UNITED STATES
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 September 28, 1997
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. EmployerIdentification 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 1, 1997 there were 141,601,731 shares of registrant's
Common Stock, $.01 par value, outstanding.
LSI LOGIC CORPORATION
Form 10-Q
FOR THE QUARTER ENDED SEPTEMBER 28, 1997
INDEX
Page No.
PART I Financial Information
Item 1 Financial Statements
Consolidated Condensed Balance Sheets - September 30, 1997
and December 31, 1996 3
Consolidated Condensed Statements of Operations -
Three-Month and Nine-Month Periods Ended
September 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows -
Nine-Month Periods Ended September 30, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 10
PART II Other Information
Item 1 Legal Proceedings 14
Item 6 Exhibits and Reports on Form 8-K 14
PART I
Item 1. Financial Statements
<TABLE>
<CAPTION>
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share amount)
(Unaudited)
September 30, December 31,
1997 1996
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 136,813 $147,059 136,813 147,059
Short-term investments 507,732 570,223
Accounts receivable, less allowance for
doubtful 218,075 184,977
accounts of $3,749 and $3,116
Inventories 100,894 90,410
Other current assets 78,094 58,385
Total current assets 1,041,608 1,051,054
Property and equipment, net 1,024,050 811,659
Other assets
118,878 90,001
Total assets $2,184,536 $1,952,714
LIABILITIES AND STOCKHOLDERS= EQUITY
Accounts payable $199,124 $104,109 199,124 104,109
Accrued salaries, wages and benefits 49,341 26,000
Other accrued liabilities 57,986 67,921
Income taxes payable 113,662 77,696
Current portion of long-term obligations and
short-term borrowings 42,105 69,612
Total current liabilities
462,218 345,338
Long-term obligations
125,149 281,136
Deferred income taxes
8,398 4,907
Minority interest in subsidiaries
5,428 5,114
Commitments and contingencies - -
Stockholders's equity:
Preferred shares; 2,000 shares authorized - -
Common stock; $.01 par value; 450,000
shares authorized; 1,417 1,290
141,673 and 129,006 shares outstanding
Additional paid-in capital 992,577 837,151
Retained earnings 580,898 452,374
Cumulative translation adjustment
8,451 25,404
Total stockholders' equity 1,583,343 1,316,219
Total liabilities and stockholders' $2,184,536 $1,952,714
equity
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,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues $326,847 $300,195 $967,239 $936,906
Costs and expenses:
Cost of revenues 163,729 175,074 496,848 528,377
Research and development 57,746 48,472 166,198 134,276
Sales, general and 49,036 40,827 143,368 124,022
administrative
Acquired in-process research 2,850 - 2,850 -
and development
Total costs and expenses
273,361 264,373 809,264 786,675
Income from operations 53,486 35,822 157,975 150,231
Interest expense - (3,647) (1,497) (10,241)
Interest income and other 8,139 6,379 22,219 22,002
Income before income taxes 61,625 38,554 178,697 161,992
Provision for income taxes 17,307 10,811 50,173 45,469
Net income $44,318 $27,743 $128,524 $116,523
Net income per share:
Primary $0.31 $0.21 $0.91 $0.89
Fully diluted $0.31 $0.21 $0.90 $0.85
Common share and common share
equivalents used in computing
per share amounts:
Primary 144,432 130,224 140,883 131,523
Fully diluted 144,506 142,100 144,543 143,259
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,
1997 1996
<S> <C> <C>
Operating activities:
Net income $128,524 $116,523
Adjustments:
Depreciation and amortization 122,240 110,251
Minority interest in net income of 566 398
subsidiaries
Write-off of acquired in-process research 2,850 -
and development
Changes in:
Accounts receivable (36,241) (9,923)
Inventories (12,339) 27,725
Other assets (37,098) 8,539
Accounts payable 96,536 (15,449)
Accrued and other liabilities 54,996 54,473
Net cash provided by operating activities 320,034 292,537
Investing activities:
Purchases of debt and equity securities (933,252) (935,681)
Maturities and sales of debt and equity 996,775 960,045
securities
Purchase of restricted equity securities (6,681) (6,252)
Purchases of property and equipment, net
of retirements and refinancings (348,321) (296,608)
Acquisition of Mint Technology, net of (6,863) -
cash acquired
Acquisition of stock from minority
interest holders - (688)
Net cash used for investing activities (298,342) (279,184)
Financing activities:
Proceeds from borrowings 34,193 133,921
Repayment of debt obligations (67,260) (51,125)
Issuance of common stock 15,254 10,886
Repurchase of common stock (12,693) (46,838)
Net cash used for financing activities (30,506) 46,844
Effect of exchange rate changes on cash and
cash equivalents (1,432) (5,332)
Decrease in cash and cash equivalents (10,246) 54,865
Cash and cash equivalents at beginning of
period 147,059 172,780
Cash and cash equivalents at end of period $136,813 $227,645
See accompanying notes to unaudited consolidated condensed financial state
ments.
</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 December 31, 1996.
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 quarter ended September 30, 1997 are not
necessarily indicative of the results to be expected for the
full year. On October 27, 1997, the Company changed the
accounting period from a 52-53 week year to a year ending
December 31. This change will be reflected for the period
ending December 31, 1997.
One customer represented 23% and 22% of the Company's
consolidated revenue during the third quarter and first nine
months of 1997.
Note 2 - Cash
equivalents and short-term investments at September 30, 1997,
consisted primarily of U.S. and foreign corporate debt
securities, commercial paper, auction rate preferred stock,
U.S. and foreign government and agency securities and time
deposits. Cash equivalents and short-term investments held
at September 30, 1997 and at December 31, 1996 approximate
fair market value and it is the Company=s intention to hold
these investments for one year or less. As of September 30,
1997, contractual maturities of available-for-sale securities
were $521 million maturing within one year and $45 million
maturing between one to six years. 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 quarters ended September 30, 1997 and
1996.
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 foreign currency exchange rates and
interest rates. The Company utilizes various hedge
instruments, primarily forward exchange, currency swap,
interest rate swap and currency option contracts, to manage
its exposure associated with firm intercompany and third-
party transactions and net asset and liability positions
denominated in non-functional currencies. The Company does
not hold derivative financial instruments for trading
purposes.
As of September 30, 1997, the Company had several interest
rate swap contracts outstanding which convert the interest
associated with 17.0 billion yen ($141 million) of borrowings
by the Company=s Japanese manufacturing subsidiary from
adjustable to fixed rates (ranging from 2.62% to 2.86%). The
interest rate swaps cover payments to be made under term
borrowings through 2001. Current period gains and losses
associated with the interest rate swaps are included in
interest expense, or as other gains and losses at such time
as related borrowings are terminated.
The Company hedges its foreign exchange exposures using
forward exchange and currency option contracts. The
contracts hedging third quarter net asset and liability
positions denominated in non-functional currencies expired on
the last day of the third quarter. Premiums associated with
option contracts are amortized over the life of the
contracts.
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. Foreign currency
amounts are translated at rates current at the reporting
date.
<TABLE>
<CAPTION>
September 30, December 31,
Buy/(Sell): 1997 1996
<S> <C> <C>
Japanese Yen $ - $ 7,337
U.S. Dollar - (7,398)
</TABLE>
Currency swap contracts outstanding 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 gains and losses were
not material at September 30, 1997 and December 31, 1996.
Note 4 - Balance sheet and cash flow information (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
Inventories:
Raw materials $ 20,794 $ 19,540
Work-in-process 60,044 53,785
Finished Goods 20,056 17,085
Total $ 100,894 $ 90,410
<S> <C> <C>
September 30, September 30,
1997 1996
Cash Paid for:
Income taxes $ 15,133 $ 28,600
Interest 7,971 14,300
</TABLE>
During the nine-month period ended September 30, 1997, the
Company capitalized $22.7 million related to the
preproduction engineering costs for its Gresham, Oregon
manufacturing facility. Additionally, during the nine-month
period ended September 30, 1997, the Company capitalized
$14.3 million for development and implementation of software
for internal use which are included in other noncurrent
assets.
Note 5 - Statement of Financial Accounting Standards No. 128 (FAS
128), "Earnings Per Share (EPS)", was issued in February
1997. Under FAS 128, the Company is required to disclose
basic EPS and diluted EPS for all periods for which an income
statement is presented. This will replace the disclosure
currently being made for primary EPS and fully-diluted EPS.
FAS 128 requires adoption for fiscal periods ending after
December 15, 1997. Pro forma disclosure of basic EPS and
diluted EPS for the current reporting and comparable period
in the prior year is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
<S> <C> <C> <C> <C>
Earnings Per Share 1997 1996 1997 1996
Basic $0.31 $ 0.22 $0.93 $ 0.90
Diluted $0.31 $ 0.21 $0.90 $ 0.85
</TABLE>
In June, 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130
(FAS 130), "Reporting Comprehensive Income", and Statement of
Financial Accounting Standards No. 131 (FAS 131),
"Disclosures about Segments of an Enterprise and Related
Information". The adoption of both standards is required for
fiscal years beginning after December 15, 1997. Under FAS
130, the Company is required to report comprehensive income
in the financial statements, in addition to net income,
including foreign currency items, minimum pension liability
adjustments, and unrealized gains and losses on certain
investments in debt and equity securities, as applicable.
The Company expects that the effect of adoption of FAS 130 on
the financial statements will be primarily from foreign
currency translation adjustments. FAS 131 requires that the
Company report separately, in the financial statements,
certain financial and descriptive information about operating
segments. This includes a measure of segment profit or loss,
certain specific revenue and expense items, and segment
assets. Additionally, the Company is required to report
information about the revenues derived from its products and
services groups, about geographic areas in which the Company
earns revenues and holds assets, and about major customers.
The adoption of FAS 131 will not have an impact on the
Companyss financial statements.
Note 6 - During the first nine months of 1997, the Company's
Japanese sales affiliate sold approximately $136.2 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 0.3%) and related fees were not material.
Note 7 - A discussion of certain
pending legal proceedings is included in Item 3 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (1996 10-K). As indicated therein,
Texas Instruments (TI) filed an appeal in the United States
Court of Appeals for the Federal Circuit (CAFC) challenging
the United States District Court that the Company's
encapsulation process did not infringe the TI patents. In
July, 1996, the CAFC issued its decision affirming the U.S.
District Court's holding in favor of the Company. In
September, 1996, the CAFC denied TI's motion for
reconsideration en banc. In December, 1996, TI petitioned the
U.S. Supreme Court for a writ of certiorari, seeking further
review of the case. The petition was denied in May, 1997.
The information provided in the Company's 1996 10-K regarding
other matters remains unchanged. The Company continues to
believe that the final outcome of such matters discussed 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 these matters will be
resolved without the Company becoming obligated to make
payments or to pay other costs to the opposing parties, with
the potential for having an adverse effect on the Company's
financial position or its results of operations.
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.
Note 8 - In July 1997, the Company acquired all issued and
outstanding shares of common stock of Mint Technology, Inc.
(Mint). Mint provides engineering services on a contract
basis to help customers ensure timely and cost-effective
completion of their design programs. Mint's consulting
services specialize in the architectural specification,
implementation and test of complex application specific
integrated circuits and field programmable gate arrays based
system designs. The acquisition was accounted for as a
purchase. The acquisition price consisted of $9.5 million in
cash and options to purchase approximately 700,000 shares of
common stock with an intrinsic value of $11.3 million. The
intrinsic value of the stock will be expensed over the
vesting period of the options. Approximately $2.9 million of
the purchase price was allocated to in-process research and
development and was expensed in the third quarter. Total
goodwill recorded as part of the acquisition was $5.7 million
and will be amortized over four years. Pro forma results of
operations have not been presented as the amounts would not
significantly differ from the Company's historical results.
Note 9 - On July 28, 1997, the Company announced that the
Company's Board of Directors approved an action which
authorizes management to acquire up to 5 million shares of
its common stock in the open market from time to time at
current market prices. During the third quarter of 1997, the
Company repurchased 400,000 shares of its common stock from
the open market for approximately $12.7 million. The
transactions were recorded as a reduction to additional paid-
in capital.
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, the availability and extent of utilization of manufacturing
capacity, fluctuations in manufacturing yields, price erosion,
competitive factors, the timing of new product introductions, changes
in product mix, 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 predominantly 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 economic conditions of the respective countries in which the
Company operates. The Company utilizes various instruments,
primarily forward exchange, currency swap and currency option
contracts, to manage exposure associated with firm intercompany and
third party transactions and net asset and liability positions
denominated in non-functional currencies. At September 28, 1997, the
Company had no currency forward exchange and currency option
contracts outstanding (see Note 3 to the Unaudited Consolidated
Condensed Financial Statements). Despite its hedging activities, the
Company continues to be exposed to the risks associated with
fluctuation of foreign currency exchange rates, particularly the
Japanese yen. There can be no assurance that such fluctuation will
not cause a material adverse effect on the Company's financial
position or results of operations.
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 1996 Annual Report on Form 10-K for the year ended December
31, 1996.
Statements in this discussion and analysis contain forward looking
information and involve known and unknown risks and uncertainties,
which may cause the Company's actual results in future periods to be
materially different from any future performance suggested herein. In
addition to the factors discussed above, such factors may include,
but may not necessarily be limited to fluctuations in customer
demand, both in timing and volumes, and fluctuations in currency
exchange rates. Also, the Company's ability to have available an
appropriate amount of production capacity in a timely manner can
significantly impact the Company=s financial performance. The timing
of new technology and product introductions and the risk of early
obsolescence are also important factors. Further, the Company
operates in an industry sector where securities values are highly
volatile and may be influenced by economic and other factors beyond
the Company's control. (See additional discussion contained in "Risk
Factors", set forth in Part 1 of the Company's report on Form 10-K
for the year ended December 31, 1996.)
Results of Operations
Revenues for the third quarter and first nine months of 1997
increased 8.9% and 3.2% to $326.8 million and $967.2 million,
respectively, as compared to the same periods in 1996. The increase
in revenues was primarily due to increased demand for the Company's
products for consumer applications, partially offset by lower average
selling prices when expressed in dollars. One customer represented
23% and 22% of the Company's consolidated revenues during the third
quarter and first nine months of 1997.
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,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Gross margin 49.9% 41.7% 48.6% 43.6%
Research and development expenses 17.7% 16.1% 17.2% 14.3%
Selling, general and 15.0% 13.6% 14.8% 13.2%
administrative expenses
Income from operations 16.4% 11.9% 16.3% 16.0%
Gross margin increased to 49.9% and 48.6% during the third quarter
and first nine months of 1997, respectively, from 41.7% and 43.6% in
the same periods a year ago. The increase was primarily related to
increased manufacturing yields, largely attributable to the
installation of chemical mechanical polishing equipment by the
Company during the fourth quarter of 1996 and improvement in capacity
utilization. Although the average yen exchange rate for the first
nine months of 1997 weakened by approximately 11% from the same
period in 1996, the effect on gross margin and net income was not
material due to the Company's yen denominated sales offsetting a
substantial portion of its yen denominated costs and the Company's
hedging a portion of its remaining yen exposures during these
periods. However, there can be no assurance that future changes in
the relative strength of the yen or mix of foreign denominated
revenues, as well as expenses, will not have a material effect on
gross margin or operating results.
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. Gross margin for the
first three quarters of 1997 may not be indicative of expected
results for the remainder of the fiscal year.
The Company is currently constructing a new manufacturing facility
in Gresham, Oregon. This new facility is expected to become
operational during the third quarter of 1998 to accommodate
anticipated future capacity requirements. If demand does not absorb
the Company's available capacity at a sufficient rate, or if
achieved, such demand is not sustained, the Company's gross margin
and operating results could be negatively impacted in future periods.
Research and development (R&D) expenses increased $9.3 million and
$31.9 million, respectively, in the third quarter and first nine
months of 1997 compared to the same periods in 1996. The increase in
R&D expenses is primarily attributed to increased compensation and
staffing levels and expansions of the Company's product development
centers as the Company continues to develop higher technology sub-
micron products and the related manufacturing processes, packaging
and design processes. As a percentage of revenue, R&D expenses
increased to 17.7% and 17.2%, respectively, in the third quarter and
first nine months of 1997 compared to 16.1% and 14.3% during the same
periods a year ago. As the Company continues its commitment to
technological leadership in the high performance semiconductor
market, it anticipates to continue with an investment rate in R&D of
approximately 17% to 19% of revenues through the fourth quarter of
1997.
Selling, general and administrative (SG&A) expenses increased $8.2
million and $19.3 million, respectively, in the third quarter and
first nine months of 1997 compared to the same periods in 1996. SG&A
expenses increased as a percentage of revenues to 15.0% and 14.8%,
respectively, in the third quarter and first nine months of 1997
compared to 13.6% and 13.2% for the same periods in 1996. The
increase in total SG&A expenses was primarily due to increased
compensation levels and information technology costs relating to
upgrading the Company's business systems and infrastructure. 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.
Interest expense for the third quarter and first nine months of 1997
decreased $3.6 million and $8.7 million, respectively, as compared to
the same periods in 1996. The decrease is primarily attributable to
the conversion of all of the Company's $144 million, 5 1/2%
Convertible Subordinated Notes to common stock on March 24, 1997 and
the capitalization of interest as part of the construction at the
new manufacturing facility in Gresham, Oregon.
Interest income and other increased $1.8 million during the third
quarter of 1997 as compared to the third quarter of 1996. The
increase is primarily related to foreign exchange gains and proceeds
from an insurance settlement offset in part by losses on fixed asset
disposals during the period. Interest income and other decreased
$0.2 million during the first nine months of 1997 as compared to the
same period in 1996. The decrease is primarily attributable to fixed
asset disposals.
The Company recorded a provision for income taxes for the first nine
months of 1997 and 1996 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 expected earnings mix in its foreign
subsidiaries which are taxed at lower rates and anticipated
utilization of available tax credits.
Financial Condition and Liquidity
The Company's cash, cash equivalents and short-term investments
decreased $72.8 million during the first nine months of 1997 to
$644.5 million from $717.3 million at the end of 1996. The decrease
is primarily due to purchases of property and equipment and repayment
of debt obligations, net of borrowings, offset in part by an increase
in cash from operations and repurchases of common stock which were
lower than repurchases in 1996. Working capital decreased $126.3
million to $579.4 million at September 30, 1997 from $705.7 million
at December 31, 1996. The decrease is primarily attributable to an
increase in current liabilities during the first nine months of 1997.
During the first nine months of 1997, the Company generated $320.0
million of cash and cash equivalents from its operating activities
compared with $292.5 million during the first nine months of 1996.
Cash and cash equivalents used for investing activities during the
first nine months of 1997 were $298.3 million compared to $279.2
million during the same period in 1996. The increase was primarily
attributable to $51.7 million of property and equipment purchases,
net of retirements and refinancings during the period and the
acquisition of Mint Technology, net of cash acquired, for $6.9
million offset in part by $39.2 million increase in the net activity
of short-term investments in the first nine months of 1997. Cash and
cash equivalents used for financing activities during the first nine
months of 1997 were $30.5 million compared to $46.8 million provided
in the first nine months of 1996. The decrease is primarily
attributed to $115.9 million repayment of debt obligations net of
borrowings in the first nine months of 1997 and the Company=s
repurchase of 400,000 shares of its common stock for $12.7 million
during the third quarter. This compares to proceeds of $82.8 million
from net borrowing in the first nine months of 1996 which was
partially offset by the Company's repurchase of two million shares of
common stock for $46.8 million.
Net property and equipment was $1.02 billion at September 30, 1997,
an increase of $212.3 million compared to $811.7 million at the end
of 1996. The increase was primarily due to a $321.7 million increase
in fixed assets, (primarily equipment purchases related to a new
facility in Gresham, Oregon) net of retirements. The increase was
partially offset by $88.5 million of depreciation and $20.8 million
due to the effect of translation. Management expects net capital
additions (excluding operating leases) to approximate $500 million
for 1997.
In December 1996, the Company entered into a credit arrangement with
several banks for a $300 million revolving line of credit expiring in
December 1999. The agreement allows for borrowings at an adjustable
interest rate. Interest payments are due quarterly. The agreement
includes financial covenants relating to senior debt ratio, quick
ratio, debt service ratio, subordinated debt and tangible net worth.
At September 30, 1997, the Company did not have any borrowings
outstanding under this credit agreement. In addition, the Company's
Japanese manufacturing subsidiary has a 25 billion yen credit line
arrangement with adjustable interest rates and covenants relating to
profitability, tangible net worth, working capital, senior and total
debt leverage and subordinated indebtedness. Borrowings under the
line of credit are for a term of five years with principle payments
due semiannually beginning in July 1997. All borrowings under this
credit line have been converted to fixed rates through the use of
interest rate swaps (see Note 3 of Notes to Unaudited Consolidated
Condensed Financial Statements). As of September 30, 1997, the
Company had 17.0 billion yen ($141 million) outstanding under the
facility and the Company was in compliance with the covenants. 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, 1997.
In February 1997, the Company called its $144 million of 52%
Convertible Subordinated Notes (Convertible Notes). The holders of
the Convertible Notes elected to convert the Convertible Notes to
common stock at a conversion price of $12.25 per share. The
conversion resulted in the issuance of 11.7 million shares of common
stock.
The Company believes that existing liquid resources and funds
generated from operations combined with its ability to borrow funds
will be adequate to meet its operating and capital requirements and
obligations through the foreseeable future. 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. However, 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 December 31, 1996 for a discussion of certain
pending legal proceedings. As indicated therein, Texas
Instruments (TI) filed an appeal in the United States
Court of Appeals for the Federal Circuit (CAFC)
challenging the United States District Court that the
Company's encapsulation process did not infringe the TI
patents. In July, 1996, the CAFC issued its decision
affirming the U.S. District Court's holding in favor of
the Company. In September, 1996, the CAFC denied TI's
motion for reconsideration en banc. In December, 1996, TI
petitioned the U.S. Supreme Court for a writ of
certiorari, seeking further review of the case. The
petition was denied in May, 1997.
The information provided at such reference regarding
other matters remains unchanged. The
Company continues to believe that the final outcome of
such matters 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
these matters will be resolved without the Company
becoming obligated to make payments or to pay other costs
to the opposing parties, with the potential for having an
adverse effect on the Company's financial position or its
results of operations.
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
Registrant reported the change in its fiscal year on a
current report on Form 8-K filed concurrently with the
from 10Q.
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 10, 1997 By /s/ R. Douglas Norby
R. Douglas Norby
Executive Vice President Finance &
Chief Financial Officer
</TABLE>
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,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Primary Earnings Per Share
Net income $ 44,318 $27,743 $128,524 $116,523
Average common and common
equivalent shares:
Average common shares outstanding 141,826 128,524 137,873 129,176
Dilutive options 2,606 1,700 3,010 2,347
144,432 130,224 140,883 131,523
Earnings per common and common
equivalent share $0.31 $0.21 $0.91 $0.89
Fully Diluted Earnings Per Share
Net income $ 44,318 $ 27,743 $128,524 $116,523
Interest expense on convertible
subordinated debt, net of tax effect - 1,542 1,279 4,625
Adjusted net income $ 44,318 $29,285 $129,803 $121,148
Average common and common
equivalent shares on a fully
diluted basis:
Average common shares outstanding 141,826 128,524 141,526 129,176
Convertible subordinated debt - 11,735 - 11,735
Dilutive options 2,680 1,841 3,017 2,348
144,506 142,100 144,543 143,259
Fully diluted earnings per common
and common equivalent share $0.31 $0.21 $0.90 $0.85
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 136,813
<SECURITIES> 507,732
<RECEIVABLES> 221,824
<ALLOWANCES> 3,749
<INVENTORY> 100,894
<CURRENT-ASSETS> 1,041,608
<PP&E> 1,634,099
<DEPRECIATION> 610,049
<TOTAL-ASSETS> 2,184,536
<CURRENT-LIABILITIES> 462,218
<BONDS> 0
<COMMON> 1,417
0
0
<OTHER-SE> 1,581,926
<TOTAL-LIABILITY-AND-EQUITY> 2,184,536
<SALES> 967,239
<TOTAL-REVENUES> 967,239
<CGS> 496,848
<TOTAL-COSTS> 496,848
<OTHER-EXPENSES> 312,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 178,697
<INCOME-TAX> 50,173
<INCOME-CONTINUING> 128,524
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128,524
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.90
</TABLE>
