06. equity valuation of lsi semiconductor (deb sahoo)
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06. equity valuation of lsi semiconductor (deb sahoo)
- 1. Equity Analysis of LSI Semiconductor (NYSE: LSI) DEB SAHOO, MBA, ROSS SCHOOL OF BUSINESS, UNIVERSITY OF MICHIGAN MARCH 17, 2011
- 2. 2 LSISEMICONDUCTORLSISEMICONDUCTOR CONTENTS Company Overview Industry Comparison Equity Valuation Recommendation
- 4. 4 LSISEMICONDUCTORLSISEMICONDUCTOR LSI Semiconductor LSI CORPORATION 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 Provides custom and standard networking solutions that include chips, such as network processors, digital signal processors, content- inspection processors, traffic shaping devices, and physical layer devices, as well as software, evaluation systems
- 5. 5 LSISEMICONDUCTORLSISEMICONDUCTOR RecommendationTarget Price and Valuation Ticker: LSI (NYSE) 5 Yr. Target Price: $15.00 Current Price: $6.07 (3/17/2011) Market Beta: 1.4 5 Yr. P/B: 1.5 5 Yr. P/S: 1.5 LSI Stock Summary BUY HOLD SELL Stock Performance (2006-2011)
- 6. 6 LSISEMICONDUCTORLSISEMICONDUCTOR Revenue Source Revenue by Segment Revenue by Geography
- 7. 7 LSISEMICONDUCTORLSISEMICONDUCTOR Income Statement and Balance Sheet Fiscal Year End (MM/DD/YYYY) 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 Actual Forecast Fiscal Year End (MM/DD/YYYY) 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 Income Statement Sales (Net) 1,982,148$ 2,603,643$ 2,677,077$ 2,219,159$ 2,570,047$ 2,930,105.35$ 3,287,807.84$ 3,629,933.11$ 3,942,249.60$ 4,210,399.81$ Cost of Goods Sold (1,126,894) (1,699,785) (1,608,108) (1,375,758) (1,461,182) (1,627,534) (1,783,182) (1,921,220) (2,034,914) (2,118,212) Gross Profit 855,254 903,858 1,068,969 843,401 1,108,865 1,302,571 1,504,626 1,708,713 1,907,335 2,092,188 R&D Expense (413,432) (655,224) (672,511) (608,312) (669,822) (758,473) (845,244) (926,770) (999,526) (1,060,057) SG&A Expense (251,426) (2,739,865) (992,178) (364,260) (401,898) (445,322) (485,232) (519,766) (547,155) (565,862) EBITDA 190,396 (2,491,231) (595,720) (129,171) 37,145 98,776 174,151 262,177 360,654 466,269 Depreciation & Amortization (32,089) 0 0 0 0 0 0 0 0 0 EBIT 158,307 (2,491,231) (595,720) (129,171) 37,145 98,776 174,151 262,177 360,654 466,269 Interest Expense (24,263) (31,020) (34,943) (21,931) (5,601) 0 0 0 0 0 Non-Operating Income (Loss) 51,277 46,762 36,110 20,272 13,848 13,157 11,810 9,779 7,081 3,781 EBT 185,321 (2,475,489) (594,553) (130,830) 45,392 111,933 185,961 271,957 367,735 470,050 Income Taxes (15,682) (11,326) (27,700) 83,111 (5,420) (13,358) (22,180) (32,418) (43,810) (55,968) Minority Interest in Earnings (1) (4) 0 0 0 0 0 0 0 0 Other Income (Loss) 0 0 0 0 0 0 0 0 0 0 Net Income Before Ext. Items 169,638 (2,486,819) (622,253) (47,719) 39,972 98,575 163,782 239,539 323,925 414,082 Ext. Items & Disc. Ops. 0 0 0 0 0 0 0 0 0 0 Preferred Dividends 0 0 0 0 0 0 0 0 0 0 Net Income (available to common) 169,638 (2,486,819) (622,253) (47,719) 39,972 98,575 163,782 239,539 323,925 414,082 Actual Forecast Balance Sheet Operating Cash and Market. Sec. 1,008,937$ 1,397,597$ 1,119,142$ 962,072$ 676,666$ 771,466$ 865,645$ 955,723$ 1,037,952$ 1,108,553$ Receivables 348,638 406,368 442,507 338,961 326,604 372,361 417,818 461,295 500,985 535,062 Inventories 209,470 240,842 220,535 169,335 186,772 208,036 227,931 245,575 260,108 270,755 Other Current Assets 68,692 147,751 17,278 115,084 73,778 84,114 94,383 104,204 113,170 120,867 Total Current Assets 1,635,737 2,192,558 1,799,462 1,585,452 1,263,820 1,435,976 1,605,776 1,766,797 1,912,215 2,035,238 PP&E (Net) 86,045 229,732 235,963 218,972 223,181 254,448 285,511 315,221 342,342 365,628 Investments 15,800 39,779 46,707 0 0 0 0 0 0 0 Intangibles 990,016 1,800,412 1,158,789 927,942 749,835 854,885 959,248 1,059,067 1,150,188 1,228,423 Other Assets 124,546 133,909 103,273 235,564 188,076 214,425 240,602 265,638 288,494 308,117 Total Assets 2,852,144 4,396,390 3,344,194 2,967,930 2,424,912 2,759,734 3,091,137 3,406,723 3,693,238 3,937,406 Current Debt 0 0 245,107 350,000 0 0 0 0 0 0 Accounts Payable 200,189 329,444 201,035 213,008 173,919 193,719 212,245 228,676 242,208 252,123 Income Taxes Payable 88,304 15,679 3,504 0 0 0 0 0 0 0 Other Current Liabilities 238,278 417,333 347,887 291,377 310,709 354,239 397,484 438,845 476,603 509,021 Total Current Liabilities 526,771 762,456 797,533 854,385 484,628 547,958 609,729 667,521 718,811 761,144 Long-Term Debt 350,000 717,967 350,000 0 0 0 0 0 0 0 Other Liabilities 79,400 430,722 755,739 652,441 622,782 710,032 796,712 879,617 955,299 1,020,278 Deferred Taxes 0 0 0 0 0 0 0 0 0 0 Minority Interest 235 249 0 0 0 0 0 0 0 0 Total Liabilities 956,406 1,911,394 1,903,272 1,506,826 1,107,410 1,257,990 1,406,441 1,547,138 1,674,110 1,781,422 Preferred Stock 0 0 0 0 0 0 0 0 0 0 Paid in Common Capital (Net) 3,116,044 6,223,518 5,801,697 5,869,598 5,686,024 5,771,691 5,790,861 5,726,211 5,561,830 5,284,603 Retained Earnings (1,220,306) (3,738,522) (4,360,775) (4,408,494) (4,368,522) (4,269,947) (4,106,165) (3,866,626) (3,542,701) (3,128,619) Total Common Equity 1,895,738 2,484,996 1,440,922 1,461,104 1,317,502 1,501,744 1,684,696 1,859,585 2,019,128 2,155,984 Total Liabilities and Equity 2,852,144 4,396,390 3,344,194 2,967,930 2,424,912 2,759,734 3,091,137 3,406,723 3,693,238 3,937,406
- 8. 8 LSISEMICONDUCTORLSISEMICONDUCTOR Statement of Cash Flow & Retained Earnings Fiscal Year End Date 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 Pro Forma Statement of Cash Flows Operating: Net Income (2,486,819)$ (622,253)$ (47,719)$ 39,972$ 98,575$ 163,782$ 239,539$ 323,925$ 414,082$ +Depreciation & Amortization 0 0 0 0 0 0 0 0 0 +Increase in Deferred Taxes 0 0 0 0 0 0 0 0 0 +Increase in Other Liabilities 351,322 325,017 (103,298) (29,659) 87,250 86,680 82,905 75,682 64,979 +Increase in Minority Interest 14 (249) 0 0 0 0 0 0 0 +Preferred Dividends 0 0 0 0 0 0 0 0 0 =Funds From Operations (2,135,483) (297,485) (151,017) 10,313 185,826 250,461 322,444 399,606 479,061 -Increase in Receivables (57,730) (36,139) 103,546 12,357 (45,757) (45,457) (43,478) (39,689) (34,077) -Increase in Inventory (31,372) 20,307 51,200 (17,437) (21,264) (19,895) (17,644) (14,533) (10,647) -Increase in Other Current Assets (79,059) 130,473 (97,806) 41,306 (10,336) (10,269) (9,821) (8,966) (7,698) +Increase in Accounts Payable 129,255 (128,409) 11,973 (39,089) 19,800 18,526 16,430 13,533 9,915 +Increase in Taxes Payable (72,625) (12,175) (3,504) 0 0 0 0 0 0 +Increase in Other Curr. Liabilities 179,055 (69,446) (56,510) 19,332 43,530 43,245 41,362 37,758 32,418 =Cash From Operations (2,067,959) (392,874) (142,118) 26,782 171,800 236,611 309,292 387,709 468,972 Investing: -Capital Expenditures (143,687) (6,231) 16,991 (4,209) (31,267) (31,063) (29,710) (27,121) (23,286) -Increase in Investments (23,979) (6,928) 46,707 0 0 0 0 0 0 -Purchases of Intangibles (810,396) 641,623 230,847 178,107 (105,050) (104,363) (99,818) (91,121) (78,235) -Increase in Other Assets (9,363) 30,636 (132,291) 47,488 (26,349) (26,177) (25,037) (22,855) (19,623) =Cash From Investing (987,425) 659,100 162,254 221,386 (162,667) (161,602) (154,565) (141,098) (121,145) Financing: +Increase in Debt 367,967 (122,860) (245,107) (350,000) 0 0 0 0 0 -Dividends Paid on Preferred 0 0 0 0 0 0 0 0 0 +Increase in Pref. Stock 0 0 0 0 0 0 0 0 0 -Dividends Paid on Common 0 0 0 0 0 0 0 0 0 +/-Net Issuance of Common Stock 3,107,474 (421,821) 67,901 (183,574) 85,667 19,170 (64,650) (164,381) (277,227) +/-Clean Surplus Plug (Ignore) (31,397) 0 0 0 0 0 0 0 0 =Cash From Financing 3,444,044 (544,681) (177,206) (533,574) 85,667 19,170 (64,650) (164,381) (277,227) Net Change in Cash 388,660 (278,455) (157,070) (285,406) 94,800 94,179 90,078 82,230 70,601 + Beginning Cash Balance 1,008,937 1,397,597 1,119,142 962,072 676,666 771,466 865,645 955,723 1,037,952 = Ending Cash Balance 1,397,597 1,119,142 962,072 676,666 771,466 865,645 955,723 1,037,952 1,108,553 Actual Forecast Statement of Retained Earnings Beg. Retained Earnings (1,220,306) (3,738,522) (4,360,775) (4,408,494) (4,368,522) (4,291,450) (4,175,930) (4,016,322) (3,808,150) +Net Income (2,486,819) (622,253) (47,719) 39,972 77,072 115,520 159,608 208,172 259,537 -Common Dividends 0 0 0 0 0 0 0 0 0 0 +/-Clean Surplus Plug (Ignore) (31,397) 0 0 0 0 0 0 0 0 =End. Retained Earnings (3,738,522) (4,360,775) (4,408,494) (4,368,522) (4,291,450) (4,175,930) (4,016,322) (3,808,150) (3,548,613)
- 14. 14 LSISEMICONDUCTORLSISEMICONDUCTOR Value Generating Stock Undergoing Transformation Equity Value Proposition
- 15. 15 LSISEMICONDUCTORLSISEMICONDUCTOR Key Success Factors / Key Risk Factors Key Success Factors Valuation 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
- 16. 16 LSISEMICONDUCTORLSISEMICONDUCTOR Reasons for Possible Turnaround 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
- 18. 18 LSISEMICONDUCTORLSISEMICONDUCTOR Assumptions Terminal Yr. Fiscal Year End Date 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 Actual Forecast Income Statement Assumptions Sales Growth 31.4% 2.8% -17.1% 15.8% 14.0% 12.2% 10.4% 8.6% 6.8% 5% Cost of Goods Sold/Sales 56.9% 65.3% 60.1% 62.0% 56.9% 55.5% 54.2% 52.9% 51.6% 50.3% 49% R&D/Sales 20.9% 25.2% 25.1% 27.4% 26.1% 25.9% 25.7% 25.5% 25.4% 25.2% 25% SG&A/Sales 12.7% 105.2% 37.1% 16.4% 15.6% 15.2% 14.8% 14.3% 13.9% 13.4% 13% Dep&Amort/Avge PP&E and Intang. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0% Interest Expense/Avge Debt 5.8% 5.3% 4.6% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3% Non-Operating Income/Sales 2.6% 1.8% 1.3% 0.9% 0.5% 0.4% 0.4% 0.3% 0.2% 0.1% 0% Effective Tax Rate 8.5% -0.5% -4.7% 63.5% 11.9% 11.9% 11.9% 11.9% 11.9% 11.9% 12% Minority Interest/After Tax Income 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0% Other Income/Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0% Ext. Items & Disc. Ops./Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0% Pref. Dividends/Avge Pref. Stock 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0% Balance Sheet Assumptions Working Capital Assumptions Ending Operating Cash/Sales 50.9% 53.7% 41.8% 43.4% 26.3% 26.3% 26.3% 26.3% 26.3% 26.3% 26.3% Ending Receivables/Sales 17.6% 15.6% 16.5% 15.3% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7% 12.7% Ending Inventories/COGS 18.6% 14.2% 13.7% 12.3% 12.8% 12.8% 12.8% 12.8% 12.8% 12.8% 12.8% Ending Other Current Assets/Sales 3.5% 5.7% 0.6% 5.2% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% Ending Accounts Payable/COGS 17.8% 19.4% 12.5% 15.5% 11.9% 11.9% 11.9% 11.9% 11.9% 11.9% 11.9% Ending Taxes Payable/Sales 4.5% 0.6% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ending Other Current Liabs/Sales 12.0% 16.0% 13.0% 13.1% 12.1% 12.1% 12.1% 12.1% 12.1% 12.1% 12.1% Other Operating Asset Assumptions Ending Net PP&E/Sales 4.3% 8.8% 8.8% 9.9% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% Ending Investments/Sales 0.8% 1.5% 1.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ending Intangibles/Sales 49.9% 69.1% 43.3% 41.8% 29.2% 29.2% 29.2% 29.2% 29.2% 29.2% 29.2% Ending Other Assets/Sales 6.3% 5.1% 3.9% 10.6% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% Other Operating Liability Assumptions Other Liabilities/Sales 4.0% 16.5% 28.2% 29.4% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2% Deferred Taxes/Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Financing Assumptions Current Debt/Total Assets 0.0% 0.0% 7.3% 11.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Long-Term Debt/Total Assets 12.3% 16.3% 10.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Minority Interest/Total Assets 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Preferred Stock/Total Assets 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Cost of Common Equity 12.00% Terminal Growth Rate 5.00% Operational Assumptions Capital Market Assumptions Cost of Debt 8.00% Cost of Preferred Stock 9.00%
- 19. 19 LSISEMICONDUCTORLSISEMICONDUCTOR Fiscal Year End Date 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 Actual Forecast Net Income (2,486,819) (622,253) (47,719) 39,972 98,575 163,782 239,539 323,925 414,082 - Increase in Common Equity (589,258) 1,044,074 (20,182) 143,602 (184,242) (182,952) (174,889) (159,543) (136,855) +/-Clean Surplus Plug (Ignore) (31,397) 0 0 0 0 0 0 0 0 =Free Cash Flow to Common Equity (3,107,474) 421,821 (67,901) 183,574 (85,667) (19,170) 64,650 164,381 277,227 Computation based on SCF: +Cash From Operations (2,067,959) (392,874) (142,118) 26,782 171,800 236,611 309,292 387,709 468,972 -Increase in Operating Cash (388,660) 278,455 157,070 285,406 (94,800) (94,179) (90,078) (82,230) (70,601) +Cash From Investing (987,425) 659,100 162,254 221,386 (162,667) (161,602) (154,565) (141,098) (121,145) +Increase in Debt 367,967 (122,860) (245,107) (350,000) 0 0 0 0 0 -Dividends Paid on Preferred 0 0 0 0 0 0 0 0 0 +Increase in Preferred Stock 0 0 0 0 0 0 0 0 0 +/-Clean Surplus Plug (Ignore) (31,397) 0 0 0 0 0 0 0 0 =Free Cash Flow to Common Equity (3,107,474) 421,821 (67,901) 183,574 (85,667) (19,170) 64,650 164,381 277,227 Financing Flows: +Dividends Paid 0 0 0 0 0 0 0 0 0 -Net Issuance of Common Stock (3,107,474) 421,821 (67,901) 183,574 (85,667) (19,170) 64,650 164,381 277,227 = Free Cash Flow to Common Equity (3,107,474) 421,821 (67,901) 183,574 (85,667) (19,170) 64,650 164,381 277,227 Free Cash Flow to Common Equity A. Valuation Using FCF to Equity Holders Fiscal Year of Forecast 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 Valuation to Common Equity FCF to Common Equity (85,667)$ (19,170)$ 64,650$ 164,381$ 277,227$ 399,038$ 418,481$ Present Value of FCF (76,488) (15,282) 46,016 104,467 157,306 202,165 189,299 Present Value Beyond 5 Years 3,230,955 Present Value of First 5 Years 216,019 Forecast Equity Value Before Time Adj. 3,446,974 Forecasted Value as of Valuation Date 3,784,112 Less Value of Contingent Equity Claims 0 Value Attributable to Common Equity 3,784,112$ Common Shares Outstanding at BS Date 615,190 Equivalent Shares at Valuation Date 615,190 Forecast Price/Share $6.15 Forecast
- 20. 20 LSISEMICONDUCTORLSISEMICONDUCTOR Fiscal Year End Date 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 Actual Forecast Net Operating Income -2,455,657 -585,682 -39,720 44,904 98,575 163,782 239,539 323,925 414,082 - Increase in Net Operating Assets (957,225) 1,166,934 224,925 493,602 (184,242) (182,952) (174,889) (159,543) (136,855) +/-Clean Surplus Plug (Ignore) (31,397) 0 0 0 0 0 0 0 0 =Free Cash Flow to Investors (3,444,279) 581,252 185,205 538,506 (85,667) (19,170) 64,650 164,381 277,227 Computation based on SCF: Cash From Operations (2,067,959) (392,874) (142,118) 26,782 171,800 236,611 309,292 387,709 468,972 -Increase in Operating Cash (388,660) 278,455 157,070 285,406 (94,800) (94,179) (90,078) (82,230) (70,601) +Cash from Investing (987,425) 659,100 162,254 221,386 (162,667) (161,602) (154,565) (141,098) (121,145) +Interest Expense 31,020 34,943 21,931 5,601 0 0 0 0 0 -Tax Shield on Interest 142 1,628 (13,932) (669) 0 0 0 0 0 +/-Clean Surplus Plug (Ignore) (31,397) 0 0 0 0 0 0 0 0 =Free Cash Flow to Investors (3,444,279) 581,252 185,205 538,506 (85,667) (19,170) 64,650 164,381 277,227 Financing Flows: +Dividends on Common Stock 0 0 0 0 0 0 0 0 0 +Interest Expense 31,020 34,943 21,931 5,601 0 0 0 0 0 -Tax Shield on Interest 142 1,628 (13,932) (669) 0 0 0 0 0 +Dividends on Preferred Stock 0 0 0 0 0 0 0 0 0 -Net Issuance of Common Stock (3,107,474) 421,821 (67,901) 183,574 (85,667) (19,170) 64,650 164,381 277,227 -Net Issuance of Debt (367,967) 122,860 245,107 350,000 0 0 0 0 0 -Net Issuance of Preferred Stock 0 0 0 0 0 0 0 0 0 =Free Cash Flow to Investors (3,444,279) 581,252 185,205 538,506 (85,667) (19,170) 64,650 164,381 277,227 Free Cash Flow to all Investors B. FCF to All Investors Traditional Computation of FCF: EBIT (2,491,231) (595,720) (129,171) 37,145 98,776 174,151 262,177 360,654 466,269 -Taxes on EBIT (11,184) (26,072) 69,179 (6,089) (13,358) (22,180) (32,418) (43,810) (55,968) +Increase in Deferred Taxes 0 0 0 0 0 0 0 0 0 = NOPLAT (2,502,415) (621,792) (59,992) 31,056 85,419 151,971 229,760 316,844 410,301 +Depreciation & Amortization 0 0 0 0 0 0 0 0 0 +Minority Interest in Earnings (4) 0 0 0 0 0 0 0 0 +Non-Operating Income (Loss) 46,762 36,110 20,272 13,848 13,157 11,810 9,779 7,081 3,781 +Other Income (Loss) 0 0 0 0 0 0 0 0 0 +Ext. Items & Disc. Ops. 0 0 0 0 0 0 0 0 0 =Gross Cash Flow (2,455,657) (585,682) (39,720) 44,904 98,575 163,782 239,539 323,925 414,082 -Increase in Working Capital (321,136) 183,066 165,969 301,875 (108,826) (108,029) (103,229) (94,127) (80,690) -Capital Expenditures (143,687) (6,231) 16,991 (4,209) (31,267) (31,063) (29,710) (27,121) (23,286) -Increase in Investments (23,979) (6,928) 46,707 0 0 0 0 0 0 -Purchases of Intangibles (810,396) 641,623 230,847 178,107 (105,050) (104,363) (99,818) (91,121) (78,235) -Increase in Other Assets (9,363) 30,636 (132,291) 47,488 (26,349) (26,177) (25,037) (22,855) (19,623) +Increase in Minority Interest 14 (249) 0 0 0 0 0 0 0 +Increase in Other Liabilities 351,322 325,017 (103,298) (29,659) 87,250 86,680 82,905 75,682 64,979 +/-Clean Surplus Plug (Ignore) (31,397) 0 0 0 0 0 0 0 0 =Free Cash Flow to Investors (3,444,279) 581,252 185,205 538,506 (85,667) (19,170) 64,650 164,381 277,227 Method 1 Method 2
- 21. 21 LSISEMICONDUCTORLSISEMICONDUCTOR B. Valuation Using FCF to All Investors Fiscal Year of Forecast 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 Forecast Valuation All Investors Cost of Debt 8.00% Cost of Preferred Stock 9.00% After Tax Weighted Average Cost of Capital 12.00% FCF to Debt -$ -$ -$ -$ -$ -$ -$ Present Value of FCF to Debt - - - - - - - Value of Debt -$ FCF to Preferred Stock -$ -$ -$ -$ -$ -$ -$ Present Value of FCF to Preferred Stock - - - - - - - Value of Preferred Stock -$ FCF to Investors (85,667)$ (19,170)$ 64,650$ 164,381$ 277,227$ 399,038$ 418,481$ Present Value of FCF to Investors (76,488) (15,282) 46,016 104,467 157,306 202,165 189,299 Entity Value 3,446,974$ Less Value of Debt 0 Less Value of Preferred Stock 0 Forecast Equity Value Before Time Adj. 3,446,974 Forecasted Value as of Valuation Date 3,784,112 Less Value of Contingent Equity Claims 0 Value Attributable to Common Equity 3,784,112$ Common Shares Outstanding at BS Date 615,190 Equivalent Shares at Valuation Date 615,190 Forecast Price/Share $6.15 Fiscal Year of Forecast 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 Net Income 98,575 163,782 239,539 323,925 414,082 506,328 531,644 Common Equity Issued (Repurchased) 85,667 19,170 (64,650) (164,381) (277,227) (399,038) (418,481) Forecasted Price at Year End $6.67 $7.47 $8.37 $9.37 $10.50 $11.76 $13.17 New Shares Issued (Repurchased) 12,840 2,565 (7,725) (17,537) (26,407) (33,937) (31,777) Shares Outstanding at End of Year 628,030 630,595 622,871 605,334 578,927 544,990 513,213 Forecast EPS $0.16 $0.26 $0.38 $0.53 $0.70 $0.90 $1.00 Forecast EPS Forecast
- 22. 22 LSISEMICONDUCTORLSISEMICONDUCTOR 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 $96K Operational improvement could lead to a higher stock price
- 23. 23 LSISEMICONDUCTORLSISEMICONDUCTOR Sensitivity Analysis of Equity Valuation 6.15$ COGS/Sales 3% 4% 5% 6% 7% 45% 7.13 7.86 8.80 10.06 11.82 47% 6.12 6.71 7.48 8.50 9.93 49% 5.10 5.56 6.15 6.94 8.05 51% 4.09 4.41 4.83 5.38 6.16 53% 3.08 3.26 3.50 3.82 4.27 Terminal Sales Growth 6.15$ SG&A/Sales 3% 4% 5% 6% 7% 9% 7.13 7.86 8.80 10.05 11.82 11% 6.12 6.71 7.47 8.50 9.93 13% 5.10 5.56 6.15 6.94 8.05 15% 4.09 4.41 4.83 5.38 6.16 17% 3.08 3.26 3.50 3.82 4.28 Terminal Sales Growth
- 25. 25 LSISEMICONDUCTORLSISEMICONDUCTOR 5 Yr. Forecasted Upper Limit $15.42 Present Best Estimate $6.15 5 Yr. Forecasted Lower Limit $4.25 Summary BUY HOLD SELL
- 26. 26 LSISEMICONDUCTORLSISEMICONDUCTOR Analyst Positions Analysts Position Ford Equity Research Outperform Market Edge Buy Ned Davis Research Neutral Standard & Poor's Equity Research Neutral Thomas White International, Ltd. Neutral Thomson Reuters Neutral Zacks Investment Research, Inc Neutral
- 27. 27 LSISEMICONDUCTOR Deb Sahoo MBA, Ross School of Business University of Michigan, Ann Arbor