SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended July 2, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to _________
Commission File Number: 0-11674
LSI LOGIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2712976
(State of Incorporation) (I.R.S. Employer
Identification Number)
1551 McCarthy Boulevard
Milpitas, California 95035
(Address of principal executive offices)
(408) 433-8000
(Registrant's telephone number)
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 x NO
As of August 7, 1995 there were 128,033,825 shares of
registrant's Common Stock, $.01 par value, outstanding.
LSI LOGIC CORPORATION
Form 10-Q
FOR THE QUARTER ENDED JULY 2, 1995
INDEX
Page
No.
PART I Financial Information
Item 1 Financial Statements
Consolidated Condensed Balance Sheets
- June 30, 1995 and December 31, 1994 3
Consolidated Condensed Statements of
Operations - Three-Month and Six-Month
Periods Ended June 30, 1995 and 1994 4
Consolidated Condensed Statements of Cash
Flows - Six-Month Periods Ended
June 30, 1995 and 1994 5
Notes to Consolidated Condensed
Financial Statements 6
Item 2 Management's Discussion and Analysis of
Results of Operations and Financial Condition 11
PART II Other Information
Item 1 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of
Security Holders 17
Item 6 Exhibits and Reports on Form 8-K 18
PART I
Item 1. Financial Statements
<TABLE>
<CAPTION>
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
June 30, December 31,
1995 1994
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 278,420 $ 224,503
Short-term investments 203,078 204,008
Accounts receivable, less allowance for
doubtful accounts of $4,674 and $4,044 181,426 152,244
Inventories 130,042 107,824
Prepaid expenses and other
current assets 62,008 42,275
Total current assets 854,974 730,854
Property and equipment, net 653,082 495,549
Other assets 50,750 43,971
Total assets $1,558,806 $1,270,374
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 168,663 $ 165,612
Accrued salaries, wages and benefits 32,719 29,251
Accrued restructuring costs 23,255 19,800
Other accrued liabilities 36,399 30,192
Income taxes payable 60,291 38,916
Current portion of long-term debt,
capital lease obligations and
short-term borrowings 46,058 24,167
Total current liabilities 367,385 307,938
Long-term debt, capital lease
obligations and other long-term
liabilities 292,144 288,496
Deferred income taxes 6,989 6,861
Minority interest in subsidiaries 28,881 122,173
Commitments and contingencies - -
Stockholders' equity:
Preferred shares; 2,000 shares
authorized - -
Common stock; $.01 par value; 250,000
shares authorized; 122,156 and
114,287 shares outstanding 1,222 1,143
Additional paid-in capital 568,255 401,268
Retained earnings 168,075 67,070
Cumulative translation adjustment 125,855 75,425
Total stockholders' equity 863,407 544,906
Total liabilities and stockholders'
equity $1,558,806 $1,270,374
See accompanying notes to unaudited consolidated condensed
financial statements.
</TABLE>
<TABLE>
<CAPTION>
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues $307,066 $212,106 $587,224 $405,918
Costs and expenses:
Cost of revenues 162,305 123,337 315,704 238,724
Research and
development 27,983 22,467 52,361 45,608
Selling, general
and administrative 40,143 31,102 79,478 60,559
Total costs and
expenses 230,431 176,906 447,543 344,891
Income from operations 76,635 35,200 139,681 61,027
Interest expense (4,117) (5,665) (8,300) (9,453)
Interest income and other 7,240 4,127 12,721 8,925
Income before income
taxes and minority
interest 79,758 33,662 144,102 60,499
Provision for income
taxes 22,333 9,425 40,349 16,939
Income before
minority interest 57,425 24,237 103,753 43,560
Minority interest in
net income of
subsidiaries 1,680 799 2,748 767
Net income $55,745 $ 23,438 $101,005 $ 42,793
Net income per share:
Primary $ 0.44 $ 0.22 $ 0.82 $ 0.41
Fully diluted $ 0.42 $ 0.20 $ 0.77 $ 0.39
Common share and common
share equivalents used
in computing per share
amounts:
Primary 125,855 106,224 123,313 103,898
Fully diluted 137,939 128,102 135,689 120,689
See accompanying notes to unaudited consolidated condensed
financial statements.
</TABLE>
<TABLE>
<CAPTION>
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1995 1994
<S> <C> <C>
Operating activities:
Net income $ 101,005 $ 42,793
Adjustments:
Depreciation and amortization 71,037 49,964
Minority interest in net income
of subsidiaries 1,680 767
Change in:
Accounts receivable (20,881) (21,805)
Inventories (13,180) (20,610)
Prepaid and other assets (14,389) (4,643)
Accounts payable (11,957) 22,626
Accrued and other liabilities 19,654 6,708
Accrued restructuring costs 509 (3,418)
Net cash provided by operating activities 133,478 72,382
Investing activities:
Purchases of debt and equity securities,
net of maturities and sales 758 (73,053)
Purchase of restricted equity securities (13,966) -
Change in other short-term investments - 8,123
Purchases of property and equipment,
net of retirements and refinancings (110,344) (53,765)
Acquisition of stock from minority
interest holders (133,704) (10,051)
Net cash used for investing activities (257,256) (128,746)
Financing activities:
Issuance of Convertible Subordinated Notes - 143,750
Proceeds from borrowings 16,726 -
Repayment of debt obligations (13,628) (16,302)
Issuance of common stock 167,062 8,995
Tax benefit from employee stock plans - 1,400
Net cash provided by financing activities 170,160 137,843
Effect of exchange rate changes on cash
and cash equivalents 7,535 2,706
Increase in cash and cash equivalents 53,917 84,185
Cash and cash equivalents at beginning
of period 224,503 121,319
Cash and cash equivalents at end
of period $ 278,420 $ 205,504
See accompanying notes to unaudited consolidated condensed
financial statements.
</TABLE>
LSI LOGIC CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1- In the opinion of the Company, the accompanying unaudited
consolidated condensed financial statements contain all
adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial information included
therein. While the Company believes that the disclosures are
adequate to make the information not misleading, it is suggested
that these financial statements be read in conjunction with the
audited consolidated financial statements and accompanying notes
included in the Company's Annual Report on Form 10-K for the year
ended January 1, 1995.
For financial reporting purposes, the Company reports on a
13 or 14 week quarter and a 52 or 53 week year ending on the
Sunday closest to December 31. For presentation purposes, the
consolidated financial statements refer to the quarter's
calendar month end for convenience. The results of operations
for the six month period ended June 30, 1995 are not necessarily
indicative of the results to be expected for the full year.
Note 2 - Effective January 3, 1994, the Company adopted the
Statement of Financial Accounting Standards No.115 (SFAS 115),
"Accounting for Certain Investments in Debt and Equity
Securities." The cumulative effect of adopting SFAS No. 115 in
the first quarter of 1994 was not material.
Cash equivalents and short-term investments at June 30, 1995,
consisted primarily of U.S. and foreign corporate debt
securities, overnight deposits, auction rate preferred stock,
commercial paper, time deposits, bank notes, and U.S. government
and agency securities. Cash equivalents and short-term
investments held at June 30, 1995 and at December 31, 1994
approximate fair market value and mature in one year or less.
The Company currently does not actively trade securities.
Realized gains and losses are based on book value of specific
securities sold and were not material during the three and six
month periods ended June 30, 1995 and 1994.
In February 1995, the Company subscribed to purchase shares
in Chartered Semiconductor Manufacturing Pte. Ltd. for
approximately $20 million, of which approximately $14 million has
been paid and approximately $6 million will be paid in March
1996. Transfer of the shares is restricted for five years. The
Company recorded the investment as a long-term asset at cost,
which approximates fair market value at June 30, 1995.
Note 3 - The Company has foreign subsidiaries which operate and
sell the Company's products in various global markets. As a
result, the Company is exposed to changes in interest rates and
foreign currency exchange rates. The Company utilizes various
hedge instruments, primarily forward exchange and currency swap
contracts, to manage its exposure associated with firm
intercompany transactions. The Company does not speculate in
these financial instruments for profit on exchange rate price
fluctuations.
As of June 30, 1995, outstanding forward exchange and currency
swap contracts, settling July 1995 through September 1996, hedge
various intercompany loans and purchase obligations to the
Company's Japanese manufacturing subsidiary in excess of sales
obligations to the Company's Japanese sales subsidiary.
Outstanding foreign currency hedge instruments at December 31,
1994 consisted of forward exchange and currency swap contracts
to manage its exposure associated with various intercompany
loans. Foreign currency amounts are translated at rates current
at the reporting date.
The following table summarizes by major currency the forward
exchange and currency swap contracts outstanding (in thousands).
The "buy" amounts represent the U.S. dollar equivalent of
commitments to purchase foreign currencies, and the "sell"
amounts represent the U.S. dollar equivalent of commitments to
sell foreign currencies.
<TABLE>
<CAPTION>
June 30, December 31,
Buy/(Sell): 1995 1994
<S> <C> <C>
Japanese Yen $ 54,372 $(10,351)
Japanese Yen (276) -
U.S. Dollar (63,123) (3,200)
U.S. Dollar 250 -
Pound Sterling 9,456 9,447
Deutschemark (10,291) (9,312)
Canadian Dollar 1,680 13,836
Singapore Dollar 6,199 -
</TABLE>
These forward exchange and currency swap contracts are considered
identifiable hedges. Realized and unrealized gains and losses
are deferred until settlement of the underlying commitments and
are recorded in income as part of the purchase or sale
transaction when it is recognized, or as other gains or losses
when a hedged transaction is no longer expected to occur.
Deferred foreign exchange gains and losses were approximately
$1.5 million and $1.3 million, respectively, at June 30, 1995,
and were not material at December 31, 1994.
Note 4 - Balance sheet and cash flow information (in thousands):
June 30, December 31,
1995 1994
Inventories:
Raw materials $ 22,791 $ 14,275
Work-in-process 66,739 58,303
Finished goods 40,512 35,246
Total $ 130,042 $ 107,824
June 30, June 30,
1995 1994
Cash Paid for:
Income taxes $ 17,636 $ 8,847
Interest 8,642 4,748
Note 5 - During the first half of 1995, the Company's Japanese
sales affiliate sold approximately $16.3 million of its accounts
receivables through non-recourse financing programs with two
Japanese banks. These receivables were discounted at short-term
Yen borrowing rates (approximately 1.8%)and related fees were not
material.
Note 6 - During the first half of 1995, $1,045,000 was charged
against the restructuring reserves. These charges were for the
continued phase-down of its U.S. manufacturing facilities,
including the write-off and disposition of equipment ($536,000),
the write-off of inventory ($267,000) and the severance of
employees ($265,000), and ongoing maintenance costs of its vacant
German facility ($239,000), offset in part by an increase in
reserves due to translation adjustments as a result of the
strengthening Deutschemark ($262,000). In response to changing
economic conditions, the Company modified its original
restructuring plan in the second quarter of 1995 and determined
it would continue operation of its Milpitas, California
wafer manufacturing facility. The Company also substantially
completed the phase-down of its U.S. assembly and test operation.
These actions resulted in excess reserves of approximately $12
million which were used to offset increases in the reserves for
legal and other corporate matters, which include reserves for the
jury verdict against the Company during the second quarter of
1995 in the Texas Instruments litigation (see Note 11 to the
Unaudited Consolidated Condensed Financial Statements).
Remaining reserves at June 30, 1995 include approximately $2.7
million for remaining costs related to the phase-down of the
California manufacturing facilities, $2.6 million for continued
maintenance of the vacant Braunschweig facility and $19 million
for legal and other corporate matters. These reserves are
accounted for as components of fixed assets, inventories and
current liabilities at June 30, 1995 and December 31, 1994.
Management believes that the total reserves established are
adequate to cover uncertainties in connection with these matters.
See further discussion in Management's Discussion and Analysis of
Results of Operations and Financial Condition, Part I, Item 2 of
this Form 10-Q.
Note 7 - During January 1995, the Company acquired all minority
owned shares (a 45% interest) of its Japanese manufacturing
subsidiary, Nihon Semiconductor, Inc. (NSI), from Kawasaki Steel
Corporation (KSC) for a total of $175 million to be paid to KSC
over eight years. The Company has defeased this obligation
through payment of $125.9 million to an unrelated party and has
been legally released from the obligation by KSC. The
acquisition was accounted for as a purchase. The excess of the
total acquisition cost over the recorded value of assets acquired
was allocated to property and equipment ($33.1 million) based on
fair value and is being amortized over the estimated useful life
of those assets of approximately nine years.
In June 1995, the Company made an offer to acquire the
approximately 12.2 million common shares (including outstanding
options) that it does not already own of its publicly traded
Canadian subsidiary, LSI Logic Corporation of Canada, Inc. (LSI
Canada), for $4.00 Canadian Dollars (CD) per share. In July
1995, the Company borrowed $40.7 million CD (U.S. $29.5 million)
under a $50 million CD revolving credit line to purchase
approximately 10.2 million shares increasing its ownership to
approximately 93%. The borrowing bears interest at Canadian
prime rate (8.25% as of July 31, 1995) and matures in
approximately six months. The Company is currently evaluating
its investment and expects to capitalize a majority of the excess
purchase price over the net assets acquired as goodwill, which it
expects to amortize over seven years. The minority interest
liability of LSI Canada approximated $18.6 million at June 30,
1995. The Company intends to acquire the remaining shares in a
transaction which may result in the remaining shareholders having
the right to dissent from the transaction and be entitled to
appraisal rights.
During the first half of 1995, the Company acquired approximately
1.2 million common shares of its Japanese sales affiliate from
its minority interest shareholders for approximately $7.8
million. The acquisition was accounted for as a purchase and the
excess of the purchase price over the fair value of the assets
acquired ($1.7 million) was allocated to goodwill and is being
amortized over seven years. The Company owned approximately 87%
of the Japanese affiliate at June 30, 1995.
Note 8 - The Company's effective tax rate differs from the
statutory rate due to the Company's ability to utilize prior loss
carryovers and due to the mix of expected earnings in its foreign
subsidiaries.
Note 9 - The Board of Directors approved an increase in the
number of common shares authorized for issuance to 250,000,000
during February 1995 which was approved by the stockholders at
the Company's annual meeting in May 1995.
During February 1995, the Company completed an offering of
3,162,500 shares of common stock, netting proceeds of
approximately $157.6 million.
On May 12, 1995, the Company's Board of Directors approved a
two-for-one stock split in the form of a stock dividend for
stockholders of record on May 23, 1995. The payment date was on
June 21, 1995. Share information for all periods presented has
been retroactively adjusted to reflect this stock dividend.
In July 1995, the Company completed an offering of 5,750,000
shares of common stock, netting proceeds of approximately $247
million. These shares will have a dilutive effect on earnings
per share in the third quarter of 1995.
Primary income per common share and common equivalent share is
computed using the weighted average number of common shares
outstanding during the respective periods, including dilutive
stock options, as applicable. Fully diluted income per
common share and common equivalent share is computed by adjusting
net income and primary shares outstanding for the potential
effect of the conversion of the weighted average convertible
subordinated debt outstanding during the period. Fully diluted
earnings per share computations are based on the most
advantageous conversion or exercise rights to the security holder
that become effective within ten years following the period
reported upon.
Note 10 - In June 1995, the Company, through its Japanese
subsidiary, entered into a master lease agreement and a master
purchase agreement with a group of leasing companies (Lessor) for
up to 15 billion Yen. The leasing companies are funded by
affiliated Japanese banks. The Company has guaranteed the
performance of its Japanese subsidiary. Each Lease Supplement
pursuant to the transaction will have a lease term of one year
with four consecutive annual renewal options. The Company may at
the end of any lease term return or purchase at a stated amount
all the equipment. Upon return of the equipment, the Company must
pay the lessor a terminal adjustment amount. The Lessor also has
entered into a remarketing agreement with a third party to
remarket and sell any equipment returned pursuant to which the
third party is obligated to reimburse the Company a guaranteed
residual value. As of June 30, 1995, the Company had utilized
6.2 billion Yen ($73.8 million) under these agreements to
refinance equipment owned by its Japanese manufacturing
subsidiary. There were no significant gains or losses from these
transactions. These leases are accounted for as operating leases
by the Company.
Note 11 - The Company is one of three defendants in a patent
infringement suit brought by Texas Instruments ("TI"). This suit
resulted in a May 1995 jury verdict against the Company holding
the patents valid and finding wilful infringement. Damages
against the Company were set by the jury at $14.6 million, for
which the Company has adequate reserves. Because both of the
patents involved in the litigation have expired, the verdict will
have no effect upon the manufacture or sale of the Company's
present or future products. The Company has filed various
post-trial motions which, if granted, could reduce the jury award
or set aside the jury verdict entirely. TI has requested treble
damages, pre-judgment interest in the amount of $7.5 million from
the Company and attorneys' fees that total $3.8 million from all
three defendants. The Company believes that the jury verdict was
in error and intends to appeal. The Company continues to believe
that the final outcome of this matter will not have a material
adverse effect on the Company's consolidated financial position
or results of operations. No assurance can be given, however,
that this matter will be resolved without the payment of damages
and other costs or that damages will not be increased to an
amount in excess of the Company's reserves, thereby having an
adverse effect on the Company.
Certain additional claims and litigation against the Company have
also arisen in the normal course of business. The Company
believes that it is unlikely that the outcome of these claims and
lawsuits will have a materially adverse effect on the Company's
consolidated financial position or results of operations.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
General
The Company believes that its future operating results are and
will continue to be subject to quarterly variations based upon a
wide variety of factors, including the cyclical nature of both
the semiconductor industry and the markets addressed by the
Company's products, price erosion, competitive factors,
fluctuations in manufacturing yields, the timing of new product
introductions, changes in product mix, the availability and
extent of utilization of manufacturing capacity, product
obsolescence and the ability to develop and implement new
technologies. The Company's operating results could also be
impacted by sudden fluctuations in customer requirements,
currency exchange rate fluctuations and other economic conditions
affecting customer demand and the cost of operations in one or
more of the global markets in which the Company does business.
As a participant in the semiconductor industry, the Company
operates in a technologically advanced, rapidly changing and
highly competitive environment. The Company predominately sells
custom products to customers operating in a similar environment.
Accordingly, changes in the circumstances of the Company's
customers may have a greater impact on the Company than if the
Company offered standard products that could be sold to many
purchasers. While the Company cannot predict what effect these
various factors may have on its financial results, the
aggregate effect of these and other factors could result in
significant volatility in the Company's future performance and
stock price. To the extent the Company's performance may not
satisfy expectations published by external sources, public
reaction could result in a sudden and significantly adverse
impact on the market price of the Company's securities,
particularly on a short-term basis.
The Company currently has international subsidiaries which
operate and sell the Company's products in various global
markets. The Company purchases a substantial portion of
its raw materials and equipment from foreign suppliers, and
incurs labor and other operating costs, particularly at its
Japanese manufacturing facility, in foreign currencies. As a
result, the Company is exposed to international factors such as
changes in foreign currency exchange rates or weak economic
conditions of the respective countries in which the Company
operates. The Company utilizes various instruments, primarily
forward exchange and currency swap contracts, to manage its
exposure associated with currency fluctuation on intercompany
transactions and certain foreign currency denominated
commitments. At June 30, 1995, the Company had various forward
exchange and currency swap contracts outstanding (see Note 3 to
the Unaudited Consolidated Condensed Financial Statements).
These contracts hedge intercompany loans and a substantial
portion of the Company's Yen related exposures for the third and
fourth quarters of 1995 and the first quarter of 1996.
The Company's corporate headquarters and manufacturing facilities
are located near major earthquake faults. As a result, in the
event of a major earthquake the Company could suffer damages
which could materially and adversely affect the operating results
and financial condition of the Company.
While management believes that the discussion and analysis in
this report is adequate for a fair presentation of the
information, management recommends that this discussion and
analysis be read in conjunction with Management's Discussion and
Analysis included in the Company's 1994 Annual Report on Form
10-K for the year ended January 1, 1995.
Results of Operations
Revenues for both the second quarter and first half of 1995
increased 45% to $307.1 million and $587.2 million, respectively,
as compared to the second quarter and first half of 1994. The
composition of revenues by major element was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Component products 94% 86% 94% 86%
Design and services 6% 14% 6% 14%
100% 100% 100% 100%
Total component revenues grew 54% to $287.8 million and 57% to
$550.3 million in the second quarter and first half of 1995,
respectively, as compared to the same periods a year ago. The
increase in revenue dollars and the increase in component
revenues as a percentage of total revenues were primarily due to
increased customer demand and volume production of the Company's
higher technology products. Volume production grew as the
Company continued to increase manufacturing capacity at its
Japanese and U.S. manufacturing facilities. Design and services
decreased to $19.2 million and $36.9 million in the second
quarter and the first half of 1995 from $30.5 million and $56.5
million, respectively, compared to the same periods a year ago.
The decrease is primarily attributed to a decline in nonrecurring
engineering (NRE) revenue as the Company refocused its
engineering efforts on large volume production opportunities and
more complex CoreWare designs. The decrease is also attributed
to the recognition of a one-time $7 million sale involving
certain products and marketing rights during the second quarter
of 1994. One customer accounted for 12% percent of revenues
during the first half of 1995.
Key elements of the statements of operations, expressed as a
percentage of revenues, were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Gross margin 47.1% 41.9% 46.2% 41.2%
Research and development
expenses 9.1% 10.6% 8.9% 11.2%
Selling, general and
administrative expenses 13.1% 14.7% 13.5% 14.9%
Income from operations 25.0% 16.6% 23.8% 15.0%
Gross margin continued to improve in the second quarter and first
half of 1995 compared to the same periods a year ago. The
improvements were primarily the result of greater factory and
capacity utilization, improving yields and other plant
efficiencies at the Company's Japanese wafer manufacturing
facility. Changes in product mix and an increase in the use of
low cost assembly and test subcontractors also contributed
favorably to gross margins. The Company's operating environment
combined with the resources required to operate in the
semiconductor industry requires managing a wide variety of
factors such as factory capacity and utilization, manufacturing
yields, product mix, availability of certain raw materials, terms
negotiated with third-party subcontractors and foreign currency
exchange rate fluctuations. Accordingly, gross profit margins for
the second quarter and first half of 1995 may not be indicative
of expected results for the remainder of the fiscal year.
Volume production capability is expected to increase
significantly throughout 1995 and during the first quarter
of 1996 due to an increase in manufacturing capacity resulting
primarily from the installation of additional production
equipment in the Company's Japanese wafer manufacturing
facilities and improving manufacturing yields. If demand for the
Company's products does not absorb this additional capacity at a
sufficient rate, the Company's gross margins and operating
results could be negatively impacted in future periods.
Changes in the relative strength of the Yen may have a greater
impact on the Company's gross margin than other foreign exchange
fluctuations due to the Company's large wafer fabrication
operations in Japan. Although the average Yen exchange rate for
the second quarter and first half of 1995 increased approximately
18% and 14% from the same periods in 1994, respectively, the
effect on gross margin and net income was not material as the
Company's Yen denominated sales offset a substantial portion of
its Yen denominated costs during those periods, and the Company
hedged a majority of its remaining Yen exposures (see Note 3 to
the Unaudited Consolidated Condensed Financial Statements).
However, there is no assurance that future changes in the
relative strength of the Yen will not have a material effect on
gross margins or operating results.
Research and development (R&D) expenses increased approximately
$5.5 million and $6.8 million in the second quarter and first
half of 1995, respectively, compared to the same periods in 1994.
The increase in R&D expenses is primarily attributed to increased
staffing levels as the Company continues to invest in the
development of higher technology sub-micron products and the
related manufacturing, packaging and design processes. As a
percentage of revenue, R&D expenses declined to approximately 9%
in the second quarter and first half of 1995 compared to the same
period a year ago primarily due to partial utilization of the
Company's R&D facility to increase production of its 0.5 micron
products. The Company anticipates continuing its investment in
R&D at a rate of 9 to 11% of revenues in future periods.
Selling, general and administrative (SG&A) expenses increased
$9.0 million and $18.9 million in the second quarter and first
half of 1995 compared to the same periods in 1994. The increase
in total SG&A expenses was primarily due to increased staffing
levels, legal costs associated with the Texas Instruments lawsuit
(see Part II, Item 1 of this Form 10-Q), other consulting costs,
and costs in connection with the implementation of a new
advertising campaign. SG&A expenses declined as a percentage of
revenue to 13.1% in the second quarter of 1995 and to 13.5% in
the first half of 1995 compared to 14.7% and 14.9%, respectively,
for the same periods in 1994. The decline in SG&A expenses as a
percentage of revenue was primarily the result of increased
revenues and continued cost containment efforts.
In summary, total operating costs and expenses for the second
quarter and first half of 1995 increased to $68.1 million and
$131.8 million from $53.6 million and $106.2 million,
respectively, for the second quarter and first half of 1994.
Operating income as a percentage of revenues during the second
quarter and first half of 1995 increased to 25.0% and 23.8%
compared to 16.6% and 15.0%, respectively, for the same periods
during 1994.
Interest expense for the second quarter and first half of 1995
decreased approximately $1.5 million and $1.2 million,
respectively, as compared to the same periods in 1994. The
decrease is primarily attributed to conversion of approximately
$97 million of the Company's 6 1/4% Convertible Subordinated
Debentures into common stock during the third quarter of 1994.
Interest income and other for the second quarter and first half
of 1995 increased $3.1 million and $3.8 million, respectively, as
compared to the same periods in 1994. The majority of this
increase is attributable to increased earnings as a result of
higher average cash and investment balances and interest rates in
the second quarter and first half of 1995, offset in part by a
reduction in other income.
The Company recorded a provision for income taxes for the second
quarter and first half of 1995 and 1994 with an effective rate of
28%. The Company's effective tax rate was lower than the U.S.
statutory rate primarily due to the Company's ability to utilize
prior loss carryovers and due to the mix of expected earnings in
its foreign subsidiaries.
Restructuring
The Company implemented a restructuring plan in the third quarter
of 1992 revising its global manufacturing strategy, streamlining
operations, discontinuing certain commodity products and focusing
its product strategy on high-end technology solutions.
Specifically, it involved the shutdown of the Braunschweig,
Germany test and assembly facility, the planned phase-out of the
Milpitas, California wafer fabrication facility, the
consolidation of certain U.S. manufacturing operations, the
downsizing of the chipset operation of its former subsidiary,
Headland Technology Inc., and severance costs for approximately
500 employees worldwide. The $101.8 million restructuring charge
included: the write-down and write-off of manufacturing
facilities, equipment and improvements; the estimated operating
costs attributable to the phase-out, closure and consolidation of
these manufacturing facilities; the write-down of commodity
chipset product inventories; the severance of manufacturing and
other personnel; the consolidation of certain U.S. and foreign
sales offices, design centers and administrative organizations;
and certain legal matters and other costs.
By the end of 1994, the Company had completed the phase-out of
the German test and assembly operation and written off the
facility, discontinued the chipset business, completed partial
phased-down of its Milpitas wafer manufacturing facility and
certain U.S. assembly and test operations, and completed
consolidation of certain U.S. sales offices and design centers.
These actions included termination of approximately 350
employees.
The following table sets forth the remaining 1992 restructuring
reserves at June 30, 1995 and December 31, 1994 (which are
accounted for as components of fixed assets, inventories and
current liabilities) and charges taken during the first half of
1995 (in thousands):
Balance Balance
12/31/94 Utilized* Adjusted 6/30/95
Fixed asset related
charges $11,100 $ (536) $(8,564) $ 2,000
Other provisions
for phase-down
and consolidation
of manufacturing
facilities 3,500 (244) (166) 3,090
Payments to
employees for
severance 1,500 (265) (1,070) 165
Relocation, lease
terminations and
other corporate
matters 9,200 - 9,800 19,000
Total $25,300 $(1,045) $ - $24,255
* Net of cumulative currency translation adjustments. Cash
charges totaled $855,000 during the first half of 1995.
During the first half of 1995, $1,045,000 was charged against the
restructuring reserves. These charges were for the continued
phase-down of its U.S. manufacturing facilities, including the
write-off and disposition of equipment ($536,000), the write-off
of inventory ($267,000) and the severance of employees
($265,000), and ongoing maintenance costs of its vacant German
facility ($239,000), offset in part by an increase in reserves
due to translation adjustments as a result of the strengthening
Deutschemark ($262,000). In response to changing economic
conditions, the Company modified its original restructuring plan
in the second quarter of 1995 and determined it would continue
operation of its Milpitas, California wafer manufacturing
facility. The Company also substantially completed the
phase-down of its U.S. assembly and test operation. These
actions resulted in excess reserves of approximately $12 million
which were used to offset increases in the reserves for legal and
other corporate matters, which include reserves for the jury
verdict against the Company during the second quarter of 1995 in
the Texas Instruments litigation (see Note 11 to the Unaudited
Consolidated Condensed Financial Statements). Remaining reserves
at June 30, 1995 include approximately $2.7 million for remaining
costs related to the phase-down of the California manufacturing
facilities, $2.6 million for continued maintenance of the vacant
Braunschweig facility and $19 million for legal and other
corporate matters. Management believes that the total reserves
established are adequate to cover uncertainties in connection
with these matters.
Financial Condition
The Company's cash, cash equivalents and short-term investments
increased $53.0 million during the first half of 1995 to $481.5
million from $428.5 at the end of 1994. The increase is primarily
due to net proceeds from a stock offering of approximately $157.6
million and cash from operations of $133.5 million, partially
offset by the acquisition of all minority owned stock in the
Company's Japanese manufacturing subsidiary, Nihon Semiconductor,
Inc. (NSI) for $125.9 million and net purchases of fixed assets
of approximately $110.3 million. Working capital increased $64.7
million to $487.6 million at June 30, 1995 from $422.9 million at
December 31, 1994.
During the first half of 1995, the Company generated $133.5
million of cash and equivalents from its operating activities,
compared to $72.4 million during the first half of 1994. The
increased net cash provided from operations as compared to the
comparable 1994 period was primarily attributable to an increase
in net income before depreciation and amortization and an
increase in accrued and other liabilities, offset in part by a
decrease in accounts payable.
Growing sales and increased manufacturing in response to rising
customer demand contributed to increases in accounts receivable,
inventories and accrued liabilities. In addition, the continued
strengthening of the Yen added approximately $8.3 million to
accounts receivable, $7.1 million to inventory and $17.3 million
to accounts payable and accrued liabilities during the first half
of 1995.
Net property and equipment was $653.1 million at June 30, 1995,
an increase of $157.6 million compared to $495.5 million at the
end of 1994. The increase was primarily due to $110.3 million of
fixed asset purchases (primarily equipment for the Company's
Japanese and U.S. manufacturing facilities) net of retirements
and $73.8 million of equipment refinanced through operating
leases by its Japanese manufacturing subsidiary (see
additional discussion at Note 10 of the Unaudited Consolidated
Condensed Financial Statements), $73.5 million associated with
the strengthening of the Yen and a $33.1 million step-up of
property and equipment as a result of the acquisition of the
minority owned stock of NSI, partially offset by $66.8 million of
depreciation. Management expects net capital expenditures to
approximate $200 to $250 million for 1995.
In August 1995, the Company announced that it has selected
Gresham, Oregon as the U.S. site for a new 8-inch wafer
manufacturing facility and began construction. The initial
phase is expected to require capital spending of approximately
$600 to $800 million over the next 24 months and, when fully
ramped, will have the capacity to run approximately 4,000
eight-inch wafers per week. Management estimates that the Company
may spend as much as $4 billion in this site over the next 15
years.
In February 1995, the Company subscribed to purchase shares in
Chartered Semiconductor Manufacturing Pte. Ltd. (CSM) for
approximately $20 million, of which approximately $14 million has
been paid and approximately $6 million will be paid in March
1996. Transfer of the shares is restricted for five years. The
Company also entered into an agreement with CSM which guarantees
specific capacity in connection with 0.6 micron wafer
manufacturing technology. The Company expects to begin receiving
output from this facility in the second half of 1995.
During 1994, the Company entered into a credit agreement with a
group of banks which provide for an unsecured $60 million
revolving credit facility. The agreement includes certain
financial and non-financial covenants, with which the Company was
in compliance at June 30, 1995. The Company has never borrowed
under the credit facility. In addition, the Company's Japanese
manufacturing subsidiary, NSI, entered into a 15 billion Yen
operating lease arrangement during June 1995, of which 6.2
billion Yen ($73.8 million) had been utilized by the end of the
quarter. The Company anticipates using the remaining lease line
throughout 1995 and during the first quarter of 1996. Each of
the Company's significant foreign affiliates have lines of credit
available for local currency borrowings. These foreign bank
lines of credit were not material as of June 30, 1995.
The increase in debt and other long-term liabilities was
primarily attributable to $25.5 million associated with
the strengthening Yen.
In July 1995, the Company completed an offering of 5,750,000
shares of common stock, netting proceeds of approximately $247
million. These shares will have a dilutive effect on earnings
per share in the third quarter of 1995.
The Company believes that its level of financial resources is
an important competitive factor in its industry. Accordingly, the
Company may, from time to time, seek additional equity or debt
financing. The Company believes that existing liquid resources
and funds generated from operations combined with funds from such
financing and its ability to borrow funds will be adequate to
meet its operating and capital requirements and obligations for
the next 12 months. There can be no assurance that such
additional financing will be available when needed or, if
available, will be on favorable terms. Any future equity
financing will decrease existing stockholders' percentage equity
ownership and may, depending on the price at which the equity is
sold, result in dilution.
Part II
Item 1 Legal Proceedings
Reference is made to Item 3, Legal Proceedings, of the
Company's Annual Report on Form 10-K for the fiscal year ended
January 1, 1995 for a discussion of certain pending legal
proceedings. The information provided at such reference remains
unchanged except for the patent infringement suit brought by
Texas Instruments ("TI"). This suit resulted in a May 1995 jury
verdict against the Company holding the patents valid and finding
wilful infringement. Damages against the Company were set by the
jury at $14.6 million, for which the Company has adequate
reserves. Because both of the patents involved in the litigation
have expired, the verdict will have no effect upon the
manufacture or sale of the Company's present or future products.
The Company has filed various post-trial motions which, if
granted, could reduce the jury award or set aside the jury
verdict entirely. TI has requested treble damages, pre-judgement
interest in the amount of $7.5 million from the Company and
attorneys' fees that total $3.8 million from all three
defendants. The Company believes that the jury verdict was in
error and intends to appeal. The Company continues to believe
that the final outcome of this matter will not have a material
adverse effect on the Company's consolidated financial position
or results of operations. No assurance can be given, however,
that this matter will be resolved without the payment of damages
and other costs or that damages will not be increased to an
amount in excess of the Company's reserves, thereby having an
adverse effect on the Company.
Item 4 Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of LSI Logic
Corporation was held on May 12, 1995 in Milpitas, California. Of
the total 60,513,725 shares outstanding as of the record date,
53,390,773 were present or represented by proxies at the meeting.
The table below presents the results of the election of the
Company's board of directors:
Votes Votes
For Withheld
Wilfred J. Corrigan 53,305,626 85,147
Malcom R. Currie 53,304,671 86,102
T. Z. Chu 53,307,551 83,222
James H. Keyes 53,307,452 83,321
R. Douglas Norby 53,306,314 84,459
The stockholders approved an amendment to the Employee
Stock Purchase Plan, which increased the number of shares of
common stock reserved for issuance thereunder by 750,000 shares.
The proposal received 46,762,630 affirmative votes, 1,961,336
negative votes, 86,969 abstentions, and 4,579,838 non-votes.
The stockholders approved an amendment to the 1991 Equity
Incentive Plan, which increased the number of shares of common
stock reserved for issuance thereunder by 3,000,000 shares.
The proposal received 38,955,416 affirmative votes, 9,776,967
negative votes, 78,552 abstentions, and 4,579,838 non-votes.
The stockholders approved an amendment to the 1991 Equity
Incentive Plan which placed limits on the number of stock options
that may be granted to any employee in a particular year to
750,000 shares. The proposal received 51,651,038 affirmative
votes, 1,285,677 negative votes, 72,950 abstentions, and 381,108
non-votes.
The stockholders approved the 1995 Director Option Plan, which
reserved 250,000 shares for issuance thereunder. The proposal
received 36,793,574 affirmative votes, 11,916,721 negative votes,
100,641 abstentions, and 4,579,837 non-votes.
The stockholders approved an amendment to the Restated
Certificate of Incorporation, which increased the number of
common shares authorized for issuance by 176,500,000 shares to a
total of 250,000,000 shares. The proposal received 36,991,619
affirmative votes, 11,361,829 negative votes, 76,379 abstentions,
and 4,960,946 non-votes. The stockholders ratified the
appointment of Price Waterhouse LLP as the Company's independent
accountants for the fiscal year ended December 31, 1995. The
proposal received 53,308,687 affirmative votes, 31,987 negative
votes, 50,099 abstentions, and zero non-votes.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Calculation of Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K filed May 16, 1995 announcing the
declaration of 100% stock dividend in the form of a
two-for-one-stock split.
Report on Form 8-K filed May 4, 1995 giving public notice of
the Company's offer to acquire for cash the approximately
11,000,000 shares of LSI Logic Corporation of Canada, Inc. which
it did not already own.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
LSI LOGIC CORPORATION
(Registrant)
Date: August 16, 1995 By /s/ Albert A. Pimentel
Albert A. Pimentel
Senior Vice President Finance
& Chief Financial Officer
Exhibit 11.1
<TABLE>
<CAPTION>
LSI LOGIC CORPORATION
CALCULATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
Primary Earnings Per Share
<S> <C> <C> <C> <C>
Net income $ 55,745 $ 23,438 $101,005 $42,793
Average common and
common equivalent
shares:
Average common
shares outstanding 121,824 102,985 119,530 100,686
Dilutive options 4,031 3,239 3,783 3,212
125,855 106,224 123,313 103,898
Earnings per common
and common equivalent
share $ 0.44 $ 0.22 $ 0.82 $ 0.41
Fully Diluted Earnings Per share
Net income $ 55,745 $ 23,438 $101,005 $42,793
Interest expense on
convertible
subordinated debt,
net of tax effect 1,542 2,514 3,083 3,843
Adjusted net income $ 57,287 $ 25,952 $104,088 $46,636
Average common and
common equivalent
shares on a fully
diluted basis:
Average common
shares outstanding 121,824 102,985 119,530 100,686
Convertible subordinated
debt 11,735 21,557 11,735 16,668
Dilutive options 4,380 3,560 4,424 3,335
137,939 128,102 135,689 120,689
Fully diluted earnings per
common and common
equivalent share $ 0.42 $ 0.20 $ 0.77 $ 0.39
On May 12, 1995, the Company's Board of Directors approved a
two-for-one stock split in the form of a stock dividend for
stockholders of record on May 23, 1995. The payment date was
on June 21, 1995. Accordingly, share information for all periods
presented has been retroactively adjusted to reflect this stock
dividend.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 278,420
<SECURITIES> 203,078
<RECEIVABLES> 186,100
<ALLOWANCES> (4,674)
<INVENTORY> 130,042
<CURRENT-ASSETS> 854,974
<PP&E> 1,161,909
<DEPRECIATION> (508,827)
<TOTAL-ASSETS> 1,558,806
<CURRENT-LIABILITIES> 367,385
<BONDS> 143,750
<COMMON> 1,222
0
0
<OTHER-SE> 862,185
<TOTAL-LIABILITY-AND-EQUITY> 1,558,806
<SALES> 587,224
<TOTAL-REVENUES> 587,224
<CGS> 315,704
<TOTAL-COSTS> 315,704
<OTHER-EXPENSES> 131,839
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,300
<INCOME-PRETAX> 144,102
<INCOME-TAX> 40,349
<INCOME-CONTINUING> 101,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101,005
<EPS-PRIMARY> .82
<EPS-DILUTED> .77
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