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.

First quarter revenue of $236.1 million increased $28.1 million or 14% over the fourth quarter of fiscal year 2009 and decreased 24% or $74.2 million from $310.4 million reported in the first quarter of fiscal year 2009. Net income of $60.7 million increased $9.3 million or 18% over the fourth quarter of fiscal year 2009 and decreased $41.6 million or 41% from the first quarter of fiscal year 2009 which in addition to higher revenue had a lower tax rate of 24% compared to 28% this quarter. Diluted earnings per share ("EPS") increased $0.04 cents per share over the adjusted fourth quarter fiscal year 2009 results. Diluted EPS of $0.27 in the first quarter of fiscal year 2010 was impacted negatively by approximately $0.025 cents per share due to the adoption of two new accounting standards. For a further discussion of the newly adopted accounting standards see Note 1 to the consolidated financial statements, included in Part 1, "Financial Information." The Company retrospectively adopted the new accounting standards, which adjusted the first quarter of fiscal year 2009 results. The Company achieved both strong sequential quarterly revenue and profit growth; however, on a year-over-year basis the Company's results were down as the Company continues to feel the effects of the global recession.

Critical Accounting Estimates

There have been no significant changes to the Company's critical accounting policies during the quarter ended September 27, 2009, as compared to the previous disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 2009.

Results of Operations

The table below summarizes the income statement items for the three months ended
September 27, 2009 and September 28, 2008 as a percentage of total revenue and
provides the percentage change in absolute dollars of such items comparing the
interim period ended September 27, 2009 to the corresponding period from the
prior fiscal year:

                                     Three Months Ended
                         September 27,   September 28,   Increase/
                             2009            2008*       (Decrease)

Revenues                    100.0%          100.0%         (24%)
Cost of sales                25.2            23.0           (17)
Gross profit                 74.8            77.0           (26)
Expenses:
Research and development     19.2            16.4           (11)
Selling, general and
administrative               13.4            12.0           (15)
                             32.6            28.4           (13)
Operating income             42.2            48.6           (34)
Interest expense             (8.1)           (7.3)          (16)
Interest income               1.6             2.2           (45)
Income before
income taxes                 35.7%           43.6%          (38)
Effective tax rates          28.0%           24.3%

* As adjusted for the adoption of ASC 470-20-10 to 35 (see Note 1 to the consolidated financial statements, included in Part 1, "Financial Information").

Gross profit of $176.6 million for the quarter ended September 27, 2009 decreased $62.3 million or 26% from the gross profit of $238.9 million in the first quarter of fiscal year 2009. Gross profit as a percentage of revenues decreased to 74.8% in the first quarter of fiscal year 2010 as compared to 77.0% for the same period in the previous fiscal year. The decrease in gross profit as a percentage of revenues for the quarter ended September 27, 2009 was primarily due to spreading fixed costs over a lower sales base.

Research and development ("R&D") expenses for the quarter ended September 27, 2009 were $45.3 million, a decrease of $5.5 million or 11% from R&D expenses of $50.9 million for the same period in the previous fiscal year. The decrease in R&D expenses was primarily due to a $4.0 million decrease in compensation costs related to the reduction in workforce that occurred in the second and fourth quarters of fiscal year 2009 and the 10% temporary reduction in base pay that occurred during the fourth quarter of fiscal year 2009. The decrease in R&D was also due to a $2.5 million decrease in the employee profit sharing accrual and a $0.7 million decrease in other R&D expenses such as mask costs. Partially offsetting these decreases to R&D expense was a $1.7 million increase in stock-based compensation.

Selling, general and administrative expenses ("SG&A") for the quarter ended September 27, 2009 were $31.7 million, a decrease of $5.4 million or 15% from SG&A expenses of $37.1 million for the same period in the previous fiscal year. The decrease in SG&A expenses was primarily due to a $1.8 million decrease in the employee profit sharing accrual and a $1.8 million decrease in compensation costs related to the reduction in workforce that occurred in the second and fourth quarters of fiscal year 2009 and the 10% temporary reduction in base pay that occurred during the fourth quarter of fiscal year 2009. The decrease in SG&A expenses was also due to a $2.8 million decrease in other SG&A expenses such as advertising and legal costs. Partially offsetting these decreases to SG&A expense was a $1.0 million increase in stock-based compensation.

Interest expense of $19.1 million for the quarter ended September 27, 2009 decreased $3.6 million from the adjusted amount in the corresponding period of fiscal year 2009. The decrease in interest expense was primarily due to the retirement of $304.2 million principal amount of the Company's 3.125% Convertible Senior Notes during fiscal year 2009 and the first quarter of fiscal year 2010.

Interest income of $3.9 million for the quarter ended September 27, 2009 decreased $3.1 million from the corresponding period of fiscal year 2009. Interest income decreased due to a decrease in the average interest rate earned on the Company's cash, cash equivalents and marketable securities balances. In addition, the Company's cash, cash equivalents and marketable securities balances decreased as the Company used its excess cash reserves to purchase $304.2 million principal amount of the Company's 3.125% Convertible Senior Notes during fiscal year 2009 and the first quarter of fiscal year 2010.

The Company's tax rate for the first quarter of fiscal year 2010 was 28% as compared to the adjusted rate of 24.3% in the same quarter of fiscal year 2009. The increase in the tax rate was primarily due to a quarterly discrete tax benefit totaling $6.7 million recognized during the first quarter of fiscal year 2009, primarily related to an IRS settlement and the related reversal of liabilities for uncertain tax positions. The impact of this quarterly discrete tax benefit was partially offset by a higher R&D credit in the first quarter of fiscal year 2010 as the first quarter of fiscal year 2009 included no tax benefit for the R&D credit as this credit had expired and was not reinstated until the second quarter of fiscal year 2009.

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.

Notwithstanding the high rate of growth the Company achieved over the fourth quarter of fiscal year 2009, there is still some uncertainty looking ahead to the second quarter of fiscal year 2010. The financial effects of the global recession are certainly not over and continue to impact many of the Company's customers. Customer orders continue to call for short lead times and turns business, or bookings that are recorded and shipped during the quarter, remains at a high level. While there are some concerns that recent improvements in the overall marketplace are at least partially attributable to a replenishment of inventory stock, the Company continues to experience bookings improvement. Therefore, based upon our positive book to bill ratio and the strength of the recovery the Company appears to be witnessing in its automotive and industrial end-markets, the Company expects revenue to grow 2% to 5% over the first quarter of fiscal year 2010.

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 September 27, 2009, the Company's cash, cash equivalents and marketable securities balances were $909.5 million in aggregate, representing an increase of $40.7 million over the June 28, 2009 balances of $868.7 million. This increase was primarily due to positive cashflow from operations of $108.1 million. Working capital as of September 27, 2009 was $993.4 million. During the first quarter of fiscal year 2010, significant cash expenditures included $11.3 million for the net purchase of available-for-sale securities; $3.4 million for capital additions; $9.8 million face value to purchase and retire a portion of the 3.125% Convertible Senior Notes; $4.2 million to purchase its common stock and $49.9 million for the payment of a cash dividend, representing $0.22 per share in the first quarter of fiscal year 2010.

Accounts receivable totaled $113.2 million at the end of the first quarter of fiscal year 2010, an increase of $17.8 million from the end of the fourth quarter of fiscal year 2009. The increase is primarily due to higher shipments in the first quarter of fiscal year 2010 as compared to the fourth quarter of fiscal year 2009. Inventory totaled $49.3 million at the end of the first quarter of fiscal year 2010, a decrease of $3.1 million from the end of the fourth quarter of fiscal year 2009. The decrease was due to higher sales in the first quarter of fiscal year 2010 as compared to the fourth quarter of fiscal year 2009.

Accrued payroll and related benefits decreased $3.7 million from the fourth quarter of fiscal year 2009 primarily due to the payment of profit sharing partially offset by an increase to the profit sharing accrual and increases in other payroll liabilities. The Company accrues for profit sharing on a quarterly basis while distributing payouts to employees on a semi-annual basis during the first and third quarters of each fiscal year. Income taxes payable for the first quarter of fiscal year 2010 increased $17.9 million over the fourth quarter of fiscal year 2009 primarily due to the income tax provision of $23.6 million. Other accrued liabilities of $44.4 million increased $12.0 million over the fourth quarter of fiscal year 2009 primarily due to accrued interest on the Company's Convertible Senior Notes. The Company makes semi-annual interest payments during the second and fourth quarters of each fiscal year.

In October 2009, the Company's Board of Directors declared a cash dividend of $0.22 per share. The $0.22 per share dividend will be paid on November 25, 2009 to shareholders of record on November 13, 2009. The payment of future dividends will be based on the Company's financial performance.

Historically, the Company has satisfied its liquidity needs through cash generated from operations. Given its financial condition and historical operating performance, the Company believes that current capital resources and cash generated from operating activities will be sufficient to meet its liquidity, capital expenditures requirements, and debt retirement for the near future.

Off Balance-Sheet Arrangements

As of September 27, 2009, the Company had no off-balance sheet financing arrangements.

In April 2007, the Company issued $1.0 billion principal amount of 3.0% debentures due May 1, 2027 and $0.7 billion principal amount of 3.125% debentures due May 1, 2027. Through the first quarter of fiscal year 2010, the Company purchased and retired $304.2 million face value of its 3.125% Convertible Senior Notes. The Company pays cash interest at an annual rate of 3.0% and 3.125%, respectively, payable semiannually on November 1 and May 1 of each year, beginning November 1, 2007. See Note 8 to the consolidated financial statements, included in Part 1, "Financial Information," for additional information about the debentures.

Fair Value

As of September 27, 2009, the Company's cash and cash equivalents, and marketable securities investment portfolio had a fair value of $807.1 million. The Company's cash and cash equivalents, and marketable securities investment portfolio consists of money-market funds, U.S. Treasury securities, obligations of U.S. government-sponsored enterprises, municipal bonds, commercial debt and corporate debt securities. The Company currently does not hold any investments in auction rate securities or asset backed securities. Most of the Company's investments in debt instruments have an investment rating of AAA. As of September 27, 2009, the Company's cash and cash equivalents, and marketable securities investment portfolio had a remaining maturity of approximately one year. As of September 27, 2009, the Company's financial instruments measured at fair value totaled $807.1 million and were classified as Level 1 or Level 2 instruments.