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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,
2010
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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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions 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 4, 2010 was approximately $2.9 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, 2011, 616,035,633 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 2011 annual meeting of
stockholders.
LSI
Corporation
Form 10-K
For the Year Ended December 31, 2010
Index
FORWARD-LOOKING
STATEMENTS
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The
words estimate, plan,
intend, expect, anticipate,
believe and similar words are intended to identify
forward-looking statements. Although we believe our expectations
are based on reasonable assumptions, our actual results could
differ materially from those projected in the forward-looking
statements. We have described in Part I,
Item 1A-Risk
Factors a number of factors that could cause our actual
results to differ from our projections or estimates. Except
where otherwise indicated, the statements made in this report
are made as of the date we filed this report with the Securities
and Exchange Commission and should not be relied upon as of any
subsequent date. We expressly disclaim any obligation to update
the information 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.
Our semiconductor business provides products for leading
original equipment manufacturer, or OEM, companies, in the
server, storage and networking industries. Our storage systems
business designs and sells entry-level and mid-range storage
systems for leading storage OEMs, as well as to our channel
customers. It also designs and sells storage systems components
to distributors who sell unbranded storage systems to small and
midsized businesses.
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 then 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 OEMs who resell these products to end
customers under their own brand name. In 2010, the Semiconductor
segment accounted for approximately 62.9% of our revenue and the
Storage Systems segment accounted for approximately 37.1% of our
revenue. You can find additional financial information about our
segments and geographic financial information in Note 9 to
our financial statements in Item 8. See
Item 1A Risk Factors for
information about risks we face as a result of our operations
outside the United States.
Company
Information
We were incorporated in California on November 6, 1980 and
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
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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 servers, 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 systems motherboard
applications. Additionally, our product line includes 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. In 2010 we
introduced our PCI
Express®-based
solid-state storage solution, which uses the industry-standard
SAS protocol and LSI SAS software to deliver a high-performance
storage solution with enhanced reliability and industry-leading
storage density. 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
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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 television picture data, which if
delayed can result in a noticeable flaw in the picture, can be
prioritized over packets containing web-page data being
downloaded to a personal computer, which if delayed is less
likely to be noticed.
Our networking portfolio includes solutions for carrier-managed
gateways that would typically 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 wired 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. In 2010, we introduced our 28nm silicon platform with
an advanced design methodology for custom SOCs, offering power
savings at increased density and higher performance. This
platform allows our wireless infrastructure and enterprise
networking customers to meet performance demands while
simultaneously reducing product and cooling costs.
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
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, communications,
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business and enterprise gateways, access routers, 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.
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.
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STORAGE
SYSTEMS SEGMENT
We offer a wide range of products for the storage markets in two
main areas: external storage systems hardware and associated
software and internal storage products and software. These
products are sold through our OEM customers, as well as to our
channel customers and distributors who sell unbranded storage
systems. Our products are highly modular, which provides our
customers with the flexibility to integrate our
sub-assemblies
with third-party components, such as disk drives or software, to
form their own storage systems products. Our modular product
approach allows our customers 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. During 2010, we
introduced our CTS2600 family of configurable storage
components, designed to provide channel partners with the
flexibility to assemble complete systems to their
customers specifications.
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 are connected to one or more servers in a storage area
network, or SAN, providing block data services. We also offer
network attached storage solutions in the form of gateway
products, which provide file data services. These gateways can
be combined with our SAN storage systems or other vendors
storage systems to provide complete network attached storage
solutions.
Our external storage systems product family includes entry level
and mid-range storage systems, including the Engenio 2600 which
was introduced in 2010. The Engenio 2600 is an upgradeable
entry-level system, providing flexibility for enhanced
performance, reliability and scalability. Our external storage
product family features the Engenio Operating System, or EOS, a
suite of storage and data management software that enables
enterprise system administrators to easily protect, manage and
better utilize their data and information assets. EOS also
offers 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®
and
3ware®
product families of RAID products, which store data using
multiple drives and various data replication strategies to
minimize the impact of the failure of any one drive. Our
MegaRAID and 3ware 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 our fully featured
RAID software and management utilities for robust storage
configuration and deployment. In addition to the OEM channel, we
offer MegaRAID and 3ware branded products through a network of
distributors and resellers.
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.
Marketing
and Distribution
Semiconductor
Marketing and Distribution
The semiconductor industry is highly competitive and is
characterized by rapidly changing technology. 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.
Our semiconductor products and design services are sold
primarily to OEM customers 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
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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, ONStor network attached
storage gateways and recently introduced CTS2600 storage
components 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 comprehensive and differentiated 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 sales. 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 2010, International Business Machines Corporation accounted
for approximately 19.4% and Seagate Technology accounted for
approximately 13.8% of our total revenues. No other customer
accounted for more than 10% of our total revenues in 2010. 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
2010, based on revenue, accounted for approximately 64.6% 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 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.
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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 us and
GLOBALFOUNDRIES.
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 systems 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 systems 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.
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.
7
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, Cavium Networks, Inc., Freescale,
Inc., International Business Machines Corporation, Marvell
Technology Group, Ltd., NetLogic Microsystems, Inc., 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 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 systems and
8
sub-system
providers such as Dot Hill Systems Corporation, Infortrend
Technology Inc., PMC-Sierra, 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 NetApp, Inc., who sell to
the same end-customers as our OEM customers.
The principal competitive factors for storage systems 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 systems 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, 2010, we had approximately 11,200
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.
9
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 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 $670 million,
$608 million and $673 million for fiscal 2010, 2009
and 2008, 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 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. 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,
regulations of this type might be adopted or amended that impose
expensive obligations on us in the future. In addition,
responsibility for cleaning up alleged historic chemical
releases into the environment or some future violation of
regulations on the use of restricted substances in products we
sell could result in:
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the need for additional capital or other material improvements;
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liability to our employees
and/or third
parties; and/or
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business interruptions.
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Employees
As of December 31, 2010, we had 5,718 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
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.
10
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 2010, IBM and Seagate, our two largest
customers, represented approximately 19.4% and 13.8%,
respectively, of our total revenues, and our 10 largest
customers accounted for approximately 64.6% 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 would be difficult for us to replace
revenues from 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,
in 2010, IBM announced its internally developed
Storwize®
V7000 storage systems product family. While IBM has positioned
the V7000 above the mid-range storage systems products that we
currently sell to IBM, the V7000 offers a number of similar
features and may be preferred by potential customers over our
offering. Further, if IBM chooses to emphasize sales of its
V7000 system over systems based on our products, our sales from
these products and resulting revenues could be negatively
impacted. Additionally, business combinations involving our
customers or competitors of our customers 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 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 support
and that compete with technologies we do support become widely
accepted, demand for our current and planned products may be
reduced. For example, if tablet computing, which involves the
use of flash memory rather than hard disks to store data,
becomes significantly more popular, it could have an impact on
demand for hard drives.
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. 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
11
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 ours, 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 products 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 public forecast of our future revenue. 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.
We
depend on outside suppliers to manufacture, assemble, package
and test our products; accordingly, any failure to secure and
maintain sufficient manufacturing capacity at attractive prices
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 necessary 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. We currently believe that semiconductor foundry capacity
is constrained with respect to certain technology platforms. If
foundry capacity is limited, it is possible that one of our
foundries may
12
allocate capacity to the production of other companies
products, including those of our competitors. This reallocation
could impair our ability to obtain sufficient wafers. If we
experience greater demand than expected for our products that we
are not able to meet, we would miss opportunities for additional
revenue and could experience a negative impact on our
relationships with affected customers. 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. In
addition, only a limited number of foundries provide services
using the advanced technologies we require to provide leading
edge products. Because of the limited competition, it is
possible that our foundry partners for products requiring these
technologies will price their services at levels which have an
adverse impact on our gross margins or make it unprofitable for
us to offer these products. This limited competition may also
make it more difficult for us to use a second foundry for a
product when we believe that doing so would be advantageous.
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 sufficient
quantities of 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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monetary or other accommodations to our customers;
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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.
13
Our
pension plans are underfunded, and may require significant
future contributions, which could have an adverse impact on our
business.
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. At December 31, 2010, our projected benefit
obligations under our pension plans exceeded the value of the
assets of those plans by approximately $462.3 million.
U.S. law provides that we must make contributions to the
pension plans in 2011 of at least $64 million. We expect to
be required to make additional contributions to the plans in
future years. We may also choose to make additional, voluntary
contributions to the plans. Depending on our cash position at
the time, contributions to our pension plans could impact our
operating flexibility, for example by impacting our ability to
invest in new products.
We may
be subject to intellectual property infringement claims and
litigation, which could cause us to incur significant expenses
or prevent us from selling our products.
As is typical in the semiconductor industry, we are frequently
involved in disputes regarding patent and other intellectual
property rights. We have in the past received, and we may in the
future receive, communications from third parties asserting that
our products, processes or technologies infringe on the patent
or other intellectual property rights of third parties, and we
may also receive claims of potential infringement if we attempt
to license intellectual property to others. Intellectual
property litigation, regardless of the outcome, may be costly
and time consuming, and may divert the attention of management
and key personnel from other business issues. Claims of
intellectual property infringement also might require us to
enter into costly royalty or license agreements. We may not be
able to obtain royalty or license agreements on acceptable
terms. If any of our products or intellectual property infringes
on valid rights held by others, our results of operations or
financial position may suffer and we may have to make material
changes in production processes or products.
If we
are unable to protect or assert our intellectual property
rights, our business and results of operations may be
harmed.
Our future success will depend, in part, upon our ability to
protect and assert our intellectual property rights. We 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. These products are
typically incorporated into our customers products, which
we believe are ultimately sold to end-users around the world. 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. We are subject to a
number of risks that could adversely affect our business and
results of operations
14
as a result of our operations outside of the United States, our
customers and suppliers operations outside of the
United States and end-demand outside of the United States,
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
15
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 engineers and
other 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 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, we are subject
to the European Union Directive on the Restriction of the use of
certain Hazardous Substances in Electrical &
Electronic Equipment (RoHS) and the Registration, Evaluation,
Authorization and Restriction of Chemicals (REACH) Regulation in
the European Union. Such regulations could require us to
redesign our products in order to comply with their requirements
and require the development
and/or
maintenance of compliance administration systems. Redesigned
products could be more costly to manufacture or require more
costly or less efficient raw materials. If we cannot develop
compliant products on a timely basis or properly administer our
compliance programs, our revenues could 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
16
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.
|
|
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.
17
|
|
Item 4.
|
(Removed
and Reserved)
|
Executive
Officers of LSI
Set forth below is information about our executive officers.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Abhijit Y. Talwalkar
|
|
|
46
|
|
|
President and Chief Executive Officer
|
Philip W. Bullinger
|
|
|
46
|
|
|
Executive Vice President and General Manager, Engenio Storage
Group
|
Bryon Look
|
|
|
57
|
|
|
Executive Vice President, Chief Financial Officer and Chief
Administrative Officer
|
Jean F. Rankin
|
|
|
52
|
|
|
Executive Vice President, General Counsel and Secretary
|
D. Jeffrey Richardson
|
|
|
46
|
|
|
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, from 1993 until
2005. At Intel, he held a number of management positions,
including senior positions from 1995 to 2005. Mr. Talwalkar
is a member of the board of directors of LAM Research
Corporation.
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 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, a
semiconductor company. At Agere, she had been Executive Vice
President, General Counsel and Secretary since 2000.
Ms. Rankin is a member of the board of directors of
InterDigital, Inc.
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, Custom and Storage Interfaces
semiconductor 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 senior positions from
1999 to 2005.
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.
18
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 2010, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
6.73
|
|
|
$
|
4.88
|
|
|
$
|
3.93
|
|
|
$
|
2.39
|
|
Second Quarter
|
|
$
|
6.72
|
|
|
$
|
4.42
|
|
|
$
|
5.20
|
|
|
$
|
3.29
|
|
Third Quarter
|
|
$
|
5.14
|
|
|
$
|
3.89
|
|
|
$
|
5.78
|
|
|
$
|
4.35
|
|
Fourth Quarter
|
|
$
|
6.13
|
|
|
$
|
4.41
|
|
|
$
|
6.14
|
|
|
$
|
4.88
|
|
At February 22, 2011, there were 319,081 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. We do not
currently pay, and do not anticipate paying in the foreseeable
future, any cash dividends to our stockholders.
Issuer
Purchases of Equity Securities
The following table contains information about our repurchases
of our common stock during the quarter ended December 31,
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Dollar Value of Shares
|
|
|
|
Total Number
|
|
|
|
|
|
as Part of
|
|
|
that May Yet Be
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Publicly Announced
|
|
|
Purchased Under
|
|
Period
|
|
Purchased
|
|
|
Paid per Share
|
|
|
Plans or Programs
|
|
|
the Programs
|
|
|
October 4 November 3, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
32,256,652
|
|
November 4 December 3, 2010
|
|
|
4,335,661
|
|
|
$
|
5.77
|
|
|
|
4,335,661
|
|
|
$
|
7,256,945
|
|
December 4 December 31, 2010
|
|
|
1,198,916
|
|
|
$
|
6.01
|
|
|
|
1,198,916
|
|
|
$
|
56,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,534,577
|
|
|
$
|
5.82
|
|
|
|
5,534,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 17, 2010, we announced that our Board of Directors
had authorized the repurchase of up to $250.0 million of
our common stock. The purchases reported in the table above were
made pursuant to this authorization, effectively completing the
share repurchase program.
19
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, 2005, 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.
Comparison
of Cumulative Five Year Total Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 31, 2005
|
|
Dec 31, 2006
|
|
Dec 31, 2007
|
|
Dec 31, 2008
|
|
Dec 31, 2009
|
|
Dec 31, 2010
|
LSI Corporation
|
|
$
|
100
|
|
|
$
|
112.50
|
|
|
$
|
66.37
|
|
|
$
|
41.12
|
|
|
$
|
75.13
|
|
|
$
|
74.87
|
|
S&P 500 Index
|
|
$
|
100
|
|
|
$
|
115.79
|
|
|
$
|
122.16
|
|
|
$
|
76.96
|
|
|
$
|
97.33
|
|
|
$
|
111.99
|
|
S&P 500 Semiconductors Index
|
|
$
|
100
|
|
|
$
|
91.09
|
|
|
$
|
102.00
|
|
|
$
|
55.34
|
|
|
$
|
89.09
|
|
|
$
|
99.07
|
|
20
|
|
Item 6.
|
Selected
Financial Data
|
Five-Year
Consolidated Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
Revenues
|
|
$
|
2,570,047
|
|
|
$
|
2,219,159
|
|
|
$
|
2,677,077
|
|
|
$
|
2,603,643
|
|
|
$
|
1,982,148
|
|
Cost of revenues
|
|
|
1,461,182
|
|
|
|
1,375,758
|
|
|
|
1,608,108
|
|
|
|
1,699,785
|
|
|
|
1,158,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,108,865
|
|
|
|
843,401
|
|
|
|
1,068,969
|
|
|
|
903,858
|
|
|
|
823,165
|
|
Research and development
|
|
|
669,822
|
|
|
|
608,312
|
|
|
|
672,511
|
|
|
|
655,224
|
|
|
|
413,432
|
|
Selling, general and administrative
|
|
|
343,013
|
|
|
|
326,014
|
|
|
|
406,875
|
|
|
|
381,409
|
|
|
|
255,569
|
|
Restructuring of operations and other items, net
|
|
|
58,885
|
|
|
|
38,246
|
|
|
|
43,717
|
|
|
|
148,121
|
|
|
|
(8,427
|
)
|
Goodwill and identified intangible asset impairment charges
|
|
|
|
|
|
|
|
|
|
|
541,586
|
|
|
|
2,021,463
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188,872
|
|
|
|
4,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations
|
|
|
37,145
|
|
|
|
(129,171
|
)
|
|
|
(595,720
|
)
|
|
|
(2,491,231
|
)
|
|
|
158,307
|
|
Interest expense
|
|
|
(5,601
|
)
|
|
|
(21,931
|
)
|
|
|
(34,943
|
)
|
|
|
(31,020
|
)
|
|
|
(24,263
|
)
|
Interest income and other, net
|
|
|
13,848
|
|
|
|
20,272
|
|
|
|
36,110
|
|
|
|
46,758
|
|
|
|
51,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
|
45,392
|
|
|
|
(130,830
|
)
|
|
|
(594,553
|
)
|
|
|
(2,475,493
|
)
|
|
|
185,320
|
|
Provision/(benefit) for income taxes
|
|
|
5,420
|
|
|
|
(83,111
|
)
|
|
|
27,700
|
|
|
|
11,326
|
|
|
|
15,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
39,972
|
|
|
$
|
(47,719
|
)
|
|
$
|
(622,253
|
)
|
|
$
|
(2,486,819
|
)
|
|
$
|
169,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income/(loss) per share
|
|
$
|
0.06
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.96
|
)
|
|
$
|
(3.87
|
)
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income/(loss) per share
|
|
$
|
0.06
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.96
|
)
|
|
$
|
(3.87
|
)
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,424,912
|
|
|
$
|
2,967,930
|
|
|
$
|
3,344,194
|
|
|
$
|
4,396,390
|
|
|
$
|
2,852,144
|
|
Long-term obligations
|
|
$
|
622,782
|
|
|
$
|
652,441
|
|
|
$
|
1,105,739
|
|
|
$
|
1,148,689
|
|
|
$
|
429,400
|
|
Stockholders equity
|
|
$
|
1,317,502
|
|
|
$
|
1,461,104
|
|
|
$
|
1,440,922
|
|
|
$
|
2,484,996
|
|
|
$
|
1,895,738
|
|
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 for the year
ended December 31, 2006, which was previously reported as a
separate component of operating expenses, has been reclassified
to cost of revenues for consistency.
In 2009, we recorded a tax benefit of $83.1 million,
primarily attributable to an $81.0 million tax benefit
resulting from settlements of tax audits in foreign
jurisdictions.
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 I, 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 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.
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 then 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 we are focusing development efforts in that area.
We derive the majority of our revenue from sales of products for
the external storage systems, server, hard disk drive and
networking equipment end markets. We believe that these markets
offer us attractive opportunities because of the growing demand
to create, store, manage and move digital content. We believe
that this growth is occurring as a result of a number of trends,
including:
|
|
|
|
|
The increasing popularity of mobile devices such as smart phones
and media tablets, and the increasing use of the internet for
streaming media, such as videos and music, which are driving the
need for more network capacity;
|
|
|
|
Consumer and business demand for hard disks to store increasing
amounts of digital data, including music, video, pictures,
medical and other business records; and
|
|
|
|
Enterprises are refreshing their data centers to provide higher
levels of business support and analytics, which drives demand
for new servers and storage systems.
|
22
In 2010, our business continued to recover from the economic
downturn that began in 2008, and benefited from a new product
cycle in our storage systems business, as our revenues grew
approximately 15.8% from 2009. During the year, we continued our
focus on seeking semiconductor business with market-leading
customers to drive future business performance. We also began to
address markets for storage systems products beyond our
traditional OEM customer base in an effort to grow and diversify
that business. In 2010, we reported net income of
$40.0 million, or $0.06 per share, an improvement from a
loss of $47.7 million, or $0.07 per share, in 2009. The
improvement reflects both increased revenues and a continuing
focus on expense control. We have been focused on controlling
our operating expenses to help achieve a higher level of
profitability. Our 2009 results included an income tax benefit
of $83.1 million resulting primarily from the settlement of
multi-year tax audits outside the U.S. In 2010, we had a
tax provision of $5.4 million.
Our cash and cash equivalents, together with our short-term
investments, declined from $962.1 million at the end of
2009 to $676.7 million at the end of 2010. During 2010, we
had strong operating cash flows of $367.2 million. We also
repaid $350 million of debt when it matured and announced
and effectively completed a $250 million share repurchase
program.
Late in 2010, in response to the changing external storage
systems market, we changed some of our business strategies in
the Storage Systems segment and discontinued several development
projects, and in early 2011 closed several office locations and
reduced our headcount. These programs were isolated primarily to
one customer and unrelated to our current core product
offerings. We do not expect any material impact to near-term or
future revenues due to these actions. Also in 2010, we reduced
our global workforce in non-strategic areas as we continued to
increase synergies across our Semiconductor segment. As a result
of these actions, we recognized $61.6 million of
restructuring expenses in 2010. Of these charges,
$44.1 million are non-cash charges and $17.5 million
are cash charges.
As we look forward into 2011, we are focused on a number of key
objectives, including:
|
|
|
|
|
Improving our gross margins and controlling operating expenses
to drive improved financial performance;
|
|
|
|
Meeting or exceeding our development, product quality and
delivery commitments to our customers;
|
|
|
|
Identifying attractive opportunities for future products,
particularly in areas that are adjacent to technologies where we
have strong capabilities;
|
|
|
|
Developing leading-edge new technologies; and
|
|
|
|
Developing the skills of our workforce.
|
RESULTS
OF OPERATIONS
Revenues
The following table summarizes our revenues by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Semiconductor segment
|
|
$
|
1,615.8
|
|
|
$
|
1,421.5
|
|
|
$
|
1,795.1
|
|
Storage Systems segment
|
|
|
954.2
|
|
|
|
797.7
|
|
|
|
882.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
2,570.0
|
|
|
$
|
2,219.2
|
|
|
$
|
2,677.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
compared to 2009:
Total consolidated revenues for 2010 increased by
$350.8 million, or 15.8%, as compared to 2009.
Semiconductor
Segment:
Revenues for the Semiconductor segment increased by
$194.3 million, or 13.7%, in 2010 as compared to 2009. The
increase was primarily attributable to an increase in unit sales
from increased demand for semiconductors used in networking and
storage product applications in 2010 as the economy began a slow
recovery from the global
23
economic downturn in the fall of 2008. To a lesser extent, the
increase reflected higher revenues from the licensing of our
intellectual property.
Storage
Systems Segment:
Revenues for the Storage Systems segment increased by
$156.5 million, or 19.6%, in 2010 as compared to 2009. The
increase was attributable to an increase in unit sales of our
server RAID adapters and software due to the economic recovery,
increases in market share and additional revenues in 2010 from
the acquisition of the 3ware RAID storage adapter business in
April 2009. The increase was also attributable to an increase in
unit sales of our entry-level storage systems due to the
economic recovery and the ramping of our new products introduced
in the second quarter of 2010 and, to a lesser extent,
additional revenues in 2010 from the acquisition of ONStor, Inc.
in July 2009.
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 in 2009 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 during 2009 and decreased unit sales of our
networking product applications that we no longer invested in.
The decrease was partially offset by increased unit sales due to
the acquisition of the hard disk drive, or HDD, semiconductor
business of 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 in 2009 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 global economic downturn
during 2009. The decrease was partially offset by increased unit
sales of our entry-level storage systems and our server RAID
adapters, following our acquisition of the 3ware RAID storage
adapter business in April 2009.
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,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Semiconductor segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Percentage of Semiconductor segment revenues
|
|
|
22%
|
|
|
|
24%
|
|
|
|
26%
|
|
Storage Systems segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
2
|
|
|
|
2
|
|
|
|
3
|
|
Percentage of Storage Systems segment revenues
|
|
|
47%, 14%
|
|
|
|
48%, 13%
|
|
|
|
46%, 14%, 11%
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of significant customers
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Percentage of consolidated revenues
|
|
|
19%, 14%
|
|
|
|
19%, 16%
|
|
|
|
17%, 16%
|
|
24
Revenues
by Geography
The following table summarizes our revenues by geography based
on the ordering location of the customer. Because we sell our
products primarily to other sellers of technology products and
not to end-users, the information in the table below may not
accurately reflect geographic end-demand for our products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
North America*
|
|
$
|
691.3
|
|
|
$
|
519.2
|
|
|
$
|
737.2
|
|
Asia**
|
|
|
1,223.1
|
|
|
|
1,126.0
|
|
|
|
1,359.8
|
|
Europe and the Middle East
|
|
|
655.6
|
|
|
|
574.0
|
|
|
|
580.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,570.0
|
|
|
$
|
2,219.2
|
|
|
$
|
2,677.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Primarily the United States. |
|
** |
|
Primarily Singapore, China and Taiwan. |
2010
compared to 2009:
Revenues in North America; Europe and the Middle East; and Asia
increased 33.1%, 14.2% and 8.6%, respectively, in 2010 as
compared to 2009. The increase in North America was primarily
attributable to increased unit sales of storage systems, server
RAID adapters and software and semiconductors used in storage
product applications. The increase in Europe and the Middle East
was primarily attributable to increased unit sales of
semiconductors used in storage and networking product
applications, storage systems, and server RAID adapters and
software. The increase in Asia was primarily attributable to
increased unit sales of semiconductors used in storage and
networking product applications and server RAID adapters and
software.
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 the U.S. to 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 were no longer investing 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 were no longer investing in, offset
in part by increased unit sales of storage systems as the result
of a significant customer shifting order placements from the
U.S. to Europe beginning in the third quarter of 2008.
Gross
Profit Margin
The following table summarizes our gross profit margins by
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Semiconductor segment
|
|
$
|
746.7
|
|
|
$
|
564.1
|
|
|
$
|
736.9
|
|
Percentage of Semiconductor segment revenues
|
|
|
46.2
|
%
|
|
|
39.7
|
%
|
|
|
41.1
|
%
|
Storage Systems segment
|
|
$
|
362.2
|
|
|
$
|
279.3
|
|
|
$
|
332.1
|
|
Percentage of Storage Systems segment revenues
|
|
|
38.0
|
%
|
|
|
35.0
|
%
|
|
|
37.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
1,108.9
|
|
|
$
|
843.4
|
|
|
$
|
1,069.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of consolidated revenues
|
|
|
43.1
|
%
|
|
|
38.0
|
%
|
|
|
39.9
|
%
|
25
2010
compared to 2009:
Consolidated gross profit as a percentage of total revenues, or
gross margin, increased to 43.1% in 2010 from 38.0% in 2009.
Semiconductor
Segment:
Gross margins for the Semiconductor segment increased to 46.2%
in 2010 from 39.7% in 2009. The increase was primarily
attributable to a favorable shift in product mix as a result of
increased revenues from the licensing of our intellectual
property, which have higher gross margins than products, a
decrease in amortization of identified intangible assets, and
more favorable unit costs from our suppliers as a result of our
volumes increasing.
Storage
Systems Segment:
Gross margins for the Storage Systems segment increased to 38.0%
in 2010 from 35.0% in 2009. The increase was primarily
attributable to a favorable shift in product mix resulting from
higher demand for our server RAID adapters and software,
mid-range storage systems and related premium software, which
all have higher gross margins than other products. The increase
was also attributable to higher overall absorption of fixed
costs as a result of the 19.6% increase in segment revenues,
along with ongoing product cost reductions and, to a lesser
extent, the absence of a $4.5 million charge incurred
during 2009 to fair value inventories acquired as part of the
3ware acquisition.
2009
compared to 2008:
Consolidated 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
segment revenues in 2009. 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 storage systems, which have lower
margins than other products, 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 in the
3ware acquisition.
Research
and Development
The following table summarizes our research and development, or
R&D, expenses by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Semiconductor segment
|
|
$
|
528.5
|
|
|
$
|
475.3
|
|
|
$
|
534.0
|
|
Percentage of Semiconductor segment revenues
|
|
|
32.7
|
%
|
|
|
33.4
|
%
|
|
|
29.7
|
%
|
Storage Systems segment
|
|
$
|
141.3
|
|
|
$
|
133.0
|
|
|
$
|
138.5
|
|
Percentage of Storage Systems segment revenues
|
|
|
14.8
|
%
|
|
|
16.7
|
%
|
|
|
15.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
669.8
|
|
|
$
|
608.3
|
|
|
$
|
672.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of consolidated revenues
|
|
|
26.1
|
%
|
|
|
27.4
|
%
|
|
|
25.1
|
%
|
26
2010
compared to 2009:
Consolidated R&D expenses increased by $61.5 million,
or 10.1%, in 2010 as compared to 2009, but decreased as a
percentage of revenues from 27.4% in 2009 to 26.1% in 2010 as a
result of the increase 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 increased by
$53.2 million, or 11.2%, in 2010 as compared to 2009. The
increase was primarily attributable to the restoration in early
2010 of certain employee compensation-related expenses that we
reduced in 2009 during the economic downturn. The increase is
also attributable to increased compensation-related expenses and
facility costs as a result of headcount additions in China and
India in 2010. R&D expenses as a percentage of segment
revenues for the Semiconductor segment decreased from 33.4% in
2009 to 32.7% in 2010, as revenue growth outpaced the increase
in R&D expenses.
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 increased by
$8.3 million, or 6.2%, in 2010 as compared to 2009. The
increase was primarily attributable to the restoration in early
2010 of certain employee compensation-related expenses that we
reduced in 2009, and higher compensation-related expenditures
associated with higher headcount from the acquisitions of the
3ware RAID storage adapter business in April 2009 and ONStor,
Inc. in July 2009, partially offset by a decrease in R&D
material spending as a result of tighter cost controls. R&D
expenses as a percentage of segment revenues for the Storage
Systems segment decreased from 16.7% in 2009 to 14.8% in 2010,
as a result of the increase in revenues.
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 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 during 2009, other
compensation-related cost reduction measures, reductions in
discretionary spending and lower spending on third-party
contractors and materials 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 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 during 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.
27
Selling,
General and Administrative
The following table summarizes our selling, general and
administrative, or SG&A, expenses by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Semiconductor segment
|
|
$
|
230.1
|
|
|
$
|
212.7
|
|
|
$
|
278.6
|
|
Percentage of Semiconductor segment revenues
|
|
|
14.2
|
%
|
|
|
15.0
|
%
|
|
|
15.5
|
%
|
Storage Systems segment
|
|
$
|
112.9
|
|
|
$
|
113.3
|
|
|
$
|
128.3
|
|
Percentage of Storage Systems segment revenues
|
|
|
11.8
|
%
|
|
|
14.2
|
%
|
|
|
14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
343.0
|
|
|
$
|
326.0
|
|
|
$
|
406.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of consolidated revenues
|
|
|
13.3
|
%
|
|
|
14.7
|
%
|
|
|
15.2
|
%
|
2010
compared to 2009:
Consolidated SG&A expenses increased by $17.0 million,
or 5.2%, in 2010 as compared to 2009, but decreased as a
percentage of revenues from 14.7% in 2009 to 13.3% in 2010 as a
result of the increase in revenues.
Semiconductor
Segment:
SG&A expenses for the Semiconductor segment increased by
$17.4 million, or 8.2%, in 2010 as compared to 2009. The
increase was primarily attributable to the restoration in early
2010 of the employee compensation-related expenses that we
reduced temporarily in 2009, and an increase in sales
commissions and other sales-related expenditures as a result of
increased design wins and revenues in 2010. SG&A expenses
as a percentage of segment revenues for the Semiconductor
segment decreased from 15.0% in 2009 to 14.2% in 2010, as
revenues increased.
Storage
Systems Segment:
SG&A expenses for the Storage Systems segment decreased by
$0.4 million, or 0.4%, in 2010 as compared to 2009. The
decrease was primarily attributable to reductions in spending as
a result of maintaining tighter expense controls, offset in part
by the restoration in early 2010 of the employee
compensation-related expenses that we reduced in 2009, and
higher compensation-related expenditures associated with the
acquisitions of the 3ware RAID storage adapter business in April
2009 and the ONStor, Inc. in July 2009. SG&A expenses as a
percentage of segment revenues for the Storage Systems segment
decreased from 14.2% in 2009 to 11.8% in 2010, as revenue growth
outpaced the increase in SG&A expenses.
2009
compared to 2008:
Consolidated SG&A expenses decreased by $80.9 million,
or 19.9%, in 2009 as compared to 2008.
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 during 2009, other
compensation-related cost reduction measures, a decrease in
amortization of identified intangible assets, and lower selling
and general expenses attributable to cost containment
activities. SG&A expenses as a percentage of segment
revenues for the Semiconductor segment 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 in 2009.
The decrease was offset in part by additional expenditures
associated with the 3ware and
28
ONStor acquisitions. SG&A expenses as a percentage of
segment revenues for the Storage Systems segment decreased from
14.5% in 2008 to 14.2% in 2009 as a result of the decrease in
expenses.
Restructuring
of Operations and Other Items, Net
A complete discussion of our restructuring actions in 2010, 2009
and 2008 is included in Note 2 to our consolidated
financial statements in Item 8.
The following table summarizes items included in restructuring
of operations and other items, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Lease and contract terminations(a)
|
|
$
|
5.6
|
|
|
$
|
19.5
|
|
|
$
|
14.4
|
|
Employee severance and benefits(b)
|
|
|
11.9
|
|
|
|
10.1
|
|
|
|
25.4
|
|
Asset impairments and other exit activities(c)
|
|
|
44.1
|
|
|
|
0.6
|
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring expenses
|
|
|
61.6
|
|
|
|
30.2
|
|
|
|
35.5
|
|
Other items(d)
|
|
|
(2.7
|
)
|
|
|
8.0
|
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring expenses and other items, net
|
|
$
|
58.9
|
|
|
$
|
38.2
|
|
|
$
|
43.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The 2009 amount included an accrual for remaining payments to be
made under a design tool license agreement that we no longer use. |
|
(b) |
|
The amounts primarily related to restructuring actions taken to
streamline our operations. In 2010, we reduced our global
workforce in non-strategic areas as we continued to increase
synergies across our Semiconductor segment. Also, late in 2010,
in response to the changing external storage systems market, we
changed some of our business strategies for the Storage Systems
segment and discontinued several development projects, and in
early 2011 closed several office locations and reduced our
headcount. |
|
(c) |
|
The 2010 amount consisted of the write-off of software,
intangible assets and fixed assets due to several development
program cancellations resulting from the changes in business
strategies in our Storage Systems segment. The 2008 amount
included a $2.0 million gain on the sale of land in
Gresham, Oregon and a $2.6 million gain on the sale of
assets that were held for sale in Singapore in connection with
the Agere merger. |
|
(d) |
|
The 2010 and 2009 amounts were primarily related to litigation.
The credit for 2010 was primarily the result of a
$4.4 million reversal of previously accrued litigation
costs as a result of a court ruling in our favor, offset in part
by $1.6 million of
catch-up
depreciation for land improvements resulting from the
reclassification of Gresham land from held for sale to held and
used in the fourth quarter of 2010. The 2008 amount 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 in 2009. |
The following table summarizes the restructuring of operations
and other items, net by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Semiconductor segment
|
|
$
|
7.3
|
|
|
$
|
34.9
|
|
|
$
|
41.1
|
|
Storage Systems segment
|
|
|
51.6
|
|
|
|
3.3
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring expenses and other items, net
|
|
$
|
58.9
|
|
|
$
|
38.2
|
|
|
$
|
43.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and Identified Intangible Asset Impairment Charges
We assess the impairment of identified intangible assets
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. There was no impairment
of goodwill or identified intangible assets in 2009. Late in
2010, in response to the changing external storage systems
market, we changed some of our business strategies for the
Storage Systems segment and discontinued several development
projects, which led us to
29
determine that certain identified intangible assets were no
longer recoverable. As a result, we recognized impairment
charges of $17.1 million in the Storage Systems segment.
These charges were included in restructuring of operations and
other items, net. During the fourth quarter of 2008, 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 a
goodwill impairment charge of $364.1 million in the fourth
quarter of 2008. 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 in charges for the impairment of certain
identified intangible assets in the Semiconductor segment for
the year ended December 31, 2008.
Interest
Expense, Interest Income and Other, net
The following table summarizes interest expense and components
of interest income and other, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Interest expense
|
|
$
|
(5.6
|
)
|
|
$
|
(21.9
|
)
|
|
$
|
(34.9
|
)
|
Interest income
|
|
|
13.7
|
|
|
|
20.6
|
|
|
|
46.2
|
|
Other income/(expense), net
|
|
|
0.1
|
|
|
|
(0.3
|
)
|
|
|
(10.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8.2
|
|
|
$
|
(1.6
|
)
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense decreased by $16.3 million in 2010
compared to 2009 as a result of the redemption of our
6.5% Convertible Subordinated Notes in June 2009 and the
repayment of our 4% Convertible Subordinated Notes in May
2010. Interest expense decreased by $13.0 million in 2009
as compared to 2008 as a result of the repurchase of
$118.6 million of our 6.5% Convertible Subordinated
Notes in November 2008 and the redemption of the remaining
$243.0 million of these notes in June 2009.
Interest income decreased by $6.9 million in 2010 as
compared to 2009 primarily as a result of lower cash balances
and lower interest rates during 2010 compared to 2009. 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.
Provision
for Income Taxes
During 2010, we recorded an income tax provision of
$5.4 million, which represents an effective tax rate of
approximately 12% on the income before income taxes of
$45.4 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 provision for income taxes in
2010 also includes a reversal of $31.8 million in
liabilities for uncertain tax positions, which includes
previously unrecognized tax benefits of $14.2 million and
interest and penalties of $17.6 million, as a result of the
expiration of statutes of limitations in multiple jurisdictions.
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 in 2009
is primarily a result of a net reversal of $111.7 million
in liabilities for uncertain tax positions, which includes
previously unrecognized tax benefits of $88.3 million and
interest and penalties of $23.4 million, as a result of a
settlement of a multi-year audit in a foreign jurisdiction, 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
30
liability because various statutes of limitations expired during
the year and recorded 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.
Excluding certain foreign jurisdictions, we believe 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
$676.7 million as of December 31, 2010 from
$962.1 million as of December 31, 2009. The decrease
was mainly due to cash outflows for financing and investing
activities, offset in part by cash inflows generated from
operating activities as described below.
Working
Capital
Working capital increased by $48.1 million to
$779.2 million as of December 31, 2010 from
$731.1 million as of December 31, 2009. The increase
was primarily attributable to the following:
|
|
|
|
|
Current portion of long-term debt decreased by
$350.0 million as a result of the repayment of our
4% Convertible Subordinated Notes upon their maturity in
May 2010;
|
|
|
|
Accounts payable decreased by $39.1 million primarily due
to the normal timing of invoice receipts and payments;
|
|
|
|
Other accrued liabilities decreased by $29.7 million
primarily attributable to the utilization of restructuring
reserves, payments of taxes and decreases in other accruals
related to our operations; and
|
|
|
|
Inventories increased by $17.4 million, primarily in the
Semiconductor segment, as December 31, 2009 inventories
were held at reduced levels due to expected declines in product
demands associated with the overall economic downturn.
|
These increases in working capital were offset in part by the
following:
|
|
|
|
|
Cash, cash equivalents and short-term investments decreased by
$285.4 million;
|
|
|
|
Accrued salaries, wages and benefits increased by
$49.0 million primarily as a result of timing differences
in the payment of salaries and benefits and the addition of
performance-based compensation accruals in early 2010, which we
reduced in 2009 in response to the global economic downturn;
|
|
|
|
Prepaid expenses and other current assets decreased by
$41.3 million primarily as a result of the reclassification
of $16.8 million of assets from held for sale to held and
used because the held for sale criteria were no longer met at
December 31, 2010, as well as decreases in deferred tax
assets and other receivables; and
|
|
|
|
Accounts receivable decreased by $12.4 million primarily as
a result of an improvement in collections.
|
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 primarily 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 as a result of the reclassification of
$350.0 million of our 4% Convertible Subordinated
Notes due in May 2010 from long-term debt to current portion of
long-term debt, offset in part by the redemption of
$243.0 million principal amount of our
6.5% Convertible Subordinated Notes during 2009;
|
|
|
|
Inventories decreased by $51.2 million primarily as a
result of reduced inventory purchases to reflect the expected
reduction in revenues resulting from the economic downturn and
also as a result of our continued focus on supply chain
management;
|
|
|
|
Prepaid expenses and other current assets decreased by
$40.7 million primarily as a result of declines 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 as a
result of settlements of multi-year tax audits in foreign
jurisdictions, utilization of restructuring reserves and a
decrease in liabilities with third-party manufacturers.
|
Cash
Provided by Operating Activities
During the year ended December 31, 2010, we generated
$367.2 million of cash from operating activities,
representing a significant improvement over $204.5 million
of cash from operating activities in 2009. This increase was a
result of the following:
|
|
|
|
|
Net income adjusted for non-cash items, including depreciation
and amortization of $266.7 million, stock-based
compensation expense of $66.4 million and non-cash
restructuring of operations and other items, net, of
$45.7 million. The non-cash items and other non-operating
adjustments are quantified in our consolidated statements of
cash flows included in Item 8;
|
|
|
|
Offset in part by a net decrease of $66.2 million in assets
and liabilities, including changes in working capital
components, from December 31, 2009 to December 31,
2010, as discussed above.
|
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 adjusted for non-cash items, primarily depreciation
and amortization of $268.2 million and stock-based
compensation expense of $64.0 million. The non-cash items
and other non-operating adjustments are quantified in our
consolidated statements of cash flows included in Item 8;
|
|
|
|
Offset in part by 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.
|
Cash Used
in Investing Activities
Cash used in investing activities for the year ended
December 31, 2010 was $60.1 million. The investing
activities during 2010 were the following:
|
|
|
|
|
Purchases of property, equipment and software, net of proceeds
from sales, totaling $91.5 million;
|
|
|
|
Proceeds from maturities and sales of investments, net of
purchases, of $21.4 million; and
|
|
|
|
Proceeds of $10.0 million from the maturity of notes
receivable associated with the sale in 2007 of our assembly and
test operations in Thailand.
|
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 investing activities during 2009 were the following:
|
|
|
|
|
Purchases of property, equipment and software, net of proceeds
from sales, totaling $87.2 million;
|
|
|
|
Proceeds from maturities and sales of investments, net of
purchases, of $76.6 million;
|
|
|
|
Acquisitions of businesses and companies, net of cash acquired,
of $47.0 million;
|
|
|
|
A decrease in non-current assets and deposits of
$13.5 million; and
|
32
|
|
|
|
|
Proceeds of $10.0 million from the maturity of notes
receivable associated with the sale in 2007 of our assembly and
test operations in Thailand.
|
We expect capital expenditures to be approximately
$60 million in 2011. 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, 2010 was $559.1 million as compared to
$225.3 million for the year ended December 31, 2009.
The primary financing activities during 2010 were the use of
$350 million to repay our outstanding 4% Convertible
Subordinated Notes upon their maturity in May 2010 and the use
of $249.9 million to repurchase our common stock, which
effectively completed the $250 million share repurchase
program that was authorized by our Board of Directors on
March 17, 2010, offset in part by the proceeds of
$40.9 million from issuances of common stock under our
employee stock plans.
The primary financing activities during 2009 were the use of
$244.0 million to redeem our 6.5% Convertible
Subordinated Notes, offset in part by the proceeds from
issuances of common stock under our employee stock plans.
We do not currently pay, and do not anticipate paying in the
foreseeable future, any cash dividends to our stockholders.
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 for more than the next 12 months. We may,
however, find it desirable to obtain additional debt or equity
financing. 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, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less Than 1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
After 5 Years
|
|
|
Other
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Operating lease obligations
|
|
$
|
54.2
|
|
|
$
|
59.5
|
|
|
$
|
18.2
|
|
|
$
|
4.2
|
|
|
$
|
|
|
|
$
|
136.1
|
|
Purchase commitments
|
|
|
391.6
|
|
|
|
10.7
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
402.5
|
|
Unrecognized tax positions plus interest and penalties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85.7
|
**
|
|
|
85.7
|
|
Pension contributions
|
|
|
64.0
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
64.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
509.8
|
|
|
$
|
70.2
|
|
|
$
|
18.4
|
|
|
$
|
4.2
|
|
|
$
|
85.7
|
|
|
$
|
688.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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 2012 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 2012 and beyond in the above table.
Effective April 6, 2009, we froze the U.S. defined benefit
pension plans, which covered active participants who joined us
from Agere. As of December 31, 2010, our projected pension
benefit obligation exceeded the fair value of our plan assets by
$462.3 million. See Note 5 to our consolidated
financial statements in Item 8. |
|
** |
|
This amount 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. |
33
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, 2010, we had $151.9 million of
unrecognized tax benefits, for which we are unable to make a
reasonably reliable estimate as to when cash settlement with a
taxing authority may occur. 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 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 the unrecognized tax
benefits, plus accrued interest and penalties, could decrease by
up to $16.3 million.
Standby
Letters of Credit
As of December 31, 2010 and 2009, we had outstanding
obligations relating to standby letters of credit of
$3.9 million and $4.3 million, respectively. Standby
letters of credit are financial guarantees provided by third
parties for leases, customs and certain self-insured risks. If
the guarantees are called, we must reimburse the provider of the
guarantee. The fair values of the letters of credit approximate
the contract amounts. The standby letters of credit generally
renew annually.
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.
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.
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
34
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. This
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 the 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 Financial Accounting Standards
Board, or 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 demands fail to meet our projections, additional
inventory write-downs may be required.
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 and identified intangible assets 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
35
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.
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 2011 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.
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 other than 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
36
deductions, and in the calculation of specific 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 tax liabilities associated with
uncertain tax positions. The calculation of tax liabilities
involves uncertainties in the application of complex tax rules
and the potential for future adjustment of our uncertain tax
positions by various tax jurisdictions. Significant changes to
these estimates may result in an increase or a decrease to our
tax provision in a subsequent period. The deferred tax assets we
record each period depend primarily on our ability to generate
future taxable income in the United States and certain
non-U.S. jurisdictions.
Each period, we evaluate the need for a valuation allowance for
our deferred tax assets and, if necessary, we adjust the
valuation allowance so that net deferred tax assets will be
realized. If our outlook for future taxable income changes
significantly, our assessment of the need for a valuation
allowance may also change.
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.
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.
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 2010, we used an expected rate of return on plan assets of
8.0% for our U.S. pension plans. For our
U.S. post-retirement benefit plans, we used a
weighted-average long-term rate of return on assets of 7.0%. 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, 2010, the MRVA for the
U.S. plans was $951.1 million, as compared to a fair
value of $925.0 million. If we used the fair value, the net
periodic benefit cost would increase by $3.0 million for
2011.
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
had an estimated $38.0 million impact on the benefit
obligation for the year ended December 31, 2010. Each
change of 25 basis points in the discount rate assumption
and expected rate of return assumption would have an estimated
$0.2 million and $2.4 million, respectively, impact on
annual net retirement benefit costs for the year ended
December 31, 2011.
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.
37
We determine the estimated fair value of financial assets and
liabilities using the market approach and the income approach as
considered to be appropriate. The market approach uses prices
and other relevant information generated by market transactions
involving identical or comparable assets or liabilities. The
income approach uses discounted cash flow models by considering
market expectations about future cash flows and other inputs
that are observable or can be corroborated by observable market
data.
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 is 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 investments 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, and the trading prices of marketable equity
securities. For non-marketable equity securities, we review
recent financing activities of the investees, movements in
equity value, venture capital markets, the investees
capital structure, liquidation preferences of the
investees capital and other economic variables. If an
unrealized 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, 2010 and 2009, including investments and
debt obligations, would not have had a significant effect on our
consolidated balance sheets, 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, 2010, we had no
interest rate swaps outstanding.
38
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
2010 and 2009.
Based on our overall currency rate exposures at
December 31, 2010 and 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
consolidated balance sheets, results of operations or cash flows
over the next fiscal year.
Credit
and Market Liquidity Risks
As of December 31, 2010, we had cash equivalents of
$380.4 million, the majority of which is invested in money
market funds. We had short-term investments of
$154.9 million in debt securities. These securities are
classified as
available-for-sale
and accordingly are recorded at fair market value 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, 2010 included
$116.6 million of asset-backed and mortgage-backed
securities, of which $97.5 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 consolidated
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.
39
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
LSI
Corporation
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
521,786
|
|
|
$
|
778,291
|
|
Short-term investments
|
|
|
154,880
|
|
|
|
183,781
|
|
Accounts receivable, less allowances of $9,701 and $9,902,
respectively
|
|
|
326,604
|
|
|
|
338,961
|
|
Inventories
|
|
|
186,772
|
|
|
|
169,335
|
|
Prepaid expenses and other current assets
|
|
|
73,778
|
|
|
|
115,084
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,263,820
|
|
|
|
1,585,452
|
|
Property and equipment, net
|
|
|
223,181
|
|
|
|
218,972
|
|
Identified intangible assets, net
|
|
|
561,137
|
|
|
|
739,244
|
|
Goodwill
|
|
|
188,698
|
|
|
|
188,698
|
|
Other assets
|
|
|
188,076
|
|
|
|
235,564
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,424,912
|
|
|
$
|
2,967,930
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Accounts payable
|
|
$
|
173,919
|
|
|
$
|
213,008
|
|
Accrued salaries, wages and benefits
|
|
|
126,307
|
|
|
|
77,281
|
|
Other accrued liabilities
|
|
|
184,402
|
|
|
|
214,096
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
484,628
|
|
|
|
854,385
|
|
Pension and post-retirement benefit obligations
|
|
|
463,119
|
|
|
|
454,206
|
|
Income taxes payable non-current
|
|
|
85,717
|
|
|
|
103,047
|
|
Other non-current liabilities
|
|
|
73,946
|
|
|
|
95,188
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,107,410
|
|
|
|
1,506,826
|
|
|
|
|
|
|
|
|
|
|
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; 615,191 and 656,484 shares outstanding,
respectively
|
|
|
6,152
|
|
|
|
6,565
|
|
Additional paid-in capital
|
|
|
5,998,137
|
|
|
|
6,142,674
|
|
Accumulated deficit
|
|
|
(4,368,522
|
)
|
|
|
(4,408,494
|
)
|
Accumulated other comprehensive loss
|
|
|
(318,265
|
)
|
|
|
(279,641
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,317,502
|
|
|
|
1,461,104
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,424,912
|
|
|
$
|
2,967,930
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
40
LSI
Corporation
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
2,570,047
|
|
|
$
|
2,219,159
|
|
|
$
|
2,677,077
|
|
Cost of revenues
|
|
|
1,461,182
|
|
|
|
1,375,758
|
|
|
|
1,608,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,108,865
|
|
|
|
843,401
|
|
|
|
1,068,969
|
|
Research and development
|
|
|
669,822
|
|
|
|
608,312
|
|
|
|
672,511
|
|
Selling, general and administrative
|
|
|
343,013
|
|
|
|
326,014
|
|
|
|
406,875
|
|
Restructuring of operations and other items, net
|
|
|
58,885
|
|
|
|
38,246
|
|
|
|
43,717
|
|
Goodwill and identified intangible asset impairment charges
|
|
|
|
|
|
|
|
|
|
|
541,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations
|
|
|
37,145
|
|
|
|
(129,171
|
)
|
|
|
(595,720
|
)
|
Interest expense
|
|
|
(5,601
|
)
|
|
|
(21,931
|
)
|
|
|
(34,943
|
)
|
Interest income and other, net
|
|
|
13,848
|
|
|
|
20,272
|
|
|
|
36,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
|
45,392
|
|
|
|
(130,830
|
)
|
|
|
(594,553
|
)
|
Provision/(benefit) for income taxes
|
|
|
5,420
|
|
|
|
(83,111
|
)
|
|
|
27,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
39,972
|
|
|
$
|
(47,719
|
)
|
|
$
|
(622,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.06
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
638,998
|
|
|
|
651,238
|
|
|
|
647,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
646,324
|
|
|
|
651,238
|
|
|
|
647,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
41
LSI
Corporation
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
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 investments, net of tax $1,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
852
|
|
|
|
|
|
Net unrealized loss on derivatives, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
98,531
|
|
|
|
|
|
|
|
|
|
|
|
98,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 investments, net of tax $1,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,248
|
|
|
|
|
|
Net unrealized gain on derivatives, 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 gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
70,060
|
|
|
|
|
|
|
|
|
|
|
|
70,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
656,484
|
|
|
|
6,565
|
|
|
|
6,142,674
|
|
|
|
(4,408,494
|
)
|
|
|
(279,641
|
)
|
|
|
1,461,104
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,972
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162
|
|
|
|
|
|
Net unrealized gain on investments, net of tax $644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,032
|
|
|
|
|
|
Net unrealized gain on derivatives, net of tax $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
357
|
|
|
|
|
|
Actuarial loss on pension and post-retirement plans, net of tax
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,008
|
)
|
|
|
|
|
Amortization of prior service cost and net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance to employees under stock option and purchase plans
|
|
|
8,999
|
|
|
|
90
|
|
|
|
40,793
|
|
|
|
|
|
|
|
|
|
|
|
40,883
|
|
Issuance of common stock pursuant to restricted stock awards, net
|
|
|
1,085
|
|
|
|
11
|
|
|
|
(3,057
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,046
|
)
|
Repurchase of shares
|
|
|
(51,377
|
)
|
|
|
(514
|
)
|
|
|
(249,428
|
)
|
|
|
|
|
|
|
|
|
|
|
(249,942
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
67,155
|
|
|
|
|
|
|
|
|
|
|
|
67,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2010
|
|
|
615,191
|
|
|
$
|
6,152
|
|
|
$
|
5,998,137
|
|
|
$
|
(4,368,522
|
)
|
|
$
|
(318,265
|
)
|
|
$
|
1,317,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
42
LSI
Corporation
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
39,972
|
|
|
$
|
(47,719
|
)
|
|
$
|
(622,253
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
266,672
|
|
|
|
268,162
|
|
|
|
324,223
|
|
Stock-based compensation expense
|
|
|
66,441
|
|
|
|
63,983
|
|
|
|
72,283
|
|
Non-cash restructuring of operations and other items, net
|
|
|
45,681
|
|
|
|
690
|
|
|
|
(4,215
|
)
|
Goodwill and identified intangible assets impairment charges
|
|
|
|
|
|
|
|
|
|
|
541,586
|
|
Gain on redemption of convertible subordinated notes
|
|
|
|
|
|
|
(149
|
)
|
|
|
(3,178
|
)
|
Write-down of investments, net of gain on sale
|
|
|
6,779
|
|
|
|
1,529
|
|
|
|
15,273
|
|
Loss/(gain) on sale of property and equipment
|
|
|
11
|
|
|
|
(145
|
)
|
|
|
(123
|
)
|
Unrealized foreign exchange loss
|
|
|
4,311
|
|
|
|
1,301
|
|
|
|
25,469
|
|
Deferred taxes
|
|
|
3,512
|
|
|
|
3,063
|
|
|
|
10,027
|
|
Changes in assets and liabilities, net of assets acquired and
liabilities assumed in business combinations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
12,357
|
|
|
|
(34,986
|
)
|
|
|
102,386
|
|
Inventories
|
|
|
(17,437
|
)
|
|
|
64,592
|
|
|
|
20,307
|
|
Prepaid expenses and other assets
|
|
|
14,404
|
|
|
|
68,469
|
|
|
|
52,024
|
|
Accounts payable
|
|
|
(35,213
|
)
|
|
|
8,420
|
|
|
|
(130,129
|
)
|
Accrued and other liabilities
|
|
|
(40,315
|
)
|
|
|
(192,736
|
)
|
|
|
(125,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
367,175
|
|
|
|
204,474
|
|
|
|
278,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of debt securities
available-for-sale
|
|
|
(44,643
|
)
|
|
|
(10
|
)
|
|
|
(190,548
|
)
|
Proceeds from maturities and sales of debt securities
available-for-sale
|
|
|
56,529
|
|
|
|
90,572
|
|
|
|
240,157
|
|
Purchases of other investments
|
|
|
(316
|
)
|
|
|
(14,159
|
)
|
|
|
(8,500
|
)
|
Proceeds from sale of other investments
|
|
|
9,795
|
|
|
|
165
|
|
|
|
|
|
Purchases of property, equipment and software
|
|
|
(92,342
|
)
|
|
|
(90,004
|
)
|
|
|
(134,589
|
)
|
Proceeds from sale of property and equipment
|
|
|
840
|
|
|
|
2,773
|
|
|
|
13,674
|
|
Acquisitions of businesses and companies, net of cash acquired
|
|
|
|
|
|
|
(46,981
|
)
|
|
|
(95,137
|
)
|
Proceeds from repayments on a note receivable
|
|
|
10,000
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(60,137
|
)
|
|
|
(34,143
|
)
|
|
|
(163,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of convertible subordinated notes
|
|
|
(349,999
|
)
|
|
|
(244,047
|
)
|
|
|
(116,636
|
)
|
Issuances of common stock
|
|
|
40,883
|
|
|
|
18,747
|
|
|
|
42,928
|
|
Purchase of minority interest in subsidiary
|
|
|
|
|
|
|
|
|
|
|
(70
|
)
|
Purchase of common stock under repurchase programs
|
|
|
(249,942
|
)
|
|
|
|
|
|
|
(229,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(559,058
|
)
|
|
|
(225,300
|
)
|
|
|
(303,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(4,485
|
)
|
|
|
3,959
|
|
|
|
(3,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(256,505
|
)
|
|
|
(51,010
|
)
|
|
|
(192,268
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
778,291
|
|
|
|
829,301
|
|
|
|
1,021,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
521,786
|
|
|
$
|
778,291
|
|
|
$
|
829,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
43
LSI
Corporation
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 communications 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
also generates revenue by licensing other entities to use its
intellectual property.
Basis of Presentation: The consolidated
financial statements include the accounts of the Company and 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, assets and liabilities are
translated into U.S. dollars using the exchange rates on
the balance sheet dates, and revenues and expenses are
translated using 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.
Use of Estimates: The preparation of financial
statements in conformity with United States generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the 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 significantly from these
estimates.
Revenue Recognition: The Company recognizes
revenue when the following fundamental criteria are met:
(i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred, (iii) the sales price is
fixed or determinable, and (iv) the title and risk of loss
have been 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
storage systems sales may include software that is more than
incidental to the product. The Company does not provide any post
contract support under such arrangements and therefore the
revenue from such arrangements is recognized at the time of
delivery of the product. 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.
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. The contractual
terms of such licensing arrangements generally provide for
payments over an extended period of time. The Company recognizes
revenue from such arrangements when payments become due. 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.
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
44
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
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 provides a reconciliation of the numerators
and denominators used in the computation of basic and diluted
per share amounts:
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Year Ended December 31,
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2010
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2009
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2008
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Per Share
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Per Share
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Per Share
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Income*
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Shares+
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Amount
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(Loss)*
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Shares+
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Amount
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(Loss)*
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Shares+
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Amount
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(In thousands except per share amounts)
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Basic:
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Net income/(loss) available to common stockholders
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$
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39,972
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638,998
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$
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0.06
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$
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(47,719
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)
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651,238
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$
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(0.07
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)
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$
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(622,253
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)
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647,953
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$
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(0.96
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)
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Stock options, employee stock purchase rights and restricted
stock unit awards
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7,326
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Diluted:
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Net income/(loss) available to common stockholders
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$
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39,972
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646,324
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$
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0.06
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$
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(47,719
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)
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651,238
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$
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(0.07
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)
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$
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(622,253
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647,953
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$
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(0.96
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)
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The following table provides information about the
weighted-average common share equivalents that were excluded
from the computation of diluted shares because their inclusion
would have had an antidilutive effect on net income/(loss) per
share:
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Year Ended December 31,
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2010
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2009
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2008
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(Shares in thousands)
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Anti-dilutive securities:
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Stock options
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70,018
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78,661
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86,798
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Restricted stock unit awards
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93
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2,037
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3,904
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Convertible notes
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9,789
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33,341
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48,407
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Stock-Based Compensation Expense: The
estimated fair value of the equity-based award, net of estimated
forfeitures, is amortized over the award vesting periods on a
straight-line basis.
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
consolidated balance sheets 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
45
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
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 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 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) or (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.
For investments in marketable equity securities, in order to
determine if impairment has occurred, the Company reviews the
financial performance of each investee, industry performance and
outlook of each investee, and the trading prices of marketable
equity securities. For non-marketable equity securities, the
Company reviews recent financing activities of each investee,
movements in equity value, venture capital markets, the
investees capital structure, liquidation preferences of
the investees capital and other economic variables. If an
unrealized loss is determined to be other than temporary, a loss
is recognized as a component of interest income and other, net,
in the statements of operations. For marketable equity
securities, impairment losses are measured using the closing
trading prices of the marketable securities on the date
management determines 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 is written down 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 is also written down when inventory
levels are in excess of the forecasted 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 are computed
using the straight-line method over the estimated useful lives
of the assets as presented below:
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Buildings and improvements
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20-40 years
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Equipment
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3-5 years
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Furniture and fixtures
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5 years
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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 costs primarily include software and external
consulting fees related to the purchase and implementation of
software used for business operations and engineering design
activities. Capitalized purchased software is amortized over the
estimated useful lives of the projects, typically a two- to
five-year period. Development costs for
46
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
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 sold
to customers. Software amortization totaling $47.3 million,
$37.2 million and $25.8 million was included in the
Companys consolidated results of operations for the years
ended December 31, 2010, 2009 and 2008, respectively. On a
quarterly basis, the Company assesses the realizability of each
software product. The Company immediately writes off the amount
by which the unamortized capitalized software development costs
exceed the estimated net realizable value. During the fourth
quarter of 2010, the Company wrote off $25.4 million of
capitalized software development costs due to the decision to
discontinue several development projects. The charge for this
write-off is included in restructuring of operations and other
items, net, in the consolidated statements of operations.
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 carrying amount may not be recoverable. Factors that could
trigger an impairment review include the following:
(i) significant negative industry or economic trends;
(ii) exiting an activity in conjunction with restructuring
of operations; (iii) current, historical or projected
losses that demonstrate continuing losses associated with an
asset; or (iv) the Companys market capitalization
being less than net book value. When the Company determines that
there is an indicator that the carrying value of goodwill may
not be recoverable, the Company measures impairment based on
estimates of future cash flows. The Company has two reporting
units, Semiconductor and Storage Systems. Impairment, if any, is
measured based on an implied fair value model that determines
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. 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, the
Company relies solely on a discounted cash-flow analysis. The
Company does research and analyzes peer multiples for comparison
purposes, but does not rely directly upon such data due to the
lack of specific comparability between the peer companies and
its reporting units. Instead the Company employs the peer
multiple data as a general check on the results of its
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.
Identified intangible assets: The Company
assesses the recoverability of its identified intangible assets
based on managements 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.
47
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
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.
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 and agency securities,
commercial paper, corporate 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, prepayment speeds,
collateral performance, 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 determines the estimated fair value of financial
instruments using the market approach and the income approach as
considered to be appropriate. The market approach uses prices
and other relevant information generated by market transactions
involving identical or comparable assets or liabilities. The
income approach uses discounted cash flow models by considering
market expectations about future cash flows and other inputs
that are observable or can be corroborated by observable market
data. 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 the 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 consolidated balance sheets 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-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
48
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
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. 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 consolidated
balance sheets 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.
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 consolidated balance sheets 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 consolidated balance sheets 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 consolidated balance sheets
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 consolidated balance sheets
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, 2010, three customers
accounted for 21.2%, 16.8% and 12.2% of trade receivables, and
as of December 31, 2009, two customers accounted for 28%
and 16% 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 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.
49
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
Product Warranties: The Company warrants
finished goods against defects in material and workmanship under
normal use and service for periods of generally one to three
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 estimates and judgments
in determining income tax expense for financial statement
purposes. These estimates and judgments are made in the
calculation of tax credits, benefits, and deductions, and in the
calculation of certain tax assets and liabilities arising from
differences in the timing of recognition of revenue and expense
for tax and financial statement purposes, as well as tax
liabilities associated with 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.
Recent
Accounting Pronouncements
Pronouncements
not yet effective:
In October 2009, the Financial Accounting Standards Board
(FASB) amended revenue recognition guidance on
multiple-deliverable arrangements to address how to separate
deliverables and how to measure and allocate arrangement
consideration. The new guidance requires the use of
managements best estimate of selling price for the
deliverables in an arrangement when a vendor does not have
specific objective evidence of selling price or third party
evidence of selling price. In addition, excluding specific
software revenue guidance, the residual method of allocating
arrangement consideration is no longer permitted, and an entity
is required to allocate arrangement consideration using the
relative selling price method. This guidance also expands the
disclosure requirements to include both quantitative and
qualitative information. This guidance is effective for the
Company beginning in the first quarter of 2011 and is not
expected to have a significant impact on the Companys
results of operations or financial position.
In October 2009, the FASB issued guidance to clarify that
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
Company beginning in the first quarter of 2011 and is not
expected to have a significant impact on the Companys
results of operations or financial position.
50
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
In December 2010, the FASB issued guidance to clarify that, when
presenting comparative financial statements for business
combinations that occurred during the current year, a public
entity should disclose revenue and earnings of the combined
entity as though the business combinations had occurred as of
the beginning of the comparable prior annual reporting period.
The update also expands the supplemental pro forma disclosures
to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the
business combination included in the reported pro forma revenue
and earnings. This guidance is effective for the Company
beginning in the first quarter of 2011 and is not expected to
have a significant impact on the Companys results of
operations or financial position.
Pronouncements
adopted during 2010:
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 Company adopted this guidance in the first quarter of
2010. The adoption did not impact the Companys results of
operations or financial position.
In January 2010, the FASB issued revised guidance that expands
the disclosure requirements for fair value measurements. New
disclosure required under the revised guidance includes
information about significant transfers in and out of
Level 1 and Level 2 and the reason for such transfers,
and inclusion of purchases, sales, issuances and settlements
information for Level 3 measurements in the rollforward of
activity on a gross basis. This guidance is effective for fiscal
years beginning after December 15, 2009, except for the
rollforward of activities on a gross basis for Level 3,
which is effective for fiscal years beginning after
December 15, 2010. The Company adopted this guidance in the
first quarter of 2010. The adoption did not impact the
Companys results of operations or financial position.
Note 2
Restructuring, Asset Impairment Charges and Other
Items
The following table summarizes the items included in
restructuring of operations and other items, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Lease and contract terminations(a)
|
|
$
|
5,629
|
|
|
$
|
19,525
|
|
|
$
|
14,382
|
|
Employee severance and benefits(b)
|
|
|
11,890
|
|
|
|
10,094
|
|
|
|
25,401
|
|
Asset impairments and other exit activities(c)
|
|
|
44,107
|
|
|
|
608
|
|
|
|
(4,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring expenses
|
|
|
61,626
|
|
|
|
30,227
|
|
|
|
35,474
|
|
Other items(d)
|
|
|
(2,741
|
)
|
|
|
8,019
|
|
|
|
8,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring expenses and other items, net
|
|
$
|
58,885
|
|
|
$
|
38,246
|
|
|
$
|
43,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The 2009 amount included an accrual for remaining payments to be
made under a design tool license agreement that the Company no
longer uses. |
|
(b) |
|
The amounts primarily related to restructuring actions taken to
streamline the Companys operations. In 2010, the Company
reduced its global workforce in non-strategic areas as it
continued to increase synergies across its Semiconductor
segment. Also, late in 2010, in response to the changing
external storage systems market, the Company changed some of its
business strategies for its Storage Systems segment and
discontinued several development projects, and in early 2011
closed several office locations and reduced its headcount. |
51
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
|
|
|
(c) |
|
The 2010 amount consisted of the write-off of software,
intangible assets and fixed assets due to several development
program cancellations resulting from the changes in business
strategies in the Companys Storage Systems segment. The
2008 amount included a $2.0 million gain on the sale of
land in Gresham, Oregon and a $2.6 million gain on the sale
of assets that were held for sale in Singapore in connection
with the Agere Systems Inc. (Agere) merger. |
|
(d) |
|
The 2010 and 2009 amounts were primarily related to litigation.
The credit for 2010 was primarily the result of a
$4.4 million reversal of previously accrued litigation
costs as a result of a court ruling in favor of the Company,
offset in part by $1.6 million of
catch-up
depreciation for land improvements resulting from the
reclassification of Gresham land from held for sale to held and
used in the fourth quarter of 2010. The 2008 amount 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 in 2009. |
The following table summarizes the restructuring of operations
and other items, net by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Semiconductor segment
|
|
$
|
7,341
|
|
|
$
|
34,930
|
|
|
$
|
41,129
|
|
Storage Systems segment
|
|
|
51,544
|
|
|
|
3,316
|
|
|
|
2,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring expenses and other items, net
|
|
$
|
58,885
|
|
|
$
|
38,246
|
|
|
$
|
43,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the restructuring and asset
impairment activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
Asset Impairments
|
|
|
|
|
|
|
Lease and Contract
|
|
|
Severance
|
|
|
and Other Exit
|
|
|
|
|
|
|
Terminations
|
|
|
and Benefits
|
|
|
Activities
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Beginning balance at December 31, 2008
|
|
$
|
44,555
|
|
|
$
|
28,031
|
|
|
$
|
83
|
|
|
$
|
72,669
|
|
Expense
|
|
|
19,525
|
|
|
|
10,094
|
|
|
|
608
|
|
|
|
30,227
|
|
Utilized
|
|
|
(23,683
|
)(a)
|
|
|
(33,220
|
)(a)
|
|
|
(691
|
)
|
|
|
(57,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance at December 31, 2009
|
|
$
|
40,397
|
|
|
$
|
4,905
|
|
|
$
|
|
|
|
$
|
45,302
|
|
Expense
|
|
|
5,629
|
|
|
|
11,890
|
|
|
|
44,107
|
|
|
|
61,626
|
|
Utilized
|
|
|
(25,121
|
)(a)
|
|
|
(11,844
|
)(a)
|
|
|
(44,107
|
)
|
|
|
(81,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance at December 31, 2010(b)
|
|
$
|
20,905
|
|
|
$
|
4,951
|
|
|
$
|
|
|
|
$
|
25,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amounts utilized represent cash payments. |
|
(b) |
|
The balance remaining for the lease and contract terminations is
expected to be paid during the remaining terms of the leases,
which extend through 2013. The majority of the balance as of
December 31, 2010 remaining for severance is expected to be
paid in the first quarter of 2011. |
Note 3
Stock-Based Compensation and Common Stock
Description
of the Companys Equity Compensation Plans
At the Companys annual meeting on May 12, 2010, the
stockholders approved amendments to the 2003 Equity Incentive
Plan (2003 Plan) and the Employee Stock Purchase
Plan (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 12, 2010. Of that amount,
30 million shares were available for grants of restricted
stock and restricted stock units; and
|
52
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
|
|
|
|
|
Updating the performance measures that can be used to determine
the vesting of awards intended to qualify for deductibility
under Section 162(m) of the Internal Revenue Code to better
match the metrics the Company uses to manage its business.
|
The principal changes to the ESPP were:
|
|
|
|
|
Making a total of 30 million shares available for purchase
under the ESPP after May 15, 2010;
|
|
|
|
Providing better coordination between the plan and a
sub-plan
through which employees outside the U.S. and Canada
participate in the ESPP; and
|
|
|
|
Extending the term of the ESPP through May 12, 2020.
|
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.
At the Companys annual meeting on May 14, 2008, the
stockholders approved amendments to the 2003 Plan and the 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 principal changes to the ESPP were:
|
|
|
|
|
Making a total of 25 million shares available for purchase
under the ESPP after May 14, 2008;
|
|
|
|
Consolidating the Companys International Employee Stock
Purchase Plan into the 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 fiscal 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, 2010,
the 2003 Plan had approximately 44.4 million common shares
available for future grants. As of December 31, 2010, there
were a total of approximately 95.3 million shares of common
stock reserved for issuance upon exercise of outstanding options
and upon vesting of outstanding restricted stock units.
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
53
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
purchase period within such an offering period. The term of the
ESPP is through May 12, 2020. As of December 31, 2010,
the ESPP had approximately 26.6 million shares available
for future purchase.
Sales under the ESPP in 2010, 2009 and 2008 were approximately
6.7 million, 5.1 million and 4.6 million shares
of common stock at an average price of $4.72, $2.67 and $3.80
per share, respectively.
Stock-Based
Compensation Expense
The following table summarizes stock-based compensation expense,
net of estimated forfeitures, related to the Companys
stock options, ESPP and restricted stock unit awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Stock-Based Compensation Expense Included In:
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cost of revenues
|
|
$
|
8,217
|
|
|
$
|
7,382
|
|
|
$
|
9,269
|
|
Research and development
|
|
|
30,514
|
|
|
|
27,979
|
|
|
|
29,214
|
|
Selling, general and administrative
|
|
|
27,710
|
|
|
|
28,622
|
|
|
|
33,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
66,441
|
|
|
$
|
63,983
|
|
|
$
|
72,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation costs capitalized to inventory and
software in 2010, 2009 and 2008 were not significant. The income
tax benefits that the Company realized for the tax deduction
from option exercises and other awards were not significant.
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 following table summarizes
the weighted-average assumptions that the Company applied in the
lattice model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Estimated grant date fair value per share
|
|
$
|
1.95
|
|
|
$
|
1.42
|
|
|
$
|
2.04
|
|
Expected life (years)
|
|
|
4.30
|
|
|
|
4.26
|
|
|
|
4.36
|
|
Risk-free interest rate
|
|
|
1.91
|
%
|
|
|
1.80
|
%
|
|
|
2.51
|
%
|
Volatility
|
|
|
51
|
%
|
|
|
67
|
%
|
|
|
52
|
%
|
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.
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
54
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
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 (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
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
|
|
|
91,526
|
|
|
$
|
9.83
|
|
|
|
85,113
|
|
|
$
|
12.62
|
|
|
|
100,242
|
|
|
$
|
16.12
|
|
Options granted
|
|
|
7,463
|
|
|
|
5.47
|
|
|
|
23,203
|
|
|
|
3.13
|
|
|
|
18,627
|
|
|
|
5.68
|
|
Options exercised
|
|
|
(2,320
|
)
|
|
|
4.01
|
|
|
|
(1,084
|
)
|
|
|
4.83
|
|
|
|
(4,682
|
)
|
|
|
5.41
|
|
Options canceled
|
|
|
(12,625
|
)
|
|
|
27.38
|
|
|
|
(15,706
|
)
|
|
|
15.40
|
|
|
|
(29,074
|
)
|
|
|
21.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31
|
|
|
84,044
|
|
|
$
|
6.97
|
|
|
|
91,526
|
|
|
$
|
9.83
|
|
|
|
85,113
|
|
|
$
|
12.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31
|
|
|
51,554
|
|
|
$
|
8.36
|
|
|
|
49,528
|
|
|
$
|
14.00
|
|
|
|
49,446
|
|
|
$
|
16.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the options outstanding and options exercisable as of
December 31, 2010, the weighted-average remaining
contractual term was 3.52 and 2.66 years, respectively, and
the aggregate intrinsic value was $71.4 million and
$21.0 million, respectively.
As of December 31, 2010, the total unrecognized
compensation expense related to unvested stock options, net of
estimated forfeitures, was $36.6 million and is expected to
be recognized over the next 2.0 years on a weighted-average
basis. The total intrinsic value of options exercised during the
years ended December 31, 2010, 2009 and 2008 was
$4.2 million, $0.6 million, $7.2 million,
respectively. Cash received from stock option exercises was
$9.3 million in 2010.
The Companys determination of the 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.
55
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 weighted-average assumptions that went into the calculation
of the fair value for the May and November grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Estimated grant date fair value per share
|
|
$
|
1.49
|
|
|
$
|
1.79
|
|
|
$
|
1.37
|
|
Expected life (years)
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
0.8
|
|
Risk-free interest rate
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
|
|
1
|
%
|
Volatility
|
|
|
36
|
%
|
|
|
52
|
%
|
|
|
84
|
%
|
Cash received from ESPP issuances was $31.6 million in 2010.
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 cost of these awards is determined
using the fair value of the Companys common stock on the
date of grant.
Service-based:
The vesting requirements for service-based restricted stock
units are determined at the time of grant and require that the
employee remain employed by the Company for a specified period
of time. As of December 31, 2010, the total unrecognized
compensation expense related to these restricted stock units,
net of estimated forfeitures, was $32.0 million and is
expected to be recognized over the next 2.9 years on a
weighted-average basis. The fair value of the shares that were
issued upon the vesting of service-based restricted stock units
during the years ended December 31, 2010, 2009 and 2008 was
$8.9 million, $15.2 million and $18.6 million,
respectively.
The following table summarizes changes in service-based
restricted stock units outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Number of Units
|
|
|
(In thousands)
|
|
Unvested service-based restricted stock units at January 1
|
|
|
2,986
|
|
|
|
6,391
|
|
|
|
9,177
|
|
Granted
|
|
|
7,557
|
|
|
|
383
|
|
|
|
1,779
|
|
Vested
|
|
|
(1,645
|
)
|
|
|
(3,279
|
)
|
|
|
(4,026
|
)
|
Forfeited
|
|
|
(483
|
)
|
|
|
(509
|
)
|
|
|
(539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested service-based restricted stock units at December 31
|
|
|
8,415
|
|
|
|
2,986
|
|
|
|
6,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes service-based restricted stock
units granted (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
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
|
|
Service-based restricted stock units granted
|
|
|
7,557
|
|
|
$
|
5.40
|
|
|
|
383
|
|
|
$
|
4.56
|
|
|
|
1,779
|
|
|
$
|
5.02
|
|
56
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
Performance-based:
During the year ended December 31, 2010, the Company
granted performance-based restricted stock units. The vesting of
these restricted stock units is contingent upon the Company
meeting specified performance criteria and requires that the
employee remain employed by the Company for a specified period
of time. As of December 31, 2010, the total unrecognized
compensation expense related to the performance-based restricted
stock units was $8.4 million and, if the contingencies are
fully met, is expected to be recognized over the next 1 to
2 years.
The following table summarizes changes in performance-based
restricted stock units outstanding during the year ended
December 31, 2010:
|
|
|
|
|
|
|
Number of Units
|
|
|
(In thousands)
|
|
Unvested performance-based restricted stock units at
January 1, 2010
|
|
|
|
|
Granted
|
|
|
3,046
|
|
Vested
|
|
|
|
|
Forfeited
|
|
|
(152
|
)
|
|
|
|
|
|
Unvested performance-based restricted stock units at
December 31, 2010
|
|
|
2,894
|
|
|
|
|
|
|
The weighted-average grant date fair value per share of
performance-based restricted stock units was $5.51 during the
year ended December 31, 2010.
Common
Stock
Stock
Repurchase Programs:
On August 20, 2007, 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. The Company effectively completed this authorization by
December 31, 2008. On March 17, 2010, the Company
announced that its Board of Directors had authorized a stock
repurchase program of up to an additional $250.0 million of
the Companys common stock in open market or privately
negotiated transactions. The Company repurchased
51.4 million shares for $249.9 million in cash during
the year ended December 31, 2010, effectively completing
the program. The repurchased shares were retired immediately
after the repurchases were completed. 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 and 2008 (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. There
were no business acquisitions during 2010. Pro forma results of
operations for the acquisitions have not been presented because
the effects of these acquisitions, individually and in the
aggregate, are not material to the Companys financial
results.
57
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
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
|
|
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 unstructured data. The
acquisition was 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 was intended to enhance the
Companys competitive position in server RAID adapter
solutions for
58
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
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.
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 provided the Company operations
handling and wafer supply services for a period of up to six
months from the date of acquisition. These services were 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 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
|
|
$
|
46.5
|
|
|
|
4
|
|
Customer base
|
|
|
31.7
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total acquired identified intangible assets
|
|
$
|
78.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. The payments under the management plan
are based on an adjusted career-average-pay formula or a
cash-balance program. The cash-balance program provides for
annual
59
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
company contributions based on a participants age,
compensation and interest on existing balances. It covers
employees of certain companies acquired by Agere since 1996 and
management employees hired after January 1, 1999 and before
July 1, 2003. The payments under the represented plan are
based on a
dollar-per-month
formula. Since February 2009, there have been no active
participants under the represented plan. 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
Company also provides post-retirement life insurance coverage
under a group life insurance plan for former Agere employees
excluding participants in the cash-balance program and
management employees hired after June 30, 2003. The Company
also has pension plans covering certain international employees.
Effective April 6, 2009, the Company froze the
U.S. management 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 Cost/(Credit):
The following table summarizes the components of the net
periodic benefit cost or credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
(In thousands)
|
|
|
Service cost
|
|
$
|
472
|
|
|
$
|
81
|
|
|
$
|
1,792
|
|
|
$
|
79
|
|
|
$
|
5,694
|
|
|
$
|
101
|
|
Interest cost
|
|
|
70,337
|
|
|
|
2,441
|
|
|
|
73,774
|
|
|
|
2,426
|
|
|
|
75,016
|
|
|
|
3,024
|
|
Expected return on plan assets
|
|
|
(71,464
|
)
|
|
|
(4,597
|
)
|
|
|
(76,802
|
)
|
|
|
(4,877
|
)
|
|
|
(82,575
|
)
|
|
|
(5,033
|
)
|
Amortization of prior service cost
|
|
|
38
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
Amortization of net actuarial loss/(gain)
|
|
|
2,155
|
|
|
|
|
|
|
|
(94
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost/(credit)
|
|
|
1,538
|
|
|
|
(2,075
|
)
|
|
|
(1,281
|
)
|
|
|
(2,372
|
)
|
|
|
(1,831
|
)
|
|
|
(2,027
|
)
|
Curtailment gain(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(771
|
)
|
|
|
(2,652
|
)
|
Special termination benefit(b)
|
|
|
|
|
|
|
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,529
|
)
|
|
|
|
|
|
|
|
|
Settlement credit(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit cost/(credit)
|
|
$
|
1,538
|
|
|
$
|
(2,075
|
)
|
|
$
|
(855
|
)
|
|
$
|
(3,901
|
)
|
|
$
|
(2,634
|
)
|
|
$
|
(4,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
|
(b) |
|
The special termination benefit in 2009 reflects enhanced
retirement benefits given to active represented plan
participants impacted by a workforce reduction in January 2009. |
|
(c) |
|
The amount in 2009 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. |
60
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 periods presented. The measurement date was December 31 for
each year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
(In thousands)
|
|
|
Projected benefit obligation at January 1
|
|
$
|
1,274,415
|
|
|
$
|
41,124
|
|
|
$
|
1,170,459
|
|
|
$
|
41,083
|
|
Service cost
|
|
|
472
|
|
|
|
81
|
|
|
|
1,792
|
|
|
|
79
|
|
Interest cost
|
|
|
70,337
|
|
|
|
2,441
|
|
|
|
73,774
|
|
|
|
2,426
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Amendments
|
|
|
|
|
|
|
|
|
|
|
(1,936
|
)
|
|
|
|
|
Actuarial loss
|
|
|
66,607
|
|
|
|
1,692
|
|
|
|
118,341
|
|
|
|
517
|
|
Benefits paid(a)
|
|
|
(85,988
|
)
|
|
|
(850
|
)
|
|
|
(88,669
|
)
|
|
|
(2,985
|
)
|
Special termination benefits
|
|
|
|
|
|
|
|
|
|
|
426
|
|
|
|
|
|
Other adjustments
|
|
|
5,294
|
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at December 31
|
|
$
|
1,331,137
|
|
|
$
|
44,488
|
|
|
$
|
1,274,415
|
|
|
$
|
41,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The pension benefits paid include amounts paid under certain
international pension plans, which do not maintain plan assets. |
The projected pension benefit obligations as of
December 31, 2010 and 2009 included $21.4 million and
$13.1 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
periods presented. The fair value of plan assets was measured at
December 31 for each year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Fair value of plan assets at January 1
|
|
$
|
819,410
|
|
|
$
|
62,300
|
|
|
$
|
720,915
|
|
|
$
|
54,781
|
|
Actual gain on plan assets
|
|
|
95,967
|
|
|
|
5,402
|
|
|
|
168,582
|
|
|
|
8,829
|
|
Employer contributions
|
|
|
31,027
|
|
|
|
|
|
|
|
20,180
|
|
|
|
1,671
|
|
Transfer to defined contribution plan funds
|
|
|
|
|
|
|
|
|
|
|
(1,863
|
)
|
|
|
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Benefits paid
|
|
|
(85,789
|
)
|
|
|
(921
|
)
|
|
|
(88,524
|
)
|
|
|
(2,985
|
)
|
Other adjustments
|
|
|
8,194
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31
|
|
$
|
868,809
|
|
|
$
|
66,781
|
|
|
$
|
819,410
|
|
|
$
|
62,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
The fair value of pension plan assets at December 31, 2010
and 2009 included $10.6 million and $2.5 million,
respectively, of assets for certain of the Companys
international pension plans. During 2010, the Company
contributed a total of $30.2 million to its
U.S. defined benefit pension plans and $0.8 million to
its non-qualified supplemental pension plan. The Companys
contribution to its international pension plans was immaterial
for the year ended December 31, 2010.
Funded
Status of the Plans:
The following table sets forth the funded status of the plans,
which is the fair value of plan assets less projected benefit
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Funded status of the plans (liability)/asset
|
|
$
|
(462,328
|
)
|
|
$
|
22,293
|
|
|
$
|
(455,005
|
)
|
|
$
|
21,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plans with Projected Benefit Obligation and Accumulated
Benefit Obligation in excess of Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
Pension Benefits
|
|
|
(In thousands)
|
|
Projected benefit obligation
|
|
$
|
1,324,302
|
|
|
$
|
1,274,415
|
|
Accumulated benefit obligation
|
|
$
|
1,322,394
|
|
|
$
|
1,272,562
|
|
Fair value of plan assets
|
|
$
|
860,414
|
|
|
$
|
819,410
|
|
The accumulated benefit obligations as of December 31, 2010
and 2009 included $19.4 million and $11.2 million,
respectively, related to the Companys international
pension plans.
Plans
with Accumulated Benefit Obligation less than Plan
Assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
Pension Benefits
|
|
|
(In thousands)
|
|
Projected benefit obligation
|
|
$
|
6,835
|
|
|
$
|
|
|
Accumulated benefit obligation
|
|
$
|
6,740
|
|
|
$
|
|
|
Fair value of plan assets
|
|
$
|
8,395
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
Post-retirement Benefits
|
|
|
(In thousands)
|
|
Accumulated benefit obligation
|
|
$
|
44,488
|
|
|
$
|
41,124
|
|
Fair value of plan assets
|
|
$
|
66,781
|
|
|
$
|
62,300
|
|
62
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
The following table sets forth amounts recognized in the
consolidated balance sheets for the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
(In thousands)
|
|
|
Non-current assets
|
|
$
|
1,560
|
|
|
$
|
22,293
|
|
|
$
|
|
|
|
$
|
21,176
|
|
Current liabilities
|
|
|
(769
|
)
|
|
|
|
|
|
|
(799
|
)
|
|
|
|
|
Non-current liabilities
|
|
|
(463,119
|
)
|
|
|
|
|
|
|
(454,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (liability)/asset
|
|
$
|
(462,328
|
)
|
|
$
|
22,293
|
|
|
$
|
(455,005
|
)
|
|
$
|
21,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Loss/(Income):
The following table sets forth amounts recognized in accumulated
other comprehensive loss related to pension and post-retirement
plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net prior service cost
|
|
$
|
278
|
|
|
$
|
|
|
|
$
|
340
|
|
|
$
|
|
|
Net actuarial loss
|
|
|
334,809
|
|
|
|
10,625
|
|
|
|
295,354
|
|
|
|
9,668
|
|
Transitional asset
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
334,912
|
|
|
|
10,625
|
|
|
|
295,694
|
|
|
|
9,668
|
|
Tax
|
|
|
23,813
|
|
|
|
3,026
|
|
|
|
23,813
|
|
|
|
3,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, net of tax
|
|
$
|
358,725
|
|
|
$
|
13,651
|
|
|
$
|
319,507
|
|
|
$
|
12,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
The following table summarizes changes in accumulated other
comprehensive income or loss related to pension and
post-retirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
Pension
|
|
|
Post-retirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
(In thousands)
|
|
|
Accumulated other comprehensive loss/(income) at January 1,
net of tax
|
|
$
|
319,507
|
|
|
$
|
12,694
|
|
|
$
|
292,951
|
|
|
$
|
13,883
|
|
|
$
|
(38,236
|
)
|
|
$
|
(3,562
|
)
|
Recognized during period Prior service cost
|
|
|
(38
|
)
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
(170
|
)
|
|
|
|
|
Recognized during period Actuarial (loss)/gain
|
|
|
(2,155
|
)
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
(12,709
|
)
|
|
|
3,093
|
|
Occurring during period Prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
405
|
|
|
|
|
|
Occurring during period Actuarial loss/(gain)
|
|
|
42,051
|
|
|
|
957
|
|
|
|
26,546
|
|
|
|
(3,435
|
)
|
|
|
343,605
|
|
|
|
14,352
|
|
Other adjustments
|
|
|
(640
|
)
|
|
|
|
|
|
|
(35
|
)
|
|
|
1,529
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss at December 31
|
|
|
358,725
|
|
|
|
13,651
|
|
|
|
319,507
|
|
|
|
11,977
|
|
|
|
292,951
|
|
|
|
13,883
|
|
Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss at December 31, net of
tax
|
|
$
|
358,725
|
|
|
$
|
13,651
|
|
|
$
|
319,507
|
|
|
$
|
12,694
|
|
|
$
|
292,951
|
|
|
$
|
13,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated prior service cost, transitional asset and net
actuarial loss for the pension plans that will be amortized from
accumulated other comprehensive loss into pension costs for the
year ending December 31, 2011 are $36 thousand, $19
thousand and $6.7 million, respectively. For the
post-retirement benefit plans, the estimated net actuarial loss
that will be amortized from accumulated other comprehensive loss
into post-retirement costs for the year ending December 31,
2011 is $0.4 million.
Plan
Assets:
Defined
Benefit Pension Plans:
The Companys investment strategy for the U.S. defined
benefit pension plans is to allocate assets in a manner that
seeks both to maximize the safety of promised benefits and to
minimize the cost of funding those benefits. The Company directs
the overall portfolio allocation, and uses an investment
consultant that has discretion to structure portfolios and
select the investment managers within those allocation
parameters. Multiple investment managers are utilized, including
both active and passive management approaches. The plan assets
are diversified across different asset classes and investment
styles, and those assets are periodically rebalanced toward
asset allocation targets.
The target asset allocation for plan assets reflects a
risk/return profile that the Company believes is appropriate
relative to the liability structure and return goals for the
plans. The Company periodically reviews the allocation of
64
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
plan assets relative to alternative allocation models to
evaluate the need for adjustments based on forecasted
liabilities and plan liquidity needs. The current target
allocations for the U.S. management and represented pension
plan assets are 55% in public equity securities, 40% in
fixed-income securities, and 5% in real estate securities. The
equity investment target allocation is equally divided between
U.S. and international equity securities. The fixed-income
allocation is primarily directed toward long-term core bond
investments, with smaller allocations to Treasury
Inflation-Protected Securities and high-yield bonds.
The fair values of the assets for the defined benefit pension
plans by asset category were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2010
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
11,382
|
|
|
$
|
13,346
|
(a)
|
|
$
|
|
|
|
$
|
24,728
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic equity securities
|
|
|
183,239
|
(b)
|
|
|
2,750
|
(c)
|
|
|
|
|
|
|
185,989
|
|
International equity securities
|
|
|
151,041
|
(b)
|
|
|
1,990
|
(c)
|
|
|
|
|
|
|
153,031
|
|
Fixed-income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries(d)
|
|
|
|
|
|
|
73,554
|
|
|
|
|
|
|
|
73,554
|
|
Corporate bonds(e)
|
|
|
|
|
|
|
140,106
|
|
|
|
|
|
|
|
140,106
|
|
Asset-backed and mortgage-backed securities
|
|
|
|
|
|
|
14,739
|
|
|
|
|
|
|
|
14,739
|
|
Agency-backed securities
|
|
|
|
|
|
|
10,930
|
|
|
|
|
|
|
|
10,930
|
|
Municipal bonds
|
|
|
|
|
|
|
8,253
|
|
|
|
|
|
|
|
8,253
|
|
Government bonds
|
|
|
|
|
|
|
11,059
|
|
|
|
|
|
|
|
11,059
|
|
Other types of investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commingled funds equities(f)
|
|
|
|
|
|
|
180,935
|
|
|
|
|
|
|
|
180,935
|
|
Commingled funds bonds(g)
|
|
|
|
|
|
|
65,232
|
|
|
|
|
|
|
|
65,232
|
|
Derivatives
|
|
|
180
|
|
|
|
73
|
|
|
|
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
345,842
|
|
|
$
|
522,967
|
|
|
$
|
|
|
|
$
|
868,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
LSI
Corporation
Notes to
Consolidated Financial
Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
5,487
|
|
|
$
|
20,461
|
(a)
|
|
$
|
|
|
|
$
|
25,948
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic equity securities
|
|
|
168,137
|
(b)
|
|
|
2,861
|
(c)
|
|
|
|
|
|
|
170,998
|
|
International equity securities
|
|
|
138,529
|
(b)
|
|
|
|
|
|
|
|
|
|
|
138,529
|
|
Fixed-income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries(d)
|
|
|
|
|
|
|
44,695
|
|
|
|
|
|
|
|
44,695
|
|
Corporate bonds(e)
|
|
|
|
|
|
|
156,239
|
|
|
|
|
|
|
|
156,239
|
|
Asset-backed and mortgage-backed securities
|
|
|
|
|
|
|
19,445
|
|
|
|
|
|
|
|
19,445
|
|
Agency-backed securities
|
|
|
|
|
|
|
12,062
|
|
|
|
|
|
|
|
12,062
|
|
Municipal bonds
|
|
|
|
|
|
|
5,407
|
|
|
|
|
|
|
|
5,407
|
|
Government bonds
|
|
|
|
|
|
|
3,440
|
|
|
|
|
|
|
|
3,440
|
|
Other types of investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commingled funds equities(f)
|
|
|
|
|
|
|
178,122
|
|
|
|
|
|
|
|
178,122
|
|
Commingled funds bonds(g)
|
|
|
|
|
|
|
64,525
|
|
|
|
|
|
|
|
64,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
312,153
|
|
|
$
|
507,257
|
|
|
$
|
|
|
|
$
|
819,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amounts represent cash equivalents and primarily include
short-term investment funds, which consisted of short-term money
market instruments that are valued using quoted prices for
similar assets and liabilities in active markets. |
|
(b) |
|
The amounts include funds that invest primarily in equity
securities of companies. The quoted prices for the funds are
available in active markets. |
|
(c) |
|
The amounts include funds that invest primarily in equity
securities that are traded less frequently than exchange-traded
securities and are valued using inputs that include quoted
prices for similar assets in active markets. |
|
(d) |
|
The fair value was determined based on compilation of primary
observable market information and 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
broker/dealer quotes, yield curves, and indices that are
observable at commonly quoted intervals. |
|
(e) |
|
The amounts include funds that invest primarily in
investment-grade debt securities. |
|
(f) |
|
The amounts consist of investments in funds not registered with
U.S. Securities and Exchange Commission, with underlying
investments primarily in publicly traded U.S. and
non-U.S.< |