Note 7 — Benefit Obligations

Pension and Post-retirement Benefit Plans

The Company provides retirement benefits to certain current and former U.S. employees under defined benefit pension plans, which include a management plan and a represented plan. Benefits under the management plan are based on an adjusted career-average-pay formula or a cash-balance program. Benefits under the represented plan are based on a dollar-per-month formula. Benefit accruals under the management plan were frozen in 2009. Participants in the adjusted career-average-pay program no longer earn service accruals. Participants in the cash-balance program no longer earn service accruals, but continue to earn 4% interest per year on their cash-balance accounts. There are no active participants under the represented plan.

The Company also has a non-qualified supplemental pension plan in the U.S. that principally provides benefits based on compensation in excess of amounts that can be considered under the management plan. In addition, the Company provides post-retirement life insurance coverage under a group life insurance plan for certain U.S. employees. The Company also has pension plans covering certain international employees.

Net Periodic Benefit Cost/(Credit):

The following table summarizes the components of the net periodic benefit cost or credit:


	Year Ended December 31,
	2012						2011						2010
	Pension Benefits			Post- retirement Benefits			Pension Benefits			Post- retirement Benefits			Pension Benefits			Post- retirement Benefits
	(In thousands)
Service cost	$	415		$	89		$	531		$	75		$	472		$	81
Interest cost		61,456			2,600			67,499			2,597			70,337			2,441
Expected return on plan assets		(68,076	)		(3,811	)		(67,965	)		(4,128	)		(71,464	)		(4,597	)
Amortization of net actuarial loss, prior service cost and transition asset		14,360			2,017			6,768			552			2,193			—
Curtailments		326			—			54			—			—			—

Total benefit cost/(credit)	$	8,481		$	895		$	6,887		$	(904	)	$	1,538		$	(2,075	)

Change in Benefit Obligation:

The following table sets forth a reconciliation of the beginning and ending balances of the benefit obligation during the periods presented. The measurement date was December 31 for each year.


	Year Ended December 31,
	2012						2011
	Pension Benefits			Post-retirement Benefits			Pension Benefits			Post-retirement Benefits
	(In thousands)
Projected benefit obligation at January 1	$	1,463,079		$	57,934		$	1,331,137		$	44,488
Service cost		415			89			531			75
Interest cost		61,456			2,600			67,499			2,597
Actuarial loss/(gain)		113,770			(1,973	)		150,776			11,893
Benefits paid(a)		(87,304	)		(1,266	)		(86,659	)		(1,119	)
Curtailments and foreign exchange impact		77			—			(205	)		—

Projected benefit obligation at December 31	$	1,551,493		$	57,384		$	1,463,079		$	57,934

(a)	The pension benefits paid include amounts paid under certain international pension plans, which do not maintain plan assets.

The pension benefit obligations as of December 31, 2012 and 2011 included $28.8 million and $22.2 million, respectively, of obligations related to the Company’s international pension plans.

Change in Plan Assets:

The following table sets forth a reconciliation of the beginning and ending balances of the fair value of plan assets during the periods presented. The fair value of plan assets was measured at December 31 for each year.


	Year Ended December 31,
	2012						2011
	Pension Benefits			Post-retirement Benefits			Pension Benefits			Post-retirement Benefits
	(In thousands)
Fair value of plan assets at January 1	$	867,241		$	66,968		$	868,809		$	66,781
Actual return on plan assets		117,084			5,833			19,721			1,379
Employer contributions		94,634			—			65,112			—
Benefits paid		(85,742	)		(1,089	)		(86,302	)		(1,192	)
Curtailments and foreign exchange impact		14			—			(99	)		—

Fair value of plan assets at December 31	$	993,231		$	71,712		$	867,241		$	66,968

The fair value of pension plan assets at December 31, 2012 and 2011 included $13.6 million and $12.3 million, respectively, of assets for certain of the Company’s international pension plans. The Company’s contributions to its international pension plans were immaterial for the year ended December 31, 2012.

Funded Status of the Plans:

The following table sets forth the funded status of the plans, which is the fair value of plan assets less projected benefit obligations:


	December 31,
	2012					2011
	Pension Benefits			Post-retirement Benefits		Pension Benefits			Post-retirement Benefits
	(In thousands)
Funded status of the plans (liability)/asset	$	(558,262	)	$	14,328	$	(595,838	)	$	9,034

Plans with Benefit Obligations in excess of Plan Assets:


	December 31,
	2012		2011
	Pension Benefits
	(In thousands)
Projected benefit obligation	$	1,542,123	$	1,455,297
Accumulated benefit obligation	$	1,540,081	$	1,453,690
Fair value of plan assets	$	981,998	$	857,259

The accumulated benefit obligations as of December 31, 2012 and 2011 included $26.7 million and $20.5 million, respectively, related to the Company’s international pension plans.

Plans with Benefit Obligations less than Plan Assets:


	December 31,
	2012		2011
	Pension Benefits
	(In thousands)
Projected benefit obligation	$	9,370	$	7,782
Accumulated benefit obligation	$	9,295	$	7,666
Fair value of plan assets	$	11,233	$	9,982


	December 31,
	2012		2011
	Post-retirement Benefits
	(In thousands)
Accumulated benefit obligation	$	57,384	$	57,934
Fair value of plan assets	$	71,712	$	66,968

The following table sets forth amounts recognized in the consolidated balance sheets for the plans:


	December 31,
	2012					2011
	Pension Benefits			Post-retirement Benefits		Pension Benefits			Post-retirement Benefits
	(In thousands)
Non-current assets	$	1,863		$	14,328	$	2,201		$	9,034
Current liabilities		(873	)		—		(856	)		—
Non-current liabilities		(559,252	)		—		(597,183	)		—

Net (liability)/asset	$	(558,262	)	$	14,328	$	(595,838	)	$	9,034

Accumulated Other Comprehensive Loss:

The following table sets forth amounts recognized in accumulated other comprehensive loss related to pension and post-retirement plans:


	December 31,
	2012					2011
	Pension Benefits			Post-retirement Benefits		Pension Benefits			Post-retirement Benefits
	(In thousands)
Net prior service cost	$	205		$	—	$	242		$	—
Net actuarial loss		577,413			18,600		527,045			24,788
Transition asset		(138	)		—		(157	)		—

Accumulated other comprehensive loss		577,480			18,600		527,130			24,788
Tax on prior actuarial gains		23,813			3,026		23,813			3,026

Accumulated other comprehensive loss, after tax	$	601,293		$	21,626	$	550,943		$	27,814

The following table summarizes changes in accumulated other comprehensive loss related to pension and post-retirement plans:


	Year Ended December 31,
	2012						2011
	Pension Benefits			Post-retirement Benefits			Pension Benefits			Post-retirement Benefits
	(In thousands)
Accumulated other comprehensive loss at January 1, after tax	$	550,943		$	27,814		$	358,725		$	13,651
Amortization of prior service cost and transition asset		(18	)		—			(18	)		—
Amortization of actuarial loss		(14,342	)		(2,017	)		(6,750	)		(552	)
Current year actuarial loss/(gain)		64,710			(4,171	)		198,986			14,715

Accumulated other comprehensive loss at December 31, after tax	$	601,293		$	21,626		$	550,943		$	27,814

There were no tax effects on any changes in accumulated other comprehensive loss for the periods presented above.

The estimated net actuarial loss for the pension plans that will be amortized from accumulated other comprehensive loss into pension costs for the year ending December 31, 2013 is $18.4 million. For the post-retirement benefit plan, the estimated net actuarial loss that will be amortized from accumulated other comprehensive loss into post-retirement costs for the year ending December 31, 2013 is $1.5 million.

Plan Assets:

Defined Benefit Pension Plans:

The Company’s investment strategy for the U.S. plans is to allocate assets in a manner that seeks both to maximize the safety of promised benefits and to minimize the cost of funding those benefits. The Company directs the overall portfolio allocation, and uses an investment consultant that has discretion to structure portfolios and select the investment managers within those allocation parameters. Multiple investment managers are utilized, including both active and passive management approaches. The plan assets are diversified across different asset classes and investment styles, and those assets are periodically rebalanced toward asset allocation targets.

The target asset allocation for U.S. plans reflects a risk/return profile that the Company believes is appropriate relative to the liability structure and return goals for the plans. The Company periodically reviews the allocation of plan assets relative to alternative allocation models to evaluate the need for adjustments based on forecasted liabilities and plan liquidity needs. The current target allocations for the U.S. management and represented pension plan assets are 50% in public equity securities, 42.5% in fixed-income securities, and 7.5% in real estate securities. The equity investment target allocation is equally divided between U.S. and international equity securities. The fixed-income allocation is primarily directed toward long-term core bond investments, with smaller allocations to Treasury Inflation-Protected Securities and high-yield bonds.

The fair values of the plan assets by asset category were as follows:


	Fair Value Measurements as of December 31, 2012
	Level 1			Level 2			Total
	(In thousands)
Cash and cash equivalents	$	5,277		$	18,410	(a)	$	23,687
Equity securities:
Domestic equity securities		183,538	(b)		—			183,538
International equity securities		91,546	(b)		2,609	(c)		94,155
Fixed-income securities:
U.S. treasuries		61,173	(b)		—			61,173
Corporate bonds		—			248,680	(d)		248,680
Asset-backed and mortgage-backed securities		—			3,848	(d)		3,848
Municipal bonds		—			12,818	(d)		12,818
Government bonds		—			30,521	(d)		30,521
Other types of investments:
Commingled funds — equities		—			194,302	(e)		194,302
Commingled funds — bonds		—			139,954	(f)		139,954
Derivatives		20			535			555

Total	$	341,554		$	651,677		$	993,231


	Fair Value Measurements as of December 31, 2011
	Level 1			Level 2			Total
	(In thousands)
Cash and cash equivalents	$	5,183		$	23,493	(a)	$	28,676
Equity securities:
Domestic equity securities		169,635	(b)		359	(c)		169,994
International equity securities		76,202	(b)		2,401	(c)		78,603
Fixed-income securities:
U.S. treasuries		80,426	(b)		—			80,426
Corporate bonds		—			155,666	(d)		155,666
Asset-backed and mortgage-backed securities		—			2,976	(d)		2,976
Agency-backed securities		—			7,793	(d)		7,793
Municipal bonds		—			6,334	(d)		6,334
Government bonds		—			17,242	(d)		17,242
Other types of investments:
Commingled funds — equities		—			163,510	(e)		163,510
Commingled funds — bonds		—			156,393	(f)		156,393
Derivatives		40			(412	)		(372	)

Total	$	331,486		$	535,755		$	867,241

(a)	The amounts represent cash equivalents and primarily include short-term investment funds, which consisted of short-term money market instruments that are valued using quoted prices for similar assets and liabilities in active markets.

(b)	Domestic equity securities, international equity securities and U.S. treasuries are valued based on quoted prices in active markets.

(c)	The amounts include funds that invest primarily in equity securities that are traded less frequently than exchange-traded securities and are valued using inputs that include quoted prices for similar assets in active markets.

(d)

The amount consists of investments that are traded less frequently than Level 1 securities and are valued using inputs that include quoted prices for similar assets in active markets and inputs other than quoted prices that are observable for the asset, such as interest rates, yield curves, prepayment speeds, collateral performance, broker/dealer quotes and indices that are observable at commonly quoted intervals.

(e)

The amounts consist of investments in funds not registered with U.S. Securities and Exchange Commission, with underlying investments primarily in publicly traded U.S. and non-U.S. equity securities, including securities with small and large market capitalization. The fair value was determined based on the net asset value per share of each investment at December 31, 2012 and 2011. These funds are classified as Level 2 in the fair value hierarchy as the Company could redeem these investments with the sponsoring investment management organizations at December 31, 2012 and 2011, and with at least monthly frequency on an ongoing basis.

(f)

The amounts consist of investments in funds not registered with U.S. Securities and Exchange Commission, with underlying investments primarily in Treasury Inflation-Protected Securities and high-yield bonds. The fair value was determined based on the net asset value per share of each investment at December 31, 2012 and 2011. These funds are classified as Level 2 in the fair value hierarchy as the Company could redeem these investments with the sponsoring investment management organizations at December 31, 2012 and 2011, and with at least monthly frequency on an ongoing basis.

Post-retirement Benefit Plan:

The Company’s overall investment strategy for the group life insurance plan is to allocate assets in a manner that seeks to both maximize the safety of promised benefits and minimize the cost of funding those benefits. The target asset allocation for plan assets reflects a risk/return profile that the Company believes is appropriate relative to the liability structure and return goals for the plan. The Company periodically reviews the allocation of plan assets relative to alternative allocation models to evaluate the need for adjustments based on forecasted liabilities and plan liquidity needs. The Company sets the overall portfolio allocation and uses an investment manager that directs the investment of funds consistent with that allocation. The investment manager invests the plan assets in index funds that it manages. The current target allocations for the plan assets are 40% in equity securities and 60% in fixed-income securities. The equity investment target allocation is equally divided between domestic and international equity securities.

The plan assets were classified as Level 2 and the fair values by asset category were as follows:


	December 31,
	2012		2011
	(In thousands)
Commingled funds — domestic equities(a)	$	14,431	$	13,302
Commingled funds — international equities(a)		14,292		13,536
Commingled funds — bonds(a)		42,989		40,130

Total	$	71,712	$	66,968

(a)

The amounts consist of investments in funds not registered with U.S. Securities and Exchange Commission, with underlying investments primarily in the equity securities included in the S&P 500 Index, non-U.S. equity securities and investment grade fixed-income securities. The fair value was determined based on the net asset value per share of each investment at December 31, 2012 and 2011. These funds are classified as Level 2 in the fair value hierarchy as the Company could redeem these investments with the sponsoring investment management organizations at December 31, 2012 and 2011, and with at least monthly frequency on an ongoing basis.

Non-qualified Supplemental Pension Plan:

The Company does not set the target asset allocation or investment strategy for assets set aside for the non-qualified supplemental pension plan. The Company monitors the investment strategy established by the trustee, who has discretion over the trust assets, trust asset allocation and trust investment decisions. The trust agreement requires that at least $1 million be held in cash to meet near-term expenses. The trustee typically directs that an incremental amount of trust assets above that minimum requirement be held in cash or cash equivalents to reduce the need to liquidate investments in volatile market environments. The current target allocation established by the trustee for the non-qualified supplemental pension plan assets is 60% in fixed-income securities and 40% in equity securities.

The plan assets were classified as Level 1 and the fair values by asset category were as follows:


	December 31,
	2012		2011
	(In thousands)
Money market funds(a)	$	1,339	$	1,353
Mutual funds(b)		10,123		9,284

Total	$	11,462	$	10,637

(a)	The fair value of money-market funds is determined using unadjusted prices in active markets.

(b)	The amounts consist of registered investment company funds with quoted prices in active markets.

Plan Asset Allocations for Pension Plans and Post-retirement Benefit Plan:

The following table sets forth the actual plan asset allocations:


	December 31,
	2012									2011
	Pension Benefits			Non-qualified Pension Benefits			Post-retirement Benefits			Pension Benefits			Non-qualified Pension Benefits			Post-retirement Benefits
Equity securities		50	%		41	%		40	%		54	%		34	%		40	%
Debt securities		43	%		59	%		60	%		42	%		66	%		60	%
Real estate securities		7	%		—			—			4	%		—			—

Actuarial Assumptions:

The Company reassesses its benefit plan assumptions on a regular basis. The actuarial assumptions for the principal pension and post-retirement plans are as follows:


	Year Ended December 31,
	2012						2011						2010
	Pension Benefits			Post-retirement Life Benefits			Pension Benefits			Post-retirement Life Benefits			Pension Benefits			Post-retirement Life Benefits
Discount rate to determine net periodic cost		4.30	%		4.50	%		5.25	%		5.70	%		5.75	%		6.00	%
Discount rate to determine the benefit obligation as of December 31		3.80	%		4.20	%		4.30	%		4.50	%		5.25	%		5.70	%
Rate of compensation increase to determine net periodic cost		N/A			3.50	%		N/A			3.50	%		N/A			4.00	%
Rate of compensation increase to determine the benefit obligation as of December 31		N/A			3.50	%		N/A			3.50	%		N/A			3.50	%
Expected average rate of return on plan assets		7.75	%		5.70	%		7.75	%		6.20	%		8.00	%		7.00	%

The Company bases the salary increase assumptions on historical experience and future expectations. The expected rate of return for the Company’s retirement benefit plans represents the average rate of return expected to be earned on plan assets over the period that the benefit obligations are expected to be paid. In developing the expected rate of return, the Company considers long-term compound annualized returns based on historical market data, historical and expected returns on the various categories of plan assets, and the target investment portfolio allocations. The rates used are adjusted for any current or anticipated shifts in the investment mix of the plans. The rates also factor in the historic performance of the plans’ assets. The gain on the pension assets during 2012 was $117.1 million, with the gains smoothed over the next five years through the return on assets assumption using the market-related value of assets (“MRVA”) with those not yet recognized through MRVA amortized under current accounting rules for recognizing asset and liability gains and losses.

Benefit Payments:

The following table reflects the benefit payments that the Company expects the plans to pay in the periods presented. These payments include amounts related to future service.


	Pension Benefits		Post-retirement Benefits
	(In thousands)
Year ending December 31, 2013	$	91,515	$	850
Year ending December 31, 2014	$	89,133	$	930
Year ending December 31, 2015	$	89,148	$	1,020
Year ending December 31, 2016	$	90,620	$	1,120
Year ending December 31, 2017	$	89,015	$	1,240
Years ending December 31, 2018 through December 31, 2022	$	447,377	$	8,820

The Company expects to contribute approximately $51.7 million to its pension plans during the year ending December 31, 2013. The Company does not expect to contribute to its post-retirement benefit plan in 2013.

LSI 401(k) Defined Contribution Plan

Eligible employees in the U.S. may participate in the LSI Corporation 401(k) Plan (the “Plan”). The Plan provides for tax-deferred and after-tax contributions for eligible employees and allows employees to contribute from 1% to 50% of their annual compensation on a pretax and after-tax basis. Effective June 1, 2012, the Plan allows employees to make Roth contributions. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. The Company matches pretax employee contributions up to 100% of the first 2% of eligible earnings that are contributed by employees and may make additional variable matching contributions based on the Company’s performance. The maximum matching contribution that the Company may allocate to each participant’s account was $11,250 in 2012 due to the $250,000 annual limit on eligible earnings under the Internal Revenue Code. All matching contributions vest immediately except that matching contribution for new employees vest after two years of service. The Company’s matching contributions to the Plan totaled $22.8 million, $18.7 million and $20.5 million during the years ended December 31, 2012, 2011 and 2010, respectively.