|
|
|
1,608,108
|
|
|
|
1,699,785
|
|
|
|
1,158,983
|
|
|
|
1,150,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
843,401
|
|
|
|
1,068,969
|
|
|
|
903,858
|
|
|
|
823,165
|
|
|
|
769,208
|
|
Research and development
|
|
|
608,312
|
|
|
|
672,511
|
|
|
|
655,224
|
|
|
|
413,432
|
|
|
|
399,685
|
|
Selling, general and administrative
|
|
|
326,014
|
|
|
|
406,875
|
|
|
|
381,409
|
|
|
|
255,569
|
|
|
|
238,265
|
|
Restructuring of operations and other items, net
|
|
|
38,246
|
|
|
|
43,717
|
|
|
|
148,121
|
|
|
|
(8,427
|
)
|
|
|
119,052
|
|
Goodwill and identified intangible asset impairment charges
|
|
|
|
|
|
|
541,586
|
|
|
|
2,021,463
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
188,872
|
|
|
|
4,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income from operations
|
|
|
(129,171
|
)
|
|
|
(595,720
|
)
|
|
|
(2,491,231
|
)
|
|
|
158,307
|
|
|
|
12,206
|
|
Interest expense
|
|
|
(21,931
|
)
|
|
|
(34,943
|
)
|
|
|
(31,020
|
)
|
|
|
(24,263
|
)
|
|
|
(25,283
|
)
|
Interest income and other, net
|
|
|
20,272
|
|
|
|
36,110
|
|
|
|
46,758
|
|
|
|
51,276
|
|
|
|
33,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before income taxes
|
|
|
(130,830
|
)
|
|
|
(594,553
|
)
|
|
|
(2,475,493
|
)
|
|
|
185,320
|
|
|
|
20,917
|
|
(Benefit)/provision for income taxes
|
|
|
(83,111
|
)
|
|
|
27,700
|
|
|
|
11,326
|
|
|
|
15,682
|
|
|
|
26,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(47,719
|
)
|
|
$
|
(622,253
|
)
|
|
$
|
(2,486,819
|
)
|
|
$
|
169,638
|
|
|
$
|
(5,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss)/income per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.96
|
)
|
|
$
|
(3.87
|
)
|
|
$
|
0.43
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss)/income per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.96
|
)
|
|
$
|
(3.87
|
)
|
|
$
|
0.42
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,967,930
|
|
|
$
|
3,344,194
|
|
|
$
|
4,396,390
|
|
|
$
|
2,852,144
|
|
|
$
|
2,796,066
|
|
Long-term obligations
|
|
$
|
652,441
|
|
|
$
|
1,105,739
|
|
|
$
|
1,148,689
|
|
|
$
|
429,400
|
|
|
$
|
699,050
|
|
Stockholders equity
|
|
$
|
1,461,104
|
|
|
$
|
1,440,922
|
|
|
$
|
2,484,996
|
|
|
$
|
1,895,738
|
|
|
$
|
1,627,950
|
|
In 2009, we recorded a tax benefit of $83.1 million,
primarily attributable to an $81.0 million tax benefit
recognized as a result of settlements of tax audits in foreign
jurisdictions.
During the years ended December 31, 2008 and 2007, we
recognized goodwill and identified intangible asset impairment
charges of $541.6 million and $2,021.5 million,
respectively, in the Semiconductor segment. There were no
impairment charges of goodwill or identified intangible assets
for the year ended December 31, 2009.
On April 2, 2007, we acquired Agere Systems Inc. through
the merger of Agere and a subsidiary of ours. The merger was
accounted for as a purchase. Accordingly, the results of
operations of Agere and estimated fair value of assets acquired
and liabilities assumed were included in our consolidated
financial statements from April 2, 2007.
Beginning in 2007, we included amortization of identified
intangible assets in cost of revenues. Amortization of
identified intangible assets of $32.1 million and
$62.5 million for the years ended December 31, 2006
and 2005, respectively, which was previously reported as a
separate component of operating expenses, has been reclassified
to cost of revenues for consistency.
On January 1, 2006, we adopted the guidance of the
Financial Accounting Standards Board, or FASB, with respect to
the fair value recognition of share-based payments, using the
modified prospective transition method. In accordance with the
modified prospective transition method, we began recognizing
compensation expense for all share-based awards granted on or
after January 1, 2006 and for unvested awards granted prior
to January 1, 2006. Under this method of implementation, no
restatement of prior periods has been made.
21
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This managements discussion and analysis should be read
in conjunction with the other sections of this
Form 10-K,
including Part 1, Item 1: Business;
Part II, Item 1A: Risk Factors;
Part II, Item 6: Selected Financial Data;
and Part II, Item 8: Financial Statements and
Supplementary Data.
Where more than one significant factor contributed to changes in
results from year to year, we have quantified these factors
throughout Managements Discussion and Analysis of
Financial Condition and Results of Operations where practicable
and material to understanding the discussion.
OVERVIEW
We design, develop and market complex, high-performance storage
and networking semiconductors and storage systems. We provide
silicon-to-system
solutions that are used at the core of products that create,
store, consume and transport digital information. We offer a
broad portfolio of capabilities, including custom and standard
product integrated circuits used in hard disk drives, solid
state drives, high-speed communication systems, computer
servers, storage systems and personal computers. We also offer
external storage systems, storage systems software, redundant
array of independent disks, or RAID, adapters for computer
servers and RAID software applications.
We operate in two segments the Semiconductor segment
and the Storage Systems segment.
Our Semiconductor segment designs, develops and markets highly
complex integrated circuits for storage and networking
applications. These solutions include both custom solutions and
standard products. We design custom solutions for a specific
application defined by the customer. We develop standard
products for market applications that we define and sell to
multiple customers. We sell our integrated circuits for storage
applications principally to makers of hard disk drives, solid
state drives and computer servers. We sell our integrated
circuits for networking applications principally to makers of
devices used in computer and telecommunications networks and, to
a lesser extent, to makers of personal computers. We also
generate revenue by licensing other entities to use our
intellectual property.
Our Storage Systems segment designs and sells enterprise storage
systems and storage software applications that enable storage
area networks. We also offer RAID adapters for computer servers
and associated software for attaching storage devices to
computer servers. We sell our storage systems and storage
solutions primarily to original equipment manufacturers, or
OEMs, who resell these products to end customers under their own
brand name.
Our revenues depend on market demand for these types of products
and our ability to compete in highly competitive markets. We
face competition not only from makers of products similar to
ours, but also from competing technologies. For example, we see
the development of solid state drives, based on flash memory
rather than the spinning platters used in hard disk drives, as a
long-term potential competitor to certain types of hard disk
drives and have begun focusing development efforts in that area.
The U.S. and global economies have experienced a
significant downturn driven by a financial and credit crisis
that could continue to challenge those economies for some period
of time. In 2009, we took a number of actions to reduce our
expenses, including a corporate-level restructuring designed to
increase synergies across our Semiconductor segment, reductions
in our global workforce, temporary and permanent reductions in
employee compensation-related expenses and reductions in
discretionary spending. While we have reduced a number of
expenses in response to the global economic downturn, we have
also tried to limit the impact of the reductions on our research
and development efforts in order to attempt to maintain a
continuing flow of new products.
Although we saw increases in demand in some parts of our
business toward the end of 2009, we anticipate that our revenues
will not return to pre-downturn levels in the near future. In
early 2010, however, we began restoring the employee
compensation-related expenses that we reduced on a temporary
basis in 2009. We continue to monitor demand and may seek to
adjust our cost structure further.
Our revenues for the year ended December 31, 2009 were
$2,219.2 million, a decrease of $457.9 million, or
17.1%, as compared to $2,677.1 million for the year ended
December 31, 2008. The decrease resulted primarily
22
from the global economic downturn and the resulting lower
end-market demand for semiconductors used in storage and
networking product applications and, to a lesser extent, lower
demand for our mid-range storage systems.
We reported a net loss of $47.7 million, or $0.07 per
diluted share, for the year ended December 31, 2009, as
compared to a net loss of $622.3 million, or $0.96 per
diluted share, for the year ended December 31, 2008. During
the year ended December 31, 2008, we recognized a goodwill
impairment charge of $364.1 million and $177.5 million
in charges for the impairment of identified intangible assets.
There was no charge for impairment of goodwill or identified
intangible assets in 2009. We recorded restructuring of
operations and other items, net of $38.2 million in 2009 as
compared to $43.7 million in 2008. In 2009, we recorded an
income tax benefit of $83.1 million, or $0.13 per diluted
share, which primarily related to settlements of multi-year
foreign tax audits.
Cash, cash equivalents and short-term investments were
$962.1 million as of December 31, 2009, as compared to
$1,119.1 million as of December 31, 2008. In 2009, we
used $244.0 million to redeem convertible notes. For the
year ended December 31, 2009, we generated
$204.5 million in cash from operating activities as
compared to $278.1 million for the year ended
December 31, 2008.
RESULTS
OF OPERATIONS
Revenues
The following table summarizes our revenues by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Semiconductor segment
|
|
$
|
1,421.5
|
|
|
$
|
1,795.1
|
|
|
$
|
1,778.9
|
|
Storage Systems segment
|
|
|
797.7
|
|
|
|
882.0
|
|
|
|
824.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
2,219.2
|
|
|
$
|
2,677.1
|
|
|
$
|
2,603.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
compared to 2008:
Total consolidated revenues for 2009 decreased by
$457.9 million, or 17.1%, as compared to 2008.
Semiconductor
Segment:
Revenues for the Semiconductor segment decreased by
$373.6 million, or 20.8%, in 2009 as compared to 2008. The
decrease was primarily attributable to a decline in unit sales
due to decreased demand for semiconductors used in storage and
networking product applications as a result of the global
economic downturn and decreased unit sales of our networking
product applications that we no longer invested in. The decrease
was partially offset by increased unit sales attributable to the
hard disk drive, or HDD, semiconductor business acquired from
Infineon in April 2008 and our newer networking product
applications.
Storage
Systems Segment:
Revenues for the Storage Systems segment decreased by
$84.3 million, or 9.6%, in 2009 as compared to 2008. The
decrease was primarily attributable to a decrease in unit sales
of our mid-range storage systems and related premium software
features as a result of the current global economic downturn.
The decrease was partially offset by increased unit sales of our
entry-level storage systems and our server RAID adapters,
primarily as a result of the acquisition of the 3ware RAID
storage adapter business on April 21, 2009.
2008
compared to 2007:
Total consolidated revenues for 2008 increased by
$73.5 million, or 2.8%, as compared to 2007.
23
Semiconductor
Segment:
Revenues for the Semiconductor segment increased by
$16.2 million, or 0.9%, in 2008 as compared to 2007. The
increase was primarily attributable to an increase in unit sales
due to:
|
|
|
|
|
Increased demand for semiconductors used in storage and
networking product applications, primarily as a result of having
a full year of revenues from the Agere Systems business, which
we acquired in 2007; and
|
|
|
|
Revenues from the HDD semiconductor business acquired from
Infineon in April 2008.
|
The increase was partially offset by the absence of revenues
from the Mobility Products Group and the Consumer Products
Group, which accounted for $213.1 million and
$54.6 million in revenues, respectively, in 2007 prior to
sale of Mobility Products Group and Consumer Products Group.
Storage
Systems Segment:
Revenues for the Storage Systems segment increased by
$57.3 million, or 6.9%, in 2008 as compared to 2007. The
increase was primarily attributable to an increase in unit sales
of our entry-level storage systems and a continued increase in
unit demand for our premium feature and direct-attached storage
software products, partially offset by a decline in unit sales
of our mid-range storage systems.
Significant
Customers:
The following table provides information about our significant
customers, each of whom accounted for 10% or more of
consolidated revenues or 10% or more of either segments
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Semiconductor segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Percentage of segment revenues
|
|
|
24%
|
|
|
|
26%
|
|
|
|
28%, 12%
|
|
Storage Systems segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
Percentage of segment revenues
|
|
|
48%, 13%
|
|
|
|
46%, 14%, 11%
|
|
|
|
47%, 16%, 11%
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Percentage of consolidated revenues
|
|
|
19%, 16%
|
|
|
|
17%, 16%
|
|
|
|
19%, 15%
|
|
Revenues
by Geography
The following table summarizes our revenues by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
North America*
|
|
$
|
519.2
|
|
|
$
|
737.2
|
|
|
$
|
858.7
|
|
Asia**
|
|
|
1,126.0
|
|
|
|
1,359.8
|
|
|
|
1,401.3
|
|
Europe and the Middle East
|
|
|
574.0
|
|
|
|
580.1
|
|
|
|
343.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,219.2
|
|
|
$
|
2,677.1
|
|
|
$
|
2,603.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Primarily the United States. |
|
** |
|
Including Japan. |
24
2009
compared to 2008:
Revenues in North America and Asia decreased 29.6% and 17.2%,
respectively, in 2009 as compared to 2008. The decrease in North
America was primarily attributable to decreased unit sales of
storage systems due to the global economic downturn in 2009 and
the result of a significant customer shifting order placements
from our U.S. subsidiary to a subsidiary in Europe. North
America revenues from semiconductors also decreased in 2009
primarily due to the global economic downturn and a decrease in
demand for networking products that we no longer invest in. The
decrease in Asia was primarily attributable to decreased unit
sales of semiconductors used in storage and networking product
applications. Revenues in Europe and the Middle East decreased
1.1% in 2009 as compared to 2008. The decrease was primarily
attributable to decreased unit sales of semiconductors used in
networking products that we no longer invest in, offset in part
by increased unit sales of storage systems as the result of a
significant customer shifting order placements from our
U.S. subsidiary to a subsidiary in Europe beginning in the
third quarter of 2008.
2008
compared to 2007:
Revenues in Europe and the Middle East increased 68.8% in 2008
as compared to 2007. This increase was primarily attributable to
increased unit sales of storage systems as the result of a
significant customer shifting order placements from our
U.S. subsidiary to a subsidiary in Europe and increased
unit sales of semiconductors used in storage product
applications. Revenues in North America decreased 14.1%. The
decrease in North America was primarily attributable to
decreased unit sales of storage systems primarily for the reason
discussed above, offset in part by increased unit sales of
semiconductors used in storage and networking standard products.
Gross
Profit Margin
The following table summarizes our gross profit margins by
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Semiconductor segment
|
|
$
|
564.1
|
|
|
$
|
736.9
|
|
|
$
|
603.7
|
|
Percentage of Semiconductor segment revenues
|
|
|
39.7
|
%
|
|
|
41.1
|
%
|
|
|
33.9
|
%
|
Storage Systems segment
|
|
$
|
279.3
|
|
|
$
|
332.1
|
|
|
$
|
300.2
|
|
Percentage of Storage Systems segment revenues
|
|
|
35.0
|
%
|
|
|
37.7
|
%
|
|
|
36.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
843.4
|
|
|
$
|
1,069.0
|
|
|
$
|
903.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
38.0
|
%
|
|
|
39.9
|
%
|
|
|
34.7
|
%
|
2009
compared to 2008:
Consolidated gross profit as a percentage of total revenues, or
gross margin, decreased to 38.0% in 2009 from 39.9% in 2008.
Semiconductor
Segment:
Gross margins for the Semiconductor segment decreased to 39.7%
in 2009 from 41.1% in 2008. The decrease was primarily
attributable to a shift in product mix and lower overall
absorption of fixed costs as a result of the 20.8% decline in
revenues. The decrease was offset in part by decreased
manufacturing-related spending as a result of our cost reduction
measures and a decrease in amortization of identified intangible
assets as a percentage of revenues.
Storage
Systems Segment:
Gross margins for the Storage Systems segment decreased to 35.0%
in 2009 from 37.7% in 2008. The decrease was primarily driven by
a shift in product mix as a greater percentage of our revenues
consisted of entry-level
25
storage systems, which have lower margins, lower overall
absorption of fixed costs as a result of the decrease in
revenues and a charge of $4.5 million to fair value
inventories acquired primarily in the 3ware acquisition.
2008
compared to 2007:
Consolidated gross margins increased to 39.9% in 2008 from 34.7%
in 2007.
Semiconductor
Segment:
Gross margins for the Semiconductor segment increased to 41.1%
in 2008 from 33.9% in 2007. The increase in 2008 was primarily
attributable to:
|
|
|
|
|
Increased sales of products with higher gross profit margins in
2008;
|
|
|
|
An inventory charge of $47.9 million recorded in the second
quarter of 2007 related to fair valuing the inventory in the
acquisition of Agere;
|
|
|
|
A decrease in inventory provisions from 2007 to 2008, primarily
as a result of improvements in supply chain management; and
|
|
|
|
$19.0 million in charges recorded in 2007 for a wafer
supply agreement with ON Semiconductor resulting from a decline
in demand.
|
Storage
Systems Segment:
Gross margins for the Storage Systems segment increased to 37.7%
in 2008 from 36.4% in 2007. The increase was primarily driven by
lower manufacturing costs across product lines and higher demand
for our premium feature and direct-attached storage software
products, which have higher margins.
Research
and Development
The following table summarizes our research and development, or
R&D, expenses by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Semiconductor segment
|
|
$
|
475.3
|
|
|
$
|
534.0
|
|
|
$
|
525.4
|
|
Percentage of Semiconductor segment revenues
|
|
|
33.4
|
%
|
|
|
29.7
|
%
|
|
|
29.5
|
%
|
Storage Systems segment
|
|
$
|
133.0
|
|
|
$
|
138.5
|
|
|
$
|
129.8
|
|
Percentage of Storage Systems segment revenues
|
|
|
16.7
|
%
|
|
|
15.7
|
%
|
|
|
15.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
608.3
|
|
|
$
|
672.5
|
|
|
$
|
655.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
27.4
|
%
|
|
|
25.1
|
%
|
|
|
25.2
|
%
|
2009
compared to 2008:
Consolidated R&D expenses decreased by $64.2 million,
or 9.5%, in 2009 as compared to 2008, but increased as a
percentage of revenues from 25.1% in 2008 to 27.4% in 2009 as a
result of the decrease in revenues.
Semiconductor
Segment:
R&D expenses for the Semiconductor segment consist
primarily of employee salaries, contractor expenses, costs
related to third-party design tools and materials used in the
design of custom silicon and standard products, as well as
depreciation of capital equipment and facilities-related
expenditures.
R&D expenses for the Semiconductor segment decreased by
$58.7 million, or 11.0%, in 2009 as compared to 2008. The
decrease was primarily attributable to lower
compensation-related expenses as a result of reduced headcount
from the restructuring actions taken since January 2009, other
compensation-related cost reduction measures, reductions in
discretionary spending and lower spending on third-party
contractors and materials
26
associated with R&D projects. R&D expenses as a
percentage of segment revenues for the Semiconductor segment
increased from 29.7% in 2008 to 33.4% in 2009 as a result of the
decrease in revenues.
Storage
Systems Segment:
R&D expenses for the Storage Systems segment consist
primarily of employee salaries, contractor expenses and
materials used in product development, as well as depreciation
of capital equipment and facilities. In addition to the
significant resources required to support hardware technology
transitions, we devote significant resources to developing and
enhancing software features and functionality to remain
competitive.
R&D expenses for the Storage Systems segment decreased by
$5.5 million, or 4.0%, in 2009 as compared to 2008. The
decrease was primarily attributable to lower
compensation-related expenses as a result of reduced headcount
from the restructuring actions taken since January 2009, other
compensation-related cost reduction measures and reductions in
discretionary spending. The decrease was offset in part by
additional compensation-related expenditures associated with the
3ware RAID storage adapter business and ONStor business
acquisitions. R&D expenses as a percentage of segment
revenues for the Storage Systems segment increased from 15.7% in
2008 to 16.7% in 2009 as a result of the decrease in revenues.
2008
compared to 2007:
Consolidated R&D expenses increased by $17.3 million,
or 2.6%, in 2008 as compared to 2007.
Semiconductor
Segment:
R&D expenses for the Semiconductor segment increased by
$8.6 million, or 1.6%, in 2008 as compared to 2007 and
increased slightly as a percentage of segment revenues from
29.5% in 2007 to 29.7% in 2008. The increase was attributable to
the merger with Agere, partially offset by reduced expenditures
resulting from the sale of the Mobility and Consumer Products
Groups, headcount reductions from our restructuring actions and
decreased spending related to third-party design tools used in
the design of custom silicon and standard products.
Storage
Systems Segment:
R&D expenses for the Storage Systems segment increased by
$8.7 million, or 6.7%, in 2008 as compared to 2007. The
increase was primarily attributable to increased
compensation-related expenditures as well as increased material
spending for R&D projects associated with new product
development.
Selling,
General and Administrative
The following table summarizes our selling, general and
administrative, or SG&A, expenses by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Semiconductor segment
|
|
$
|
212.7
|
|
|
$
|
278.6
|
|
|
$
|
264.1
|
|
Percentage of Semiconductor segment revenues
|
|
|
15.0
|
%
|
|
|
15.5
|
%
|
|
|
14.8
|
%
|
Storage Systems segment
|
|
$
|
113.3
|
|
|
$
|
128.3
|
|
|
$
|
117.3
|
|
Percentage of Storage Systems segment revenues
|
|
|
14.2
|
%
|
|
|
14.5
|
%
|
|
|
14.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
326.0
|
|
|
$
|
406.9
|
|
|
$
|
381.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues
|
|
|
14.7
|
%
|
|
|
15.2
|
%
|
|
|
14.6
|
%
|
2009
compared to 2008:
Consolidated SG&A expenses decreased by $80.9 million,
or 19.9%, in 2009 as compared to 2008.
27
Semiconductor
Segment:
SG&A expenses for the Semiconductor segment decreased by
$65.9 million, or 23.7%, in 2009 as compared to 2008. The
decrease was primarily attributable to lower
compensation-related expenses as a result of reduced headcount
from the restructuring actions taken since January 2009, other
compensation-related cost reduction measures, a decrease in
amortization of identified intangible assets, and lower selling
and general expenses attributable to continued cost containment
activities. SG&A expenses as a percentage of segment
revenues decreased from 15.5% in 2008 to 15.0% in 2009, as a
result of the decrease in SG&A expenses.
Storage
Systems Segment:
SG&A expenses for the Storage Systems segment decreased by
$15.0 million, or 11.7%, in 2009 as compared to 2008. The
decrease was primarily attributable to lower
compensation-related expenses and other discretionary expenses
as a result of continued cost containment activities, along with
lower bad debt expense due to the decrease in revenues. The
decrease was offset in part by additional expenditures
associated with the 3ware and ONStor acquisitions. SG&A
expenses as a percentage of segment revenues decreased from
14.5% in 2008 to 14.2% in 2009, as a result of the decrease in
expenses.
2008
compared to 2007:
Consolidated SG&A expenses increased by $25.5 million,
or 6.7%, in 2008 as compared to 2007.
Semiconductor
Segment:
SG&A expenses for the Semiconductor segment increased by
$14.5 million, or 5.5%, in 2008 as compared to 2007 and
increased as a percentage of segment revenues from 14.8% in 2007
to 15.5% in 2008. The increase was attributable to the merger
with Agere, partially offset by reduced expenditures resulting
from the sale of the Mobility and Consumer Products Groups as
well as headcount reductions from our restructuring actions.
Storage
Systems Segment:
SG&A expenses for the Storage Systems segment increased by
$11.0 million, or 9.4%, in 2008 as compared to 2007 and
increased as a percentage of segment revenues from 14.2% in 2007
to 14.5% in 2008. The increase was primarily attributable to an
increase in sales and marketing expenditures to support higher
revenues in 2008 compared to 2007.
Restructuring
of Operations and Other Items
A complete discussion of our restructuring actions in 2009, 2008
and 2007 is included in Note 2 to our consolidated
financial statements in Item 8.
For the year ended December 31, 2009, we recorded charges
of $38.2 million in restructuring of operations and other
items, net, consisting of $30.2 million in charges for
restructuring of operations and $8.0 million in charges for
other items. Of these charges, $34.9 million and
$3.3 million were recorded in the Semiconductor segment and
the Storage Systems segment, respectively. The restructuring
charges were largely related to an accrual for remaining
payments to be made under a licensing arrangement for design
tools that we will no longer use and for severance and
termination benefits for approximately 200 employees
primarily related to headcount reductions from our restructuring
actions taken in April and July 2009.
As a result of the restructuring actions taken since January
2009, we have been realizing operating expense savings of
approximately $12.0 million per quarter beginning the
fourth quarter of 2009.
For the year ended December 31, 2008, we recorded charges
of $43.7 million in restructuring of operations and other
items, net, consisting of $35.5 million in charges for
restructuring of operations and $8.2 million in charges for
other items. Of these charges, $41.1 million and
$2.6 million were recorded in the Semiconductor segment and
the Storage Systems segment, respectively. The restructuring
charges were largely related to severance and termination
benefits for approximately 260 employees associated with a
broad-based reorganization that was announced in
28
January 2009 and various lease termination costs. The charges
were offset in part by a gain on the sale of land in Gresham,
Oregon.
For the year ended December 31, 2007, we recorded charges
of $148.1 million in restructuring of operations and other
items, net, consisting of $142.9 million in charges for
restructuring of operations and $5.2 million in charges for
other items. Of these charges, $143.4 million and
$4.7 million were recorded in the Semiconductor segment and
the Storage Systems segment, respectively. We completed the sale
of our Consumer Products Group in the third quarter of 2007 and
the sales of our semiconductor assembly and test operations in
Thailand and our Mobility Products Group in the fourth quarter
of 2007. We also announced the elimination of approximately 900
non-production positions, inclusive of the Consumer Products
Group, across all business and functional areas worldwide in the
second quarter of 2007, and in the third quarter of 2007
announced the elimination of approximately 2,100 production
positions worldwide associated with the sale of our assembly and
test operations in Thailand and our plan to transition assembly
and test operations performed at our facilities in Singapore and
Wichita, Kansas to current manufacturing partners.
Goodwill
and Identified Intangible Asset Impairment Charges
We monitor the recoverability of goodwill and identified
intangible assets recorded in connection with acquisitions, by
reporting unit, annually in our fourth quarter or sooner if
events or changes in circumstances indicate that the carrying
amount may not be recoverable. There was no impairment of
goodwill or identified intangible assets in 2009. During the
fourth quarters of 2008 and 2007, we determined that, based on
the then current market conditions in the semiconductor
industry, the carrying amounts of goodwill and certain
identified intangible assets for our Semiconductor reporting
unit were no longer recoverable. We recognized goodwill
impairment charges of $364.1 million and
$2,019.9 million in the fourth quarter of 2008 and 2007,
respectively. The fair value of the Semiconductor reporting unit
was estimated by using the present value of estimated future
cash flows. In addition, we recognized $177.5 million and
$1.6 million in charges for the impairment of certain
identified intangible assets in the Semiconductor segment for
the years ended December 31, 2008 and 2007, respectively.
Acquired
In-Process Research and Development
Our methodology for allocating the purchase price relating to
purchase acquisitions to acquired in-process research and
development, or IPR&D, involves established valuation
techniques in the high-technology industry. Prior to
January 1, 2009, IPR&D was expensed upon acquisition
because technological feasibility had not been established and
no future alternative uses existed. Beginning January 1,
2009, IPR&D is capitalized and classified as
indefinite-lived until the completion or abandonment of the
associated research and development activities. The fair value
of technology under development is determined using the income
approach, which discounts expected future cash flows to present
value. A discount rate is used for the projects to account for
the risks associated with the inherent uncertainties surrounding
the successful development of the IPR&D, market acceptance
of the technology, the useful life of the technology, the
profitability level of such technology and the uncertainty of
technological advances, which could affect the estimates
recorded. The discount rates used in the present value
calculations are derived from a weighted-average
cost-of-capital
analysis.
In 2009, we capitalized $0.8 million related to acquired
IPR&D that was included in identified intangible assets,
net, in the consolidated balance sheets. In 2008, there were no
IPR&D charges. For the year ended December 31, 2007,
we recorded IPR&D charges of $188.9 million in
connection with the Tarari, Inc., Agere Systems Inc. and
SiliconStor, Inc. acquisitions.
29
The following table summarizes details of the 2007 acquisitions
at the acquisition dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Cost
|
|
|
|
|
|
Revenue Projections
|
|
Company
|
|
Acquisition Date
|
|
Projects
|
|
IPR&D
|
|
|
to Complete
|
|
|
Discount Rate
|
|
|
Extend Through
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Tarari
|
|
October 3, 2007
|
|
Content Inspection-Abraxas-5 Gbps;
|
|
$
|
6.0
|
|
|
$
|
2.9
|
|
|
|
22.7
|
%
|
|
|
2013
|
|
|
|
|
|
Abraxas-10Gbps; Electra
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agere
|
|
April 2, 2007
|
|
Storage read channel and preamps;
|
|
$
|
176.4
|
|
|
$
|
85.8
|
*
|
|
|
13.8
|
%
|
|
|
2021
|
|
|
|
|
|
Mobility HSPDA for 3G;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Networking modems, Firewire, serdes, media gateway,
VoIP, network processors, Ethernet, mappers and framers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SiliconStor
|
|
March 13, 2007
|
|
Storage SATA/SAS multiplexers
|
|
$
|
6.5
|
|
|
$
|
4.4
|
|
|
|
27.0
|
%
|
|
|
2017
|
|
|
|
|
* |
|
This amount excludes estimated costs to complete the
Mobility-HSPDA for 3G project because we sold the Mobility
Products Group to Infineon Technologies in the fourth quarter of
2007. |
As of December 31, 2009, the actual development timelines
and costs for the IPR&D projects described above were in
line with original estimates. However, development of the
technology remains a substantial risk to us due to a number of
factors, including the remaining effort to achieve technical
feasibility, rapidly changing customer needs and competitive
threats from other companies. Failure to bring these products to
market in a timely manner could adversely affect our sales and
profitability in the future.
Interest
(Expense) or Income and Other, net
The following table summarizes our interest expense and
components of interest income and other, net, for the years
ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Interest expense
|
|
$
|
(21.9
|
)
|
|
$
|
(34.9
|
)
|
|
$
|
(31.0
|
)
|
Interest income
|
|
|
20.6
|
|
|
|
46.2
|
|
|
|
58.6
|
|
Other expense, net
|
|
|
(0.3
|
)
|
|
|
(10.1
|
)
|
|
|
(11.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1.6
|
)
|
|
$
|
1.2
|
|
|
$
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense:
Interest expense decreased by $13.0 million in 2009 as
compared to 2008 as a result of the repurchase of
$118.6 million of 6.5% Convertible Subordinated Notes
in November 2008 and the redemption of the remaining
$243.0 million of these notes in June 2009.
Interest expense increased by $3.9 million in 2008 as
compared to 2007 as a result of interest on
6.5% Convertible Subordinated Notes that we guaranteed in
connection with the Agere merger in April 2007, offset in part
by the repurchase of $118.6 million principal amount of
these notes in November 2008.
Interest
Income and Other, net:
Interest income decreased by $25.6 million in 2009 as
compared to 2008 primarily as a result of lower interest rates
and, to a lesser extent, lower cash balances during 2009
compared to 2008. Interest income decreased by
$12.4 million in 2008 as compared to 2007 primarily as a
result of lower interest rates during 2008 compared to 2007.
Other expense, net, decreased by $9.8 million in 2009 as
compared to 2008 primarily as a result of lower impairment
charges in the amount of $13.9 million for debt and equity
securities, offset in part by lower foreign exchange gains.
Other expenses, net, decreased by $1.7 million in 2008 as
compared to 2007 primarily as a result of
30
foreign exchange gains in 2008 compared to foreign exchange
losses in 2007 and a gain from the repurchase of convertible
notes, offset in part by impairment charges related to certain
available-for-sale
debt and equity securities.
Provision
for Income Taxes
During 2009, we recorded an income tax benefit of
$83.1 million, which represents an effective tax rate of
approximately 64% on the loss before income taxes of
$130.8 million. This rate differs from the
U.S. statutory rate primarily because we have a full
valuation allowance recorded against U.S. and certain
non-U.S. net
deferred tax assets and certain profitable
non-U.S. jurisdictions
where we have income taxes. The benefit for income taxes for
2009 primarily reflects a net reversal of $111.7 million in
liabilities, which includes previously unrecognized tax benefits
of $88.3 million and interest and penalties of
$23.4 million, because of settlements of multi-year tax
audits in foreign jurisdictions, the expiration of various
statutes of limitations and re-measurements of uncertain tax
positions taken in prior periods based on new information.
During 2008, we recorded an income tax provision of
$27.7 million, which represents an effective tax rate of
approximately (5)% on the loss before income taxes of
$594.6 million. This rate differs from the
U.S. statutory rate primarily due to a full valuation
allowance recorded against U.S. and certain
non-U.S. net
deferred tax assets and income taxes related to certain
profitable
non-U.S. jurisdictions.
We also recorded a release of a $13.9 million liability
because various statutes of limitations expired during the year
and an increase of $5.6 million in liabilities as a result
of a re-measurement of uncertain tax positions taken in prior
periods based on new information received during 2008.
During 2007, we recorded an income tax provision of
$11.3 million, which represents an effective tax rate of
approximately 0%. This rate differs from the U.S. statutory
rate primarily due to a full valuation allowance recorded
against U.S. and certain
non-U.S. net
deferred tax assets. We also benefited from lower tax rates in
foreign jurisdictions. The provision for income taxes for 2007
reflects a release of a $5.4 million liability because
various statutes of limitations expired and a reduction of
previous years uncertain tax positions. The provision for
income taxes for 2007 also includes the impact of recording a
$26.1 million tax benefit as a result of a
$67.9 million reduction to the pension benefit and other
obligations.
Excluding certain foreign jurisdictions, management believes
that it is more likely than not that the future benefit of
deferred tax assets will not be realized.
FINANCIAL
CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments decreased to
$962.1 million as of December 31, 2009 from
$1,119.1 million as of December 31, 2008. The decrease
was mainly due to cash outflows for financing and investing
activities, offset in part by cash generated from operating
activities as described below.
Working
Capital
Working capital decreased by $270.8 million to
$731.1 million as of December 31, 2009 from
$1,001.9 million as of December 31, 2008. The decrease
was attributable to the following:
|
|
|
|
|
Cash, cash equivalents and short-term investments decreased by
$157.0 million;
|
|
|
|
Current portion of long-term debt increased by
$104.9 million because of the reclassification of
$350.0 million of 4% Convertible Subordinated Notes
due in May 2010 from long-term debt to the current portion of
long-term debt, offset in part by the redemption of
$243.0 million principal amount of 6.5% Convertible
Subordinated Notes during 2009;
|
|
|
|
Inventories decreased by $51.2 million primarily as a
result of reduced inventory purchases to reflect the reduction
in revenues from the global economic downturn and also as a
direct result of our continued focus on supply chain management;
|
|
|
|
Prepaid expenses and other current assets decreased by
$40.7 million primarily due to decreases in prepaid taxes
and prepaid software maintenance; and
|
31
|
|
|
|
|
Accounts payable increased by $12.0 million primarily as a
result of the normal timing of invoice receipts and payments.
|
These decreases in working capital were offset in part by the
following:
|
|
|
|
|
Accrued salaries, wages and benefits decreased by
$37.4 million primarily as a result of the absence of
performance-based compensation accruals;
|
|
|
|
Accounts receivable increased by $35.0 million primarily as
a result of higher revenues in the fourth quarter of 2009
compared to the same quarter of 2008; and
|
|
|
|
Other accrued liabilities decreased by $22.6 million
primarily attributable to a reversal in tax liabilities because
of settlements of multi-year tax audits in foreign
jurisdictions, utilization of restructuring reserves and a
decrease in liabilities with third-party manufacturers.
|
Working capital decreased by $428.2 million to
$1,001.9 million as of December 31, 2008 from
$1,430.1 million as of December 31, 2007. The decrease
was attributable to the following:
|
|
|
|
|
Cash, cash equivalents and short-term investments decreased by
$278.5 million;
|
|
|
|
The current portion of our long-term debt increased by
$245.1 million because of the reclassification of our
6.5% Convertible Subordinated Notes due in December 2009
from long-term debt to the current portion of long-term debt;
|
|
|
|
Accounts receivable decreased by $102.4 million as a result
of lower revenues in the fourth quarter of 2008 compared to the
same period in 2007; and
|
|
|
|
Inventories declined by $20.3 million primarily as the
result of a shift to progress billing for one of our customers
and a reduction in buffer stocks established to facilitate our
transition to contract manufacturers, offset in part by
inventories sold to customers later than expected.
|
These decreases in working capital were offset in part by the
following:
|
|
|
|
|
Accounts payable decreased by $128.4 million primarily
attributable to a reduction in purchases as a result of the
global economic downturn and the timing of invoice receipts and
payments;
|
|
|
|
Other accrued liabilities decreased by $77.4 million
primarily as a result of the utilization of restructuring
reserves, decreases in the retiree medical liability, income
taxes payable and liabilities with third-party manufacturers,
partially offset by an increase in tax reserves;
|
|
|
|
Prepaid expenses and other current assets increased by
$8.1 million primarily attributable to an increase in
deferred tax assets, prepaid taxes, and software additions, net
of amortization, offset in part by decreases in assets held for
sale and a reduction in notes receivables; and
|
|
|
|
Accrued salaries, wages and benefits decreased by
$4.2 million primarily attributable to timing of payments
offset in part by the establishment of a sabbatical reserve.
|
Cash
Provided by Operating Activities
During the year ended December 31, 2009, we generated
$204.5 million of cash from operating activities compared
to $278.1 million in 2008. Cash provided by operating
activities in 2009 was the result of the following:
|
|
|
|
|
A net loss offset by positive non-cash adjustments, including
depreciation, amortization and stock-based compensation expense.
The non-cash items and other non-operating adjustments are
quantified in our consolidated statements of cash flows included
in Item 8; and
|
|
|
|
A net decrease of $86.2 million in assets and liabilities,
including changes in working capital components from
December 31, 2008 to December 31, 2009, as discussed
above.
|
32
During the year ended December 31, 2008, we generated
$278.1 million of cash from operating activities compared
to $295.0 million generated in 2007. Cash generated by
operating activities in 2008 was the result of the following:
|
|
|
|
|
A net loss offset by positive non-cash adjustments, including
goodwill and other intangible impairment charges and
depreciation and amortization. The non-cash items and other
non-operating adjustments are quantified in our consolidated
statements of cash flows included in Item 8; and
|
|
|
|
A net decrease of $81.0 million in assets and liabilities,
including changes in working capital components from
December 31, 2007 to December 31, 2008, as discussed
above.
|
Cash Used
in Investing Activities
Cash used in investing activities for the year ended
December 31, 2009 was $34.1 million as compared to
$163.4 million for the year ended December 31, 2008.
The primary investing activities during 2009 were:
|
|
|
|
|
Purchases of property, equipment and software, net of sales;
|
|
|
|
Proceeds from maturities and sales of
available-for-sale
debt securities and equity securities, net of purchases;
|
|
|
|
Acquisition of businesses and companies, net of cash acquired;
|
|
|
|
A decrease in non-current assets and deposits; and
|
|
|
|
Proceeds from maturity of notes receivable associated with sale
of our assembly and test operations in Thailand.
|
Cash used in investing activities for the year ended
December 31, 2008 was $163.4 million as compared to
$1,121.4 million provided by investing activities for the
year ended December 31, 2007. The primary investing
activities during 2008 were:
|
|
|
|
|
Proceeds from maturities and sales of
available-for-sale
debt securities and equity securities, net of purchases;
|
|
|
|
Purchases of property, equipment and software, net of sales;
|
|
|
|
Acquisition of businesses, net of cash acquired;
|
|
|
|
Proceeds from maturity of notes receivable associated with sale
of our assembly and test operations in Thailand; and
|
|
|
|
An increase in non-current assets and deposits.
|
We expect capital expenditures to be approximately
$55.0 million in 2010. 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 and with third-party assembly and
test operations, which enables us to have access to advanced
manufacturing capacity while reducing our capital spending
requirements.
Cash Used
in Financing Activities
Cash used in financing activities for the year ended
December 31, 2009 was $225.3 million as compared to
$303.0 million for the year ended December 31, 2008.
The financing activities during 2009 were the use of
$244.0 million to redeem our convertible subordinated
notes, offset in part by the proceeds from issuances of common
stock under our employee stock plans.
Cash used in financing activities for the year ended
December 31, 2008 was $303.0 million as compared to
$724.5 million in 2007. The primary financing activities
during 2008 were the use of $229.2 million to purchase
common stock under our repurchase programs and the use of
$116.6 million to repurchase our convertible subordinated
notes, offset in part by proceeds from issuances of common stock
under our employee stock plans.
33
It is our policy to reinvest our earnings, and we do not
anticipate paying any cash dividends to stockholders in the
foreseeable future.
Cash, cash equivalents and short-term investments are our
primary source of liquidity. We believe that our existing liquid
resources and cash generated from operations will be adequate to
meet our operating and capital requirements and other
obligations, including repayment of our outstanding convertible
subordinated notes as they mature, for more than the next
12 months. We may find it desirable to obtain additional
debt or equity financing or seek to refinance our existing
convertible notes. Such financing may not be available to us at
all or on acceptable terms if we determine that it would be
desirable to obtain additional financing.
CONTRACTUAL
OBLIGATIONS
The following table summarizes our contractual obligations as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less Than 1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
After 5 Years
|
|
|
Other
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Convertible subordinated notes
|
|
$
|
350.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
350.0
|
|
Interest payments on convertible subordinated notes
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.0
|
|
Operating lease obligations
|
|
|
71.9
|
|
|
|
49.9
|
|
|
|
13.6
|
|
|
|
1.3
|
|
|
|
|
|
|
|
136.7
|
|
Purchase commitments
|
|
|
408.4
|
|
|
|
151.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
559.6
|
|
Unrecognized tax positions plus interest and penalties
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103.0
|
**
|
|
|
114.2
|
|
Pension contributions
|
|
|
31.0 to 37.0
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
31.0 to 37.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
879.5 to 885.5
|
|
|
$
|
201.1
|
|
|
$
|
13.6
|
|
|
$
|
1.3
|
|
|
$
|
103.0
|
|
|
$
|
1,198.5 to 1,204.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
We have pension plans covering substantially all former Agere
U.S. employees, excluding management employees hired after
June 30, 2003. We also have pension plans covering certain
international employees. Although additional future
contributions will be required, the amount and timing of these
contributions will be affected by actuarial assumptions, the
actual rate of return on plan assets, the level of market
interest rates, and the amount of voluntary contributions to the
plans. The amount shown in the table represents our planned
contributions to our pension plans within a year. Because any
contributions for 2011 and later will depend on the value of the
plan assets in the future and thus are uncertain, we have not
included any amounts for 2011 and beyond in the above table.
Effective April 6, 2009, we froze the U.S. defined benefit
pension plans, which cover active participants who joined us
from Agere. As of December 31, 2009, our projected pension
benefit obligation exceeded the fair value of our plan assets by
$455.0 million. See Note 5 to our consolidated
financial statements in Item 8. |
|
** |
|
Represents the non-current tax payable obligation. We are unable
to make a reasonably reliable estimate as to when cash
settlement with a taxing authority may occur. |
Convertible
Subordinated Notes
As of December 31, 2009, we had outstanding
$350.0 million of 4% Convertible Subordinated Notes
due May 15, 2010. Interest on these notes is payable
semiannually on May 15 and November 15 of each year. These notes
are subordinated to all existing and future senior debt and are
convertible at the holders option into shares of our
common stock at a conversion price of approximately $13.42 per
share at any time prior to maturity. We cannot elect to redeem
these notes prior to maturity. Each holder of these notes has
the right to cause us to repurchase all of such holders
convertible notes at a price equal to 100% of their principal
amount plus accrued interest upon the
34
occurrence of any fundamental change, which includes a
transaction or an event such as an exchange offer, liquidation,
a tender offer, consolidation, certain mergers or combination.
Fluctuations in our stock price affect the prices of our
outstanding convertible securities and the likelihood of the
convertible securities being converted into equity. We believe
that our current cash position and expected future operating
cash flows will be adequate to redeem these notes.
Operating
Lease Obligations
We lease real estate, certain non-manufacturing equipment and
software under non-cancelable operating leases.
Purchase
Commitments
We maintain purchase commitments with certain suppliers
primarily for raw materials and manufacturing services and for
some non-production items. Purchase commitments for inventory
materials are generally restricted to a forecasted time-horizon
as mutually agreed upon between the parties. This forecasted
time-horizon can vary for different suppliers.
Uncertain
Tax Positions
As of December 31, 2009, the amount of the unrecognized tax
benefits was $163.9 million, of which we expect to pay
$11.2 million within one year. Accordingly, this amount has
been recorded in other current liabilities. For the remaining
balance, we are unable to make a reasonably reliable estimate as
to when cash settlement with a taxing authority may occur. For
the year ended December 31, 2009, we recorded a reversal of
$144.6 million in liabilities, which includes previously
unrecognized tax benefits of $113.3 million and interest
and penalties of $31.3 million, because of settlements of
multi-year tax audits in foreign jurisdictions and the
expiration of various statutes of limitations. It is reasonably
possible that the total amount of unrecognized tax benefits will
increase or decrease in the next 12 months. Such changes
could occur based on the normal expiration of various statutes
of limitations or the possible conclusion of ongoing tax audits
in various jurisdictions around the world. If those events occur
within the next 12 months, we estimate that, in addition to
the $11.2 million discussed above, unrecognized tax
benefits, plus accrued interest and penalties, could decrease by
an amount of up to $29.8 million.
Standby
Letters of Credit
As of December 31, 2009 and 2008, we had outstanding
obligations relating to standby letters of credit of
$4.3 million and $19.2 million, respectively. Standby
letters of credit are financial guarantees provided by third
parties for leases, claims from litigations and certain
self-insured risks. If the guarantees are called, we must
reimburse the provider of the guarantee. The fair value of the
letters of credit approximates the contract amount and they
generally have one-year terms.
CRITICAL
ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and
results of operations is based on the consolidated financial
statements, which have been prepared in accordance with
generally accepted accounting principles, or GAAP, in the United
States. Note 1 to those financial statements describes our
significant accounting policies. The preparation of these
financial statements requires estimates and assumptions that
affect the reported amounts and disclosures.
We believe the following to be critical accounting estimates.
They are important to the portrayal of our financial condition
and results, and they require significant management judgment
and estimates about matters that are inherently uncertain. As a
result of the inherent uncertainty, there is a likelihood that
materially different amounts would be reported under different
conditions or using different assumptions. Although we believe
that our judgments and estimates are reasonable, appropriate and
correct, different amounts could have been reported if different
estimates were made.
35
Stock-Based
Compensation
Determining the fair value of stock-based awards at the grant
date requires considerable judgment, including estimating
expected volatility, expected term and risk-free interest rate.
Our stock-based compensation expense in 2009, 2008 and 2007 was
$64.0 million, $72.3 million and $77.3 million,
respectively.
Stock
Options:
The fair value of each option grant is estimated as of the date
of grant using a reduced form calibrated binomial lattice model,
or the lattice model. The lattice model requires the use of
historical data for employee exercise behavior and the use of
assumptions, including expected life, risk-free interest rate
and expected stock price volatility over the term of our
employee stock options. The expected life of employee stock
options is affected by all of the underlying assumptions and
calibration of our model. The risk-free interest rate assumption
is based upon observed interest rates for constant maturity
U.S. Treasury securities appropriate for the term of our
employee stock options, however this may not accurately reflect
future interest rates.
We use an equally weighted combination of historical and implied
volatilities as of the grant date. Although we believe that the
equally weighted combination of historical and implied
volatilities is more representative of future stock price trends
than sole use of historical or implied volatilities, there is no
way of accurately predicting the future stock price.
The lattice model estimates the probability of exercise by an
employee as a function of two variables based on the entire
history of exercises and cancellations for all past option
grants made by us since our initial public offering. Such
estimate may not be a reliable indicator of future employee
behavior.
Forfeitures are estimated based on historical experience, which
may not hold true in the future.
Our determination of fair value of share-based payment awards on
the date of grant using an option-pricing model is affected by
our stock price as well as a number of highly complex and
subjective assumptions. We use third-party consultants to assist
in developing the assumptions used in, as well as calibrating,
the lattice model. We are responsible for determining the
assumptions used in estimating the fair value of our share-based
payment awards. Option-pricing models were developed for use in
estimating the value of traded options that have no vesting or
hedging restrictions and are fully transferable. Because our
employee stock options have certain characteristics that are
significantly different from traded options, and because changes
in the subjective assumptions can materially affect the
estimated value, in managements opinion, the existing
valuation models may not provide an accurate measure of the fair
value of our employee stock options. Although the fair value of
employee stock options is determined in accordance with the FASB
guidance using an option-pricing model, that value may not be
indicative of the fair value observed in a willing buyer/willing
seller market transaction.
Employee
Stock Purchase Plan:
Compensation expense under the employee stock purchase plan is
calculated using the fair value of the employees purchase
rights under the Black-Scholes model. This model requires the
use of historical data for employee exercise behavior and the
use of assumptions, including expected life, risk-free interest
rate and expected stock price volatility. As such, it is subject
to similar risks to those relating to stock options.
Inventory
Valuation Methodology
Inventories are valued at the lower of cost or market using the
first-in,
first-out, or FIFO, method. We write down our inventories for
estimated obsolescence and unmarketable inventory in an amount
equal to the difference between the cost of the inventory and
the estimated market value based upon assumptions about future
demand and market conditions. Inventory impairment charges
create a new cost basis for inventory.
We balance the need to maintain strategic inventory levels to
ensure competitive delivery performance to our customers with
the risk of inventory obsolescence due to rapidly changing
technology and customer requirements, product life-cycles,
life-time buys at the end of supplier product runs and a shift
of production to outsourcing. If actual demand or market
conditions are less favorable than we project or our customers
fail to meet projections,
36
additional inventory write-downs may be required. Our inventory
balance was $169.3 million and $220.5 million as of
December 31, 2009 and 2008, respectively.
If market conditions are more favorable than expected, we could
experience more favorable gross profit margins going forward as
we sell inventory that was previously written down.
Valuation
of Long-Lived Assets, Intangible Assets and Goodwill
We have historically pursued the acquisition of businesses,
which has resulted in the accumulation of a significant amount
of goodwill and intangible assets. We assess the impairment of
long-lived assets such as identified intangible assets and
property, plants and equipment whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. We assess the impairment of goodwill annually or
sooner if events or changes in circumstances indicate that the
carrying value may not be recoverable. When we determine that
there is an indicator that the carrying value of long-lived
assets, identified intangibles or related goodwill may not be
recoverable, we measure impairment based on estimates of future
cash flows.
The goodwill impairment testing is a two-step process and is
performed by reporting unit. Our reporting units are
Semiconductor and Storage Systems. The first step requires
comparing the fair value of each reporting unit to its net book
value. If the fair value of the reporting unit is greater than
its net book value, there is no impairment. Otherwise, the
second step must be completed to measure the amount of
impairment. The second step calculates the implied fair value of
goodwill by deducting the fair value of all tangible and
intangible assets, excluding goodwill, of the reporting unit
from the fair value of the reporting unit as determined in step
1. The implied fair value of goodwill determined in step 2 is
compared to the carrying value of goodwill. If the implied fair
value of goodwill is less than the carrying value of goodwill,
an impairment loss is recognized equal to the difference.
In determining the fair value of each reporting unit, we rely
solely on a discounted cash-flow analysis. We do research and
analyze peer multiples for comparison purposes, but we do not
rely directly upon such data due to the lack of specific
comparability between the peer companies and our reporting
units. Instead we employ the peer multiple data as a general
check on the results of our discounted cash-flow analysis. The
material assumptions used in performing the discounted cash-flow
analysis include forecasts of expected future cash flows,
including elements such as revenues, cost of sales, operating
expenses, tax expenses, working capital, investment and capital
expenditures. Key assumptions include expected near- and
long-term growth rates, as well as expected profitability levels
and capital investment. Since the forecasted cash flows of the
business, as well as those allocated to individual assets, need
to be discounted to present value in order to arrive at
estimates of fair value, discount rates must also be estimated
and applied in the valuation models. These discount rates are
based on estimates of a market weighted-average
cost-of-capital
for each reporting unit, with adjustments made to account for
the relative risk of individual assets valued.
In the fourth quarters of 2008 and 2007, the economic conditions
in the semiconductor industry deteriorated and our stock price
declined, resulting in our market capitalization falling below
our net book value. Additionally, in the fourth quarter of 2008,
our revenues declined significantly from initial expectations
amidst a global economic downturn. During the fourth quarters of
2008 and 2007, the results of our analysis indicated that the
carrying amount of goodwill for our Semiconductor reporting unit
was no longer recoverable and we recognized goodwill impairment
charges of $364.1 million and $2,019.9 million in the
Semiconductor segment during 2008 and 2007, respectively.
Although we believe that our methods of evaluating impairment
are reasonable, future changes in economic and other conditions
could force us to take additional charges. Our next annual test
for the impairment of goodwill is expected to be performed in
the fourth quarter of 2010 or sooner if events or changes in
circumstances indicate that the carrying amount may not be
recoverable.
We assess the recoverability of our identified intangible assets
based on our estimates of undiscounted projected future
operating cash flows compared to the net book value of the
identified intangible assets. In cases where the net book value
exceeds undiscounted projected future operating cash flows, an
impairment exists. The impairment charge is measured as the
difference between the net book value of the identified
intangible assets and the fair value of such assets. The fair
value is determined using a discounted cash-flow approach for
each asset grouping. In 2008, we recorded impairment charges of
$177.5 million in the Semiconductor segment, of which
37
$98.1 million related to existing technology and
$79.4 million related to customer relationships. Additional
impairment charges may be required in the future.
Restructuring
Reserves
We have recorded reserves/accruals for restructuring costs
related to our restructuring of operations. The restructuring
reserves include estimated payments to employees for severance,
termination fees associated with leases and other contracts,
decommissioning and selling costs associated with assets held
for sale, and other costs related to the closure of facilities.
The restructuring reserves are based upon management estimates
at the time they are recorded. These estimates can change
depending upon changes in facts and circumstances subsequent to
when the original liability was recorded. For example, existing
accruals for severance may be modified if employees are
redeployed due to circumstances not foreseen when the original
plans were initiated, accruals for outplacement services may not
be fully utilized by former employees, and severance accruals
could change for statutory reasons in countries outside the
United States. Accruals for facility leases under which we
ceased using the benefits conveyed to us under the lease may
change if market conditions for subleases change or if we later
negotiate a termination of the lease.
Income
Taxes
The calculation of our tax liabilities involves the application
of complex tax rules and regulations in multiple jurisdictions
throughout the world. We make certain estimates and judgments in
determining income tax expense for financial statement purposes.
These estimates and judgments occur in the calculation of tax
credits, benefits and deductions, and in the calculation of
certain tax assets and liabilities, which arise from differences
in the timing of recognition of revenue and expense for tax and
financial statement purposes, as well as the interest and
penalties related to uncertain tax positions. Significant
changes to these estimates may result in an increase or a
decrease to our tax provision in a subsequent period.
We recognize the effect of income tax positions only if these
positions are more likely than not of being sustained.
Recognized income tax positions are measured at the largest
amount that is greater than 50% likely of being realized.
Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. We record
interest and penalties related to unrecognized tax benefits in
income tax expense.
Deferred tax assets and liabilities are recognized for temporary
differences between financial statement and income tax bases of
assets and liabilities. We have recorded a valuation allowance
to reduce the deferred tax assets to the amount that is more
likely than not to be realized. We have considered future
taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance.
See Note 12 to our financial statements in Item 8 for
more details about our deferred tax assets and liabilities.
Retirement
Benefits
Post-retirement assets and liabilities are our estimates of
benefits that we expect to pay to eligible retirees. We consider
various factors in determining our post-retirement group life
assets, including the number of employees that we expect to
receive benefits and other actuarial assumptions. Effective
January 1, 2009, the post-retirement medical plans were
terminated, and therefore that liability at the end of 2008
represented managements best estimate for medical claims
from 2008. Actual post-retirement benefits paid in 2009 were
$1.5 million less than the estimate, and therefore this
amount was recorded as a credit in 2009.
For defined benefit pension plans, we consider various factors
in determining our pension liability and net period benefit
cost, including the number of employees that we expect to
receive benefits, their salary levels and years of service, the
expected return on plan assets, the discount rate, the timing of
the payment of benefits, and other actuarial assumptions. If the
actual results and events of our pension plan differ from our
current assumptions, our benefit obligations may be over-or
under-valued.
The key benefit plan assumptions are the discount rate and the
expected rate of return on plan assets. The assumptions
discussed below are for our U.S. retirement benefit plans.
For our international plans, we chose assumptions specific to
each country.
38
The discount rate we use is based on a cash-flow analysis using
the Citigroup Pension Discount Curve and the Citigroup Above
Median Pension Discount Curve as of the measurement date. We
base our salary increase assumptions on historical experience
and future expectations. In developing the expected rate of
return, we consider long-term compound annualized returns based
on historical market data, historical and expected returns on
the various categories of plan assets, and the target investment
portfolio allocation among debt, equity securities and other
investments.
For 2009, we used an expected rate of return on plan assets of
8.25% and 8.0% for the management and represented pension plans,
respectively. For our U.S. post-retirement benefit plans,
we used a weighted-average long-term rate of return on assets of
7.5%. For the U.S. plans, we use a calculated market
related value of assets, or MRVA, in determining the estimated
return on plan assets. The MRVA smoothes the recognition of
asset gains and losses over a five year period. Because of this
smoothing, the MRVA also affects the determination of
amortization of gains or losses. As of December 31, 2009,
the MRVA for the U.S. plans was $988.4 million as
compared to a fair value of $879.2 million. If we used the
fair value, the net periodic benefit cost would increase by
$12.8 million for 2010.
Actuarial assumptions are based on our best estimates and
judgment. Material changes may occur in retirement benefit costs
in the future if these assumptions differ from actual events or
experience. We performed a sensitivity analysis on the discount
rate, which is the key assumption in calculating the pension and
post-retirement benefit obligations. Each change of
25 basis points in the discount rate assumption would have
an estimated $0.1 million impact on annual net retirement
benefit costs for the year ended December 31, 2009 and a
$37.0 million impact on benefit obligations at
December 31, 2009. Each change of 25 basis points in
the expected rate of return assumption would have an estimated
$2.5 million annual impact on net retirement benefit costs.
Fair
Value Measurements
GAAP defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (i.e., an
exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date.
We utilize the market approach to measure fair value for our
financial assets and liabilities. The market approach uses
prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities.
The fair value inputs are reviewed by management for
reasonableness, may be further validated by comparison to
publicly available information and could be adjusted based on
market indices or other information that management deems
material to their estimate of fair value. In the current market
environment, the assessment of fair value can be difficult and
subjective. However, given the relative reliability of the
inputs we use to value our investment portfolio, and because
substantially all of our valuation inputs are obtained using
quoted market prices for identical or similar assets, we do not
believe that the nature of estimates and assumptions affected by
levels of subjectivity and judgment was material to the
valuation of our investment portfolio.
We do not estimate the fair value for non-marketable equity
securities unless there are identified events or changes in
circumstances that may have a significant adverse effect on the
investment. If management determines that these non-marketable
equity investments are impaired, losses are generally measured
by using pricing reflected in current rounds of financing.
Other
Than Temporary Impairment
We recognize an impairment charge when declines in the fair
values of our investment in debt and equity securities below
their cost basis are judged to be other than temporary. We
evaluate both qualitative and quantitative factors, such as
duration and severity of the unrealized loss, credit ratings,
prepayment speeds, default and loss rates of the underlying
collateral, structure and credit enhancements to determine if a
credit loss may exist.
For investments in equity securities, to determine if an
impairment has occurred, we review the financial performance of
each investee, industry performance and outlook for each
investee, the trading prices of marketable equity securities and
pricing in current rounds of financing for non-marketable equity
securities. If an unrealized
39
loss is determined to be other than temporary, a loss is
recognized as a component of interest income and other, net. For
marketable equity securities, impairment losses are measured
using the closing market price of the marketable securities on
the date management determined that the investments are
impaired. For non-marketable equity securities, impairment
losses are generally measured by using pricing reflected in
current rounds of financing. We do not estimate the fair values
of non-marketable equity investments unless there are identified
events or changes in circumstances that may have a significant
adverse effect on the investments.
RECENT
ACCOUNTING PRONOUNCEMENTS
The information contained in Note 1 to our financial
statements in Part II, Item 8 under the heading
Recent Accounting Pronouncements is incorporated by
reference into this Part II, Item 7.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest
Rate Sensitivity
A 10% weighted-average worldwide interest rate movement
affecting our fixed and floating rate financial instruments as
of December 31, 2009 and 2008, including investments and
debt obligations, would not have had a significant effect on our
financial position, results of operations or cash flows over the
next fiscal year, assuming that the debt and investment balances
remained consistent.
With the objective of protecting our cash flows and earnings
from the impact of fluctuations in interest rates, while
minimizing the
cost-of-capital,
we may enter into interest rate swaps from time to time. As of
December 31, 2009, there were no interest rate swaps
outstanding.
Foreign
Currency Exchange Risk
We have foreign subsidiaries that operate and sell our products
in various global markets. As a result, our cash flows and
earnings are exposed to fluctuations in foreign currency
exchange rates. We attempt to limit these exposures through
operational strategies and financial market instruments. We use
various hedge instruments, primarily forward contracts with
maturities of 12 months or less, to manage our exposure
associated with net asset and liability positions and cash flows
denominated in non-functional currencies. We did not enter into
derivative financial instruments for trading purposes during
2009 and 2008.
Based on our overall currency rate exposures at
December 31, 2009, including derivative financial
instruments and non-functional currency-denominated receivables
and payables, a near-term 10% appreciation or depreciation of
the U.S. dollar would not have a significant effect on our
financial position, results of operations or cash flows over the
next fiscal year. In 2008, a near-term 10% appreciation or
depreciation of the U.S. dollar would also not have had a
significant effect.
Equity
Price Risk
We have investments in
available-for-sale
equity securities included in our long-term assets. The fair
values of these investments are sensitive to equity price
changes. Changes in the value of these investments are
ordinarily recorded through accumulated other comprehensive
income. The increase or decrease in the fair value of the
investments would affect our results of operations to the extent
that the investments were sold or that declines in value were
concluded by management to be other than temporary.
If the prices of our
available-for-sale
equity securities were to increase or decrease 10% from their
fair values as of December 31, 2009, it would increase or
decrease the investment values by $0.1 million. As of
December 31, 2008, a 10% increase or decrease in fair
values would have increased or decreased the investment values
by $0.1 million. We do not use any derivatives to hedge the
fair value of our marketable
available-for-sale
equity securities.
40
Credit
and Market Liquidity Risks
As of December 31, 2009, we had investments in money market
mutual funds of $631.1 million and short-term debt
securities of $183.8 million. These securities are
classified as
available-for-sale
and accordingly are recorded at fair market value in cash and
cash equivalents or short-term investments with unrealized gains
or losses reported as a separate component of accumulated other
comprehensive income, net of applicable taxes.
These investments expose us to credit risk or the risk of loss
should the issuer of the debt securities held in our portfolio
or by the money market mutual funds we invest in be unable to
meet their financial obligations under those securities. Our
available-for-sale
debt securities at December 31, 2009 included
$138.3 million of asset-backed and mortgage-backed
securities, of which $115.8 million are issued by agencies
of the U.S. government. We diversify our investments to
reduce the exposure to loss from any single issuer, sector, bank
or mutual fund.
We are also exposed to market liquidity risk. This is the risk
that the demand for securities in the market becomes
significantly lower than normal or ceases to exist, similar to
circumstances that existed during the recent global financial
crisis. During the course of that crisis, the Federal Reserve
implemented a number of new programs designed to improve
liquidity and conditions in financial markets. Due to the
improved functioning of financial markets, many of those
programs have expired or have been closed.
Despite the potential intervention by the Federal Reserve,
should financial market conditions require it in the future,
access to our funds could be limited in some cases and some
money market funds could limit redemptions for a period of time.
The impact of market liquidity risk on our investments is that
we may be unable to sell our investments in a timely manner
should we need to, or if we are able to sell them, the sale
price of the investments may be lower than we expect.
Credit and market liquidity risks could impact our results of
operations to the extent we incur a loss or if management
determines that changes in prices of
available-for-sale
debt securities are other than temporary.
41
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
LSI
Corporation
Consolidated Balance Sheets
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
778,291
|
|
|
$
|
829,301
|
|
Short-term investments
|
|
|
183,781
|
|
|
|
289,841
|
|
Accounts receivable, less allowances of $9,902 and $9,627,
respectively
|
|
|
338,961
|
|
|
|
303,971
|
|
Inventories
|
|
|
169,335
|
|
|
|
220,535
|
|
Prepaid expenses and other current assets
|
|
|
115,084
|
|
|
|
155,814
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,585,452
|
|
|
|
1,799,462
|
|
Property and equipment, net
|
|
|
218,972
|
|
|
|
235,963
|
|
Identified intangible assets, net
|
|
|
739,244
|
|
|
|
889,995
|
|
Goodwill
|
|
|
188,698
|
|
|
|
175,624
|
|
Other assets
|
|
|
235,564
|
|
|
|
243,150
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,967,930
|
|
|
$
|
3,344,194
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Accounts payable
|
|
$
|
213,008
|
|
|
$
|
201,035
|
|
Accrued salaries, wages and benefits
|
|
|
77,281
|
|
|
|
114,730
|
|
Other accrued liabilities
|
|
|
214,096
|
|
|
|
236,661
|
|
Current portion of long-term debt
|
|
|
350,000
|
|
|
|
245,107
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
854,385
|
|
|
|
797,533
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
350,000
|
|
Pension, post-retirement and other benefits
|
|
|
455,134
|
|
|
|
451,079
|
|
Income taxes payable non-current
|
|
|
103,047
|
|
|
|
193,590
|
|
Other non-current liabilities
|
|
|
94,260
|
|
|
|
111,070
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations and other liabilities
|
|
|
652,441
|
|
|
|
1,105,739
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred shares; $.01 par value; 2,000 shares
authorized; none outstanding
|
|
|
|
|
|
|
|
|
Common stock; $.01 par value; 1,300,000 shares
authorized; 656,484 and 648,132 shares outstanding,
respectively
|
|
|
6,565
|
|
|
|
6,481
|
|
Additional paid-in capital
|
|
|
6,142,674
|
|
|
|
6,058,786
|
|
Accumulated deficit
|
|
|
(4,408,494
|
)
|
|
|
(4,360,775
|
)
|
Accumulated other comprehensive loss
|
|
|
(279,641
|
)
|
|
|
(263,570
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,461,104
|
|
|
|
1,440,922
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,967,930
|
|
|
$
|
3,344,194
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
42
LSI
Corporation
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$
|
2,219,159
|
|
|
$
|
2,677,077
|
|
|
$
|
2,603,643
|
|
Cost of revenues
|
|
|
1,375,758
|
|
|
|
1,608,108
|
|
|
|
1,699,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
843,401
|
|
|
|
1,068,969
|
|
|
|
903,858
|
|
Research and development
|
|
|
608,312
|
|
|
|
672,511
|
|
|
|
655,224
|
|
Selling, general and administrative
|
|
|
326,014
|
|
|
|
406,875
|
|
|
|
381,409
|
|
Restructuring of operations and other items, net
|
|
|
38,246
|
|
|
|
43,717
|
|
|
|
148,121
|
|
Goodwill and identified intangible asset impairment charges
|
|
|
|
|
|
|
541,586
|
|
|
|
2,021,463
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
188,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(129,171
|
)
|
|
|
(595,720
|
)
|
|
|
(2,491,231
|
)
|
Interest expense
|
|
|
(21,931
|
)
|
|
|
(34,943
|
)
|
|
|
(31,020
|
)
|
Interest income and other, net
|
|
|
20,272
|
|
|
|
36,110
|
|
|
|
46,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(130,830
|
)
|
|
|
(594,553
|
)
|
|
|
(2,475,493
|
)
|
(Benefit)/provision for income taxes
|
|
|
(83,111
|
)
|
|
|
27,700
|
|
|
|
11,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(47,719
|
)
|
|
$
|
(622,253
|
)
|
|
$
|
(2,486,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.07
|
)
|
|
$
|
(0.96
|
)
|
|
$
|
(3.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.96
|
)
|
|
$
|
(3.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
651,238
|
|
|
|
647,953
|
|
|
|
641,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
651,238
|
|
|
|
647,953
|
|
|
|
641,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
43
LSI
Corporation
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
Balances at December 31, 2006
|
|
|
403,680
|
|
|
$
|
4,037
|
|
|
$
|
3,102,178
|
|
|
$
|
(1,220,306
|
)
|
|
$
|
9,829
|
|
|
$
|
1,895,738
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,486,819
|
)
|
|
|
|
|
|
|
|
|
Cumulative effect adjustment to accumulated deficit with respect
to the adoption of FASB guidance on uncertain tax positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,193
|
)
|
|
|
|
|
|
|
|
|
Adoption of FASB guidance on sabbatical leave
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,204
|
)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,982
|
|
|
|
|
|
Net unrealized gain on
available-for-sale
securities, net of tax $197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,682
|
|
|
|
|
|
Actuarial gain on pension and post-retirement plans, net of tax
$26,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,463,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with Agere merger
|
|
|
368,002
|
|
|
|
3,680
|
|
|
|
3,641,384
|
|
|
|
|
|
|
|
|
|
|
|
3,645,064
|
|
Agere restricted stock units & options vested as of
acquisition date
|
|
|
|
|
|
|
|
|
|
|
50,158
|
|
|
|
|
|
|
|
|
|
|
|
50,158
|
|
Repurchase of shares
|
|
|
(102,642
|
)
|
|
|
(1,026
|
)
|
|
|
(769,726
|
)
|
|
|
|
|
|
|
|
|
|
|
(770,752
|
)
|
Issuance to employees under stock option and purchase plans
|
|
|
7,176
|
|
|
|
71
|
|
|
|
46,238
|
|
|
|
|
|
|
|
|
|
|
|
46,309
|
|
Issuance of common stock pursuant to restricted stock awards, net
|
|
|
4,379
|
|
|
|
44
|
|
|
|
(11,869
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,825
|
)
|
Stock-based compensation related to employee stock options
|
|
|
|
|
|
|
|
|
|
|
47,127
|
|
|
|
|
|
|
|
|
|
|
|
47,127
|
|
Stock-based compensation related to employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
11,757
|
|
|
|
|
|
|
|
|
|
|
|
11,757
|
|
Stock-based compensation related to restricted shares
|
|
|
|
|
|
|
|
|
|
|
35,174
|
|
|
|
|
|
|
|
|
|
|
|
35,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
680,595
|
|
|
|
6,806
|
|
|
|
6,152,421
|
|
|
|
(3,738,522
|
)
|
|
|
64,291
|
|
|
|
2,484,996
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(622,253
|
)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,824
|
|
|
|
|
|
Net unrealized gain on
available-for-sale
securities, net of tax $1,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
852
|
|
|
|
|
|
Net unrealized loss on cash-flow hedges, net of tax $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(905
|
)
|
|
|
|
|
Actuarial loss on pension and post-retirement plans, net of tax
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(357,957
|
)
|
|
|
|
|
Amortization of prior service cost and net actuarial loss
included in net periodic benefit credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(950,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of shares
|
|
|
(44,611
|
)
|
|
|
(446
|
)
|
|
|
(228,978
|
)
|
|
|
|
|
|
|
|
|
|
|
(229,424
|
)
|
Issuance to employees under stock option and purchase plans
|
|
|
9,403
|
|
|
|
94
|
|
|
|
42,834
|
|
|
|
|
|
|
|
|
|
|
|
42,928
|
|
Issuance of common stock pursuant to restricted stock awards, net
|
|
|
2,745
|
|
|
|
27
|
|
|
|
(6,022
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,995
|
)
|
Stock-based compensation related to employee stock options
|
|
|
|
|
|
|
|
|
|
|
55,037
|
|
|
|
|
|
|
|
|
|
|
|
55,037
|
|
Stock-based compensation related to employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
8,473
|
|
|
|
|
|
|
|
|
|
|
|
8,473
|
|
Stock-based compensation related to restricted shares
|
|
|
|
|
|
|
|
|
|
|
35,021
|
|
|
|
|
|
|
|
|
|
|
|
35,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
648,132
|
|
|
|
6,481
|
|
|
|
6,058,786
|
|
|
|
(4,360,775
|
)
|
|
|
(263,570
|
)
|
|
|
1,440,922
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,719
|
)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,273
|
|
|
|
|
|
Net unrealized gain on
available-for-sale
securities, net of tax $1,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,248
|
|
|
|
|
|
Net unrealized gain on cash-flow hedges, net of tax $467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
775
|
|
|
|
|
|
Actuarial loss on pension and post-retirement plans, net of tax
$717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,828
|
)
|
|
|
|
|
Amortization of prior service cost and net actuarial loss
included in net periodic benefit credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance to employees under stock option and purchase plans
|
|
|
6,139
|
|
|
|
62
|
|
|
|
18,685
|
|
|
|
|
|
|
|
|
|
|
|
18,747
|
|
Issuance of common stock pursuant to restricted stock awards, net
|
|
|
2,213
|
|
|
|
22
|
|
|
|
(4,857
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,835
|
)
|
Stock-based compensation related to employee stock options
|
|
|
|
|
|
|
|
|
|
|
39,988
|
|
|
|
|
|
|
|
|
|
|
|
39,988
|
|
Stock-based compensation related to employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
8,394
|
|
|
|
|
|
|
|
|
|
|
|
8,394
|
|
Stock-based compensation related to restricted shares
|
|
|
|
|
|
|
|
|
|
|
21,678
|
|
|
|
|
|
|
|
|
|
|
|
21,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
656,484
|
|
|
$
|
6,565
|
|
|
$
|
6,142,674
|
|
|
$
|
(4,408,494
|
)
|
|
$
|
(279,641
|
)
|
|
$
|
1,461,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
44
LSI
Corporation
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(47,719
|
)
|
|
$
|
(622,253
|
)
|
|
$
|
(2,486,819
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
268,162
|
|
|
|
324,223
|
|
|
|
278,542
|
|
Stock-based compensation expense
|
|
|
63,983
|
|
|
|
72,283
|
|
|
|
77,267
|
|
Non-cash restructuring of operations and other items, net
|
|
|
690
|
|
|
|
(4,215
|
)
|
|
|
98,909
|
|
Goodwill and identified intangible assets impairment charges
|
|
|
|
|
|
|
541,586
|
|
|
|
2,021,463
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
188,872
|
|
Gain on redemption/repurchase of convertible subordinated notes
|
|
|
(149
|
)
|
|
|
(3,178
|
)
|
|
|
|
|
Write-down of debt and equity securities, net of gain on sale of
equity securities
|
|
|
1,529
|
|
|
|
15,273
|
|
|
|
2,396
|
|
Gain on sale of property and equipment, including assets
held-for-sale
|
|
|
(145
|
)
|
|
|
(123
|
)
|
|
|
(9,399
|
)
|
Unrealized foreign exchange loss
|
|
|
1,301
|
|
|
|
25,469
|
|
|
|
4,207
|
|
Deferred taxes
|
|
|
3,063
|
|
|
|
10,027
|
|
|
|
(3,619
|
)
|
Changes in assets and liabilities, net of assets acquired and
liabilities assumed in business combinations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(34,986
|
)
|
|
|
102,386
|
|
|
|
174,962
|
|
Inventories
|
|
|
64,592
|
|
|
|
20,307
|
|
|
|
74,708
|
|
Prepaid expenses and other assets
|
|
|
68,469
|
|
|
|
52,024
|
|
|
|
21,557
|
|
Accounts payable
|
|
|
8,420
|
|
|
|
(130,129
|
)
|
|
|
(39,162
|
)
|
Accrued and other liabilities
|
|
|
(192,736
|
)
|
|
|
(125,628
|
)
|
|
|
(108,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
204,474
|
|
|
|
278,052
|
|
|
|
294,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of debt securities
available-for-sale
|
|
|
(10
|
)
|
|
|
(190,548
|
)
|
|
|
(303,407
|
)
|
Proceeds from maturities and sales of debt securities
available-for-sale
|
|
|
90,572
|
|
|
|
240,157
|
|
|
|
616,224
|
|
Purchases of equity securities
|
|
|
(14,159
|
)
|
|
|
(8,500
|
)
|
|
|
(10,500
|
)
|
Proceeds from sale of equity securities
|
|
|
165
|
|
|
|
|
|
|
|
|
|
Purchases of property, equipment and software
|
|
|
(90,004
|
)
|
|
|
(134,589
|
)
|
|
|
(102,823
|
)
|
Proceeds from sale of property and equipment
|
|
|
2,773
|
|
|
|
13,674
|
|
|
|
16,166
|
|
Cash acquired from acquisition of Agere, net of acquisition costs
|
|
|
|
|
|
|
|
|
|
|
517,712
|
|
Acquisitions of other businesses and companies, net of cash
acquired
|
|
|
(46,981
|
)
|
|
|
(95,137
|
)
|
|
|
(132,830
|
)
|
Proceeds from sale of Consumer Products Group
|
|
|
|
|
|
|
|
|
|
|
22,555
|
|
Proceeds from sale of Mobility Products Group, net of
transaction costs
|
|
|
|
|
|
|
|
|
|
|
445,500
|
|
Proceeds from sale of semiconductor operations in Thailand, net
of transaction costs
|
|
|
|
|
|
|
|
|
|
|
49,600
|
|
Proceeds from maturity of notes receivable associated with sale
of semiconductor operations in Thailand
|
|
|
10,000
|
|
|
|
20,000
|
|
|
|
|
|
Decrease/(increase) in non-current assets and deposits
|
|
|
13,501
|
|
|
|
(13,300
|
)
|
|
|
|
|
Proceeds received from the resolution of a pre-acquisition
income tax contingency
|
|
|
|
|
|
|
4,821
|
|
|
|
3,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by investing activities
|
|
|
(34,143
|
)
|
|
|
(163,422
|
)
|
|
|
1,121,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption/repurchase of convertible subordinated notes
|
|
|
(244,047
|
)
|
|
|
(116,636
|
)
|
|
|
|
|
Issuances of common stock
|
|
|
18,747
|
|
|
|
42,928
|
|
|
|
46,280
|
|
Purchase of minority interest in subsidiary
|
|
|
|
|
|
|
(70
|
)
|
|
|
|
|
Purchase of common stock under repurchase programs
|
|
|
|
|
|
|
(229,231
|
)
|
|
|
(770,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(225,300
|
)
|
|
|
(303,009
|
)
|
|
|
(724,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
3,959
|
|
|
|
(3,889
|
)
|
|
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/increase in cash and cash equivalents
|
|
|
(51,010
|
)
|
|
|
(192,268
|
)
|
|
|
693,769
|
|
Cash and cash equivalents at beginning of year
|
|
|
829,301
|
|
|
|
1,021,569
|
|
|
|
327,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
778,291
|
|
|
$
|
829,301
|
|
|
$
|
1,021,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
45
|
|
Note 1
|
Significant
Accounting Policies
|
Nature of the Business: LSI Corporation
(LSI or the Company) designs, develops
and markets complex, high-performance storage and networking
semiconductors and storage systems. The Company provides
silicon-to-system
solutions that are used at the core of products that create,
store, consume and transport digital information. The Company
offers a broad portfolio of capabilities including custom and
standard product integrated circuits used in hard disk drives,
solid state drives, high-speed communication systems, computer
servers, storage systems, and personal computers. The Company
also offers external storage systems, storage systems software,
redundant array of independent disks (RAID) adapters
for computer servers and RAID software applications.
The Company operates in two segments the
Semiconductor segment and the Storage Systems segment.
The Companys Semiconductor segment designs, develops and
markets highly complex integrated circuits for storage and
networking applications. These solutions include both custom
solutions and standard products. The Company designs custom
solutions for a specific application defined by the customer.
The Company develops standard products for market applications
that it defines and sells to multiple customers. The Company
sells its integrated circuits for storage applications
principally to makers of hard disk drives, solid state drives
and computer servers. The Company sells its integrated circuits
for networking applications principally to makers of devices
used in computer and telecommunications networks and, to a
lesser extent, to makers of personal computers. The Company also
generates revenue by licensing other entities to use its
intellectual property.
The Companys Storage Systems segment designs and sells
enterprise storage systems and storage software applications
that enable storage area networks. The Company also offers RAID
adapters for computer servers and associated software for
attaching storage devices to computer servers. The Company sells
its storage systems and storage solutions primarily to original
equipment manufacturers, who resell these products to end
customers under their own brand name.
On April 2, 2007, the Company acquired Agere Systems Inc.
(Agere) through the merger of Agere and a subsidiary
of the Company.
Basis of Presentation: The consolidated
financial statements include the accounts of the Company and all
of its wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
Where the functional currency of the Companys foreign
subsidiaries is the local currency, all assets and liabilities
are translated into U.S. dollars at the current rates of
exchange as of the balance sheet date, and revenues and expenses
are translated using weighted-average rates prevailing during
the period. Accounts and transactions denominated in foreign
currencies have been re-measured into functional currencies
before translation into U.S. dollars. Foreign currency
transaction gains and losses are included as a component of
interest income and other, net. Gains and losses from foreign
currency translation are included as a separate component of
comprehensive income.
The Company has evaluated subsequent events through
February 26, 2010, the date that the financial statements
were issued.
Use of Estimates: The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ materially from these
estimates.
Acquisitions: The estimated fair value of
acquired assets and assumed liabilities and the results of
operations of purchased businesses are included in the
Companys consolidated financial statements from the
effective date of the purchase. The total purchase price is
allocated to the estimated fair value of assets acquired and
liabilities assumed based on management estimates. Prior to
January 1, 2009, direct acquisition costs, consisting of
46
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
investment banking, legal and accounting fees, were included in
the purchase price. Beginning January 1, 2009,
acquisition-related costs are expensed in the period the costs
are incurred.
Revenue Recognition: The majority of the
Companys product revenues are recognized when the
following fundamental criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) delivery has
occurred, (iii) the price is fixed or determinable, and
(iv) the title has transferred and collection of resulting
receivables is reasonably assured (or probable in the case of
software). Standard products sold to distributors are subject to
specific rights of return, and revenue recognition is deferred
until the distributor sells the product to a third-party because
the selling price is not fixed and determinable. Revenues from
the licensing of the Companys intellectual property are
recognized when the significant contractual obligations have
been fulfilled and the fundamental revenue recognition criteria
discussed above are met. Royalty revenues are recognized upon
the sale of products subject to royalties and are recognized
based upon reports received from licensees during the period,
unless collectibility is not reasonably assured, in which case
revenue is recognized when payment is received from the
licensee. All amounts billed to a customer related to shipping
and handling are classified as revenues, while all costs
incurred by the Company for shipping and handling are classified
as cost of revenues. Consideration given to customers, when
offered, is primarily in the form of discounts and rebates and
is accounted for as reductions to revenues in the same period
the related sale is made. The amount of these reductions is
based on historical rebate claims, specific criteria included in
rebate agreements, and other factors known at the time.
Sales arrangements that include a combination of storage systems
hardware, software where software is not considered
more-than-incidental
to the product being sold
and/or
services are accounted for as multiple element arrangements.
Revenues from multiple element arrangements that include a
combination of storage systems hardware, premium software and
services are allocated to the separate elements based on
relative fair values, which are determined based on the prices
when the items are sold separately.
Income/(Loss) per Share: Basic income/(loss)
per share is computed by dividing net income/(loss) available to
common stockholders (numerator) by the weighted-average number
of common shares outstanding (denominator) during the period.
Diluted income/(loss) per share is computed using the
weighted-average number of common and potentially dilutive
common shares outstanding during the period using the treasury
stock method for outstanding stock options and restricted stock
unit awards and the if-converted method for convertible notes.
Under the treasury stock method, the amount the employee must
pay for exercising stock options and employee stock purchase
rights, the amount of compensation cost for future service that
the Company has not yet recognized, and the amount of tax
benefits that would be recorded in additional paid-in capital
when the award becomes deductible are assumed to be used to
repurchase shares.
The following table sets forth a reconciliation of the
numerators and denominators used in the computation of basic and
diluted per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Per-Share
|
|
|
|
|
|
|
|
|
Per-Share
|
|
|
|
|
|
|
|
|
Per-Share
|
|
|
|
Loss*
|
|
|
Shares+
|
|
|
Amount
|
|
|
Loss*
|
|
|
Shares+
|
|
|
Amount
|
|
|
Loss*
|
|
|
Shares+
|
|
|
Amount
|
|
|
|
(In thousands except per share amounts)
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(47,719
|
)
|
|
|
651,238
|
|
|
$
|
(0.07
|
)
|
|
$
|
(622,253
|
)
|
|
|
647,953
|
|
|
$
|
(0.96
|
)
|
|
$
|
(2,486,819
|
)
|
|
|
641,823
|
|
|
$
|
(3.87
|
)
|
Stock options, employee stock purchase rights and restricted
stock unit awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(47,719
|
)
|
|
|
651,238
|
|
|
$
|
(0.07
|
)
|
|
$
|
(622,253
|
)
|
|
|
647,953
|
|
|
$
|
(0.96
|
)
|
|
$
|
(2,486,819
|
)
|
|
|
641,823
|
|
|
$
|
(3.87
|
)
|
47
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
Options to purchase 78,660,895, 86,798,304 and 93,011,016
weighted-average shares were excluded from the computation of
diluted shares for the years ended December 31, 2009, 2008
and 2007, respectively, because of their antidilutive effect on
net loss per share.
For the years ended December 31, 2009, 2008 and 2007,
33,341,308, 48,406,774 and 43,810,596, respectively,
weighted-average potentially dilutive shares associated with
convertible notes were excluded from the calculation of diluted
shares because of their antidilutive effect on net loss per
share.
Stock-Based Compensation Expense: The
estimated fair value of the equity-based awards, less expected
forfeitures, is amortized over the awards vesting period
on a straight-line basis. Determining the fair value of
stock-based awards at the grant date requires considerable
judgment, including estimating expected volatility, expected
term and risk-free rate. If factors change and the Company
employs different assumptions, stock-based compensation expense
may differ materially from what the Company has recorded in
prior years.
Sales and Value-Added Taxes: Taxes collected
from customers and remitted to governmental authorities are
presented on a net basis in the Companys statements of
operations.
Cash Equivalents: All highly liquid
investments purchased with an original maturity of 90 days
or less are considered to be cash equivalents. Cash and cash
equivalents consist primarily of highly liquid investments in
overnight deposits and money-market funds.
Accounts Receivable and Allowance for Doubtful Accounts:
Trade receivables are reported in the balance sheet reduced
by an allowance for doubtful accounts reflecting estimated
losses resulting from receivables not considered to be
collectible. The allowance for doubtful accounts is estimated by
evaluating customers payment history and credit worthiness
as well as current economic and market trends.
Investments: Available-for-sale
investments include marketable short-term investments in debt
securities and long-term investments in marketable equity
securities of technology companies. Short-term investments in
marketable debt securities are reported at fair value and
include all debt securities regardless of their maturity dates.
Long-term investments in marketable equity securities are
reported at fair value. Unrealized gains and losses on
marketable debt and equity securities, net of related tax, are
recorded as a separate component of comprehensive income in
stockholders equity until realized. The investments in
long-term non-marketable equity securities are recorded at cost
and consist primarily of non-marketable common and preferred
stock of various technology companies. Pre-tax gains and losses
on securities sold are determined based on the specific
identification method and are included in interest income and
other, net, in the statements of operations. The Company does
not hold any of these securities for speculative or trading
purposes.
For all investments in debt and equity securities, unrealized
losses are evaluated to determine if they are other than
temporary. For investments in equity securities, unrealized
losses that are considered to be other than temporary are
considered impairment losses and recognized as a component of
interest income and other, net, in the statements of operations.
For investments in debt securities, if the fair value of a debt
security is less than its amortized cost basis, the Company
assesses whether the impairment is other than temporary. An
impairment is considered other than temporary if (i) the
Company has the intent to sell the security, (ii) it is
more likely than not that the Company will be required to sell
the security before recovery of its entire amortized cost basis,
or (iii) the Company does not expect to recover the entire
amortized cost of the security. If an impairment is considered
other than temporary based on conditions (i) and (ii), the
entire difference between the amortized cost and the fair value
of the security is recognized in earnings. If an impairment is
considered other than temporary based on condition (iii), the
amount representing credit losses, defined as the difference
between the present value of the cash flows expected to be
collected and the amortized cost basis of the debt security,
will be recognized in earnings and the amount relating to all
other factors will be recognized in other comprehensive income.
The Company evaluates both qualitative and quantitative factors
such as duration and severity of the unrealized loss, credit
ratings, prepayment speeds, default and loss rates of the
underlying collateral, structure and credit enhancements to
determine if a credit loss may exist.
48
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
In order to determine if an impairment has occurred for equity
securities, the Company reviews the financial performance of
each investee, industry performance and outlook of each
investee, the trading prices of marketable equity securities and
pricing in current rounds of financing for non-marketable equity
securities. For marketable equity securities, impairment losses
are measured using the closing trading prices of the marketable
securities on the date management determined that the
investments are impaired. For non-marketable equity securities,
the Company does not estimate the fair values unless there are
identified events or changes in circumstances that may have a
significantly adverse effect on the investment. If management
determines that these non-marketable equity investments are
impaired, losses are generally measured by using pricing
reflected in current rounds of financing.
Inventories: Inventories are stated at the
lower of cost or market. Cost is computed on a
first-in,
first-out basis for raw materials,
work-in-process
and finished goods. Inventory provisions are established when
conditions indicate that the selling price could be less than
the cost due to physical deterioration, obsolescence, changes in
price levels or other causes. Inventory provisions are also
established for excess inventory generally based on inventory
levels in excess of 12 months of demand, as judged by
management, for each specific product. When inventory is written
down, a new cost basis is established.
Property and Equipment: Property and equipment
are recorded at cost. Depreciation and amortization for property
and equipment are calculated based on the straight-line method
over the estimated useful lives of the assets as presented below:
|
|
|
|
|
Buildings and improvements
|
|
|
20-40 years
|
|
Equipment
|
|
|
3-5 years
|
|
Furniture and fixtures
|
|
|
5 years
|
|
Amortization of leasehold improvements is computed using the
shorter of the remaining term of the related leases or the
estimated useful lives of the improvements.
Software: The Company capitalizes both
purchased software and software development costs. Purchased
software primarily includes software and external consulting
fees related to the purchase and implementation of software
projects used for business operations and engineering design
activities. Capitalized software projects are amortized over the
estimated useful lives of the projects, typically a two- to
five-year period. Development costs for software that will be
sold to customers
and/or
embedded in certain hardware products are capitalized when a
products technological feasibility has been established.
Prior to the establishment of technological feasibility,
software development costs are expensed as research and
development. Capitalized development costs are amortized over
the periods, typically 18 to 36 months, during which they
are expected to contribute to the Companys future cash
flows and are recorded in cost of revenues when software is
ready for general release to customers. Software amortization
totaling $37.2 million, $25.8 million and
$19.1 million was included in the Companys results of
operations for the years ended December 31, 2009, 2008 and
2007, respectively. On a quarterly basis, the Company assesses
the realizability of each software product. The amount by which
the unamortized capitalized software development costs exceed
the estimated net realizable value is written off immediately.
Impairment of Long-Lived Assets: The Company
evaluates the carrying value of long-lived assets whenever
events or changes in circumstances indicate the carrying value
of an asset may not be recoverable. The determination of
recoverability is based on an estimate of undiscounted cash
flows expected to result from the use and eventual disposition
of the asset. In the event such cash flows are not expected to
be sufficient to recover the recorded value of the assets, the
assets are written down to their estimated fair values. When
assets are removed from operations and held for sale, the
impairment loss is estimated as the excess of the carrying value
of the assets over their fair value.
Goodwill: The Company monitors the
recoverability of goodwill recorded in connection with
acquisitions, by reporting unit, annually in the fourth quarter
or sooner if events or changes in circumstances indicate that
the
49
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
carrying amount may not be recoverable. The Companys two
reporting units are Semiconductor and Storage Systems.
Impairment, if any, would be determined based on an implied fair
value model for determining the carrying value of goodwill. The
impairment test is a two-step process. The first step requires
comparing the fair value of each reporting unit to its net book
value. The Company uses management estimates of future cash
flows to perform the first step of the goodwill impairment test.
Managements estimates include assumptions about future
conditions such as future revenues, gross margins, operating
expenses and industry trends. The second step is only performed
if impairment is indicated after the first step is performed and
involves measuring the actual impairment to goodwill.
Fair Value Disclosures of Financial
Instruments: GAAP defines fair value as the
exchange price that would be received for an asset or paid to
transfer a liability (i.e., an exit price) in the principal or
most advantageous market for the asset or liability in an
orderly transaction between market participants on the
measurement date. GAAP also establishes a fair value hierarchy,
which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when
measuring fair value. The Companys financial assets and
financial liabilities recorded at fair value have been
categorized based upon the following three levels of inputs:
Level 1 Unadjusted, quoted prices in active,
accessible markets for identical assets or liabilities. The
Companys investments in marketable equity securities,
money-market funds and mutual funds that are traded in active
exchange markets, as well as certain U.S. Treasury
securities that are highly liquid and are actively traded in
over-the-counter
markets, are classified under level 1.
Level 2 Observable inputs other than
level 1 prices, such as quoted prices for similar assets or
liabilities in active markets; quoted prices in markets that are
not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the
full term of the assets or liabilities. The Companys
investments in U.S. government agency securities,
commercial paper, corporate and municipal debt securities,
U.S. Treasury Inflation-Protected Securities and
asset-backed and mortgage-backed securities are traded less
frequently than exchange-traded securities and are valued using
inputs that include quoted prices for similar assets in active
markets and inputs other than quoted prices that are observable
for the asset, such as interest rates, yield curves,
broker/dealer quotes and indices that are observable at commonly
quoted intervals. Foreign exchange forward contracts traded in
the
over-the-counter
markets are valued using market transactions or broker
quotations. As such, these derivative instruments are classified
within level 2. The Companys investments in
commingled funds are valued based on the net asset value per
share of each investment at the measurement date. Commingled
funds are classified as level 2 as the Company could redeem
these investments with the sponsoring investment management
organizations at least monthly.
Level 3 Unobservable inputs that are supported
by little or no market activity and that are significant to the
fair value of the assets or liabilities.
The Company utilizes the market approach to measure fair value
for its financial assets and liabilities. The market approach
uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities. The Company determines the estimated fair value of
financial instruments using available market information and
valuation methodologies considered to be appropriate. However,
considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates
are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different
market assumptions
and/or
estimation methodologies could have a significant effect on the
estimated fair value amounts. The fair value of investments,
derivative instruments and convertible debt are based on market
data. Carrying amounts of accounts receivable and accounts
payable approximate fair value due to the short maturity of
these financial instruments.
Derivative Instruments: All of the
Companys derivative instruments are recognized as assets
or liabilities in the statement of financial position and
measured at fair value. On the date a derivative contract is
entered into, the Company may designate the derivative as either
a hedge of the fair value of a recognized asset or liability
(fair-
50
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
value hedge), as a hedge of the variability of cash flows
to be received or paid (cash-flow hedge), or as a
foreign-currency hedge. Changes in the fair value of a
derivative that is highly effective and is designated and
qualifies as a fair-value hedge, along with the loss or gain on
the hedged asset or liability that is attributable to the hedged
risk (including losses or gains on firm commitments), are
recorded in current period earnings. Effective changes in the
fair value of a derivative that is highly effective and is
designated and qualifies as a cash-flow hedge are recorded in
other comprehensive income until earnings are affected by the
variability of the cash flows. Changes in the fair value of a
derivative that is highly effective and is designated and
qualifies as a foreign-currency hedge are recorded in either
current period earnings or other comprehensive income, depending
on whether the hedged transaction is a fair-value hedge (e.g., a
hedge of a firm commitment that is to be settled in a foreign
currency) or a cash-flow hedge (e.g., a hedge of
foreign-currency-denominated forecasted transaction).
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management
objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives that
are designated as fair-value, cash-flow or foreign-currency
hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. The
Company also assesses, both at the hedges inception and on
an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes
in fair values or cash flows of the hedged items. If it were
determined that a derivative was not highly effective as a hedge
or that it had ceased to be a highly effective hedge, the
Company would discontinue hedge accounting prospectively.
The Company would discontinue hedge accounting prospectively
when (1) it is determined that the derivative is no longer
highly effective in offsetting changes in the fair value or cash
flows of a hedged item (including firm commitments or forecasted
transactions); (2) the derivative expires or is sold,
terminated or exercised; (3) the derivative is no longer
designated as a hedge instrument, because it is unlikely that a
forecasted transaction will occur; (4) the hedged firm
commitment no longer meets the definition of a firm commitment;
or (5) management determines that designation of the
derivative as a hedge instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined
that the derivative no longer qualifies as a highly effective
fair-value hedge, the derivative will continue to be carried on
the balance sheet at its fair value, and the hedged asset or
liability will no longer be adjusted for changes in fair value.
When a fair-value hedge on an interest-bearing financial
instrument (such as an interest rate swap) is cancelled and
hedge accounting is discontinued, the hedged item is no longer
adjusted for changes in its fair value, and the remaining asset
or liability will be amortized to earnings over the remaining
life of the hedged item. When hedge accounting is discontinued
because it is probable that a forecasted transaction will not
occur, the derivative will continue to be carried on the balance
sheet at its fair value, and gains and losses that were
accumulated in other comprehensive income will be recognized
immediately in earnings. When hedge accounting is discontinued
because the hedged item no longer meets the definition of a firm
commitment, the derivative will continue to be carried on the
balance sheet at its fair value, and any asset or liability that
was previously recorded pursuant to recognition of the firm
commitment will be removed from the balance sheet and recognized
as a gain or loss in current period earnings.
Concentration of Credit Risk of Financial Instruments:
Financial instruments that potentially subject the Company
to credit risk consist of cash equivalents, short-term
investments and accounts receivable. Cash equivalents and
short-term investments are maintained with high quality
institutions, and their composition and maturities are regularly
monitored by management. The Company diversifies its investments
to reduce the exposure to loss from any single issuer, sector,
bank or mutual fund. A majority of the Companys trade
receivables are derived from sales to large multinational
computer, communication, networking and storage manufacturers,
with the remainder distributed across other industries. As of
December 31, 2009, two customers accounted for 28% and 16%
of trade receivables, and as of December 31, 2008, two
customers accounted for 19% and 14% of trade receivables.
Concentrations of credit risk with respect to all other trade
receivables are considered to be limited due to the quantity of
customers comprising the Companys customer base and their
dispersion across industries and
51
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
geographies. The Company performs ongoing credit evaluations of
its customers financial condition and requires collateral
as considered necessary. Write-offs of uncollectible amounts
have not been significant.
Product Warranties: The Company warrants
finished goods against defects in material and workmanship under
normal use and service for periods of one to five years. A
liability for estimated future costs under product warranties is
recorded when products are shipped.
Litigation and Settlement Costs: The Company
is involved in legal actions arising in the ordinary course of
business. The Company records an estimated loss for a loss
contingency when both of the following conditions are met:
(i) information available prior to issuance of the
financial statements indicates that it is probable that an asset
had been impaired or a liability had been incurred at the date
of the financial statements, and (ii) the amount of loss
can be reasonably estimated.
Income Taxes: The calculation of the
Companys tax provision involves the application of complex
tax rules and regulations within multiple jurisdictions
throughout the world. The Company makes certain estimates and
judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the
calculation of tax credits, benefits, and deductions, and in the
calculation of certain tax assets and liabilities, which arise
from differences in the timing of recognition of revenue and
expense for tax and financial statement purposes, as well as the
interest and penalties related to uncertain tax positions.
Significant changes to these estimates may result in an increase
or a decrease to the Companys tax provision in a
subsequent period.
The Company recognizes the effect of income tax positions only
if these positions are more likely than not of being sustained.
Recognized income tax positions are measured at the largest
amount that is more than 50% likely of being realized. Changes
in recognition or measurement are reflected in the period in
which the change in judgment occurs. The Company records
interest and penalties related to unrecognized tax benefits in
income tax expense.
Deferred tax assets and liabilities are recognized for temporary
differences between financial statement and income tax bases of
assets and liabilities. Valuation allowances are provided
against deferred tax assets when it is more likely than not that
some portion or all of the deferred tax asset will not be
realized. The Company considers future taxable income and
ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. The Company uses
the flow-through method to account for investment tax credits.
Under this method, a credit is recognized as a reduction of
income tax expense in the year the credit is utilized.
Assets Held for Sale: Assets held for sale are
included within prepaid expenses and other current assets in the
consolidated balance sheets as of December 31, 2009 and
2008. As of December 31, 2009 and 2008, assets held for
sale were $17.2 million and $17.3 million,
respectively, and primarily consisted of $16.8 million
related to land in Gresham, Oregon.
Assets classified as held for sale are recorded at the lower of
their carrying amount or fair value less costs to sell and are
not depreciated. The Company reassesses the ability to realize
the carrying value of these assets at the end of each reporting
period until the assets are sold or otherwise disposed of and,
therefore, additional adjustments may be necessary.
Recent
Accounting Pronouncements
In June 2009, the FASB issued guidance that amends the
consolidation rules related to variable interest entities. The
determination of whether a company is required to consolidate an
entity is based on, among other things, an entitys purpose
and design and a companys ability to direct the activities
of the entity that most significantly impact the entitys
economic performance. This guidance requires ongoing
reassessments of whether an enterprise is the primary
beneficiary of the variable interest entity. This guidance is
effective for fiscal years beginning after November 15,
2009. The adoption of this guidance is not expected to have a
significant impact on the Companys results of operations
or financial position.
52
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
In October 2009, the FASB issued guidance on
multiple-deliverable arrangements to address how to separate
deliverables and how to measure and allocate arrangement
consideration. This guidance requires vendors to develop the
best estimate of selling price for each deliverable and allocate
the arrangement consideration using this selling price. This
guidance also expands the disclosure requirements to include
both quantitative and qualitative information. This guidance is
effective for fiscal years beginning after June 15, 2010.
The Company is currently evaluating the impact of the adoption
of this guidance on its results of operations and financial
position.
In October 2009, the FASB issued guidance that clarifies that
the tangible products containing software components and
non-software components that function together to deliver a
products essential functionality will be considered
non-software deliverables and will be scoped out of the software
revenue recognition guidance. This guidance is effective for the
fiscal years beginning after June 15, 2010. The Company is
currently evaluating the impact of the adoption of this guidance
on its results of operations and financial position.
In January 2010, the FASB issued guidance that expands the
interim and annual disclosure requirements of fair value
measurements, including the information about movement of assets
between level 1 and 2 of the three-tier fair value
hierarchy established under its fair value measurement guidance.
This guidance also requires separate disclosure for each of
purchases, sales, issuance, and settlements in the
reconciliation for fair value measurements using significant
unobservable inputs, level 3. Except for the detailed
disclosure in the level 3 reconciliation, which is
effective for the fiscal years beginning after December 15,
2010, all the other disclosures under this guidance are
effective for the fiscal years beginning after December 15,
2009. The Company is currently evaluating the impact of the
adoption of this guidance on its results of operations and
financial position.
|
|
Note 2
|
Restructuring
of Operations and Other Items
|
2009
The Company recorded charges of $38.2 million in
restructuring of operations and other items, net, for the year
ended December 31, 2009, consisting of $30.2 million
in charges for restructuring of operations and $8.0 million
in charges for other items. Of these charges, $34.9 million
and $3.3 million were recorded in the Semiconductor segment
and the Storage Systems segment, respectively.
Restructuring:
The $30.2 million in charges primarily resulted from the
following:
|
|
|
|
|
A charge of $14.0 million primarily related to an accrual
for remaining payments to be made under a licensing arrangement
for design tools that will no longer be used by the Company;
|
|
|
|
A charge of $10.1 million for severance and termination
benefits for employees, primarily related to headcount
reductions from restructuring actions taken in April and July
2009; and
|
|
|
|
A charge of $5.5 million primarily for changes in estimates
and sublease assumptions and for the change in time value of
accruals for previously accrued facility lease exit costs.
|
Restructuring reserves as of December 31, 2009 are included
within other accrued liabilities and other non-current
liabilities in the consolidated balance sheets. The following
table summarizes the activities affecting the restructuring
accruals during the year ended December 31, 2009. The
amounts as of December 31, 2008 in the table
53
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
below include restructuring reserves related to restructuring
actions associated with the Agere merger, which were presented
in a separate table in prior years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Restructuring
|
|
|
Utilized
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Expense
|
|
|
During
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Write-down of excess assets and other liabilities
|
|
$
|
83
|
|
|
$
|
608
|
|
|
$
|
(691
|
)
|
|
$
|
|
|
Lease terminations(a)
|
|
|
44,555
|
|
|
|
19,525
|
|
|
|
(23,683
|
)
|
|
|
40,397
|
|
Payments to employees for severance(b)
|
|
|
28,031
|
|
|
|
10,094
|
|
|
|
(33,220
|
)
|
|
|
4,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
72,669
|
|
|
$
|
30,227
|
|
|
$
|
(57,594
|
)
|
|
$
|
45,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amount utilized represents cash payments. The balance
remaining is expected to be paid during the remaining terms of
the leases, which extend through 2013, and includes accruals for
a licensing agreement that is no longer being used by the
Company. |
|
(b) |
|
The majority of the balance remaining for severance is expected
to be paid by the first quarter of 2011. |
Other
Items:
The Company recorded a net charge of $8.0 million for other
items for the year ended December 31, 2009, primarily
related to litigation costs.
2008
The Company recorded charges of $43.7 million in
restructuring of operations and other items, net, for the year
ended December 31, 2008, consisting of $35.5 million
in charges for restructuring of operations and $8.2 million
in charges for other items. Of these charges, $41.1 million
and $2.6 million were recorded in the Semiconductor segment
and the Storage Systems segment, respectively.
Restructuring:
The $35.5 million restructuring charges included a charge
of $5.6 million related to the Agere merger. See further
discussion under Restructuring Actions Associated with the
Agere Merger below.
The remaining $29.9 million in charges primarily resulted
from the following actions in 2008:
|
|
|
|
|
A charge of $22.6 million for severance and termination
benefits for employees, primarily related to headcount
reductions from the restructuring action and broad-based
reorganization that was announced in January 2009;
|
|
|
|
A charge of $9.0 million for lease termination costs, which
included $7.0 million primarily for U.S. lease
termination costs and a $2.0 million charge primarily for
the change in time value of accruals for previously accrued
facility lease exit costs; and
|
|
|
|
A gain of $2.0 million from the sale of land in Gresham,
Oregon.
|
Restructuring reserves as of December 31, 2008 are included
within other accrued liabilities and other non-current
liabilities in the consolidated balance sheets. The following
table summarizes the activities affecting the
54
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
restructuring accruals other than reserves related to
restructuring actions associated with the Agere merger during
the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Restructuring
|
|
|
Utilized
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
(Income)/Expense
|
|
|
During
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Write-down of excess assets and other liabilities(a)
|
|
$
|
225
|
|
|
$
|
(1,740
|
)
|
|
$
|
1,598
|
|
|
$
|
83
|
|
Lease terminations(b)
|
|
|
23,318
|
|
|
|
8,946
|
|
|
|
(13,997
|
)
|
|
|
18,267
|
|
Payments to employees for severance(c)
|
|
|
24,817
|
|
|
|
22,645
|
|
|
|
(21,781
|
)
|
|
|
25,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,360
|
|
|
$
|
29,851
|
|
|
$
|
(34,180
|
)
|
|
$
|
44,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amount utilized includes a gain from the sale of land in
Gresham, Oregon. |
|
(b) |
|
The amount utilized represents cash payments. The balance
remaining for real estate lease terminations is expected to be
paid during the remaining terms of the leases, which extend
through 2011. |
|
(c) |
|
The amount utilized includes $6.6 million related to stock
grants exercised or expired. The majority of the balance
remaining for severance was paid during 2009. |
Restructuring
Actions Associated with the Agere Merger:
In connection with the Agere merger, management restructured
Ageres operations to eliminate certain duplicative
activities, reduce cost structure and better align product and
operating expenses with existing general economic conditions.
Agere restructuring costs were accounted for as liabilities
assumed as part of the purchase business combination as of
April 2, 2007. Adjustments to the initial restructuring
cost estimates made before December 31, 2007 were recorded
as an offset to goodwill and to restructuring expense thereafter.
The Company recorded a charge of $5.6 million related to
other restructuring actions, consisting of the following:
|
|
|
|
|
A net charge of $5.4 million for lease termination costs,
which included $2.3 million for the change in time value of
accruals for previously accrued facility lease exit costs and
$3.1 million for changes in sublease assumptions for
previously accrued lease exit costs;
|
|
|
|
A charge of $2.8 million for severance and termination
benefits for employees primarily related to a change in
severance estimates; and
|
|
|
|
A credit of $2.6 million primarily related to a gain from
the sale of assets held for sale in Singapore.
|
55
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
Restructuring reserves related to the Agere merger as of
December 31, 2008 are included within other accrued
liabilities and other non-current liabilities in the
consolidated balance sheets. The following table summarizes the
activities affecting the restructuring accruals related to Agere
merger during the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Changes in
|
|
|
Utilized
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Estimates During
|
|
|
During
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Lease terminations(a)
|
|
$
|
33,439
|
|
|
$
|
5,436
|
|
|
$
|
(12,587
|
)
|
|
$
|
26,288
|
|
Payments to employees for severance(b)
|
|
|
18,926
|
|
|
|
2,756
|
|
|
|
(20,974
|
)
|
|
|
708
|
|
Stock-based compensation charges(c)
|
|
|
20,860
|
|
|
|
|
|
|
|
(19,218
|
)
|
|
|
1,642
|
|
Write-down of excess assets and other liabilities(d)
|
|
|
|
|
|
|
(2,569
|
)
|
|
|
2,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
73,225
|
|
|
$
|
5,623
|
|
|
$
|
(50,210
|
)
|
|
$
|
28,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amount utilized includes $0.8 million for write-off of
leasehold improvements and the remaining utilized amount
represents cash payments. The balance remaining for real estate
lease terminations is expected to be paid during the remaining
terms of these contracts, which extend through 2013. |
|
(b) |
|
The amount utilized represents cash severance payments to
employees. The balance remaining for severance was paid during
2009. |
|
(c) |
|
The amount utilized represents stock grants exercised or
expired. The balance was utilized during 2009. |
|
(d) |
|
The amount includes a gain on the sale of assets in Singapore. |
Other
Items:
The Company recorded a net charge of $8.2 million related
to other items for the year ended December 31, 2008. The
charge included $12.5 million for the settlement of a legal
proceeding offset primarily by curtailment gains resulting from
the pension plan freeze effective April 6, 2009 and
termination of the post-retirement medical plans.
2007
The Company recorded charges of $148.1 million in
restructuring of operations and other items, net, for the year
ended December 31, 2007, consisting of $142.9 million
in charges for restructuring of operations and a charge of
$5.2 million for other items. Of these total charges,
$143.4 million and $4.7 million were recorded in the
Semiconductor segment and the Storage Systems segment,
respectively.
Restructuring
and impairment of long-lived assets:
The $142.9 million in restructuring charges were the result
of the following actions in 2007:
Sale of
the Mobility Products Group:
On October 24, 2007, the Company completed the sale of its
Mobility Products Group (MPG) to Infineon for
$450.0 million in cash, plus a potential performance-based
payment based on 2008 performance that was due in the first
quarter of 2009. The Company did not receive any
performance-based payment as the performance threshold was not
met. The MPG designed semiconductors and software for cellular
telephone handsets and complete chip-level solutions for
satellite digital audio radio applications. The Company is
obligated to provide operational handling services to Infineon
until October 2011 and is leasing space in its Allentown,
Pennsylvania facility to Infineon. The facility lease is for a
term of 36 months. Infineon pays LSI fair market value for
such space.
56
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
A charge of $95.4 million related to the sale of the MPG
consisted of the following:
|
|
|
|
|
A charge of $17.7 million for the difference between the
proceeds of $450.0 million received and the
$467.7 million net book value of MPG at closing;
|
|
|
|
A charge of $27.5 million for future credits the buyer was
expected to receive from the Company on purchases of finished
goods inventory;
|
|
|
|
A charge of $21.8 million for post-closing inventory
pricing benefits the buyer was expected to receive for products
manufactured at Silicon Manufacturing Partners Pte. Ltd.
(SMP), a joint venture LSI has with GLOBALFOUNDRIES;
|
|
|
|
A charge of $14.4 million for the acceleration of stock
awards previously granted to MPG employees whose positions were
eliminated as part of the sale of MPG; and
|
|
|
|
A charge of $4.5 million for MPG-related lease termination
costs for leases not assumed by the buyer, a $4.5 million
charge for estimated transaction costs, a $3.2 million
charge for severance and termination benefits for employees and
a charge of $1.8 million for the write-off of MPG fixed
assets not acquired by the buyer.
|
Sale of
the Consumer Products Group:
On July 27, 2007, the Company completed the sale of its
Consumer Products Group (CPG or Consumer
Group) to Magnum Semiconductor for approximately
$22.6 million in cash, plus a promissory note for
$18.0 million due in 2010 and a warrant to purchase
preferred shares of Magnum Semiconductor stock.
A charge of $14.0 million related to the sale of the
Consumer Group consisted of the following:
|
|
|
|
|
A credit of $1.3 million for the difference between the
$22.6 million received and the $21.3 million net book
value of the assets as of the date the transaction closed;
|
|
|
|
A $12.8 million charge for severance and termination
benefits for employees; and
|
|
|
|
A $2.5 million charge related to facility lease termination
costs for leases not assumed by the buyer.
|
Sale of
Thailand Semiconductor Assembly and Test Operations:
On October 2, 2007, the Company completed the sale of its
semiconductor assembly and test operations in Thailand to STATS
ChipPAC Ltd. (STATS ChipPAC) for approximately
$100 million, with $50 million due upon closing and a
$50 million note payable over four years. As of
December 31, 2009, the note payable balance was
$20 million. STATS ChipPAC offered employment to
substantially all of the LSI manufacturing employees associated
with the facility. The Company also entered into additional
agreements with STATS ChipPAC, including a multi-year wafer
assembly and test agreement and a transition services agreement.
Under the terms of the wafer assembly agreement, LSI is a
customer of STATS ChipPAC, whereby LSI has agreed to utilize
STATS ChipPAC for wafer assembly and testing until
October 2, 2011. The wafer assembly and testing prices
under the agreement represent fair market values. The transition
services agreement was short-term in nature and priced
separately from the overall sale agreement. Services performed
by LSI under this agreement were primarily related to short-term
information system services and priced at fair market value.
A charge of $5.6 million related to the sale of Thailand
assembly and test operations consisted of the following:
|
|
|
|
|
A charge of $5.5 million to adjust the carrying value of
the assets held for sale to fair market value; and
|
|
|
|
A charge of $0.1 million for the difference between the net
proceeds of $99.6 million received and the
$99.7 million of net book value at closing.
|
57
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
Other
Restructuring Actions and Charges:
On June 27, 2007, the Company announced a reduction in
workforce of approximately 900 positions (inclusive of the
Consumer Group), or 13 percent of the Companys
non-production workers across all business and functional areas
worldwide. On July 25, 2007, the Company also announced
that it would transition semiconductor and storage systems
assembly and test operations performed at its facilities in
Singapore and Wichita, Kansas to current manufacturing partners.
As part of these actions, the Company eliminated approximately
2,100 production positions worldwide. The Company recorded a
charge of $27.9 million related to the above actions and
other activities, consisting of the following:
|
|
|
|
|
A charge of $24.6 million for severance and termination
benefits for employees, of which $13.3 million related to
the general workforce reduction action announced on
June 27, 2007, $7.9 million related to workforce
reductions planned to occur in 2008, and $3.4 million
related to the transition of the Kansas manufacturing operations
to manufacturing partners;
|
|
|
|
A charge of $7.4 million to adjust the carrying value of
the assets held for sale in Singapore to fair market values and
a charge of $1.0 million for certain other asset write-offs;
|
|
|
|
A charge of $1.5 million primarily for changes in sublease
assumptions for previously accrued facility lease terminations
and $2.0 million to reflect the change in time value of
accruals for facility lease terminations;
|
|
|
|
A charge of $1.8 million for the acceleration of stock
awards previously granted to employees whose positions were to
be eliminated as a result of the planned workforce reductions in
January 2008; and
|
|
|
|
A net gain of $10.4 million for the sale of land in
Colorado, which had a net book value of $2.0 million. Total
proceeds from the sale were $12.4 million.
|
Restructuring
Actions Associated with the Agere Merger:
The Company established a reserve of $93.4 million as of
April 2, 2007, consisting of the following items:
|
|
|
|
|
A reserve of $50.1 million for severance and termination
benefits for employees as a result of the restructuring actions
related to the Agere merger and the sale of the Thailand and
Singapore assembly and test facilities;
|
|
|
|
A reserve of $28.8 million for stock-related compensation
expense associated with employees whose positions were
eliminated; and
|
|
|
|
A reserve of $14.5 million for facility lease exit costs,
primarily in Singapore and Europe.
|
From April 2, 2007 through December 31, 2007, the
Company recorded a net charge of $3.3 million to reflect
changes in estimates, resulting from the following items:
|
|
|
|
|
A charge of $1.3 million for changes in assumptions for
previously accrued facility lease termination costs;
|
|
|
|
A charge of $1.2 million to reflect a change in time value
of accruals previously recorded for facility lease termination
costs;
|
|
|
|
A charge of $1.0 million for additional stock-based
compensation charges for employees whose positions were
eliminated; and
|
|
|
|
A credit of $0.2 million for changes in estimated payments
to employees for severance previously recorded for Thailand and
other restructuring actions.
|
58
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
Other
Items:
During the fourth quarter of 2007, the Company recorded
$5.2 million of litigation charges in connection with
ongoing litigation matters.
|
|
Note 3
|
Stock-Based
Compensation and Common Stock
|
Description
of the Companys Equity Compensation Plans
At the Companys annual meeting on May 14, 2008, the
stockholders approved amendments to the 2003 Equity Incentive
Plan (2003 Plan) and the Employee Stock Purchase
Plan (US ESPP). The principal changes to the 2003
Plan were:
|
|
|
|
|
Making a total of 45 million shares available for grants
under the 2003 Plan after May 14, 2008. Of that amount,
15 million shares were available for grants of restricted
stock and restricted stock units;
|
|
|
|
Allowing non-employee directors to be eligible to participate in
the 2003 Plan;
|
|
|
|
Including stock appreciation rights as a permitted type of award
under the 2003 Plan;
|
|
|
|
Increasing the limits on the size of awards that can be granted
under the 2003 Plan to any person in one year from two million
to four million shares for stock options and from
0.5 million to one million shares for restricted stock and
restricted stock units; and
|
|
|
|
Allowing incentive stock options to be granted under the 2003
Plan until May 14, 2018.
|
The Company will no longer award stock options, stock
appreciation rights, restricted stock or restricted stock units
under any plan other than the 2003 plan.
The principal changes to the US ESPP were:
|
|
|
|
|
Making a total of 25 million shares available for purchase
under the US ESPP after May 14, 2008;
|
|
|
|
Consolidating the Companys International Employee Stock
Purchase Plan (IESPP, and together with the US ESPP,
the ESPP) into the US ESPP; and
|
|
|
|
Extending the term of the ESPP through May 14, 2018.
|
2003
Plan:
Under the 2003 Plan, the Company may grant stock options and
stock appreciation rights with an exercise price that is no less
than the fair market value of the stock on the date of grant,
restricted stock and restricted stock units to employees and
non-employee directors. No participant may be granted stock
options covering more than four million shares of stock or more
than an aggregate of one million shares of restricted stock and
restricted stock units in any year. The term of each option or
restricted stock unit is determined by the Board of Directors or
its delegate and, for option grants on or after
February 12, 2004, is generally seven years. Options
generally vest in annual increments of 25% per year commencing
one year from the date of grant. As of December 31, 2009,
the 2003 Plan had approximately 17.3 million common shares
available for future grants.
ESPP:
Under the ESPP, rights are granted to LSI 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. On March 31, 2009, the
Compensation Committee of the Board of Directors of the Company
adopted an amendment to the ESPP to increase the maximum number
of shares that a participant can purchase in a single purchase
period from 1,000 shares to 2,000 shares, effective
November 15, 2009. As of December 31, 2009, the ESPP
had approximately 17.8 million shares available for future
purchase.
59
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
Sales under the ESPP in 2009, 2008 and 2007 were approximately
5.1 million, 4.6 million and 4.0 million shares
of common stock at an average price of $2.67, $3.80 and $6.03
per share, respectively.
Stock-Based
Compensation Expense
The following table summarizes stock-based compensation expense
related to the Companys stock options, ESPP and restricted
stock unit awards for the years ended December 31, 2009,
2008 and 2007. Stock-based compensation costs capitalized to
inventory and software for the years ended December 31,
2009, 2008 and 2007 were not significant. The income tax
benefits that the Company realized for the tax deduction from
option exercises and other awards for the years ended
December 31, 2009, 2008 and 2007 were not significant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Stock-Based Compensation Expense Included In:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
7,382
|
|
|
$
|
9,269
|
|
|
$
|
10,711
|
|
Research and development
|
|
|
27,979
|
|
|
|
29,214
|
|
|
|
31,743
|
|
Selling, general and administrative
|
|
|
28,622
|
|
|
|
33,800
|
|
|
|
34,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
63,983
|
|
|
$
|
72,283
|
|
|
$
|
77,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated fair value of the stock-based awards, less
expected forfeitures, is amortized over each awards
vesting period on a straight-line basis.
Stock
Options:
The fair value of each option grant is estimated as of the date
of grant using a reduced form calibrated binomial lattice model
(the lattice model). The lattice model requires the
use of historical data for employee exercise behavior and the
use of assumptions outlined in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Weighted-average estimated grant date fair value per share
|
|
$
|
1.42
|
|
|
$
|
2.04
|
|
|
$
|
3.05
|
|
Weighted-average assumptions in calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
4.26
|
|
|
|
4.36
|
|
|
|
4.29
|
|
Risk-free interest rate
|
|
|
1.80
|
%
|
|
|
2.51
|
%
|
|
|
4.50
|
%
|
Volatility
|
|
|
67
|
%
|
|
|
52
|
%
|
|
|
47
|
%
|
The expected life of employee stock options represents the
weighted-average period the stock options are expected to remain
outstanding and is a derived output of the lattice model. The
expected life of employee stock options is affected by all of
the underlying assumptions and calibration of the Companys
model.
The risk-free interest rate assumption is based upon observed
interest rates of constant maturity U.S. Treasury
securities appropriate for the term of the Companys
employee stock options.
The Company uses an equally weighted combination of historical
and implied volatilities as of the grant date. The historical
volatility is the standard deviation of the daily stock returns
for LSI from the date of the initial public offering of its
common stock in 1983. For the implied volatilities, the Company
uses
near-the-money
exchange-traded call options, as stock options are call options
that are granted
at-the-money.
The historical and implied volatilities are annualized and
equally weighted to determine the volatilities as of the grant
date. 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 or implied
volatilities.
60
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
The lattice model assumes that employees exercise behavior
is a function of the options remaining vested life and the
extent to which the option is
in-the-money.
The lattice model estimates the probability of exercise as a
function of these two variables based on the entire history of
exercises and cancellations for all past option grants made by
the Company since its initial public offering.
Because stock-based compensation expense recognized is based on
awards ultimately expected to vest, it has been reduced for
estimated forfeitures. Forfeitures are estimated at the time of
grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures are
estimated based on historical experience.
The following table summarizes changes in stock options
outstanding during each of the years ended December 31,
2009, 2008 and 2007 (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Shares
|
|
|
Per Share
|
|
|
Shares
|
|
|
Per Share
|
|
|
Options outstanding at January 1
|
|
|
85,113
|
|
|
$
|
12.62
|
|
|
|
100,242
|
|
|
$
|
16.12
|
|
|
|
56,750
|
|
|
$
|
11.92
|
|
Options assumed in Agere Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,884
|
|
|
|
22.41
|
|
Options granted
|
|
|
23,203
|
|
|
|
3.13
|
|
|
|
18,627
|
|
|
|
5.68
|
|
|
|
15,628
|
|
|
|
8.61
|
|
Options exercised
|
|
|
(1,084
|
)
|
|
|
4.83
|
|
|
|
(4,682
|
)
|
|
|
5.41
|
|
|
|
(3,725
|
)
|
|
|
5.91
|
|
Options canceled
|
|
|
(15,706
|
)
|
|
|
15.40
|
|
|
|
(29,074
|
)
|
|
|
21.41
|
|
|
|
(17,295
|
)
|
|
|
15.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31
|
|
|
91,526
|
|
|
$
|
9.83
|
|
|
|
85,113
|
|
|
$
|
12.62
|
|
|
|
100,242
|
|
|
$
|
16.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31
|
|
|
49,528
|
|
|
$
|
14.00
|
|
|
|
49,446
|
|
|
$
|
16.72
|
|
|
|
67,124
|
|
|
$
|
20.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the options outstanding and options exercisable as of
December 31, 2009, the weighted-average remaining
contractual term was 4.02 and 2.79 years, respectively, and
the average intrinsic value was $77.5 million and
$7.5 million, respectively.
As of December 31, 2009, the total unrecognized
compensation expense related to unvested stock options, net of
estimated forfeitures, was $60.7 million and is expected to
be recognized over the next 2.5 years on a weighted-average
basis. The total intrinsic value of options exercised during the
year ended December 2009, 2008 and 2007 was $0.6 million,
$7.2 million and $7.7 million, respectively. Cash
received from stock option exercises was $5.2 million in
2009.
The Companys determination of fair value of share-based
payment awards on the date of grant using an option-pricing
model is affected by the Companys stock price as well a
number of highly complex and subjective assumptions. The Company
uses third-party consultants to assist in developing the
assumptions used in, as well as calibrating, the lattice model.
The Company is responsible for determining the assumptions used
in estimating the fair value of its share-based payment awards.
61
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
Employee
Stock Purchase Plan:
Compensation expense for the Companys ESPP is calculated
using the fair value of the employees purchase rights
under the Black-Scholes model. The following table summarizes
the assumptions that went into the calculation of fair value for
the May and November 2009, 2008 and 2007 grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Weighted-average estimated grant date fair value per share
|
|
$
|
1.79
|
|
|
$
|
1.37
|
|
|
$
|
2.09
|
|
Weighted-average assumptions in calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (years)
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
0.7
|
|
Risk-free interest rate
|
|
|
0.3
|
%
|
|
|
1
|
%
|
|
|
4
|
%
|
Volatility
|
|
|
52
|
%
|
|
|
84
|
%
|
|
|
42
|
%
|
Cash received from ESPP issuances was $13.5 million in 2009.
Restricted
Stock Awards:
Under the 2003 Plan, the Company may grant restricted stock and
restricted stock unit awards. The Company typically grants
restricted stock units. The vesting requirements for restricted
stock units are determined at the time of grant, and typically
vesting of restricted stock units 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.
The following table summarizes changes in restricted stock units
outstanding during each of the years ended December 31,
2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Number of Shares
|
|
|
|
(In thousands)
|
|
|
Unvested restricted stock units at January 1
|
|
|
6,391
|
|
|
|
9,177
|
|
|
|
1,910
|
|
Assumed in Agere Acquisition
|
|
|
|
|
|
|
|
|
|
|
9,141
|
|
Granted
|
|
|
383
|
|
|
|
1,779
|
|
|
|
4,337
|
|
Vested
|
|
|
(3,279
|
)
|
|
|
(4,026
|
)
|
|
|
(5,555
|
)
|
Forfeited
|
|
|
(509
|
)
|
|
|
(539
|
)
|
|
|
(656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock units at December 31
|
|
|
2,986
|
|
|
|
6,391
|
|
|
|
9,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes restricted stock units granted
during the years ended December 31, 2009, 2008 and 2007
(share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of
|
|
|
Grant Date Fair
|
|
|
Number of
|
|
|
Grant Date Fair
|
|
|
Number of
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Value per Share
|
|
|
Shares
|
|
|
Value per Share
|
|
|
Shares
|
|
|
Value per Share
|
|
|
Restricted stock units granted
|
|
|
383
|
|
|
$
|
4.56
|
|
|
|
1,779
|
|
|
$
|
5.02
|
|
|
|
4,337
|
|
|
$
|
8.20
|
|
As of December 31, 2009, the total unrecognized
compensation expense related to restricted stock units, net of
estimated forfeitures, was $14.7 million and is expected to
be recognized over the next 1.3 years on a weighted-average
basis. The fair value of shares vested during the year ended
December 31, 2009, 2008 and 2007 was $15.2 million,
$18.6 million and $37.0 million, respectively.
62
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
As of December 31, 2009, there were a total of
approximately 111.8 million shares of common stock reserved
for issuance upon exercise of outstanding options and upon
vesting of outstanding restricted stock units and for use in
connection with future equity awards under the 2003 plan.
Common
Stock
Stock
Repurchase Programs:
On December 4, 2006, the Company announced that its Board
of Directors had authorized a stock repurchase program of up to
$500.0 million worth of shares of the Companys common
stock and terminated the prior stock repurchase program
authorized by the Board of Directors on July 28, 2000. In
July 2007, the Company completed the repurchase program
announced on December 4, 2006. On August 20, 2007, the
Company announced that its Board of Directors had authorized a
repurchase program of up to an additional $500.0 million
worth of shares of the Companys common stock. The Company
effectively completed this authorization by December 31,
2008. The repurchased shares were retired immediately after the
repurchases were complete. Retirement of the repurchased shares
is recorded as a reduction of common stock and additional
paid-in
capital.
|
|
Note 4
|
Business
Combinations
|
The following tables summarize the acquisitions completed in
2009, 2008 and 2007 (dollars in millions). These acquisitions
were accounted under the purchase method of accounting. Under
this method, the estimated fair value of assets acquired and
liabilities assumed and the results of operations of the
acquired business were included in the Companys financial
statements from the effective date of the acquisition.
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
|
|
Entity Name or Type of Technology;
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
Net
|
|
|
Identified
|
|
|
In-Process
|
|
|
|
|
Segment Included in;
|
|
Acquisition
|
|
|
Total
|
|
|
Type of
|
|
|
Tangible
|
|
|
Intangible
|
|
|
Research and
|
|
|
|
|
Description of Acquired Business
|
|
Date
|
|
|
Consideration
|
|
|
Consideration
|
|
|
Assets
|
|
|
Assets
|
|
|
Development
|
|
|
Goodwill
|
|
|
ONStor, Inc.; Storage Systems segment; Clustered
network-attached storage solutions
|
|
|
July 27, 2009
|
|
|
$
|
25.5
|
|
|
|
Cash
|
|
|
$
|
0.8
|
|
|
$
|
15.0
|
|
|
$
|
0.8
|
|
|
$
|
8.9
|
|
3ware RAID storage adapter business; Storage Systems segment;
Server RAID adapters and storage solutions
|
|
|
April 21, 2009
|
|
|
$
|
21.5
|
|
|
|
Cash
|
|
|
$
|
12.3
|
|
|
$
|
5.0
|
|
|
|
None
|
|
|
$
|
4.2
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
|
|
Entity Name or Type of Technology;
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
Net
|
|
|
Identified
|
|
|
In-Process
|
|
|
|
|
Segment Included in;
|
|
Acquisition
|
|
|
Total
|
|
|
Type of
|
|
|
Tangible
|
|
|
Intangible
|
|
|
Research and
|
|
|
|
|
Description of Acquired Business
|
|
Date
|
|
|
Consideration
|
|
|
Consideration
|
|
|
Assets
|
|
|
Assets
|
|
|
Development
|
|
|
Goodwill
|
|
|
HDD semiconductor business of Infineon; Semiconductor segment;
Silicon solutions for hard disk drive makers
|
|
|
April 25, 2008
|
|
|
$
|
95.1
|
|
|
|
Cash
|
|
|
$
|
10.3
|
|
|
$
|
78.2
|
|
|
|
None
|
|
|
$
|
6.6
|
|
63
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
|
|
Entity Name or Type of Technology;
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
Net
|
|
|
Identified
|
|
|
In-Process
|
|
|
|
|
Segment Included in;
|
|
Acquisition
|
|
|
Total
|
|
|
Type of
|
|
|
Tangible
|
|
|
Intangible
|
|
|
Research and
|
|
|
|
|
Description of Acquired Business
|
|
Date
|
|
|
Consideration
|
|
|
Consideration
|
|
|
Assets
|
|
|
Assets
|
|
|
Development
|
|
|
Goodwill
|
|
|
Tarari, Inc.; Semiconductor segment; Silicon and software
solutions for security and network control
|
|
|
October 3, 2007
|
|
|
$
|
93.0
|
|
|
|
Cash
|
|
|
$
|
6.3
|
|
|
$
|
23.3
|
|
|
$
|
6.0
|
|
|
$
|
57.4
|
|
Agere Systems Inc.; Semiconductor segment; Integrated circuit
solutions for communications and computing applications
|
|
|
April 2, 2007
|
|
|
$
|
3,720.1
|
|
|
|
368 million
shares of LSI
common stock
|
|
|
$
|
231.8
|
|
|
$
|
1,727.7
|
|
|
$
|
176.4
|
|
|
$
|
1,584.2
|
|
SiliconStor, Inc..; Semiconductor segment; Silicon solutions for
enterprise storage network based on SAS and FC-SATA
|
|
|
March 13, 2007
|
|
|
$
|
56.4
|
|
|
|
Cash
|
|
|
$
|
1.5
|
|
|
$
|
10.6
|
|
|
$
|
6.5
|
|
|
$
|
37.8
|
|
2009
Acquisition
of ONStor, Inc.:
On July 27, 2009, the Company acquired privately-held
ONStor, Inc. (ONStor), which provided clustered
network-attached storage solutions designed to help enterprises
consolidate, protect and manage the accelerating growth of
unstructured data. The acquisition is intended to further
advance the Companys storage systems business. For
reporting purposes, the ONStor business is included as part of
the Storage Systems segment.
The goodwill of $8.9 million represents the excess of the
purchase price over the fair value of the net tangible and
identified intangible assets acquired. The goodwill was assigned
to the Storage Systems segment and is not expected to be
deductible for tax purposes.
The following table summarizes the components of the identified
intangible assets associated with this acquisition. These assets
will be amortized over the periods during which they are
expected to contribute to the Companys future cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Fair Value
|
|
|
Average Life
|
|
|
|
(In millions)
|
|
|
(In years)
|
|
|
Current technology
|
|
$
|
12.7
|
|
|
|
6
|
|
Customer base
|
|
|
2.1
|
|
|
|
2
|
|
Trade names
|
|
|
0.2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total acquired identified intangible assets
|
|
$
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of 3ware RAID Storage Adapter Business:
On April 21, 2009, the Company completed the acquisition of
the assets and certain associated intellectual property of the
3ware RAID storage adapter business of Applied Micro Circuits
Corporation. 3ware products include SAS and SATA RAID adapters
and high-capacity storage solutions for a broad range of
applications. The acquisition is intended to enhance the
Companys competitive position in server RAID adapter
solutions for distributors and system builders. For reporting
purposes, the 3ware business is included as part of the Storage
Systems segment.
The goodwill of $4.2 million represents the excess of the
purchase price over the fair value of the net tangible and
identified intangible assets acquired. The goodwill was assigned
to the Storage Systems segment and is not expected to be
deductible for tax purposes.
64
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
The following table summarizes the components of the identified
intangible assets associated with this acquisition. These assets
will be amortized over the periods during which they are
expected to contribute to the Companys future cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Fair Value
|
|
|
Average Life
|
|
|
|
(In millions)
|
|
|
(In years)
|
|
|
Current technology
|
|
$
|
1.5
|
|
|
|
2
|
|
Customer base
|
|
|
3.2
|
|
|
|
5
|
|
Trade names
|
|
|
0.3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total acquired identified intangible assets
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Acquisition
of Hard Disk Drive (HDD) Semiconductor Business of
Infineon:
On April 25, 2008, the Company completed the acquisition of
the assets of the HDD semiconductor business of Infineon. The
acquisition was intended to enhance the Companys
competitive position in the desktop and enterprise HDD space.
In connection with the acquisition, the Company also entered
into additional agreements with Infineon, including a supply
agreement and a transition service agreement. Under the terms of
the supply agreement, Infineon was to provide the Company
operations handling and wafer supply services for a period of up
to six months from the date of acquisition. These services are
priced separately at fair market values. Under the terms of the
transition services agreement, Infineon provided the Company
engineering services in support of the existing HDD business
products through December 31, 2009. These services were
also priced separately at fair market values.
The following table sets forth the components of the identified
intangible assets associated with this acquisition. These assets
will be amortized over the periods during which they are
expected to contribute to the Companys future cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Fair Value
|
|
|
Average Life
|
|
|
|
(In millions)
|
|
|
(In years)
|
|
|
Current technology
|
|
$
|
46.5
|
|
|
|
4
|
|
Customer base
|
|
|
31.7
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total acquired identified intangible assets
|
|
$
|
78.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Merger
with Agere:
On April 2, 2007, the Company completed the acquisition of
Agere. Agere was a provider of integrated circuit solutions for
a variety of computing and communications applications. Some of
Ageres solutions included related software and reference
designs. Ageres solutions were used in products such as
hard disk drives, mobile phones, high-speed communications
systems and personal computers. Agere also licensed its
intellectual property to others. The purpose of the acquisition
was to enable the Company to expand its comprehensive set of
building-block solutions, including semiconductors, systems and
related software for storage, networking and consumer
electronics products, and to expand its intellectual property
portfolio and integrated workforce in the Semiconductor segment.
Upon completion of the merger, each share of Agere common stock
outstanding at the effective time of the merger was converted
into the right to receive 2.16 shares of LSI common stock.
As a result, approximately
65
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
368 million shares of LSI common stock were issued to
former Agere stockholders. The fair value of the common stock
issued was determined using a share price of $9.905 per share,
which represented the average closing price of LSI common shares
for the period commencing two trading days before and ending two
trading days after December 4, 2006, the date that the
merger was agreed to and announced. LSI assumed stock options
and restricted stock units covering a total of approximately
58 million shares of LSI common stock. The fair value of
options assumed was estimated using the lattice model and a
share price of $9.905 per share. The value of the options and
restricted stock units assumed was reduced by the fair value of
unvested options and restricted stock units assumed, based on
the price of a share of LSI common stock on April 2, 2007.
LSI also guaranteed Ageres 6.5% Convertible
Subordinated Notes at the fair value of $370.2 million as
of April 2, 2007. These notes were redeemed during the year
ended December 31, 2009.
The following table sets forth the total purchase price of the
acquisition at the acquisition date (in thousands):
|
|
|
|
|
Fair value of LSI common shares issued
|
|
$
|
3,647,021
|
|
(a) Fair value of stock awards assumed
|
|
|
218,713
|
|
(b) Fair value of unvested stock awards assumed
|
|
|
(168,555
|
)
|
|
|
|
|
|
(a) (b) Fair value of the vested options assumed
|
|
|
50,158
|
|
Direct transaction costs
|
|
|
22,970
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
3,720,149
|
|
|
|
|
|
|
Purchase
Price Allocation:
The allocation of the purchase price to Ageres tangible
and identified intangible assets acquired and liabilities
assumed was based on their estimated fair values. The excess of
the purchase price over the tangible and identified intangible
assets acquired and liabilities assumed was allocated to
goodwill. None of the goodwill recorded is expected to be
deductible for tax purposes except the tax deductible goodwill
LSI inherited from Agere. The purchase price was allocated as
follows as of April 2, 2007 (in thousands):
|
|
|
|
|
Cash
|
|
$
|
540,140
|
|
Accounts receivable
|
|
|
222,169
|
|
Inventory
|
|
|
120,848
|
|
Assets held for sale
|
|
|
122,756
|
|
Property and equipment
|
|
|
162,047
|
|
Accounts payable
|
|
|
(167,947
|
)
|
Pension and post-retirement liabilities
|
|
|
(214,607
|
)
|
Convertible notes
|
|
|
(370,249
|
)
|
Other liabilities
|
|
|
(183,359
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
231,798
|
|
Identified intangible assets
|
|
|
1,727,700
|
|
In-process research and development
|
|
|
176,400
|
|
Goodwill
|
|
|
1,584,251
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
3,720,149
|
|
|
|
|
|
|
Note 2 contains information related to the cost of
restructuring programs related to Agere. The costs were included
as part of other liabilities assumed as of April 2, 2007.
66
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
The following table sets forth the components of the identified
intangible assets, which are being amortized over their
estimated useful lives, some on a straight-line basis and others
on an accelerated basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Fair Value
|
|
|
Average Life
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
Current technology
|
|
$
|
844,500
|
|
|
|
8.5
|
|
Customer base
|
|
|
513,000
|
|
|
|
10
|
|
Patent licensing
|
|
|
317,200
|
|
|
|
10
|
|
Order backlog
|
|
|
53,000
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
Total acquired identified intangible assets
|
|
$
|
1,727,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
In-Process Research and Development
In 2009, the Company capitalized $0.8 million related to
acquired IPR&D, which was included in identified intangible
assets, net, in the consolidated balance sheets. In 2008, there
were no IPR&D charges. For the year ended December 31,
2007, we recorded IPR&D charges of $188.9 million in
connection with the Agere, SiliconStor and Tarari acquisitions.
The following table summarizes details of the 2007 acquisitions
at the acquisition dates (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Cost To
|
|
|
|
|
|
Revenue Projections
|
|
Entity Name
|
|
IPR&D
|
|
|
Complete
|
|
|
Discount Rate
|
|
|
Extended Through
|
|
|
Agere Systems Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage read channel and preamps
|
|
$
|
36.2
|
|
|
$
|
17.8
|
|
|
|
13.8
|
%
|
|
|
2016
|
|
Mobility HSPDA for 3G
|
|
$
|
31.2
|
|
|
|
|
*
|
|
|
13.8
|
%
|
|
|
|
|
Networking modems, Firewire, serdes, media gateway,
VoIP, network processors, Ethernet, mappers and framers
|
|
$
|
109.0
|
|
|
$
|
68.0
|
|
|
|
13.8
|
%
|
|
|
2021
|
|
SiliconStor, Inc.
|
|
$
|
6.5
|
|
|
$
|
4.4
|
|
|
|
27.0
|
%
|
|
|
2017
|
|
Tarari, Inc.
|
|
$
|
6.0
|
|
|
$
|
2.9
|
|
|
|
22.7
|
%
|
|
|
2013
|
|
|
|
|
* |
|
During the fourth quarter of 2007, the Company sold the Mobility
Products Group and therefore no costs will be incurred to
complete the acquired Mobility-HSPDA for 3G project. |
The Companys methodology for allocating the purchase price
relating to purchase acquisitions to IPR&D involves
established valuation techniques in the high-technology
industry. The fair value of each project in process is
determined by discounting forecasted cash flows directly related
to the products expected to result from the subject research and
development once commercially feasible, net of returns on
contributory assets including working capital, fixed assets,
customer relationships, trade name, and assembled workforce. The
net cash flows from the identified projects are based on
estimates of revenues, cost of revenues, research and
development costs, selling, general and administrative costs and
applicable income taxes for the projects. Total revenues for the
projects are expected to extend through the dates noted in the
table above. These projections are based on estimates of market
size and growth, expected trends in technology and the expected
timing of new product introductions by the Company and its
competitors.
A discount rate is used for the projects to account for the
risks associated with the inherent uncertainties surrounding the
successful development of the IPR&D, market acceptance of
the technology, the useful life of the technology, the
profitability level of such technology and the uncertainty of
technological advances, which could
67
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
affect the estimates recorded. The discount rates used in the
present value calculations are typically derived from a
weighted-average
cost-of-capital
analysis. These estimates do not account for any potential
synergies realizable as a result of the acquisition and are in
line with industry averages and growth estimates.
For acquisitions completed prior to January 1, 2009,
IPR&D was expensed upon acquisition because technological
feasibility had not been established and no future alternative
uses existed. For acquisitions completed on or after
January 1, 2009, IPR&D is capitalized and classified
as indefinite-lived until the completion or abandonment of the
associated research and development activities. The Company
assesses these indefinite-lived IPR&D assets for impairment
whenever events or changes in circumstances indicate that the
assets might be impaired. Once research and development efforts
are completed or abandoned, the Company determines the useful
life of the assets and amortizes the related IPR&D over the
useful life of the assets.
The actual development timelines and costs for the IPR&D
projects described above were in line with original estimates as
of December 31, 2009. However, development of the
technology remains a substantial risk to the Company due to
factors including the remaining effort to achieve technical
feasibility, rapidly changing customer needs and competitive
threats from other companies. Failure to bring these products to
market in a timely manner could adversely affect sales and
profitability of the Company in the future.
Pro Forma
Results (Unaudited)
The consolidated financial statements include the operational
results of each acquired business from the date of acquisition.
The following pro forma summary combines the results of
operations of the Company and Agere as if Agere had been
acquired as of the beginning of 2007. Pro forma results of
operations for the remaining acquisitions have not been
presented because the effects of these acquisitions,
individually and in the aggregate, were not material to the
Companys financial results. The summary is provided for
illustrative purposes only and is not necessarily indicative of
the consolidated results of operations for future periods or
results that actually would have been realized had the Company
and Agere been a consolidated entity during the period presented.
The summary includes the impact of certain adjustments such as
amortization of intangibles, stock-based compensation charges
and interest expense related to Ageres convertible notes
that the Company guaranteed, but excludes the charges for
IPR&D associated with the Agere acquisition.
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
(In thousands except
|
|
|
|
per share amounts)
|
|
|
Revenues
|
|
$
|
2,938,487
|
|
Net loss
|
|
$
|
(2,307,572
|
)
|
Basic loss per share
|
|
$
|
(2.29
|
)
|
Diluted loss per share
|
|
$
|
(2.29
|
)
|
|
|
Note 5
|
Benefit
Obligations
|
Pension
and Post-retirement Benefit Plans
The Company has pension plans covering substantially all former
Agere U.S. employees, excluding management employees hired
after June 30, 2003. Retirement benefits are offered under
defined benefit pension plans, which include a management plan
and a represented plan, and are based on an adjusted
career-average-pay,
dollar-per-month
formula or on a cash-balance program. The cash-balance program
provides for annual company contributions based on a
participants age and compensation and interest on existing
balances and covers employees of certain companies acquired by
Agere since 1996 and management employees hired after
January 1, 1999 and before July 1, 2003. The Company
also has a non-qualified supplemental pension plan in the
U.S. that principally provides benefits based on
compensation in excess of amounts that can be considered under a
tax qualified plan. The
68
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
Company also provides post-retirement life insurance coverage
for former Agere employees under a group life insurance plan.
The Company provided post-retirement medical benefits for former
Agere employees until December 31, 2008. Participants in
the cash-balance program and management employees hired after
June 30, 2003 are not covered under the post-retirement
life insurance. The Company also has pension plans covering
certain international employees.
Effective April 6, 2009, the Company froze the
U.S. defined benefit pension plans. Participants in the
adjusted career-average-pay program will not earn any future
service accruals after that date. Participants in the
cash-balance program will not earn any future service accruals,
but will continue to earn 4% interest per year on their
cash-balance accounts.
Net
Periodic Benefit Credit:
The following table sets forth the components of the net
periodic benefit credit. The amounts reported for the year ended
December 31, 2007 reflect costs from April 2, 2007,
the date the merger with Agere was completed:
|
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Year Ended December 31,
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2009
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2008
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2007
|
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Pension
|
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|
Post-retirement
|
|
|
Pension
|
|
|
Post-retirement
|
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|
Pension
|
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|
Post-retirement
|
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|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
(In thousands)
|
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|
Service cost
|
|
$
|
1,792
|
|
|
$
|
79
|
|
|
$
|
5,694
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|
|
$
|
101
|
|
|
$
|
5,523
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|
$
|
118
|
|
Interest cost
|
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|
73,774
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|
2,426
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75,016
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|
3,024
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55,361
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|
|
2,776
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Expected return on plan assets
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|
(76,802
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)
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|
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(4,877
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)
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(82,575
|
)
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|
(5,033
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)
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|
|
(62,804
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)
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(3,669
|
)
|
Amortization of prior service cost
|
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49
|
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39
|
|
|
|
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Net actuarial gain recognized
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(94
|
)
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|
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(5
|
)
|
|
|
(119
|
)
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(12
|
)
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Net periodic benefit credit
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|
|
(1,281
|
)
|
|
|
(2,372
|
)
|
|
|
(1,831
|
)
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|
|
(2,027
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)
|
|
|
(1,920
|
)
|
|
|
(787
|
)
|
Curtailment gain(a)
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|
|
|
|
|
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(771
|
)
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|
|
(2,652
|
)
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|
|
(414
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)
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|
|
(281
|
)
|
Special termination benefit(b)
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|
426
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Other(c)
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(1,529
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)
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Settlement credit(d)
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(32
|
)
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|
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|
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|
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|
Total benefit credit
|
|
$
|
(855
|
)
|
|
$
|
(3,901
|
)
|
|
$
|
(2,634
|
)
|
|
$
|
(4,679
|
)
|
|
$
|
(2,334
|
)
|
|
$
|
(1,068
|
)
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(a) |
|
The curtailments in 2008 resulted from the pension plan freeze
effective April 6, 2009 and the termination of the
post-retirement medical plan effective January 1, 2009. The
curtailments in 2007 reflect accelerated recognition of gains
resulting from the sale of the Mobility Products Group. |
|
(b) |
|
Reflects enhanced retirement benefits given to active
represented plan participants impacted by workforce reduction in
January 2009. |
|
(c) |
|
Reflects the reversal of the excess retiree medical liability
accrued for claims from 2008. |
|
(d) |
|
The settlement in 2008 reflects accelerated recognition of gains
resulting from lump sum distributions from the non-qualified
supplemental pension plan. |
69
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
Change
in Projected Benefit Obligation:
The following table sets forth a reconciliation of the beginning
and ending balances of the projected benefit obligation during
the years ended December 31, 2009 and 2008. The measurement
date was December 31 for each of the years presented below.
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|
Year Ended December 31,
|
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2009
|
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|
2008
|
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|
Pension
|
|
|
Post-retirement
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
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|
(In thousands)
|
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|
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|
Projected benefit obligation at January 1
|
|
$
|
1,170,459
|
|
|
$
|
41,083
|
|
|
$
|
1,194,302
|
|
|
$
|
56,123
|
|
Service cost
|
|
|
1,792
|
|
|
|
79
|
|
|
|
5,694
|
|
|
|
101
|
|
Interest cost
|
|
|
73,774
|
|
|
|
2,426
|
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|
|
75,016
|
|
|
|
3,024
|
|
Plan participants contributions
|
|
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|
4
|
|
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|
|
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|
9,375
|
|
Amendments
|
|
|
(1,936
|
)
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|
|
|
|
|
|
(13,683
|
)
|
|
|
322
|
|
Actuarial loss/(gain)
|
|
|
118,341
|
|
|
|
517
|
|
|
|
8,569
|
|
|
|
(265
|
)
|
Benefits paid
|
|
|
(88,669
|
)*
|
|
|
(2,985
|
)
|
|
|
(99,439
|
)*
|
|
|
(27,597
|
)
|
Special termination benefits
|
|
|
426
|
|
|
|
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|
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|
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|
Other adjustments
|
|
|
228
|
|
|
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|
Projected benefit obligation at December 31
|
|
$
|
1,274,415
|
|
|
$
|
41,124
|
|
|
$
|
1,170,459
|
|
|
$
|
41,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
* |
|
Includes benefits paid under certain international pension
plans, which do not maintain plan assets. |
The projected pension benefit obligations as of
December 31, 2009 and 2008 include $13.1 million and
$12.6 million, respectively, of obligations related to the
Companys international pension plans.
Change
in Plan Assets:
The following table sets forth a reconciliation of the beginning
and ending balances of the fair value of plan assets during the
years ended December 31, 2009 and 2008. The fair value of
plan assets was measured at December 31 for each of the
years presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
(In thousands)
|
|
|
Fair value of plan assets at January 1
|
|
$
|
720,915
|
|
|
$
|
54,781
|
|
|
$
|
1,061,420
|
|
|
$
|
65,754
|
|
Actual gain/(loss) on plan assets
|
|
|
168,582
|
|
|
|
8,829
|
|
|
|
(252,088
|
)
|
|
|
(9,583
|
)
|
Employer contributions
|
|
|
20,180
|
|
|
|
1,671
|
|
|
|
10,968
|
|
|
|
16,832
|
|
Transfer to defined contribution plan funds
|
|
|
(1,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan participants contributions
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
9,375
|
|
Benefits paid
|
|
|
(88,524
|
)
|
|
|
(2,985
|
)
|
|
|
(99,385
|
)
|
|
|
(27,597
|
)
|
Other adjustments
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31
|
|
$
|
819,410
|
|
|
$
|
62,300
|
|
|
$
|
720,915
|
|
|
$
|
54,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
The fair value of pension plan assets as of December 31,
2009 and 2008 includes $2.5 million and $3.8 million
of assets related to the Companys international pension
plans, respectively. The Company contributed a total of
$18.9 million to its U.S. defined benefit pension
plans, $1.0 million to its non-qualified supplemental
pension plan and $0.3 million to its international pension
plans for the year ended December 31, 2009. The significant