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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 April 2, 2006
 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
  Large Accelerated Filer þ
    
    Accelerated Filer o
    
    Non-Accelerated Filer o
  o þ




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##### 



LSI LOGIC CORPORATION
Form 10-Q
For the Quarter Ended March 31, 2006
INDEX
  
 PageNo.PART I. FINANCIAL INFORMATIONItem 1
    
    Financial StatementsConsolidated Condensed Balance Sheets as of March 31, 2006 (unaudited) and
December 31, 2005
    
    
    3Consolidated Condensed Statements of Operations  for the Three Months Ended March
31, 2006 and 2005 (unaudited)
    
    
    4Consolidated Condensed Statements of Cash Flows  for the Three Months Ended March
31, 2006 and 2005 (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
    
    
    29Item 4
    
    Controls and Procedures
    
    
    29PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    29Item 1A
    
    Risk Factors
    
    
    30Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 6
    
    Exhibits
    
    
    38Signatures
    
    
    39Index to Exhibits
    
    
    40EXHIBIT 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)
 March 31,
    
    December 31,2006
    
    2005(In thousands, except per-share amounts)AssetsCash and cash equivalents
    
    $
    303,830
    
    
    $
    264,649Short-term investments
    
    
    727,759
    
    
    
    674,260Accounts receivable, less allowances of $17,973 and $15,328
    
    
    266,409
    
    
    
    323,310Inventories
    
    
    186,121
    
    
    
    194,814Prepaid expenses and other current assets
    
    
    159,807
    
    
    
    163,086Total current assets
    
    
    1,643,926
    
    
    
    1,620,119Property and equipment, net
    
    
    94,290
    
    
    
    98,285Other intangibles assets, net
    
    
    34,758
    
    
    
    45,974Goodwill
    
    
    928,542
    
    
    
    928,542Other assets
    
    
    107,889
    
    
    
    103,146Total assets
    
    $
    2,809,405
    
    
    $
    2,796,066Liabilities and Stockholders EquityAccounts payable
    
    $
    150,985
    
    
    $
    171,632Accrued salaries, wages and benefits
    
    
    63,263
    
    
    
    77,713Other accrued liabilities
    
    
    154,164
    
    
    
    140,194Income taxes payable
    
    
    82,605
    
    
    
    79,290Current portion of long-term debt
    
    
    273,225
    
    
    
    273,940Total current liabilities
    
    
    724,242
    
    
    
    742,769Long-term debt
    
    
    350,000
    
    
    
    350,000Tax related liabilities and other
    
    
    74,390
    
    
    
    75,110Total long-term obligations and other liabilities
    
    
    424,390
    
    
    
    425,110Commitments and contingencies (Note 11)Minority interest in subsidiary
    
    
    235
    
    
    
    237Stockholders equity:Preferred shares; $.01 par value; 2,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock; $.01 par value; 1,300,000 shares authorized; 395,931 and
394,015 shares outstanding, respectively
    
    
    3,959
    
    
    
    3,940Additional paid-in capital
    
    
    3,018,880
    
    
    
    2,996,102Accumulated deficit
    
    
    (1,376,776
    )
    
    
    (1,389,944
    )Accumulated other comprehensive income
    
    
    14,475
    
    
    
    17,852Total stockholders equity
    
    
    1,660,538
    
    
    
    1,627,950Total liabilities and stockholders equity
    
    $
    2,809,405
    
    
    $
    2,796,066
  3




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LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three Months EndedMarch 31,2006
    
    2005(In thousands, except per-share amounts)Revenues
    
    $
    475,884
    
    
    $
    450,007Cost of revenues
    
    
    271,395
    
    
    
    259,901Gross profit
    
    
    204,489
    
    
    
    190,106Research and development
    
    
    102,274
    
    
    
    100,072Selling, general and administrative
    
    
    68,878
    
    
    
    58,599Restructuring of operations and other items, net
    
    
    5,650
    
    
    
    1,533Amortization of intangibles
    
    
    11,216
    
    
    
    17,613Income from operations
    
    
    16,471
    
    
    
    12,289Interest expense
    
    
    (6,330
    )
    
    
    (6,710
    )Interest income and other, net
    
    
    9,527
    
    
    
    5,390Income before income taxes
    
    
    19,668
    
    
    
    10,969Provision for income taxes
    
    
    6,500
    
    
    
    6,250Net income
    
    $
    13,168
    
    
    $
    4,719Net income per share:Basic
    
    $
    0.03
    
    
    $
    0.01Diluted
    
    $
    0.03
    
    
    $
    0.01Shares used in computing per share amounts:Basic
    
    
    394,851
    
    
    
    387,664Diluted
    
    
    402,189
    
    
    
    390,458
  4




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LSI LOGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three Months EndedMarch 31,2006
    
    2005(In thousands)Operating activities:Net income
    
    $
    13,168
    
    
    $
    4,719Adjustments:Depreciation and amortization
    
    
    25,335
    
    
    
    40,765Stock-based compensation expense
    
    
    11,831
    
    
    
    1,455Non-cash restructuring and other items
    
    
    (2,958
    )
    
    
    849Non-cash foreign exchange gain
    
    
    (588
    )
    
    
    Gain on sale of equity securities
    
    
    (1,429
    )
    
    
    Gain on sale of property and equipment
    
    
    
    
    
    
    (54
    )Changes in deferred tax assets and liabilities
    
    
    (3
    )
    
    
    37Changes in assets and liabilities:Accounts receivable
    
    
    56,889
    
    
    
    12,576Inventories
    
    
    8,693
    
    
    
    15,534Prepaid expenses and other assets
    
    
    9,404
    
    
    
    (5,115
    )Accounts payable
    
    
    (23,008
    )
    
    
    (9,466
    )Accrued and other liabilities
    
    
    2,226
    
    
    
    (1,969
    )Net cash provided by operating activities
    
    
    99,560
    
    
    
    59,331Investing activities:Purchase of debt securities available-for-sale
    
    
    (166,193
    )
    
    
    (112,325
    )Maturities and sales of debt securities available-for-sale
    
    
    108,166
    
    
    
    102,313Purchases of equity securities
    
    
    (150
    )
    
    
    Proceeds from sales of equity securities
    
    
    1,555
    
    
    
    Purchases of property, equipment and software
    
    
    (15,978
    )
    
    
    (8,433
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    1,411Adjustment to goodwill acquired in a prior year for
resolution of a pre-acquisition income tax contingency
    
    
    
    
    
    
    5,792Net cash used in investing activities
    
    
    (72,600
    )
    
    
    (11,242
    )Financing activities:Issuance of common stock
    
    
    11,988
    
    
    
    1,354Repayment of debt obligations
    
    
    
    
    
    
    (97
    )Net cash provided by financing activities
    
    
    11,988
    
    
    
    1,257Effect of exchange rate changes on cash and cash equivalents.
    
    
    233
    
    
    
    (3,335
    )Increase in cash and cash equivalents
    
    
    39,181
    
    
    
    46,011Cash and cash equivalents at beginning of period
    
    
    264,649
    
    
    
    218,723Cash and cash equivalents at end of period
    
    $
    303,830
    
    
    $
    264,734
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LSI LOGIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 NOTE 1  BASIS OF PRESENTATION
     Recent Accounting Pronouncements
  NOTE 2  STOCK-BASED COMPENSATION
  Description of the Companys equity compensation plans:
 2003 Equity Incentive Plan (2003 plan):
 The 1991 Equity Incentive Plan (the 1991 Plan):
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The 1995 Director Option Plan:
 The 1999 Nonstatutory Stock Option Plan (the 1999 Plan):
 The Employee Stock Purchase Plan, amended and restated (US ESPP):
 International
Employee Stock Purchase Plan (IESPP):
 Stock-based compensation expense under SFAS 123R:
    7




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Three months ended March 31,Stock-based compensation expense:
    
    2006
    
    
    2005(In thousands)Cost of revenues
    
    $
    1,525
    
    
    $
    161Research and development
    
    
    4,522
    
    
    
    835Selling, general and administrative
    
    
    5,784
    
    
    
    459Total stock-based compensation expense
    
    $
    11,831
    
    
    $
    1,455
 Stock Options
  Three months endedEmployee Stock Options Granted
    
    March 31, 2006Weighted average estimated grant date fair value
    
    $
    3.37Weighted average assumptions in calculation:Expected life (years)
    
    
    4.25Risk-free interest rate
    
    
    4.59
    %Volatility
    
    
    47.84
    %Dividend yield
    
    
    Kurtosis
    
    
    4.08Skewness
    
    
    (0.54
    )
      8




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2006Weighted
    
    Weighted
    
    AverageAverage
    
    Average
    
    IntrinsicNumber of
    
    Exercise
    
    Remaining
    
    ValueShares
    
    Price Per
    
    Contractual
    
    (In(In thousands)
    
    Share
    
    Term
    
    thousands)Options outstanding at January 1,
    
    
    70,618
    
    
    $
    13.21Options granted
    
    
    2,327
    
    
    
    9.59Options exercised
    
    
    (1,715
    )
    
    
    (6.99
    )Options canceled
    
    
    (3,088
    )
    
    
    (17.76
    )Options outstanding at March 31,
    
    
    68,142
    
    
    $
    13.03
    
    
    
    5.14
    
    
    $
    167,386Options exercisable at March 31,
    
    
    44,296
    
    
    $
    15.92
    
    
    
    4.50
    
    
    $
    74,392
    Employee Stock Purchase Plans
  Restricted Stock Awards
  9




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##### Table of Contents



2006WeightedAverageNumber of
    
    Grant-DateShares
    
    Fair Value(In thousands)Non-vested shares at January 1,
    
    
    2,375
    
    
    $
    6.20Granted
    
    
    249
    
    
    
    9.45Vested
    
    
    (518
    )
    
    
    5.53Forfeited
    
    
    (48
    )
    
    
    5.95Non-vested shares at March 31,
    
    
    2,058
    
    
    $
    6.76
   Income taxes
   Earnings per share
  10




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Pro Forma Information under SFAS 123 for Period Prior to January 1, 2006:
  Three month endedMarch 31, 2005(In thousands, exceptper share amounts)Net income, as reported
    
    $
    4,719Add: Amortization of non-cash
stock-based compensation expense
determined under the intrinsic value
method as reported in net income, net
of related tax effects *
    
    
    296Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net
of related tax effects
    
    
    (18,039
    )Pro forma net loss
    
    $
    (13,024
    )Income/(loss) per share:Basic-as reported
    
    $
    0.01Basic-pro forma
    
    $
    (0.03
    )Diluted-as reported
    
    $
    0.01Diluted-pro forma
    
    $
    (0.03
    )
 
 *
    
    This amount excludes amortization of stock-based compensation on restricted stock awards.  Three months endedEmployee Stock Options Granted
    
    March 31, 2005Weighted average estimated grant date fair value
    
    $
    3.84Assumptions in calculation:Expected life (years)
    
    
    4.42Risk-free interest rate
    
    
    3.591
    %Volatility
    
    
    78.93
    %Dividend yield
    
    
    
  NOTE 3 RESTRUCTURING AND OTHER ITEMS
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##### Table of Contents



Restructuring and impairment of long-lived assets:
 First quarter of 2006:
     Balance at
    
    Restructuring
    
    Utilized
    
    Balance atDecember 31,
    
    Expense
    
    during Q1
    
    March 31,2005
    
    Q1 2006
    
    2006
    
    2006(In thousands)Decommissioning costs (a)
    
    $
    4,993
    
    
    $
    
    
    
    $
    (48
    )
    
    $
    4,945Lease terminations (b)
    
    
    22,287
    
    
    
    3,144
    
    
    
    (2,220
    )
    
    
    23,211Facility closure and other exit costs (c)
    
    
    
    
    
    
    1,368
    
    
    
    (463
    )
    
    
    905Payments to employees for severance (d)
    
    
    5,395
    
    
    
    5,693
    
    
    
    (1,743
    )
    
    
    9,345Total
    
    $
    32,675
    
    
    $
    10,205
    
    
    $
    (4,474
    )
    
    $
    38,406
 
 (a)
    
    The $4.9 million balance as of March 31, 2006, relates to estimates for selling costs for
assets held for sale and is expected to be utilized during 2006. 12




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(b)
    
    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)
    
    Amounts utilized represent cash payments. The balance remaining for facility closure and
other exit costs will be paid during 2006.(d)
    
    Amounts utilized represent cash severance payments to 24 employees during the three months
ended March 31, 2006. The balance remaining for severance is expected to be paid by the end
of 2006. NOTE 4 INVESTMENTS
 March 31,
    
    December 31,2006
    
    2005(In thousands)Available-for-sale debt securitiesAsset and mortgage-backed securities
    
    $
    356,348
    
    
    $
    335,495U.S. government and agency securities
    
    
    298,038
    
    
    
    266,077Corporate and municipal debt securities
    
    
    73,373
    
    
    
    72,688Total short-term investments
    
    $
    727,759
    
    
    $
    674,260Long-term investments in equity securitiesMarketable equity securities available-for-sale
    
    $
    16,566
    
    
    $
    18,769Non-marketable equity securities
    
    
    7,220
    
    
    
    7,070Total long-term investments in equity securities
    
    $
    23,786
    
    
    $
    25,839
    13




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NOTE 5  BALANCE SHEET DETAIL
 March 31,
    
    December 31,2006
    
    2005(In thousands)Cash and cash equivalents:Cash in financial institutions
    
    $
    44,440
    
    
    $
    85,641Cash equivalents
    
    
    259,390
    
    
    
    179,008$
    303,830
    
    
    $
    264,649Inventories:Raw materials
    
    $
    30,784
    
    
    $
    30,541Work-in-process
    
    
    53,705
    
    
    
    62,167Finished goods
    
    
    101,632
    
    
    
    102,106$
    186,121
    
    
    $
    194,814
  NOTE 6  DEBT
 Conversion
    
    March 31,
    
    December 31,Maturity
    
    Interest Rate
    
    Price
    
    2006
    
    2005(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
    
    
    
    271,848Deferred gain on terminated swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,377
    
    
    
    2,092623,225
    
    
    
    623,940Current portion of long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (273,225
    )
    
    
    (273,940
    )Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    350,000
    
    
    $
    350,000
 NOTE 7 RECONCILIATION OF BASIC AND DILUTED INCOME PER SHARE
  14




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Three Months Ended March 31,2006
    
    
    2005Per-
    
    
    
    
    
    
    
    
    
    
    Per-Net
    
    
    
    
    
    
    Share
    
    
    Net
    
    
    
    
    
    
    ShareIncome*
    
    
    Shares+
    
    
    Amount
    
    
    Income*
    
    
    Shares+
    
    
    Amount(In thousands except per share amounts)Basic :Net income
available to common
stockholders
    
    $
    13,168
    
    
    
    394,851
    
    
    $
    0.03
    
    
    $
    4,719
    
    
    
    387,664
    
    
    $
    0.01Potentially
dilutive common
securities
    
    
    
    
    
    
    7,338
    
    
    
    
    
    
    
    
    
    
    
    2,794
    
    
    
    Diluted :Net income
available to
common
stockholders
    
    $
    13,168
    
    
    
    402,189
    
    
    $
    0.03
    
    
    $
    4,719
    
    
    
    390,458
    
    
    $
    0.01
 
 *
    
    Numerator+
    
    Denominator   NOTE 8  COMPREHENSIVE INCOME/(LOSS)
  Three months ended March 31,2006
    
    2005(In thousands)Net income
    
    $
    13,168
    
    
    $
    4,719Change in unrealized loss on derivative instruments
designated as and qualifying as cash-flow hedges
    
    
    
    
    
    
    (166
    )Change in unrealized gain on available-for-sale securities.
    
    
    (3,011
    )
    
    
    (2,823
    )Change in foreign currency translation adjustments
    
    
    (366
    )
    
    
    (3,449
    )Comprehensive income/(loss)
    
    $
    9,791
    
    
    $
    (1,719
    )
 NOTE 9  SEGMENT REPORTING
  15




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Three months ended March 31,2006
    
    
    2005(In thousands)Revenues:Semiconductor
    
    $
    298,374
    
    
    $
    304,038Storage Systems
    
    
    177,510
    
    
    
    145,969Total
    
    $
    475,884
    
    
    $
    450,007Income/(loss) from operations:Semiconductor
    
    $
    3,529
    
    
    $
    14,002Storage Systems
    
    
    12,942
    
    
    
    (1,713
    )Total
    
    $
    16,471
    
    
    $
    12,289
  Significant Customers.
 Three months ended March 31,2006
    
    2005Semiconductor segment:Number of significant customers
    
    
    1
    
    
    
    2Percentage of segment revenues
    
    
    19
    %
    
    
    16%, 13
    %Storage Systems segment:Number of significant customers
    
    
    2
    
    
    
    4Percentage of segment revenues
    
    
    43%, 15
    %
    
    
    39%, 14 12%, 10
    %,%Consolidated:Number of significant customers
    
    
    2
    
    
    
    2Percentage of consolidated
revenues
    
    
    17%, 12
    %
    
    
    13%, 11
    %
  March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Total assets:Semiconductor
    
    $
    2,309,370
    
    
    $
    2,285,913Storage Systems
    
    
    500,035
    
    
    
    510,153Total
    
    $
    2,809,405
    
    
    $
    2,796,066
  16




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NOTE 10 RELATED PARTY TRANSACTIONS
  NOTE 11  COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS
    17




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NOTE 12  SUBSEQUENT EVENTS
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  OVERVIEW
  18




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RESULTS OF OPERATIONS
 Revenues:
 Three Months EndedMarch 31,
    
    March 31,2006
    
    2005Semiconductor segment
    
    $
    298.4
    
    
    $
    304.0Storage Systems segment
    
    
    177.5
    
    
    
    146.0Consolidated
    
    $
    475.9
    
    
    $
    450.0
 19




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Three months ended March 31, 2006 compared to the same period of 2005
  Semiconductor segment
  
    
    Revenues decreased for semiconductors used in consumer product applications such as
videogame products and professional products, offset in part by increased demand for
semiconductors used in digital audio players and cable set-top box solutions;
    
    Revenues increased for semiconductors used in storage product applications such as
custom silicon used in hard disk drives and increased demand for semiconductors used in
communication product applications such as office automation solutions, switches and
wide area network ( WAN) products.
 Storage Systems segment
  Significant Customers.
 Three months ended March 31,2006
    
    2005Semiconductor segment:Number of significant customers
    
    
    1
    
    
    
    2Percentage of segment revenues
    
    
    19
    %
    
    
    16%, 13
    %Storage Systems segment:Number of significant customers
    
    
    2
    
    
    
    4Percentage of segment revenues
    
    
    43%, 15
    %
    
    
    39%, 14%, 12%, 10
    %Consolidated:Number of significant customers
    
    
    2
    
    
    
    2Percentage of consolidated revenues
    
    
    17%, 12
    %
    
    
    13%, 11
    %
 Revenues by geography.
 Three Months EndedMarch 31, 2006
    
    March 31, 2005Revenues:North America
    
    $
    236.9
    
    
    $
    207.5Asia, including Japan
    
    
    186.4
    
    
    
    195.3Europe
    
    
    52.6
    
    
    
    47.2Total
    
    $
    475.9
    
    
    $
    450.0
 20




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Three months ended March 31, 2006 compared to the same period of 2005
  Operating costs and expenses.
 Gross profit margin:
 Three Months EndedMarch 31, 2006
    
    March 31, 2005Semiconductor segment
    
    $
    139.4
    
    
    $
    142.5Percentage of revenues
    
    
    47
    %
    
    
    47
    %Storage Systems segment
    
    $
    65.1
    
    
    $
    47.6Percentage of revenues
    
    
    37
    %
    
    
    33
    %Consolidated
    
    $
    204.5
    
    
    $
    190.1Percentage of revenues
    
    
    43
    %
    
    
    42
    %
 Three months ended March 31, 2006 compared to the same period of 2005
  Semiconductor segment:
  
    
    Manufacturing variances for the Gresham facility were more favorable in the first
quarter of 2006 compared to the same period of 2005 as a result of yield improvements
and operating cost savings attributable to write-downs recorded in the second half of
2005 related to the impairment of the Gresham manufacturing facility. These
improvements were offset by:
 21




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
    
    An unfavorable shift in product mix in the first quarter of 2006 and lower average selling prices on DVD-R products; and
    
    Stock-based compensation expense associated with the adoption of SFAS 123R as of
January 1, 2006 (See Note 2 of the Notes).
 Storage Systems segment:
       
    
    Competitive pricing pressures;
    
    Product mix;
    
    Factory capacity and utilization;
    
    Geographic location of manufacturing;
    
    Manufacturing yields;
    
    Availability of certain raw materials;
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##### Table of Contents




    
    Implementation of new process technologies;
    
    Adoption of new industry standards;
    
    Terms negotiated with third-party subcontractors; and
    
    Foreign currency fluctuations.
  Research and development:
 Three Months EndedMarch 31, 2006
    
    March 31, 2005Semiconductor segment
    
    $
    81.6
    
    
    $
    79.2Percentage of revenues
    
    
    27
    %
    
    
    26
    %Storage Systems segment
    
    $
    20.7
    
    
    $
    20.9Percentage of revenues
    
    
    12
    %
    
    
    14
    %Consolidated
    
    $
    102.3
    
    
    $
    100.1Percentage of revenues
    
    
    22
    %
    
    
    22
    %
 Three months ended March 31, 2006 compared to the same period of 2005
  Semiconductor segment:
  Storage Systems segment:
  Selling, general and administrative:
 Three Months EndedMarch 31, 2006
    
    March 31, 2005Semiconductor segment
    
    $
    40.3
    
    
    $
    37.2Percentage of revenue
    
    
    14
    %
    
    
    12
    %Storage Systems segment
    
    $
    28.6
    
    
    $
    21.4Percentage of revenue
    
    
    16
    %
    
    
    15
    %Consolidated
    
    $
    68.9
    
    
    $
    58.6Percentage of revenue
    
    
    15
    %
    
    
    13
    %
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Three months ended March 31, 2006 compared to the same period of 2005
  Semiconductor segment:
  Storage Systems segment:
  
    
    A $5.4 million charge recorded in the first quarter of 2006 to reduce a receivable balance with customer, Silicon
Graphics, as discussed above;
    
    An increase in expense associated with new product launches; and
    
    Stock-based compensation associated with the adoption of SFAS 123R. See Note 2 of the Notes
 Restructuring of operations and other items:
 Stock-based compensation
  Amortization of intangibles:
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Interest expense:
 Interest income and other, net:
 Provision for income taxes:
  FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
  Working capital.
 
    
    Cash, cash equivalents and short-term investments increased by $92.7 million.
    
    Accounts payable decreased by $20.6 million due to the timing of invoice receipt and payments.
    
    Accrued salaries, wages and benefits decreased by $14.5 million primarily due to timing
differences in payment of salaries, benefits and performance-based compensation.
  
    
    Accounts receivable decreased by $56.9 million to $266.4 million as of March 31, 2006
from $323.3 million at December 31, 2005. The decrease is mainly attributed to lower
revenues and improved collections in the first quarter of 2006 as compared to the fourth
quarter of 2005. Silicon Graphics, a customer of ours, filed for chapter 11 bankruptcy
protection under the United States Bankruptcy Code on May 8, 2006. As a result of this
action, we recorded a $5.6 million charge in the first quarter of 2006 because we do not
believe the receivable balance as of March 31, 2006 is collectible. Of this charge, $5.4 million relates to the
Storage Systems segment and $0.2 million relates to the Semiconductor segment. We perform
ongoing credit evaluations of our customers financial condition and require collateral as
considered necessary. (See Note 12 of the Notes).
    
    Other accrued liabilities increased by $14.0 million due to increases in interest
payable, restructuring reserves, and deferred revenues, offset in part by other
miscellaneous items.
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
    
    Inventories decreased by $8.7 million to $186.1 million as of March 31, 2006, from
$194.8 million as of December 31, 2005. The decline in inventory levels reflects our
continued focus on supply chain management.
    
    Income taxes payable increased by $3.3 million due to the timing of income tax payments
made and the income tax provision recorded during the first quarter of 2006.
    
    Prepaid expenses and other current assets decreased by $3.3 million primarily due to
decreases in prepaid software maintenance and other miscellaneous items, offset in part by
an increase in assets held for sale of $14.7 million primarily as a result of the
reclassification of land and building from property and equipment (See Note 3 of the
Notes).
 Cash and cash equivalents generated from operating activities.
 
    
    Net income adjusted for non-cash transactions. 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 assets and liabilities, including changes in working capital
components from December 31, 2005 to March 31, 2006, 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, and
    
    Purchases of property, equipment and software.
  Cash and cash equivalents provided by financing activities
  Contractual Obligations
  26




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Payments due by periodLess than
    
    1 - 3
    
    4 - 5
    
    After 5Contractual Obligations
    
    1 year
    
    years
    
    years
    
    years
    
    Total(in millions)Convertible Subordinated
Notes
    
    $
    271.8
    
    
    $
    
    
    
    $
    350.0
    
    
    $
    
    
    
    $
    621.8Operating lease obligations
    
    
    45.7
    
    
    
    49.4
    
    
    
    32.8
    
    
    
    20.4
    
    
    
    148.3Purchase commitments
    
    
    275.8
    
    
    
    12.4
    
    
    
    0.1
    
    
    
    
    
    
    
    288.3Total
    
    $
    593.3
    
    
    $
    61.8
    
    
    $
    382.9
    
    
    $
    20.4
    
    
    $
    1,058.4
 Convertible Subordinated Notes
   Operating Lease Obligations
  Purchase Commitments
  Critical Accounting Policies
  27




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Stock-Based compensation:
  Stock Options
  Three months endedEmployee Stock Options Granted
    
    March 31, 2006Weighted average estimated grant date fair value
    
    $
    3.37Weighted average assumptions in calculation:Expected life (years)
    
    
    4.25Risk-free interest rate
    
    
    4.59
    %Volatility
    
    
    47.84
    %Dividend yield
    
    
    Kurtosis
    
    
    4.08Skewness
    
    
    (0.54
    )
      28




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##### Table of Contents



Restricted Stock Awards
    Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  29




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##### Table of Contents



Item 1A. Risk Factors
    General economic weakness and geopolitical factors may harm our operating results and
financial condition.
 We have announced our intention to become entirely dependent on independent foundry
subcontractors to manufacture a portion of our current product; accordingly, any failure to secure
and maintain sufficient foundry capacity could materially and adversely affect our business.
   
    
    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.
    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;
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##### Table of Contents




    
    major customers make significant changes in scheduled deliveries; or
    
    there are declines in the prices of products that we sell to these customers.
 We are potentially subject to credit risk from accounts receivable.
 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;
    
    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 a limited number of domestic and foreign sources.
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We utilize indirect channels of distribution over which we have limited control.
 We engage in acquisitions and alliances giving rise to financial 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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##### Table of Contents



We design and develop highly complex semiconductors and storage systems.
 The high technology industry in which we operate is prone to intellectual property litigation.
   We may not be able to adequately protect or enforce our intellectual property rights, which
could harm our competitive position.
  33




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##### Table of Contents



Our manufacturing facilities are subject to disruption
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##### Table of Contents



We depend on third-party subcontractors to assemble, obtain packaging materials for, and test
substantially all of our current semiconductor products. If we lose the services of any of our
subcontractors or if these subcontractors are unable to obtain sufficient packaging materials,
shipments of our products may be disrupted, which could harm our customer relationships and
adversely affect our revenues.
  We depend on third-party subcontractors to manufacture all of our current board products.
  We are increasingly exposed to various legal, business, political and economic risks
associated with our international operations.
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##### Table of Contents




    
    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.
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The adoption of new accounting standards related to the expensing of stock awards adversely
affected our results for the first quarter of 2006 and is expected to negatively impact the results
of operations in subsequent periods. Future changes in financial accounting standards or practices
or existing taxation rules or practices may also cause adverse unexpected fluctuations and affect
our reported results of operations.
   We face uncertainties related to the effectiveness of internal controls.
  Internal control deficiencies or weaknesses that are not yet identified could emerge.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  37




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Item 6. Exhibits
 2.1
    
    Asset Purchase Agreement between LSI Logic Corporation and
Semiconductor Components Industries, LLC, dated as of April 5, 2006.
Incorporated by reference to exhibit filed with Quarterly Report
on Form 10-Q on April 27, 2006, by ON Semiconductor Corporation.+10.53
    
    Written Description of 2006 Incentive Plan. Incorporated by
reference to exhibit filed with the Current Report on Form 8-K on
February 15, 2006.10.54
    
    LSI Logic Corporation Incentive Plan, as amended and restated on
March 10, 2004. Incorporated by reference to exhibit filed with the
Current Report on Form 8-K on February 15, 2006.31.1
    
    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
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.**
 
 +
    
    Schedules to this exhibit not filed herewith shall be furnished to the SEC upon request.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.**
    
    Furnished not filed. 38




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##### Table of Contents



SIGNATURES
  LSI LOGIC CORPORATION (Registrant)Date: May 11, 2006
    
    By
    
    /s/ Bryon LookBryon LookExecutive Vice President &
Chief Financial Officer
 39




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##### Table of Contents



INDEX TO EXHIBITS
 2.1
    
    Asset Purchase Agreement between LSI Logic Corporation and
Semiconductor Components Industries, LLC, dated as of April 5, 2006.
Incorporated by reference to exhibit filed with Quarterly Report
on Form 10-Q on April 27, 2006, by ON Semiconductor Corporation.+10.53
    
    Written Description of 2006 Incentive Plan. Incorporated by
reference to exhibit filed with the Current Report on Form 8-K on
February 15, 2006.10.54
    
    LSI Logic Corporation Incentive Plan, as amended and restated on
March 10, 2004. Incorporated by reference to exhibit filed with the
Current Report on Form 8-K on February 15, 2006.31.1
    
    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.**
 
 +
    
    Schedules to this exhibit not filed herewith shall be furnished to the SEC upon request.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.**
    
    Furnished not filed. 40