UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~July 1, 2012~~June 30, 2013

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-10317

LSI CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		94-2712976
*(State of Incorporation)*		*(I.R.S. Employer Identification Number)*

~~1621 Barber Lane~~1320 Ridder Park Drive

~~Milpitas,~~San Jose, California ~~95035~~95131

(Address of principal executive offices)

(Zip code)

(408) 433-8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filerþ	Accelerated filer¨	Non-accelerated filer¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company.)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Noþ

As of August ~~1, 2012,~~2, 2013, there were ~~557,562,166~~547,075,131 shares of the registrant’s Common Stock, $.01 par value, outstanding.

LSI CORPORATION

FORM 10-Q

For the Quarter Ended ~~July 1, 2012~~June 30, 2013

INDEX


	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)		3
Condensed Consolidated Balance Sheets as of ~~July 1, 2012~~June 30, 2013 and December 31, ~~2011~~2012		3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and July 1, 2012 ~~and July 3, 2011~~		4
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and July 1, 2012 ~~and July 3, 2011~~		5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and July 1, 2012 ~~and July 3, 2011~~		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		2117
Item 3. Quantitative and Qualitative Disclosures about Market Risk		2824
Item 4. Controls and Procedures		2824
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		2924
Item 1A. Risk Factors		2924
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		2925
Item 6. Exhibits		3025
Signatures		3126
Exhibit Index		3227

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “plan,” “intend,” “expect,” “anticipate,” “believe” and similar words are intended to identify forward-looking statements. Although we believe our expectations are based on reasonable assumptions, our actual results could differ materially from those projected in the forward-looking statements. We have described in Part II, Item 1A-”“Risk Factors” a number of factors that could cause our actual results to differ materially from our projections or estimates. Except where otherwise indicated, the statements made in this report are made as of the date we filed this report with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. We expressly disclaim any obligation to update the information in this report, except as may otherwise be required by law.

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

LSI CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)


	July 1, 2012			December 31, 2011			June 30, 2013			December 31, 2012
ASSETS
Cash and cash equivalents	$	402,144		$	779,811		$	409,571		$	471,528
Short-term investments		198,940			155,644			263,908			204,457
Accounts receivable, less allowances of $7,375 and $6,950, respectively		296,840			246,539
Accounts receivable, less allowances of $6,095 and $6,770, respectively								241,962			264,112
Inventories		204,013			180,035			173,568			206,323
Prepaid expenses and other current assets		63,394			60,659			68,605			80,372

Total current assets		1,165,331			1,422,688			1,157,614			1,226,792
Property and equipment, net		235,669			180,589			281,459			269,747
Identified intangible assets, net		546,118			433,790			426,861			486,119
Goodwill		255,838			72,377			255,005			255,005
Other assets		107,647			122,604			113,641			118,502

Total assets	$	2,310,603		$	2,232,048		$	2,234,580		$	2,356,165

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	206,041		$	175,093		$	191,001		$	209,699
Accrued salaries, wages and benefits		108,555			106,948			103,893			129,533
Other accrued liabilities		153,804			178,830			148,873			177,662

Total current liabilities		468,400			460,871			443,767			516,894
Pension and post-retirement benefit obligations		566,811			597,183			528,666			559,252
Income taxes payable — non-current		94,314			91,791			104,254			102,246
Other non-current liabilities		17,676			23,263			17,576			18,149

Total liabilities		1,147,201			1,173,108			1,094,263			1,196,541

Commitments and contingencies (Note 13)
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $.01 par value: 2,000 shares authorized; none outstanding		—			—			—			—
Common stock, $.01 par value: 1,300,000 shares authorized; 557,065 and 561,767 shares outstanding, respectively		5,571			5,618
Common stock, $.01 par value: 1,300,000 shares authorized; 546,256 and 550,894 shares outstanding, respectively								5,463			5,509
Additional paid-in capital		5,588,935			5,623,581			5,511,298			5,573,248
Accumulated deficit		(3,903,121	)		(4,037,031	)		(3,797,751	)		(3,840,803	)
Accumulated other comprehensive loss		(527,983	)		(533,228	)		(578,693	)		(578,330	)

Total stockholders’ equity		1,163,402			1,058,940			1,140,317			1,159,624

Total liabilities and stockholders’ equity	$	2,310,603		$	2,232,048		$	2,234,580		$	2,356,165

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

LSI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended					Six Months Ended						Three Months Ended				Six Months Ended
	July 1, 2012		July 3, 2011			July 1, 2012			July 3, 2011			June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012
Revenues	$	659,573	$	500,644		$	1,281,997		$	973,908		$	589,583	$	659,573	$	1,158,219	$	1,281,997
Cost of revenues		327,685		263,024			663,197			512,114			290,324		327,685		569,456		663,197

Gross profit		331,888		237,620			618,800			461,794			299,259		331,888		588,763		618,800
Research and development		175,564		145,873			345,435			288,220			176,448		175,564		347,753		345,435
Selling, general and administrative		88,914		71,793			179,014			140,660			87,432		88,914		176,927		179,014
Restructuring of operations and other items, net		6,491		(10,904	)		21,953			(8,098	)		7,807		6,491		28,259		21,953

Income from operations		60,919		30,858			72,398			41,012			27,572		60,919		35,824		72,398
Interest income and other, net		9,594		6,450			24,250			10,738			2,248		9,594		10,128		24,250

Income from continuing operations before income taxes		70,513		37,308			96,648			51,750
Income before income taxes													29,820		70,513		45,952		96,648
Provision for/(benefit from) income taxes		11,800		8,900			(37,262	)		4,796			5,200		11,800		2,900		(37,262	)

Income from continuing operations		58,713		28,408			133,910			46,954
Income from discontinued operations (including a gain on disposal of $260,066 for the three and six months ended July 3, 2011), net of taxes		—		265,376			—			256,984

Net income	$	58,713	$	293,784		$	133,910		$	303,938		$	24,620	$	58,713	$	43,052	$	133,910


Basic income per share:
Income from continuing operations	$	0.10	$	0.05		$	0.24		$	0.08
Net income per share:
Basic												$	0.04	$	0.10	$	0.08	$	0.24

Income from discontinued operations	$	—	$	0.44		$	—		$	0.42

Net income	$	0.10	$	0.49		$	0.24		$	0.50

Diluted income per share:
Income from continuing operations	$	0.10	$	0.05		$	0.23		$	0.08

Income from discontinued operations	$	—	$	0.43		$	—		$	0.41

Net income	$	0.10	$	0.48		$	0.23		$	0.49
Diluted												$	0.04	$	0.10	$	0.08	$	0.23

Shares used in computing per share amounts:
Basic		563,686		594,957			564,945			605,315			548,282		563,686		549,249		564,945

Diluted		581,344		611,093			586,431			621,248			561,801		581,344		565,426		586,431

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

LSI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

   Three Months Ended Six Months Ended
   July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011
Net income
   $ 58,713    $ 293,784    $ 133,910    $ 303,938


Other comprehensive (loss)/income before tax:

Foreign currency translation adjustments
   (4,844 ) 190    (3,397 ) 1,591


Unrealized gain on investments for the period
   553    384    1,244    1,421
Reclassification adjustments for gain on investments included in net income
   (918 ) (802 ) (1,413 ) (1,513 )


Unrealized loss on investments
   (365 ) (418 ) (169 ) (92 )


Unrealized (loss)/gain on derivatives for the period
   (1,989 ) 399    (1,349 ) 1,021
Reclassification adjustments for loss/(gain) on derivatives included in net income
   1,335    (759 ) 2,008    (972 )


Unrealized (loss)/gain on derivatives
   (654 ) (360 ) 659    49


Amortization of transition asset, prior service cost and net actuarial loss
   4,183    1,784    8,152    3,562


Other comprehensive (loss)/income before tax
   (1,680 ) 1,196    5,245    5,110
Income tax expense related to items of other comprehensive (loss)/income
   —      —      —      —


Other comprehensive (loss)/income, net of tax
   (1,680 ) 1,196    5,245    5,110


Comprehensive income
   $ 57,033    $ 294,980    $ 139,155    $ 309,048


   Three Months Ended Six Months Ended
   June 30, 2013 July 1, 2012 June 30, 2013 July 1, 2012
Net income
   $ 24,620    $ 58,713    $ 43,052    $ 133,910
Other comprehensive (loss)/income before tax:

Foreign currency translation adjustments
   (4,965 ) (4,844 ) (5,307 ) (3,397 )
Available-for-sale securities:

Unrealized (loss)/gain on investments
   (5,396 ) 195    (3,416 ) 533
Reclassification of net realized (gain)/loss on investments to net income
   (1 ) (560 ) 16    (702 )
Derivative financial instruments:

Unrealized loss on derivatives
   (1,619 ) (1,989 ) (1,651 ) (1,349 )
Reclassification of net realized (gain)/loss on derivatives to net income
   (140 ) 1,335    (302 ) 2,008
Amortization of net actuarial loss, prior service cost and transition asset on defined benefit pension and post-retirement plans
   5,253    4,183    10,297    8,152


Other comprehensive (loss)/income before tax
   (6,868 ) (1,680 ) (363 ) 5,245
Income tax benefit on unrealized loss on investments
   (740 ) —   —      —


Other comprehensive (loss)/income, net of tax
   (6,128 ) (1,680 ) (363 ) 5,245


Comprehensive income
   $ 18,492    $ 57,033    $ 42,689    $ 139,155


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
LSI CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   Six Months Ended    Six Months Ended
   July 1, 2012 July 3, 2011    June 30, 2013 July 1, 2012
Operating activities:

Net income
   $ 133,910    $ 303,938       $ 43,052    $ 133,910
Adjustments:

Depreciation and amortization
   90,647    102,310       89,832    90,647
Stock-based compensation expense
   56,152    27,112       47,411    56,152
Non-cash restructuring of operations and other items, net
   5,041    20,964       6,330    5,041
Gain on re-measurement of a pre-acquisition equity interest to fair value
   (5,765 ) —         —      (5,765 )
Gain on sale of business
   —      (260,066 )
Gain on sale of property and equipment
   (70 ) (508 )    (4 ) (70 )
Unrealized foreign exchange (gain)/loss
   (2,735 ) 2,581
Unrealized foreign exchange gain
   (2,254 ) (2,735 )
Deferred taxes
   (43,174 ) (19,766 )    (51 ) (43,174 )
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combination:

Accounts receivable
   (39,417 ) 92,477
Accounts receivable, net
   21,690    (39,417 )
Inventories
   227    (43,140 )    32,570    227
Prepaid expenses, assets held for sale and other assets
   (1,830 ) (10,991 )
Prepaid expenses and other assets
   (9,117 ) (1,830 )
Accounts payable
   29,521    9,290       (10,601 ) 29,521
Accrued and other liabilities
   (55,010 ) (77,878 )    (78,208 ) (55,010 )




Net cash provided by operating activities
   167,497    146,323       140,650    167,497




Investing activities:

Purchases of debt securities available-for-sale
   (72,369 ) (24,131 )    (117,178 ) (72,369 )
Proceeds from maturities and sales of debt securities available-for-sale
   17,756    23,445       51,017    17,756
Purchases of other investments
   —      (4,000 )    (750 ) —
Purchases of property and equipment
   (77,618 ) (37,198 )    (43,357 ) (77,618 )
Proceeds from sale of property and equipment
   252    896       82    252
Acquisition of business, net of cash acquired
   (319,231 ) —         —      (319,231 )
Proceeds from sale of business, net of transaction costs
   —      475,150




Net cash (used in)/provided by investing activities
   (451,210 ) 434,162
Net cash used in investing activities
   (110,186 ) (451,210 )




Financing activities:

Issuances of common stock
   82,128    50,931       31,889    82,128
Purchases of common stock under repurchase program
   (176,185 ) (396,792 )
Purchases of common stock under repurchase programs
   (122,280 ) (176,185 )




Net cash used in financing activities
   (94,057 ) (345,861 )    (90,391 ) (94,057 )




Effect of exchange rate changes on cash and cash equivalents
   103    (968 )    (2,030 ) 103




Net change in cash and cash equivalents
   (377,667 ) 233,656       (61,957 ) (377,667 )




Cash and cash equivalents at beginning of period
   779,811    521,786       471,528    779,811




Cash and cash equivalents at end of period
   $ 402,144    $ 755,442       $ 409,571    $ 402,144




The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
LSI CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Basis of Presentation
For financial reporting purposes, LSI Corporation (“LSI” or the “Company”) reports on a 13- or 14-week quarter with the year ending December 31. The second ~~quarter~~quarters of ~~2012~~2013 and ~~2011~~2012 consisted of 13 weeks each and ended on June 30, 2013 and July 1, 2012, ~~and July 3, 2011,~~ respectively. The results of operations for the quarter ended ~~July 1, 2012~~June 30, 2013 are not necessarily indicative of the results to be expected for the full year.
On January 3, 2012, the Company completed the acquisition of SandForce, Inc. (“SandForce”) for total consideration of approximately $346.4 million, net of cash acquired. SandForce was a provider of flash storage processors for enterprise and client flash solutions and solid state drives. The acquisition was accounted for under the purchase method of accounting. Accordingly, the results of operations of SandForce and the estimated fair value of assets acquired and liabilities assumed were included in the Company’s condensed consolidated financial statements from January 3, 2012.
On May 6, 2011, the Company completed the sale of substantially all of its external storage systems business to NetApp, Inc. (“NetApp”). The results of the external storage systems business are presented as discontinued operations in the Company’s condensed consolidated statements of operations and, as such, have been excluded from all line items other than “Income from discontinued operations” for all periods presented.
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from these estimates.
In management’s opinion, the accompanying unaudited condensed consolidated financial statements contain all normal recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations, comprehensive income and cash flows for the interim periods presented. While the Company believes that the disclosures are adequate to make the information not misleading, these financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2011.~~2012.
Recent Accounting Pronouncements
~~Pronouncements adopted:~~
In ~~May 2011,~~July 2013, the Financial Accounting Standards Board (“FASB”) issued additional guidance ~~on fair value measurements~~regarding the presentation of unrecognized tax benefits. The guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset if a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from a disallowance of a tax position. This guidance is effective for fiscal years and ~~related disclosures.~~interim periods beginning after December 15, 2013. The ~~new guidance clarifies~~Company is currently evaluating the ~~application~~impact of ~~existing~~the adoption of this guidance on ~~fair value measurement~~its financial position. The adoption will not have an impact on the Company’s results of operations.
In February 2013, FASB issued additional guidance regarding the presentation of comprehensive income. The guidance requires an entity to present the effects on net income line items of significant amounts reclassified out of accumulated other comprehensive income, but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. An entity shall provide this information either on the face of the financial statements or in the notes to the financial statements. The guidance is effective for ~~non-financial assets and requires the disclosure of quantitative information about the unobservable inputs used in a fair value measurement.~~fiscal years beginning after December 15, 2012. The Company adopted this guidance in the first quarter of ~~2012. The adoption did not impact the Company’s results of operations or financial position.~~
In June 2011, the FASB issued amended guidance regarding the presentation of comprehensive income. The amended guidance gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amended guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The Company adopted this guidance in the first quarter of 2012.2013. The adoption did not impact the Company’s results of operations or financial position.
Note 2 — Stock-Based Compensation ~~Expense~~
InOn May ~~2012,~~9, 2013, the ~~Company’s~~ 2003 Equity Incentive Plan was amended to increase the number of shares available for new awards to ~~a total of 25~~20 million, of which 15 million ~~shares~~ were available for restricted stock and/or restricted stock units (“RSUs”). In addition, the period during which incentive stock options can be granted was extended to February ~~9, 2022,~~5, 2023, and the ~~maximum~~value of awards that can be granted in any fiscal year to a non-employee director was limited to $0.5 million.
On May 15, 2013, the Employee Stock Purchase Plan (“ESPP”) was amended to increase the number of shares ~~that may be issued upon exercise~~available for issuance under the plan to 30 million and to extend the term of ~~incentive stock options was set at 25 million.~~the ESPP through May 14, 2023.
Stock-based compensation expense, ~~included in continuing operations,~~ net of estimated forfeitures, related to the Company’s stock options, ~~Employee Stock Purchase Plan (“ESPP”)~~ESPP and ~~restricted stock unit awards~~RSUs by expense category was as follows:

   Three Months Ended    Six Months Ended
   July 1, 2012    July 3, 2011    July 1, 2012    July 3, 2011
   (In thousands)
Cost of revenues
   $ 3,003       $ 2,051       $ 6,515       $ 3,864
Research and development
   11,973       6,653       24,281       12,876
Selling, general and administrative
   10,342       4,948       25,356       10,579








Total stock-based compensation expense
   $ 25,318       $ 13,652       $ 56,152       $ 27,319








   Three Months Ended    Six Months Ended
   June 30, 2013    July 1, 2012    June 30, 2013    July 1, 2012
   (In thousands)
Cost of revenues
   $ 2,237       $ 3,003       $ 5,112       $ 6,515
Research and development
   9,619       11,973       22,028       24,281
Selling, general and administrative
   10,009       10,342       20,271       25,356








Total stock-based compensation expense
   $ 21,865       $ 25,318       $ 47,411       $ 56,152








~~In connection with the SandForce acquisition,~~The income tax benefit that the Company ~~assumed stock options and RSUs originally granted by SandForce. Stock-based compensation expense~~realized for the ~~six months ended July 1, 2012 included $4.5 million of expense related to the accelerated vesting of stock options~~tax deduction from option exercises and ~~RSUs~~other awards was not material for certain SandForce employees in January 2012. Stock-based compensation expense for the three and six months ended July 1, 2012 also includes $3.3 million and $5.7 million, respectively, related to stock options and RSUs assumed.any period presented.
The Company has issued RSUs that will not vest unless specified performance criteria are met. In the first quarter of 2012, the compensation committee of the board of directors authorized additional vesting of performance-based RSUs where the Company’s performance had been adversely affected as a result of the flooding that occurred in Thailand in the fourth quarter of 2011 and as a result, vesting levels would have been lower. The Company recognized $1.6 million and $6.0 million of stock-based compensation expense related to the additional vesting for the three and six months ended July 1, 2012, respectively. No executive officers were included in the group of employees that received additional vesting. Executive officers hold RSUs, the vesting of which depends on the Company’s performance compared to specified peer companies over a three-year period. Based on the Company’s latest available financial performance, the Company recognized $1.6 million and $4.0 million of stock-based compensation expense related to the executive officer performance grants for the three and six months ended July 1, 2012, respectively. There was no stock-based compensation expense related to the executive officer performance grants for the three or six months ended July 3, 2011.
Stock Options
The fair value of each option grant is estimated as of the date of grant using a reduced-form calibrated binomial lattice model (“lattice model”). The following table summarizes the weighted-average assumptions that the Company applied in the lattice model:

   Three Months Ended Six Months Ended    Three Months Ended Six Months Ended
   July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011    June 30, 2013 July 1, 2012 June 30, 2013 July 1, 2012
Estimated grant date fair value per share
   $ 2.64    $ 2.65    $ 2.86    $ 2.14       $ 2.29    $ 2.64    $ 2.33    $ 2.86
Expected life (years)
   4.52    5.01    4.46    4.51       4.47    4.52    4.38    4.46
Risk-free interest rate
   1 % 2 % 1 % 2 %    1 % 1 % 1 % 1 %
Volatility
   49 % 47 % 47 % 47 %    47 % 49 % 49 % 47 %
The following table summarizes changes in stock options outstanding:

   Number of
Shares Weighted-Average
Exercise
Price Per Share    Weighted-Average
Remaining
Contractual
Term    Aggregate
Intrinsic
Value
   (In thousands)    (In years)    (In thousands)
Options outstanding at December 31, 2011
   64,245    $ 6.19
Assumed in SandForce acquisition
   7,542    $ 0.75
Granted
   5,033    $ 8.50
Exercised
   (11,942 ) $ 5.69
Canceled
   (2,757 ) $ 9.32



Options outstanding at July 1, 2012
   62,121    $ 5.67       4.09       $ 91,608



Options exercisable at July 1, 2012
   37,288    $ 6.15       2.81       $ 43,806



   Number of
Shares Weighted-Average
Exercise
Price Per Share    Weighted-Average
Remaining
Contractual
Term    Aggregate
Intrinsic
Value
   (In thousands)    (In years)    (In thousands)
Options outstanding at December 31, 2012
   56,042    $ 5.75
Granted
   6,331    $ 6.89
Exercised
   (4,511 ) $ 3.16
Canceled
   (1,808 ) $ 7.90



Options outstanding at June 30, 2013
   56,054    $ 6.01       3.57       $ 86,943



Options exercisable at June 30, 2013
   38,018    $ 5.88       2.48       $ 66,893



As of ~~July 1, 2012,~~June 30, 2013, the total unrecognized compensation expense related to unvested stock options, net of estimated forfeitures, was ~~$46.8~~$36.8 million and is expected to be recognized over the next ~~2.3~~2.5 years on a weighted-average basis.
Restricted Stock Units
The cost of service-based and performance-based RSUs is determined using the fair value of the Company’s common stock on the date of grant. For performance-based RSU expense, the Company also considers the probability that those RSUs will vest.
Service-based:
The vesting of service-based RSUs requires that the employees remain employed by the Company for a specified period of time.
The following table summarizes changes in service-based RSUs outstanding:

   Number of Units Weighted-Average
Grant Date Fair
Value per Share    Number of Units Weighted-Average
Grant Date Fair
Value per Share
   (In thousands)    (In thousands)
Unvested service-based RSUs at December 31, 2011
   12,085    $ 5.94
Assumed in SandForce acquisition
   1,576    $ 6.17
Unvested service-based RSUs outstanding at December 31, 2012
   17,655    $ 6.99
Granted
   7,012    $ 8.32       7,950    $ 6.92
Vested
   (3,035 ) $ 5.90       (4,747 ) $ 6.84
Forfeited
   (464 ) $ 6.32       (673 ) $ 6.81




Unvested service-based RSUs at July 1, 2012
   17,174    $ 6.93
Unvested service-based RSUs outstanding at June 30, 2013
   20,185    $ 7.01




As of ~~July 1, 2012,~~June 30, 2013, the total unrecognized compensation expense related to service-based RSUs, net of estimated forfeitures, was ~~$98.7~~$115.7 million and will be recognized over the next ~~2.9~~2.8 years on a weighted-average basis.
Performance-based:
The vesting of performance-based RSUs is contingent upon the Company meeting specified performance criteria and requires that the employees remain employed by the Company for a specified period of time.
The following table summarizes changes in performance-based RSUs outstanding:

   Number of Units Weighted-Average
Grant Date Fair
Value per Share    Number of Units Weighted-Average
Grant Date Fair
Value per Share
   (In thousands)    (In thousands)
Unvested performance-based RSUs at December 31, 2011
   4,729    $ 5.98
Unvested performance-based RSUs outstanding at December 31, 2012
   5,634    $ 7.29
Granted
   2,986    $ 8.52       1,441    $ 6.89
Vested
   (1,446 ) $ 5.85       (3,167 ) $ 7.41
Forfeited
   (535 ) $ 6.41       (330 ) $ 6.40




Unvested performance-based RSUs at July 1, 2012
   5,734    $ 7.30
Unvested performance-based RSUs outstanding at June 30, 2013
   3,578    $ 7.11




As of ~~July 1, 2012,~~June 30, 2013, the total unrecognized compensation expense related to performance-based RSUs, net of estimated forfeitures, was ~~$30.0~~$15.1 million and, if the performance conditions are fully met, will be recognized over the next ~~3 years.~~
A total of 9,117,372 shares of common stock were reserved for future issuance upon exercise of options and RSUs assumed in the SandForce acquisition. Those options and RSUs are included in the preceding tables. The options vest over four years and have ten year terms. The RSUs vest over one to four1.8 years.
Employee Stock Purchase Plan
Compensation expense for the ~~Company’s~~ ESPP is calculated using the fair value of the employees’ purchase rights computed under the Black-Scholes model. Under the ESPP, rights to purchase shares are granted during the second and fourth quarters of each year. The Company issued 3.2 million and 2.8 million ~~and 2.9 million~~ shares of common stock under the ESPP during the three months ended June 30, 2013 and July 1, 2012, ~~and July 3, 2011,~~ respectively. The following table summarizes the weighted-average assumptions that the Company applied in the calculation of the fair value for the May ~~2012~~2013 and May ~~2011~~2012 grants:

   Three Months Ended    Three Months Ended
   July 1, 2012 July 3, 2011    June 30, 2013 July 1, 2012
Estimated grant date fair value per share
   $ 2.19    $ 2.10       $ 1.88    $ 2.19
Expected life (years)
   0.8    0.8       0.8    0.8
Risk-free interest rate
   0.17 % 0.02 %    0.11 % 0.17 %
Volatility
   41 % 37 %    34 % 41 %
Note 3 — Common Stock Repurchases
On March 9, 2011, the Company’s board of directors authorized a stock repurchase program of up to $750.0 million of the Company’s common stock. As of July 1, 2012, $75.0 million remained available under this stock repurchase program. The Company repurchased 17.9 million shares for $138.0 million during the three months ended July 1, 2012 and 22.5 million shares for $176.2 million during the six months ended July 1, 2012. The Company repurchased 41.6 million shares for $300.0 million during the three months ended July 3, 2011 and 56.3 million shares for $396.8 million during the six months ended July 3, 2011. Repurchased shares are retired immediately after the repurchases are completed. Retirement of repurchased shares is recorded as a reduction of common stock and additional paid-in capital. On August 1, 2012, the Company’s board of directors authorized ~~the~~a common stock repurchase program of up to ~~an additional~~ $500.0 million of its common stock. As of June 30, 2013, $356.3 million remained available for repurchases under this program.
The following table summarizes the Company’s common ~~stock.~~
stock repurchases:
   Three Months Ended    Six Months Ended
   June 30, 2013    July 1, 2012    June 30, 2013    July 1, 2012
   (In thousands)
Dollar value of shares repurchased
   $ 61,515       $ 137,979       $ 122,280       $ 176,185
Number of shares repurchased
   8,763       17,919       17,398       22,521
Repurchased shares are retired immediately and are recorded as reductions in common stock and additional paid-in capital.
Note 4 — Restructuring and Other Items
The following table summarizes items included in restructuring of operations and other items, net:

   Three Months Ended Six Months Ended    Three Months Ended Six Months Ended
   July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011    June 30, 2013 July 1, 2012 June 30, 2013 July 1, 2012
   (In thousands)    (In thousands)
Lease terminations (a)
   $ 1,181    $ 1,865    $ 2,815    $ 3,553
Leases
   $ 2,031 (a) $ 1,181 (a) $ 3,799 (a) $ 2,815 (a)
Employee severance and benefits ~~(b)~~
   1,028    289    1,459    1,932       2,170    1,028    6,556    1,459




Total restructuring expense
   2,209    2,154    4,274    5,485       4,201    2,209    10,355    4,274
Other items, net
   4,282 (c) (13,058 )(d) 17,679 (e) (13,583 )(d)    3,606 (b) 4,282 (c) 17,904 (d) 17,679 (e)




Total restructuring of operations and other items, net
   $ 6,491    $ (10,904 ) $ 21,953    $ (8,098 )    $ 7,807    $ 6,491    $ 28,259    $ 21,953




(a) Includes lease obligation costs and related changes in estimates, changes in time value ~~on-going operating expense~~ and ~~changes in estimates related to previously vacated facilities.~~other ongoing expenditures.

(b) ~~Relates to restructuring actions taken as the Company continued to streamline operations.~~Primarily includes a $2.7 million increase in environmental remediation liabilities based on current period information and $1.1 million for a litigation settlement.

(c) Primarily consists of $2.4 million of property and equipment write-downs and $1.9 million of costs related to the transition service agreement ~~costs related to~~associated with the sale of the external storage systems business.

(d) Primarily ~~relates to the reversal of a $14.5~~includes $13.7 million sales and use tax related liability as a result of concluding various audits, partially offset by $1.3 million of transition service agreement costs related to the sale of the external storage systems business.for litigation settlements.

(e) Primarily consists of $8.4 million of ~~SandForce~~ acquisition-related costs and $6.5 million of costs related to the transition service agreement ~~costs related to~~associated with the sale of the external storage systems business.
The following table summarizes the significant ~~activity~~activities within, and components of, the Company’s restructuring obligations:

   Lease
Terminations Employee
Severance
and
Benefits Total    Leases Employee
Severance
and
Benefits Total
   (In thousands)    (In thousands)
Balance at December 31, 2011
   $ 11,752    $ 10,444    $ 22,196
Balance at December 31, 2012
   $ 12,991    $ 5,003    $ 17,994
Expense
   2,815    1,459    4,274       3,799    6,556    10,355
Utilized~~(a)~~
   (4,844 ) (10,810 ) (15,654 )    (10,057 )(a) (7,073 )(a) (17,130 )




Balance at July 1, 2012 (b)
   $ 9,723    $ 1,093    $ 10,816
Balance at June 30, 2013
   $ 6,733 (b) $ 4,486 (b) $ 11,219




(a) Represents cash payments.

(b) The balance remaining for lease ~~terminations~~obligations is expected to be paid during the remaining terms of the leases, which extend through ~~2013.~~the first quarter of 2015. The majority of the balance remaining for employee severance and benefits is expected to be paid by the ~~end~~second quarter of ~~2013.~~2014.
Note 5 — ~~Business Combination~~
~~Acquisition of SandForce~~
On January 3, 2012, the Company completed the acquisition of SandForce. SandForce was a provider of flash storage processors for enterprise and client flash solutions and solid state drives. The Company acquired SandForce to enhance its position in storage technology solutions.
~~Total consideration consisted of the following (in thousands):~~

Cash paid, net of cash acquired
   $ 319,231
Fair value of partially vested equity awards
   19,089
Fair value of LSI’s previous investment in SandForce
   8,120


Total
   $ 346,440


In connection with the SandForce acquisition, the Company assumed stock options and RSUs originally granted by SandForce and converted them into LSI stock options and RSUs. The portion of the fair value of partially vested equity awards associated with prior service of SandForce employees represents a component of the total consideration for the SandForce acquisition, as presented above. Stock options assumed were valued using a binomial lattice model calibrated to the exercise behavior of LSI’s employees. RSUs were valued based on LSI’s stock price as of the acquisition date.
Prior to the acquisition, the Company held an equity interest in SandForce. The Company determined the fair value by applying the per share value of the contractual cash consideration to the SandForce shares held by the Company immediately prior to the acquisition. The fair value of the Company’s pre-acquisition investment in SandForce represents a component of total consideration, as presented above. As a result of re-measuring the pre-acquisition equity interest in SandForce to fair value, the Company recognized a gain of $5.8 million, which was included in interest income and other, net, for the six month period ended July 1, 2012.
~~The allocation of the purchase price to SandForce’s tangible and identified intangible assets acquired and liabilities assumed was based on their estimated fair values.~~
~~The purchase price has been allocated as follows (in thousands):~~

Accounts receivable
   $ 10,711
Inventory
   24,268
Identified intangible assets
   172,400
Goodwill
   183,461
Net deferred tax liabilities
   (43,198 )
Other, net
   (1,202 )


Total
   $ 346,440


The goodwill is primarily attributable to the assembled workforce of SandForce and synergies and economies of scale expected from combining the operations of LSI and SandForce. The goodwill recognized is not deductible for tax purposes.
~~Identified intangible assets were comprised of the following:~~

   Fair Value    Weighted-
Average Life
   (In thousands)    (In years)
Current technology
   $ 73,400       4.0
Customer relationships
   41,700       7.0
Order backlog
   4,500       0.5
Trade names
   1,500       3.0



Total identified intangible assets subject to amortization
   121,100       4.9
In-process research and development
   51,300



Total identified intangible assets
   $ 172,400



The allocation of the purchase price to identified intangible assets acquired was based on the Company’s best estimate of the fair value of such assets. Fair value for acquired identified intangible assets is determined based on inputs that are unobservable and significant to the overall fair value measurement. As such, acquired intangible assets are classified as Level 3 assets.
The fair value of each of the acquired identified intangible assets was determined using a discounted cash flow methodology. The cash flows for each category of identified intangible assets represent the estimated incremental effect on the Company’s cash flows directly attributable to that intangible asset over its estimated remaining life. Estimated cash flows represent expected incremental revenues, net of returns on contributory assets and after considering estimated incremental operating costs and income taxes. Discount rates ranging from 12.9% to 17.9% were used based on the cost of capital, adjusted to reflect the specific risk associated with each of the cash flows.
Current technology represents the fair value of SandForce products that had reached technological feasibility and were a part of its product offering. Customer relationships represent the fair values of the underlying relationships with SandForce’s customers.
In-process research and development (“IPR&D”) represents the fair value of incomplete research and development projects that had not reached technological feasibility as of the date of the acquisition. At the time of acquisition, SandForce had IPR&D related to its next generation flash storage processor (the “Griffin project”). At July 1, 2012, expected costs to complete the Griffin project are approximately $24 million through its anticipated completion date in 2013. Total revenues for the Griffin project are expected to extend through 2018. The acquisition date fair value of the Griffin project will be either amortized or impaired depending on whether the project is completed or abandoned.
From January 3, 2012 through July 1, 2012, the Company recognized approximately $77.0 million of revenues related to the SandForce business. In addition, during the six months ended July 1, 2012, the Company recognized $8.4 million of acquisition-related costs included in restructuring of operations and other items, net, related to SandForce. It is impracticable to determine the effect on net income resulting from the SandForce acquisition for the six months ended July 1, 2012, as the Company immediately integrated SandForce into its ongoing operations. As such, the impact of SandForce is not separable from the Company’s consolidated results of operations.
~~Historical pro forma results giving effect to the acquisition have not been presented because such effect is not material to the prior period financial results.~~
~~Note 6 —~~ Benefit Obligations
~~In 2007, the Company acquired Agere Systems Inc. (“Agere”).~~ The Company ~~has pension plans covering substantially all~~provides retirement benefits to certain current and former ~~Agere~~ U.S. employees ~~excluding management employees hired after June 30, 2003. Retirement benefits are provided~~ under defined benefit pension plans, which include a management plan and a represented plan. ~~The payments~~Benefits under the management plan are based on an adjusted career-average-pay formula or a cash-balance program. The cash-balance program provides for annual company contributions based on a participant’s age and compensation and interest on existing balances. It covers employees of certain companies acquired by Agere since 1996 and management employees hired after January 1, 1999 and before July 1, 2003. The paymentsBenefits under the represented plan are based on a dollar-per-month formula. ~~Since February 2009, there have been~~Benefit accruals under the management plan were frozen in 2009. Participants in the adjusted career-average-pay program no longer earn service accruals. Participants in the cash-balance program no longer earn service accruals, but continue to earn 4% interest per year on their cash-balance accounts. There are no active participants under the represented plan.
The Company also has a non-qualified supplemental pension plan in the U.S. that principally provides benefits based on compensation in excess of amounts that can be considered under ~~a tax qualified~~the management plan. ~~The~~In addition, the Company ~~also~~ provides post-retirement life insurance coverage under a group life insurance plan for ~~former Agere employees excluding participants in the cash-balance program and management employees hired after June 30, 2003.~~certain U.S. employees. The Company also has pension plans covering certain international employees.
Effective April 6, 2009, the Company froze the U.S. management defined benefit pension plan. Participants in the adjusted career-average-pay program will not earn any future service accruals after that date. Participants in the cash-balance program will not earn any future service accruals, but will continue to earn 4% interest per year on their cash-balance accounts.
The following ~~table summarizes~~tables summarize the components of the net periodic benefit ~~cost or credit:~~cost:

   Three Months Ended    Three Months Ended
   July 1, 2012 July 3, 2011    June 30, 2013 July 1, 2012
   Pension
Benefits Post-retirement
Benefits Pension
Benefits Post-retirement
Benefits    Pension
Benefits Post-retirement
Benefits Pension
Benefits Post-retirement
Benefits
   (In thousands)    (In thousands)
Service cost
   $ 116    $ 20    $ 141    $ 21       $ 119    $ 5    $ 116    $ 20
Interest cost
   15,483    643    16,929    621       14,363    583    15,483    643
Expected return on plan assets
   (17,030 ) (856 ) (17,000 ) (1,033 )    (16,575 ) (902 ) (17,030 ) (856 )
Amortization of net actuarial loss, prior service cost and transition asset
   3,693    490    1,699    85
Net actuarial loss, prior service cost and transition asset amortization
   4,900    353    3,693    490




Total benefit cost/(credit)
   $ 2,262    $ 297    $ 1,769    $ (306 )
Total benefit cost
   $ 2,807    $ 39    $ 2,262    $ 297




   Six Months Ended    Six Months Ended
   July 1, 2012 July 3, 2011    June 30, 2013 July 1, 2012
   Pension
Benefits Post-retirement
Benefits Pension
Benefits Post-retirement
Benefits    Pension
Benefits Post-retirement
Benefits Pension
Benefits Post-retirement
Benefits
   (In thousands)    (In thousands)
Service cost
   $ 225    $ 45    $ 275    $ 38       $ 242    $ 30    $ 225    $ 45
Interest cost
   30,735    1,293    33,779    1,246       28,633    1,183    30,735    1,293
Expected return on plan assets
   (34,053 ) (1,906 ) (33,998 ) (2,065 )    (33,156 ) (1,777 ) (34,053 ) (1,906 )
Amortization of net actuarial loss, prior service cost and transition asset
   7,162    990    3,385    177
Net actuarial loss, prior service cost and transition asset amortization
   9,569    728    7,162    990




Total benefit cost/(credit)
   $ 4,069    $ 422    $ 3,441    $ (604 )
Total benefit cost
   $ 5,288    $ 164    $ 4,069    $ 422




During the six months ended ~~July 1, 2012,~~June 30, 2013, the Company contributed ~~$26.2~~$26.3 million to its ~~U.S. defined benefit~~ pension ~~plans and $0.4 million to its non-qualified supplemental pension plan.~~plans. The Company expects to contribute an additional ~~$68.6~~$25.5 million to its pension plans during the remainder of ~~2012.~~2013. The Company does not expect to contribute to its post-retirement benefit plan in ~~2012.~~2013.
Note 76 — Cash Equivalents and Investments
The following tables summarize the Company’s cash equivalents and investments measured at fair value:

   Fair Value Measurements as of July 1, 2012    Fair Value Measurements as of June 30, 2013
   Level 1 Level 2 Total    Level 1 Level 2 Total
   (In thousands)    (In thousands)
Cash equivalents:

Money-market funds
   $ 310,545 (a) $ —    $ 310,545       $ 268,320 (a) $ —      $ 268,320
U.S. government and agency securities
   —    2,003 (b) 2,003
Government and agency securities
   —      600 (b) 600
Commercial paper
   —      4,924 (b) 4,924




Total cash equivalents
   $ 310,545    $ 2,003    $ 312,548       $ 268,320    $ 5,524    $ 273,844




Available-for-sale debt securities:

Asset-backed and mortgage-backed securities:

Agency securities
   $ —    $ 124,603 (b) $ 124,603       $ —      $ 144,220 (b) $ 144,220
Non-agency securities
   —    3,135 (b) 3,135       —      845 (b) 845
U.S. government and agency securities
   13,225 (a) 44,200 (b) 57,425
Government and agency securities
   23,441 (a) 61,200 (b) 84,641
Corporate debt securities
   —    13,777 (b) 13,777       —      20,857 (b) 20,857
Commercial paper
   —      13,345 (b) 13,345




��

Total short-term investments
   $ 13,225    $ 185,715    $ 198,940       $ 23,441    $ 240,467    $ 263,908




Long-term investments in equity securities:

Marketable available-for-sale equity securities
   $ 2,145 (c) $ —    $ 2,145       $ 1,990 (c) $ —      $ 1,990

   Fair Value Measurements as of December 31, 2011    Fair Value Measurements as of December 31, 2012
   Level 1 Level 2 Total    Level 1 Level 2 Total
   (In thousands)    (In thousands)
Cash equivalents:

Money-market funds
   $ 674,219 (a) $ —    $ 674,219       $ 364,596 (a) $ —      $ 364,596
Government and agency securities
   —      6,479 (b) 6,479


Total cash equivalents
   $ 364,596    $ 6,479    $ 371,075


Available-for-sale debt securities:

Asset-backed and mortgage-backed securities:

Agency securities
   $ —    $ 97,408 (b) $ 97,408       $ —      $ 129,463 (b) $ 129,463
Non-agency securities
   —    9,989 (b) 9,989       —      1,393 (b) 1,393
U.S. government and agency securities
   5,403 (a) 30,572 (b) 35,975
Government and agency securities
   17,042 (a) 49,658 (b) 66,700
Corporate debt securities
   —    12,272 (b) 12,272       —   6,001 (b) 6,001
Commercial paper
   —      900 (b) 900




Total short-term investments
   $ 5,403    $ 150,241    $ 155,644       $ 17,042    $ 187,415    $ 204,457




Long-term investments in equity securities:

Marketable available-for-sale equity securities
   $ 1,514 (c) $ —    $ 1,514       $ 1,689 (c) $ —      $ 1,689

(a) The fair value of money-market funds is determined using unadjusted prices in active markets. ~~The fair value of~~ Level 1 ~~U.S.~~ government and agency securities consist of U.S. government securities and their fair value is determined using quoted prices in active markets.
(b) These investments are traded less frequently than Level 1 securities and are valued using inputs that include quoted prices for similar assets in active markets and inputs other than quoted prices that are observable for the asset, such as interest rates, yield curves, prepayment speeds, collateral performance, broker/dealer quotes and indices that are observable at commonly quoted intervals.
(c) The fair value of marketable equity securities is determined using quoted ~~market~~ prices in active markets. These amounts are included within other assets in the condensed consolidated balance sheets.
As of ~~July 1, 2012~~June 30, 2013 and December 31, ~~2011,~~2012, the aggregate carrying value of the Company’s non-marketable securities was ~~$41.6~~$42.8 million and ~~$43.9~~$42.1 million, respectively.
Upon the acquisition of SandForce, Inc. (“SandForce”) in January 2012, the Company recognized a gain of $5.8 million as a result of re-measuring its pre-acquisition equity interest in SandForce to estimated fair value. There were no other non-marketable securities fair-valued during the three and six months ended June 30, 2013 or July 1, ~~2012 or July 3, 2011.~~2012.
The following tables summarize the Company’s available-for-sale securities:

   July 1, 2012    June 30, 2013
   Amortized
Cost    Gross Unrealized
Gain    Gross Unrealized
Loss Fair Value    Amortized
Cost    Gross Unrealized
Gain    Gross Unrealized
Loss Fair Value
   (In thousands)    (In thousands)
Short-term debt securities:

Asset-backed and mortgage-backed securities
   $ 121,466       $ 6,764       $ (492 ) $ 127,738       $ 142,541       $ 4,862       $ (2,338 ) $ 145,065
U.S. government and agency securities
   56,542       888       (5 ) 57,425
Government and agency securities
   84,738       447       (544 ) 84,641
Corporate debt securities
   13,617       161       (1 ) 13,777       20,848       87       (78 ) 20,857
Commercial paper
   13,345       —         —      13,345












Total short-term debt securities
   $ 191,625       $ 7,813       $ (498 ) $ 198,940       $ 261,472       $ 5,396       $ (2,960 ) $ 263,908












Long-term marketable equity securities
   $ 669       $ 1,476       $ —      $ 2,145       $ 669       $ 1,321       $ —      $ 1,990

   December 31, 2011    December 31, 2012
   Amortized
Cost    Gross Unrealized
Gain    Gross Unrealized
Loss Fair Value    Amortized
Cost    Gross Unrealized
Gain    Gross Unrealized
Loss Fair Value
   (In thousands)    (In thousands)
Short-term debt securities:

Asset-backed and mortgage-backed securities
   $ 99,884       $ 7,891       $ (378 ) $ 107,397       $ 125,563       $ 6,390       $ (1,097 ) $ 130,856
U.S. government and agency securities
   35,179       799       (3 ) 35,975
Government and agency securities
   65,904       802       (6 ) 66,700
Corporate debt securities
   12,146       153       (27 ) 12,272       5,864       137       —      6,001
Commercial paper
   900       —         —      900












Total short-term debt securities
   $ 147,209       $ 8,843       $ (408 ) $ 155,644       $ 198,231       $ 7,329       $ (1,103 ) $ 204,457












Long-term marketable equity securities
   $ 669       $ 846       $ (1 ) $ 1,514       $ 669       $ 1,020       $ —      $ 1,689
As of ~~July 1, 2012,~~June 30, 2013, there were 94217 investments in an unrealized loss position. The following tables summarize the gross unrealized losses and fair values of the Company’s short-term investments that have been in a continuous unrealized loss position for less than and greater than 12 months, aggregated by investment category:

   July 1, 2012    June 30, 2013
   Less than 12 Months Greater than 12 Months    Less than 12 Months Greater than 12 Months
   Fair Value    Unrealized Losses Fair Value    Unrealized Losses    Fair Value    Unrealized Losses Fair Value    Unrealized Losses
   (In thousands)    (In thousands)
Asset-backed and mortgage-backed securities
   $ 33,176       $ (473 ) $ 1,247       $ (19 )    $ 67,133       $ (2,138 ) $ 6,598       $ (200 )
U.S. government and agency securities
   15,356       (5 ) —         —
Government and agency securities
   51,960       (544 ) —         —
Corporate debt securities
   4,544       (1 ) 503       —         9,611       (78 ) —         —












Total
   $ 53,076       $ (479 ) $ 1,750       $ (19 )    $ 128,704       $ (2,760 ) $ 6,598       $ (200 )












   December 31, 2011    December 31, 2012
   Less than 12 Months Greater than 12 Months    Less than 12 Months Greater than 12 Months
   Fair Value    Unrealized Losses Fair Value    Unrealized Losses    Fair Value    Unrealized Losses Fair Value    Unrealized Losses
   (In thousands)    (In thousands)
Asset-backed and mortgage-backed securities
   $ 10,645       $ (286 ) $ 1,301       $ (92 )    $ 38,280       $ (1,018 ) $ 4,141       $ (79 )
U.S. government and agency securities
   3,872       (3 ) —         —
Corporate debt securities
   2,375       (27 ) 505       —
Government and agency securities
   18,301       (6 ) —         —












Total
   $ 16,892       $ (316 ) $ 1,806       $ (92 )    $ 56,581       $ (1,024 ) $ 4,141       $ (79 )












Net realized losses and gains on sales of available-for-sale securities were not material for the three and six months ended June 30, 2013 or July 1, ~~2012 or July 3, 2011.~~2012.
Contractual maturities of available-for-sale debt securities as of ~~July 1, 2012~~June 30, 2013 were as ~~follows:~~follows (in thousands):

   Available-For-Sale
Debt Securities
   (In thousands)
Due within one year
   $ 27,998       $ 38,100
Due in 1-5 years
   47,794       82,511
Due in 5-10 years
   10,015       9,389
Due after 10 years
   113,133       133,908




Total
   $ 198,940       $ 263,908




The maturities of asset-backed and mortgage-backed securities were ~~allocated~~determined based on contractual principal maturities assuming no prepayments.
Note 87 — Supplemental Financial Information
Inventories

   July 1,
2012    December 31,
2011
   (In thousands)
Raw materials
   $ 147       $ 236
Work-in-process
   56,248       78,886
Finished goods
   147,618       100,913




Total inventories
   $ 204,013       $ 180,035




~~Goodwill~~
~~The following table summarizes goodwill activity for the six months ended July 1, 2012:~~

   Goodwill
   (In thousands)
Balance as of December 31, 2011
   $ 72,377
Addition due to SandForce acquisition
   183,461


Balance as of July 1, 2012
   $ 255,838


~~There was no impairment charge for goodwill during the six months ended July 1, 2012 or July 3, 2011. The accumulated impairment loss as of July 1, 2012 was $2.4 billion.~~
   June 30,
2013    December 31,
2012
   (In thousands)
Raw materials
   $ 74       $ 176
Work-in-process
   42,524       52,003
Finished goods
   130,970       154,144




Total inventories
   $ 173,568       $ 206,323




Accumulated Other Comprehensive Loss
The following table presents the components of, and changes in, accumulated other comprehensive loss, net of taxes:

   Balance at
December 31, 2011 Other
Comprehensive
Income Balance at
July 1, 2012
   (In thousands)
Accumulated net foreign currency translation adjustments
   $ 42,138    $ (3,397 ) $ 38,741
Accumulated net unrealized gain on investments
   5,942    (169 ) 5,773
Accumulated net unrealized loss on derivatives
   (2,551 ) 659    (1,892 )
Accumulated actuarial loss on pension and post-retirement plans
   (578,757 ) 8,152    (570,605 )


Total accumulated other comprehensive loss
   $ (533,228 ) $ 5,245    $ (527,983 )


   Balance at
December 31, 2012 Other
Comprehensive
Loss before
Reclassifications Amounts
Reclassified from
Accumulated
Other
Comprehensive
Loss (a) Net Current Period
Other
Comprehensive
Loss Balance at
June 30, 2013
   (In thousands)
Foreign currency translation adjustments
   $ 39,881    $ (5,307 ) $ —      $ (5,307 ) $ 34,574
Net unrealized gain on investments
   4,484    (3,416 ) 16    (3,400 ) 1,084
Net unrealized gain/(loss) on derivatives
   224    (1,651 ) (302 ) (1,953 ) (1,729 )
Defined benefit pension and post-retirement plans
   (622,919 ) —      10,297    10,297    (612,622 )


Total accumulated other comprehensive loss
   $ (578,330 ) $ (10,374 ) $ 10,011    $ (363 ) $ (578,693 )


There was no tax effect on any item of other comprehensive income presented in the condensed consolidated statements of comprehensive income for the three and six months ended July 1, 2012 and July 3, 2011.
(a) The reclassified components of defined benefit pension and post-retirement plans were included in the computation of net periodic benefit cost (see Note 5). All other reclassified amounts were insignificant for all periods presented.
Reconciliation of Basic and Diluted Shares
The following table provides a reconciliation of basic and diluted shares:

   Three Months Ended    Six Months Ended    Three Months Ended    Six Months Ended
   July 1, 2012    July 3, 2011    July 1, 2012    July 3, 2011    June 30, 2013    July 1, 2012    June 30, 2013    July 1, 2012
   (In thousands)    (In thousands)
Basic shares
   563,686       594,957       564,945       605,315       548,282       563,686       549,249       564,945
Dilutive effect of stock options, employee stock purchase rights and restricted stock unit awards
   17,658       16,136       21,486       15,933
Dilutive effect of stock options, employee stock purchase rights and RSUs
   13,519       17,658       16,177       21,486
















Diluted shares
   581,344       611,093       586,431       621,248       561,801       581,344       565,426       586,431
















The weighted-average common share equivalents that were excluded from the computation of diluted shares because their inclusion would have had an anti-dilutive effect on net income per share were as follows:

   Three Months Ended    Six Months Ended    Three Months Ended    Six Months Ended
   July 1, 2012    July 3, 2011    July 1, 2012    July 3, 2011    June 30, 2013    July 1, 2012    June 30, 2013    July 1, 2012
   (In thousands)    (In thousands)
Anti-dilutive securities:

Stock options
   30,540       38,338       24,672       44,130       32,837       30,540       31,191       24,672
Restricted stock unit awards
   9,743       1,445       5,985       93
RSUs
   4,544       9,743       941       5,985
Note 98 — Derivative Instruments
The Company has foreign subsidiaries that operate and sell the Company’s products in various markets around the world. As a result, the Company is exposed to changes in foreign-currency exchange rates. The Company utilizes forward contracts to manage its exposure associated with net ~~asset~~assets and ~~liability positions~~liabilities denominated in non-functional currencies and to reduce the volatility of earnings and cash flows related to forecasted foreign-currency transactions. The Company does not hold derivative financial instruments for speculative or trading purposes.
Cash-Flow Hedges
The Company enters into forward contracts that are designated as foreign-currency cash-flow hedges of selected forecasted payments denominated in currencies other than U.S. dollars. These forward contracts generally mature within twelve months. The Company evaluates and calculates the effectiveness of each hedge at least quarterly. Changes in fair value attributable to changes in time value are excluded from the assessment of effectiveness and are recognized in interest income and other, net. The effective portion of the forward contracts’ gain or loss is recorded in other comprehensive income and, when the hedged expense is recognized, is subsequently reclassified into earnings within the same line item in the ~~statements~~statement of operations as the impact of the hedged transaction. The ineffective portion of the gain or loss is reported in earnings immediately. As of ~~July 1, 2012~~June 30, 2013 and December 31, ~~2011,~~2012, the total notional value of ~~the Company’s~~ outstanding forward contracts, designated as foreign-currency cash-flow hedges, was ~~$36.5~~$40.9 million and ~~$36.9~~$39.8 million, respectively.
Other Foreign-Currency Hedges
The Company enters into foreign-exchange forward contracts that are used to hedge certain ~~foreign-currency-denominated~~ assets or liabilities denominated in non-functional currencies and that do not qualify for hedge accounting. These forward contracts generally mature within three months. Changes in the fair value of these forward contracts are recorded immediately in earnings to offset the changes in fair value of the assets or liabilities being hedged. As of ~~July 1, 2012~~June 30, 2013 and December 31, ~~2011,~~2012, the total notional value of ~~the Company’s~~ outstanding forward contracts, not designated as hedges under hedge accounting, was ~~$35.3~~$60.0 million and ~~$37.6~~$31.6 million, respectively. For the three and six months ended June 30, 2013, the Company recognized losses of $2.5 million and $3.7 million on other foreign-currency hedges, respectively. For the three and six months ended July 1, 2012, the Company recognized losses of $2.9 million and $1.7 million ~~respectively,~~ on other foreign-currency hedges, ~~were recognized~~respectively. These amounts are included in interest income and other, ~~net. For~~net in the ~~three~~condensed consolidated statements of operations and ~~six months ended July 3, 2011, gains of $0.3 million and $2.1 million, respectively, on other foreign-currency hedges were recognized in interest income and other, net. These amounts~~ were substantially offset by the gains ~~and losses~~ on the underlying foreign-currency-denominated assets or liabilities.
Fair Value of Derivative Instruments
~~As of July 1, 2012 and December 31, 2011, the~~The total fair value of derivative assets ~~was immaterial~~ and liabilities was recorded in prepaid expenses and other current assets and in other accrued liabilities, respectively, in the condensed consolidated balance sheets. As of ~~July 1, 2012~~June 30, 2013 and December 31, ~~2011,~~2012, the total fair value of derivative assets and liabilities was ~~$2.3 million and $3.0 million, respectively, and was recorded in other accrued liabilities in the condensed consolidated balance sheets.~~immaterial.
Note 109 — Segment, Geographic and Product Information
The Company operates in one reportable segment — the Semiconductor segment.
The Company’s chief executive officer is the chief operating decision maker (“CODM”). The Company’s CODM bears ultimate responsibility for, and is actively engaged in, the allocation of resources and the evaluation of the Company’s operating and financial results.
Information about Geographic Areas
The following table summarizes the Company’s revenues by geography based on the ordering location of the customer. Because the Company sells its products primarily to other sellers of technology products and not to end users, the information in the table below may not accurately reflect geographic end-user demand for its products.

   Three Months Ended    Six Months Ended
   July 1, 2012    July 3, 2011    July 1, 2012    July 3, 2011
   (In thousands)
North America*
   $ 154,468       $ 122,881       $ 313,437       $ 243,799
Asia
   463,988       330,343       878,010       633,001
Europe and the Middle East
   41,117       47,420       90,550       97,108








Total
   $ 659,573       $ 500,644       $ 1,281,997       $ 973,908








   Three Months Ended    Six Months Ended
   June 30, 2013    July 1, 2012    June 30, 2013    July 1, 2012
   (In thousands)
North America*
   $ 157,692       $ 154,468       $ 304,342       $ 313,437
Asia
   385,348       463,988       759,281       878,010
Europe and the Middle East
   46,543       41,117       94,596       90,550








Total
   $ 589,583       $ 659,573       $ 1,158,219       $ 1,281,997








* Primarily the United States.
Information about Product Groups
The following table presents the Company’s revenues by product groups:

   Three Months Ended    Six Months Ended    Three Months Ended    Six Months Ended
   July 1, 2012    July 3, 2011    July 1, 2012    July 3, 2011    June 30, 2013    July 1, 2012    June 30, 2013    July 1, 2012
   (In thousands)    (In thousands)
Storage products
   $ 534,697       $ 358,961       $ 1,023,166       $ 695,348       $ 457,245       $ 534,697       $ 895,146       $ 1,023,166
Networking products
   98,780       117,383       205,802       229,383       104,496       98,780       197,099       205,802
Other
   26,096       24,300       53,029       49,177       27,842       26,096       65,974       53,029
















Total
   $ 659,573       $ 500,644       $ 1,281,997       $ 973,908       $ 589,583       $ 659,573       $ 1,158,219       $ 1,281,997
















Note 1110 — Income Taxes
The Company recorded income tax provisions of $5.2 million and $2.9 million for the three and six months ended June 30, 2013, respectively, and an income tax provision of $11.8 million and an income tax benefit of $37.3 million for the three and six months ended July 1, 2012, ~~respectively, and~~respectively.
The income tax ~~provisions of $8.9 million and $4.8 million~~provision for the ~~three and~~ six months ended ~~July 3, 2011, respectively.~~June 30, 2013 included a reversal of $8.7 million of liabilities for uncertain tax positions, which included previously unrecognized tax benefits of $3.9 million and interest and penalties of $4.8 million, as a result of the expiration of statutes of limitations in multiple jurisdictions.
The income tax benefit for the six months ended July 1, 2012 included a tax benefit of approximately $43.2 million due to the release of valuation allowance resulting from the net deferred tax liabilities recorded as part of the SandForce purchase price allocation. The income tax benefit for the six months ended July 1, 2012 also included a reversal of $10.2 million inof liabilities for uncertain tax positions, which included previously unrecognized tax benefits of $5.2 million and interest and penalties of $5.0 ~~million, as a result of the expiration of statutes of limitations in multiple jurisdictions.~~
The income tax provision for the six months ended July 3, 2011 included a reversal of $8.2 million in liabilities for uncertain tax positions, which included previously unrecognized tax benefits of $4.8 million and interest and penalties of $3.4 million, as a result of the expiration of statutes of limitations in multiple jurisdictions.
The Company computes its tax provision using an estimated annual tax rate. The Company excludes certain loss jurisdictions from the computation of the estimated annual rate when no benefit can be realized on those losses. ~~With the exception of certain foreign jurisdictions,~~Historically, the Company ~~believes~~has sustained losses from its U.S. operations and, as a result, has maintained a full valuation allowance against U.S. net deferred tax assets. The Company recently achieved profitability in the U.S., however, management does not believe there is sufficient positive evidence to reach a conclusion that it is ~~not~~ more likely than not that the Company will generate sufficient future ~~benefit~~taxable income in the U.S. to realize the benefits of its deferred tax assets. Depending on future results and projected trends, it is reasonably possible that Company may determine in the foreseeable future that it is more likely than not that a significant portion of its U.S. deferred tax assets will be ~~realized.~~realized, resulting in a release of a significant portion of the valuation allowance.
As of ~~July 1, 2012,~~June 30, 2013, the Company had ~~$180.7~~$200.1 million of unrecognized tax benefits, for which the Company is unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority may occur. It is reasonably possible that the total amount of unrecognized tax benefits will increase or decrease in the next 12 months. Such changes could occur based on the normal expiration of statutes of limitations, or the possible conclusion of ongoing tax audits in various jurisdictions around the ~~world.~~world or other negotiations with tax authorities. If those events occur within the next 12 months, the Company estimates that the unrecognized tax benefits, plus accrued interest and penalties, could decrease by up to ~~$16.7~~$46.8 million.
Note 1211 — Related Party Transactions
A member of the Company’s board of directors is also a member of the board of directors of Seagate Technology (“Seagate”). The Company sells semiconductors used in storage product applications to Seagate for prices comparable to those charged to an unrelated third party. Revenues from sales by the Company to Seagate were $150.5 million and $304.2 million for the three and six months ended June 30, 2013, respectively. Revenues from sales by the Company to Seagate were $227.6 million and $434.6 million for the three and six months ended July 1, 2012, respectively. ~~Revenues from sales by the Company to Seagate were $118.9 million and $217.5 million for the three and six months ended July 3, 2011, respectively.~~ The Company had accounts receivable from Seagate of ~~$134.8~~$79.8 million and ~~$90.3~~$94.0 million as of ~~July 1, 2012~~June 30, 2013 and December 31, ~~2011,~~2012, respectively.
The Company has an equity interest in a joint venture, Silicon Manufacturing Partners Pte Ltd. (“SMP”), with GLOBALFOUNDRIES, a manufacturing foundry for integrated circuits. SMP operates an integrated circuit manufacturing facility in Singapore. The Company owns a 51% equity interest in this joint venture and accounts for its ownership position under the equity method of accounting. The Company is effectively precluded from unilaterally taking any significant action in the management of SMP due to GLOBALFOUNDRIES’ significant participatory rights under the joint venture agreement. Because of GLOBALFOUNDRIES’ approval rights, the Company cannot make any significant decisions regarding SMP without GLOBALFOUNDRIES’ approval, despite the 51% equity interest. In addition, the General Manager, who is responsible for the day-to-day management of SMP, is appointed by GLOBALFOUNDRIES, and GLOBALFOUNDRIES provides day-to-day operational support to SMP.
The Company purchased $10.9 million and $20.3 million of inventory from SMP during the three and six months ended June 30, 2013, respectively. The Company purchased $11.7 million and $23.9 million of inventory from SMP during the three and six months ended July 1, 2012, respectively. ~~The Company purchased $14.8 million and $25.6 million of inventory from SMP during the three and six months ended July 3, 2011, respectively.~~ As of ~~July 1, 2012~~June 30, 2013 and December 31, ~~2011,~~2012, the amounts payable to SMP were ~~$9.5~~$9.3 million and ~~$5.0~~$9.2 million, respectively.
Note 1312 — Commitments, Contingencies and Legal Matters
Purchase Commitments
The Company maintains purchase commitments with certain suppliers, primarily for raw materials and manufacturing services and for some non-production items. Purchase commitments for inventory materials are generally restricted to a forecasted time horizon as mutually agreed upon between the parties. This forecasted time horizon can vary for different suppliers. As of ~~July 1, 2012,~~June 30, 2013, the Company had purchase commitments of ~~$446.7~~$388.9 million, which are due through 2016.
The Company has a take-or-pay agreement with SMP under which it has agreed to purchase 51% of the managed wafer capacity from SMP’s integrated circuit manufacturing facility, and GLOBALFOUNDRIES has agreed to purchase the remaining managed wafer capacity. SMP determines its managed wafer capacity each year based on forecasts provided by the Company and GLOBALFOUNDRIES. If the Company fails to purchase its required commitments, it will be required to pay SMP for the fixed costs associated with the unpurchased wafers. GLOBALFOUNDRIES is similarly obligated with respect to the wafers allotted to it. The agreement may be terminated by either party upon two years written notice. The agreement may also be terminated for material breach, bankruptcy or insolvency.
Guarantees
Product Warranties:
The following table sets forth a summary of changes in product warranties:

   Accrued Warranties    Accrued Warranties
   (In thousands)    (In thousands)
Balance as of December 31, 2011
   $ 6,334
Balance as of December 31, 2012
   $ 5,426
Accruals for warranties issued during the period
   868       107
Adjustments to pre-existing accruals (including changes in estimates)
   (470 )    721
Warranty liabilities assumed in SandForce acquisition
   426
Settlements made during the period (in cash or in kind)
   (1,059 )    (295 )




Balance as of July 1, 2012
   $ 6,099
Balance as of June 30, 2013
   $ 5,959




Standby Letters of Credit:
The Company had outstanding obligations relating to standby letters of credit of ~~$4.1~~$3.9 million and ~~$3.5~~$4.1 million, respectively, as of ~~July 1, 2012~~June 30, 2013 and December 31, ~~2011.~~2012. Standby letters of credit are financial guarantees provided by third parties for leases, customs, taxes and certain self-insured risks. If the guarantees are called, the Company must reimburse the provider of the guarantee. The fair value of the letters of credit approximates the contract amounts. The standby letters of credit generally renew annually.
Indemnifications
The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party. These obligations arise primarily in connection with sales contracts, license agreements or agreements for the sale of assets, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of warranties, representations and covenants related to such matters as title to assets sold, validity of certain intellectual property rights, non-infringement of third-party rights, and certain income tax-related matters. In each of these circumstances, payment by the Company is typically subject to the other party making a claim to and cooperating with the Company pursuant to the procedures specified in the particular contract. This usually allows the Company to challenge the other party’s claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third-party claims brought against the other party. Further, the Company’s obligations under these agreements may be limited in terms of activity (typically to replace or correct the products or terminate the agreement with a refund to the other party), duration and/or amounts. In some instances, the Company may have recourse against third parties covering certain payments made by the Company.
Legal Matters
On December 6, 2006, Sony Ericsson Mobile Communications USA Inc. (“Sony Ericsson”) filed a lawsuit against Agere in Wake County Superior Court in North Carolina, alleging unfair and deceptive trade practices, fraud and negligent misrepresentation in connection with Agere’s engagement with Sony Ericsson to develop a wireless data card for personal computers. The complaint claimed an unspecified amount of damages and sought compensatory damages, treble damages and attorneys’ fees. In August, 2007, the case was dismissed for improper venue. On October 22, 2007, Sony Ericsson filed a lawsuit in the Supreme Court of the State of New York, New York County against LSI, raising substantially the same allegations and seeking substantially the same relief as the North Carolina proceeding. In January 2010, Sony Ericsson amended its complaint by adding claims for fraudulent concealment and gross negligence. On September 10, 2010, LSI filed a motion for summary judgment. On August 4, 2011, the court granted LSI’s motion and ordered the dismissal of all of Sony Ericsson’s claims. Sony Ericsson has appealed this decision. The Company is unable to estimate the possible loss or range of loss, if any, that may be incurred with respect to this matter.
On March 23, 2007, CIF Licensing, LLC, d/b/a GE Licensing (“GE”) filed a lawsuit against Agere in the United States District Court for the District of Delaware, asserting that Agere products infringe patents in a portfolio of patents GE acquired from Motorola. GE has asserted that four of the patents cover inventions relating to modems. GE is seeking monetary damages. Agere believes it has a number of defenses to the infringement claims in this action, including laches, exhaustion and its belief that it has a license to the patents. The court postponed hearing motions based on these defenses until after the trial, and did not allow Agere to present evidence on these defenses at trial. On February 17, 2009, the jury in this case returned a verdict finding that three of the four patents were invalid and that Agere products infringed the one patent found to be valid and awarding GE $7.6 million for infringement of that patent. The jury also found Agere’s infringement was willful, which means that the judge could increase the amount of damages up to three times its original amount. The court has not scheduled hearings on Agere’s post-trial motions related to its defenses. One of these motions seeks to have a mis-trial declared based on Agere’s belief that GE withheld evidence in discovery, which affected Agere’s ability to present evidence at trial. On October 6, 2010, a special master appointed by the court determined that GE’s actions were not wrongful and that the evidence withheld by GE was not material to the jury’s findings. Agere is challenging this determination. If the jury’s verdict is entered by the court, Agere would also expect to be required to pay interest from the date of infringing sales. If the verdict is entered, Agere intends to appeal the matter. On February 17, 2010, the court issued an order granting GE’s summary judgment motions seeking to bar Agere’s defenses of laches, exhaustion, and license and denying Agere’s summary judgment motions concerning the same defenses. On July 30, 2010, the court held that one of the patents found invalid by the jury was valid. The court also held that the February 17, 2010 order was not inconsistent with its previous ruling that Agere would be permitted to renew its laches, licensing, and exhaustion defenses, and that Agere has not been precluded from asserting them post-trial. The Company is unable to estimate the possible loss or range of loss, if any, that may be incurred with respect to this matter.
On December 1, 2010, Rambus Inc. (“Rambus”) filed a lawsuit against LSI in the United States District Court for the Northern District of California alleging that LSI products infringe one or more of 19 Rambus patents. These products contain either DDR-type memory controllers or certain high-speed SerDes peripheral interfaces, such as PCI Express interfaces and certain SATA and SAS interfaces. Rambus is seeking unspecified monetary damages, treble damages and costs, expenses and attorneys’ fees due to alleged willfulness, interest and permanent injunctive relief in this action. In addition, on December 1, 2010, Rambus filed an action with the International Trade Commission (“ITC”) against LSI and five of its customers alleging that LSI products infringe six of the 19 patents in the California case. Rambus also named five other companies and a number of their customers in the ITC action. Rambus sought an exclusionary order against LSI and its customers in the ITC action, which, if granted, would preclude LSI and its customers from selling these products in the U.S. The ITC held a hearing on the matter in October 2011. On March 2, 2012, an administrative law judge (“ALJ”) found that LSI infringed Rambus’ patents; however, the ALJ also found the patents invalid or unenforceable or both, and accordingly, found no violation of section 337 of the Tariff Act of 1930. On July 25, 2012, the ITC determined to terminate the investigation with a finding of no violation of section 337 of the Tariff Act of 1930. The ITC affirmed the ALJ’s conclusion that all of the asserted patent claims are invalid under 35 U.S.C. §102 or 103, except for certain asserted claims, for which they found that Rambus has not demonstrated infringement. The ITC reversed the ALJ’s determination that Rambus had demonstrated the existence of a domestic industry under 19 U.S.C. § 1337(a) for the asserted patents. The ITC affirmed the ALJ’s determination that certain patents are unenforceable under the doctrine of unclean hands. The lawsuit against LSI in the United States District Court for the Northern District of California is still pending. The Company is unable to estimate the possible loss or range of loss, if any, that may be incurred with respect to these proceedings.
~~In addition to the foregoing, the~~ Company and its subsidiaries are parties to ~~other~~ litigation matters and claims in the normal course of business. The Company does not believe, based on currently available facts and circumstances, that the final outcome of these ~~other~~ matters, taken individually or as a whole, will have a material adverse effect on the Company’s consolidated results of operations or financial position. However, the pending unsettled lawsuits may involve complex questions of fact and law and may require the expenditure of significant funds and
the diversion of other resources to defend. From time to time, the Company may enter into confidential discussions regarding the potential settlement of such lawsuits. However, there can be no assurance that any such discussions will occur or will result in a settlement. Moreover, the settlement of any pending litigation could require the Company to incur substantial costs and, in the case of the settlement of any intellectual property proceeding against the Company, may require the Company to obtain a license to a third-party’s intellectual property that could require royalty payments in the future and the Company to grant a license to certain of its intellectual property to a third party under a cross-license agreement. The results of litigation are inherently uncertain, and material adverse outcomes are possible.
The Company has not provided accruals for any legal matters in its financial statements as potential losses for such matters are not considered probable and reasonably estimable. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable, and there can be no assurances that the actual amounts required to satisfy any liabilities arising from the matters described above will not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.
Note 1413 — ~~Discontinued Operations~~Subsequent Event
On ~~May 6, 2011,~~July 24, 2013, the Company ~~completed the sale~~announced that its board of ~~substantially all~~directors had declared a cash dividend of ~~its external storage systems business~~$0.03 per common share to ~~NetApp for $480.0 million in cash. The strategic decision~~be paid on September 20, 2013 to ~~exit the external storage systems business was based on the Company’s expectation that long-term shareholder value could be maximized by becoming a pure-play semiconductor company. Under the terms~~stockholders of ~~the agreement, NetApp purchased substantially all the assets~~record as of the Company’s external storage systems business, which developed and delivered external storage systems products and technology to a wide range of partners who provide storage solutions to end customers. As part of the transaction, the Company provided transitional services to NetApp. The purpose of these services was to provide short-term assistance to the buyer in assuming the operations of the purchased business.September 6, 2013.
~~Following is selected financial information included in income from discontinued operations for the three and six months ended July 3, 2011:~~

   Three Months Ended Six Months Ended
   July 3, 2011 July 3, 2011
   (In thousands)
Revenues
   $ 51,675    $ 207,365
Loss before gain on sale of external storage systems business and income taxes
   $ (14,590 ) $ (22,500 )
Gain on sale of external storage systems business
   260,066    260,066
Benefit from income taxes
   (19,900 ) (19,418 )


Income from discontinued operations
   $ 265,376    $ 256,984


~~There was no income from discontinued operations for the three and six months ended July 1, 2012.~~
During the three and six months ended July 3, 2011, the Company recognized $14.1 million and $37.9 million, respectively, of restructuring expense as the Company terminated employees, closed several office locations, terminated certain contracts, discontinued various development projects and wrote off intangible assets and software due to the cancellation of development programs in connection with the exit of the external storage systems business. Further, the Company released $19.7 million of deferred tax liabilities related to tax deductible goodwill in connection with the sale of the external storage systems business during the three months ended July 3, 2011.
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.~~ 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 the discussion.
OVERVIEW
We design, develop and market complex, high-performance storage and networking semiconductors. We offer a broad portfolio of capabilities including custom and standard product integrated circuits that are used in hard disk drives, solid state drives, high-speed communications systems, computer servers, storage systems and personal computers. We deliver our products to our customers as stand-alone integrated circuits as well as incorporated onto circuit boards that offer additional functionality. We also license ~~other entities to use~~ our intellectual ~~property.~~
~~Our products are sold primarily~~property to ~~original equipment manufacturer, or OEM, companies in the server, storage and networking industries. We also sell our products through a network of resellers and distributors.~~other entities.
On January 3, 2012, we acquired SandForce, Inc., a provider of flash storage processors for enterprise and client flash solutions and solid state drives, for total consideration of approximately $346.4 million, net of cash acquired. ~~This acquisition has enhanced LSI’s position in storage technology solutions.~~
On May 6, 2011, we sold our external storage systems business for $480.0 million in cash. That business sold external storage systems, primarily to OEMs, who resold these products to end customers under their own brand name. We have reflected the external storage systems business as discontinued operations in our condensed consolidated statements of operations and, as such, the results of that business have been excluded from all line items other than “Income from discontinued operations” for all periods presented.
We derive the majority of our revenues from sales of products for the hard disk and solid state drive, server and networking equipment end ~~markets.~~markets and our revenues depend on market demand for these types of products. We believe that these markets offer us attractive opportunities because of the growing demand to create, store, manage and move digital ~~content.~~content efficiently. Our products are sold primarily to original equipment manufacturers, or OEMs, in the server, storage and networking industries. We ~~believe that this growth is occurring as~~also sell some of our products through a ~~result~~network of ~~a number of trends, including:~~
resellers and distributors. The ~~increasing popularity of mobile devices such as smart phones~~markets in which we operate are highly competitive and ~~media tablets, and the increasing use of the internet for streaming media, such as videos and music, which together are driving the need for more network capacity;~~
~~Consumer and business demand for hard disks to store increasing amounts of digital data, including music, video, pictures and medical and other business records; and~~
~~Enterprises refreshing their data centers to provide higher levels of business support and analytics, which drives demand for new servers and storage systems and associated equipment.~~
~~Our~~our revenues depend on ~~market demand for these types of products and~~ our ability to compete ~~in highly competitive markets.~~successfully. We face competition not only from makers of products similar to ours, but also from competing technologies.
During the second quarter of ~~2012,~~2013, we reported revenues of ~~$659.6~~$589.6 million, compared to ~~$500.6~~$659.6 million for the second quarter of ~~2011.~~2012. For the six months ended ~~July 1, 2012,~~June 30, 2013, we reported revenues of ~~$1,282.0~~$1,158.2 million, compared to ~~$973.9~~$1,282.0 million for the six months ended July ~~3, 2011.~~1, 2012. For the second quarter of ~~2012,~~2013, we reported net income of ~~$58.7~~$24.6 million, or ~~$0.10~~$0.04 per diluted share, compared to ~~$293.8~~$58.7 million, or ~~$0.48~~$0.10 per diluted share, for the second quarter of ~~2011. Net income for the second quarter of 2011 included a $260.1 million gain on the sale of our external storage systems business.~~2012. For the six months ended ~~July 1, 2012,~~June 30, 2013, we reported net income of ~~$133.9~~$43.1 million, or ~~$0.23~~$0.08 per diluted share, compared to ~~$303.9~~$133.9 million, or ~~$0.49~~$0.23 per diluted share, for the six months ended July ~~3, 2011.~~1, 2012.
~~On March 9, 2011, our~~Our board of directors authorized a stock repurchase program of up to ~~$750.0~~$500.0 million ~~of our common stock.~~on August 1, 2012. During the six months ended ~~July 1, 2012,~~June 30, 2013, we repurchased ~~22.5~~17.4 million shares for ~~$176.2~~$122.3 million under this program. As of ~~July 1, 2012, $75.0~~June 30, 2013, $356.3 million remained available ~~under this program. On August 1, 2012, our board of directors authorized the repurchase of up to an additional $500.0 million of our common stock. Purchases~~for stock repurchases. Future purchases under the ~~new authorization~~stock repurchase program are expected to be funded with available cash, cash equivalents and short-term investments.
We ended the second quarter of ~~2012~~2013 with cash and cash equivalents, together with short-term investments, of ~~$601.1~~$673.5 million, ~~a decline from $935.5~~compared to $676.0 million at the end of ~~2011, primarily attributable~~2012.
On July 24, 2013, we announced that our board of directors had declared a cash dividend of $0.03 per common share to ~~the~~be paid on September 20, 2013 to stockholders of record as of September 6, 2013. We intend to pay a regular quarterly cash ~~we used for the acquisition~~dividend on our common stock, subject to approval by our board of ~~SandForce.~~directors.
In 2011, Thailand experienced significant flooding, which adversely affected the operations of various technology companies, particularly those involved in the hard disk drive industry. In the first half ofearly 2012, our operations and those of many of our customers recovered significantly. However toward the end of the second quarter of 2012, we believe that end demand for hard disk drives declined and that we will experience lower shipmentssales of semiconductors for hard disk drives benefited as the hard disk drive industry recovered from the impact of flooding that occurred in ~~the third quarter~~Thailand in late 2011. Sales of ~~2012.~~
~~The prices of certain commodities used~~desktop and notebook computers have declined in the production of semiconductors have increased in recent periods, adversely affecting our gross margins. For example, we use gold in the production of semiconductors and the market price of gold increased significantly in the second half of 2011 and remained at elevated levels through the first half of ~~2012.~~2013 compared to the first half of 2012 and we expect the year over year decline in personal computer sales to continue in the near term, affecting sales of hard disk and solid state drives and our revenues from semiconductors for hard disk and solid state drives. We doalso believe that global economic conditions remain soft, and are resulting in reduced spending on information technology products in general, which is also affecting our revenues.
Many of our customers for standard product controllers used in solid state drives depend on suppliers for the flash memory used in those products. We believe that demand for that type of flash memory currently exceeds available supply and our customers may not ~~currently enter into hedging transactions~~be able to obtain all of the flash memory they could use, which may be affecting our revenues from standard product controllers for solid state drives.
Our networking revenues are closely tied to capital spending by wireless telecommunications carriers who have been limiting their capital expenditures in recent quarters. Some large carriers have indicated that they may increase their expenditures later in 2013.
In light of this environment, we are working to manage our ~~exposure~~operating expenses while at the same time continuing work on products under development. We are focusing our research and development operations on products that we believe provide favorable growth opportunities for our business. We are also working to ~~changes~~expand our sales of products in the prices of gold or other commodities, although we may choose to do so in the future. Further increases in commodity costs or sustained increased prices may continue to have an adverse impact on our gross margins.
~~As we look forward into the remainder of 2012,~~newer areas such as flash memory-based server adapter cards, where we are ~~focused on a number of key objectives, including:~~
~~Successfully delivering products to customers to support share gains and new product ramps we anticipate;~~
~~Improving our gross margins and controlling operating expenses to drive improved financial performance;~~
~~Meeting or exceeding our development, product quality and delivery commitments~~working directly with large, internet-based datacenter operators, in addition to our ~~customers;~~
~~Identifying attractive opportunities for future products, particularly in areas that are adjacent to technologies where we have strong capabilities;~~
~~Developing leading-edge new technologies; and~~
~~Developing the skills~~more traditional customer base of ~~our workforce.~~OEMs and distributors.
RESULTS OF OPERATIONS
Revenues

   Three Months Ended    Six Months Ended
   July 1, 2012    July 3, 2011    July 1, 2012    July 3, 2011
   (In millions)
Revenues
   $ 659.6       $ 500.6       $ 1,282.0       $ 973.9
   Three Months Ended    Six Months Ended
   June 30, 2013    July 1, 2012    June 30, 2013    July 1, 2012
   (In millions)
Revenues
   $ 589.6       $ 659.6       $ 1,158.2       $ 1,282.0
Revenues ~~increased~~decreased by ~~$159.0~~$70.0 million, or ~~31.8%~~10.6%, ~~and by $308.1 million, or 31.6%, respectively,~~ for the three ~~and six~~ months ended ~~July 1, 2012~~June 30, 2013 as compared to the three ~~and six~~ months ended July ~~3, 2011.~~1, 2012. The ~~increases were~~decrease primarily ~~attributable to~~reflected lower unit sales of semiconductors used in hard disk drives in 2013. Revenues for the second quarter of 2012 reflected temporarily higher unit sales of semiconductors used in ~~storage applications, such as~~ hard disk drives as that industry recovered from the flooding in Thailand in late 2011 and the ramping of new products to existing customers. The increases were also due to higher unit sales of flash storage processors as a result of the ~~acquisition of SandForce.~~recovery from the Thailand flooding, which had adversely impacted the hard disk drive industry in late 2011.
Revenues decreased by $123.8 million, or 9.7%, for the six months ended June 30, 2013 as compared to the six months ended July 1, 2012. The ~~increases were offset by decreases in~~decrease reflected lower unit sales of semiconductors used in hard disk drives and our older networking ~~product applications.~~products in 2013. Revenues in the first six months of 2012 reflected temporarily higher unit sales of semiconductors used in hard disk drives as a result of the recovery from the Thailand flooding. These decreases were partially offset by increased unit sales from the ramping of flash memory-based storage products and a $12.9 million increase in intellectual property licensing revenues in 2013.
Significant Customers:
The following table provides information about sales to Seagate, which was our only customer that accounted for 10% or more of our ~~consolidated revenues:~~revenues in each of the three and six months ended June 30, 2013 and July 1, 2012:

   Three Months Ended Six Months Ended
   July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011
Percentage of revenues
   35 % 24 % 34 % 22 %
   Three Months Ended Six Months Ended
   June 30, 2013 July 1, 2012 June 30, 2013 July 1, 2012
Percentage of revenues
   26 % 35 % 26 % 34 %
Revenues by Geography:
The following table summarizes our revenues by geography based on the ordering location of the customer. Because we sell our products primarily to other sellers of technology products and not to end users, the information in the table below may not accurately reflect geographic end-user demand for our products.

   Three Months Ended    Six Months Ended    Three Months Ended    Six Months Ended
   July 1, 2012    July 3, 2011    July 1, 2012    July 3, 2011    June 30, 2013    July 1, 2012    June 30, 2013    July 1, 2012
   (In millions)    (In millions)
North America*
   $ 154.5       $ 122.9       $ 313.4       $ 243.8       $ 157.7       $ 154.5       $ 304.3       $ 313.4
Asia
   464.0       330.3       878.0       633.0       385.3       464.0       759.3       878.0
Europe and the Middle East
   41.1       47.4       90.6       97.1       46.6       41.1       94.6       90.6
















Total
   $ 659.6       $ 500.6       $ 1,282.0       $ 973.9       $ 589.6       $ 659.6       $ 1,158.2       $ 1,282.0
















* Primarily the United States.
Revenues in ~~North America and~~ Asia ~~increased~~decreased by ~~$31.6~~$78.7 million, or ~~25.7%~~17.0%, ~~and $133.7 million, or 40.5%, respectively,~~ for the three months ended ~~July 1, 2012~~June 30, 2013 as compared to the three months ended July ~~3, 2011.~~1, 2012. The decrease was primarily attributable to lower unit sales of semiconductors used in hard disk drives in 2013 as compared to 2012, which benefited from the recovery from the flooding in Thailand. Revenues in North America ~~and Asia~~ increased by ~~$69.6~~$3.2 million, or ~~28.5%~~2.1%, for the three months ended June 30, 2013 as compared to the three months ended July 1, 2012. The increase was primarily attributable to higher unit sales of our flash memory-based storage products. Revenues in Europe and ~~$245.0~~the Middle East increased by $5.5 million, or ~~38.7%~~13.4%, ~~respectively,~~for the three months ended June 30, 2013 as compared to the three months ended July 1, 2012. The increase was due to higher demand across our product groups.
Revenues in Asia decreased by $118.7 million, or 13.5% for the six months ended ~~July 1, 2012~~June 30, 2013 as compared to the six months ended July ~~3, 2011.~~1, 2012. The ~~increases were~~decrease was primarily attributable to ~~higher~~lower unit sales of semiconductors used in hard disk drives in 2013 as compared to 2012, which benefited from the recovery from the flooding in Thailand. The decrease was partially offset by increased unit sales from the ramping of flash memory-based storage ~~product applications and higher~~products in 2013. Revenues in North America decreased by $9.1 million, or 2.9%, for the six months ended June 30, 2013 as compared to the six months ended July 1, 2012. The decrease was primarily attributable to lower unit sales of ~~flash~~our server storage ~~processors as a result of the acquisition of SandForce. The increases were~~connectivity products and our storage semiconductors, offset in part by ~~decreases in~~increased unit sales from the ramping of ~~semiconductors used~~flash memory-based storage products and higher intellectual property licensing revenues in ~~older networking~~2013. Revenues in Europe and the Middle East increased by $4.0 million, or 4.4%, for the six months ended June 30, 2013 as compared to the six months ended July 1, 2012. The increase was due to higher demand across our product ~~applications.~~
groups.
Revenues by Product Groups:
The following table presents our revenues by product groups:

   Three Months Ended    Six Months Ended    Three Months Ended    Six Months Ended
   July 1, 2012    July 3, 2011    July 1, 2012    July 3, 2011    June 30, 2013    July 1, 2012    June 30, 2013    July 1, 2012
   (In millions)    (In millions)
Storage products
   $ 534.7       $ 358.9       $ 1,023.2       $ 695.3       $ 457.2       $ 534.7       $ 895.1       $ 1,023.2
Networking products
   98.8       117.4       205.8       229.4       104.5       98.8       197.1       205.8
Other
   26.1       24.3       53.0       49.2       27.9       26.1       66.0       53.0
















Total
   $ 659.6       $ 500.6       $ 1,282.0       $ 973.9       $ 589.6       $ 659.6       $ 1,158.2       $ 1,282.0
















Revenues from storage products ~~increased~~decreased by ~~$175.8~~$77.5 million, or ~~49.0%~~14.5%, and by ~~$327.9~~$128.1 million, or ~~47.2%~~12.5%, respectively, for the three and six months ended ~~July 1, 2012~~June 30, 2013 as compared to the three and six months ended July ~~3, 2011.~~1, 2012. The ~~increases~~decreases were ~~primarily~~ attributable to lower unit sales of semiconductors used in hard disk drives in 2013. Revenues in 2012 reflected temporarily higher unit sales of semiconductors used in hard disk drives as ~~that industry recovered~~a result of the recovery from the ~~flooding~~Thailand flooding. These decreases were partially offset by increased unit sales from the ramping of flash memory-based storage products in ~~Thailand in late 2011 and~~2013.
Revenues from networking products increased by $5.7 million, or 5.8%, for the three months ended June 30, 2013 as compared to the three months ended July 1, 2012. The increase was primarily the result of the ramping of new products towith existing customers. ~~The increases were also the result of higher unit sales of flash storage processors as a result of the acquisition of SandForce.~~
Revenues from networking products decreased by ~~$18.6~~$8.7 million, or ~~15.8%, and by $23.6 million, or 10.3%~~4.2%, for the ~~three and~~six months ended June 30, 2013 as compared to the six months ended July 1, ~~2012, respectively, as compared to the three and six months ended July 3, 2011.~~2012. The ~~decreases were~~decrease was primarily the result of lower unit sales of semiconductors used in our older networking ~~product applications.~~products, offset in part by increases from the ramping of new products with existing customers.
Other revenues ~~result~~increased by $1.8 million, or 6.9%, and by $13.0 million, or 24.5%, respectively, for the three and six months ended June 30, 2013 as compared to the three and six months ended July 1, 2012. The increases primarily resulted from ~~the~~higher intellectual property licensing ~~of our intellectual property.~~revenues in 2013.
Gross Profit Margin

   Three Months Ended Six Months Ended    Three Months Ended Six Months Ended
   July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011    June 30, 2013 July 1, 2012 June 30, 2013 July 1, 2012
   (Dollars in millions)    (Dollars in millions)
Gross profit margin
   $ 331.9    $ 237.6    $ 618.8    $ 461.8       $ 299.3    $ 331.9    $ 588.8    $ 618.8
Percentage of revenues
   50.3 % 47.5 % 48.3 % 47.4 %    50.8 % 50.3 % 50.8 % 48.3 %
~~Gross profit~~Various factors affect and may continue to affect our product gross margin. These factors include, but are not limited to, changes in our production mix and volume of product sales, the timing of production ramps and margin ~~as a percentage~~structures for new products, the positions of ~~revenues increased by 2.8% for~~our products in their respective life cycles, the ~~three months ended July 1, 2012 as compared to~~effects of competition, the ~~three months ended July 3, 2011. The increase was primarily attributable to favorable product mix, that is, more sales~~price of ~~higher margin products, and higher revenues enabling better absorption of fixed costs. The increases were offset in part by higher commodity costs~~commodities used in ~~manufacturing~~ our ~~products.~~products, provisions for excess and obsolete inventories, changes in the costs charged by foundry, assembly and test subcontractors, and amortization of acquired intangible assets.
Gross profit margin as a percentage of revenues increased by ~~0.9%~~0.5% and 2.5%, respectively, for the three and six months ended June 30, 2013 as compared to the three and six months ended July 1, 2012. The increase for each period was primarily attributable to sales of higher margin products, offset in part by decreased revenues with a similar level of fixed costs.
Research and Development
   Three Months Ended Six Months Ended
   June 30, 2013 July 1, 2012 June 30, 2013 July 1, 2012
   (Dollars in millions)
Research and development
   $ 176.4    $ 175.6    $ 347.8    $ 345.4
Percentage of revenues
   29.9 % 26.6 % 30.0 % 26.9 %
R&D expense increased by $0.8 million, or 0.5%, and by $2.4 million, or 0.7%, respectively, for the three and six months ended June 30, 2013 as compared to the three and six months ended July 1, 2012. The increase for each period was primarily attributable to higher compensation-related expense and increased spending to support our new product development projects.
Selling, General and Administrative
   Three Months Ended Six Months Ended
   June 30, 2013 July 1, 2012 June 30, 2013 July 1, 2012
   (Dollars in millions)
Selling, general and administrative
   $ 87.4    $ 88.9    $ 176.9    $ 179.0
Percentage of revenues
   14.8 % 13.5 % 15.3 % 14.0 %
SG&A expense decreased by $1.5 million, or 1.7%, for the three months ended June 30, 2013 as compared to the three months ended July 1, 2012. The decrease was primarily attributable to lower legal fees as a result of recent litigation settlements.
SG&A expense decreased by $2.1 million, or 1.2%, for the six months ended ~~July 1, 2012~~June 30, 2013 as compared to the six months ended July ~~3, 2011.~~1, 2012. The ~~increase~~decrease was primarily attributable to favorable product mix and higher revenues enabling better absorption of fixed costs. The increases were offset in part by a reduction in gross profit margin resulting from fair valuing inventories acquired from SandForce and higher commodity costs used in manufacturing our products.
~~Research and Development~~

   Three Months Ended Six Months Ended
   July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011
   (Dollars in millions)
Research and development
   $ 175.6    $ 145.9    $ 345.4    $ 288.2
Percentage of revenues
   26.6 % 29.1 % 26.9 % 29.6 %
R&D expense increased by $29.7 million, or 20.4%, for the three months ended July 1, 2012 as compared to the three months ended July 3, 2011. The increase was primarily attributable to higher compensation-related expense, which includeslower stock-based ~~compensation, resulting from headcount additions associated with the acquisition of SandForce and headcount additions to support our ongoing product development efforts, higher performance-based~~ compensation expense as a result of ~~improved financial performance and increased information technology costs for R&D projects. As~~ a ~~percentage of revenues, R&D expense declined from 29.1%~~$4.5 million charge in ~~the second quarter of 2011 to 26.6% in the second quarter of~~ 2012 ~~as a result of higher revenues for the second quarter of 2012 as compared~~related to the ~~same period~~accelerated vesting of stock options and restricted stock units for certain SandForce employees. The decrease was offset in ~~2011.~~
~~R&D expense increased~~part by ~~$57.2 million, or 19.8%, for the six months ended July 1, 2012 as compared to the six months ended July 3, 2011. The~~an increase ~~was primarily attributable to higher compensation-related expense, which includes stock-based compensation, resulting from headcount additions associated with the acquisition of SandForce~~in sales and ~~headcount additions~~marketing expenses to support our ongoing product development efforts, higher performance-based compensation expense as a result of improved financial performance and increased information technology costs for R&D projects. As a percentage of revenues, R&D expense declined from 29.6% for the six months ended July 3, 2011 to 26.9% for the six months ended July 1, 2012 as a result of higher revenues for the first half of 2012 as compared to the same period in 2011.
~~Selling, General and Administrative~~

   Three Months Ended Six Months Ended
   July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011
   (Dollars in millions)
Selling, general and administrative
   $ 88.9    $ 71.8    $ 179.0    $ 140.7
Percentage of revenues
   13.5 % 14.3 % 14.0 % 14.4 %
SG&A expense increased by $17.1 million, or 23.8%, for the three months ended July 1, 2012 as compared to the three months ended July 3, 2011. The increase was primarily attributable to higher compensation related expense, which includes stock-based compensation, resulting from headcount additions associated with the acquisition of SandForce and headcount additions to supportfuture revenue growth, along with higher performance-based compensation expense as a result of improved financial performance. As a percentage of revenues, SG&A expense declined from 14.3% in the second quarter of 2011 to 13.5% in the second quarter of 2012 as a result of higher revenues for the second quarter of 2012 as compared to the same period in 2011.
SG&A expense increased by $38.3 million, or 27.2%, for the six months ended July 1, 2012 as compared to the six months ended July 3, 2011. The increase was primarily attributable to higher compensation related expense, which includes stock-based compensation, resulting from headcount additions associated with the acquisition of SandForce and headcount additions to support revenue growth, along with higher performance-based compensation expense as a result of improved financial performance. As a percentage of revenues, SG&A expense remained relatively flat for the first half of 2012 compared to the same period in 2011 as the impact of higher revenues was offset by increased SG&A expense.growth.
Restructuring of Operations and Other Items, net
The following table summarizes items included in restructuring of operations and other items, net:

   Three Months Ended Six Months Ended    Three Months Ended Six Months Ended
   July 1, 2012 July 3, 2011 July 1, 2012 July 3, 2011    June 30, 2013 July 1, 2012 June 30, 2013 July 1, 2012
   (In millions)    (In millions)
Lease terminations (a)
   $ 1.2    $ 1.9    $ 2.8    $ 3.6
Leases
   $ 2.0 (a) $ 1.2 (a) $ 3.8 (a) $ 2.8 (a)
Employee severance and benefits ~~(b)~~
   1.0    0.3    1.5    1.9       2.2    1.0    6.6    1.5




Total restructuring expense
   2.2    2.2    4.3    5.5       4.2    2.2    10.4    4.3
Other items, net
   4.3 (c) (13.1 )(d) 17.7 (e) (13.6 )(d)    3.6 (b) 4.3 (c) 17.9 (d) 17.7 (e)




Total restructuring of operations and other items, net
   $ 6.5    $ (10.9 ) $ 22.0    $ (8.1 )    $ 7.8    $ 6.5    $ 28.3    $ 22.0




(a) Includes lease obligation costs and related changes in estimates, changes in time value ~~on-going operating expense~~ and ~~changes in estimates related to previously vacated facilities.~~other ongoing expenditures.

(b) ~~Relates to restructuring actions taken as we continued to streamline operations.~~Primarily includes a $2.7 million increase in environmental remediation liabilities based on current period information and $1.1 million for a litigation settlement.

(c) Primarily consists of $2.4 million of property and equipment write-downs and $1.9 million of costs related to the transition service agreement ~~costs related to~~associated with the sale of the external storage systems business.

(d) Primarily ~~relates to the reversal of a $14.5~~includes $13.7 million sales and use tax related liability as a result of concluding various audits, partially offset by $1.3 million of transition service agreement costs related to the sale of the external storage systems business.for litigation settlements.

(e) Primarily consists of $8.4 million of ~~SandForce~~ acquisition-related costs and $6.5 million of costs related to the transition service agreement ~~costs related to~~associated with the sale of the external storage systems business.
Interest Income and Other, net
The following table summarizes components of interest income and other, net:

   Three Months Ended    Six Months Ended    Three Months Ended    Six Months Ended
   July 1, 2012    July 3, 2011    July 1, 2012    July 3, 2011    June 30, 2013    July 1, 2012    June 30, 2013    July 1, 2012
   (In millions)    (In millions)
Interest income
   $ 1.6       $ 3.3       $ 3.2       $ 6.7       $ 1.1       $ 1.6       $ 1.4       $ 3.2
Other income, net
   8.0       3.2       21.1       4.0       1.1       8.0       8.7       21.1
















Total
   $ 9.6       $ 6.5       $ 24.3       $ 10.7       $ 2.2       $ 9.6       $ 10.1       $ 24.3
















~~Interest~~The decreases in interest income ~~decreased by $1.7~~of $0.5 million and ~~$3.5~~$1.8 million, respectively, for the three and six months ended ~~July 1, 2012~~June 30, 2013 as compared to the three and six months ended July ~~3, 2011. The decrease was~~1, 2012 primarily ~~due to the absence of interest income~~resulted from lower returns on investments in ~~2012 on a note we received in connection with the sale of a business in 2007 and lower interest rates in 2012~~2013 as compared to ~~2011.~~2012.
Other income, net, for the six months ended June 30, 2013 primarily included $6.1 million of insurance proceeds we received for covered losses from the 2011 Thailand flooding. We do not expect any further insurance recoveries related to the Thailand flooding. Other income, net, for the six months ended July 1, 2012 primarily included $6.1 million of income for services provided under the transition ~~services related to~~service agreements associated with the sale of the external storage systems business, a $5.8 million gain as a result of re-measuring our pre-acquisition equity interest in SandForce to estimated fair value and $4.7 million of insurance proceeds ~~from insurance claims covering a portion of our~~we received for covered losses ~~that resulted~~ from the 2011 Thailand ~~flooding in late 2011.~~flooding.
~~Provision for/Benefit from~~ Income Taxes
We recorded income tax provisions of $5.2 million and $2.9 million for the three and six months ended June 30, 2013, respectively, and an income tax provision of $11.8 million and an income tax benefit of $37.3 million for the three and six months ended July 1, 2012, ~~respectively, and~~respectively.
The income tax ~~provisions of $8.9 million and $4.8 million~~provision for the ~~three and~~ six months ended ~~July 3, 2011, respectively.~~June 30, 2013 included a reversal of $8.7 million of liabilities for uncertain tax positions, which included previously unrecognized tax benefits of $3.9 million and interest and penalties of $4.8 million, as a result of the expiration of statutes of limitations in multiple jurisdictions.
The income tax benefit for the six months ended July 1, 2012 included a tax benefit of approximately $43.2 million due to the release of valuation allowance resulting from the net deferred tax liabilities recorded as part of the SandForce purchase price allocation. The income tax benefit for the six months ended July 1, 2012 also included a reversal of $10.2 million inof liabilities for uncertain tax positions, which included previously unrecognized tax benefits of $5.2 million and interest and penalties of $5.0 ~~million, as a result of the expiration of statutes of limitations in multiple jurisdictions.~~
The income tax provision for the six months ended July 3, 2011 included a reversal of $8.2 million in liabilities for uncertain tax positions, which included previously unrecognized tax benefits of $4.8 million and interest and penalties of $3.4 million, as a result of the expiration of statutes of limitations in multiple jurisdictions.
We compute our tax provision using an estimated annual tax rate. We exclude certain loss jurisdictions from the computation of the estimated annual rate when no benefit can be realized on those losses. ~~With~~Historically, we have sustained losses from our U.S. operations and, as a result, have maintained a full valuation allowance against U.S. net deferred tax assets. We recently achieved profitability in the ~~exception of certain foreign jurisdictions,~~U.S., however, we do not believe there is sufficient positive evidence to reach a conclusion that it is ~~not~~ more likely than not that we will generate sufficient future taxable income in the U.S. to realize the benefits of our deferred tax assets. Depending on future ~~benefit~~results and projected trends, it is reasonably possible that we may determine in the foreseeable future that it is more likely than not that a significant portion of ~~the~~our U.S. deferred tax assets will be ~~realized.~~
~~Discontinued Operations~~
~~Following is selected financial information included~~realized, resulting in ~~income from discontinued operations:~~

   Three Months Ended Six Months Ended
   July 3, 2011 July 3, 2011
   (In millions)
Revenues
   $ 51.7    $ 207.4
Loss before gain on sale of external storage systems business and income taxes
   $ (14.6 ) $ (22.5 )
Gain on sale of external storage systems business
   260.1    260.1
Benefit from income taxes
   (19.9 ) (19.4 )


Income from discontinued operations
   $ 265.4    $ 257.0


~~There was no income from discontinued operations for the three and six months ended July 1, 2012.~~
~~During the three and six months ended July 3, 2011, we recognized $14.1 million and $37.9 million, respectively,~~a release of restructuring expense as we terminated employees, closed several office locations, terminated certain contracts, discontinued various development projects and wrote off intangible assets and software due to the cancellation of development programs in connection with the exita significant portion of the external storage systems business. Further, we released $19.7 million of deferred tax liabilities related to tax deductible goodwill in connection with the sale of the external storage systems business during the three months ended July 3, 2011.valuation allowance.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents, ~~and~~ short-term investments and cash generated from our operations are our primary ~~source~~sources of liquidity. Short-term investments consist primarily of U.S. government and agency securities. We believe that our existing liquid resources and cash generated from operations will be adequate to meet our operating and capital requirements and other obligations, and fund cash dividends and common stock repurchases for more than the next 12 months. We may, however, find it desirable to obtain additional debt or equity financing. Such financing may not be available to us at all or on acceptable terms if we determine that it would be desirable to obtain additional financing.
Cash, cash equivalents and short-term investments decreased to ~~$601.1~~$673.5 million as of ~~July 1, 2012~~June 30, 2013 from ~~$935.5~~$676.0 million as of December 31, ~~2011.~~2012. The decrease was mainly due to ~~$319.2 million of cash used in connection with the acquisition of SandForce and~~ cash outflows for ~~other~~ investing ~~activities~~ and financing activities, substantially offset ~~in part~~ by cash inflows generated from operating activities as described below.
Working Capital
Working capital increased by $3.9 million to $713.8 million as of June 30, 2013 from $709.9 million as of December 31, 2012. The increase was attributable to the following:
Other accrued liabilities decreased by $28.8 million primarily due to decreases in income taxes payable and other accruals;
Accrued salaries, wages and benefits decreased by $25.6 million primarily due to timing of payments for performance-based compensation and benefits; and
Accounts payable decreased by $18.7 million primarily due to the timing of invoice receipts and payments.
These increases in working capital were offset in part by the following:
Inventories decreased by $32.8 million, which primarily reflects our continued proactive management of inventory levels;
Accounts receivable decreased by $22.1 million primarily as a result of decreased revenues in the second quarter of 2013 as compared to the fourth quarter of 2012;
Prepaid expenses and other current assets decreased by $11.8 million primarily as a result of timing of certain prepayments; and
Cash, cash equivalents and short-term investments decreased by $2.5 million primarily due to common stock repurchases of $122.3 million and $43.3 million used for purchases of property and equipment, net of proceeds from sales, substantially offset by net cash provided by operating activities of $140.7 million and proceeds from issuances of common stock of $31.9 million.
Working capital decreased by $264.9 million to $696.9 million as of July 1, 2012 from $961.8 million as of December 31, 2011. The decrease was primarily attributable to the following:

Cash, cash equivalents and short-term investments decreased by $334.4 million primarily due to ~~the use of~~ $319.2 million used in connection with the acquisition of SandForce in January 2012, ~~the use~~net of cash acquired, $176.2 million used to repurchase our common stock, and ~~the use of~~ $77.4 million used for purchases of property and equipment, net of proceeds from sales, offset in part by net cash provided by operating activities of $167.5 million and proceeds from issuances of common stock of $82.1 million; and
Accounts payable increased by $30.9 million primarily due to an increase in inventory purchases to support new product introductions and the normal timing of invoice receipts and payments.
These decreases in working capital were offset in part by the following:

Accounts receivable increased by $50.3 million primarily as a result of increased revenues in the second quarter of 2012 as compared to the fourth quarter of 2011;

Other accrued liabilities decreased by $25.0 million primarily due to the utilization of restructuring reserves, payments of taxes and decreases in other accruals related to our operations, offset in part by an increase in deferred revenues; and

Inventories increased by $24.0 million as a result of increased inventory purchases to support new product introductions and higher revenues in 2012 as compared to 2011.
~~Working capital increased by $199.9 million to $979.1 million as of July 3, 2011 from $779.2 million as of December 31, 2010. The increase was primarily attributable to the following:~~
Cash, cash equivalents and short-term investments increased by $229.8 million primarily due to $475.2 million of proceeds from the sale of our external storage systems business in May 2011 and net cash provided by operating activities of $146.3 million, offset in part by the use of $396.8 million to repurchase our common stock.
Accrued salaries, wages and benefits decreased by $38.6 million primarily as a result of the timing of payments for salaries, benefits and performance-based compensation, and the payout of accrued compensation-related costs to employees transferred to NetApp as part of the sale of the external storage systems business;
Assets held for sale increased by $18.1 million primarily as a result of the reclassification of $16.2 million of land in Gresham, Oregon from held and used to held for sale because the held for sale criteria were met during the quarter ended July 3, 2011;
~~Other accrued liabilities decreased by $9.9 million due to a reduction in accruals as a result of the sale of the external storage systems business; and~~
Inventories increased by $7.0 million primarily due to increased inventory purchases during the second quarter of 2011 in anticipation of expected increases in product demand in the second half of 2011, offset in part by inventory sold to NetApp as part of the sale of the external storage systems business.
~~These increases in working capital were offset in part by the following:~~
~~Accounts receivable decreased by $92.5 million primarily as a result of lower revenues from discontinued operations due to the sale of the external storage systems business; and~~
Accounts payable increased by $11.5 million primarily due to increased inventory purchases, as inventory purchased to support continuing operations exceeded the reduction in inventory purchases resulting from the sale of the external storage systems business.
Cash Provided by Operating Activities
During the six months ended June 30, 2013, we generated $140.7 million of cash from operating activities as a result of the following:
Net income adjusted for non-cash items and other non-operating adjustments, which are quantified in our statements of cash flows included in Item 1;
Offset in part by a net decrease of $43.7 million in assets and liabilities, including changes in working capital components, from December 31, 2012 to June 30, 2013, as discussed above.
During the six months ended July 1, 2012, we generated $167.5 million of cash from operating activities as a result of the following:

Net income adjusted for non-cash items and other non-operating adjustments, which are quantified in our ~~condensed consolidated~~ statements of cash flows included in Item 1;

Offset in part by a net decrease of $66.5 million in assets and liabilities, including changes in working capital components, from December 31, 2011 to July 1, 2012, as discussed above.
~~During~~Cash Used in Investing Activities
Cash used in investing activities for the six months ended ~~July 3, 2011, we generated $146.3 million of cash from operating~~June 30, 2013 was $110.2 million. Our investing activities ~~as a result of~~during the six months ended June 30, 2013 were the following:

~~Net income adjusted for non-cash items~~Purchases of available-for-sale debt securities and other ~~non-operating adjustments, which are quantified in our condensed consolidated statements~~investments, net of ~~cash flows included in Item 1;~~proceeds from maturities and sales, of $66.9 million; and

~~Offset in part by a~~Purchases of property and equipment, net ~~decrease~~ of ~~$30.2 million in assets and liabilities, including changes in working capital components,~~proceeds from ~~December 31, 2010 to July 3, 2011, as discussed above.~~sales, totaling $43.3 million.
~~Cash Used in/Provided by Investing Activities~~
Cash used in investing activities for the six months ended July 1, 2012 was $451.2 million. ~~The~~Our investing activities during the ~~first half of~~six months ended July 1, 2012 were the following:

~~Acquisition of SandForce, net~~$319.2 million of cash ~~acquired, for $319.2 million;~~used in connection with the acquisition of SandForce;

Purchases of property and equipment, net of proceeds from sales, totaling $77.4 million, including $45.5 million for ~~an office building that we intend to be~~ our new headquarters; and

Purchases of available-for-sale debt securities, net of proceeds from maturities and sales, of $54.6 million.
~~Cash provided by investing activities for the six months ended July 3, 2011 was $434.2 million. The investing activities during the first half of 2011 were the following:~~
~~Proceeds from the sale of our external storage systems business, net of transaction fees, of $475.2 million;~~
~~Purchases of property and equipment, net of proceeds from sales, totaling $36.3 million; and~~
~~Purchases of available-for-sale debt securities and other investments, net of proceeds from maturities and sales, of $4.7 million.~~
We expect capital expenditures to be approximately ~~$130.0~~$85 million in 2012, a significant portion of which relates to the office building that we intend to be our new headquarters. In recent years, we have reduced our manufacturing-related capital expenditures as a result of our focus on establishing strategic supplier alliances with foundry2013. We use semiconductor ~~manufacturers~~foundries and ~~with third-party~~outside assembly and test ~~operations,~~companies to manufacture products, which ~~enables~~enable us to have access to advanced manufacturing capacity ~~while reducing our~~without significant capital spending requirements.
Cash Used in Financing Activities
Cash used in financing activities for the six months ended ~~July 1, 2012~~June 30, 2013 was ~~$94.1~~$90.4 million. ~~Cash~~This amount included $122.3 million used ~~in financing activities during the first half of 2012 was~~ to repurchase ~~$176.2 million of~~ our common stock, offset in part by ~~$82.1~~$31.9 million of cash received from issuances of common stock under our employee stock plans.
Cash used in financing activities for the six months ended July ~~3, 2011~~1, 2012 was ~~$345.9~~$94.1 million. ~~The financing activities during the first half of 2011 were the use of $396.8~~This amount included $176.2 million used to repurchase our common stock, offset in part by ~~proceeds~~$82.1 million of ~~$50.9 million~~cash received from issuances of common stock under our employee stock plans.
On July 24, 2013, we announced that our board of directors had declared a cash dividend of $0.03 per common share to be paid on September 20, 2013 to stockholders of record as of September 6, 2013. We ~~do not currently~~intend to pay ~~any~~a regular quarterly cash ~~dividends~~dividend on our common stock, subject to approval by our ~~stockholders.~~board of directors. Our dividend policy could be impacted in the future by, among other items, future changes in our cash flows and other potential uses of cash.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of ~~July 1, 2012:~~June 30, 2013:

   Payments Due by Period    Payments Due by Period
   Less Than 1 Year    1-3 Years    4-5 Years    After 5 Years    Other Total    Less Than 1 Year    1-3 Years    4-5 Years    After 5 Years    Other Total
   (In millions)    (In millions)
Operating lease obligations
   $ 39.8       $ 39.8       $ 10.5       $ 6.6       $ —    $ 96.7       $ 34.0       $ 31.0       $ 9.3       $ 4.1       $ —      $ 78.4
Purchase commitments
   411.9       24.8       10.0       —       —    446.7       362.8       22.5       3.6       —         —      388.9
Pension contributions
   68.6       *       *       *       *    68.6       25.5       *       *       *       *    25.5
Uncertain tax positions
   —       —       —       —       94.3 ** 94.3       —         —         —         —         104.3 ** 104.3




















Total
   $ 520.3       $ 64.6       $ 20.5       $ 6.6       $ 94.3    $ 706.3       $ 422.3       $ 53.5       $ 12.9       $ 4.1       $ 104.3    $ 597.1




















* We have pension plans covering ~~substantially all former Agere~~certain U.S. ~~employees, excluding management employees hired after June 30, 2003. We also have pension plans covering certain~~and international employees. Although additional future contributions will be required, the amount and timing of these contributions will be affected by actuarial assumptions, the actual rate of return on plan assets, the level of market interest rates, legislation changes and the amount of voluntary contributions to the plans. The amount shown in the table represents our planned contributions to our pension plans during the remainder of ~~2012.~~2013. Because any contributions for ~~2013~~2014 and later will depend on the value of the plan assets in the future and thus are uncertain, we have not included any amounts for ~~2013~~2014 and beyond in the above table.

** This amount represents the non-current tax payable obligation. We are unable to make a reasonably reliable estimate as to when a cash settlement with a taxing authority may occur.
Operating Lease Obligations
We lease real estate and certain non-manufacturing equipment under non-cancellable operating leases. We also include non-cancellable obligations under certain software licensing arrangements in this category.
Purchase Commitments
We maintain purchase commitments with certain suppliers, primarily for raw materials and manufacturing services and for some non-production items. Purchase commitments for inventory materials are generally restricted to a forecasted time horizon as mutually agreed upon between the parties. This forecasted time horizon can vary for different suppliers.
Uncertain Tax Positions
As of ~~July 1, 2012,~~June 30, 2013, we had ~~$180.7~~$200.1 million of unrecognized tax benefits, for which we are unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority may occur. It is reasonably possible that the total amount of unrecognized tax benefits will increase or decrease in the next 12 months. Such changes could occur based on the normal expiration of statutes of limitations, or the possible conclusion of ongoing tax audits in various jurisdictions around the ~~world.~~world or other negotiations with tax authorities. If those events occur within the next 12 months, we estimate that the unrecognized tax benefits, plus accrued interest and penalties, could decrease by up to ~~$16.7~~$46.8 million.
Standby Letters of Credit
We had outstanding obligations relating to standby letters of credit of ~~$4.1~~$3.9 million and ~~$3.5~~$4.1 million, respectively, as of ~~July 1, 2012~~June 30, 2013 and December 31, ~~2011.~~2012. Standby letters of credit are financial guarantees provided by third parties for leases, customs, taxes and certain self-insured risks. If the guarantees are called, we must reimburse the provider of the guarantee. The fair value of the letters of credit approximates the contract amounts. The standby letters of credit generally renew annually.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes in our critical accounting estimates or significant accounting policies during the six months ended ~~July 1, 2012~~June 30, 2013 as compared to the discussion in Part II, Item 7 and in Note 2 to our financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, ~~2011.~~2012.
RECENT ACCOUNTING PRONOUNCEMENTS
The information contained in Note 1 to our financial statements in Item 1 ~~under the heading “Recent Accounting Pronouncements”~~ is incorporated by reference into this Item 2.
Item 3.Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in the market risk disclosures during the six months ended ~~July 1, 2012~~June 30, 2013 as compared to the discussion in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, ~~2011.~~2012.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures:The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required or necessary disclosures. Our chief executive officer and chief financial officer have concluded, based on the evaluation of the effectiveness of the disclosure controls and procedures by our management with the participation of our chief executive officer and chief financial officer, as of the end of the period covered by this report, that our disclosure controls and procedures were effective for this purpose.
Changes in Internal Control:During the second quarter of ~~2012, we did not make any change~~2013, there were no changes in our internal control over financial reporting that materially affected or isare reasonably likely to materially affect our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1.Legal Proceedings
This information is included under the caption “Legal Matters” in Note 1312 to our financial statements in Item 1 of Part I.
Item 1A.Risk Factors
Set forth below are risks and uncertainties, many of which are discussed in greater detail in our Annual Report on Form 10-K for the year ended December 31, ~~2011,~~2012, that, if they were to occur, could materially adversely affect our business or could cause our actual results to differ materially from the results contemplated by the forward-looking statements in this report and other public statements we make:

We depend on a small number of customers. The loss of, or a significant reduction in revenues from, any of these customers would harm our results of operations.

A significant portion of our revenues is derived from the sale of products for use in hard disk drives and dynamics in that industry as well as competing technologies could have an adverse impact on our revenues.
We operate in intensely competitive markets, and our failure to compete effectively would harm our results of operations.

Customer orders and ordering patterns can change quickly, making it difficult for us to predict our revenues and making it possible that our actual revenues may vary materially from our expectations, which could harm our results of operations and stock price.

We depend on outside suppliers to manufacture, assemble, package and test our products; accordingly, any failure to secure and maintain sufficient manufacturing capacity at attractive prices or to maintain the quality of our products could harm our business and results of operations.

Failure to qualify our semiconductor products or our suppliers’ manufacturing lines with key customers could harm our business and results of operations.

We are seeking to expand our business by selling to new types of customers and may be unsuccessful in doing so, which could have a negative impact on our results of operations.
If we fail to keep pace with technological advances, or if we pursue technologies that do not become commercially accepted, customers may not buy our products and our results of operations may be harmed.

Any defects in our products could harm our reputation, customer relationships and results of operations.

Our pension plans are underfunded, and may require significant future contributions, which could have an adverse impact on our business.

We may be subject to intellectual property infringement claims and litigation, which could cause us to incur significant expenses or prevent us from selling our products.

If we are unable to protect or assert our intellectual property rights, our business and results of operations may be harmed.

~~Increases~~Volatility in the price of commodities used in the production of our products or lack of availability of these materials could negatively impact our ~~operating results.~~results of operations.

We are exposed to legal, business, political and economic risks associated with our international operations.

We use indirect channels of product distribution over which we have limited control.

We ~~may~~have engaged, and will likely continue to engage, in acquisitions and strategic alliances, which may disrupt our business or may not be successful and could harm our business and operating results.

The semiconductor industry is highly cyclical, which may cause our operating results to fluctuate.

Our failure to attract, retain and motivate key employees could harm our business.

Our operations and our suppliers’ operations are subject to natural disasters and other events outside of our control that may disrupt our business and harm our operating results.

Laws and regulations to which we are subject, as well as customer requirements in the area of environmental protection and social responsibility, could impose substantial costs on us and may adversely affect our business.

We rely on our information technology systems to run our business and any failure of these systems or any malicious intrusion into those systems could result in harm to our business, results of operations and financial condition.
Our blank check preferred stock and Delaware law contain provisions that may inhibit potential acquisition bids, which may harm our stock price, discourage merger offers or prevent changes in our management.

Class action litigation due to stock price volatility or other factors could cause us to incur substantial costs and divert our management’s attention and resources.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
~~The following table contains information about the repurchases~~On August 1, 2012, our board of directors authorized a common stock repurchase program of up to $500.0 million of our common ~~stock~~stock. The repurchases during the quarter ended ~~July 1, 2012.~~June 30, 2013 reported in the following table were made pursuant to this authorization:
Issuer Purchases of Equity Securities

Period
   Total Number of Shares
Purchased    Average Price
Paid per Share    Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs    Dollar Value of Shares
that May Yet Be
Purchased Under
the Plans or Programs
April 2 — May 1, 2012
   —       $ —       —       $ 213,007,356
May 2 — June 1, 2012
   15,934,768       $ 7.84       15,934,768       $ 88,013,739
June 2 — July 1, 2012
   1,984,501       $ 6.54       1,984,501       $ 75,028,406





Total
   17,919,269       $ 7.70       17,919,269





On March 9, 2011, our board of directors authorized the repurchase of up to $750 million of our common stock. The repurchases reported in the table above were made pursuant to this authorization. In addition, on August 1, 2012, our board of directors authorized the repurchase of up to an additional $500 million of our common stock. Information about the new program is not included in the table above.
Period
   Total Number of Shares
Purchased    Average Price
Paid per Share    Total Number of
Shares Purchased
as Part of
Publicly Announced
Program    Dollar Value of Shares
that May Yet Be
Purchased
April 1 — April 30, 2013
   —         $ —         —         $ 417,864,085
May 1 — May 31, 2013
   6,011,402       $ 6.87       6,011,402       $ 376,548,476
June 1 — June 30, 2013
   2,751,914       $ 7.34       2,751,914       $ 356,349,122





Total
   8,763,316       $ 7.02       8,763,316





Item 6. Exhibits
See the Exhibit Index, which follows the signature page to this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LSI CORPORATION
(Registrant)
Date: August ~~9, 2012~~
8, 2013 By
/s/ Bryon Look

Bryon Look

Executive Vice President, Chief Financial Officer
and Chief Administrative Officer

EXHIBIT INDEX

10.1    LSI Corporation 2003 Equity Incentive Plan. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.
10.2    ~~LSI Corporation~~ 2003 Equity Incentive Plan Form of Notice of Grant of Stock Option for Employees. Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.
10.3    ~~LSI Corporation~~ 2003 Equity Incentive Plan Form of ~~Nonqualifed~~Nonqualified Stock Option Agreement for Employees. Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.
10.4    ~~LSI Corporation~~ 2003 Equity Incentive Plan Form of Notice of Grant of Stock Option for Non-Employee Directors. Incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.
10.5    ~~LSI Corporation~~ 2003 Equity Incentive Plan Form of ~~Nonqualifed~~ Stock Option Agreement for Non-Employee Directors. Incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.
10.6    ~~LSI Corporation~~ 2003 Equity Incentive Plan Form of Notice of Grant of Restricted Stock Units for Employees. Incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.
10.7    ~~LSI Corporation~~ 2003 Equity Incentive Plan Form of Restricted Stock Unit Agreement for Employees. Incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.
10.8    ~~LSI Corporation~~ 2003 Equity Incentive Plan Form of Notice of Grant of Restricted Stock Units for Non-Employee Directors. Incorporated by reference to Exhibit ~~10.6~~10.8 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.
10.9    ~~LSI Corporation~~ 2003 Equity Incentive Plan Form of Restricted Stock Unit Agreement for Non-Employee Directors. Incorporated by reference to Exhibit ~~10.7~~10.9 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350
101.INS    XBRL instance document
101.SCH    XBRL taxonomy extension schema document
101.CAL    XBRL taxonomy extension calculation linkbase document
101.DEF    XBRL taxonomy extension definition linkbase document
101.LAB    XBRL taxonomy extension label linkbase document
101.PRE    XBRL taxonomy extension presentation linkbase document

3227


	Number of Shares			Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
	(In thousands)					(In years)		(In thousands)
Options outstanding at December 31, 2011		64,245		$	6.19
Assumed in SandForce acquisition		7,542		$	0.75
Granted		5,033		$	8.50
Exercised		(11,942	)	$	5.69
Canceled		(2,757	)	$	9.32

Options outstanding at July 1, 2012		62,121		$	5.67		4.09	$	91,608

Options exercisable at July 1, 2012		37,288		$	6.15		2.81	$	43,806


	Number of Units			Weighted-Average Grant Date Fair Value per Share		Number of Units			Weighted-Average Grant Date Fair Value per Share
	(In thousands)					(In thousands)
Unvested service-based RSUs at December 31, 2011		12,085		$	5.94
Assumed in SandForce acquisition		1,576		$	6.17
Unvested service-based RSUs outstanding at December 31, 2012							17,655		$	6.99
Granted		7,012		$	8.32		7,950		$	6.92
Vested		(3,035	)	$	5.90		(4,747	)	$	6.84
Forfeited		(464	)	$	6.32		(673	)	$	6.81

Unvested service-based RSUs at July 1, 2012		17,174		$	6.93
Unvested service-based RSUs outstanding at June 30, 2013							20,185		$	7.01


	Lease Terminations			Employee Severance and Benefits			Total			Leases			Employee Severance and Benefits			Total
	(In thousands)									(In thousands)
Balance at December 31, 2011	$	11,752		$	10,444		$	22,196
Balance at December 31, 2012										$	12,991		$	5,003		$	17,994
Expense		2,815			1,459			4,274			3,799			6,556			10,355
Utilized~~(a)~~		(4,844	)		(10,810	)		(15,654	)		(10,057	)(a)		(7,073	)(a)		(17,130	)

Balance at July 1, 2012 (b)	$	9,723		$	1,093		$	10,816
Balance at June 30, 2013										$	6,733	(b)	$	4,486	(b)	$	11,219


Cash paid, net of cash acquired	$	319,231
Fair value of partially vested equity awards		19,089
Fair value of LSI’s previous investment in SandForce		8,120

Total	$	346,440


Accounts receivable	$	10,711
Inventory		24,268
Identified intangible assets		172,400
Goodwill		183,461
Net deferred tax liabilities		(43,198	)
Other, net		(1,202	)

Total	$	346,440


	Fair Value		Weighted- Average Life
	(In thousands)		(In years)
Current technology	$	73,400		4.0
Customer relationships		41,700		7.0
Order backlog		4,500		0.5
Trade names		1,500		3.0

Total identified intangible assets subject to amortization		121,100		4.9
In-process research and development		51,300

Total identified intangible assets	$	172,400


	Fair Value Measurements as of July 1, 2012								Fair Value Measurements as of June 30, 2013
	Level 1			Level 2			Total		Level 1			Level 2			Total
	(In thousands)								(In thousands)
Cash equivalents:
Money-market funds	$	310,545	(a)	$	—		$	310,545	$	268,320	(a)	$	—		$	268,320
U.S. government and agency securities		—			2,003	(b)		2,003
Government and agency securities										—			600	(b)		600
Commercial paper										—			4,924	(b)		4,924

Total cash equivalents	$	310,545		$	2,003		$	312,548	$	268,320		$	5,524		$	273,844

Available-for-sale debt securities:
Asset-backed and mortgage-backed securities:
Agency securities	$	—		$	124,603	(b)	$	124,603	$	—		$	144,220	(b)	$	144,220
Non-agency securities		—			3,135	(b)		3,135		—			845	(b)		845
U.S. government and agency securities		13,225	(a)		44,200	(b)		57,425
Government and agency securities										23,441	(a)		61,200	(b)		84,641
Corporate debt securities		—			13,777	(b)		13,777		—			20,857	(b)		20,857
Commercial paper										—			13,345	(b)		13,345
												��
Total short-term investments	$	13,225		$	185,715		$	198,940	$	23,441		$	240,467		$	263,908

Long-term investments in equity securities:
Marketable available-for-sale equity securities	$	2,145	(c)	$	—		$	2,145	$	1,990	(c)	$	—		$	1,990


	Fair Value Measurements as of December 31, 2011								Fair Value Measurements as of December 31, 2012
	Level 1			Level 2			Total		Level 1			Level 2			Total
	(In thousands)								(In thousands)
Cash equivalents:
Money-market funds	$	674,219	(a)	$	—		$	674,219	$	364,596	(a)	$	—		$	364,596
Government and agency securities										—			6,479	(b)		6,479

Total cash equivalents									$	364,596		$	6,479		$	371,075

Available-for-sale debt securities:
Asset-backed and mortgage-backed securities:
Agency securities	$	—		$	97,408	(b)	$	97,408	$	—		$	129,463	(b)	$	129,463
Non-agency securities		—			9,989	(b)		9,989		—			1,393	(b)		1,393
U.S. government and agency securities		5,403	(a)		30,572	(b)		35,975
Government and agency securities										17,042	(a)		49,658	(b)		66,700
Corporate debt securities		—			12,272	(b)		12,272		—			6,001	(b)		6,001
Commercial paper										—			900	(b)		900

Total short-term investments	$	5,403		$	150,241		$	155,644	$	17,042		$	187,415		$	204,457

Long-term investments in equity securities:
Marketable available-for-sale equity securities	$	1,514	(c)	$	—		$	1,514	$	1,689	(c)	$	—		$	1,689


	July 1, 2012									June 30, 2013
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	(In thousands)									(In thousands)
Short-term debt securities:
Asset-backed and mortgage-backed securities	$	121,466	$	6,764	$	(492	)	$	127,738	$	142,541	$	4,862	$	(2,338	)	$	145,065
U.S. government and agency securities		56,542		888		(5	)		57,425
Government and agency securities											84,738		447		(544	)		84,641
Corporate debt securities		13,617		161		(1	)		13,777		20,848		87		(78	)		20,857
Commercial paper											13,345		—		—			13,345

Total short-term debt securities	$	191,625	$	7,813	$	(498	)	$	198,940	$	261,472	$	5,396	$	(2,960	)	$	263,908

Long-term marketable equity securities	$	669	$	1,476	$	—		$	2,145	$	669	$	1,321	$	—		$	1,990


	December 31, 2011									December 31, 2012
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	(In thousands)									(In thousands)
Short-term debt securities:
Asset-backed and mortgage-backed securities	$	99,884	$	7,891	$	(378	)	$	107,397	$	125,563	$	6,390	$	(1,097	)	$	130,856
U.S. government and agency securities		35,179		799		(3	)		35,975
Government and agency securities											65,904		802		(6	)		66,700
Corporate debt securities		12,146		153		(27	)		12,272		5,864		137		—			6,001
Commercial paper											900		—		—			900

Total short-term debt securities	$	147,209	$	8,843	$	(408	)	$	155,644	$	198,231	$	7,329	$	(1,103	)	$	204,457

Long-term marketable equity securities	$	669	$	846	$	(1	)	$	1,514	$	669	$	1,020	$	—		$	1,689


	July 1, 2012										June 30, 2013
	Less than 12 Months					Greater than 12 Months					Less than 12 Months					Greater than 12 Months
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)										(In thousands)
Asset-backed and mortgage-backed securities	$	33,176	$	(473	)	$	1,247	$	(19	)	$	67,133	$	(2,138	)	$	6,598	$	(200	)
U.S. government and agency securities		15,356		(5	)		—		—
Government and agency securities												51,960		(544	)		—		—
Corporate debt securities		4,544		(1	)		503		—			9,611		(78	)		—		—

Total	$	53,076	$	(479	)	$	1,750	$	(19	)	$	128,704	$	(2,760	)	$	6,598	$	(200	)


	Available-For-Sale Debt Securities
	(In thousands)
Due within one year	$	27,998	$	38,100
Due in 1-5 years		47,794		82,511
Due in 5-10 years		10,015		9,389
Due after 10 years		113,133		133,908

Total	$	198,940	$	263,908


	Goodwill
	(In thousands)
Balance as of December 31, 2011	$	72,377
Addition due to SandForce acquisition		183,461

Balance as of July 1, 2012	$	255,838


	Balance at December 31, 2011			Other Comprehensive Income			Balance at July 1, 2012
	(In thousands)
Accumulated net foreign currency translation adjustments	$	42,138		$	(3,397	)	$	38,741
Accumulated net unrealized gain on investments		5,942			(169	)		5,773
Accumulated net unrealized loss on derivatives		(2,551	)		659			(1,892	)
Accumulated actuarial loss on pension and post-retirement plans		(578,757	)		8,152			(570,605	)

Total accumulated other comprehensive loss	$	(533,228	)	$	5,245		$	(527,983	)


	Balance at December 31, 2012			Other Comprehensive Loss before Reclassifications			Amounts Reclassified from Accumulated Other Comprehensive Loss (a)			Net Current Period Other Comprehensive Loss			Balance at June 30, 2013
	(In thousands)
Foreign currency translation adjustments	$	39,881		$	(5,307	)	$	—		$	(5,307	)	$	34,574
Net unrealized gain on investments		4,484			(3,416	)		16			(3,400	)		1,084
Net unrealized gain/(loss) on derivatives		224			(1,651	)		(302	)		(1,953	)		(1,729	)
Defined benefit pension and post-retirement plans		(622,919	)		—			10,297			10,297			(612,622	)

Total accumulated other comprehensive loss	$	(578,330	)	$	(10,374	)	$	10,011		$	(363	)	$	(578,693	)


	Accrued Warranties			Accrued Warranties
	(In thousands)			(In thousands)
Balance as of December 31, 2011	$	6,334
Balance as of December 31, 2012				$	5,426
Accruals for warranties issued during the period		868			107
Adjustments to pre-existing accruals (including changes in estimates)		(470	)		721
Warranty liabilities assumed in SandForce acquisition		426
Settlements made during the period (in cash or in kind)		(1,059	)		(295	)

Balance as of July 1, 2012	$	6,099
Balance as of June 30, 2013				$	5,959


	Payments Due by Period													Payments Due by Period
	Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years		Other			Total		Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years		Other			Total
	(In millions)													(In millions)
Operating lease obligations	$	39.8	$	39.8	$	10.5	$	6.6	$	—		$	96.7	$	34.0	$	31.0	$	9.3	$	4.1	$	—		$	78.4
Purchase commitments		411.9		24.8		10.0		—		—			446.7		362.8		22.5		3.6		—		—			388.9
Pension contributions		68.6		*		*		*		*			68.6		25.5		*		*		*		*			25.5
Uncertain tax positions		—		—		—		—		94.3	**		94.3		—		—		—		—		104.3	**		104.3

Total	$	520.3	$	64.6	$	20.5	$	6.6	$	94.3		$	706.3	$	422.3	$	53.5	$	12.9	$	4.1	$	104.3		$	597.1


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
April 2 — May 1, 2012		—	$	—		—	$	213,007,356
May 2 — June 1, 2012		15,934,768	$	7.84		15,934,768	$	88,013,739
June 2 — July 1, 2012		1,984,501	$	6.54		1,984,501	$	75,028,406

Total		17,919,269	$	7.70		17,919,269


		LSI CORPORATION
		(Registrant)

Date: August ~~9, 2012~~ 8, 2013	By	/s/ Bryon Look
		Bryon Look
		Executive Vice President, Chief Financial Officer and Chief Administrative Officer



10.1		LSI Corporation 2003 Equity Incentive Plan. Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.

10.2		~~LSI Corporation~~ 2003 Equity Incentive Plan Form of Notice of Grant of Stock Option for Employees. Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.

10.3		~~LSI Corporation~~ 2003 Equity Incentive Plan Form of ~~Nonqualifed~~Nonqualified Stock Option Agreement for Employees. Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.

10.4		~~LSI Corporation~~ 2003 Equity Incentive Plan Form of Notice of Grant of Stock Option for Non-Employee Directors. Incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.

10.5		~~LSI Corporation~~ 2003 Equity Incentive Plan Form of ~~Nonqualifed~~ Stock Option Agreement for Non-Employee Directors. Incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.

10.6		~~LSI Corporation~~ 2003 Equity Incentive Plan Form of Notice of Grant of Restricted Stock Units for Employees. Incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.

10.7		~~LSI Corporation~~ 2003 Equity Incentive Plan Form of Restricted Stock Unit Agreement for Employees. Incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.

10.8		~~LSI Corporation~~ 2003 Equity Incentive Plan Form of Notice of Grant of Restricted Stock Units for Non-Employee Directors. Incorporated by reference to Exhibit ~~10.6~~10.8 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.

10.9		~~LSI Corporation~~ 2003 Equity Incentive Plan Form of Restricted Stock Unit Agreement for Non-Employee Directors. Incorporated by reference to Exhibit ~~10.7~~10.9 to our Current Report on Form 8-K filed on May 14, ~~2012.~~2013.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350

101.INS		XBRL instance document

101.SCH		XBRL taxonomy extension schema document

101.CAL		XBRL taxonomy extension calculation linkbase document

101.DEF		XBRL taxonomy extension definition linkbase document

101.LAB		XBRL taxonomy extension label linkbase document

101.PRE		XBRL taxonomy extension presentation linkbase document