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 June 29, 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. 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 1, 1997 there were 141,939,241 shares of registrant's
Common Stock, $.01 par value, outstanding.
LSI LOGIC CORPORATION
Form 10-Q
FOR THE QUARTER ENDED JUNE 29, 1997
INDEX
Page
No.
PART I Financial Information
Item 1 Financial Statements
Consolidated Condensed Balance Sheets - June 30, 1997
and December 31, 1996 3
Consolidated Condensed Statements of Operations -
Three-Month and Six-Month Periods Ended
June 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows -
Six-Month Periods Ended June 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 4 Submission of Matters to a Vote of Security Holders 14
Item 6 Exhibits and Reports on Form 8-K 15
PART I
Item 1. Financial Statements
<TABLE>
<CAPTION>
LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share amount)
(Unaudited)
June 30, December 31,
1997 1996
<S> <C> <C>
ASSETS
Cash and cash equivalents $177,035 $147,059
Short-term investments 558,946 570,223
Accounts receivable, less allowance for
doubtful 207,237 184,977
accounts of $3,154 and $3,116
Inventories 94,106 90,410
Other current assets 71,071 58,385
Total current assets 1,108,395 1,051,054
Property and equipment, net 921,463 811,659
Other assets 103,173 90,001
Total assets $2,133,031 $1,952,714
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 195,338 $ 104,109
Accrued salaries, wages and benefits 44,669 26,000
Other accrued liabilities 49,430 67,921
Income taxes payable 100,276 77,696
Current portion of long-term obligations and
short-term borrowings 50,380 69,612
Total current liabilities 440,093 345,338
Long-term obligations 124,451 281,136
Deferred income taxes 8,479 4,907
Minority interest in subsidiaries 5,491 5,114
Commitments and contingencies - -
Stockholders' equity:
Preferred shares; 2,000 shares authorized - -
Common stock; $.01 par value; 450,000
shares authorized; 141,913 and 129,006
shares outstanding 1,419 1,290
Additional paid-in capital 992,251 837,151
Retained earnings 536,580 452,374
Cumulative translation adjustment 24,267 25,404
Total stockholders' equity 1,554,571 1,316,219
Total liabilities and stockholders' $2,133,031 $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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues $332,004 $325,359 $640,392 $636,711
Costs and expenses:
Cost of revenues 168,999 176,454 333,119 353,303
Research and development 58,068 44,859 108,452 85,804
Sales, general and
administrative 49,274 42,010 94,33 83,195
Total costs and expenses
276,341 263,323 535,903 522,302
Income from operations 55,663 62,036 104,489 114,409
Interest expense - (3,386) (1,497) (6,594)
Interest income and other 7,993 5,996 14,080 15,623
Income before income taxes 63,656 64,646 117,072 123,438
Provision for income taxes 17,857 18,150 32,866 34,658
Net income $ 45,799 $ 46,496 $ 84,206 $ 88,780
Net income per share:
Primary $ 0.32 $ 0.35 $ 0.61 $ 0.67
Fully diluted $ 0.32 $ 0.34 $ 0.60 $ 0.64
Common share and common share
equivalents used in computing
per share amounts:
Primary 144,995 131,624 138,979 131,747
Fully diluted 144,998 143,359 144,468 143,486
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,
1997 1996
<S> <C> <C>
Operating activities:
Net income $ 84,206 $ 88,780
Adjustments:
Depreciation and amortization 79,558 71,552
Minority interest in net income of 380 318
subsidiaries
Changes in:
Accounts receivable (21,232) (13,881)
Inventories (3,168) 13,774
Other assets (24,612) 2,278
Accounts payable 90,953 (4,969)
Accrued and other liabilities 32,893 27,680
Accrued restructuring costs - (1,882)
Net cash provided by operating activities 238,978 183,650
Investing activities:
Purchases of debt and equity securities (692,099) (611,596)
Maturities and sales of debt and equity 703,526 630,473
securities
Purchase of restricted equity securities (6,681) (6,252)
Purchases of property and equipment, net
of retirements and refinancings (194,440) (190,158)
Acquisition of stock from minority
interest holders - (664)
Net cash used for investing activities (189,694) (178,197)
Financing activities:
Proceeds from borrowings 34,193 117,592
Repayment of debt obligations (66,509) (49,919)
Issuance of common stock 13,520 9,684
Repurchase of common stock - (27,241)
Net cash provided by financing activities (18,796) 50,116
Effect of exchange rate changes on cash and
cash equivalents (512) (5,561)
Increase in cash and cash equivalents 29,976 50,008
Cash and cash equivalents at beginning of
period 147,059 172,780
Cash and cash equivalents at end of period $ 177,035 $ 222,788
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 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 June 30, 1997 are not
necessarily indicative of the results to be expected for the
full year.
One customer represented 23 % and 21% of the Company's
consolidated revenue during the second quarter and first
half of 1997.
Note 2 - Cash equivalents and short-term investments at June 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 June 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 June 30, 1997,
contractual maturities of available-for-sale securities were
$532 million maturing within one year and $27 million
maturing between one to five 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 June 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 inter-
company 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 June 30, 1997, the Company had several interest rate
swap contracts outstanding which convert the interest
associated with 16.97 billion yen ($148 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 related borrowings are terminated.
Additionally, as of June 30, 1997, a currency forward
exchange contract, settling in July 1997 and a currency
option contract to buy 12 million pound sterling expiring in
September 1997, were outstanding. Both contracts were held
to hedge the company's exposure associated with net asset
and liability positions denominated in non-functional
currencies. 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>
June 30, December 31,
Buy/(Sell): 1997 1996
<S> <C> <C>
Japanese Yen $ 24,260 $ 7,337
U.S. Dollar 23,950 (7,398)
</TABLE>
The currency swap contracts outstanding as of December 31,
1996 and June 30, 1997 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 not material at June
30, 1997 and December 31, 1996.
Note 4 - Balance sheet and cash flow information (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
Inventories:
Raw materials $ 21,380 $ 19,540
Work-in-process 53,269 53,785
Finished Goods 19,457 17,085
Total $ 94,106 $ 90,410
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, June 30,
1997 1996
Cash Paid for:
Income taxes $ 13,200 $ 11,700
Interest 6,700 7,900
</TABLE>
During the six month period ended June 30, 1997, the Company
capitalized $10.8 million related to the preproduction
engineering costs for its Gresham, Oregon manufacturing
facility. Additionally, during the six-month period ended
June 30, 1997, the Company capitalized $12.1 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 Six months ended
June 30, June 30,
<S> <C> <C>
Earnings Per Share 1997 1996 1996 1997
Basic $0.32 $ 0.36 $ 0.65 $ 0.69
Diluted $0.32 $ 0.34 $ 0.60 $ 0.64
</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 the both statements are
required for fiscal years beginning after December 15, 1997.
Under FAS 130, the Company is required to report in the
financial statements, in addition to net income,
comprehensive income including, as applicable, foreign
currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain investments in debt
and equity securities. 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 any impact on the Company's financial
statements.
Note 6 - During the first half of 1997, the Company's Japanese
sales affiliate sold approximately $75.7 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
0.4%) 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 - After the end of the second quarter, on July 22, 1997,
the Company acquired all issued and outstanding
shares of common stock of Mint Technology, Inc. (Mint).
Mint provides engineering consulting 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 will be accounted for as a
purchase. The acquisition price consists of $9.5 million in
cash and options to purchase approximately 700,000 shares of
common stock with intrinsic value of $12.7 million. The
intrinsic value will be included in goodwill or charged to
expense over the vesting period of the options.
Approximately $2.9 million of the purchase price will be
allocated to in-process research and development and charged
to the Company's operations during the third quarter. Total
goodwill recorded as part of the acquisition is $5.6 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 heCompany'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.
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
June, 1997, the Company had 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 second quarter and first half of 1997 increased
2.0% and 0.6% to $332.0 million and $640.4 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 product applications, partially offset by lower average
selling prices when expressed in dollars. One customer represented
23% and 21% of the Company's consolidated revenues during the second
quarter and first half of 1997.
Key elements of the statements of operations, expressed as a
percentage of revenues, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Gross margin 49.1% 45.8% 48.0% 44.5%
Research and development expenses 17.5% 13.8% 16.9% 13.5%
Selling, general and 14.8% 12.9% 14.7% 13.1%
administrative expenses
Income from operations 16.8% 19.1% 16.3% 18.0%
</TABLE>
Gross margin increased to 49.1% and 48.0% during the second quarter
and first half of 1997, respectively, from 45.8% and 44.5% 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 half of 1997 weakened by approximately 10% 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 two 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 first half 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 $13.2 million and
$22.6 million, respectively, in the second quarter and first half 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 design 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 17.5% and 16.9%, respectively, in the second quarter and first
half of 1997 compared to 13.8% and 13.5% 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 16% to 18% of revenues throughout the remainder of
1997.
Selling, general and administrative (SG&A) expenses increased $7.3
million and $11.1 million, respectively, in the second quarter and
first half of 1997 compared to the same periods in 1996. SG&A
expenses increased as a percentage of revenues to 14.8% and 14.7%,
respectively, in the second quarter and first half of 1997 compared
to 12.9% and 13.1% 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 second quarter and first half of 1997
decreased $3.4 million and $5.1 million, respectively, as compared
to the same periods in 1996. The decrease is primarily attributed
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
interest capitalized as part of the construction at the new
manufacturing facility in Gresham, Oregon.
Interest income and other increased $2.0 million during the second
quarter of 1997 as compared to the second quarter of 1996. The
increase is primarily related to higher interest income resulting
from higher average cash balances and foreign exchange gains during
the second quarter of 1997. Interest income and other decreased
$1.5 million during the first half 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 half
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
increased $18.7 million during the first half of 1997 to $736.0
million from $717.3 million at the end of 1996. The increase is
primarily due to cash provided from operations and the fact that the
Company did not repurchase its common stock as it did in 1996,
offset partially by net fixed asset purchases and net repayment of
debt obligations during the first half of 1997. Working capital
decreased $37.4 million to $668.3 million at June 30, 1997 from
$705.7 million at December 31, 1996.
During the first half of 1997, the Company generated $239.0 million
of cash and cash equivalents from its operating activities compared
with $183.7 million during the first half of 1996. Cash and cash
equivalents used for investing activities during the first half of
1997 were $189.7 million compared to $178.2 million during the same
period in 1996. The increase was primarily attributable to $7.5
million increase in the net activity of short-term investments in
the first half of 1997, and $4.3 million increase in the net
purchasing activity of property and equipment during the period.
Cash and cash equivalents used by financing activities during the
first half of 1997 were $18.8 million compared to $50.1 million
provided in the first half of 1996. The decrease is primarily
attributed to $32.3 million repayment of debt obligations net of
borrowings in the first half of 1997 compared to proceeds of $67.7
million from net borrowing in the first half of 1996 which was
partially offset by the Company's repurchase of one million shares
of common stock for $27.2 million.
Net property and equipment was $921.5 million at June 30, 1997, an
increase of $109.8 million compared to $811.7 million at the end of
1996. The increase was primarily due to a $194.4 million net
increase in fixed assets, (primarily construction costs related to a
new wafer fabrication facility in Gresham, Oregon) net of
retirements. The increase was partially offset by $70.0 million of
depreciation and $15.1 million due to the effect of translation and
assets transferred to operating leases. 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 June 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 June
30, 1997, the Company had 16.97 billion yen ($148 million)
outstanding under the facility and the Company was in compliance
with the covenants. Each of the Company's significant foreign
affiliates has lines of credit available for local currency
borrowings. These foreign bank lines of credit were not material as
of June 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 4 Submission of Matters to a Vote of Security Holders
The Annual meeting of Stockholders of LSI Logic
Corporation was held on May 6, 1997 in Gresham, Oregon.
Of the total 129,390,793 shares outstanding as of the
record date, 118,994,800 shares (92%) were present or
represented by proxy at the meeting. The table below
presents the voting results of election of the Company's
board of directors:
<TABLE>
<CAPTION>
Votes For Votes Withheld
<S> <C> <C>
Wilfred J. Corrigan 117,302,327 1,692,473
James H. Keys 117,298,586 1,696,214
Malcolm R. Currie 117,258,643 1,736,157
T.Z. Chu 117,295,787 1,699,013
R. Douglas Norby 117,287,662 1,707,138
</TABLE>
The stockholders approved an amendment to the Employee
Stock Purchase Plan (Purchase Plan) to increase the
number of shares reserved for issuance thereunder by
500,000. The proposal received 63,123,123 affirmative
votes, 22,581,088 negative votes, 1,462,386 abstentions,
and 31,828,203 non-votes.
The stockholders approved an amendment to the Purchase
Plan to increase the number of shares reserved for
issuance thereunder on the first day of each fiscal
year, beginning fiscal 1998, by 1.15% of the shares of
the Company's Common Stock issued and outstanding on the
last day of the immediately preceding fiscal year less
the number of shares available for future option grants
under the Purchase Plan on the last day of the
immediately preceding fiscal year. The proposal
received 57,567,749 affirmative votes, 28,084,600
negative votes, 1,514,248 abstentions, and 31,828,203
non-votes.
The stockholders approved an amendment to the 1991
Equity Incentive Plan (1991 Plan) to increase the
number of shares reserved for issuance thereunder by
3,000,000. The proposal received 45,683,380 affirmative
votes, 39,921,272 negative votes, 1,561,945 abstentions,
and 31,828,203 non-votes.
The stockholders did not approve an amendment to the
1991 Plan to increase the number of shares reserved for
issuance thereunder on the first day of each fiscal
year, beginning fiscal 1998 and ending fiscal 2004, by
3.75% of the shares of the Company's Common Stock issued
and outstanding on the last day of the immediately
preceding fiscal year less the number of shares
available for future option grants under the 1991 Plan
on the last day of the immediately preceding fiscal
year. The proposal received 42,692,597 affirmative
votes, 42,885,743 negative votes, 1,588,257 abstentions,
and 31,828,203 non-votes.
The stockholders approved an amendment to the
Certificate of Incorporation to increase authorized
number of shares of Common Stock to 450,000,000 shares.
The proposal received 108,750,259 affirmative votes,
8,742,675 negative votes, 1,501,866 abstentions, and
zero non-votes.
The stockholders approved a Performance-Based Bonus
Compensation Plan for the Chief Executive Officer. The
proposal received 114,461,238 affirmative votes,
2,835,770 negative votes, 1,697,792 abstentions, and
zero non-votes.
The stockholders ratified the appointment of Price
Waterhouse LLP as the Company's independent accountants
for the fiscal year ended December 31, 1997. The
proposal received 117,200,923 affirmative votes, 452,670
negative votes, 1,341,207 abstentions, and zero non-
votes.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Calculation of Earnings Per Share
27.1Financial 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: August 11, 1997 By /s/ R. Douglas Norby
R. Douglas Norby
Executive Vice President Finance &
Chief Financial Officer
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 11, 1997 By
R. Douglas Norby
Executive 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,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Primary Earnings Per Share
Net income $ 45,799 $ 46,496 $ 84,206 $ 88,780
Average common and common
equivalent shares:
Average commoon shares
outstanding 141,418 129,019 129,506 129,106
Dilutive options 3,577 2,605 9,473 2,641
144,995 131,624 138,979 131,747
Earnings per common and
common equivalent share $ 0.32 $ 0.35 $ 0.61 $ 0.67
Fully Diluted Earnings Per Share
Net income $ 45,799 $ 46,496 $ 84,206 $ 88,780
Interest expense on convertible
subordinated debt, net of
tax effect - 1,542 1,279 3,083
Adjusted net income $ 45,799 $ 48,038 $ 85,485 $ 91,863
Average common and common equivalent
shares on a fully diluted basis:
Average common shares
outstanding 141,418 129,019 129,506 129,106
Convertible subordinated
debt - 11,735 11,735 11,735
Dilutive options 3,580 2,605 3,227 2,645
144,998 143,359 144,468 143,486
Fully diluted earnings per common
and common equivalent share $ 0.32 $ 0.34 $ 0.60 $ 0.64
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 177,035
<SECURITIES> 558,946
<RECEIVABLES> 210,391
<ALLOWANCES> 3,154
<INVENTORY> 94,106
<CURRENT-ASSETS> 1,108,395
<PP&E> 1,516,531
<DEPRECIATION> 595,068
<TOTAL-ASSETS> 2,133,031
<CURRENT-LIABILITIES> 440,093
<BONDS> 0
<COMMON> 1,419
0
0
<OTHER-SE> 1,553,098
<TOTAL-LIABILITY-AND-EQUITY> 2,133,031
<SALES> 640,392
<TOTAL-REVENUES> 640,392
<CGS> 333,119
<TOTAL-COSTS> 333,119
<OTHER-EXPENSES> 202,784
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 117,072
<INCOME-TAX> 32,866
<INCOME-CONTINUING> 84,206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,206
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.60
