##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended October 2, 2005
 OR
 o
    
    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 LOGIC CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    94-2712976(State of Incorporation)
    
    (I.R.S. Employer Identification Number)
 1621 Barber Lane
Milpitas, California 95035
(Address of principal executive offices)
(Zip code)
 (408) 433-8000
(Registrants telephone number, including area code)
 
 þ o
 þ o
 o þ




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##### Table of Contents



LSI LOGIC CORPORATION
Form 10-Q
For the Quarter Ended September 30, 2005
INDEX
 PageNo.PART I. FINANCIAL INFORMATIONItem 1 Financial StatementsConsolidated Condensed Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004
    
    
    3Consolidated Condensed Statements of Operations  for the Three and Nine Months Ended September 30, 2005 and 2004 (unaudited)
    
    
    4Consolidated Condensed Statements of Cash Flows  for the Nine Months Ended September 30, 2005 and 2004 (unaudited)
    
    
    5Notes to Unaudited Consolidated Condensed Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4 Controls and Procedures
    
    
    39PART II. OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    40Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 6 Exhibits
    
    
    40Signatures
    
    
    41Index to Exhibits
    
    
    42EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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PART
I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 LSI LOGIC CORPORATION
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
 September 30,
    
    December 31,2005
    
    2004(In thousands, except per-share amounts)AssetsCash and cash equivalents
    
    $
    225,654
    
    
    $
    218,723Short-term investments
    
    
    619,380
    
    
    
    595,862Accounts receivable, less allowances of $11,892 and $12,545
    
    
    298,500
    
    
    
    272,065Inventories
    
    
    189,133
    
    
    
    218,900Deferred tax assets
    
    
    5,650
    
    
    
    5,661Prepaid expenses and other current assets
    
    
    146,060
    
    
    
    54,076Total current assets
    
    
    1,484,377
    
    
    
    1,365,287Property and equipment, net
    
    
    97,856
    
    
    
    311,916Intangibles, net
    
    
    57,539
    
    
    
    108,457Goodwill
    
    
    965,468
    
    
    
    973,130Deferred tax assets
    
    
    4,943
    
    
    
    5,044Other assets
    
    
    108,340
    
    
    
    110,167Total assets
    
    $
    2,718,523
    
    
    $
    2,874,001Liabilities and Stockholders EquityAccounts payable
    
    $
    129,812
    
    
    $
    122,422Accrued salaries, wages and benefits
    
    
    74,560
    
    
    
    58,516Other accrued liabilities
    
    
    142,877
    
    
    
    142,278Income taxes payable
    
    
    82,370
    
    
    
    72,935Current portion of long-term obligations
    
    
    
    
    
    
    129Total current liabilities
    
    
    429,619
    
    
    
    396,280Long-term debt
    
    
    624,802
    
    
    
    781,846Tax related liabilities and other
    
    
    77,333
    
    
    
    77,570Total long-term obligations and other liabilities
    
    
    702,135
    
    
    
    859,416Commitments and contingencies (Notes 11 and 12)Minority interest in subsidiary
    
    
    243
    
    
    
    259Stockholders equity:Preferred shares; $.01 par value; 2,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock; $.01 par value; 1,300,000 shares authorized; 391,559 and
387,490 shares outstanding, respectively
    
    
    3,916
    
    
    
    3,875Additional paid-in capital
    
    
    2,997,184
    
    
    
    2,969,478Deferred stock compensation
    
    
    (13,328
    )
    
    
    (8,936
    )Accumulated deficit
    
    
    (1,427,734
    )
    
    
    (1,384,321
    )Accumulated other comprehensive income
    
    
    26,488
    
    
    
    37,950Total stockholders equity
    
    
    1,586,526
    
    
    
    1,618,046Total liabilities and stockholders equity
    
    $
    2,718,523
    
    
    $
    2,874,001
  3




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LSI LOGIC CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004(In thousands, except per share amounts)Revenues
    
    $
    481,716
    
    
    $
    380,217
    
    
    $
    1,413,015
    
    
    $
    1,280,471Cost of revenues
    
    
    271,511
    
    
    
    228,418
    
    
    
    800,782
    
    
    
    718,424Gross profit
    
    
    210,205
    
    
    
    151,799
    
    
    
    612,233
    
    
    
    562,047Research and development
    
    
    100,524
    
    
    
    108,134
    
    
    
    299,420
    
    
    
    327,173Selling, general and administrative
    
    
    58,342
    
    
    
    63,460
    
    
    
    176,354
    
    
    
    188,375Restructuring of operations and other items, net
    
    
    99,986
    
    
    
    228,624
    
    
    
    108,675
    
    
    
    231,055Amortization of non-cash deferred stock
compensation (*)
    
    
    1,313
    
    
    
    2,593
    
    
    
    3,940
    
    
    
    6,422Amortization of intangibles
    
    
    15,693
    
    
    
    19,212
    
    
    
    50,919
    
    
    
    56,884Loss from operations
    
    
    (65,653
    )
    
    
    (270,224
    )
    
    
    (27,075
    )
    
    
    (247,862
    )Interest expense
    
    
    (6,058
    )
    
    
    (5,999
    )
    
    
    (19,088
    )
    
    
    (17,978
    )Interest income and other, net
    
    
    4,567
    
    
    
    (209
    )
    
    
    21,500
    
    
    
    17,735Loss before income taxes
    
    
    (67,144
    )
    
    
    (276,432
    )
    
    
    (24,663
    )
    
    
    (248,105
    )Provision for income taxes
    
    
    6,250
    
    
    
    6,000
    
    
    
    18,750
    
    
    
    18,000Net loss
    
    $
    (73,394
    )
    
    $
    (282,432
    )
    
    $
    (43,413
    )
    
    $
    (266,105
    )Net loss per share:Basic
    
    $
    (0.19
    )
    
    $
    (0.73
    )
    
    $
    (0.11
    )
    
    $
    (0.69
    )Diluted
    
    $
    (0.19
    )
    
    $
    (0.73
    )
    
    $
    (0.11
    )
    
    $
    (0.69
    )Shares used in computing per share amounts:Basic
    
    
    391,017
    
    
    
    384,876
    
    
    
    389,247
    
    
    
    383,355Diluted
    
    
    391,017
    
    
    
    384,876
    
    
    
    389,247
    
    
    
    383,355
 
 (*)
    
    Amortization of non-cash deferred stock compensation, if not shown separately, would
have been included in cost of revenues, research and development and selling, general and
administrative expenses as shown below: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004(In thousands)Cost of revenues
    
    $
    186
    
    
    $
    52
    
    
    $
    511
    
    
    $
    148Research and development
    
    
    503
    
    
    
    2,085
    
    
    
    1,908
    
    
    
    4,796Selling, general and administrative
    
    
    624
    
    
    
    456
    
    
    
    1,521
    
    
    
    1,478Total
    
    $
    1,313
    
    
    $
    2,593
    
    
    $
    3,940
    
    
    $
    6,422
  4




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LSI
LOGIC CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine Months EndedSeptember 30,2005
    
    2004(In thousands)Operating activities:Net loss
    
    $
    (43,413
    )
    
    $
    (266,105
    )Adjustments:Depreciation and amortization
    
    
    120,468
    
    
    
    136,407Amortization of non-cash deferred stock compensation
    
    
    3,940
    
    
    
    6,422Non-cash restructuring and other items
    
    
    86,661
    
    
    
    214,058Gain on sale and exchange of equity securities
    
    
    (824
    )
    
    
    (2,113
    )Gain on repurchase of Convertible Subordinated Notes
    
    
    (4,123
    )
    
    
    (1,767
    )Gain on sale of property and equipment
    
    
    (91
    )
    
    
    (5,881
    )Changes in deferred tax assets and liabilities
    
    
    112
    
    
    
    238Changes in assets and liabilities, net of assets acquired and liabilities
assumed in business combinations:Accounts receivable
    
    
    (26,468
    )
    
    
    (32,855
    )Inventories
    
    
    29,767
    
    
    
    (46,032
    )Prepaid expenses and other assets
    
    
    (2,090
    )
    
    
    (2,068
    )Accounts payable
    
    
    6,118
    
    
    
    29,908Accrued and other liabilities
    
    
    26,627
    
    
    
    34,343Net cash provided by operating activities
    
    
    196,684
    
    
    
    64,555Investing activities:Purchase of debt securities available-for-sale
    
    
    (397,240
    )
    
    
    (641,435
    )Maturities and sales of debt securities available-for-sale
    
    
    365,228
    
    
    
    568,178Purchases of equity securities
    
    
    
    
    
    
    (2,250
    )Proceeds from sales of equity securities
    
    
    3,871
    
    
    
    10,518Purchases of property, equipment and software
    
    
    (35,326
    )
    
    
    (41,794
    )Proceeds from sale of property and equipment
    
    
    3,399
    
    
    
    8,597Adjustment to goodwill acquired in a prior year for resolution of
a pre-acquisition income tax contingency
    
    
    7,662
    
    
    
    Increase in non-current assets and deposits
    
    
    
    
    
    
    (313,013
    )Decrease in non-current assets and deposits
    
    
    
    
    
    
    369,464Acquisition of companies, net of cash acquired
    
    
    
    
    
    
    (32,025
    )Net cash used in investing activities
    
    
    (52,406
    )
    
    
    (73,760
    )Financing activities:Repurchase of Convertible Subordinated Notes
    
    
    (148,126
    )
    
    
    (68,117
    )Issuance of common stock
    
    
    20,073
    
    
    
    17,864Purchase of minority interest in subsidiary
    
    
    
    
    
    
    (7,978
    )Repayment of debt obligations
    
    
    (129
    )
    
    
    (297
    )Net cash used in financing activities
    
    
    (128,182
    )
    
    
    (58,528
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (9,165
    )
    
    
    678Increase/(decrease) in cash and cash equivalents
    
    
    6,931
    
    
    
    (67,055
    )Cash and cash equivalents at beginning of period
    
    
    218,723
    
    
    
    269,682Cash and cash equivalents at end of period
    
    $
    225,654
    
    
    $
    202,627
  5




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LSI LOGIC CORPORATION
 
 NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 1  BASIS OF PRESENTATION
    Recent Accounting Pronouncements
  6




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NOTE 2  STOCK-BASED COMPENSATION
  7




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share amounts)Net loss, as reported
    
    $
    (73,394
    )
    
    $
    (282,432
    )
    
    $
    (43,413
    )
    
    $
    (266,105
    )Add: Amortization of
non-cash deferred
stock compensation
determined under the
intrinsic value method
as reported *
    
    
    44
    
    
    
    749
    
    
    
    340
    
    
    
    2,771Deduct: Total
stock-based employee
compensation expense
determined under fair
value method for all
awards
    
    
    (17,362
    )
    
    
    (27,038
    )
    
    
    (60,876
    )
    
    
    (97,635
    )Pro forma net loss
    
    $
    (90,712
    )
    
    $
    (308,721
    )
    
    $
    (103,949
    )
    
    $
    (360,969
    )Loss per share:Basic-as reported
    
    $
    (0.19
    )
    
    $
    (0.73
    )
    
    $
    (0.11
    )
    
    $
    (0.69
    )Basic-pro forma
    
    $
    (0.23
    )
    
    $
    (0.80
    )
    
    $
    (0.27
    )
    
    $
    (0.94
    )Diluted-as reported
    
    $
    (0.19
    )
    
    $
    (0.73
    )
    
    $
    (0.11
    )
    
    $
    (0.69
    )Diluted-pro forma
    
    $
    (0.23
    )
    
    $
    (0.80
    )
    
    $
    (0.27
    )
    
    $
    (0.94
    )
 
 *
    
    This amount excludes amortization of non-cash deferred stock compensation on restricted stock awards.  NOTE 3
 ENGENIO STOCK OPTION EXCHANGE PROGRAM
  NOTE 4  RESTRUCTURING AND OTHER ITEMS
  Restructuring and impairment of long-lived assets:
 First quarter of 2005:
  8




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Second quarter of 2005:
  Third quarter of 2005:
      9




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Restructuring
    
    Utilized
    
    Restructuring
    
    Utilized
    
    Restructuring
    
    Utilized
    
    BalanceBalance at
    
    Expense
    
    during Q1,
    
    Expense
    
    during Q2,
    
    Expense
    
    during Q3,
    
    At(In thousands)
    
    December 31, 2004
    
    Q1, 2005
    
    2005
    
    Q2, 2005
    
    2005
    
    Q3, 2005
    
    2005
    
    September 30, 2005Write-down of
excess assets and
decommissioning
costs (a)
    
    $
    1,207
    
    
    $
    796
    
    
    $
    (1,271
    )
    
    $
    429
    
    
    $
    (451
    )
    
    $
    89,633
    
    
    $
    (85,311
    )
    
    $
    5,032Lease terminations
(b)
    
    
    20,065
    
    
    
    738
    
    
    
    (2,691
    )
    
    
    727
    
    
    
    (2,674
    )
    
    
    8,207
    
    
    
    (2,555
    )
    
    
    21,817Facility closure
and other exit
costs (c)
    
    
    543
    
    
    
    
    
    
    
    (476
    )
    
    
    404
    
    
    
    (462
    )
    
    
    488
    
    
    
    (492
    )
    
    
    5Payments to
employees for
severance (d)
    
    
    7,408
    
    
    
    (1
    )
    
    
    (4,250
    )
    
    
    160
    
    
    
    (1,850
    )
    
    
    1,658
    
    
    
    (412
    )
    
    
    2,713Total
    
    $
    29,223
    
    
    $
    1,533
    
    
    $
    (8,688
    )
    
    $
    1,720
    
    
    $
    (5,437
    )
    
    $
    99,986
    
    
    $
    (88,770
    )
    
    $
    29,567
 
 (a)
    
    The amounts utilized in 2005 reflect $1.2 million of non-cash write-downs of long-lived
assets in the U.S. due to impairment and $0.5 million in cash payments to decommission and
sell assets. The write-downs of long-lived assets were accounted for as a reduction of the
assets and did not result in a liability. The charge of $89.6 million includes the impairment
charge for the Gresham facility of $85.2 million, related estimated Gresham facility selling
costs of $4.8 million and a credit of $0.4 million of net
of other miscellaneous items. The
$5.0 million balance as of September 30, 2005, relates to estimates for selling costs for
assets held for sale and is expected to be utilized during 2006.(b)
    
    An expense of $7.7 million was recorded for changes in sublease assumptions for certain
previously accrued facility lease termination costs. In addition, an expense of $0.5 million
was recorded to reflect the change in time value of accruals for facility lease termination
costs. Amounts utilized represent cash payments. The balance remaining for real estate lease
terminations will be paid during the remaining terms of these contracts, which extend through
2011.(c)
    
    An expense of $0.5 million was recorded for facility closure costs related to the Colorado
fabrication facility as the expenses were incurred. Amounts utilized represent cash payments.
The balance remaining for facility closure and other exit costs will be paid during 2005.(d)
    
    An expense of $1.1 million was recorded in connection with the Companys decision to sell the
Gresham facility. An expense of $0.5 million was recorded in connection with the Companys
reorganization. Amounts utilized represent cash severance payments to 126 employees during the
nine months ended September 30, 2005 for the action announced in the third quarter of 2004.
Amounts utilized also include cash severance payments for 14 employees for the action
announced in the third quarter of 2005 during the three months ended September 30, 2005. The
balance remaining for severance is expected to be paid by the end of 2005. Other Items:
 Second quarter of 2005:
  10




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NOTE 5
 INVESTMENTS
 September 30,
    
    
    December 31,2005
    
    
    2004(In thousands)Available-for-sale debt securitiesAsset and mortgage-backed securities
    
    $
    302,438
    
    
    $
    292,898U.S. government and agency securities
    
    
    242,794
    
    
    
    234,787Corporate and municipal debt securities
    
    
    74,148
    
    
    
    68,177Total short-term investments
    
    $
    619,380
    
    
    $
    595,862Long-term investments in equity securitiesMarketable equity securities available-for-sale
    
    $
    26,241
    
    
    $
    28,372Non-marketable equity securities
    
    
    7,820
    
    
    
    9,307Total long-term investments in equity securities
    
    $
    34,061
    
    
    $
    37,679
          11




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Non-marketable
    
    Marketableequity
    
    equityinvestments
    
    investments(in millions)Pre-tax loss:Three months ended September 30, 2005
    
    $
    1.5
    
    
    $
    Nine months ended September 30, 2005
    
    
    1.5
    
    
    
    Pre-tax loss:Three months ended September 30, 2004
    
    $
    1.9
    
    
    $
    4.1Nine months ended September 30, 2004
    
    
    3.1
    
    
    
    4.1Total carrying value of impaired investments as of September 30, 2005
    
    $
    2.4
    
    
    $
    
 NOTE 6  BALANCE SHEET DETAIL
 September 30,
    
    
    December 31,2005
    
    
    2004(In thousands)Cash and cash equivalents:Cash in financial institutions
    
    $
    47,188
    
    
    $
    51,172Cash equivalents
    
    
    178,466
    
    
    
    167,551$
    225,654
    
    
    $
    218,723Inventories:Raw materials
    
    $
    23,360
    
    
    $
    20,022Work-in-process
    
    
    89,099
    
    
    
    106,818Finished goods
    
    
    76,674
    
    
    
    92,060$
    189,133
    
    
    $
    218,900
  Semiconductor
    
    
    Storage SystemsSegment*
    
    
    segment*
    
    
    TotalBalance as of December 31, 2004*
    
    $
    801,272
    
    
    $
    171,858
    
    
    $
    973,130Adjustment to goodwill acquired in a
prior year for
cash received from the resolution of
a pre-acquisition income tax
contingency
    
    
    (7,662
    )
    
    
    
    
    
    
    (7,662
    )Balance as of September 30, 2005
    
    $
    793,610
    
    
    $
    171,858
    
    
    $
    965,468
 
 *
    
    The information provided herein has been recast to include the RAID Storage Adapter (RSA)
business as part of the Storage Systems segment from the Semiconductor segment for all periods
presented.  12




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NOTE 7  DEBT
 Conversion
    
    September 30,
    
    December 31,Maturity
    
    Interest Rate
    
    Price
    
    2005
    
    2004(In thousands)2003 Convertible Subordinated Notes
    
    May 2010
    
    
    4
    %
    
    $
    13.4200
    
    
    $
    350,000
    
    
    $
    350,0002001 Convertible Subordinated Notes
    
    November 2006
    
    
    4
    %
    
    $
    26.3390
    
    
    
    271,848
    
    
    
    421,500Deferred gain on terminated swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,954
    
    
    
    10,346Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129624,802
    
    
    
    781,975Current portion of long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (129
    )Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    624,802
    
    
    $
    781,846
   NOTE 8  RECONCILIATION OF BASIC AND DILUTED NET LOSS PER SHARE
  Three Months Ended September 30,2005
    
    
    2004Per-Share
    
    
    
    
    
    
    
    
    
    
    Per-ShareNet loss*
    
    
    Shares+
    
    
    Amount
    
    
    Net loss*
    
    
    Shares+
    
    
    Amount(In thousands except per share amounts)Basic :Net loss available to common stockholders
    
    $
    (73,394
    )
    
    
    391,017
    
    
    $
    (0.19
    )
    
    $
    (282,432
    )
    
    
    384,876
    
    
    $
    (0.73
    )Stock options and restricted stock
awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted :Net loss available to common stockholders
    
    $
    (73,394
    )
    
    
    391,017
    
    
    $
    (0.19
    )
    
    $
    (282,432
    )
    
    
    384,876
    
    
    $
    (0.73
    )
 Nine Months Ended September 30,2005
    
    
    2004Per-Share
    
    
    
    
    
    
    
    
    
    
    Per-ShareNet loss*
    
    
    Shares+
    
    
    Amount
    
    
    Net loss*
    
    
    Shares+
    
    
    Amount(In thousands except per share amounts)Basic :Net loss available to common stockholders
    
    $
    (43,413
    )
    
    
    389,247
    
    
    $
    (0.11
    )
    
    $
    (266,105
    )
    
    
    383,355
    
    
    $
    (0.69
    )Stock options and restricted stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted :Net loss available to common stockholders
    
    $
    (43,413
    )
    
    
    389,247
    
    
    $
    (0.11
    )
    
    $
    (266,105
    )
    
    
    383,355
    
    
    $
    (0.69
    )
 
 *
  13




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##### Table of Contents



NOTE 9  COMPREHENSIVE LOSS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Net loss
    
    $
    (73,394
    )
    
    $
    (282,432
    )
    
    $
    (43,413
    )
    
    $
    (266,105
    )Change in unrealized gain/loss on derivative
instruments
designated as and qualifying as cash-flow hedges
    
    
    260
    
    
    
    (3,473
    )
    
    
    (275
    )
    
    
    (2,003
    )Change in unrealized gain/loss on available-for-sale
securities
    
    
    2,422
    
    
    
    2,687
    
    
    
    (1,851
    )
    
    
    (8,725
    )Change in foreign currency translation adjustments
    
    
    (2,546
    )
    
    
    (1,109
    )
    
    
    (9,336
    )
    
    
    (5,597
    )Comprehensive loss
    
    $
    (73,258
    )
    
    $
    (284,327
    )
    
    $
    (54,875
    )
    
    $
    (282,430
    )
 NOTE 10  SEGMENT REPORTING
   14




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Revenues:Semiconductor
    
    $
    311,739
    
    
    $
    249,822
    
    
    $
    940,940
    
    
    $
    840,937Storage Systems
    
    
    169,977
    
    
    
    130,395
    
    
    
    472,075
    
    
    
    439,534Total
    
    $
    481,716
    
    
    $
    380,217
    
    
    $
    1,413,015
    
    
    $
    1,280,471(Loss)/income from operations:Semiconductor
    
    $
    (78,999
    )
    
    $
    (266,763
    )
    
    $
    (50,083
    )
    
    $
    (273,516
    )Storage Systems
    
    
    13,346
    
    
    
    (3,461
    )
    
    
    23,008
    
    
    
    25,654Total
    
    $
    (65,653
    )
    
    $
    (270,224
    )
    
    $
    (27,075
    )
    
    $
    (247,862
    )
  Significant Customers.
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Semiconductor segment:Number of significant
customers
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    1Percentage of
segment revenues
    
    
    16%, 12
    %
    
    
    14%, 12
    %
    
    
    17
    %
    
    
    10
    %Storage Systems segment:Number of significant
customers
    
    
    2
    
    
    
    3
    
    
    
    3
    
    
    
    3Percentage of segment
revenues
    
    
    46%, 11
    %
    
    
    40%, 14%, 11
    %
    
    
    43%, 13%, 10
    %
    
    
    40%, 16%, 11
    %Consolidated:Number of significant
customers
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    1Percentage of
consolidated revenues
    
    
    17%, 11
    %
    
    
    15
    %
    
    
    15%, 11
    %
    
    
    15
    %
 15




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##### Table of Contents



September 30,
    
    
    December 31,2005
    
    
    2004(In thousands)Total assets:Semiconductor
    
    $
    2,254,959
    
    
    $
    2,408,642Storage Systems
    
    
    463,564
    
    
    
    465,359Total
    
    $
    2,718,523
    
    
    $
    2,874,001
   NOTE
11  COMMITMENTS AND CONTINGENCIES
  NOTE 12  LEGAL MATTERS
   16




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##### Table of Contents



NOTE 13  SUBSEQUENT EVENT
  17




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  OVERVIEW
      18




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##### Table of Contents



RESULTS OF OPERATIONS
 Revenues:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    June 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004(in millions)Semiconductor segment
    
    $
    311.7
    
    
    $
    325.2
    
    
    $
    249.8
    
    
    $
    940.9
    
    
    $
    841.0Storage Systems segment
    
    
    170.0
    
    
    
    156.1
    
    
    
    130.4
    
    
    
    472.1
    
    
    
    439.5Consolidated
    
    $
    481.7
    
    
    $
    481.3
    
    
    $
    380.2
    
    
    $
    1,413.0
    
    
    $
    1,280.5
  Third quarter of 2005 compared to the second quarter of 2005
  19




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##### Table of Contents



Semiconductor segment
  
    
    Revenues decreased for semiconductors used in storage product applications primarily
a result of lower demand for ASICs used in hard disk drives, Host Bus Adapters (HBA) and
storage subsystems; and
    
    Revenues decreased for semiconductors used in communications product applications due
to declines in demand for enterprise, wireless, military, aerospace and certain older
product applications.
  Storage Systems segment
  Three and nine months ended September 30, 2005 compared to the same period of 2004
  Semiconductor segment
  
    
    An increase in revenues for semiconductors used in consumer product applications
primarily a result of increased demand for digital audio players, DVD recorders and
cable set-top boxes, offset in part by decreases in demand for semiconductors used in
video games; and
    
    An increase in revenues for semiconductors used in storage product applications
primarily due to higher demand for ASICs used in hard disk drives , HBAs and storage
area networking products and ASSPs used in storage product applications such as the
Ultra 320 product.
   
    
    An increase in revenues for semiconductors used in consumer product applications
primarily a result of increased demand for digital audio players, DVD recorders, cable
set-top boxes and video games, offset in part by decreases in demand for semiconductors
used in DVD playback products; and
    
    An increase in revenues for semiconductors used in storage product applications
primarily due to higher demand for ASICs used in hard disk drives.
 20




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##### Table of Contents



Storage Systems segment
   Significant Customers.
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Semiconductor segment:Number of significant customers
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    1Percentage of segment revenues
    
    
    16%, 12
    %
    
    
    14%, 12
    %
    
    
    17
    %
    
    
    10
    %Storage Systems segment:Number of significant customers
    
    
    2
    
    
    
    3
    
    
    
    3
    
    
    
    3Percentage of segment revenues
    
    
    46%, 11
    %
    
    
    40%, 14%, 11
    %
    
    
    43%, 13%, 10
    %
    
    
    40%, 16%, 11
    %Consolidated:Number of significant customers
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    1Percentage of consolidated revenues
    
    
    17%, 11
    %
    
    
    15
    %
    
    
    15%, 11
    %
    
    
    15
    %
 Revenues by geography.
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    June 30, 2005
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    
    
    
    
    2004
    
    
    2005
    
    
    2004(in millions)Revenues:North America *
    
    $
    230.7
    
    
    $
    228.1
    
    
    $
    185.1
    
    
    $
    666.3
    
    
    $
    644.2Asia, including Japan
    
    
    193.1
    
    
    
    195.4
    
    
    
    156.7
    
    
    
    583.8
    
    
    
    486.2Europe *
    
    
    57.9
    
    
    
    57.8
    
    
    
    38.4
    
    
    
    162.9
    
    
    
    150.1Total
    
    $
    481.7
    
    
    $
    481.3
    
    
    $
    380.2
    
    
    $
    1,413.0
    
    
    $
    1,280.5
 
 *
    
    Revenues by geography are accumulated based on the revenues generated by our
subsidiaries located within the three geographic areas noted in the above table. In the
second half of 2004, Engenio formed new subsidiaries within Europe. As a result, the amounts
in the table above have been restated. All revenues generated by Engenio Europe were
previously reported in North America. 21




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##### Table of Contents



Third quarter of 2005 compared to the second quarter of 2005
  Three and nine months ended September 30, 2005 compared to the same periods of 2004
   Operating costs and expenses.
 Gross profit margin:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    June 30, 2005
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    
    
    
    
    2004
    
    
    2005
    
    
    2004(in millions)Semiconductor segment
    
    $
    147.5
    
    
    $
    158.1
    
    
    $
    107.0
    
    
    $
    448.4
    
    
    $
    395.4Percentage of
revenues
    
    
    47%
    
    
    
    49%
    
    
    
    43%
    
    
    
    48%
    
    
    
    47%Storage Systems segment
    
    $
    62.7
    
    
    $
    53.6
    
    
    $
    44.8
    
    
    $
    163.8
    
    
    $
    166.6Percentage of revenues
    
    
    37%
    
    
    
    34%
    
    
    
    34%
    
    
    
    35%
    
    
    
    38%Consolidated
    
    $
    210.2
    
    
    $
    211.7
    
    
    $
    151.8
    
    
    $
    612.2
    
    
    $
    562.0Percentage of revenues
    
    
    44%
    
    
    
    44%
    
    
    
    40%
    
    
    
    43%
    
    
    
    44%
 Third quarter of 2005 compared to the second quarter of 2005
  22




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##### Table of Contents



Semiconductor segment:
  Storage Systems segment:
   Three and nine months ended September 30, 2005 compared to the same periods of 2004
  Semiconductor segment:
  
    
    Lower average selling prices for semiconductors used in some consumer product
applications and in storage applications such as hard disk drives; and
    
    An unfavorable shift in product mix which included selling fewer semiconductors used
in consumer product applications such as video games in 2005.
  
    
    Improved operating efficiencies and cost savings in 2005 associated with the
restructuring actions undertaken in the latter part of 2004; and
    
    A favorable shift in product mix for semiconductors used in consumer product
applications such as video games.
  
    
    Lower average selling prices for semiconductors used in some consumer product
applications and storage applications such as hard disk drives; and
 23




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##### Table of Contents




    
    Higher inventory charges in 2005 for consumer product applications such as DVD
products.
 Storage Systems segment:
   Factors that may affect gross profit margins
    
    
    Competitive pricing pressures;
    
    Product mix;
    
    Factory capacity and utilization;
    
    Geographic location of manufacturing;
    
    Manufacturing yields;
    
    Availability of certain raw materials;
    
    Implementation of new process technologies;
    
    Adoption of new industry standards;
    
    Terms negotiated with third-party subcontractors; and
    
    Foreign currency fluctuations.
  24




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##### Table of Contents



Research and development:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    June 30, 2005
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    
    
    
    2004
    
    
    2005
    
    
    2004(in millions)Semiconductor segment
    
    $
    75.4
    
    
    $
    77.1
    
    
    $
    87.5
    
    
    $
    230.8
    
    
    $
    266.2Percentage of revenues
    
    
    24%
    
    
    
    24%
    
    
    
    35%
    
    
    
    25%
    
    
    
    32%Storage Systems segment
    
    $
    25.1
    
    
    $
    22.6
    
    
    $
    20.6
    
    
    $
    68.6
    
    
    $
    61.0Percentage of revenues
    
    
    15%
    
    
    
    14%
    
    
    
    16%
    
    
    
    15%
    
    
    
    14%Consolidated
    
    $
    100.5
    
    
    $
    99.7
    
    
    $
    108.1
    
    
    $
    299.4
    
    
    $
    327.2Percentage of revenues
    
    
    21%
    
    
    
    21%
    
    
    
    28%
    
    
    
    21%
    
    
    
    26%
 Third quarter of 2005 compared to the second quarter of 2005
  Semiconductor segment:
   Storage Systems segment:
  Three and nine months ended September 30, 2005 compared to the same periods of 2004
  Semiconductor segment:
  25




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##### Table of Contents



Storage Systems segment
  Selling, general and administrative:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    June 30, 2005
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    
    
    
    
    2004
    
    
    2005
    
    
    2004(in millions)Semiconductor segment
    
    $
    36.3
    
    
    $
    37.9
    
    
    $
    38.6
    
    
    $
    111.1
    
    
    $
    117.6Percentage of revenue
    
    
    12%
    
    
    
    12%
    
    
    
    15%
    
    
    
    12%
    
    
    
    14%Storage Systems segment
    
    $
    22.0
    
    
    $
    22.0
    
    
    $
    24.8
    
    
    $
    65.2
    
    
    $
    70.8Percentage of revenue
    
    
    13%
    
    
    
    14%
    
    
    
    19%
    
    
    
    14%
    
    
    
    16%Consolidated
    
    $
    58.3
    
    
    $
    59.9
    
    
    $
    63.4
    
    
    $
    176.3
    
    
    $
    188.4Percentage of revenue
    
    
    12%
    
    
    
    12%
    
    
    
    17%
    
    
    
    12%
    
    
    
    15%
 Third quarter of 2005 compared to the second quarter of 2005
  Semiconductor segment:
  Storage Systems segment:
  Three and nine months ended September 30, 2005 compared to the same periods of 2004
  Semiconductor segment:
  26




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##### Table of Contents



Storage Systems segment:
   Restructuring of operations and other items:
 Restructuring and impairment of long-lived assets:
 First quarter of 2005:
  Second quarter of 2005:
  Third quarter of 2005:
   27




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##### Table of Contents



Restructuring
    
    Utilized
    
    Restructuring
    
    Utilized
    
    Restructuring
    
    Utilized
    
    BalanceBalance at
    
    Expense
    
    during Q1,
    
    Expense
    
    during Q2,
    
    Expense
    
    during Q3,
    
    at(In thousands)
    
    December 31, 2004
    
    Q1, 2005
    
    2005
    
    Q2, 2005
    
    2005
    
    Q3, 2005
    
    2005
    
    September 30, 2005Write-down of
excess assets and
decommissioning
costs (a)
    
    $
    1,207
    
    
    $
    796
    
    
    $
    (1,271
    )
    
    $
    429
    
    
    $
    (451
    )
    
    $
    89,633
    
    
    $
    (85,311
    )
    
    $
    5,032Lease terminations
(b)
    
    
    20,065
    
    
    
    738
    
    
    
    (2,691
    )
    
    
    727
    
    
    
    (2,674
    )
    
    
    8,207
    
    
    
    (2,555
    )
    
    
    21,817Facility closure
and other exit
costs (c)
    
    
    543
    
    
    
    
    
    
    
    (476
    )
    
    
    404
    
    
    
    (462
    )
    
    
    488
    
    
    
    (492
    )
    
    
    5Payments to
employees for
severance (d)
    
    
    7,408
    
    
    
    (1
    )
    
    
    (4,250
    )
    
    
    160
    
    
    
    (1,850
    )
    
    
    1,658
    
    
    
    (412
    )
    
    
    2,713Total
    
    $
    29,223
    
    
    $
    1,533
    
    
    $
    (8,688
    )
    
    $
    1,720
    
    
    $
    (5,437
    )
    
    $
    99,986
    
    
    $
    (88,770
    )
    
    $
    (29,567
    )
 
 (a)
    
    The amounts utilized in 2005 reflect $1.2 million of non-cash write-downs of long-lived
assets in the U.S. due to impairment and $0.5 million in cash payments to decommission and
sell assets. The write-downs of long-lived assets were accounted for as a reduction of the
assets and did not result in a liability. The charge of $89.6 million includes the impairment
charge for the Gresham facility of $85.2 million, related estimated Gresham facility selling
costs of $4.8 million and a credit of $0.4 million of net of other miscellaneous items. The $5.0
million balance as of September 30, 2005, relates to estimates for selling costs for assets
held for sale and is expected to be utilized during 2006.(b)
    
    An expense of $7.7 million was recorded for changes in sublease assumptions for certain
previously accrued facility lease termination costs. In addition, an expense of $0.5 million
was recorded to reflect the change in time value of accruals for facility lease termination
costs. Amounts utilized represent cash payments. The balance remaining for real estate lease
terminations will be paid during the remaining terms of these contracts, which extend through
2011.(c)
    
    An expense of $0.5 million was recorded for facility closure costs related to the Colorado
fabrication facility as the expenses were incurred. Amounts utilized represent cash payments.
The balance remaining for facility closure and other exit costs will be paid during 2005.(d)
    
    An expense of $1.1 million was recorded in connection with our decision to sell Gresham
facility. An expense of $0.5 million was recorded in connection with our reorganization.
Amounts utilized represent cash severance payments to 126 employees during the nine months
ended September 30, 2005 for the action announced in the third quarter of 2004. 28




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##### Table of Contents



Other Items:
 Second quarter of 2005:
  Amortization of non-cash deferred stock compensation:
  Amortization of intangibles:
  Interest expense:
 29




---



##### Table of Contents



Interest income and other, net:
   Provision for income taxes:
  FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
  Working capital.
 
    
    Prepaid expenses and other current assets increased by $92.0 million. The increase is
primarily attributable to a $96.2 million increase in other current assets as a result of the
reclassification of the Gresham, Oregon manufacturing facility
 30




---



##### Table of Contents



and excess land from Property and Equipment, net to other current assets. We announced our
intention to sell the Gresham, Oregon manufacturing facility on September 13, 2005. (See Note
4 of the Notes).
 
    
    Cash, cash equivalents and short-term investments increased by $30.4 million.
    
    Accounts receivable increased by $26.4 million. The increase is mainly attributable to
higher revenues in the third quarter of 2005 as compared to the fourth quarter of 2004 and
the timing of sales in the last month of the third quarter of 2005 as compared to the last
month of the fourth quarter of 2004.
  
    
    Inventories decreased by $29.8 million to $189.1 million as of September 30, 2005, from
$218.9 million as of December 31, 2004. The decline in inventory levels reflects our
continued focus on supply chain management.
    
    Accrued salaries, wages and benefits increased by $16.0 million primarily due to timing
differences in payment of salaries, benefits and performance based compensation.
    
    Income taxes payable increased by $9.4 million due to the timing of tax payments made and
the income tax provision recorded in the first nine months of 2005.
    
    Accounts payable increased by $7.4 million primarily due to the timing of invoice receipt
and payments.
 Cash and cash equivalents generated from operating activities.
 
    
    Income before depreciation and amortization, non-cash restructuring and other items,
amortization of non-cash deferred stock compensation, loss on write-down of equity
securities, gain on sale and exchange of equity securities, gain on repurchase of
convertible subordinated notes and gain on sale of property and equipment. The non-cash
items and other non-operating adjustments are quantified in our Consolidated Condensed
Statements of Cash Flows included in this Form 10-Q; and
    
    A net increase in liabilities, offset in part by a net increase in assets including
changes in working capital components from December 31, 2004 to September 30, 2005, as
discussed above.
 Cash and cash equivalents used in investing activities.
 
    
    Purchases of debt and equity securities available for sale, net of sales and maturities;
    
    Purchases of property, equipment and software;
    
    Proceeds from the sale of property and equipment; and
    
    The receipt of an income tax refund for pre-acquisition tax matters associated with
C-Cube Microsystems Inc. C-Cube Microsystems was acquired in May of 2001.
  31




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##### Table of Contents



Cash and cash equivalents used in financing activities
 
    
    The repurchase of a portion of the Convertible Notes due in 2006;
    
    The issuance of common stock under our employee stock option and purchase plans; and
    
    The repayment of debt obligations.
  Contractual Obligations
  Payments due by periodAfter 5Contractual Obligations
    
    Less than 1 year
    
    
    1 - 3 years
    
    
    4 - 5 years
    
    
    years
    
    
    Total(in millions)Convertible Subordinated
Notes
    
    $
    
    
    
    $
    271.8
    
    
    $
    350.0
    
    
    $
    
    
    
    $
    621.8Operating lease obligations
    
    
    58.2
    
    
    
    54.2
    
    
    
    36.1
    
    
    
    25.6
    
    
    
    174.1Purchase commitments
    
    
    275.1
    
    
    
    9.9
    
    
    
    0.8
    
    
    
    
    
    
    
    285.8Total
    
    $
    333.3
    
    
    $
    335.9
    
    
    $
    386.9
    
    
    $
    25.6
    
    
    $
    1,081.7
 Convertible Subordinated Notes
    32




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##### Table of Contents



Operating Lease Obligations
  Purchase Commitments
  Critical Accounting Policies
   Recent Accounting Pronouncements
  FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
   General economic weakness and geopolitical factors may harm our operating results and
financial condition .
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Our target markets are characterized by rapid technological change.
 We operate in highly competitive markets.
 We are dependent on a limited number of customers .
  
    
    we do not win new product designs from major existing customers;
    
    major customers reduce or cancel their existing business with us;
    
    major customers make significant changes in scheduled deliveries; or
    
    there are declines in the prices of products that we sell to these customers.
 Our new products may not achieve market acceptance .
 The manufacturing facilities we operate are highly complex and require high fixed costs .
 
    
    maintain a competitive manufacturing cost structure;
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
    
    implement the latest process technologies required to manufacture new products;
    
    exercise stringent quality control measures to ensure high yields;
    
    effectively manage the subcontractors engaged in the wafer fabrication, test and assembly of products; and
    
    update equipment and facilities as required for leading edge production capabilities.
 We procure parts and raw materials from limited domestic and foreign sources .
 We utilize indirect channels of distribution over which we have limited control .
 We engage in acquisitions and alliances giving rise to economic and technological risks .
  The price of our securities may be subject to wide fluctuations .
  We may rely on capital and bank markets to provide liquidity.
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We design and develop highly complex cell-based ASICs .
 The high technology industry in which we operate is prone to intellectual property litigation .
   Our manufacturing facilities are subject to disruption
 We depend on independent foundry subcontractors to manufacture a portion of our current
products, and any failure to secure and maintain sufficient foundry capacity could materially and
adversely affect our business .
  36




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
    
    a lack of guaranteed wafer supply and potential wafer shortages and higher wafer prices;
    
    limited control over delivery schedules, quality assurance, manufacturing yields and production costs; and
    
    the unavailability of, or potential delays in obtaining access to, key process technologies.
    We depend on third party subcontractors to assemble, obtain packaging materials for, and test
substantially all of our current products. If we lose the services of any of our subcontractors or
if these subcontractors are unable to attain sufficient packaging materials, shipments of our
products may be disrupted, which could harm our customer relationships and adversely affect our net
sales .
  37




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We are increasingly exposed to various legal, business, political and economic risks
associated with our international operations.
 
    
    political, social and economic instability;
    
    exposure to different legal standards, particularly with respect to intellectual property;
    
    natural disasters and public health emergencies;
    
    nationalization of business and blocking of cash flows;
    
    trade and travel restrictions;
    
    the imposition of governmental controls and restrictions;
    
    burdens of complying with a variety of foreign laws;
    
    import and export license requirements and restrictions of the United States and each
other country in which we operate;
    
    unexpected changes in regulatory requirements;
    
    foreign technical standards;
    
    changes in tariffs;
    
    difficulties in staffing and managing international operations;
    
    fluctuations in currency exchange rates;
    
    difficulties in collecting receivables from foreign entities or delayed revenue recognition; and
    
    potentially adverse tax consequences.
   We are exposed to fluctuations in foreign currency exchange rates.
 We must attract and retain key employees in a highly competitive environment .
 Future changes in financial accounting standards or practices or existing taxation rules or
practices may cause adverse unexpected fluctuations and affect our reported results of operations .
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We face uncertainties related to the effectiveness of internal controls .
 Internal control deficiencies or weaknesses that are not yet identified could emerge .
 Internal control issues that appear minor now may later become reportable conditions .
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
   39




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 6. Exhibits
 31.1
    
    Certification of the Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbarnes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant to Securities
Exchange Act Rules 13a-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.**32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.**
 
 **
    
    Furnished not filed. 40




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##### Table of Contents



SIGNATURES
  LSI LOGIC CORPORATION
(Registrant)Date: November 14, 2005
    
    By
    
    /s/ Bryon LookBryon LookExecutive Vice President &
Chief Financial Officer
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INDEX TO EXHIBITS
 31.1
    
    Certification of the Chief Executive Officer pursuant to Securities
and Exchange Act Rules 13a-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant to Securities
and Exchange Act Rules 13-15(e) and 15d-1(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.**32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.**
 
 **
    
    Furnished not filed. 42