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LLTC > SEC Filings for LLTC > Form 10-K on 19-Aug-2013All Recent SEC Filings

Show all filings for LINEAR TECHNOLOGY CORP /CA/ | Request a Trial to NEW EDGAR Online Pro

Form 10-K for LINEAR TECHNOLOGY CORP /CA/


19-Aug-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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 over three decades. The Company's products provide an essential bridge between our analog world and the digital electronics in communications, networking, industrial, automotive, computer, medical, instrumentation, 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.

Quarterly revenues of $327.3 million for the fourth quarter of fiscal year 2013 increased $12.7 million or 4.0% over the previous quarter's revenue of $314.5 million and decreased $2.7 million or 0.8% from $330.0 million reported in the fourth quarter of fiscal year 2012. Net income of $101.9 million decreased $9.0 million or 8.1% from the third quarter of fiscal year 2013 and decreased $1.4 million or 1.3% from the fourth quarter of fiscal year 2012. Net income in the third quarter of fiscal year 2013 benefited from a lower tax rate of 12.75% whereas the fourth quarter of fiscal year 2013 had a more normalized rate of 25.0%. The Company's tax rate in the third quarter of fiscal year 2013 was lower primarily due to cumulative benefits from the reinstatement of the federal Research and Develpment ("R&D") tax credit and secondarily due to the release of estimated tax liabilities for fiscal years that are no longer subject to audit. Diluted earnings per share of $0.43 per share in the fourth quarter of fiscal year 2013 decreased $0.03 per share or 6.5% from the third quarter of fiscal year 2013 due to the change in the tax rate and decreased $0.01 per share from the fourth quarter of fiscal year 2012.

Revenue for fiscal year 2013 was $1,282 million, an increase of 1.2% or $15.6 million over revenue of $1,267 million in the prior fiscal year. Net income of $406.9 million for fiscal year 2013 increased $8.8 million or 2.2% over $398.1 million reported in the previous fiscal year. The results for fiscal year 2013 benefited from a lower tax rate of 23.1% compared to 25.7% in fiscal year 2012. Diluted earnings per share for fiscal year 2013 was $1.71, an increase of $0.01 per share over 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 2013 and 2012, the Company recognized approximately 15% 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 June 30, 2013, the Company had approximately $54.8 million of deferred revenue and $10.7 million of deferred cost of sales recognized as $44.1 million of "Deferred income on shipments to distributors." 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." 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 $3.4 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 in dollars compared to the prior fiscal year amount.

                                         Fiscal Year Ended             Percentage Change
                                  June 30,    July 1,    July 3,    2013 Over     2012 Over
                                    2013        2012       2011        2012          2011
Revenues                           100.0  %   100.0  %   100.0  %         1 %         (15 )%
Cost of sales                       25.2       24.7       21.9            3            (4 )
Gross profit                        74.8       75.3       78.1            1           (18 )
Expenses:
Research & development              18.3       17.7       15.3            5            (1 )
Selling, general & administrative   11.8       11.7       11.1            3           (11 )
                                    30.1       29.4       26.4            4            (5 )
Operating income                    44.7       45.9       51.7           (2 )         (24 )
Interest expense                    (3.8 )     (3.8 )     (3.6 )         (2 )         (12 )
Acquisition related costs              -       (0.2 )        -            -             -
Interest and other income            0.3        0.4        0.7          (11 )         (57 )
Income before income taxes          41.2  %    42.3  %    48.8  %        (1 )         (26 )
Tax rate                            23.1  %    25.7  %    19.8  %

Fiscal year 2013 revenues of $1,282 million increased $15.6 million or 1% over revenues of $1,267 million in fiscal year 2012. Fiscal year 2013 revenues increased over the prior fiscal year due to increases in revenues in the industrial and automotive end-markets partially offset by lower revenues in the communication and consumer end-markets. The Company's computer and military end-market revenues were generally unchanged from the prior year. 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 86% of bookings in fiscal year 2013, as compared to 82% of bookings for fiscal year 2011, 76% in fiscal 2010, and 64% in fiscal 2005.

Revenues in fiscal year 2013 increased over the prior fiscal year due to an increase in the average selling price ("ASP") while the number of units shipped was down slightly. The ASP for fiscal year 2013 increased $0.03 or 2% to $1.84 per unit in fiscal year 2013 over $1.81 per unit in fiscal year 2012. The number of units shipped was down slightly to 691.0 million units in fiscal year 2013 from 692.1 million units in the fiscal year 2012.

Geographically, revenues in fiscal year 2013 increased in Rest of World ("ROW"), which is primarily Asia excluding Japan, and the United States offset by decreases in Japan and Europe. International revenues were $912.5 million or 71% of revenues in fiscal year 2013, an increase of $12.4 million over international revenues of $900.1 million or 71% of revenues in the previous fiscal year. Internationally, sales to ROW represented $486.8 million or 38% of revenues, while sales to Europe and Japan were $235.3 million or 18% of revenues and $190.4 million or 15% of revenues, respectively. Domestic revenues were $369.7 million or 29% of revenues in fiscal year 2013, an increase of $3.2 million over domestic revenues of $366.5 million or 29% of revenues in fiscal year 2012.

Fiscal year 2012 revenues of $1,267 million decreased $217.3 million or 15% from record annual revenues of $1,484 million in fiscal year 2011. The decrease in revenues 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.

Revenues 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 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 ROW were $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.

Gross profit for fiscal year 2013 was $959.7 million, an increase of $5.6 million or 1% over gross profit of $954.1 million in fiscal year 2012. Gross profit as a percentage of revenues decreased to 74.8% of revenues in fiscal year 2013 as compared to 75.3% of revenues in fiscal year 2012. The decrease in gross profit as a percentage of revenues in fiscal year 2013 was primarily due to a slight change in mix of products sold and higher factory costs primarily due to stronger foreign currencies partially offset by slightly higher ASP's and lower royalty costs.

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.

Research and development ("R&D") expense for fiscal year 2013 was $235.2 million, an increase of $10.7 million or 5% over R&D expense of $224.5 million in fiscal year 2012. The increase in R&D expense was primarily due to a $6.3 million increase in compensation costs due to increased headcount from the acquisition of Dust Networks ("Dust") that occurred at the end of the second quarter of fiscal 2012, annual salary increases resulting from employee performance reviews and increases in related fringe benefit costs. In addition, stock-based compensation costs increased $1.5 million and employee profit sharing increased $0.6 million. Other R&D expense increased $2.3 million primarily due to $1.6 million in intangible asset amortization and retention bonus costs related to the Dust acquisition as well as an increase in mask costs of $0.6 million.

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 expense increased $3.8 million due to higher costs such as masks, depreciation, supplies and $1.6 million of intangible amortization related to Dust.

Selling general and administrative ("SG&A") expense for fiscal year 2013 was $151.4 million, an increase of $3.8 million or 3% over SG&A expense of $147.6 million in fiscal year 2012. The increase in SG&A expense was primarily due to a $3.2 million increase in compensation costs primarily due to annual salary increases resulting from employee performance reviews and increases in related fringe benefit costs. In addition, employee profit sharing increased $0.8 million and employee stock-based compensation increased $0.8 million. Other SG&A expense decreased $1.0 million primarily due to lower legal expenses.

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 expense 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.

Interest expense for fiscal year 2013 was $48.3 million, an increase of $0.8 million over $47.5 million in fiscal year 2012 primarily due to higher non-cash interest expense from the amortization of the discount on the Company's 3.00% Convertible Senior Notes.

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.

The Company incurred $3.2 million in transaction costs related to the acquisition of Dust Networks during the second quarter of fiscal 2012.


Interest and other income for fiscal year 2013 was $4.1 million, a decrease of $0.5 million or 11% from interest and other income of $4.6 million in fiscal year 2012. Interest income decreased due to a lower average interest rate earned on the Company's cash, cash equivalents and marketable securities balances partially offset by higher cash, cash equivalents and marketable securities balances.

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 to settlements of lawsuits during fiscal year 2011. In addition, interest and other income decreased due to a lower average interest rate earned on the Company's cash, cash equivalents and marketable securities balances.

The Company's effective tax rate was 23.1% in fiscal year 2013 compared to 25.7% in fiscal year 2012. The decrease in the effective tax rate from fiscal year 2012 to fiscal year 2013 was primarily due to discrete tax benefits recognized in the third quarter of fiscal year 2013. During fiscal 2013, the Company's annual effective tax rate was positively impacted by the reinstatement of the federal R&D tax credit commencing with the third quarter of fiscal 2013, which resulted in a discrete tax benefit of $4.5 million. In addition, the Company recognized a $6.1 million discrete tax benefit in the third quarter primarily from the reversal of estimated liabilities for uncertain tax positions as a result of the expiration of open tax years (i.e. fiscal years that are no longer subject to IRS audit). The Company expects that its annual effective tax rate for fiscal year 2014 will be in the range of 25% to 26% absent quarterly discrete tax items, if any.

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 fiscal year 2011 totaling $48.8 million as noted below. In addition, the Company's annual effective tax rate for fiscal 2012 was negatively impacted by the expiration of the federal R&D tax credit legislation. This decrease was partially offset by a $4.0 million discrete tax benefit recognized in the third quarter of fiscal year 2012 primarily for the reversal of estimated liabilities for uncertain tax positions as a result of the expiration of open tax years. During fiscal year 2011 the Company and the Appeals Division of the Internal Revenue Service ("IRS Appeals") reached an agreement to close all 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 quarterly discrete tax benefits during the year totaling $37.7 million. In addition, the Company recognized discrete tax benefits totaling $11.1 million primarily for the reinstatement of the R&D tax credit and the reversal of estimated liabilities for uncertain tax positions as a result of the expiration of open tax 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 2014 which the Company expects to extend if certain conditions are met. In addition, the Company receives tax benefits as a domestic manufacturer and from R&D tax credits and non-taxable interest income.

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.

Quarterly revenues of $327.3 million for the fourth quarter of fiscal year 2013 increased $12.7 million or 4.0% sequentially over the third quarter of fiscal year 2013 primarily due to increased revenues in the automotive and industrial end-markets. In addition, both gross margin and operating margin improved over the third quarter and continue at industry leading levels. Fiscal year 2013 suffered from a difficult macro economic environment, however, the Company grew annual revenues 1.2% over the prior fiscal year and increased net income and earnings per share. Heading into the new fiscal year, the Company is optimistic about its future growth prospects. The fourth quarter of fiscal year 2013 was a good bookings quarter and the Company's book-to-bill ratio was greater than one. Historically, the first fiscal quarter is generally a seasonally weak quarter for the Company, but given the current bookings level the Company currently estimates revenues will grow 2% to 5% in the first quarter of fiscal 2014 over the fourth fiscal quarter of fiscal 2013.


Liquidity and Capital Resources

At June 30, 2013, cash, cash equivalents and marketable securities totaled $1,524.7 million, an increase of $321.7 million over the July 1, 2012 balance. The increase was primarily due to positive cash flows from operations of $563.9 million and due to the issuance of stock under employee stock plans of $102.6 million. These increases were partially offset by the payment of cash dividends of $241.3 million, representing $1.02 per share for fiscal year 2013; $85.7 million to purchase common stock, of which $64.6 million was used to purchase 1.8 million shares of the Company's common stock in the open market and $21.1million was used to purchase 0.6 million shares to satisfy minimum statutory withholding requirements related to the vesting of employee restricted stock awards. Lastly, the Company used $17.6 million for capital additions.

Working capital at June 30, 2013 was $768.0 million. Working capital decreased $566.8 million from the prior year due to the reclassification of the Company's outstanding debt of $826.6 million from a long term liability to a short term liability because the debt can be redeemed by the holders as well as by the Company in less than twelve months after June 30, 2013. The Company presently intends to redeem the debt on May 1, 2014, and presently anticipates having sufficient domestic cash balances to do so.

The Company's accounts receivable balance of $145.3 million at the end of fiscal year 2013 decreased $7.8 million from the July 1, 2012 balance of $153.1 million. The decrease is primarily due to lower shipments in the fourth quarter of fiscal year 2013 as compared to the fourth quarter of fiscal year 2012. Inventory totaled $87.2 million at the end of the fourth quarter of fiscal year 2013, an increase of $7.6 million over the fourth quarter of fiscal year 2012. The increase in inventory was primarily due to an increase in the Company's work in process inventory, primarily diebank. The Company maintains a relatively high quantity of diebank inventory, which are unpackaged integrated circuits in wafer form, to maintain low lead-times on customer orders. Current deferred tax assets decreased $36.8 million from the fourth quarter of fiscal year 2012 due to the . . .

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