Summary of LSI CORP - Yahoo! Finance

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's discussion and analysis should be read in conjunction with the other sections of this Form 10-Q, including Part 1, "Item 1. Financial Statements."
Where more than one significant factor contributed to changes in results from year to year, we have quantified these factors throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where practicable and material to understanding a material change included in the discussion.
OVERVIEW
We design, develop and market complex, high-performance semiconductors and storage systems. We provide silicon-to-system solutions that are used at the core of products that create, store, consume and transport digital information. We offer a broad portfolio of capabilities including custom and standard product integrated circuits used in hard disk drives, high-speed communication systems, computer servers, storage systems and personal computers. We also offer external storage systems, host bus adapter boards and software applications for attaching storage devices to computer servers and for storage area networks.
We operate in two segments - the Semiconductor segment and the Storage Systems segment. For the Semiconductor segment, we sell our integrated circuits for storage applications principally to makers of hard disk drives and computer servers. We sell our integrated circuits for networking applications principally to makers of devices used in computer and communications networks and, to a lesser extent, to makers of personal computers. For the Storage Systems segment, we sell our storage systems, host adapter boards and software applications for attaching storage devices to computer servers and for storage area networks principally to original equipment manufacturers, or OEMs, who resell those products to end customers under their own brand name. We also generate revenue by licensing other entities to use our intellectual property. We recognize this revenue primarily in the Semiconductor segment.
Our revenues depend on market demand for these types of products and our ability to compete in highly competitive markets. We face competition not only from makers of products similar to ours, but also from competing technologies. For example, we see the development of solid state drives, based on flash memory rather than the spinning platters used in hard disk drives, as a long term potential competitor to certain types of hard disk drives and have begun focusing development efforts in that area.
The U.S. and global economies have experienced a significant downturn driven by a financial and credit crisis that could continue to challenge those economies for some period of time. In the first half of 2009, our revenues declined significantly as compared to our revenues in the first half of 2008 due to the effects of the global economic downturn. Since January 2009, we have taken a number of actions to reduce our expenses, including a corporate-level restructuring designed to increase synergies across our Semiconductor segment, reductions in our global workforce, temporary and permanent reductions in employee compensation-related expenses and reductions in discretionary spending.
Although we saw increases in demand in some parts of our business beginning at the end of the first quarter of 2009, we anticipate that our quarterly revenues will not return to pre-downturn levels in the near future. Accordingly, we continue to monitor demand and may seek to adjust our cost structure further.
Our revenues for the three months ended July 5, 2009 were $520.7 million, a decrease of $171.4 million as compared to $692.1 million for the three months ended June 29, 2008. Our revenues for the six months ended July 5, 2009 were $1,002.9 million, a decrease of $349.9 million, compared to $1,352.8 million for the six months ended June 29, 2008. These decreases resulted primarily from the global economic downturn and the resulting lower end-market demand for semiconductors used in storage and networking product applications and lower demand for our mid-range storage systems.
We reported a net loss of $61.5 million, or $0.09 per diluted share, for the three months ended July 5, 2009 as compared to a net loss of $13.6 million, or $0.02 per diluted share, for the three months ended June 29, 2008. We reported a net loss of $165.0 million, or $0.25 per diluted share, for the six months ended July 5, 2009, as compared to a net loss of $27.3 million, or $0.04 per diluted share, for the six months ended June 29, 2008.
Cash, cash equivalents and short-term investments were $873.6 million as of July 5, 2009, as compared to $1,119.1 million as of December 31, 2008. During the quarter ended July 5, 2009, we used $244.0 million for the redemption of all of the outstanding 6.5% Convertible Subordinated Notes due in December 2009. For the three and six months ended July 5, 2009, we generated $68.9 million and $59.1 million, respectively, in cash provided by operating activities, as compared to $27.3 million and $123.5 million, respectively, cash provided by operating activities for the three and six months ended June 29, 2008.

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RESULTS OF OPERATIONS
Revenues
   The following table summarizes our revenues by segment for the three and six
months ended July 5, 2009 and June 29, 2008:

                                                        Three Months Ended                            Six Months Ended
                                               July 5, 2009           June 29, 2008          July 5, 2009          June 29, 2008
                                                                                 (In millions)
Semiconductor segment                         $        343.8         $         462.0        $        668.8        $         920.8
Storage Systems segment                                176.9                   230.1                 334.1                  432.0

Consolidated                                  $        520.7         $         692.1        $      1,002.9        $       1,352.8

Three months ended July 5, 2009 compared to the three months ended June 29, 2008:
Semiconductor Segment:
Revenues for the Semiconductor segment decreased $118.2 million or 25.6% for the three months ended July 5, 2009 as compared to the three months ended June 29, 2008. The decrease was primarily attributable to decreased demand for semiconductors used in storage and networking product applications as a result of the global economic downturn, and decreased revenues in our older networking product applications, partially offset by increased revenues in our newer networking product applications.
Storage Systems Segment:
Revenues for the Storage Systems segment decreased $53.2 million or 23.1% for the three months ended July 5, 2009 as compared to the three months ended June 29, 2008. The decrease was primarily attributable to a decrease in revenues for our mid-range storage systems and related premium software features as a result of the current global economic downturn.
Six months ended July 5, 2009 compared to the six months ended June 29, 2008:
Semiconductor Segment:
Revenues for the Semiconductor segment decreased $252.0 million or 27.4% for the six months ended July 5, 2009 as compared to the six months ended June 29, 2008. The decrease was primarily attributable to decreased demand for semiconductors used in storage and networking product applications as a result of the global economic downturn and decreased revenues in our older networking product applications. The decrease was partially offset by increased revenues in our newer networking product applications and increased revenues from the licensing of intellectual property.
Storage Systems Segment:
Revenues for the Storage Systems segment decreased $97.9 million or 22.7% for the six months ended July 5, 2009 as compared to the six months ended June 29, 2008. The decrease was primarily attributable to a decrease in revenues for our mid-range storage systems and related premium software features as a result of the current global economic downturn.
See Note 12 to our consolidated financial statements in Item 1 for information about our significant customers. Revenues by Geography
The following table summarizes our revenues by geography for the three and six months ended July 5, 2009 and June 29, 2008:

                                                        Three Months Ended                            Six Months Ended
                                               July 5, 2009           June 29, 2008          July 5, 2009          June 29, 2008
                                                                                 (In millions)
North America *                               $        112.1         $         220.8        $        219.7        $         427.6
Asia **                                                280.4                   346.9                 525.3                  695.1
Europe and the Middle East                             128.2                   124.4                 257.9                  230.1

Total                                         $        520.7         $         692.1        $      1,002.9        $       1,352.8

* Primarily the United States.

** Including Japan.

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Three months ended July 5, 2009 compared to the three months ended June 29, 2008:
Revenues in North America and Asia decreased 49.2% and 19.2%, respectively, for the three months ended July 5, 2009 as compared to the three months ended June 29, 2008. The decrease in North America was primarily attributable to a significant customer shifting order placements from our U.S. subsidiary to a subsidiary in Europe during the third quarter of 2008, and to a lesser extent, decreased demand for our mid-range storage systems and semiconductors used in storage and networking product applications. The decrease in Asia was primarily attributable to decreased revenues from semiconductors used in storage product applications. Revenues in Europe and the Middle East increased 3.1% for the three months ended July 5, 2009 as compared to the three months ended June 29, 2008. The increase was primarily attributable to a significant customer shifting order placements from our U.S. subsidiary to a subsidiary in Europe during the third quarter of 2008, offset in part by decreased demand for semiconductors used in storage and networking product applications.
Six months ended July 5, 2009 compared to the six months ended June 29, 2008:
Revenues in North America and Asia decreased 48.6% and 24.4%, respectively, for the six months ended July 5, 2009 as compared to the six months ended June 29, 2008. The decrease in North America was primarily attributable to a significant customer shifting order placements from our U.S. subsidiary to a subsidiary in Europe during the third quarter of 2008, and to a lesser extent, decreased demand for our mid-range storage systems and semiconductors used in storage and networking product applications, offset in part by increased revenues from the licensing of intellectual property. The decrease in Asia was primarily attributable to decreased revenues from semiconductors used in storage product applications. Revenues in Europe and the Middle East increased 12.1% for the six months ended July 5, 2009 as compared to the six months ended June 29, 2008. The increase was primarily attributable to a significant customer shifting order placements from our U.S. subsidiary to a subsidiary in Europe during the third quarter of 2008, offset in part by decreased demand for semiconductors used in storage and networking product applications. Gross Profit Margin
The following table summarizes our gross profit margins by segment for the three and six months ended July 5, 2009 and June 29, 2008:

                                                        Three Months Ended                            Six Months Ended
                                               July 5, 2009           June 29, 2008         July 5, 2009          June 29, 2008
                                                                                (In millions)
Semiconductor segment                         $        122.1         $         196.0        $       246.7        $         380.9
Percentage of segment revenues                          35.5 %                  42.4 %               36.9 %                 41.4 %
Storage Systems segment                       $         58.8         $          88.9        $       104.3        $         163.6
Percentage of segment revenues                          33.2 %                  38.6 %               31.2 %                 37.9 %

Consolidated                                  $        180.9         $         284.9        $       351.0        $         544.5

Percentage of total revenues                            34.7 %                  41.2 %               35.0 %                 40.2 %

Three months ended July 5, 2009 compared to the three months ended June 29, 2008:
The consolidated gross profit margin as a percentage of total revenues decreased to 34.7% for the three months ended July 5, 2009 from 41.2% for the three months ended June 29, 2008.
Semiconductor Segment:
The gross profit margin as a percentage of segment revenues for the Semiconductor segment decreased to 35.5% for the three months ended July 5, 2009 from 42.4% for the three months ended June 29, 2008. The decrease was primarily attributable to a shift in product mix and lower overall absorption of fixed costs as a result of the decline in revenues.

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Storage Systems Segment:
The gross profit margin as a percentage of segment revenues for the Storage Systems segment decreased to 33.2% for the three months ended July 5, 2009 from 38.6% for the three months ended June 29, 2008. The decrease was primarily driven by a shift in product mix as a greater percentage of our sales consisted of entry-level storage systems, which have lower margins, along with lower overall absorption of fixed costs as a result of the decrease in revenues.
Six months ended July 5, 2009 compared to the six months ended June 29, 2008:
The consolidated gross profit margin as a percentage of total revenues decreased to 35.0% for the six months ended July 5, 2009 from 40.2% for the six months ended June 29, 2008.
Semiconductor Segment:
The gross profit margin as a percentage of segment revenues for the Semiconductor segment decreased to 36.9% for the six months ended July 5, 2009 from 41.4% for the six months ended June 29, 2008. The decrease was primarily attributable to a shift in product mix, lower overall absorption of fixed costs as a result of the decline in revenues and an increase in amortization of identified intangible assets as a percentage of revenues. The decrease was offset in part by a decrease in inventory provisions as a result of continued improvements in supply chain management.
Storage Systems Segment:
The gross profit margin as a percentage of segment revenues for the Storage Systems segment decreased to 31.2% for the six months ended July 5, 2009 from 37.9% for the six months ended June 29, 2008. The decrease was primarily driven by a shift in product mix as a greater percentage of our sales consisted of entry-level storage systems, which have lower margins, along with lower overall absorption of fixed costs as a result of the decrease in revenues. Research and Development
The following table summarizes our research and development, or R&D, expenses by segment for the three and six months ended July 5, 2009 and June 29, 2008:

                                                        Three Months Ended                            Six Months Ended
                                               July 5, 2009           June 29, 2008         July 5, 2009          June 29, 2008
                                                                                (In millions)
Semiconductor segment                         $        116.2         $         135.4        $       239.2        $         270.6
Percentage of segment revenues                          33.8 %                  29.3 %               35.8 %                 29.4 %
Storage Systems segment                       $         32.7         $          34.7        $        65.0        $          69.2
Percentage of segment revenues                          18.5 %                  15.1 %               19.5 %                 16.0 %

Consolidated                                  $        148.9         $         170.1        $       304.2        $         339.8

Percentage of total revenues                            28.6 %                  24.6 %               30.3 %                 25.1 %

Three months ended July 5, 2009 compared to the three months ended June 29, 2008:
Consolidated R&D expenses decreased $21.2 million or 12.5% for the three months ended July 5, 2009 as compared to the three months ended June 29, 2008.
Semiconductor Segment:
R&D expenses for the Semiconductor segment decreased $19.2 million or 14.2% for the three months ended July 5, 2009 as compared to the three months ended June 29, 2008. The decrease was primarily attributable to lower compensation-related expenses as a result of reduced headcount from the restructuring actions taken since January 2009 and other cost reduction measures, reductions in discretionary spending and lower spending on materials associated with existing R&D projects. R&D expenses for the Semiconductor segment increased as a percentage of segment revenues from 29.3% for the three months ended June 29, 2008 to 33.8% for the three months ended July 5, 2009, primarily as a result of the decrease in revenues.

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Storage Systems Segment:
R&D expenses for the Storage Systems segment decreased $2.0 million or 5.8% for the three months ended July 5, 2009 as compared to the three months ended June 29, 2008. The decrease was primarily attributable to lower compensation-related expenses as a result of reduced headcount from the restructuring actions taken since January 2009 and other cost reduction measures, reduction in discretionary spending and lower depreciation expense as a result of existing assets for product development that have become fully depreciated coupled with fewer new assets being purchased. The decrease was offset in part by expenses as a result of headcount additions associated with the acquisition of the 3ware business. R&D expenses for the Storage Systems segment increased as a percentage of segment revenues from 15.1% for the three months ended June 29, 2008 to 18.5% for the three months ended July 5, 2009, primarily as a result of the decrease in revenues.
Six months ended July 5, 2009 compared to the six months ended June 29, 2008:
Consolidated R&D expenses decreased $35.6 million or 10.5% for the six months ended July 5, 2009 as compared to the six months ended June 29, 2008.
Semiconductor Segment:
R&D expenses for the Semiconductor segment decreased $31.4 million or 11.6% for the six months ended July 5, 2009 as compared to the six months ended June 29, 2008. The decrease was primarily attributable to lower compensation-related expenses as a result of reduced headcount from the restructuring actions taken since January 2009 and other cost reduction measures, reductions in discretionary spending and lower spending on materials associated with existing R&D projects. R&D expenses for the Semiconductor segment increased as a percentage of segment revenues from 29.4% for the six months ended June 29, 2008 to 35.8% for the six months ended July 5, 2009, primarily as a result of the decrease in revenues.
Storage Systems Segment:
R&D expenses for the Storage Systems segment decreased $4.2 million or 6.1% for the six months ended July 5, 2009 as compared to the six months ended June 29, 2008. The decrease was primarily attributable to lower compensation-related expenses as a result of reduced headcount from the restructuring actions taken since January 2009 and other cost reduction measures, reductions in discretionary spending and lower depreciation expense as existing assets for product development were fully depreciated and fewer new assets were purchased. The decrease was offset in part by additional compensation-related expenditures as a result of the 3ware acquisition. R&D expenses for the Storage Systems segment increased as a percentage of segment revenues from 16.0% for the six months ended June 29, 2008 to 19.5% for the six months ended July 5, 2009, primarily as a result of the decrease in revenues. Selling, General and Administrative
The following table summarizes our selling, general and administrative, or SG&A, expenses by segment for the three and six months ended July 5, 2009 and June 29, 2008:

                                                       Three Months Ended                            Six Months Ended
                                              July 5, 2009           June 29, 2008         July 5, 2009          June 29, 2008
                                                                                (In millions)
Semiconductor segment                         $        53.6         $          72.2        $       110.1        $         141.6
Percentage of segment revenues                         15.6 %                  15.6 %               16.5 %                 15.4 %
Storage Systems segment                       $        28.1         $          32.3        $        55.4        $          62.0
Percentage of segment revenues                         15.9 %                  14.0 %               16.6 %                 14.4 %

Consolidated                                  $        81.7         $         104.5        $       165.5        $         203.6

Percentage of total revenues                           15.7 %                  15.1 %               16.5 %                 15.1 %

Three months ended July 5, 2009 compared to the three months ended June 29, 2008:
Consolidated SG&A expenses decreased $22.8 million or 21.8% for the three months ended July 5, 2009 as compared to the three months ended June 29, 2008.
Semiconductor Segment:
SG&A expenses for the Semiconductor segment decreased $18.6 million or 25.8% for the three months ended July 5, 2009 as compared to the three months ended June 29, 2008. The decrease was primarily attributable to a decrease in compensation-related expenses as a result of reduced headcount from the restructuring actions taken since January 2009 and other cost reduction measures, a decrease in amortization of identified intangible assets, and lower sales and general expenses attributable to continued cost containment activities.

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Storage Systems Segment:
SG&A expenses for the Storage Systems segment decreased $4.2 million or 13.0% for the three months ended July 5, 2009 as compared to the three months ended June 29, 2008. The decrease was primarily attributable to lower compensation-related expenses as a result of cost reduction measures, lower spending from continued cost containment activities and lower bad debt expense due to the decrease in revenues. SG&A expenses for the Storage Systems segment increased as a percentage of segment revenues from 14.0% for the three months ended June 29, 2008 to 15.9% for the three months ended July 5, 2009, primarily as a result of the decrease in revenues.
Six months ended July 5, 2009 compared to the six months ended June 29, 2008:
Consolidated SG&A expenses decreased $38.1 million or 18.7% for the six months ended July 5, 2009 as compared to the six months ended June 29, 2008.
Semiconductor Segment:
SG&A expenses for the Semiconductor segment decreased $31.5 million or 22.2% for the six months ended July 5, 2009 as compared to the six months ended June 29, 2008. The decrease was primarily attributable to a decrease in compensation-related expenses as a result of reduced headcount from the restructuring actions taken since January 2009 and other cost reduction measures, a decrease in amortization expenses associated with identified intangible assets, and lower sales and general expenses attributable to continued cost containment activities. SG&A expenses for the Semiconductor segment increased as a percentage of segment revenues from 15.4% for the six months ended June 29, 2008 to 16.5% for the six months ended July 5, 2009, primarily as a result of the decrease in revenues.
Storage Systems Segment:
SG&A expenses for the Storage Systems segment decreased $6.6 million or 10.6% for the six months ended July 5, 2009 as compared to the six months ended June 29, 2008. The decrease was primarily attributable to lower compensation-related expenses as a result of reduced headcount from the restructuring actions taken since January 2009 and other cost reduction measures, lower spending from continued cost containment activities and lower bad debt expense due to the decrease in revenues. SG&A expenses for the Storage Systems segment increased as a percentage of segment revenues from 14.4% for the six months ended June 29, 2008 to 16.6% for the six months ended July 5, 2009, primarily as a result of the decrease in revenues. Restructuring of Operations and Other Items, net We recorded charges of $6.0 million in restructuring of operations and other items, net, for the three months ended July 5, 2009. Of these charges, $4.5 million and $1.5 million were recorded in the Semiconductor segment and Storage Systems segment, respectively. We recorded charges of $31.2 million in restructuring of operations and other items, net, for the six months ended July 5, 2009, consisting of $25.0 million in charges for restructuring of operations and $6.2 million in charges for other items. Of these charges, $29.7 million and $1.5 million were recorded in the Semiconductor segment and Storage Systems segment, respectively.
We recorded charges of $20.7 million in restructuring of operations and other items, net, for the three months ended June 29, 2008, consisting of $10.0 million in charges for restructuring of operations and $10.7 million in charges for other items. The majority of the $20.7 million in charges for three months ended June 29, 2008 were recorded in the Semiconductor segment. We recorded charges of $25.3 million in restructuring of operations and other items, net, for the six months ended June 29, 2008, consisting of $13.3 million in charges for restructuring of operations and $12.0 million in charges for other items. The majority of the $25.3 million in charges for the six months ended June 29, 2008 were recorded in the Semiconductor segment.
See Note 3 to our consolidated financial statements in Item 1 for more information about the restructuring charges recorded during 2009.

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Interest (Expense) or Income and Other, net The following table summarizes our interest expense and components of interest income and other, net, for the three and six months ended July 5, 2009 and June 29, 2008:

                                                       Three Months Ended                            Six Months Ended
. . .