SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended April 3, 1994
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______________ to
_______________
Commission File Number: 0-11674
LSI LOGIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2712976
(State of Incorporation) (I.R.S. Employer
Identification Number)
1551 McCarthy Boulevard
Milpitas, California 95035
(Address of principal executive offices)
(408) 433-8000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [x] NO
As of May 3, 1994 there were 50,798,101 shares of registrant's
Common Stock, $.01 par value,outstanding.
LSI LOGIC CORPORATION
Form 10-Q
FOR THE QUARTER ENDED APRIL 3, 1994
INDEX
Page No.
PART I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets - March 31, 1994 and
December 31, 1993 3
Consolidated Statements of Operations -
Three-Month Periods Ended March 31, 1994 and 1993 4
Consolidated Statements of Cash Flows -
Three-Month Periods Ended March 31, 1994 and 1993 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
PART II Other Information
Item 1 Legal Proceedings 13
Item 6 Exhibits and Reports on Form 8-K 13
PART I
Item 1. Financial Statements
LSI LOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amount)
(Unaudited)
March 31, December 31,
1994 1993
ASSETS
Cash and cash equivalents $ 273,108 $121,319
Short-term investments 83,792 80,764
Accounts receivable, less
allowance for doubtful accounts
of $2,906 and $2,470 141,193 124,384
Inventories 84,184 69,066
Prepaid expenses and other
current assets 32,268 30,165
Total current assets 614,545 425,698
Property and equipment, at cost
less accumulated depreciation
and amortization 408,294 385,063
Other assets 50,646 41,945
Total assets $1,073,485 $852,706
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 104,266 $ 66,822
Accrued salaries, wages
and benefits 22,462 24,397
Accrued restructuring costs 27,634 29,503
Other accrued liabilities 31,441 28,353
Income taxes payable 20,274 17,079
Current portion of long-term debt,
capital lease obligations and
short-term borrowings 16,528 22,727
Total current liabilities 222,605 188,881
Long-term debt, capital lease
obligations and other long-term
liabilities 396,412 246,314
Deferred income taxes 5,738 6,337
Minority interest in subsidiaries 121,757 118,740
Stockholders' equity:
Preferred shares; 2,000 shares
authorized - -
Common stock; $.01 par value; 73,500
shares authorized; 50,760 and 49,728
shares outstanding 508 497
Additional paid-in capital 279,058 273,933
Accumulated deficit (22,318) (41,673)
Cumulative translation adjustment 69,725 59,677
Total stockholders' equity 326,973 292,434
Total liabilities and
stockholders' equity $1,073,485 $852,706
See accompanying notes to unaudited consolidated financial
statements.
LSI LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
1994 1993
Revenues $193,812 $168,929
Costs and expenses:
Cost of revenues 115,387 103,920
Research and development 23,141 18,997
Selling, general and administrative 29,457 29,208
Total costs and expenses 167,985 152,125
Income from operations 25,827 16,804
Interest expense 3,788 2,173
Interest income and other 4,798 1,695
Income before income taxes and
minority interest 26,837 16,326
Provision for income taxes 7,514 4,898
Income before minority interest 19,323 11,428
Minority interest in net income (loss)
of subsidiaries (32) 813
Net income $ 19,355 $ 10,615
Net income per share:
Primary $ .37 $ .22
Fully diluted $ .36
Common share and common share equivalents
used in computing per share amounts:
Primary 51,631 47,452
Fully diluted 57,582
See accompanying notes to unaudited consolidated financial
statements.
LSI LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1994 1993
Operating activities:
Net income $ 19,355 $ 10,615
Adjustments:
Depreciation and amortization 24,278 15,237
Minority interest in net income
(loss) of subsidiaries (32) 813
Change in accounts receivable (13,794) (4,248)
Change in inventories (12,379) (3,652)
Change in prepaid and other assets (7,566) (200)
Change in accounts payable 35,184 (26,635)
Change in accrued and other liabilities 4,373 11,943
Change in accrued restructuring costs (1,872) (2,133)
Net cash provided by operating activities 47,547 1,740
Investing activities:
Maturities of debt securities
available-for-sale 17,895 -
Sales of debt securities
available-for-sale 1,989 -
Purchases of debt securities
available-for-sale (25,089) -
Change in other investments 2,157 (10,882)
Acquisition of stock from minority
interest holders (5,350) -
Purchases of property and equipment,
net of retirements (24,102) (29,058)
Net cash used in investing activities (32,500) (39,940)
Financing activities:
Borrowings (repayments) of short-term
debt, net - 1,174
Issuance of Convertible Subordinated Notes 143,750 -
Long-term debt borrowings - 31,091
Repayment of long-term debt and
capital lease obligations (10,687) (7,158)
Issuance of common stock 3,736 6,603
Tax benefit from employee stock plans 1,400 -
Net cash provided by financing activities 138,199 31,710
Effect of exchange rate changes on
cash and cash equivalents (1,457) 3,682
Increase (decrease) in cash and
cash equivalents 151,789 (2,808)
Cash and cash equivalents at
beginning of period 121,319 87,103
Cash and cash equivalents at
end of period $273,108 $84,295
Cash paid (refunded) during the period for:
Interest $ 1,633 $ 2,427
Income taxes $ 4,016 $ (79)
See accompanying notes to unaudited consolidated financial
statements.
LSI LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - In the opinion of the Company, the accompanying
unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial information included
therein. While the Company believes that the disclosures are
adequate to make the information not misleading, it is
suggested that these financial statements be read in
conjunction with the audited financial statements and
accompanying notes included in the Company's Annual Report to
Stockholders incorporated by reference in the Company's Annual
Report on Form 10-K for the year ended January 2, 1994.
For financial reporting purposes, the Company reports on a 13 or
14 week quarter and a 52 or 53 week year ending on the Sunday
closest to December 31. For presentation purposes, the
consolidated financial statements refer to the quarter's
calendar month end for convenience. The results of operations for
the three month period ended March 31, 1994 is not necessarily
indicative of the results to be expected for the full year.
Note 2 - Effective January 3, 1994, the Company adopted the
Statement of Financial Accounting Standards No. 115 (SFAS 115),
"Accounting for Certain Investments in Debt and Equity
Securities." This statement requires investments in debt and
equity securities to be classified as "held-to-maturity,"
"trading," or "available-for-sale." Investments in debt and
equity securities classified as held-to-maturity are reported
at amortized cost; securities classified as trading are reported
at fair value with unrealized gains and losses included in
earnings; and, securities available-for-sale are reported at
fair value with unrealized gains and losses, net of related
tax, if any, reported as a separate component of stockholders'
equity. Realized gains and losses are based on the book value
of specific securities sold. The cumulative effect as of
January 3, 1994, of adopting SFAS No. 115 is considered to be
immaterial.
Management determines the appropriate classification of debt and
equity securities at the time of purchase and reassesses the
classification at each reporting date. Debt and equity
securities are classified as held-to-maturity when the Company
has the positive intent and ability to hold those securities to
maturity. Debt and equity securities are classified as
available-for-sale when the Company generally has the ability
and intent to hold such securities to maturity, but, in certain
circumstances, may potentially dispose of such securities prior
to their maturity.
Cash and cash equivalents and short-term investments include the
following debt and equity securities at March 31, 1994:
Unrealized Unrealized
Amortized Market Holding Holding
(In thousands) Cost Value Gains Losses
Corporate debt
securities $145,428 $145,428 $ - $ -
Security
repurchase
agreements 49,368 49,368 - -
Foreign corporate
debt securities 13,408 13,395 1 14
State and political
subdivision
securities 6,005 6,005 - -
Held-to-maturity
debt securities 214,209 $214,196 $ 1 $ 14
Other cash
equivalents 34,175
Cash 24,724
Total cash and
cash equivalents $273,108
Corporate debt
securities $ 30,862 $ 30,376 $ 1 $ 487
U.S. government
and agency
securities 19,442 19,949 621 114
State and
political
subdivision
securities 18,471 18,424 - 47
Other debt and
equity securities 8,024 7,969 - 55
Available-for-sale
debt and equity
securities 76,799 $ 76,718 $ 622 $ 703
Other short-term
investments 6,993
Total short-term
investments $ 83,792
All held-to-maturity and available-for-sale debt and equity
investments mature in one year or less.
Note 3 - Balance sheet detail (in thousands):
March 31, December 31,
1994 1993
Inventories:
Raw materials $ 14,307 $ 11,667
Work-in-process 47,731 34,997
Finished goods 22,146 22,402
Total $ 84,184 $ 69,066
Property and equipment:
Property and equipment, at cost $800,097 $750,186
Accumulated depreciation
and amortization (391,803) (365,123)
Property and equipment, net $408,294 $385,063
Property and equipment includes capitalized interest of
approximately $9.1 million (net of $.5 million accumulated
amortization) and $9.6 million at March 31, 1994 and
December 31, 1993, respectively. Property and equipment include
preproduction engineering costs of $27.4 million at March 31,
1994 and December 31, 1993. Accumulated amortization of
preproduction engineering costs was $2 million at March 31, 1994.
There was no accumulated amortization for preproduction
engineering at December 31, 1993.
Note 4 - During the first quarter of 1994 and during 1993, the
Company continued its strategic consolidation of worldwide
operations that were contemplated by the Company's 1992
restructuring. In the first quarter of 1994, the Company
continued phase-down of its older process-technology
manufacturing facility in the U.S. In 1993, the Company sold
certain assets from its discontinued German assembly and test
operation, transferred certain Canadian manufacturing equipment
to its U.S. operations, continued phase-down of its older
process-technology manufacturing facility in the U.S. and began
consolidation of some of its other U.S. manufacturing facilities.
During the third quarter of 1992, the Company recorded a $101.8
million restructuring charge which consisted primarily of
estimated costs associated with consolidations in the Company's
worldwide manufacturing operations, write-down and discontinuance
of certain commodity standard product inventories, severance
costs and other costs. The Company's strategic consolidation
of worldwide manufacturing operations and facilities encompassed
the phase-out and closure of the Company's German assembly and
test operations, the write-down of U.S. manufacturing assets
pertaining to older process technologies which, in certain
instances, had become redundant; and estimated operating losses
attributable to the period of the phase-out and closure of such
operations or the write-down of such assets.
Note 5 - During March 1994, the Company issued $143,750,000 of
5-1/2% Convertible Subordinated Notes (Notes) due 2001. The
Notes are subordinated to all existing and future senior debt,
are convertible at any time after 60 days following issuance
into shares of the Company's common stock at a conversion price
of $24.50 per share, and are redeemable at the option of the
Company, in whole or in part, at any time on or after
March 18, 1997. Each holder of these Notes has the right to
cause the Company to repurchase all of such holder's Notes at
100% of their principal amount plus accrued interest subject to
certain events and circumstances. Interest is payable
semiannually. The proceeds from this offering will be used for
capital expenditures and for general corporate purposes.
Note 6 - The Company's effective tax rate differs from the
statutory rate due to the Company's ability to partially utilize
prior loss carryovers.
Note 7 - Primary income per common share and common equivalent
share is computed using the weighted average number of common
shares outstanding during the respective periods, including
dilutive stock options, as applicable. Fully-dilutive income
per common share and common equivalent share is computed by
adjusting net income and primary shares outstanding for the
potential effect of the conversion of the weighted average
subordinated debentures outstanding during the period.
Fully-dilutive earnings per share computations are based on the
most advantageous (to the security holder) conversion or
exercise rights that become effective within ten years following
the period reported upon.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
General
As a participant in the semiconductor industry, the Company
operates in a technologically advanced, rapidly changing and
highly competitive environment. The Company predominately
sells custom products to customers operating in a similar
environment. Accordingly, changes in the circumstances of the
Company's customers may have a greater impact on the Company
than if the Company offered standard products that could be
sold to many purchasers. While the Company cannot predict what
effect these various factors may have on its financial results,
the aggregate effect of these and other factors could result in
significant volatility in the Company's future performance. To
the extent the Company's performance may not satisfy expectations
published by external sources, public reaction could result in a
sudden and significant adverse impact on the market price of the
Company's securities, particularly on a short-term basis.
The Company's future operating results are and will continue to
be subject to quarterly variations based upon a wide variety of
factors, many of which are beyond the Company's control,
including sudden fluctuations in customer requirements, rapid
price declines, unexpected product obsolescence, currency
exchange rate fluctuations and other economic conditions
affecting customer demand and the Company's cost of operations
in one or more of the global markets in which the Company does
business. While the Company attempts to identify and respond
to these conditions in a timely manner, they represent
significant risks to the Company's performance.
While management believes that the discussion and analysis in
this report is adequate for a fair presentation of the
information, management recommends that this discussion and
analysis be read in conjunction with Management's Discussion
and Analysis included in the Company's 1993 Annual Report to
Stockholders incorporated by reference in the Company's Annual
Report on Form 10-K for the year ended January 2, 1994.
Results of Operations
Revenues for the first quarter of 1994 increased 15% to $193.8
million from first quarter 1993 revenues of $168.9 million.
The composition of revenues by major element was as follows:
Three Months Ended
March 31,
1994 1993
Component products 87% 84%
Design and services 13 16
100% 100%
Total component revenues grew 18% to $167.8 million in the first
quarter of 1994 from $142.2 million in the first quarter of
1993. The increase in revenue dollars and the increase in
component revenues as a percentage of total revenues in the
first quarter of 1994 compared to the first quarter of 1993, was
primarily due to increased revenues from application specific
integrated circuit (ASIC) products. Higher ASIC component
revenues were primarily the result of higher average selling
prices and increased unit shipments. Total dollar revenues from
design and services decreased slightly in the first quarter of
1994 compared to the first quarter of 1993.
Key elements of the statements of operations, expressed as a
percentage of revenues, were as follows:
Three Months Ended
March 31,
1994 1993
Gross profit margin 40.5% 38.5%
Research and development expenses 11.9% 11.2%
Selling, general and administrative
expenses 15.2% 17.3%
Income from operations 13.3% 9.9%
Gross profit, as a percentage of revenues, increased during the
first quarter of 1994 over the comparable 1993 period. The
improvement in the gross profit margin is primarily related to
increased product demand for ASIC products, higher average
selling prices, and the increased use of lower cost third-party
subcontractors. A substantial portion of the Company's wafer
manufacturing operations occur at the Japanese affiliate's
manufacturing facilities. Improvements in ASIC gross profit
margins were partially offset by increased operating costs
attributable to the continued strengthening of the Yen in
relation to the U.S. Dollar and amortization of preproduction
engineering as the Japanese affiliate's new submicron wafer
manufacturing facility began volume production in the first
quarter of 1994. Gross profits in the first quarter of 1994 do
not fully reflect the effect of depreciation and other
manufacturing costs attributable to this new facility because a
substantial portion of the inventory manufactured there was in
process at March 31, 1994. The contribution to gross profits
from design and services revenue increased slightly as a
percentage of revenues in the first quarter of 1994 compared to
the same period in 1993. The Company's gross profit margins
are largely dependent upon factory capacity and utilization,
availability of certain raw materials, terms negotiated with
third-party subcontractors, foreign exchange fluctuations and
product mix. Volume production capability is expected to
increase throughout 1994, thereby significantly increasing
factory capacity by the end of 1994. A new wafer fabrication
facility initially operates at higher fixed costs. In the
event that demand for the Company's products does not absorb
this additional capacity at a sufficient rate or delays occur
in the ramp up of the new facility, the Company's gross profit
margins could be negatively impacted in future periods.
Accordingly, gross profit margins for the first quarter of 1994
may not be indicative of expected results for the remainder of
the fiscal year.
Research and development (R&D) expenses for the first quarter of
1994 related primarily to advanced process technology
development and increased approximately $4.1 million or 22% from
the comparable period in 1993. The Company is committed to
technological leadership in the ASIC markets and anticipates
continued investment in R&D at a rate of between 10-12% of
revenues in future periods. The Company's R&D investments are
primarily for the development of advanced manufacturing
processes, enhancements to the Company's design automation
software capability, and development of new advanced products.
Selling, general and administrative (SG&A) expenses remained
essentially flat during the first quarter of 1994 and decreased
as a percentage of revenues compared to the first quarter of 1993
as management continued its cost containment efforts.
In summary, total operating costs and expenses for the first
quarter of 1994 were $168.0 million, a $15.9 million increase
over $152.1 million for the same quarter in 1993. However,
operating income as a percentage of revenues increased to 13.3%
in the first quarter of 1994 from 9.9% for the comparable
quarter in 1993.
Interest expense for the first quarter of 1994 increased by $1.6
million from the comparable 1993 period. The majority of the
increase resulted from discontinued capitalization of interest
upon commencement of volume production by the Japanese
affiliate's new wafer fabrication facility in the first quarter
of 1994. Interest expense is expected to increase in the second
quarter of 1994 as a result of the issuance of $143.8 million of
5-1/2% Convertible Subordinated Notes during March, 1994 (see
additional discussion at Note 5 to the Consolidated Financial
Statements). Interest income and other for the first quarter of
1994 increased $3.1 million in relation to the first quarter of
1993. The majority of this increase is attributable to foreign
exchange gains related to transactions between the U.S. company
and its Japanese affiliates and an intercompany loan between the
U.K. and German affiliates.
The Company recorded a provision for income taxes for the first
quarter of 1994 with an effective rate of 28% compared to a
first quarter 1993 provision of 30%. The decrease in the
effective rate was primarily attributable to changes in the
composition of worldwide earnings.
The decrease in minority interest for the first quarter of 1994
from the comparable quarter in 1993 was attributable to the
composition of earnings and losses among certain of the Company's
international affiliates.
Financial Condition
The Company's cash, cash equivalents and short-term investments
increased $154.8 million during the first quarter of 1994 to
$356.9 million, and working capital increased by $155.1 million
to $391.9 million at March 31, 1994. The increase is primarily
attributable to the issuance of $143.8 million of convertible
subordinated notes in March, 1994, as discussed below.
During the first three months of fiscal 1994, the Company
generated $47.5 million of cash and equivalents from its
operating activities, compared to $1.7 million during the first
three months of 1993. The increased net cash provided from
operations as compared to the comparable 1993 period was
primarily attributable to an increase in accounts payable and
net income before depreciation which was partially offset by
increases in accounts receivable, inventories and other assets.
Effective January 3, 1994, the Company adopted the Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting
for Certain Investments in Debt and Equity Securities." This
statement requires investments in debt and equity securities to
be classified as "held-to-maturity," "trading," or
"available-for-sale." Investments in debt and equity securities
classified as held-to-maturity are reported at amortized cost;
securities classified as trading are reported at fair value with
unrealized gains and losses included in earnings; and,
securities available-for-sale are reported at fair value with
unrealized gains and losses, net of related tax, if any,
reported as a separate component of stockholders' equity.
Realized gains and losses are based on the book value of
specific securities sold. The cumulative effect as of
January 3, 1994, of adopting SFAS No. 115 is considered to be
immaterial. See further discussion in Note 2 of the
Consolidated Financial Statements.
During the first three months of 1994, $32.5 million of cash and
equivalents were used for investing activities compared to $39.9
million during the comparable period of 1993. The primary
investing activities consisted of fixed asset purchases for the
Japanese affiliate's new wafer manufacturing facility in Japan
and the repurchase of LSI Logic K.K. minority owned stock. Net
capital expenditures for the three months ended March 31, 1994
totaled approximately $23.8 million. Management expects net
capital expenditures of approximately $35 million for the second
quarter of 1994.
Financing activities generated $138.2 million of cash and
equivalents during the first quarter of 1994 compared to $31.7
million for the same period of 1993. The Company repaid
Japanese and European debt totaling approximately $10.6 million
during the first quarter of 1994. In addition, the Company
issued $143.8 million of 5 1/2% convertible subordinated notes
due in 2001. The Notes are subordinated to all existing and
future senior debt, are convertible at any time after 60 days
following issuance into shares of the Company's common stock at a
conversion price of $24.50 per share, and are redeemable at the
option of the Company, in whole or in part, at any time on or
after March 18, 1997. Each holder of these Notes has the right
to cause the Company to repurchase all of such holder's Notes at
100% of their principal amount plus accrued interest subject to
certain events and circumstances. Interest is payable
semiannually. The proceeds from this offering will be used for
capital expenditures and for general corporate purposes.
The Company believes that existing liquid resources and funds
generated from operations combined with its ability to borrow
funds will be adequate to meet its operating requirements and
payment of restructuring liabilities in the foreseeable future.
Part II
Item 1 Legal Proceedings
Reference is made to Item 3, Legal Proceedings, of the
Company's Annual Report on Form 10-K for the fiscal year ended
January 2, 1994 for a discussion of certain pending legal
proceedings. The information provided at such reference remains
unchanged.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
4.4 Indenture dated March 23, 1994 between LSI Logic
Corporation and The First National Bank of Boston, Trustee,
covering $143,750,000 principal amount of 5-1/2% Convertible
Subordinated Notes due 2001 (including form of Note).
(b) Reports on Form 8-K
Form 8-K dated March 7, 1994, Item 5, Press Release
announcing the Company's intention to raise approximately
$125,000,000 through an offering of convertible subordinated
notes not registered or required to be registered under the
Securities Act of 1933, as amended.
Form 8-K dated March 23, 1994, Item 5, Press Release
announcing the closing of an offering of $143,750,000 in
convertible subordinated notes not registered or required to be
registered under the Securities Act of 1933, as amended.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
LSI LOGIC CORPORATION
(Registrant)
Date: May 18, 1994 By /s/ Albert A. Pimentel
Albert A. Pimentel
Senior Vice President
Finance & Chief Financial
Officer