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 October 1, 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 November 3, 1995 there were 129,028,971 shares of
registrant's Common Stock, $.01 par value, outstanding.
LSI LOGIC CORPORATION
Form 10-Q
FOR THE QUARTER ENDED OCTOBER 1, 1995
INDEX
Page No.
PART I Financial Information
Item 1 Financial Statements
Consolidated Condensed Balance Sheets -
September 30, 1995 and December 31, 1994 3
Consolidated Condensed Statements of Operations -
Three-Month and Nine-Month Periods Ended
September 30, 1995 and 1994 4
Consolidated Condensed Statements of Cash Flows -
Nine-Month Periods Ended
September 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 amount)
September 30, December 31,
1995 1994
<S> <C> <C>
ASSETS
(Unaudited)
Cash and cash equivalents $ 320,747 $ 224,503
Short-term investments 350,293 204,008
Accounts receivable, less allowance
for doubtful accounts of
$3,681 and $4,044 203,197 152,244
Inventories 140,958 107,824
Other current assets 74,662 42,275
Total current assets 1,089,857 730,854
Property and equipment, net 590,930 495,549
Other assets 66,837 43,971
Total assets $ 1,747,624 $ 1,270,374
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 155,082 $ 165,612
Accrued salaries, wages
and benefits 32,066 29,251
Accrued restructuring costs 22,465 19,800
Other accrued liabilities 41,137 30,192
Income taxes payable 77,184 38,916
Current portion of long-term
obligations and short-term
borrowings 19,062 24,167
Total current liabilities 346,996 307,938
Long-term obligations 272,270 288,496
Deferred income taxes 6,847 6,861
Minority interest in subsidiaries 7,623 122,173
Commitments and contingencies
Stockholders' equity:
Preferred shares; 2,000 shares
authorized - -
Common stock; $.01 par value;
250,000 shares authorized;
128,876 and 114,287 shares
outstanding 1,289 1,143
Additional paid-in capital 822,760 401,268
Retained earnings 233,617 67,070
Cumulative translation adjustment 56,222 75,425
Total stockholders' equity 1,113,888 544,906
Total liabilities and stockholders'
equity $ 1,747,624 $ 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 Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues $330,832 $240,218 $918,056 $646,137
Costs and expenses:
Cost of revenues 170,801 138,219 486,505 376,943
Research and development 34,263 26,834 86,624 72,442
Selling, general and
administrative 39,325 30,645 118,803 91,204
Total costs and expenses 244,389 195,698 691,932 540,589
Income from operations 86,443 44,520 226,124 105,548
Interest expense (4,379) (4,822) (12,679) (14,275)
Interest income and other 9,269 3,263 21,990 12,186
Income before income
taxes and minority
interest 91,333 42,961 235,435 103,459
Provision for income
taxes 25,574 12,028 65,923 28,966
Income before minority
interest 65,759 30,933 169,512 74,493
Minority interest in net
income of subsidiaries 217 1,465 2,965 2,232
Net income $ 65,542 $ 29,468 $ 166,547 $ 72,261
Net income per share:
Primary $ 0.50 $ 0.26 $ 1.34 $ 0.68
Fully diluted $ 0.47 $ 0.24 $ 1.25 $ 0.63
Common share and common share equivalents
used in computing per share amounts:
Primary 132,123 112,788 124,644 106,992
Fully diluted 144,128 127,876 137,232 123,772
See accompanying notes to unaudited consolidated condensed
financial statements.
</TABLE>
<TABLE>
<CAPTION>
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1995 1994
<S> <C> <C>
Operating activities:
Net income $ 166,547 $ 72,261
Adjustments:
Depreciation and amortization 108,970 78,121
Minority interest in net income
of subsidiaries 2,965 2,232
Change in:
Accounts receivable (51,338) (27,333)
Inventories (30,615) (24,340)
Other assets (33,683) (24,559)
Accounts payable (12,736) 75,482
Accrued and other liabilities 52,230 11,439
Accrued restructuring costs (3,866) (4,472)
Net cash provided by operating activities 198,474 158,831
Investing activities:
Purchases of debt and equity securities,
net of maturities and sales (146,850) (89,806)
Purchase of restricted equity
securities (13,966) -
Change in other short-term investments - (7,989)
Purchases of property and equipment, net
of retirements and refinancings (165,053) (102,553)
Acquisition of stock from minority
interest holders (167,316) (10,710)
Net cash used for investing activities (493,185) (211,058)
Financing activities:
Issuance of Convertible Subordinated
Notes - 143,750
Proceeds from borrowings 52,971 5,061
Repayment of debt obligations (70,045) (17,724)
Issuance of common stock 421,633 15,471
Tax benefit from employee stock plans - 1,400
Net cash provided by financing activities 404,559 147,958
Effect of exchange rate changes on cash and cash
equivalents (13,604) 6,441
Increase in cash and cash equivalents 96,244 102,172
Cash and cash equivalents at beginning
of period 224,503 121,319
Cash and cash equivalents at end
of period $ 320,747 $ 223,491
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
nine month period ended September 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 115 in the
first quarter of 1994 was not material.
Cash equivalents and short-term investments at September 30,
1995, consisted primarily of U.S. and foreign corporate debt
securities, time deposits, auction rate preferred stock,
commercial paper, bank notes, and U.S. and foreign government and
agency securities. Cash equivalents and short-term investments
held at September 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 nine month periods ended
September 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
the estimated fair market value at September 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 September 30, 1995, outstanding forward exchange and
currency swap contracts, settling October 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>
September 30, December 31,
1995 1994
<S> <C> <C>
Buy/(Sell):
Japanese Yen $ 38,821 $(10,351)
Japanese Yen (26,021) -
U.S. Dollar (51,383) (3,200)
U.S. Dollar 26,046 -
Pound Sterling 7,572 9,447
Deutschemark (8,053) (9,312)
Canadian Dollar - 13,836
Singapore Dollar 6,089 -
</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
$5.2 million and $0.7 million, respectively, at September 30,
1995, and were not material at December 31, 1994.
Note 4 - Balance sheet and cash flow information (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
Inventories:
Raw materials $ 32,371 $ 14,275
Work-in-process 64,503 58,303
Finished goods 44,084 35,246
Total $ 140,958 $ 107,824
September 30, September 30,
1995 1994
<S> <C> <C>
Cash Paid for:
Income taxes $ 25,677 $ 13,700
Interest 14,471 15,500
</TABLE>
Note 5 - During the first nine months of 1995, the Company's
Japanese sales affiliate sold approximately $23.8 million of its
accounts receivables through non-recourse financing programs with
two Japanese banks. These receivables were discounted at
short-term Yen borrowing rates (averaging approximately 1.2%) and
related fees were not material.
Note 6 - In August 1995, the Company purchased economic
development revenue bonds with a twenty year term from the State
of Oregon for $200 million. The State of Oregon then loaned the
bond proceeds back to the Company under the same terms as the
bonds. The coterminous agreements are accounted for on a net
basis. The proceeds will be utilized in the construction of the
wafer fabrication facility being constructed for the Company's
use in Gresham, Oregon. The transaction is part of the strategic
investment program contract between Multnomah County, Oregon, the
City of Gresham, Oregon and the Company.
Note 7 - During the first nine months of 1995, $1.2 million 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
($492,000), the write-off of inventory ($267,000) and the
severance of employees ($265,000), the buyout of facility leases
($106,000) and ongoing maintenance costs of its vacant German
facility ($330,000), offset in part by an increase in reserves
due to translation adjustments as a result of the strengthening
Deutschemark ($211,000). 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 12 to the Unaudited
Consolidated Condensed Financial Statements). Remaining reserves
at September 30, 1995 include approximately $2.7 million for
remaining costs related to the phase-down of the California
manufacturing facilities, $2.4 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 September 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 8 - 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 defeased this obligation through
payment of $125.9 million to an unrelated party and pursuant
thereto was 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 July 1995, the Company purchased substantially all shares
(approximately 12.2 million common shares, including outstanding
options) not already owned of its publicly traded Canadian
subsidiary, LSI Logic Corporation of Canada, Inc. (LSI Canada),
for $4.00 Canadian Dollars (CD) per share or $42.7 million CD
(U.S. $31.6 million). The excess of the purchase price over the
fair value of the assets acquired of $15.6 million was allocated
to goodwill and is being amortized over seven years. The Company
funded the total purchase amount under a $50 million CD revolving
credit line. During September 1995, the Company repaid all
borrowings outstanding under the line of credit.
During the first nine months of 1995, the Company acquired
approximately 1.4 million common shares of its Japanese sales
affiliate from its minority interest shareholders for
approximately $9.2 million. The acquisition was accounted for as
a purchase and the excess of the purchase price over the fair
value of the assets acquired ($1.8 million) was allocated to
goodwill and is being amortized over seven years. The Company
owned approximately 89.4% of the Japanese affiliate at September
30, 1995.
Note 9 - 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 10 - 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
6,325,000 (3,162,500 prior to the stock dividend in May 1995)
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
June 21, 1995. Share information for all periods presented has
been retroactively adjusted to reflect this stock dividend.
During July 1995, the Company completed an offering of 5,750,000
shares of common stock, netting proceeds of approximately $247
million.
Note 11 - 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 September 30, 1995, the Company had
utilized 9.9 billion Yen ($114 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 12 - The Company is one of three defendants in a patent
infringement suit brought by Texas Instruments (TI) in the
Federal District Court in Dallas, Texas. In May 1995, this suit
resulted in a 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. The Company
filed certain post trial motions with the trial court, which
included a motion to set aside the jury verdict and for an order
that the Company had not infringed the patents. In addition, TI
filed certain post trial motions, which included a motion that
the jury award of damages be trebled. In July 1995, the district
court judge ruled in the Company's favor, holding that the
Company had not infringed the patents, and set aside the jury
verdict, including the award of damages. TI has filed a notice
of appeal with the United States Court of Appeals for the Federal
Circuit. The Company had adequate reserves for the jury award.
These reserves are being maintained by the Company pending the
final outcome of this matter. Because both of the patents
involved in the litigation have expired, they have no effect upon
the manufacture or sale of the Company's present or future
products. 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 his matter
will be resolved without the payment of damages and other costs,
including an amount greater than the Company's present reserves,
with the potential for 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 September
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 fourth quarter 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 the third quarter and first nine months of 1995
increased 38% and 42% to $330.8 million and $918.1 million,
respectively, as compared to $240.2 million and $646.1 million
for the third quarter and first nine months of 1994,
respectively. The composition of revenues by major element was
as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Component products 96% 90% 96% 88%
Design and services 4% 10% 4% 12%
100% 100% 100% 100%
</TABLE>
Total component revenues grew 44% to $312.6 million and 52% to
$862.9 million in the third quarter and first nine months of
1995, respectively, as compared to $217.5 million and $566.9
million in 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 increased volume relating to the production of 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 revenue
decreased to $18.2 million and $55.2 million in the third quarter
and the first nine months of 1995 compared to $22.7 million and
$79.2 million in the same periods a year ago. The decrease is
primarily attributed to a decline in nonrecurring engineering
(NRE) revenue as the Company's engineering efforts emphasized
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 nine months of 1995.
Key elements of the statements of operations, expressed as a
percentage of revenues, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Gross margin 48.4% 42.5% 47.0% 41.7%
Research and development
expenses 10.4% 11.2% 9.4% 11.2%
Selling, general and
administrative expenses 11.9% 12.8% 12.9% 14.1%
Income from operations 26.1% 18.5% 24.6% 16.3%
Gross margin continued to improve in the third quarter and first
nine months 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 and capacity 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 third quarter and first nine months of 1995 may not be
indicative of expected results for the remainder of the fiscal
year.
Volume production capability is expected to continue to increase
throughout the remainder of 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 third quarter and first nine months of 1995 increased
approximately 5% and 11% 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
$7.4 million and $14.2 million in the third quarter and first
nine months 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 10%
and 9% in the third quarter and first nine months of 1995
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
$8.7 million and $27.6 million in the third quarter and first
nine months 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 12% in the third quarter
of 1995 and to 13% in the first nine months of 1995 compared to
13% and 14%, respectively, for the same periods in 1994. The
decline in SG&A expenses as a percentage of revenue primarily
reflects the trend of more rapidly increasing revenues across
these periods. The Company expects that SG&A expenses will
continue to increase in absolute dollars although such expenses
may fluctuate as a percentage of revenue on a quarterly basis.
In summary, total operating costs and expenses for the third
quarter and first nine months of 1995 increased to $73.6 million
and $205.4 million from $57.5 million and $163.6 million,
respectively, for the third quarter and first nine months of
1994. Operating income as a percentage of revenues during the
third quarter and first nine months of 1995 increased to 26% and
25% compared to 19% and 16%, respectively, for the same periods
during 1994.
Interest expense for the third quarter and first nine months of
1995 decreased approximately $0.4 million and $1.6 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 third quarter and first nine
months of 1995 increased $6.0 million and $9.8 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 third quarter and first nine months of
1995, offset in part by a reduction in other income.
The Company recorded a provision for income taxes for the third
quarter and first nine months of 1995 and 1994 with an effective
rate of 28%. The Company's effective tax rate is 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 September 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 nine months of 1995 (in thousands):
</TABLE>
<TABLE>
<CAPTION>
Balance Balance
12/31/94 Utilized* Adjusted 9/30/95
<S> <C> <C> <C> <C>
Fixed asset related
charges $11,100 $ (492) $(8,669) $ 1,939
Other provisions for
phase-down and
consolidation of
manufacturing
facilities 3,500 (386) (167) 2,947
Payments to employees
for severance 1,500 (265) (1,070) 165
Relocation, lease
terminations and
other corporate
matters 9,200 (106) 9,906 19,000
Total $25,300 $(1,249) $ - $24,051
* Net of cumulative currency translation adjustments. Cash
charges totaled $1,008,000 during the first nine months of 1995.
</TABLE>
During the first nine months of 1995, $1,249,000 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 ($492,000),
the write-off of inventory ($267,000) and the severance of
employees ($265,000), the buyout of facility leases ($106,000)
and ongoing maintenance costs of its vacant German facility
($330,000), offset in part by an increase in reserves due to
translation adjustments as a result of the strengthening
Deutschemark ($210,000). 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 12 to the Unaudited
Consolidated Condensed Financial Statements). Remaining reserves
at September 30, 1995 include approximately $2.7 million for
remaining costs related to the phase-down of the California
manufacturing facilities, $2.4 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 $242.5 million during the first nine months of 1995 to
$671.0 million from $428.5 at the end of 1994. The increase is
primarily due to net proceeds from two stock offerings in
February and July 1995 of approximately $157.6 million and $247.0
million, respectively, and cash from operations of $198.5
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 its
Canadian subsidiary for $31.6 million and net purchases of fixed
assets of approximately $165.1 million. Working capital increased
$320.0 million to $742.9 million at September 30, 1995 from
$422.9 million at December 31, 1994.
During the first nine months of 1995, the Company generated
$198.5 million of cash and equivalents from its operating
activities, compared to $158.8 million during the first nine
months 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 increases in accounts receivable, prepaid and
other assets and inventories and a decrease in accounts payable.
Increased sales and manufacturing activities in response to
rising customer demand contributed to increases in accounts
receivable, inventories and accrued liabilities.
Net property and equipment was $590.9 million at September 30,
1995, an increase of $95.4 million compared to $495.5 million at
the end of 1994. The increase was primarily due to $165.1
million of fixed asset purchases (primarily equipment for the
Company's Japanese and U.S. manufacturing facilities) and
construction costs related to a new wafer fabrication facility in
Oregon (see below) net of retirements and $114 million of
equipment refinanced through operating leases by its Japanese
manufacturing subsidiary (see additional discussion at Note 11 of
the Unaudited Consolidated Condensed Financial Statements) 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 $109.0 million of depreciation. Management expects net
capital expenditures to approximate $200 to $250 million for
1995.
In August 1995, the Company announced that it 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.
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 first quarter of 1996.
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 September 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 9.9
billion Yen ($114 million) had been utilized by the end of the
quarter. The Company anticipates using the remaining lease line
by 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 September 30, 1995.
The decrease in debt and other long-term liabilities was
primarily attributable to repayments of debt and capital
lease obligations.
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
through at least 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. In July 1995 the district court judge granted the
Company's motions, overturned the jury verdict and set aside all
assessed damages. TI has filed an appeal. The Company has
adequate reserves for the damages originally assessed. 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 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 with the potential
for having an adverse effect on the Company.
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
None
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: November 14, 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 Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Primary Earnings
Per Share
Net income $ 65,542 $ 29,468 $166,547 $ 72,261
Average common and
common equivalent
shares:
Average common shares
outstanding 127,648 109,280 120,509 103,598
Dilutive options 4,475 3,508 4,135 3,394
132,123 112,788 124,644 106,992
Earnings per common and
common equivalent
share $ 0.50 $ 0.26 $ 1.34 $ 0.68
Fully Diluted
Earnings Per share
Net income $ 65,542 $ 29,468 $166,547 $ 72,261
Interest expense on
convertible subordinated
debt, net of tax
effect 1,542 1,780 4,625 5,651
Adjusted net income $ 67,084 $ 31,248 $171,172 $ 77,912
Average common and
common equivalent shares
on a fully diluted basis:
Average common shares
outstanding 127,648 112,238 120,509 111,058
Convertible
subordinated debt 11,734 11,734 11,734 8,476
Dilutive options 4,746 3,904 4,989 4,238
144,128 127,876 137,232 123,772
Fully diluted earnings
per common and common
equivalent share $ 0.47 $ 0.24 $ 1.25 $ 0.63
</TABLE>
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> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 320,747
<SECURITIES> 350,293
<RECEIVABLES> 203,197
<ALLOWANCES> (3,681)
<INVENTORY> 203,197
<CURRENT-ASSETS> 1,089,857
<PP&E> 1,075,186
<DEPRECIATION> (484,256)
<TOTAL-ASSETS> 1,747,624
<CURRENT-LIABILITIES> 346,996
<BONDS> 143,750
<COMMON> 1,289
0
0
<OTHER-SE> 1,112,599
<TOTAL-LIABILITY-AND-EQUITY> 1,747,624
<SALES> 918,056
<TOTAL-REVENUES> 918,056
<CGS> 486,505
<TOTAL-COSTS> 486,505
<OTHER-EXPENSES> 205,427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,679
<INCOME-PRETAX> 235,435
<INCOME-TAX> 65,923
<INCOME-CONTINUING> 166,547
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166,547
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.25
</TABLE>
