Overview

Linear Technology Corporation is a manufacturer of high performance linear integrated circuits. The Company generates revenue exclusively from the sale of analog integrated circuits. The Company targets the high performance segment of the analog integrated circuit market. The Company was founded in 1981 and became a public company in 1986. Linear Technology products include high performance amplifiers, comparators, voltage references, monolithic filters, linear regulators, DC-DC converters, battery chargers, data converters, communications interface circuits, RF signal conditioning circuits, uModuleTM products, and many other analog functions. Applications for Linear Technology's high performance circuits include telecommunications, cellular telephones, networking products such as optical switches, notebook and desktop computers, computer peripherals, video/multimedia, industrial instrumentation, security monitoring devices, high-end consumer products such as digital cameras and MP3 players, complex medical devices, automotive electronics, factory automation, process control, and military and space systems.

Third quarter revenue of $200.9 million decreased 19% compared to the previous quarter's revenue of $249.2 million and decreased 33% or $97.0 million from $297.9 million reported in the third quarter of fiscal 2008. The Company continues to experience the impact of the U.S. credit crisis and the global recession, as the third quarter revenue decline of 19% follows a decline of 20% in the second quarter after the Company achieved record quarterly revenue of $310.4 million in the first quarter of fiscal 2009. Despite the significant decrease in quarterly revenues, the Company continues to have strong operating margins, with operating income of 36.4% of sales in the third quarter. To maintain this level of profitability, the Company has cut variable costs aggressively where possible in reaction to the revenue decline. The Company has significantly reduced costs through weekly plant closures, forced vacation, variable compensation reductions, modest employee terminations and otherwise limiting discretionary spending. Going into the fourth quarter, there is more optimism that the Company's revenues and bookings will stabilize in the June quarter as the book to bill ratio was positive for the March quarter. Nevertheless, foreseeing future results and customer activity in the current economic environment is very difficult and the Company will continue to control its variable costs where possible, including the implementation of actions to reduce labor costs noted above.

Major factors impacting the March 2009 quarter were:
· Revenue decreased by $48.3 million or 19% from the second quarter of fiscal year 2009;

· The Company's quarterly effective tax rate of 19.5% was positively impacted by a discrete tax benefit of $5.7 million primarily related to the Company's domestic manufacturing deduction;

· Operating expenses were favorably impacted by lower labor costs as employees were required to take approximately 2.5 weeks of time-off during the quarter as compared to approximately 2.0 weeks in the previous quarter;

· The Company purchased and retired $30.0 million face value of its 3.125% Convertible Senior Notes, resulting in a gain of approximately $1.7 million, or $0.01 diluted earnings per share, net of deferred issuance costs.

Critical Accounting Estimates

The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require it to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The Company regularly evaluates these estimates, including those related to stock-based compensation, inventory valuation, revenue recognition and income taxes. These estimates are based on historical experience and on assumptions that are believed by management to be reasonable under the circumstances. Actual results may differ from these estimates, which may impact the carrying values of assets and liabilities.

The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company's consolidated financial statements.

Stock-Based Compensation

The Company uses the Black-Scholes valuation model to determine the fair value of its stock options at the date of grant. The stock options fair value is then amortized straight-line over the vesting period, which is generally five years. The Black-Scholes valuation model requires the Company to estimate key assumptions such as expected option term, stock price volatility, dividend yields and risk free interest rates that determine the stock options fair value. Higher volatility and expected lives result in a proportional increase to stock-based compensation determined at the date of grant. The expected dividend rate and expected risk-free rate do not have as significant an effect on the calculation of fair value. As a result, if factors change and the Company's estimates of volatility and expected life were to increase or decrease, the Company's stock-based compensation expense could be materially different in the future. In addition, if deferred taxes based on the Black-Scholes valuation are greater than or less than the gain on the sale of the associated stock option, the Company's income tax expense could increase or decrease.

The Company values inventories at the lower of cost or market. The Company records charges to write-down inventories for unsalable, excess or obsolete raw materials, work-in-process and finished goods. Newly introduced parts are generally not valued until success in the market place has been determined by a consistent pattern of sales and backlog among other factors. The Company arrives at the estimate for newly released parts by analyzing sales and customer backlog against ending inventory on hand. The Company reviews the assumptions on a quarterly basis and makes decisions with regard to inventory valuation based on the current business climate. In addition to write-downs based on newly introduced parts, judgmental assessments are calculated for the remaining inventory based on salability, obsolescence, historical experience and current business conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that could adversely affect operating results. If actual market conditions are more favorable, the Company may have higher gross margins when products are sold. Sales to date of such products have not had a significant impact on gross margin.

Revenue Recognition

The Company recognizes revenues when the earnings process is complete, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection is reasonably assured. During the third quarter and the first nine months of fiscal year 2009, the Company recognized approximately 17% and 16%, respectively, of net revenues from domestic distributors that are recognized under agreements which provide for certain sales price rebates and limited product return privileges. Given the uncertainties associated with the levels of pricing rebates, the ultimate sales price on domestic distributor sales transactions is not fixed or determinable until domestic distributors sell the merchandise to the end-user. At the time of shipment to domestic distributors, the Company records a trade receivable and deferred revenue at the distributor purchasing price since there is a legally enforceable obligation from the distributor to pay for the products delivered. The Company relieves inventory as title has passed to the distributor and recognizes deferred cost of sales in the same amount. "Deferred income on shipments to distributors" represents the difference between deferred revenue and deferred cost of sales and is recognized as a current liability until such time as the distributor confirms a final sale to its end customer. At March 29, 2009, the Company had approximately $38.3 million of deferred revenue and $7.0 million of deferred cost of sales recognized as $31.3 million of "Deferred income on shipment to distributors." At June 29, 2008, the Company had approximately $46.2 million of deferred revenue and $8.4 million of deferred cost of sales recognized as $37.8 million of "Deferred income on shipment to distributors." The Company believes that its deferred costs of revenues have limited risk of material impairment, as the Company offers stock rotation privileges to distributors (up to 3% to 5% of quarterly purchases) which enable distributors to rotate slow moving inventory. In addition, stock rotated inventory that is returned to the Company is generally resalable. The Company reviews distributor ending on-hand inventory balances, as well as orders placed on the Company to ensure that distributors are not overstocking parts and are ordering to forecasted demand. To the extent the Company had a significant reduction in distributor price or grant significant price rebates, there could be a material impact on the ultimate revenue and gross profit recognized. The price rebates that have been remitted back to distributors have ranged from $1.5 million to $3.1 million per quarter.

The Company's sales to international distributors are made under agreements which permit limited stock return privileges but not sales price rebates. Revenue on these sales is recognized upon shipment at which time title passes. The Company has reserves to cover expected product returns. If product returns for a particular fiscal period exceed or are below expectations, the Company may determine that additional or less sales return allowances are required to properly reflect its estimated exposure for product returns. Generally, changes to sales return allowances have not had a significant impact on operating margin.

Income Taxes

The Company must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, tax benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to the tax provision in a subsequent period.

The calculation of the Company's tax liabilities involves uncertainties in the application of complex tax regulations. In the first quarter of fiscal year 2008, the Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of SFAS No. 109 ("FIN 48"), and related guidance. As a result of the implementation of FIN 48, the Company recognizes liabilities for uncertain tax positions based on the two-step process prescribed in the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires the Company to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as the Company has to determine the probability of various possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. For a discussion of current tax matters, see "Note 11. Income Taxes" in Part I, Item 1 of this Form 10-Q.

Results of Operations

The table below summarizes the income statement items for the three months and
nine months ended March 29, 2009 and March 30, 2008 as a percentage of total
revenue and provides the percentage change in absolute dollars of such items
comparing the interim period ended March 29, 2009 to the corresponding period
from the prior fiscal year:

                         Three Months Ended                   Nine Months Ended
                 March 29,   March 30,   Increase/    March 29,   March 30,   Increase/
                   2009        2008      (Decrease)     2009        2008      (Decrease)

Revenues          100.0%      100.0%       (33%)       100.0%      100.0%       (12%)
Cost of sales      26.2        22.5         (21)        24.2        22.7         (6)
Gross profit       73.8        77.5         (36)        75.8        77.3         (14)
Expenses:
Research and       22.3        16.6         (10)        18.6        16.7         (3)
development
Selling, general
and
administrative     15.1        11.9         (14)        13.2        11.7         (2)
Restructuring        -           -                       0.2          -          100
                   37.4        28.5         (12)        32.0        28.4         (2)
Operating income   36.4        49.0         (50)        43.8        48.9         (21)
Interest expense   (6.2)       (4.8)        (13)        (5.3)       (5.0)        (7)
Interest income     2.7         2.5         (26)         2.4         2.4         (12)
Gain on early
retirement
convertible         0.8          -                       3.0          -
senior notes
Income before
income taxes       33.7%       46.7%        (51)        43.9%       46.3%        (17)

Effective tax      19.5%       28.5%                    23.0%       29.2%
rates

Revenue for the quarter ended March 29, 2009 was $200.9 million, a decrease of $96.9 million or 33% from revenue of $297.9 million for the same quarter of the previous fiscal year. The decrease in revenue is due to lower domestic and international sales as a result of the global recession. The average selling price ("ASP") of $1.59 per unit in the third quarter of fiscal year 2009 was relatively flat as compared to the third quarter of fiscal year 2008 ASP of $1.57 per unit. Geographically, international revenues were $135.7 million or 68% of revenues, a decrease of $74.2 million as compared to international revenues of $209.9 million or 70% of revenues for the same quarter of the previous fiscal year. Internationally, revenues to Rest of the World ("ROW"), which is primarily Asia excluding Japan, represented $80.7 million or 40% of revenues, while sales to Europe and Japan were $27.9 million or 14% of revenues and $27.1 million or 14% of revenues, respectively. Domestic revenues were $65.2 million or 32% of revenues in the third quarter of fiscal year 2009, a decrease of $22.7 million, from $88.0 million or 30% of revenues in the same period in fiscal year 2008.

Revenue for the nine months ended March 29, 2009 was $760.5 million, a decrease of $107.6 million or 12% from revenue of $868.1 million for the same period of the previous fiscal year. The decrease in revenue for the nine-month period was due to similar factors as the three-month period discussed above. The ASP for the first nine-month period of fiscal year 2009 was relatively flat at $1.53 per unit compared to $1.54 per unit in the same period of fiscal year 2008. Geographically, international revenues were $532.8 million or 70% of revenues, decreased $79.1 million from international revenues of $611.9 million or 70% of revenues for the same period of the previous fiscal year. Internationally, revenues to ROW, represented $304.2 million or 40% of revenues, while sales to Europe and Japan were $127.8 million or 17% of revenues and $100.8 million or 13% of revenues, respectively. Domestic revenues were $227.7 million or 30% of revenues in the first nine-month period of fiscal year 2009, a decrease of $28.5 million, compared to $256.2 million or 30% of revenues in the same period in fiscal year 2008.

Research and development ("R&D") expenses for the quarter ended March 29, 2009 were $44.7 million, a decrease of $4.9 million or 10% from R&D expenses of $49.6 million for the same period in the previous fiscal year. The decrease in R&D expenses was primarily due to a $3.4 million decrease in employee profit sharing and a $2.2 million decrease in compensation costs related to the impact of requiring employees to take approximately 2.5 weeks of vacation or time-off without pay and the reduction in workforce that occurred during the second quarter of fiscal year 2009. The decrease in R&D was also due to $0.5 million decrease in other R&D expenses such as software and equipment maintenance fees. Partially offsetting these decreases to R&D expense was a $1.2 million increase in stock-based compensation.

R&D expenses for the nine months ended March 29, 2009 were $141.4 million, a decrease of $3.8 million or 3% from R&D expenses of $145.2 million for the same period in the previous fiscal year. The decrease in R&D expenses was primarily due to a $3.7 million decrease in employee profit sharing. In addition, compensation costs decreased $0.5 million due to the impact of requiring employees to take approximately 4.5 weeks of vacation or time-off without pay during this period, which was partially offset by the impact of higher average headcount in fiscal year 2009. The decrease in R&D expense was also due to a $1.1 million decrease in other R&D expenses such as software and equipment maintenance fees. Partially offsetting these decreases to R&D expenses was a $1.5 million increase in stock-based compensation.

Selling, general and administrative expenses ("SG&A") for the quarter ended March 29, 2009 were $30.4 million, a decrease of $5.0 million or 14% from SG&A expenses of $35.4 million for the same period in the previous fiscal year. The decrease in SG&A expenses was primarily due to a $2.5 million decrease in employee profit sharing and a $1.5 million decrease in compensation costs related to the impact of requiring employees to take approximately 2.5 weeks of vacation or time-off without pay and the reduction in workforce that occurred during the second quarter of fiscal year 2009. The decrease in SG&A expenses was also due to a $1.8 million decrease in other SG&A expenses such as advertising and travel costs. Partially offsetting these decreases to SG&A expenses was a $0.8 million increase in stock-based compensation.

SG&A expenses for the nine months ended March 29, 2009 were $100.1 million, a decrease of $1.7 million or 2% from SG&A expenses of $101.8 million for the same period in the previous fiscal year. The decrease in SG&A expenses was primarily due to a $2.8 decrease in employee profit sharing and a $1.4 million decrease in other SG&A expenses such as legal and advertising costs. Partially offsetting these decreases was a $1.1 million increase in stock-based compensation and a $1.4 million increase in compensation costs related to an increase in employee headcount and annual salary increases partially offset by the impact of requiring employees to take approximately 4.5 weeks of vacation or time-off without pay during this period.

During the second quarter of fiscal year 2009, the Company responded to lower sales levels and the uncertain business climate by reducing its workforce by approximately 100 employees. The $1.6 million charge represented severance costs incurred in connection with this workforce reduction and the majority of these severance amounts were paid during the December quarter. In addition, at the beginning of the fourth quarter of fiscal year 2009, the Company responded to continued lower sales levels and the uncertain business climate by reducing its workforce by another approximately 130 employees. The Company anticipates incurring a restructuring charge of approximately $2.0 million during the fourth quarter of fiscal year 2009. The $2.0 million charge represents the severance costs incurred in connection with this workforce reduction; the majority of these severance amounts will be paid during the June quarter. In summary, during fiscal year 2009, the Company has had two reductions in workforce that have eliminated approximately 230 positions or 5% of its workforce. The annual savings as a result of lower labor costs are expected to be approximately $14.5 million.

Interest expense was $12.5 million and $40.2 million for the third quarter and the nine-month period ended March 29, 2009, decreases of $1.9 million and $3.2 million, respectively, from the corresponding periods of fiscal year 2008. The decreases in interest expense were primarily due to the retirement of $230.0 million face value of the Company's 3.125% Convertible Senior Notes during the second and third quarters of fiscal year 2009.

Interest income was $5.4 million and $18.5 million for the third quarter and the nine-month period ended March 29, 2009, decreases of $1.9 million and $2.5 million, respectively, from the corresponding periods of fiscal year 2008. Interest income decreased due to a decrease in the average interest rate earned on the Company's cash, cash equivalents and marketable securities balance.

The Company's tax rate for the third quarter of fiscal year 2009 was 19.5% as compared to 28.5% in the same quarter of fiscal year 2008. The decrease in the tax rate was primarily due to a quarterly discrete tax benefit totaling $5.7 million recognized during the third quarter of fiscal year 2009, primarily related to an increase in domestic manufacturing tax benefits in prior years, as well as the positive impact of the reinstatement of the R&D tax credit in the second quarter of fiscal 2009 on the estimated annual effective tax rate. The Company's estimated annual effective tax rate excluding discrete items and other quarterly adjustments is approximately 28%.

The Company's tax rate for the nine months ended March 29, 2009 was 23% as compared to 29.2% in the corresponding period of fiscal year 2008. The Company's tax rate for this period is lower primarily due to quarterly discrete tax benefits recognized in each of the first three quarters related to ETI export benefit settlement with the IRS, the reinstatement of the R&D tax benefit and the increase in domestic manufacturing tax benefits from prior years.

The Company's effective tax rate is lower than the federal statutory rate of 35% as a result of lower tax rates on the earnings of its wholly-owned foreign subsidiaries, principally in Singapore and Malaysia. The Company has a partial tax holiday through July 2015 in Malaysia and a partial tax holiday in Singapore through August 2011. In addition, the Company receives tax benefits from non-taxable interest income, domestic manufacturing and R&D tax credits.

Factors Affecting Future Operating Results

Except for historical information contained herein, the matters set forth in this Form 10-Q, including the statements in the following paragraphs, are forward-looking statements that are dependent on certain risks and uncertainties including such factors, among others, as the timing, volume and pricing of new orders received and shipped during the quarter, the timely introduction of new processes and products; increases in costs associated with utilities, transportation and raw materials; currency fluctuations; the effects of adverse economic conditions in the United States and international markets and other factors described below and in "Item 1A - Risk Factors" section of this Quarterly Report on Form 10-Q.

As the Company enters its June quarter, there is continued uncertainty forecasting operating results due to the global recession. Forecasting operating results in the current environment is difficult, particularly since lead times are shorter than usual as customers tend to order only what they urgently need. However, the Company's book to bill ratio was slightly positive in the March quarter and the Company is encouraged going into the fourth quarter as it expects to see some stability in customer bookings. The Company currently anticipates that its fourth quarter revenues will be down 2% to up 4% over the third quarter. In order to meet these expectations, turns business, or bookings that are recorded and shipped during the quarter, will need to remain at a high level as customers order to current demand.

The Company will continue to control costs where possible. Subsequent to the end of the third quarter, the Company reduced its workforce by approximately 130 employees to further reduce its cost structure. As a result of the reduction in workforce the Company anticipates incurring a restructuring charge of approximately $2.0 million during the fourth quarter of fiscal year 2009. Over the past few quarters in addition to workforce reductions the Company has substantially reduced variable compensation benefits. In addition, during the fourth quarter the Company will require employees to take one week of vacation or unpaid time and will implement a temporary reduction in base pay of 10% for all employees. The Company expects these tight expense controls will allow the Company to maintain pre-tax profits in the low to mid thirties range as a percentage of net sales.

Although the Company believes that it has the product lines, manufacturing facilities and technical and financial resources for its current operations, sales and profitability could be significantly affected by factors described above and other factors. Additionally, the Company's common stock could be subject to significant price volatility should sales and/or earnings fail to meet expectations of the investment community. Furthermore, stocks of high technology companies are subject to extreme price and volume fluctuations that are often unrelated or disproportionate to the operating performance of these companies.

Liquidity and Capital Resources

At March 29, 2009, cash, cash equivalents and marketable securities totaled $920.0 million and working capital was $995.5 million. The Company's cash, cash equivalents and marketable securities balance decreased $46.7 million as compared to June 29, 2008 primarily due to the following cash outflows: $207.3 million to retire $230.0 million face value of its 3.125% Convertible Senior Notes; $144.8 million for the payment of cash dividends, representing $0.64 per share; $35.5 million for capital asset additions and $25.8 million to purchase its common stock. These cash outflows were offset by positive cashflow from . . .