Overview

Linear Technology Corporation, a member of the S&P 500, has been designing, manufacturing and marketing a broad line of high performance analog integrated circuits for major companies worldwide for three decades. The Company's products

provide an essential bridge between our analog world and the digital electronics in industrial, medical, instrumentation, communications, networking, automotive, computer, consumer, and military and aerospace systems. Linear Technology produces power management, data conversion, signal conditioning, RF and interface ICs, µModule subsystems, and wireless sensor network products.

Fourth quarter revenues of $330.0 million increased $17.7 million or 5.7% over the previous quarter's revenue of $312.4 million and decreased $28.5 million or 8.0% from $358.6 million reported in the fourth quarter of fiscal year 2011. Net income of $103.3 million increased $4.8 million or 4.9% over the third quarter of fiscal year 2012 and decreased $54.9 million or 34.7% from the fourth quarter of fiscal year 2011. Net income for the fourth quarter of fiscal year 2011 benefited from a lower tax rate of 9.5% compared to the fourth quarter of fiscal year 2012 rate of 26.5%. The Company's tax rate in the prior year quarter included a quarterly tax benefit from a settlement with the IRS related to its audit of prior fiscal years. Diluted earnings per share of $0.44 per share in the fourth quarter of fiscal year 2012 increased $0.02 per share or 5% over the third quarter of fiscal year 2012 and decreased $0.24 per share or 35% from the fourth quarter of fiscal year 2011.

Revenue for fiscal year 2012 was $1.27 billion, a decrease of 14.6% or $217.3 million from revenue of $1.48 billion for the previous fiscal year. Net income of $398.1 million for fiscal year 2012 decreased $182.7 million or 31.5% from $580.8 million reported in the previous fiscal year. Fiscal year 2012 results were impacted by a $3.2 million charge related to acquisition costs for Dust Networks while the previous fiscal year benefited from a $4.2 million gain related to various legal settlements and from a lower tax rate of 19.8% compared to 25.7% in fiscal 2012. Diluted earnings per share for fiscal year 2012 was $1.70, a decrease of 32% or $0.80 per share from the prior fiscal year.

Critical Accounting Policies

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 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.

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 fiscal years 2012 and 2011, the Company recognized approximately 16% and 14%, 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 July 1, 2012, the Company had approximately $51.5 million of deferred revenue and $10.2 million of deferred cost of sales recognized as $41.3 million of "Deferred income on shipments to distributors." At July 3, 2011, the Company had approximately $59.7 million of deferred revenue and $12.1 million of deferred cost of sales recognized as $47.6 million of "Deferred income on shipments 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 were to have 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 $2.7 million to $3.2 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.

Inventory Valuation

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.

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. The Company recognizes liabilities for uncertain tax positions based on the two-step process prescribed in the authoritative accounting literature. 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. Refer to Note 10 of Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for a discussion of current tax matters.

Results of Operations

The table below presents the income statement items as a percentage of revenues and provides the percentage change of such items compared to the prior fiscal year amount.

                                          Fiscal Year Ended                Percentage Change
                                   July 1,     July 3,    June 27,      2012 Over      2011 Over
                                    2012        2011        2010          2011            2010
Revenues                           100.0  %    100.0  %    100.0  %        (15 )%            27 %
Cost of sales                       24.7        21.9        23.0            (4 )             21
Gross profit                        75.3        78.1        77.0           (18 )             29
Expenses:
Research & development              17.7        15.3        17.0            (1 )             14
Selling, general & administrative   11.7        11.1        11.8           (11 )             20
                                    29.4        26.4        28.8            (5 )             16
Operating income                    45.9        51.7        48.2           (24 )             36
Interest expense                    (3.8 )      (3.6 )      (6.5 )         (12 )            (28 )
Acquisition related costs           (0.2 )         -           -             -                -
Interest and other income            0.4         0.7         1.1           (57 )            (16 )
Loss on early retirement of
convertible senior notes               -           -        (0.9 )           -                -
Income before income taxes          42.3  %     48.8  %     41.9  %        (26 )             48
Tax rate                            25.7  %     19.8  %     26.3  %

In each of the last three years, changes in the global macroeconomic climate have had a significant impact on the Company's revenues. In the second half of fiscal 2009 and the first half of fiscal year 2010 the Company's results were adversely affected by the worldwide recession attributed to global credit availability problems. In the second half of fiscal 2010, as well as in fiscal 2011, the Company experienced a snapback from the recession. Revenues increased rapidly resulting in extended lead times which caused customers to over order so that they would have adequate safety stock inventory. In fiscal year 2012, there were once again negative global macroeconomic concerns which dampened economic growth. All of the above have contributed to unusually large swings in quarterly and year over year revenue comparisons over the past three years.

Fiscal year 2012 revenues of $1.27 billion decreased $217.3 million or 15% from record annual revenues of $1.48 billion in fiscal year 2011. The decrease in revenue was due to a declining global macroeconomic environment compared to the previous fiscal year. In response to the declining global economic environment, customers were more cautious and lowered their inventory balances. In fiscal 2012 revenues decreased in the industrial, communication, computer, consumer and military/space end-markets. Most of these declines were broad-based except for in the computer end-market where there was a large decrease in the Company's products used in computer tablets. Partially offsetting these decreases was an improvement in the automotive end-market. The Company has been focusing its efforts in the automotive end-market because of the increasing electronic content in automobiles. The Company continues to reduce its exposure to the consumer and cell-phone end-markets in favor of the industrial, automotive, communication infrastructure and military end-markets. The Company's bookings in the industrial, automotive, communication infrastructure, and military end-markets in aggregate were 84% of bookings in fiscal year 2012, as compared to 82% of booking for fiscal year 2011, 76% in fiscal 2010, and 64% in fiscal 2005.

Revenue for fiscal year 2012 decreased from the prior fiscal year due to a decrease in the number of units shipped, offset by an increase in the average selling price ("ASP"). The number of units shipped decreased by approximately 20% from 862.1 million units in the fiscal year 2011 to 692.1 million units in the fiscal year 2012. The ASP for fiscal year 2012 increased approximately 4% over $1.74 per unit in fiscal year 2011 to $1.81 per unit in fiscal year 2012.

Geographically, revenues in fiscal year 2012 decreased in each major geographical region compared to the prior fiscal year. International revenues were $900.1 million or 71% of revenues in fiscal year 2012, a decrease of $178.1 million from international revenues of $1,078.2 million or 73% of revenues in the previous fiscal year. Internationally, sales to Rest of the World ("ROW"), which is primarily Asia excluding Japan, represented $452.4 million or 36% of revenues, while sales to Europe and Japan were $243.2 million or 19% of revenues and $204.5 million or 16% of revenues, respectively. Domestic revenues were $366.5 million or 29% of revenues in fiscal year 2012, a decrease of $39.2 million from domestic revenues of $405.7 million or 27% of revenues in fiscal year 2011.

The Company achieved record annual revenues in fiscal year 2011 of $1.48 billion, an increase of $314.0 million or 27% over revenue of $1.17 billion in fiscal year 2010. The increase in revenue was primarily due to an improved global macro-economic climate during the first half of fiscal 2011. In addition, the beginning of the prior fiscal year was adversely impacted by the

worldwide global credit and financial crisis, whereas the results for the second half of the prior fiscal year and the first half of the current fiscal year reflected a recovery from the worldwide recession. During the third and fourth quarters of fiscal year 2011 the Company began to see a slow down in revenue growth primarily related to the natural disasters in Japan and the related supply disruptions and the general economic sluggishness related to the US and European debt issues.

Revenue for fiscal year 2011 grew due to an increase in the number of units shipped and due to an increase in the ASP. The number of units shipped increased by approximately 132 million units or 18% from 730 million units in fiscal year 2010 to 862 million units in fiscal year 2011. The ASP for fiscal year 2011 increased approximately 9% from $1.60 per unit in fiscal year 2010 to $1.74 per unit in fiscal year 2011.

Geographically, revenues in fiscal year 2011 increased in each major geographical region compared to the prior fiscal year. International revenues were $1,078.2 million or 73% of revenues in fiscal year 2011, an increase of $236.4 million over international revenues of $841.8 million or 72% of revenues in the previous fiscal year. Internationally, sales to ROW, represented $565.6 million or 38% of revenues, while sales to Europe and Japan were $297.1 million or 20% of revenues and $215.5 million or 15% of revenues, respectively. Domestic revenues were $405.7 million or 27% of revenues in fiscal year 2011, an increase of $77.5 million over domestic revenues of $328.2 million or 28% of revenues in fiscal year 2010.

Gross profit for fiscal year 2012 was $954.1 million, a decrease of $205.4 million or 18% from gross profit of $1,159.5 million in fiscal year 2011. Gross profit as a percentage of revenues decreased to 75.3% of revenues in fiscal year 2012 as compared to 78.1% of revenues in fiscal year 2011. The decrease in gross profit as a percentage of revenues in fiscal year 2012 was primarily due to spreading fixed costs over a lower sales base, partially offset by slightly higher ASP's and lower employee profit sharing.

Gross profit for fiscal year 2011 was $1,159.5 million, an increase of $258.6 million or 29% over gross profit of $900.9 million in fiscal year 2010. Gross profit as a percentage of revenues increased to 78.1% of revenues in fiscal year 2011 as compared to 77.0% of revenues in fiscal year 2010. The increase in gross profit as a percentage of revenues in fiscal year 2011 was primarily due to spreading fixed costs over a higher sales base and improved ASPs. Partially offsetting these improvements to gross profit as a percentage of revenues were increases in employee profit-sharing; increases in labor costs as a result of increases in headcount; an unfavorable exchange rate at the Company's test and assembly facilities located in Singapore and Penang; and increases in raw material costs, primarily gold.

Research and development ("R&D") expense for fiscal year 2012 was $224.5 million, a decrease of $2.0 million or 1% from R&D expense of $226.5 million in fiscal year 2011. The decrease in R&D expense was primarily due to a $9.8 million decrease in employee profit sharing and a $3.9 million decrease in stock-based compensation costs. Offsetting these decreases was a $6.3 million increase in compensation costs primarily due to increased headcount from the acquisition of Dust Networks ("Dust") in December 2011 and an increase in annual merit compensation. In addition, other R&D expenses increased $3.8 million due to higher costs such as masks, depreciation, supplies and $1.6 million of intangible amortization related to Dust.

R&D expense for fiscal year 2011 was $226.5 million, an increase of $27.6 million or 14% over R&D expense of $199.0 million in fiscal year 2010. The increase in R&D expenses was primarily due to an $11.7 million increase in employee profit-sharing and a $13.3 million increase in compensation costs. Compensation costs increased due to increased headcount; the prior year period had a temporary 5% reduction in base pay for part of the period; and fiscal year 2011 had an additional week of labor costs as the period had 27 pay periods rather than the customary 26 pay periods. In addition, other R&D expenses such as computer and software costs and employee travel expenses increased $2.6 million.

Selling general and administrative ("SG&A") expense for fiscal year 2012 was $147.6 million, a decrease of $18.1 million or 11% from SG&A expense of $165.7 million in fiscal year 2011. The decrease in SG&A expenses was primarily due to a $7.3 million decrease in legal expense as the prior year period had a one-time legal charge of $5.3 million. In addition, SG&A expense decreased due to a $7.5 million decrease in employee profit sharing and a $2.9 million decrease in stock-based compensation costs. Other SG&A expenses decreased $3.5 million primarily due to lower advertising costs. Offsetting these decreases was a $3.1 million increase in compensation costs due to increased headcount and an increase in annual merit compensation.

SG&A expense for fiscal year 2011 was $165.7 million, an increase of $27.1 million or 20% over SG&A expense of $138.5 million in fiscal year 2010. The increase in SG&A expenses was primarily due to a $9.0 million increase in employee profit sharing and a $7.4 million increase in compensation costs. Compensation costs increased due to increased headcount; the prior year period had a temporary 5% reduction in base pay for part of the period; and fiscal year 2011 had an additional week of labor costs due to the period having 27 pay periods rather than the customary 26 pay periods. SG&A increased $5.3 million due to a one-time legal charge that occurred during the first quarter of fiscal year 2011 and a $5.4 million increase in other SG&A expenses, primarily advertising and employee travel expenses.

Interest expense for fiscal year 2012 was $47.5 million, a decrease of $6.7 million from $54.2 million in fiscal year 2011. Interest expense decreased due to the cash redemption of $395.8 million of the Company's 3.125% Convertible Senior Notes on November 1, 2010.

Interest expense for fiscal year 2011 was $54.2 million, a decrease of $21.2 million from $75.4 million in fiscal year 2010. The decrease in interest expense was primarily due to the cash redemption of $395.8 million (the remaining principal amount) of the Company's 3.125% Convertible Senior Notes on November 1, 2010 and due to the repurchase of $154.9 million (principal amount) of the Company's 3.0% Convertible Senior Notes in the fourth quarter of fiscal year 2010.

The Company incurred $3.2 million in transaction costs related to the acquisition of Dust Networks during the second quarter of fiscal 2012. Included in the $3.2 million were $1.7 million of Dust's acquisition expenses.

Interest and other income for fiscal year 2012 was $4.6 million, a decrease of $6.1 million or 57% from interest and other income of $10.7 million in fiscal year 2011. Interest and other income decreased because the prior year period included a gain of $4.2 million due tosettlements of lawsuits during the third and fourth quarters of fiscal year 2011. In addition, interest and other income decreased due to a decrease in the average interest rate earned on the Company's cash, cash equivalents and marketable securities balances.

Interest and other income for fiscal year 2011 was $10.7 million, a decrease of $2.1 million or 16% from interest income and other income of $12.8 million in fiscal year 2010. The Company recognized a gain of $4.2 million on the settlements of two legal matters during fiscal year 2011 that was included in interest and other income. Interest income and other income decreased due to lower cash, cash equivalent and marketable securities balances as a result of the cash redemption of $395.8 million (principal amount) of the Company's 3.125% Convertible Senior Notes in the second quarter of fiscal year 2011 and a decrease in the average interest rate earned on the Company's cash, cash equivalents and marketable securities balances.

The Company's effective tax rate was 25.7% in fiscal year 2012 compared to 19.8% in fiscal year 2011. The increase in the effective tax rate from fiscal year 2011 to fiscal year 2012 was primarily due to discrete tax benefits recognized in the second, third and fourth quarters of fiscal year 2011 as noted below. During fiscal 2012, the Company's annual effective tax rate was negatively impacted by the expiration of the federal R&D tax credit legislation commencing with the third quarter of fiscal 2012. This decrease was partially offset by a $4 million discrete tax benefit recognized in the third quarter of fiscal year 2012 primarily for reversal of estimated liabilities for uncertain tax positions for years that are no longer subject to audit . The Company expects that its annual effective tax rate for fiscal year 2013 will be approximately 27% absent quarterly discrete tax items, if any.

During the fourth quarter of fiscal year 2011 the Company and the Appeals Division of the Internal Revenue Service ("IRS Appeals") reached an agreement to close all remaining matters pertaining to fiscal years 2002 through 2006. Accordingly, the Company released all remaining liabilities for uncertain tax positions pertaining to fiscal years 2002 through 2006 and recognized a discrete tax benefit totaling $29.7 million primarily due to the reversal of conservatively estimated liabilities for uncertain tax positions. As a result of the discrete tax benefit, the Company's effective tax rate for the fourth quarter of fiscal year 2011 was 9.5%.

In addition to the discrete tax benefit recognized in the Company's fourth quarter noted above, the Company recognized an additional $19 million in net discrete tax benefits during the second and third quarters of fiscal 2011. These discrete tax benefits related primarily to the release of estimated liabilities for uncertain tax positions due to a settlement between the Company and IRS Appeals for certain disputed refund claims for export tax benefits the Company claimed as its extraterritorial income ("ETI") exclusion under the Internal Revenue Code for fiscal years 2002 through 2006. In addition, the Company recognized discrete tax benefits for the reversal of estimated liabilities for uncertain tax positions for years that are no longer subject to audit and for the reinstatement of the R&D tax credit.

The Company's effective tax rate was 19.8% in fiscal year 2011 compared to 26.3% in fiscal year 2010. The Company's tax rate for fiscal year 2011 was lower primarily due to discrete tax benefits recognized in the second, third and fourth quarters noted above; the reinstatement of the R&D tax credit for the full fiscal year commencing with the second quarter of fiscal 2011, and increased tax benefits from domestic manufacturing. The Company's annual effective tax rate for the fiscal year 2011 was 26.5% exclusive of discrete items.

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 2014 which the Company expects to extend if certain conditions are met. In addition, the Company receives tax benefits primarily 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 Annual Report on Form 10-K, 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, timely ramp-up of new facilities, 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 and financial conditions in the United States and throughout the world; and other factors described below and in "Item 1A - Risk Factors" section of this Annual Report on Form 10-K.

The Company's fourth quarter financial results were in the mid range of its . . .