Equity Analysis of LSI Semiconductor

(NYSE: LSI)
DEB SAHOO, MBA, ROSS SCHOOL OF BUSINESS, UNIVERSITY OF MICHIGAN
MARCH 17, 2011

LSI SEMICONDUCTOR

CONTENTS

Company Overview

Industry Comparison

Equity Valuation

Recommendation

LSI SEMICONDUCTOR

Company Overview

LSI Semiconductor

1621 Barber Lane

Milpitas, CA 95035
USA
408-433-8000
www.lsi.com

Economic Sector: Technology

Industry: Electronic Semi.
Number of Employees: 4,588
Market Capitalization: $4.6B
Shares Outstanding: 615 mil
% Held By Institutions: 78.63%

 LSI Corporation designs, develops,

and markets storage and networking
semiconductors worldwide
 Offers integrated circuits for hard disk
and tape drive solutions, which are
used to store and retrieve data in
personal computers, corporate
network servers, archive/back-up
devices, and consumer electronics
products

LSI SEMICONDUCTOR

LSI CORPORATION

 Provides custom and standard

networking solutions that include
chips, such as network processors,
digital signal processors, contentinspection processors, traffic shaping
devices, and physical layer devices,
as well as software, evaluation
systems
4

LSI Stock Summary

Target Price and Valuation

Ticker: LSI (NYSE)

5 Yr. Target Price: $15.00
Current Price: $6.07 (3/17/2011)
Market Beta: 1.4
5 Yr. P/B: 1.5
5 Yr. P/S: 1.5

LSI SEMICONDUCTOR

Stock Performance (2006-2011)

Recommendation
BUY
HOLD
SELL
5

Revenue Source

LSI SEMICONDUCTOR

Revenue by Segment

Revenue by Geography

Income Statement and Balance Sheet

Income Statement
Sales (Net)
Cost of Goods Sold
Gross Profit
R&D Expense
SG&A Expense
EBITDA

12/31/2006
$

1,982,148
(1,126,894)
855,254
(413,432)
(251,426)
190,396

Actual
12/31/2008

12/31/2007
$

2,603,643
(1,699,785)
903,858
(655,224)
(2,739,865)
(2,491,231)

2,677,077
(1,608,108)
1,068,969
(672,511)
(992,178)
(595,720)

12/31/2009
$

2,219,159
(1,375,758)
843,401
(608,312)
(364,260)
(129,171)

12/31/2010
$

2,570,047
(1,461,182)
1,108,865
(669,822)
(401,898)
37,145

12/31/2011

Forecast
12/31/2013

12/31/2012

12/31/2014

12/31/2015

$ 2,930,105.35 $ 3,287,807.84 $ 3,629,933.11 $ 3,942,249.60 $ 4,210,399.81

(1,627,534)
(1,783,182)
(1,921,220)
(2,034,914)
(2,118,212)
1,302,571
1,504,626
1,708,713
1,907,335
2,092,188
(758,473)
(845,244)
(926,770)
(999,526)
(1,060,057)
(445,322)
(485,232)
(519,766)
(547,155)
(565,862)
98,776
174,151
262,177
360,654
466,269

Depreciation & Amortization

EBIT

(32,089)
158,307

0
(2,491,231)

0
(595,720)

0
(129,171)

0
37,145

0
98,776

0
174,151

0
262,177

0
360,654

0
466,269

Interest Expense
Non-Operating Income (Loss)
EBT
Income Taxes
Minority Interest in Earnings
Other Income (Loss)
Net Income Before Ext. Items

(24,263)
51,277
185,321
(15,682)
(1)
0
169,638

(31,020)
46,762
(2,475,489)
(11,326)
(4)
0
(2,486,819)

(34,943)
36,110
(594,553)
(27,700)
0
0
(622,253)

(21,931)
20,272
(130,830)
83,111
0
0
(47,719)

(5,601)
13,848
45,392
(5,420)
0
0
39,972

0
13,157
111,933
(13,358)
0
0
98,575

0
11,810
185,961
(22,180)
0
0
163,782

0
9,779
271,957
(32,418)
0
0
239,539

0
7,081
367,735
(43,810)
0
0
323,925

0
3,781
470,050
(55,968)
0
0
414,082

Ext. Items & Disc. Ops.

Preferred Dividends
Net Income (available to common)

0
0
169,638

0
0
(2,486,819)

0
0
(622,253)

0
0
(47,719)

0
0
39,972

0
0
98,575

0
0
163,782

0
0
239,539

0
0
323,925

0
0
414,082

Fiscal Year End (MM/DD/YYYY)

12/31/2006

12/31/2007

12/31/2010

12/31/2011

12/31/2012

Balance Sheet
Operating Cash and Market. Sec.
Receivables
Inventories
Other Current Assets
Total Current Assets
PP&E (Net)
Investments
Intangibles
Other Assets
Total Assets

$ 1,008,937
348,638
209,470
68,692
1,635,737
86,045
15,800
990,016
124,546
2,852,144

Current Debt
Accounts Payable
Income Taxes Payable
Other Current Liabilities
Total Current Liabilities
Long-Term Debt
Other Liabilities
Deferred Taxes
Minority Interest
Total Liabilities
Preferred Stock
Paid in Common Capital (Net)
Retained Earnings
Total Common Equity
Total Liabilities and Equity

0
200,189
88,304
238,278
526,771
350,000
79,400
0
235
956,406
0
3,116,044
(1,220,306)
1,895,738
2,852,144

1,397,597
406,368
240,842
147,751
2,192,558
229,732
39,779
1,800,412
133,909
4,396,390

Actual
12/31/2008

1,119,142
442,507
220,535
17,278
1,799,462
235,963
46,707
1,158,789
103,273
3,344,194

12/31/2009

962,072
338,961
169,335
115,084
1,585,452
218,972
0
927,942
235,564
2,967,930

676,666
326,604
186,772
73,778
1,263,820
223,181
0
749,835
188,076
2,424,912

771,466
372,361
208,036
84,114
1,435,976
254,448
0
854,885
214,425
2,759,734

865,645
417,818
227,931
94,383
1,605,776
285,511
0
959,248
240,602
3,091,137

Forecast
12/31/2013

955,723
461,295
245,575
104,204
1,766,797
315,221
0
1,059,067
265,638
3,406,723

12/31/2014

1,037,952
500,985
260,108
113,170
1,912,215
342,342
0
1,150,188
288,494
3,693,238

LSI SEMICONDUCTOR

Fiscal Year End (MM/DD/YYYY)

12/31/2015

1,108,553
535,062
270,755
120,867
2,035,238
365,628
0
1,228,423
308,117
3,937,406

0
329,444
15,679
417,333
762,456
717,967
430,722
0
249
1,911,394

245,107
201,035
3,504
347,887
797,533
350,000
755,739
0
0
1,903,272

350,000
213,008
0
291,377
854,385
0
652,441
0
0
1,506,826

0
173,919
0
310,709
484,628
0
622,782
0
0
1,107,410

0
193,719
0
354,239
547,958
0
710,032
0
0
1,257,990

0
212,245
0
397,484
609,729
0
796,712
0
0
1,406,441

0
228,676
0
438,845
667,521
0
879,617
0
0
1,547,138

0
242,208
0
476,603
718,811
0
955,299
0
0
1,674,110

0
252,123
0
509,021
761,144
0
1,020,278
0
0
1,781,422

0
6,223,518
(3,738,522)
2,484,996
4,396,390

0
5,801,697
(4,360,775)
1,440,922
3,344,194

0
5,869,598
(4,408,494)
1,461,104
2,967,930

0
5,686,024
(4,368,522)
1,317,502
2,424,912

0
5,771,691
(4,269,947)
1,501,744
2,759,734

0
5,790,861
(4,106,165)
1,684,696
3,091,137

0
5,726,211
(3,866,626)
1,859,585
3,406,723

0
5,561,830
(3,542,701)
2,019,128
3,693,238

0
5,284,603
(3,128,619)
2,155,984
3,937,406

Statement of Cash Flow & Retained Earnings

Investing:
-Capital Expenditures
-Increase in Investments
-Purchases of Intangibles
-Increase in Other Assets
=Cash From Investing

Actual
12/31/2008
12/31/2009

12/31/2007

(2,486,819)
0
0
351,322
14
0
(2,135,483)
(57,730)
(31,372)
(79,059)
129,255
(72,625)
179,055
(2,067,959)

(622,253) $
0
0
325,017
(249)
0
(297,485)
(36,139)
20,307
130,473
(128,409)
(12,175)
(69,446)
(392,874)

(47,719)
0
0
(103,298)
0
0
(151,017)
103,546
51,200
(97,806)
11,973
(3,504)
(56,510)
(142,118)

12/31/2010

39,972
0
0
(29,659)
0
0
10,313
12,357
(17,437)
41,306
(39,089)
0
19,332
26,782

12/31/2011

12/31/2012

98,575 $
0
0
87,250
0
0
185,826
(45,757)
(21,264)
(10,336)
19,800
0
43,530
171,800

163,782 $
0
0
86,680
0
0
250,461
(45,457)
(19,895)
(10,269)
18,526
0
43,245
236,611

(143,687)
(23,979)
(810,396)
(9,363)
(987,425)

(6,231)
(6,928)
641,623
30,636
659,100

16,991
46,707
230,847
(132,291)
162,254

(4,209)
0
178,107
47,488
221,386

(31,267)
0
(105,050)
(26,349)
(162,667)

(31,063)
0
(104,363)
(26,177)
(161,602)

Financing:
+Increase in Debt
-Dividends Paid on Preferred
+Increase in Pref. Stock
-Dividends Paid on Common
+/-Net Issuance of Common Stock
+/-Clean Surplus Plug (Ignore)
=Cash From Financing

367,967
0
0
0
3,107,474
(31,397)
3,444,044

(122,860)
0
0
0
(421,821)
0
(544,681)

(245,107)
0
0
0
67,901
0
(177,206)

(350,000)
0
0
0
(183,574)
0
(533,574)

0
0
0
0
85,667
0
85,667

Net Change in Cash

+ Beginning Cash Balance
= Ending Cash Balance

388,660
1,008,937
1,397,597

(278,455)
1,397,597
1,119,142

(157,070)
1,119,142
962,072

(285,406)
962,072
676,666

94,800
676,666
771,466

Forecast
12/31/2013

239,539 $
0
0
82,905
0
0
322,444
(43,478)
(17,644)
(9,821)
16,430
0
41,362
309,292

12/31/2014

323,925 $
0
0
75,682
0
0
399,606
(39,689)
(14,533)
(8,966)
13,533
0
37,758
387,709

12/31/2015

414,082
0
0
64,979
0
0
479,061
(34,077)
(10,647)
(7,698)
9,915
0
32,418
468,972

(29,710)
0
(99,818)
(25,037)
(154,565)

(27,121)
0
(91,121)
(22,855)
(141,098)

(23,286)
0
(78,235)
(19,623)
(121,145)

0
0
0
0
19,170
0
19,170

0
0
0
0
(64,650)
0
(64,650)

0
0
0
0
(164,381)
0
(164,381)

0
0
0
0
(277,227)
0
(277,227)

94,179
771,466
865,645

90,078
865,645
955,723

82,230
955,723
1,037,952

LSI SEMICONDUCTOR

Fiscal Year End Date

Pro Forma Statement of Cash Flows
Operating:
Net Income
+Depreciation & Amortization
+Increase in Deferred Taxes
+Increase in Other Liabilities
+Increase in Minority Interest
+Preferred Dividends
=Funds From Operations
-Increase in Receivables
-Increase in Inventory
-Increase in Other Current Assets
+Increase in Accounts Payable
+Increase in Taxes Payable
+Increase in Other Curr. Liabilities
=Cash From Operations

70,601
1,037,952
1,108,553

Statement of Retained Earnings

Beg. Retained Earnings
+Net Income
-Common Dividends
+/-Clean Surplus Plug (Ignore)
=End. Retained Earnings

(1,220,306)
(2,486,819)
0
(31,397)
(3,738,522)

(3,738,522)
(622,253)
0
0
(4,360,775)

(4,360,775)
(47,719)
0
0
(4,408,494)

(4,408,494)
39,972
0
0
(4,368,522)

(4,368,522)
77,072
0
0
(4,291,450)

(4,291,450)
115,520
0
0
(4,175,930)

(4,175,930)
159,608
0
0
(4,016,322)

(4,016,322)
208,172
0
0
(3,808,150)

(3,808,150)
259,537
0
0
(3,548,613)

LSI SEMICONDUCTOR

Industry Comparison

LSI SEMICONDUCTOR

Market Valuation

10

LSI SEMICONDUCTOR

Management Effectiveness

11

LSI SEMICONDUCTOR

Operational Profitability

12

LSI SEMICONDUCTOR

Financial Health

13

Equity Value Proposition

LSI SEMICONDUCTOR

Value Generating Stock Undergoing Transformation

14

Key Success Factors / Key Risk Factors

Key Success Factors

Valuation

LSI SEMICONDUCTOR

The P/E ratio of 14.41 is lower than the average P/E for this Industry which is 56.87.
The Price/Sales ratio of 1.88 is lower than the industry average of 2.91.
The PEG ratio is 0.61. The average Market Edge PEG ratio for this Industry is 0.68

Profitability
The Return on Assets (ROA) is 14.23. ROA for this Industry Group is 7.90. It reflects the ability
of management to produce profits from each dollar of company assets.

Balance Sheet Strength

The Current Ratio is 3.08. Current ratios above 1 (Short-term debts are less than its assets)

Key Risk Factors

Valuation
The P/B Value ratio 4.21 is higher than the average P/B of 2.52 for this Industry
15

New product cycle ramps and new opportunities ahead in areas like flash
storage processors, PCIe flash adapters, HDD SoCs, SAS for multicore
processors

Transforming its business model into a storage and networking company

Focusing on fewer and larger end-markets

Continuing adoption of newer storage protocols such as SAS and ramp in

new entry-level storage systems will improve its position in the hard
drive market

Has begun to address markets for storage systems products beyond its
traditional OEM base to grow and diversify

LSI SEMICONDUCTOR

Reasons for Possible Turnaround

16

LSI SEMICONDUCTOR

Equity Valuation

17

Assumptions
Capital Market Assumptions
Cost of Common Equity
Terminal Growth Rate

12.00%
5.00%

Cost of Debt

8.00%

Cost of Preferred Stock

9.00%

Operational Assumptions
Income Statement Assumptions
Sales Growth
Cost of Goods Sold/Sales
R&D/Sales
SG&A/Sales
Dep&Amort/Avge PP&E and Intang.
Interest Expense/Avge Debt
Non-Operating Income/Sales
Effective Tax Rate
Minority Interest/After Tax Income
Other Income/Sales
Ext. Items & Disc. Ops./Sales
Pref. Dividends/Avge Pref. Stock
Balance Sheet Assumptions
Working Capital Assumptions
Ending Operating Cash/Sales
Ending Receivables/Sales
Ending Inventories/COGS
Ending Other Current Assets/Sales
Ending Accounts Payable/COGS
Ending Taxes Payable/Sales
Ending Other Current Liabs/Sales
Other Operating Asset Assumptions
Ending Net PP&E/Sales
Ending Investments/Sales
Ending Intangibles/Sales
Ending Other Assets/Sales
Other Operating Liability Assumptions
Other Liabilities/Sales
Deferred Taxes/Sales
Financing Assumptions
Current Debt/Total Assets
Long-Term Debt/Total Assets
Minority Interest/Total Assets
Preferred Stock/Total Assets
Dividend Payout Ratio

Actual
12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010

Forecast
Terminal Yr.
12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016

31.4%
65.3%
25.2%
105.2%
0.0%
5.8%
1.8%
-0.5%
0.0%
0.0%
0.0%
0.0%

2.8%
60.1%
25.1%
37.1%
0.0%
5.3%
1.3%
-4.7%
0.0%
0.0%
0.0%
0.0%

-17.1%
62.0%
27.4%
16.4%
0.0%
4.6%
0.9%
63.5%
0.0%
0.0%
0.0%
0.0%

15.8%
56.9%
26.1%
15.6%
0.0%
3.2%
0.5%
11.9%
0.0%
0.0%
0.0%
0.0%

14.0%
55.5%
25.9%
15.2%
0.0%
3.2%
0.4%
11.9%
0.0%
0.0%
0.0%
0.0%

12.2%
54.2%
25.7%
14.8%
0.0%
3.2%
0.4%
11.9%
0.0%
0.0%
0.0%
0.0%

10.4%
52.9%
25.5%
14.3%
0.0%
3.2%
0.3%
11.9%
0.0%
0.0%
0.0%
0.0%

8.6%
51.6%
25.4%
13.9%
0.0%
3.2%
0.2%
11.9%
0.0%
0.0%
0.0%
0.0%

6.8%
50.3%
25.2%
13.4%
0.0%
3.2%
0.1%
11.9%
0.0%
0.0%
0.0%
0.0%

5%
49%
25%
13%
0%
3%
0%
12%
0%
0%
0%
0%

50.9%
17.6%
18.6%
3.5%
17.8%
4.5%
12.0%

53.7%
15.6%
14.2%
5.7%
19.4%
0.6%
16.0%

41.8%
16.5%
13.7%
0.6%
12.5%
0.1%
13.0%

43.4%
15.3%
12.3%
5.2%
15.5%
0.0%
13.1%

26.3%
12.7%
12.8%
2.9%
11.9%
0.0%
12.1%

26.3%
12.7%
12.8%
2.9%
11.9%
0.0%
12.1%

26.3%
12.7%
12.8%
2.9%
11.9%
0.0%
12.1%

26.3%
12.7%
12.8%
2.9%
11.9%
0.0%
12.1%

26.3%
12.7%
12.8%
2.9%
11.9%
0.0%
12.1%

26.3%
12.7%
12.8%
2.9%
11.9%
0.0%
12.1%

26.3%
12.7%
12.8%
2.9%
11.9%
0.0%
12.1%

4.3%
0.8%
49.9%
6.3%

8.8%
1.5%
69.1%
5.1%

8.8%
1.7%
43.3%
3.9%

9.9%
0.0%
41.8%
10.6%

8.7%
0.0%
29.2%
7.3%

8.7%
0.0%
29.2%
7.3%

8.7%
0.0%
29.2%
7.3%

8.7%
0.0%
29.2%
7.3%

8.7%
0.0%
29.2%
7.3%

8.7%
0.0%
29.2%
7.3%

8.7%
0.0%
29.2%
7.3%

4.0%
0.0%

16.5%
0.0%

28.2%
0.0%

29.4%
0.0%

24.2%
0.0%

24.2%
0.0%

24.2%
0.0%

24.2%
0.0%

24.2%
0.0%

24.2%
0.0%

24.2%
0.0%

0.0%
12.3%
0.0%
0.0%
0.0%

0.0%
16.3%
0.0%
0.0%
0.0%

7.3%
10.5%
0.0%
0.0%
0.0%

11.8%
0.0%
0.0%
0.0%
0.0%

0.0%
0.0%
0.0%
0.0%
0.0%

0.0%
0.0%
0.0%
0.0%
0.0%

0.0%
0.0%
0.0%
0.0%
0.0%

0.0%
0.0%
0.0%
0.0%
0.0%

0.0%
0.0%
0.0%
0.0%
0.0%

0.0%
0.0%
0.0%
0.0%
0.0%

0.0%
0.0%
0.0%
0.0%
0.0%

56.9%
20.9%
12.7%

2.6%
8.5%
0.0%
0.0%
0.0%

LSI SEMICONDUCTOR

Fiscal Year End Date

18

Fiscal Year End Date

Actual
12/31/2008
12/31/2009

12/31/2007

12/31/2010

12/31/2011

12/31/2012

Forecast
12/31/2013

12/31/2014

12/31/2015

Free Cash Flow to Common Equity

Net Income
- Increase in Common Equity
+/-Clean Surplus Plug (Ignore)
=Free Cash Flow to Common Equity

(2,486,819)
(589,258)
(31,397)
(3,107,474)

(622,253)
1,044,074
0
421,821

(47,719)
(20,182)
0
(67,901)

39,972
143,602
0
183,574

98,575
(184,242)
0
(85,667)

163,782
(182,952)
0
(19,170)

239,539
(174,889)
0
64,650

323,925
(159,543)
0
164,381

414,082
(136,855)
0
277,227

Computation based on SCF:

+Cash From Operations
-Increase in Operating Cash
+Cash From Investing
+Increase in Debt
-Dividends Paid on Preferred
+Increase in Preferred Stock
+/-Clean Surplus Plug (Ignore)
=Free Cash Flow to Common Equity

(2,067,959)
(388,660)
(987,425)
367,967
0
0
(31,397)
(3,107,474)

(392,874)
278,455
659,100
(122,860)
0
0
0
421,821

(142,118)
157,070
162,254
(245,107)
0
0
0
(67,901)

26,782
285,406
221,386
(350,000)
0
0
0
183,574

171,800
(94,800)
(162,667)
0
0
0
0
(85,667)

236,611
(94,179)
(161,602)
0
0
0
0
(19,170)

309,292
(90,078)
(154,565)
0
0
0
0
64,650

387,709
(82,230)
(141,098)
0
0
0
0
164,381

468,972
(70,601)
(121,145)
0
0
0
0
277,227

Financing Flows:
+Dividends Paid
-Net Issuance of Common Stock
= Free Cash Flow to Common Equity

0
(3,107,474)
(3,107,474)

0
421,821
421,821

0
(67,901)
(67,901)

0
183,574
183,574

0
(85,667)
(85,667)

0
(19,170)
(19,170)

0
64,650
64,650

0
164,381
164,381

0
277,227
277,227

Fiscal Year of Forecast

Valuation to Common Equity
FCF to Common Equity
Present Value of FCF
Present Value Beyond 5 Years
Present Value of First 5 Years
Forecast Equity Value Before Time Adj.
Forecasted Value as of Valuation Date
Less Value of Contingent Equity Claims
Value Attributable to Common Equity
Common Shares Outstanding at BS Date
Equivalent Shares at Valuation Date
Forecast Price/Share

12/31/2011
$

(85,667)
(76,488)
3,230,955
216,019
3,446,974
3,784,112
0
3,784,112

12/31/2012
$

(19,170) $
(15,282)

Forecast
12/31/2014

12/31/2013
64,650
46,016

164,381
104,467

12/31/2015
$

277,227
157,306

12/31/2016
$

399,038
202,165

LSI SEMICONDUCTOR

A. Valuation Using FCF to Equity Holders

12/31/2017
$

418,481
189,299

615,190
615,190
$6.15

19

B. FCF to All Investors

Fiscal Year End Date

12/31/2007

Actual
12/31/2008
12/31/2009

12/31/2010

12/31/2011

12/31/2012

Forecast
12/31/2013

12/31/2014

12/31/2015

Free Cash Flow to all Investors

Net Operating Income
- Increase in Net Operating Assets
+/-Clean Surplus Plug (Ignore)
=Free Cash Flow to Investors

-2,455,657
(957,225)
(31,397)
(3,444,279)

-585,682
1,166,934
0
581,252

-39,720
224,925
0
185,205

44,904
493,602
0
538,506

98,575
(184,242)
0
(85,667)

163,782
(182,952)
0
(19,170)

239,539
(174,889)
0
64,650

323,925
(159,543)
0
164,381

414,082
(136,855)
0
277,227

Computation based on SCF:

Cash From Operations
-Increase in Operating Cash
+Cash from Investing
+Interest Expense
-Tax Shield on Interest
+/-Clean Surplus Plug (Ignore)
=Free Cash Flow to Investors

(2,067,959)
(388,660)
(987,425)
31,020
142
(31,397)
(3,444,279)

(392,874)
278,455
659,100
34,943
1,628
0
581,252

(142,118)
157,070
162,254
21,931
(13,932)
0
185,205

26,782
285,406
221,386
5,601
(669)
0
538,506

171,800
(94,800)
(162,667)
0
0
0
(85,667)

236,611
(94,179)
(161,602)
0
0
0
(19,170)

309,292
(90,078)
(154,565)
0
0
0
64,650

387,709
(82,230)
(141,098)
0
0
0
164,381

468,972
(70,601)
(121,145)
0
0
0
277,227

Financing Flows:
+Dividends on Common Stock
+Interest Expense
-Tax Shield on Interest
+Dividends on Preferred Stock
-Net Issuance of Common Stock
-Net Issuance of Debt
-Net Issuance of Preferred Stock
=Free Cash Flow to Investors

0
31,020
142
0
(3,107,474)
(367,967)
0
(3,444,279)

0
34,943
1,628
0
421,821
122,860
0
581,252

0
21,931
(13,932)
0
(67,901)
245,107
0
185,205

0
5,601
(669)
0
183,574
350,000
0
538,506

0
0
0
0
(85,667)
0
0
(85,667)

0
0
0
0
(19,170)
0
0
(19,170)

0
0
0
0
64,650
0
0
64,650

0
0
0
0
164,381
0
0
164,381

0
0
0
0
277,227
0
0
277,227

(2,491,231)
(11,184)
0
(2,502,415)
0
(4)
46,762
0
0
(2,455,657)
(321,136)
(143,687)
(23,979)
(810,396)
(9,363)
14
351,322
(31,397)
(3,444,279)

(595,720)
(26,072)
0
(621,792)
0
0
36,110
0
0
(585,682)
183,066
(6,231)
(6,928)
641,623
30,636
(249)
325,017
0
581,252

(129,171)
69,179
0
(59,992)
0
0
20,272
0
0
(39,720)
165,969
16,991
46,707
230,847
(132,291)
0
(103,298)
0
185,205

37,145
(6,089)
0
31,056
0
0
13,848
0
0
44,904
301,875
(4,209)
0
178,107
47,488
0
(29,659)
0
538,506

98,776
(13,358)
0
85,419
0
0
13,157
0
0
98,575
(108,826)
(31,267)
0
(105,050)
(26,349)
0
87,250
0
(85,667)

174,151
(22,180)
0
151,971
0
0
11,810
0
0
163,782
(108,029)
(31,063)
0
(104,363)
(26,177)
0
86,680
0
(19,170)

262,177
(32,418)
0
229,760
0
0
9,779
0
0
239,539
(103,229)
(29,710)
0
(99,818)
(25,037)
0
82,905
0
64,650

360,654
(43,810)
0
316,844
0
0
7,081
0
0
323,925
(94,127)
(27,121)
0
(91,121)
(22,855)
0
75,682
0
164,381

466,269
(55,968)
0
410,301
0
0
3,781
0
0
414,082
(80,690)
(23,286)
0
(78,235)
(19,623)
0
64,979
0
277,227

LSI SEMICONDUCTOR

Method 1

Method 2
Traditional Computation of FCF:
EBIT
-Taxes on EBIT
+Increase in Deferred Taxes
= NOPLAT
+Depreciation & Amortization
+Minority Interest in Earnings
+Non-Operating Income (Loss)
+Other Income (Loss)
+Ext. Items & Disc. Ops.
=Gross Cash Flow
-Increase in Working Capital
-Capital Expenditures
-Increase in Investments
-Purchases of Intangibles
-Increase in Other Assets
+Increase in Minority Interest
+Increase in Other Liabilities
+/-Clean Surplus Plug (Ignore)
=Free Cash Flow to Investors

20

B. Valuation Using FCF to All Investors

Fiscal Year of Forecast

12/31/2011

12/31/2012

Forecast
12/31/2014

12/31/2013

12/31/2015

12/31/2016

12/31/2017

Valuation All Investors

Cost of Debt

8.00%

Cost of Preferred Stock

9.00%

FCF to Debt

12.00%
$

Present Value of FCF to Debt

Value of Debt

FCF to Preferred Stock

FCF to Investors

(85,667)

Present Value of FCF to Investors

Entity Value

(76,488)
3,446,974

$
-

(19,170) $

64,650

(15,282)

46,016

$
-

164,381

$
-

277,227

104,467

157,306

Forecast
12/31/2014
323,925
(164,381)
$9.37
(17,537)
605,334
$0.53

12/31/2015
414,082
(277,227)
$10.50
(26,407)
578,927
$0.70

$
-

399,038
202,165

418,481
189,299

Less Value of Preferred Stock

Forecast Equity Value Before Time Adj.

3,446,974

Forecasted Value as of Valuation Date

3,784,112
$

0
3,784,112

Common Shares Outstanding at BS Date

615,190

Equivalent Shares at Valuation Date

615,190

Forecast Price/Share

Less Value of Debt

$
-

Present Value of FCF to Preferred Stock

Value of Preferred Stock

Less Value of Contingent Equity Claims

Value Attributable to Common Equity

LSI SEMICONDUCTOR

After Tax Weighted Average Cost of Capital

$6.15

EPS Forecast
Fiscal Year of Forecast
Net Income
Common Equity Issued (Repurchased)
Forecasted Price at Year End
New Shares Issued (Repurchased)
Shares Outstanding at End of Year
Forecast EPS

12/31/2011
98,575
85,667
$6.67
12,840
628,030
$0.16

12/31/2012
163,782
19,170
$7.47
2,565
630,595
$0.26

12/31/2013
239,539
(64,650)
$8.37
(7,725)
622,871
$0.38

12/31/2016
506,328
(399,038)
$11.76
(33,937)
544,990
$0.90

12/31/2017
531,644
(418,481)
$13.17
(31,777)
513,213
$1.00

21

Margin Compared to Semiconductor Industry Avg.

Operational Metric

LSI

Industry Avg.

Gross Margin

55%

61%

Operating Profit Margin

6%

23%

Return on Sales

7%

19%

Return on Asset

6%

13%

Income/Employee

$32K

$96K

LSI SEMICONDUCTOR

Operational improvement could lead to a higher stock price

22

Sensitivity Analysis of Equity Valuation

6.15

COGS/Sales
45%
47%
49%
51%
53%

$
6.15
SG&A/Sales
9%
11%
13%
15%
17%

Terminal Sales Growth

3%
7.13
6.12
5.10
4.09
3.08

4%
7.86
6.71
5.56
4.41
3.26

5%
8.80
7.48
6.15
4.83
3.50

6%
10.06
8.50
6.94
5.38
3.82

7%
11.82
9.93
8.05
6.16
4.27

3%
7.13
6.12
5.10
4.09
3.08

Terminal Sales Growth

4%
5%
6%
7.86
8.80
10.05
6.71
7.47
8.50
5.56
6.15
6.94
4.41
4.83
5.38
3.26
3.50
3.82

7%
11.82
9.93
8.05
6.16
4.28

LSI SEMICONDUCTOR

23

LSI SEMICONDUCTOR

Recommendation

24

5 Yr. Forecasted Upper Limit

$15.42

BUY

Present Best Estimate

$6.15

HOLD

5 Yr. Forecasted Lower Limit

$4.25

SELL

LSI SEMICONDUCTOR

Summary

25

Analyst Positions

Position
Outperform
Buy
Neutral
Neutral
Neutral
Neutral
Neutral

LSI SEMICONDUCTOR

Analysts
Ford Equity Research
Market Edge
Ned Davis Research
Standard & Poor's Equity Research
Thomas White International, Ltd.
Thomson Reuters
Zacks Investment Research, Inc

26

LSI SEMICONDUCTOR

Deb Sahoo
MBA, Ross School of Business
University of Michigan, Ann Arbor

27