e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended April 3, 2011
OR
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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: 1-10317
LSI CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
(State of Incorporation)
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94-2712976
(I.R.S. Employer Identification Number) |
1621 Barber Lane
Milpitas, California 95035
(Address of principal executive offices)
(Zip code)
(408) 433-8000
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company.)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of May 6, 2011, there were 605,650,469 shares of the registrants Common Stock, $.01 par value,
outstanding.
LSI CORPORATION
FORM 10-Q
For the Quarter Ended April 3, 2011
INDEX
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words
estimate, plan, intend, expect, anticipate, believe and similar words are intended to
identify forward-looking statements. Although we believe our expectations are based on reasonable
assumptions, our actual results could differ materially from those projected in the forward-looking
statements. We have described in Part II, Item 1A. Risk Factors a number of factors that could
cause our actual results to differ from our projections or estimates. Except where otherwise
indicated, the statements made in this report are made as of the date we filed this report with the
Securities and Exchange Commission and should not be relied upon as of any subsequent date. We
expressly disclaim any obligation to update the information in this report, except as may otherwise
be required by law.
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
LSI CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
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April 3, |
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December 31, |
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2011 |
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2010 |
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ASSETS |
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Cash and cash equivalents |
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$ |
526,528 |
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$ |
521,786 |
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Short-term investments |
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155,786 |
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154,880 |
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Accounts receivable, less allowances of $7,418 and $9,701, respectively |
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286,133 |
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326,604 |
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Inventories |
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155,023 |
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186,772 |
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Prepaid expenses and other current assets |
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68,369 |
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73,314 |
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Assets held for sale |
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236,296 |
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464 |
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Total current assets |
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1,428,135 |
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1,263,820 |
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Property and equipment, net |
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188,002 |
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223,181 |
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Identified intangible assets, net |
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519,588 |
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561,137 |
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Goodwill |
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72,377 |
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188,698 |
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Other assets |
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146,772 |
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188,076 |
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Total assets |
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$ |
2,354,874 |
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$ |
2,424,912 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Accounts payable |
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$ |
198,836 |
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$ |
173,919 |
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Accrued salaries, wages and benefits |
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104,198 |
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126,307 |
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Other accrued liabilities |
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181,217 |
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184,402 |
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Total current liabilities |
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484,251 |
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484,628 |
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Pension and post-retirement benefit obligations |
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454,750 |
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463,119 |
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Income taxes payable non-current |
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81,478 |
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85,717 |
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Other non-current liabilities |
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74,746 |
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73,946 |
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Total liabilities |
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1,095,225 |
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1,107,410 |
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Commitments and contingencies (Note 13) |
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Stockholders equity: |
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Preferred stock, $.01 par value: 2,000 shares authorized; none outstanding |
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Common stock, $.01 par value: 1,300,000 shares authorized; 606,150 and
615,191 shares outstanding, respectively |
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6,062 |
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6,152 |
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Additional paid-in capital |
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5,926,306 |
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5,998,137 |
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Accumulated deficit |
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(4,358,368 |
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(4,368,522 |
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Accumulated other comprehensive loss |
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(314,351 |
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(318,265 |
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Total stockholders equity |
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1,259,649 |
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1,317,502 |
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Total liabilities and stockholders equity |
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$ |
2,354,874 |
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$ |
2,424,912 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
LSI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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April 3, 2011 |
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April 4, 2010 |
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Revenues |
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$ |
473,264 |
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$ |
472,672 |
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Cost of revenues |
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249,090 |
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257,878 |
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Gross profit |
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224,174 |
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214,794 |
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Research and development |
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142,347 |
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138,862 |
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Selling, general and administrative |
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68,867 |
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70,365 |
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Restructuring of operations and other items, net |
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2,806 |
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1,620 |
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Income from operations |
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10,154 |
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3,947 |
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Interest expense |
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(3,894 |
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Interest income and other, net |
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4,288 |
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(8,807 |
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Income/(loss) from continuing operation before income taxes |
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14,442 |
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(8,754 |
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Benefit from income taxes |
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(4,104 |
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(23,102 |
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Income from continuing operations |
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18,546 |
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14,348 |
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(Loss)/income from discontinued operations, net of tax |
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(8,392 |
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8,172 |
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Net income |
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$ |
10,154 |
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$ |
22,520 |
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Basic income/(loss) per share: |
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Income from continuing operations |
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$ |
0.03 |
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$ |
0.02 |
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(Loss)/income from discontinued operations |
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$ |
(0.01 |
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$ |
0.01 |
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Net income |
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$ |
0.02 |
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$ |
0.03 |
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Diluted income/(loss) per share: |
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Income from continuing operations |
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$ |
0.03 |
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$ |
0.02 |
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(Loss)/income from discontinued operations |
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$ |
(0.01 |
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$ |
0.01 |
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Net income |
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$ |
0.02 |
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$ |
0.03 |
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Shares used in computing per share amounts: |
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Basic |
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615,450 |
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656,528 |
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Diluted |
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629,733 |
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664,315 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
LSI CORPORATION
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended |
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April 3, 2011 |
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April 4, 2010 |
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Operating activities: |
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Net income |
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$ |
10,154 |
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$ |
22,520 |
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Adjustments: |
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Depreciation and amortization |
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56,007 |
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67,017 |
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Stock-based compensation expense |
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13,986 |
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16,431 |
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Non-cash restructuring of operations and other items, net |
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10,824 |
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(10 |
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Write-down of investments |
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11,600 |
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(Gain)/loss on sale of property and equipment |
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(239 |
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3 |
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Unrealized foreign exchange loss/(gain) |
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1,379 |
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(2,215 |
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Deferred taxes |
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(43 |
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98 |
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Changes in assets and liabilities: |
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Accounts receivable, net |
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40,471 |
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40,396 |
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Inventories |
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(12,651 |
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(16,441 |
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Prepaid expenses, assets held for sale and other assets |
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(1,066 |
) |
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(8,095 |
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Accounts payable |
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24,273 |
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(8,547 |
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Accrued and other liabilities |
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(35,066 |
) |
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(16,979 |
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Net cash provided by operating activities |
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108,029 |
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105,778 |
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Investing activities: |
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Purchases of debt securities available-for-sale |
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(15,530 |
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Proceeds from maturities and sales of debt securities available-for-sale |
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12,958 |
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11,254 |
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Purchases of property, equipment and software |
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(21,542 |
) |
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(27,276 |
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Proceeds from sale of property and equipment |
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310 |
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22 |
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Net cash used in investing activities |
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(23,804 |
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(16,000 |
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Financing activities: |
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Issuances of common stock |
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17,319 |
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3,635 |
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Purchase of common stock under repurchase programs |
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(96,791 |
) |
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(26,208 |
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Net cash used in financing activities |
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(79,472 |
) |
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(22,573 |
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Effect of exchange rate changes on cash and cash equivalents |
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(11 |
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(2,117 |
) |
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Net change in cash and cash equivalents |
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4,742 |
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65,088 |
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Cash and cash equivalents at beginning of period |
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521,786 |
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778,291 |
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Cash and cash equivalents at end of period |
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$ |
526,528 |
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$ |
843,379 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
LSI CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Basis of Presentation
For financial reporting purposes, LSI Corporation (LSI or the Company) reports on a 13- or
14-week quarter with the year ending December 31. The first quarter of 2011 and 2010 consisted of
approximately 13 weeks each and ended on April 3, 2011 and on April 4, 2010, respectively. The
results of operations for the quarter ended April 3, 2011 are not necessarily indicative of the
results to be expected for the full year.
On March 9, 2011, the Company entered into a definitive agreement to sell its external storage
systems business to NetApp, Inc. (NetApp) for $480.0 million in cash. The strategic decision to
divest the external storage systems business was based on the Companys expectation that long-term
shareholder value can be maximized by becoming a pure-play semiconductor company. Under the terms
of the agreement, NetApp will purchase substantially all the assets of the Companys external
storage systems business, which develops and delivers external storage systems products and
technology to a wide range of partners that provide storage solutions to end customers. Most of LSI
external storage systems employees are expected to join NetApp. In accordance with the applicable
accounting guidance for the disposal of long-lived assets, the results of the external storage
systems business are presented as discontinued operations and, as such, have been excluded from
both continuing operations and segment results for all periods presented. In the first quarter of
2011, the Company operates in one reportable segment. The external storage systems business was
part of the Storage Systems segment. The results of the redundant array of independent disks
(RAID) adapter business, which were formerly included in the Storage Systems segment, are now
included in the Companys remaining reportable segment. Additionally, the assets of the external
storage systems business as of April 3, 2011 are presented as held for sale in the condensed
consolidated balance sheets.
The preparation of financial statements in conformity with generally accepted accounting
principles in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ significantly from these
estimates.
In managements opinion, the accompanying unaudited condensed consolidated financial
statements contain all normal recurring adjustments necessary for a fair presentation of the
Companys financial position, results of operations, and cash flows for the interim periods
presented. While the Company believes that the disclosures are adequate to make the information not
misleading, these financial statements should be read in conjunction with the audited consolidated
financial statements and accompanying notes included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2010.
Recent Accounting Pronouncements
Pronouncements adopted during the three months ended April 3, 2011:
In October 2009, the Financial Accounting Standards Board (FASB) amended revenue recognition
guidance on multiple-deliverable arrangements to address how to separate deliverables and how to
measure and allocate arrangement consideration. The new guidance requires the use of managements
best estimate of selling price for the deliverables in an arrangement when a vendor does not have
specific objective evidence of selling price or third party evidence of selling price. In addition,
excluding specific software revenue guidance, the residual method of allocating arrangement
consideration is no longer permitted, and an entity is required to allocate arrangement
consideration using the relative selling price method. This guidance also expands the disclosure
requirements to include both quantitative and qualitative information. The Company adopted this
guidance in the first quarter of 2011. The adoption did not impact the Companys results of
operations or financial position.
In October 2009, the FASB issued guidance to clarify that tangible products containing
software components and non-software components that function together to deliver a products
essential functionality will be considered non-software deliverables and will be scoped out of the
software revenue recognition guidance. The Company adopted this guidance in the first quarter of
2011. The adoption did not impact the Companys results of operations or financial position.
In December 2010, the FASB issued guidance to clarify that, when presenting comparative
financial statements for business combinations that occurred during the current year, a public
entity should disclose revenue and earnings of the combined entity as
6
though the business combinations had occurred as of the beginning of the comparable prior
annual reporting period. The update also expands the supplemental pro forma disclosures to include
a description of the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma revenue and earnings.
The Company adopted this guidance in the first quarter of 2011. The adoption did not impact the
Companys results of operations or financial position.
Note 2 Stock-Based Compensation and Common Stock
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense, net of estimated forfeitures,
related to the Companys stock options, Employee Stock Purchase Plan (ESPP) and restricted stock
unit awards.
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Three Months Ended |
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Stock-Based Compensation Expense Included In: |
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April 3, 2011 |
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April 4, 2010 |
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(In thousands) |
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Cost of revenues |
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$ |
1,813 |
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$ |
1,416 |
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Research and development |
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6,223 |
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|
6,020 |
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Selling, general and administrative |
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5,631 |
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|
5,687 |
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Total stock-based compensation expense |
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$ |
13,667 |
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$ |
13,123 |
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Stock Options:
The fair value of each option grant is estimated as of the date of grant using a reduced-form
calibrated binomial lattice model (the lattice model). The following table summarizes the
weighted-average assumptions that the Company applied in the lattice model:
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Three Months Ended |
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April 3, 2011 |
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April 4, 2010 |
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Estimated grant date fair value per share |
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$ |
2.08 |
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$ |
1.97 |
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Expected life (years) |
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4.45 |
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4.28 |
|
Risk-free interest rate |
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2 |
% |
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2 |
% |
Volatility |
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47 |
% |
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|
51 |
% |
The following table summarizes changes in stock options outstanding:
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Weighted-Average |
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Weighted-Average |
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Aggregate |
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Number of |
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Exercise |
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Remaining |
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Intrinsic |
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Shares |
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Price Per Share |
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Contractual Term |
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Value |
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(In thousands) |
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(In years) |
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(In thousands) |
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Options outstanding at December 31, 2010 |
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69,997 |
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$ |
6.99 |
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Options granted |
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7,433 |
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|
6.18 |
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Options exercised |
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(2,587 |
) |
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4.79 |
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Options canceled |
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(3,725 |
) |
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|
18.01 |
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Options outstanding at April 3, 2011 |
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71,118 |
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$ |
6.41 |
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|
3.74 |
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$ |
82,958 |
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Options exercisable at April 3, 2011 |
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45,093 |
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$ |
7.10 |
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|
2.88 |
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$ |
42,216 |
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Employee Stock Purchase Plan:
Compensation expense for the Companys ESPP is calculated using the fair value of the
employees purchase rights under the Black-Scholes model. Under the ESPP, rights to purchase shares
are granted during the second and fourth quarters of each year. No shares related to the ESPP were
issued during the three months ended April 3, 2011 or April 4, 2010.
Restricted Stock Awards:
The cost of restricted stock unit awards is determined using the fair value of the Companys
common stock on the date of grant.
Service-based:
7
The vesting requirements for service-based restricted stock units are determined at the time
of grant and require that the employee remain employed by the Company for a specified period of
time. As of April 3, 2011, the total unrecognized compensation expense related to these restricted
stock units, net of estimated forfeitures, was $57.6 million and is expected to be recognized over
the next 3.5 years on a weighted-average basis. The fair value of the shares that were issued upon
the vesting of service-based restricted stock units during the three months ended April 3, 2011 was
$10.3 million.
The following table summarizes changes in service-based restricted stock units outstanding:
|
|
|
|
|
|
|
Number of Units |
|
|
|
(In thousands) |
|
Unvested service-based restricted stock units at December 31, 2010 |
|
|
6,713 |
|
Granted |
|
|
6,297 |
|
Vested |
|
|
(1,640 |
) |
Forfeited |
|
|
(212 |
) |
|
|
|
|
Unvested service-based restricted stock units at April 3, 2011 |
|
|
11,158 |
|
|
|
|
|
Performance-based:
The vesting of performance-based restricted stock units is contingent upon the Company meeting
specified performance criteria and requires that the employee remain employed by the Company for a
specified period of time. As of April 3, 2011, the total unrecognized compensation expense related
to performance-based restricted stock units was $18.9 million and, if the contingencies are fully
met, is expected to be recognized over the next 1 to 3 years.
The following table summarizes changes in performance-based restricted stock units
outstanding:
|
|
|
|
|
|
|
Number of Units |
|
|
|
(In thousands) |
|
Unvested performance-based restricted stock units at December 31, 2010 |
|
|
2,277 |
|
Granted |
|
|
3,476 |
|
Vested |
|
|
(796 |
) |
Forfeited |
|
|
(54 |
) |
|
|
|
|
Unvested performance-based restricted stock units at April 3, 2011 |
|
|
4,903 |
|
|
|
|
|
Common Stock
Stock Repurchase Program:
On March 9, 2011, the Company announced that its Board of Directors had authorized a new stock
repurchase program of up to $750.0 million of its common stock. Purchases under this program are
expected to be funded from the proceeds of the sale of the external storage systems business,
available cash and short-term investments. The Company repurchased 14.7 million shares for $96.8
million under this program during the three months ended April 3, 2011. The repurchased shares were
retired immediately after the repurchases were completed. Retirement of the repurchased shares is
recorded as a reduction of common stock and additional paid-in capital.
Note 3 Restructuring, Asset Impairment Charges and Other Items
The following table summarizes items included in restructuring of operations and other items,
net from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
|
(In thousands) |
|
Lease and contract terminations |
|
$ |
1,688 |
(a) |
|
$ |
846 |
|
Employee severance and benefits |
|
|
1,643 |
(b) |
|
|
525 |
|
|
|
|
|
|
|
|
Total restructuring expenses |
|
|
3,331 |
|
|
|
1,371 |
|
Other items |
|
|
(525 |
) |
|
|
249 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,806 |
|
|
$ |
1,620 |
|
|
|
|
|
|
|
|
8
|
|
|
(a) |
|
The amount primarily relates to changes in estimates and changes in time value of accruals
for previously accrued facility lease exit costs. |
|
(b) |
|
The amount primarily relates to restructuring actions taken during the first quarter of 2011
as the Company continues to streamline operations. |
In connection with the strategic decision to divest the external storage systems business, the
Company initiated certain restructuring actions. The results of those actions are included in
discontinued operations and are summarized below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
|
(In thousands) |
|
Lease and contract terminations |
|
$ |
1,711 |
|
|
$ |
|
|
Employee severance and benefits |
|
|
11,020 |
(a) |
|
|
|
|
Asset impairment and other exit charges |
|
|
11,080 |
(b) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23,811 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amount includes severance accruals for the restructuring actions taken related to the
decision to sell the external storage systems business. |
|
(b) |
|
The amount includes $9.0 million and $1.9 million for the write-down of certain identified
intangible assets and certain software and hardware assets, respectively, related to the
decision to sell the external storage systems business. |
The following table summarizes the significant activity within, and components of, the
Companys restructuring obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
|
|
|
|
Asset Write-downs |
|
|
Lease and Contract |
|
|
Severance |
|
|
|
|
|
|
and Other Exit Costs |
|
|
Terminations |
|
|
and Benefits |
|
|
Total |
|
|
|
(In thousands) |
|
Beginning balance at December 31, 2010 |
|
$ |
|
|
|
$ |
20,905 |
|
|
$ |
4,951 |
|
|
$ |
25,856 |
|
Expense |
|
|
11,080 |
|
|
|
3,399 |
|
|
|
12,663 |
|
|
|
27,142 |
|
Utilized |
|
|
(11,080 |
) |
|
|
(4,467 |
)(a) |
|
|
(7,473 |
)(a) |
|
|
(23,020 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance at April 3, 2011 |
|
$ |
|
|
|
$ |
19,837 |
(b) |
|
$ |
10,141 |
(b) |
|
$ |
29,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amounts utilized represent cash payments. |
|
(b) |
|
The balance remaining for lease and contract terminations is expected to be paid during the
remaining terms of the leases, which extend through 2013. The majority of the balance
remaining for severance is expected to be paid by the third quarter of 2011. |
Note 4 Benefit Obligations
The Company has pension plans covering substantially all former Agere Systems Inc. (Agere)
U.S. employees, excluding management employees hired after June 30, 2003. Retirement benefits are
offered under defined benefit pension plans, which include a management plan and a represented
plan. The payments under the management plan are based on an adjusted career-average-pay formula or
a cash-balance program. The cash-balance program provides for annual company contributions based on
a participants age, compensation and interest on existing balances. It covers employees of certain
companies acquired by Agere since 1996 and management employees hired after January 1, 1999 and
before July 1, 2003. The payments under the represented plan are based on a dollar-per-month
formula. Since February 2009, there have been 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 a tax
qualified plan. The Company also provides post-retirement life insurance coverage under a group
life insurance plan for former Agere employees excluding participants in the cash-balance program
and management employees hired after June 30, 2003. The Company also has pension plans covering
certain international employees.
Effective April 6, 2009, the Company froze the U.S. management defined benefit pension plan.
Participants in the adjusted career-average-pay program will not earn any future service accruals
after that date. Participants in the cash-balance program will not earn any future service
accruals, but will continue to earn 4% interest per year on their cash-balance accounts.
9
The following table summarizes the components of the net periodic benefit cost/(credit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
|
Pension |
|
|
Post-retirement |
|
|
Pension |
|
|
Post-retirement |
|
|
|
Benefits |
|
|
Benefits |
|
|
Benefits |
|
|
Benefits |
|
|
|
(In thousands) |
|
Service cost |
|
$ |
134 |
|
|
$ |
17 |
|
|
$ |
118 |
|
|
$ |
20 |
|
Interest cost |
|
|
16,850 |
|
|
|
625 |
|
|
|
17,617 |
|
|
|
608 |
|
Expected return on plan assets |
|
|
(16,998 |
) |
|
|
(1,032 |
) |
|
|
(17,823 |
) |
|
|
(1,148 |
) |
Amortization of transition asset |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
10 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
Amortization of net actuarial loss |
|
|
1,681 |
|
|
|
92 |
|
|
|
547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit cost/(credit) |
|
$ |
1,672 |
|
|
$ |
(298 |
) |
|
$ |
469 |
|
|
$ |
(520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended April 3, 2011, the Company contributed $9.0 million to its
pension plans. The Company expects to contribute an additional $56.2 million to its pension plans
for the remainder of 2011. The Company does not expect to contribute to its post-retirement benefit
plan in 2011.
Note 5 Inventories
Inventories were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
April 3, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Raw materials |
|
$ |
31,706 |
|
|
$ |
30,691 |
|
Work-in-process |
|
|
45,930 |
|
|
|
33,513 |
|
Finished goods |
|
|
77,387 |
|
|
|
122,568 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
155,023 |
|
|
$ |
186,772 |
|
|
|
|
|
|
|
|
Note 6 Cash Equivalents and Investments
The following tables summarize the Companys cash equivalents and investments measured at fair
value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of April 3, 2011 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In thousands) |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money-market funds |
|
$ |
402,953 |
(a) |
|
$ |
|
|
|
$ |
|
|
|
$ |
402,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed and mortgage-backed securities |
|
$ |
|
|
|
$ |
114,312 |
(b) |
|
$ |
|
|
|
$ |
114,312 |
|
U.S. government and agency securities |
|
|
1,497 |
(a) |
|
|
25,346 |
(b) |
|
|
|
|
|
|
26,843 |
|
Corporate debt securities |
|
|
|
|
|
|
14,631 |
(b) |
|
|
|
|
|
|
14,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
1,497 |
|
|
$ |
154,289 |
|
|
$ |
|
|
|
$ |
155,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments in equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable available-for-sale equity securities |
|
$ |
1,802 |
(c) |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2010 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In thousands) |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money-market funds |
|
$ |
378,382 |
(a) |
|
$ |
|
|
|
$ |
|
|
|
$ |
378,382 |
|
U.S. government and agency securities |
|
|
2,000 |
(a) |
|
|
|
|
|
|
|
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents |
|
$ |
380,382 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
380,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed and mortgage-backed securities |
|
$ |
|
|
|
$ |
116,552 |
(b) |
|
$ |
|
|
|
$ |
116,552 |
|
U.S. government and agency securities |
|
|
1,496 |
(a) |
|
|
24,502 |
(b) |
|
|
|
|
|
|
25,998 |
|
Corporate debt securities |
|
|
|
|
|
|
12,330 |
(b) |
|
|
|
|
|
|
12,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
1,496 |
|
|
$ |
153,384 |
|
|
$ |
|
|
|
$ |
154,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments in equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable available-for-sale equity securities |
|
$ |
1,681 |
(c) |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,681 |
|
10
|
|
|
(a) |
|
The fair value of money-market funds is determined using unadjusted prices in active
markets. The fair value of U.S. Treasury securities is determined using quoted prices in
active markets. |
|
(b) |
|
The fair value of the short-term investments in debt securities is determined using the
market approach and the income approach. These investments 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. |
|
(c) |
|
The fair value of marketable equity securities is determined using quoted market prices in
active markets. These amounts are included within other assets in the condensed consolidated
balance sheets. |
Investments in Non-Marketable Securities
The Company does not estimate the fair value of non-marketable securities unless there are
identified events or changes in circumstances that may have a significant adverse effect on the
investment. There were no non-marketable securities fair-valued during the three months ended April
3, 2011. The following table summarizes certain non-marketable securities measured and recorded at
fair value on a non-recurring basis during the three months ended April 4, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value |
|
|
Fair Value Measurements |
|
|
Losses for the |
|
|
|
as of |
|
|
During the Three Months Ended April 4, 2010 |
|
|
Three Months Ended |
|
|
|
April 4, 2010 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
April 4, 2010 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Non-marketable securities |
|
$ |
1,900 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,900 |
|
|
$ |
11,600 |
|
As of April 3, 2011 and December 31, 2010, the aggregate carrying value of the Companys
non-marketable securities was $39.9 million. There were no sales of non-marketable securities for
the three months ended April 3, 2011 and April 4, 2010.
Investments in Available-for-Sale Securities
The following tables summarize the Companys available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3, 2011 |
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gain |
|
|
Loss* |
|
|
Fair Value |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Short-term debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed and mortgage-backed securities |
|
$ |
105,348 |
|
|
$ |
9,164 |
|
|
$ |
(200 |
) |
|
$ |
114,312 |
|
U.S. government and agency securities |
|
|
26,414 |
|
|
|
548 |
|
|
|
(119 |
) |
|
|
26,843 |
|
Corporate debt securities |
|
|
14,530 |
|
|
|
171 |
|
|
|
(70 |
) |
|
|
14,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt securities |
|
$ |
146,292 |
|
|
$ |
9,883 |
|
|
$ |
(389 |
) |
|
$ |
155,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term marketable equity securities |
|
$ |
852 |
|
|
$ |
989 |
|
|
$ |
(39 |
) |
|
$ |
1,802 |
|
|
|
|
* |
|
As of April 3, 2011, there were 57 investments in an unrealized loss position. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Fair Value |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Short-term debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed and mortgage-backed securities |
|
$ |
107,891 |
|
|
$ |
9,012 |
|
|
$ |
(351 |
) |
|
$ |
116,552 |
|
U.S. government and agency securities |
|
|
25,313 |
|
|
|
812 |
|
|
|
(127 |
) |
|
|
25,998 |
|
Corporate debt securities |
|
|
12,226 |
|
|
|
176 |
|
|
|
(72 |
) |
|
|
12,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt securities |
|
$ |
145,430 |
|
|
$ |
10,000 |
|
|
$ |
(550 |
) |
|
$ |
154,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term marketable equity securities |
|
$ |
852 |
|
|
$ |
868 |
|
|
$ |
(39 |
) |
|
$ |
1,681 |
|
11
The following tables summarize the gross unrealized losses and fair values of the Companys
short-term investments that have been in a continuous unrealized loss position for less than and
greater than 12 months, aggregated by investment category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3, 2011 |
|
|
|
Less than 12 Months |
|
|
Greater than 12 Months |
|
|
|
Fair Value |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
Unrealized Losses |
|
|
|
(In thousands) |
|
Asset-backed and mortgage-backed securities |
|
$ |
4,781 |
|
|
$ |
(77 |
) |
|
$ |
1,274 |
|
|
$ |
(123 |
) |
U.S. government and agency securities |
|
|
13,535 |
|
|
|
(119 |
) |
|
|
|
|
|
|
|
|
Corporate debt securities |
|
|
7,279 |
|
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25,595 |
|
|
$ |
(266 |
) |
|
$ |
1,274 |
|
|
$ |
(123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Less than 12 Months |
|
|
Greater than 12 Months |
|
|
|
Fair Value |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
Unrealized Losses |
|
|
|
(In thousands) |
|
Asset-backed and mortgage-backed securities |
|
$ |
11,807 |
|
|
$ |
(179 |
) |
|
$ |
2,469 |
|
|
$ |
(172 |
) |
U.S. government and agency securities |
|
|
13,969 |
|
|
|
(127 |
) |
|
|
|
|
|
|
|
|
Corporate debt securities |
|
|
6,527 |
|
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
32,303 |
|
|
$ |
(378 |
) |
|
$ |
2,469 |
|
|
$ |
(172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no impairment charges for available-for-sale debt or equity securities for the
three months ended April 3, 2011 or April 4, 2010. There were no material other than temporary
impairment losses recorded in other comprehensive income for the three months ended April 3, 2011
or April 4, 2010. Net realized gain or loss on sales of available-for-sale debt and equity
securities for the three months ended April 3, 2011 and April 4, 2010 was not significant.
Contractual maturities of available-for-sale debt securities as of April 3, 2011 were as
follows:
|
|
|
|
|
|
|
Amount |
|
|
|
(In thousands) |
|
Due within one year |
|
$ |
9,394 |
|
Due in 1-5 years |
|
|
37,957 |
|
Due in 5-10 years |
|
|
9,230 |
|
Due after 10 years |
|
|
99,205 |
|
|
|
|
|
Total |
|
$ |
155,786 |
|
|
|
|
|
The maturities of asset-backed and mortgage-backed securities were allocated based on
contractual principal maturities assuming no prepayments.
Note 7 Derivative Instruments
The Company has foreign subsidiaries that operate and sell the Companys products in various
markets around the world. As a result, the Company is exposed to changes in foreign-currency
exchange rates. The Company utilizes forward contracts to manage its exposure associated with net
asset and liability positions denominated in non-functional currencies and to reduce the volatility
of earnings and cash flows related to forecasted foreign-currency transactions. The Company does
not hold derivative financial instruments for speculative or trading purposes.
Cash-Flow Hedges
The Company enters into forward contracts that are designated as foreign-currency cash-flow
hedges of selected forecasted payments denominated in currencies other than U.S. dollars. These
forward contracts generally mature within 12 months. The Company evaluates and calculates the
effectiveness of each hedge at least quarterly. Changes in fair value attributable to changes in
time value are excluded from the assessment of effectiveness and are recognized in interest income
and other, net. The effective portion of the forward contracts gain or loss is recorded in other
comprehensive income and is subsequently reclassified into earnings when the hedged expense is
recognized within the same line item in the statements of operations as the impact of the hedged
transaction. The ineffective portion of the gain or loss is reported in earnings immediately. As of
April 3, 2011 and December 31,
12
2010, the total notional value of the Companys outstanding forward
contracts, designated as foreign-currency cash-flow hedges, was $38.2 million and $41.7 million,
respectively. For the three months ended April 3, 2011 and April 4, 2010, the after-tax effect of
foreign-exchange forward contract derivatives on other comprehensive income was not material.
Other Foreign-Currency Hedges
The Company enters into foreign-exchange forward contracts that are used to hedge certain
foreign-currency-denominated assets or liabilities that do not qualify for hedge accounting. These
forward contracts generally mature within three months. Changes in the fair value of these hedges
are recorded immediately in earnings to offset the changes in fair value of the assets or
liabilities being hedged. As of April 3, 2011 and December 31, 2010, the total notional value of
the Companys outstanding forward contracts, not designated as hedges under hedge accounting, was
$53.1 million and $112.3 million, respectively. For the three months ended April 3, 2011 and April
4, 2010, the gain/(loss) on other foreign-currency hedges of $1.8 million and $(5.8) million,
respectively, were recognized in interest income and other, net. This gain and loss was
substantially offset by the loss and gain on the underlying foreign-currency-denominated assets or
liabilities.
Fair Value of Derivative Instruments
As of April 3, 2011 and December 31, 2010, the fair value of derivative instruments included
in the condensed consolidated balance sheets was not material.
Note 8 Reconciliation of Basic and Diluted Income per Share
The following table provides a reconciliation of the numerators and denominators used in the
computation of basic and diluted per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
April 3, 2011 |
|
April 4, 2010 |
|
|
|
|
|
|
|
|
|
|
Per Share |
|
|
|
|
|
|
|
|
|
Per Share |
|
|
Income* |
|
Shares+ |
|
Amount |
|
Income* |
|
Shares+ |
|
Amount |
|
|
(In thousands except per share amounts) |
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
10,154 |
|
|
|
615,450 |
|
|
$ |
0.02 |
|
|
$ |
22,520 |
|
|
|
656,528 |
|
|
$ |
0.03 |
|
Dilutive effect of stock options, employee
stock purchase rights and restricted stock
unit awards |
|
|
|
|
|
|
14,283 |
|
|
|
|
|
|
|
|
|
|
|
7,787 |
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
10,154 |
|
|
|
629,733 |
|
|
$ |
0.02 |
|
|
$ |
22,520 |
|
|
|
664,315 |
|
|
$ |
0.03 |
|
|
|
|
* |
|
Numerator |
|
+ |
|
Denominator |
The following table provides information about the weighted-average common share equivalents
that were excluded from the computation of diluted shares because their inclusion would have an
antidilutive effect on net income per share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
|
(Shares in thousands) |
|
Anti-dilutive securities: |
|
|
|
|
|
|
|
|
Stock options |
|
|
48,331 |
|
|
|
69,225 |
|
Restricted stock unit awards |
|
|
16,217 |
|
|
|
399 |
|
Convertible notes |
|
|
|
|
|
|
26,080 |
|
Note 9 Segment and Geographic Information
The Chief Executive Officer has been identified as the Chief Operating Decision Maker
(CODM). The CODM allocates resources and assesses the Companys performance using information
about its revenue and operating income or loss before interest and taxes.
Historically, the Company operated in two reportable segments the Semiconductor segment and
the Storage Systems segment. The Semiconductor segment designs, develops and markets highly complex
integrated circuits for storage and networking
13
applications. These solutions include both custom
solutions and standard products. The Storage Systems segment offered external storage systems and
RAID adapters for computer servers and associated software for attaching storage devices to
computer servers. On March 9, 2011, the Company entered into a definitive agreement to sell its
external storage systems business to NetApp and started
to operate its RAID adapter business as part of its semiconductor business. Accordingly, the
Company now has one reportable segment. The change has been reflected in the Companys segment
reporting for all periods presented.
Information about Geographic Areas
The following table summarizes the Companys revenues by geography based on the ordering
location of the customer. Because the Company sells its products primarily to other sellers of
technology products and not to end-users, the information in the table below may not accurately
reflect geographic end-demand for its products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
North America * |
|
$ |
120,918 |
|
|
$ |
89,766 |
|
|
$ |
31,152 |
|
|
|
34.7 |
% |
Asia ** |
|
|
302,658 |
|
|
|
332,738 |
|
|
|
(30,080 |
) |
|
|
(9.0 |
)% |
Europe and the Middle East |
|
|
49,688 |
|
|
|
50,168 |
|
|
|
(480 |
) |
|
|
(1.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
473,264 |
|
|
$ |
472,672 |
|
|
$ |
592 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Primarily the United States. |
|
** |
|
Primarily Singapore, China and Taiwan. |
Note 10 Comprehensive Income
Comprehensive income or loss is defined as a change in equity of a company during a period
from transactions and other events and circumstances, excluding transactions resulting from
investments by owners and distributions to owners. The following table summarizes the changes in
the total comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
|
(In thousands) |
|
Net income |
|
$ |
10,154 |
|
|
$ |
22,520 |
|
Net unrealized gain on investments |
|
|
326 |
|
|
|
527 |
|
Net unrealized gain/(loss) on derivatives |
|
|
409 |
|
|
|
(859 |
) |
Foreign currency translation adjustments |
|
|
1,401 |
|
|
|
(4,002 |
) |
Amortization of transition asset, prior-service cost and net actuarial loss |
|
|
1,778 |
|
|
|
557 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
14,068 |
|
|
$ |
18,743 |
|
|
|
|
|
|
|
|
Note 11 Income Taxes
The Company recorded income tax benefits from continuing operations of $4.1 million and $23.1
million for the three months ended April 3, 2011 and April 4, 2010, respectively.
The income tax benefit from continuing operations for the three months ended April 3, 2011
included a reversal of $8.2 million in liabilities for uncertain tax positions, which included
previously unrecognized tax benefits of $4.8 million and interest and penalties of $3.4 million, as
a result of the expiration of statutes of limitations in multiple jurisdictions. The income tax
benefit from continuing operations for the three months ended April 4, 2010 was primarily a result
of a reversal of $27.9 million in liabilities for uncertain tax positions, which included
previously unrecognized tax benefits of $12.2 million and interest and penalties of $15.7 million,
as a result of the expiration of statutes of limitations in multiple jurisdictions.
In general, the Company computes the tax provision using an estimated annual tax rate.
However, the Company excludes certain loss jurisditions from the computation of estimated annual rate when no benefit can be realized on those losses. Excluding certain foreign
jurisdictions, the Company believes that it is more likely than not that the future benefit of
deferred tax assets will not be realized.
14
Note 12 Related Party Transactions
A member of the Companys board of directors is also a member of the board of directors of
Seagate Technology. The Company sells semiconductors used in storage product applications to
Seagate Technology for prices comparable to those charged to an unrelated third party. The Company
also purchased drives used in its storage systems from Seagate Technology for prices comparable
to those paid to other vendors for similar products. Revenues from sales by the Company to
Seagate Technology were $98.6 million and $96.1 million for the three months ended April 3, 2011
and April 4, 2010, respectively. Purchases from Seagate Technology were $0.4 million and $11.6
million for the three months ended April 3, 2011 and April 4, 2010, respectively. The Company had
accounts receivable from Seagate Technology of $53.1 million and $55.0 million as of April 3, 2011
and December 31, 2010, respectively.
The Company has an equity interest in a joint venture, Silicon Manufacturing Partners Pte Ltd.
(SMP), with GLOBALFOUNDRIES, a manufacturing foundry for integrated circuits. SMP operates an
integrated circuit manufacturing facility in Singapore. The Company owns a 51% equity interest in
this joint venture, and GLOBALFOUNDRIES owns the remaining 49% equity interest. The Companys 51%
interest in SMP is accounted for under the equity method because the Company is effectively
precluded from unilaterally taking any significant action in the management of SMP due to
GLOBALFOUNDRIES significant participatory rights under the joint venture agreement. Because of
GLOBALFOUNDRIES approval rights, the Company cannot make any significant decisions regarding SMP
without GLOBALFOUNDRIES approval, despite the 51% equity interest. In addition, the General
Manager, who is responsible for the day-to-day management of SMP, is appointed by GLOBALFOUNDRIES,
and GLOBALFOUNDRIES provides day-to-day operational support to SMP.
The Company purchased $10.8 million and $12.0 million of inventory from SMP for the three
months ended April 3, 2011 and April 4, 2010, respectively. As of April 3, 2011 and December 31,
2010, the amounts of inventory on hand that were purchased from SMP were $7.1 million and $5.0
million, respectively, and the amounts payable to SMP were $4.6 million and $1.2 million,
respectively.
Note 13 Commitments, Contingencies and Legal Matters
Purchase Commitments
The Company maintains purchase commitments with certain suppliers, primarily for raw materials
and manufacturing services and for some non-production items. Purchase commitments for inventory
materials are generally restricted to a forecasted time horizon as mutually agreed upon between the
parties. This forecasted time horizon can vary for different suppliers. As of April 3, 2011, the
Company had purchase commitments of $371.2 million, which are due through 2015.
The Company has a take-or-pay agreement with SMP under which it has agreed to purchase 51% of
the managed wafer capacity from SMPs integrated circuit manufacturing facility, and
GLOBALFOUNDRIES has agreed to purchase the remaining 49% of the managed wafer capacity. SMP
determines its managed wafer capacity each year based on forecasts provided by the Company and
GLOBALFOUNDRIES. If the Company fails to purchase its required commitments, it will be required to
pay SMP for the fixed costs associated with the unpurchased wafers. GLOBALFOUNDRIES is similarly
obligated with respect to the wafers allotted to it. The agreement may be terminated by either
party upon two years written notice. The agreement may also be terminated for material breach,
bankruptcy or insolvency.
Guarantees
Product Warranties:
The Company warrants finished goods against defects in material and workmanship under normal
use and service for periods of generally one to three years. A liability for estimated future costs
under product warranties is recorded when products are shipped.
The following table sets forth a summary of changes in product warranties:
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 3, 2011 |
|
|
|
(In thousands) |
|
Balance as of December 31, 2010 |
|
$ |
17,617 |
|
Accruals for warranties issued during the period |
|
|
2,258 |
|
Accruals related to pre-existing warranties (including changes in estimates) |
|
|
547 |
|
Settlements made during the period (in cash or in kind) |
|
|
(3,169 |
) |
|
|
|
|
Balance as of April 3, 2011 |
|
$ |
17,253 |
|
|
|
|
|
15
Standby Letters of Credit:
As of April 3, 2011 and December 31, 2010, the Company had outstanding obligations relating to
standby letters of credit of $3.5 million and $3.9 million, respectively. Standby letters of credit
are financial guarantees provided by third parties for leases, customs and certain self-insured
risks. If the guarantees are called, the Company must reimburse the provider of the guarantee. The
fair value of the letters of credit approximates the contract amounts. The standby letters of
credit generally renew annually.
Uncertain Tax Positions
As of April 3, 2011, the Company had $150.8 million of unrecognized tax benefits, for which
the Company is unable to make a reasonably reliable estimate as to when cash settlement with a
taxing authority may occur. It is reasonably possible that the total amount of unrecognized tax
benefits will increase or decrease in the next 12 months. Such changes could occur based on the
normal expiration of statutes of limitations or the possible conclusion of ongoing tax audits in
various jurisdictions around the world. If those events occur within the next 12 months, the
Company estimates that the unrecognized tax benefits, plus accrued interest and penalties, could
decrease by up to $18.5 million.
Indemnifications
The Company is a party to a variety of agreements pursuant to which it may be obligated to
indemnify the other party. Typically, these obligations arise primarily in connection with sales
contracts and license agreements or the sale of assets, under which the Company customarily agrees
to hold the other party harmless against losses arising from a breach of warranties,
representations and covenants related to such matters as title to assets sold, validity of certain
intellectual property rights, non-infringement of third-party rights, and certain income
tax-related matters. In each of these circumstances, payment by the Company is typically subject to
the other party making a claim to and cooperating with the Company pursuant to the procedures
specified in the particular contract. This usually allows the Company to challenge the other
partys claims or, in case of breach of intellectual property representations or covenants, to
control the defense or settlement of any third-party claims brought against the other party.
Further, the Companys obligations under these agreements may be limited in terms of activity
(typically to replace or correct the products or terminate the agreement with a refund to the other
party), duration and/or amounts. In some instances, the Company may have recourse against third
parties covering certain payments made by the Company.
Legal Matters
On December 6, 2006, Sony Ericsson Mobile Communications USA Inc. (Sony Ericsson) filed a
lawsuit against Agere in Wake County Superior Court in North Carolina, alleging unfair and
deceptive trade practices, fraud and negligent misrepresentation in connection with Ageres
engagement with Sony Ericsson to develop a wireless data card for personal computers. The complaint
claims an unspecified amount of damages and seeks compensatory damages, treble damages and
attorneys fees. On February 13, 2007, Agere filed a motion to dismiss for improper venue. On
August 27, 2007, the court granted Ageres motion to dismiss for improper venue. Sony Ericsson
appealed that ruling. On March 3, 2009, the North Carolina Court of Appeals affirmed the lower
courts ruling. On October 22, 2007, Sony Ericsson filed a lawsuit in the Supreme Court of the
State of New York, New York County against LSI, raising substantially the same allegations and
seeking substantially the same relief as the North Carolina proceeding. In January 2010, Sony
Ericsson amended its complaint by adding claims for fraudulent concealment and gross negligence. On
September 10, 2010, LSI filed a motion for summary judgment. In January 2011, LSI and Sony Ericsson
held an unsuccessful mediation in this matter. The Company is unable to estimate the possible loss
or range of loss, if any, that may be incurred with respect to this matter.
On March 23, 2007, CIF Licensing, LLC, d/b/a GE Licensing (GE) filed a lawsuit against
Agere in the United States District Court for the District of Delaware, asserting that Agere
products infringe patents in a portfolio of patents GE acquired from Motorola. GE has asserted that
four of the patents cover inventions relating to modems. GE is seeking monetary damages. Agere
believes it has a number of defenses to the infringement claims in this action, including laches,
exhaustion and its belief that it has a license to the patents. The court postponed hearing motions
based on these defenses until after the trial, and did not allow Agere to present evidence on these
defenses at trial. On February 17, 2009, the jury in this case returned a verdict finding that
three of the four patents were invalid and that Agere products infringed the one patent found to be
valid and awarding GE $7.6 million for infringement of that patent. The jury also found Ageres
infringement was willful, which means that the judge could increase the amount of damages up to
three times its original amount. The court has not scheduled hearings on Ageres post-trial motions
related to its defenses. One of these motions seeks to have a mis-trial declared based on Ageres
belief that GE withheld evidence in discovery, which affected Ageres ability to present evidence
at trial. On October 6, 2010, a special master appointed by the court determined that GEs actions
were not
16
wrongful and that the evidence withheld by GE was not material to the jurys findings.
Agere is challenging this determination. If the jurys verdict is entered by the court, Agere would
also expect to be required to pay interest from the date of infringing sales. If the
verdict is entered, Agere intends to appeal the matter. On February 17, 2010, the court issued
an order granting GEs summary judgment motions seeking to bar Ageres defenses of laches,
exhaustion, and license and denying Ageres summary judgment motions concerning the same defenses.
On July 30, 2010, the court held that one of the patents found invalid by the jury was valid. The
court also held that the February 17, 2010 order was not inconsistent with its previous ruling that
Agere would be permitted to renew its laches, licensing, and exhaustion defenses, and that Agere
has not been precluded from asserting them post-trial. The Company is unable to estimate the
possible loss or range of loss, if any, that may be incurred with respect to this matter.
On December 1, 2010, Rambus Inc. (Rambus) filed a lawsuit against LSI in the United
States District Court for the Northern District of California alleging that LSIs products infringe
one or more of nineteen Rambus patents. These products contain either DDR-type memory controllers
or certain high-speed SerDes peripheral interfaces, such as PCI Express interfaces and certain SATA
and SAS interfaces. Rambus is seeking unspecified monetary damages, treble damages and costs,
expenses and attorneys fees due to alleged willfulness, interest, and permanent injunctive relief
in this action. In addition, on December 1, 2010, Rambus filed an action with the International
Trade Commission (ITC) against LSI and five of its customers alleging that LSI products infringe
six of the nineteen patents in the California case. Rambus also named five other companies and a
number of their customers in the ITC action. Rambus is seeking an exclusionary order against LSI
and its customers in the ITC action, which, if granted, would preclude LSI and its customers from
selling these products in the U.S. The ITC instituted its investigation on December 29, 2010. LSI
has filed an answer in the ITC proceedings and has requested a stay in the California case. The
Company is unable to estimate the possible loss or range of loss, if any, that may be incurred with
respect to this matter.
In addition to the foregoing, the Company and its subsidiaries are parties to other litigation
matters and claims in the normal course of business. The Company does not believe, based on
currently available facts and circumstances, that the final outcome of these other matters, taken
individually or as a whole, will have a material adverse effect on the Companys consolidated
results of operations or financial position. However, the pending unsettled lawsuits may involve
complex questions of fact and law and may require the expenditure of significant funds and the
diversion of other resources to defend. From time to time, the Company may enter into confidential
discussions regarding the potential settlement of such lawsuits. However, there can be no assurance
that any such discussions will occur or will result in a settlement. Moreover, the settlement of
any pending litigation could require the Company to incur substantial costs and, in the case of the
settlement of any intellectual property proceeding against the Company, may require the Company to
obtain a license to a third-partys intellectual property that could require royalty payments in
the future and the Company to grant a license to certain of its intellectual property to a third
party under a cross-license agreement. The results of litigation are inherently uncertain, and
material adverse outcomes are possible.
The Company has not provided accruals for any legal matters in its financial statements as
potential losses for such matters are not considered probable and reasonably estimable. However,
because such matters are subject to many uncertainties, the ultimate outcomes are not predictable,
and there can be no assurances that the actual amounts required to satisfy alleged liabilities from
the matters described above will not have a material adverse effect on its consolidated results of
operations, financial position or cash flows.
Note 14 Discontinued Operations
On March 9, 2011, the Company entered into a definitive agreement to sell its external storage
systems business to NetApp for $480.0 million in cash. The external storage systems business had
historically been part of the Companys Storage Systems segment. In accordance with the applicable
accounting guidance for the disposal of long-lived assets, the results of the external storage
systems business are presented as discontinued operations and, as such, have been excluded from
both continuing operations and segment results for all periods presented. Additionally, the assets
of the external storage systems business at April 3, 2011 are presented as held for
sale in the condensed consolidated balance sheets.
Following is selected financial information included in (loss)/income from discontinued
operations for the external storage systems business:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
|
(In thousands) |
|
Revenues |
|
$ |
155,690 |
|
|
$ |
164,510 |
|
(Loss)/income before income taxes |
|
$ |
(7,910 |
) |
|
$ |
12,474 |
|
17
Assets classified as held for sale as of April 3, 2011 related to the external storage
systems business are as follows:
|
|
|
|
|
|
|
Amount |
|
|
|
(In thousands) |
|
Inventories |
|
$ |
44,400 |
|
Property and equipment, net |
|
|
25,952 |
|
Goodwill and identified intangible assets, net |
|
|
117,847 |
|
Other assets |
|
|
47,700 |
|
|
|
|
|
Total assets held for sale of discontinued operations |
|
$ |
235,899 |
|
|
|
|
|
Note 15 Subsequent Events
On May 6, 2011, the Company completed the sale of its external storage systems business to
NetApp pursuant to the terms of the asset purchase agreement and received cash consideration of
$480.0 million.
As part of the asset purchase agreement, certain transitional services will be provided to
NetApp for a period of up to eighteen months. The purpose of these services is to provide
short-term assistance to the buyer in assuming the operations of the external storage systems
business.
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This managements discussion and analysis should be read in conjunction with the other
sections of this Form 10-Q, including Part 1, Item 1. Financial Statements.
Where more than one significant factor contributed to changes in results from year to year, we
have quantified these factors throughout Managements Discussion and Analysis of Financial
Condition and Results of Operations where practicable and material to understanding the discussion.
OVERVIEW
We design, develop and market complex, high-performance storage and networking semiconductors.
We provide silicon-to-system solutions that are used at the core of products that create, store,
consume and transport digital information. We offer a broad portfolio of capabilities, including
custom and standard product integrated circuits used in hard disk drives, solid state drives,
high-speed communications systems, computer servers, storage systems and personal computers. We
also offer redundant array of independent disks, or RAID, adapters for computer servers and RAID
software applications.
We sell our integrated circuits for server and storage applications principally to makers of
hard disk drives, solid state drives and computer servers. We sell our integrated circuits for
networking applications principally to makers of devices used in computer and telecommunications
networks and, to a lesser extent, to makers of personal computers. We also generate revenue by
licensing other entities to use our intellectual property.
We derive the majority of our revenue from sales of products for the server, hard disk drive
and networking equipment end markets. We believe that these markets offer us attractive
opportunities because of the growing demand to create, store, manage and move digital content. We
believe that this growth is occurring as a result of a number of trends, including:
|
|
|
The increasing popularity of mobile devices such as smart phones and media tablets, and
the increasing use of the internet for streaming media, such as videos and music, which are
driving the need for more network capacity; |
|
|
|
Consumer and business demand for hard disks to store increasing amounts of digital data,
including music, video, pictures, and medical and other business records; and |
|
|
|
Enterprises are refreshing their data centers to provide higher levels of business
support and analytics, which drives demand for new servers and storage systems and
associated equipment. |
Our revenues depend on market demand for these types of products and our ability to compete in
highly competitive markets. We face competition not only from makers of products similar to ours,
but also from competing technologies. For example, we see the development of solid state drives
based on flash memory rather than the spinning platters used in hard disk drives as a long-term
potential competitor to certain types of hard disk drives, and we are focusing development efforts
in that area.
Prior to May 6, 2011, we also sold external storage systems, primarily to original equipment
manufacturers, or OEMs, who resell these products to end customers under their own brand name. On
May 6, 2011, we completed the sale of our external storage systems business to NetApp for $480.0
million in cash. Because of our decision to exit the external storage systems business, we have
reflected that business as a discontinued operation in our financial statements for all periods
presented and have reclassified the assets of that business as held for sale in the balance sheet
as of April 3, 2011. Until we made the decision to exit the external storage systems business, our
storage systems business included our external storage systems and RAID adapter businesses. We have
retained the RAID adapter business, which is now managed by and has been incorporated into our
semiconductor business. We now operate in one reportable segment.
During the first quarter of 2011, we reported revenue of $473.3 million, compared to $472.7
for the first quarter of 2010, and net income of $10.2 million, or $0.02 per share, compared to
$22.5 million, or $0.03 per share, for the first quarter of 2010.
On March 9, 2011, our Board of Directors authorized a new stock repurchase program of up to
$750.0 million of our common stock. During the first quarter of 2011, we repurchased 14.7 million
shares for $96.8 million under this program and anticipate continuing to repurchase stock under
current market conditions. We ended the first quarter of 2011 with cash and cash equivalents,
19
together with short-term investments, of $682.3 million, an improvement of $5.6 million from
the end of 2010 and received additional cash from the closing of the sale of our external storage
systems business after the end of the quarter.
As we look forward into 2011, we are focused on a number of key objectives, including:
|
|
|
Working with suppliers and customers to maintain our ability to meet customer demand for
products in light of the impact of the recent earthquake and ensuing events in Japan. The
packaging we use for some of our semiconductor products uses materials from a supplier in
Japan whose operations have been affected. While we believe we have access to sufficient
materials for the near term, we are working to ensure adequate supplies of materials
acceptable to our customers to fully meet demand anticipated in the second half of 2011 and
beyond. |
|
|
|
Improving our gross margins and controlling operating expenses to drive improved
financial performance; |
|
|
|
Meeting or exceeding our development, product quality and delivery commitments to our
customers; |
|
|
|
Identifying attractive opportunities for future products, particularly in areas that are
adjacent to technologies where we have strong capabilities; |
|
|
|
Developing leading-edge new technologies; and |
|
|
|
Developing the skills of our workforce. |
RESULTS OF OPERATIONS
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
|
Revenues |
|
$ |
473.3 |
|
|
$ |
472.7 |
|
|
$ |
0.6 |
|
|
|
0.1 |
% |
The increase in revenues was primarily attributable to increases in demand for our server RAID
adapters from existing customers, program ramp-ups with new customers, and higher revenues from the
licensing of our intellectual property. These increases were offset in part by a decrease in unit
sales from semiconductors used in storage product applications, primarily as our customers
experienced lower demand for fiber channel and host bus adaptors.
Significant Customers:
The following table provides information about our one customer that accounted for 10% or more
of consolidated revenues:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
% of revenues |
|
|
21 |
% |
|
|
20 |
% |
Revenues by Geography
The following table summarizes our revenues by geography based on the ordering location of the
customer. Because we sell our products primarily to other sellers of technology products and not to
end-users, the information in the table below may not accurately reflect geographic end-demand for
our products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
|
North America * |
|
$ |
120.9 |
|
|
$ |
89.8 |
|
|
$ |
31.1 |
|
|
|
34.7 |
% |
Asia ** |
|
|
302.7 |
|
|
|
332.7 |
|
|
|
(30.0 |
) |
|
|
(9.0 |
)% |
Europe and the Middle East |
|
|
49.7 |
|
|
|
50.2 |
|
|
|
(0.5 |
) |
|
|
(1.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
473.3 |
|
|
$ |
472.7 |
|
|
$ |
0.6 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Primarily the United States. |
|
** |
|
Primarily Singapore, China and Taiwan. |
20
The increase in revenues in North America was primarily attributable to increased unit sales
of server RAID adapters and semiconductors used in networking product applications. The decrease in
revenues in Asia was primarily attributable to decreased unit sales of semiconductors used in
storage and networking product applications.
Gross Profit Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
|
Gross profit |
|
$ |
224.2 |
|
|
$ |
214.8 |
|
|
$ |
9.4 |
|
|
|
4.4 |
% |
% of revenues |
|
|
47.4 |
% |
|
|
45.4 |
% |
|
|
|
|
|
|
|
|
Gross margins increased primarily due to a favorable shift in product mix as a result of
increased revenues from the licensing of our intellectual property, which have higher gross margins
than products, and a decrease in amortization of identified intangible assets.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
|
Research and development |
|
$ |
142.3 |
|
|
$ |
138.9 |
|
|
$ |
3.4 |
|
|
|
2.4 |
% |
% of revenues |
|
|
30.1 |
% |
|
|
29.4 |
% |
|
|
|
|
|
|
|
|
R&D expenses increased primarily due to higher compensation-related expenses and facility
costs as a result of headcount additions in China and India.
Selling, General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
|
Selling, general and administrative |
|
$ |
68.9 |
|
|
$ |
70.4 |
|
|
$ |
(1.5 |
) |
|
|
(2.1 |
)% |
% of revenues |
|
|
14.6 |
% |
|
|
14.9 |
% |
|
|
|
|
|
|
|
|
SG&A expenses decreased primarily due to decreases in amortization of identified intangible
assets and sales commissions.
Restructuring of Operations and Other Items, net
The following table summarizes items included in restructuring of operations and other items,
net from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
|
(In millions) |
|
Lease and contract terminations |
|
$ |
1.7 |
(a) |
|
$ |
0.9 |
|
Employee severance and benefits |
|
|
1.6 |
(b) |
|
|
0.5 |
|
|
|
|
|
|
|
|
Total restructuring expenses |
|
|
3.3 |
|
|
|
1.4 |
|
Other items |
|
|
(0.5 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2.8 |
|
|
$ |
1.6 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The amount primarily relates to changes in estimates and changes in time value of accruals
for previously accrued facility lease exit costs. |
|
(b) |
|
The amount primarily relates to restructuring actions taken during the first quarter of 2011
as we continue to streamline our operations. |
Interest Expense, Interest Income and Other, net
The following table summarizes interest expense and components of interest income and other,
net:
21
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 3, 2011 |
|
|
April 4, 2010 |
|
|
|
(In millions) |
|
Interest expense |
|
$ |
|
|
|
$ |
(3.9 |
) |
Interest income |
|
|
3.4 |
|
|
|
3.6 |
|
Other income/(expense), net |
|
|
0.9 |
|
|
|
(12.4 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
4.3 |
|
|
$ |
(12.7 |
) |
|
|
|
|
|
|
|
Interest expense decreased by $3.9 million for the three months ended April 3, 2011 as
compared to the three months ended April 4, 2010 as a result of the repayment of our 4% Convertible
Subordinated Notes in May 2010.
Interest income decreased by $0.2 million for the three months ended April 3, 2011 as compared
to the three months ended April 4, 2010 primarily as a result of lower cash balances throughout the
first quarter of 2011, offset in part by higher interest rates during the first quarter of 2011
compared to the first quarter of 2010.
The $12.4 million of other expense, net, for the three months ended April 4, 2010 primarily
consisted of $11.6 million of other than temporary impairment charges for certain non-marketable
equity securities.
Benefit from Income Taxes
During the three months ended April 3, 2011 and April 4, 2010, we recorded income tax benefits
from continuing operations of $4.1 million and $23.1 million, respectively. The income tax benefit
from continuing operations for the three months ended April 3, 2011 included a reversal of $8.2
million in liabilities for uncertain tax positions, which included previously unrecognized tax
benefits of $4.8 million and interest and penalties of $3.4 million, as a result of the expiration
of statutes of limitations in multiple jurisdictions. The income tax benefit from continuing
operations for the three months ended April 4, 2010 included a reversal of $27.9 million in
liabilities for uncertain tax positions, which included previously unrecognized tax benefits of
$12.2 million and interest and penalties of $15.7 million, as a result of the expiration of
statutes of limitations in multiple jurisdictions.
In general, we compute our tax provision using an estimated annual tax rate. However, we
exclude certain loss jurisdictions from the computation of estimated annual rate when no benefit
can be realized on those losses. Excluding certain foreign jurisdictions, we believe that it is
more likely than not that the future benefit of deferred tax assets will not be realized.
Discontinued Operations
Net loss from discontinued operations, net of taxes, was $8.4 million for the three months
ended April 3, 2011 as compared to net income of $8.2 million for the three months ended April 4,
2010. The $16.6 million decrease primarily represents $23.8 million of restructuring, asset
impairment and other exit charges, offset in part by a $7.9 million decrease in R&D expenses due to
lower compensation-related expenses and facility costs as a result of the decision to sell the
external storage systems business during the three months ended April 3, 2011.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and short-term investments increased to $682.3 million as of April 3,
2011 from $676.7 million as of December 31, 2010. The increase was mainly due to cash inflows
generated from operating activities, which were substantially offset by cash outflows for financing
and investing activities, as described below.
Working Capital
Working capital increased by $164.7 million to $943.9 million as of April 3, 2011 from $779.2
million as of December 31, 2010. The increase was primarily attributable to the following:
|
|
|
Assets held for sale increased by $235.8 million primarily as certain assets of the
external storage systems business were classified to assets held for sale; |
|
|
|
Accrued salaries, wages and benefits decreased by $22.1 million primarily as a result of
timing differences in the payment of salaries, benefits and performance-based compensation;
and
|
22
|
|
|
Cash, cash equivalents and short-term investments increased by $5.6 million. |
These increases in working capital were offset in part by the following:
|
|
|
Accounts receivable decreased by $40.5 million primarily as a result of an improvement in
collections; |
|
|
|
Inventories decreased by $31.7 million primarily as a result of the reclassification of
the external storage systems business inventory to assets held for sale, offset in part by
an increase in inventory purchases primarily due to new product introductions and expected
increases in product demand in future quarters; |
|
|
|
Accounts payable increased by $24.9 million primarily due to the normal timing of invoice
receipts and payments, and increased levels of inventory purchases as a result of expected
increases in product demand; and |
|
|
|
Prepaid expenses and other current assets decreased by $4.9 million primarily as a result
of decreases in prepaid software maintenance and other receivables. |
Working capital increased by $33.8 million to $764.9 million as of April 4, 2010 from $731.1
million as of December 31, 2009. The increase was primarily attributable to the following:
|
|
|
Cash, cash equivalents and short-term investments increased by $53.4 million; |
|
|
|
Inventories increased by $16.4 million primarily as a result of an increase in inventory
purchases to meet expected customer demand in the second quarter of 2010; |
|
|
|
Accounts payable decreased by $12.8 million primarily due to the normal timing of invoice
receipts and payments; |
|
|
|
Prepaid expenses and other current assets increased by $9.4 million primarily due to
increases in prepaid software maintenance contracts, other prepaid expenses and receivables;
and |
|
|
|
Other accrued liabilities decreased by $6.8 million primarily attributable to the
utilization of restructuring reserves and payment of liabilities, offset in part by
increases in accruals for interest on our convertible notes as the interest payment date
approached in May 2010 and other accruals related to our operations. |
These increases in working capital were offset in part by the following:
|
|
|
Accounts receivable decreased by $40.4 million primarily as a result of an improvement in
collections; and |
|
|
|
Accrued salaries, wages and benefits increased by $24.6 million primarily as a result of
timing differences in the payment of salaries and benefits and the addition of
performance-based compensation accruals, which we reduced in 2009 in response to the global
economic downturn. |
Cash Provided by Operating Activities
During the three months ended April 3, 2011, we generated $108.0 million of cash from
operating activities as a result of the following:
|
|
|
Net income adjusted for non-cash items, including depreciation and amortization of $56.0
million and stock-based compensation expense of $14.0 million. The non-cash items and other
non-operating adjustments are quantified in our condensed consolidated statements of cash
flows included in Item 1; and |
|
|
|
A net increase of $16.0 million in assets and liabilities, including changes in working
capital components, from December 31, 2010 to April 3, 2011, as discussed above. |
During the three months ended April 4, 2010, we generated $105.8 million of cash from
operating activities as a result of the following:
23
|
|
|
Net income adjusted for non-cash items, including depreciation and amortization of $67.0
million and stock-based compensation expense of $16.4 million. The non-cash items and other
non-operating adjustments are quantified in our condensed consolidated statements of cash
flows included in Item 1; |
|
|
|
Offset in part by a net decrease of $9.7 million in assets and liabilities, including
changes in working capital components, from December 31, 2009 to April 4, 2010, as discussed
above. |
Cash Used in Investing Activities
Cash used in investing activities for the three months ended April 3, 2011 was $23.8 million.
The investing activities during the first quarter of 2011 were the following:
|
|
|
Purchases of property, equipment and software, net of proceeds from sales, totaling $21.2
million; and |
|
|
|
Purchases of available-for-sale debt securities, net of proceeds from maturities and
sales, of $2.6 million. |
Cash used in investing activities for the three months ended April 4, 2010 was $16.0 million.
The investing activities during the first quarter of 2010 were the following:
|
|
|
Purchases of property, equipment and software, net of proceeds from sales, totaling $27.3
million; and |
|
|
|
Proceeds from maturities and sales of available-for-sale debt securities of $11.3
million. |
We expect capital expenditures to be approximately $55 million in 2011. In recent years, we
have reduced our level of capital expenditures as a result of our focus on establishing strategic
supplier alliances with foundry semiconductor manufacturers and with third-party assembly and test
operations, which enables us to have access to advanced manufacturing capacity while reducing our
capital spending requirements.
Cash Used in Financing Activities
Cash used in financing activities for the three months ended April 3, 2011 was $79.5 million,
as compared to $22.6 million for the three months ended April 4, 2010. The primary financing
activities during the three months ended April 3, 2011 were the use of $96.8 million to repurchase
our common stock, offset in part by the proceeds of $17.3 million from issuances of common stock
under our employee stock plans. On March 9, 2011, our Board of Directors authorized a new stock
repurchase program of up to $750.0 million of our common stock. We expect to fund the repurchases
under this authorization from the proceeds of the sale of our external storage systems business,
available cash and short-term investments.
The primary financing activities during the three months ended April 4, 2010 were the use of
$26.2 million to repurchase our common stock, offset in part by the proceeds of $3.6 million from
issuances of common stock under our employee stock plans.
We do not currently pay, and do not anticipate paying in the foreseeable future, any cash
dividends to our stockholders.
Cash, cash equivalents and short-term investments are our primary source of liquidity. We
believe that our existing liquid resources and cash generated from operations will be adequate to
meet our operating and capital requirements and other obligations for more than the next 12 months.
We may, however, find it desirable to obtain additional debt or equity financing. Such financing
may not be available to us at all or on acceptable terms if we determine that it would be desirable
to obtain additional financing.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of April 3, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
Less Than 1 Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
After 5 Years |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
$ |
48.0 |
|
|
$ |
51.4 |
|
|
$ |
15.5 |
|
|
$ |
3.6 |
|
|
$ |
|
|
|
$ |
118.5 |
|
Purchase commitments |
|
|
367.0 |
|
|
|
4.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
371.2 |
|
Unrecognized tax positions plus
interest and penalties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81.5 |
** |
|
|
81.5 |
|
Pension contributions |
|
|
56.2 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
56.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
471.2 |
|
|
$ |
55.5 |
|
|
$ |
15.6 |
|
|
$ |
3.6 |
|
|
$ |
81.5 |
|
|
$ |
627.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
* |
|
We have pension plans covering substantially all former Agere U.S. employees, excluding
management employees hired after June 30, 2003. We also have pension plans covering certain
international employees. Although additional future contributions will be required, the amount
and timing of these contributions will be affected by actuarial assumptions, the actual rate
of return on plan assets, the level of market interest rates, and the amount of voluntary
contributions to the plans. The amount shown in the table represents our planned contributions
to our pension plans for the remainder of 2011. Because any contributions for 2012 and later
will depend on the value of the plan assets in the future and thus are uncertain, we have not
included any amounts for 2012 and beyond in the above table. |
|
** |
|
This amount represents the non-current tax payable obligation. We are unable to make a
reasonably reliable estimate as to when cash settlement with a taxing authority may occur. |
Operating Lease Obligations
We lease real estate and certain non-manufacturing equipment under non-cancelable operating
leases. We also include non-cancellable obligations under certain software licensing arrangements
in this category.
Purchase Commitments
We maintain purchase commitments with certain suppliers, primarily for raw materials and
manufacturing services and for some non-production items. Purchase commitments for inventory
materials are generally restricted to a forecasted time horizon as mutually agreed upon between the
parties. This forecasted time horizon can vary for different suppliers.
Uncertain Tax Positions
As of April 3, 2011, we had $150.8 million of unrecognized tax benefits, for which we are
unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority
may occur. It is reasonably possible that the total amount of unrecognized tax benefits will
increase or decrease in the next 12 months. Such changes could occur based on the normal expiration
of statutes of limitations or the possible conclusion of ongoing tax audits in various
jurisdictions around the world. If those events occur within the next 12 months, we estimate that
the unrecognized tax benefits, plus accrued interest and penalties, could decrease by up to $18.5
million.
Standby Letters of Credit
As of April 3, 2011 and December 31, 2010, we had outstanding obligations relating to standby
letters of credit of $3.5 million and $3.9 million, respectively. Standby letters of credit are
financial guarantees provided by third parties for leases, customs and certain self-insured risks.
If the guarantees are called, we must reimburse the provider of the guarantee. The fair value of
the letters of credit approximates the contract amount. The standby letters of credit generally
renew annually.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes in our critical accounting estimates or significant
accounting policies during the three months ended April 3, 2011 as compared to the discussion in
Part II, Item 7 and in Note 1 to our financial statements in Part II, Item 8 of our Annual Report
on Form 10-K for the year ended December 31, 2010.
RECENT ACCOUNTING PRONOUNCEMENTS
The information contained in Note 1 to our financial statements in Item 1 under the heading
Recent Accounting Pronouncements is incorporated by reference into this Item 2.
25
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in the market risk disclosures during the three months
ended April 3, 2011 as compared to the discussion in Part II, Item 7A of our Annual Report on Form
10-K for the year ended December 31, 2010.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: The Securities and Exchange Commission
defines the term disclosure controls and procedures to mean a companys controls and other
procedures that are designed to ensure that information required to be disclosed in the reports
that it files or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our reports filed under the Securities Exchange
Act is accumulated and communicated to management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required or necessary
disclosures. Our chief executive officer and chief financial officer have concluded, based on the
evaluation of the effectiveness of the disclosure controls and procedures by our management with
the participation of our chief executive officer and chief financial officer, as of the end of the
period covered by this report, that our disclosure controls and procedures were effective for this
purpose.
Changes in Internal Control: During the first quarter of 2011, we did not make any change in
our internal control over financial reporting that materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
This information is included under the caption Legal Matters in Note 13 to our financial
statements in Item 1 of Part I.
Item 1A. Risk Factors
Set forth below are risks and uncertainties, many of which are discussed in greater detail in
our Annual Report on Form 10-K for the year ended December 31, 2010, that, if they were to occur,
could materially adversely affect our business or could cause our actual results to differ
materially from the results contemplated by the forward-looking statements in this report and other
public statements we make:
|
|
|
As a result of the earthquake and tsunami that affected Japan in early March 2011, and
the events at the Fukushima Dai-ichi nuclear plant, it is possible that supplies of some
materials we need to make semiconductors, as well as demand from our customers will be
affected, which could have an adverse impact on our business. |
On March 11, 2011, Japan experienced a 9.0 magnitude earthquake, which triggered a tsunami
that led to widespread damage and business interruption. Following the earthquake, the cooling
system at the Fukushima Daiichi nuclear generating plant failed and the plant has experienced
significant emissions of radiation. As a result of the earthquake, a number of factories in Japan
have been forced to shut down and the country has been experiencing rolling blackouts, further
affecting industrial production.
We do not maintain significant operations in Japan and do not use semiconductor foundries in
Japan. We do, however, obtain materials used in the packaging of some of our semiconductors from
suppliers in Japan, the operations of one of which have been curtailed. While we have sufficient
supplies of these materials to cover our needs for the near term, we are working with some of our
customers and suppliers to obtain alternate sources of supply that are acceptable to our customers.
While alternate suppliers and alternate materials may be available, our ability to use these
alternate suppliers and materials may be delayed if customers require that the suppliers or
materials be qualified before they accept products using materials from the alternate suppliers or
using alternate materials. To the extent that our existing suppliers operations continue to be
curtailed and we are unable to obtain timely, acceptable alternate sources of supply, our revenues
could be adversely affected, beginning in the second half of 2011.
We have been working closely with our customers to understand their needs. We have some
customers with significant operations in Japan and demand from these customers may be reduced if
the customers operations are curtailed. Our revenues may also be adversely affected if any of our
customers are unable to obtain sufficient parts from other suppliers or if they experience reduced
demand from their customers.
26
|
|
|
We depend on a small number of customers. The loss of, or a significant reduction in
revenue from, any of these customers would harm our results of operations. |
|
|
|
If we fail to keep pace with technological advances, or if we pursue technologies that
do not become commercially accepted, customers may not buy our products and our results of
operations may be harmed. |
|
|
|
We operate in intensely competitive markets, and our failure to compete effectively
would harm our results of operations. |
|
|
|
Customer orders and ordering patterns can change quickly, making it difficult for us to
predict our revenues and making it possible that our actual revenues may vary materially
from our expectations, which could harm our results of operations and stock price. |
|
|
|
We depend on outside suppliers to manufacture, assemble, package and test our products;
accordingly, any failure to secure and maintain sufficient manufacturing capacity at
attractive prices or to maintain the quality of our products could harm our business and
results of operations. |
|
|
|
Failure to qualify our products or our suppliers manufacturing lines with key customers
could harm our business and results of operations. |
|
|
|
Any defects in our products could harm our reputation, customer relationships and
results of operations. |
|
|
|
Our pension plans are underfunded, and may require significant future contributions,
which could have an adverse impact on our business. |
|
|
|
We may be subject to intellectual property infringement claims and litigation, which
could cause us to incur significant expenses or prevent us from selling our products. |
|
|
|
If we are unable to protect or assert our intellectual property rights, our business and
results of operations may be harmed. |
|
|
|
We are exposed to legal, business, political and economic risks associated with our
international operations. |
|
|
|
We use indirect channels of product distribution over which we have limited control. |
|
|
|
We may engage in acquisitions and strategic alliances, which may not be successful and
could harm our business and operating results. |
|
|
|
The semiconductor industry is highly cyclical, which may cause our operating results to
fluctuate. |
|
|
|
Our failure to attract, retain and motivate key employees could harm our business. |
|
|
|
Our operations and our suppliers operations are subject to natural disasters and other
events outside of our control that may disrupt our business and harm our operating results. |
|
|
|
We are subject to various environmental laws and regulations that could impose
substantial costs on us and may harm our business. |
|
|
|
Our blank check preferred stock and Delaware law contain provisions that may inhibit
potential acquisition bids, which may harm our stock price, discourage merger offers or
prevent changes in our management. |
|
|
|
Class action litigation due to stock price volatility or other factors could cause us to
incur substantial costs and divert our managements attention and resources. |
27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains information about our repurchases of our common stock during the
quarter ended April 3, 2011.
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
Dollar Value of Shares |
|
|
|
|
|
|
|
|
|
|
|
as Part of |
|
|
that May Yet Be |
|
|
|
Total Number of Shares |
|
|
Average Price |
|
|
Publicly Announced |
|
|
Purchased Under |
|
Period |
|
Purchased |
|
|
Paid per Share |
|
|
Plans or Programs |
|
|
the Programs |
|
January 1 January 31, 2011 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
February 1 February 28, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1 April 3, 2011 |
|
|
14,707,638 |
|
|
|
6.58 |
|
|
|
14,707,638 |
|
|
|
653,209,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
14,707,638 |
|
|
$ |
6.58 |
|
|
|
14,707,638 |
|
|
$ |
653,209,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 9, 2011, our Board of Directors authorized the repurchase of up to $750 million of
our common stock. The repurchases reported in the table above were made pursuant to this
authorization.
Item 6. Exhibits
See the Exhibit Index, which follows the signature page to this report.
28
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 CORPORATION
(Registrant)
|
|
Date: May 12, 2011 |
By |
/s/ Bryon Look
|
|
|
|
Bryon Look |
|
|
|
Executive Vice President, Chief Financial Officer
and Chief Administrative Officer |
|
29
EXHIBIT INDEX
|
|
|
2.1
|
|
Asset Purchase Agreement, by and between LSI Corporation and NetApp, Inc., dated as of March 9, 2011.
(Exhibits and Schedules have been omitted pursuant to Regulation S-K Item 601(b)(2), but will be provided to
the Securities and Exchange Commission upon request.) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 |
|
|
|
101.INS
|
|
XBRL instance document |
|
|
|
101.SCH
|
|
XBRL taxonomy extension schema document |
|
|
|
101.CAL
|
|
XBRL taxonomy extension calculation linkbase document |
|
|
|
101.LAB
|
|
XBRL taxonomy extension label linkbase document |
|
|
|
101.PRE
|
|
XBRL taxonomy extension presentation linkbase document |
30