-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MteShCQF+h76L/8cXWMw/zYOJJdoTQuhvZdCmJr11smDA+RLMc0ByoZFyWWPW2lU 8WuvLUc1IPxyEbkfUyOjTA== 0000703360-95-000017.txt : 19951120 0000703360-95-000017.hdr.sgml : 19951120 ACCESSION NUMBER: 0000703360-95-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951001 FILED AS OF DATE: 19951115 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LSI LOGIC CORP CENTRAL INDEX KEY: 0000703360 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942712976 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10317 FILM NUMBER: 95593397 BUSINESS ADDRESS: STREET 1: 1551 MCCARTHY BLVD STREET 2: MS D 106 CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4084334039 MAIL ADDRESS: STREET 1: 1551 MCCARTHY BLVD STREET 2: MS D 106 CITY: MILPITAS STATE: CA ZIP: 95035 10-Q 1 FORM 10-Q 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
LSI LOGIC CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except per share amount) September 30, December 31, 1995 1994 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.
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 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.
LSI LOGIC CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 1995 1994 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.
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.
September 30, December 31, 1995 1994 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 -
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):
September 30, December 31, 1995 1994 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 Cash Paid for: Income taxes $ 25,677 $ 13,700 Interest 14,471 15,500
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:
Three Months Ended Nine Months Ended September 30, September 30, 1995 1994 1995 1994 Component products 96% 90% 96% 88% Design and services 4% 10% 4% 12% 100% 100% 100% 100%
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:
Three Months Ended Nine Months Ended September 30, September 30, 1995 1994 1995 1994 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):
Balance Balance 12/31/94 Utilized* Adjusted 9/30/95 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.
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 EX-11 2 EXHIBIT 11.1 Exhibit 11.1
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 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
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. EX-27 3 FINANCIAL DATA SCHEDULE
5 1000 3-MOS DEC-31-1995 SEP-30-1995 320,747 350,293 203,197 (3,681) 203,197 1,089,857 1,075,186 (484,256) 1,747,624 346,996 143,750 1,289 0 0 1,112,599 1,747,624 918,056 918,056 486,505 486,505 205,427 0 12,679 235,435 65,923 166,547 0 0 0 166,547 1.34 1.25
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