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LLTC > SEC Filings for LLTC > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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

Form 10-Q for LINEAR TECHNOLOGY CORP /CA/


7-Nov-2013

Quarterly Report


Item 2. 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 $340.4 million for the first quarter of fiscal year 2014 increased $13.1 million or 4.0% over the previous quarter's revenue of $327.3 million and increased $5.2 million or 2% over $335.1 million reported in the first quarter of fiscal year 2013. Net income of $107.9 million increased $5.9 million or 6% over the fourth quarter of fiscal year 2013 and increased $2.7 million or 3% over the first quarter of fiscal year 2013. Diluted earnings per share of $0.45 per share in the first quarter of fiscal year 2014 increased $.02 per share or 5% over the fourth quarter of fiscal year 2013 and was flat compared to the first quarter of fiscal year 2013. Critical Accounting Estimates

There have been no significant changes to the Company's critical accounting policies during the quarter ended September 29, 2013, 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 30, 2013.

Results of Operations

The table below summarizes the income statement items for the three months ended
September 29, 2013 and September 30, 2012 as a percentage of total revenue and
provides the percentage change in absolute dollars of such items comparing the
interim periods ended September 29, 2013 to the corresponding period from the
prior fiscal year:

                                                      Three Months Ended
                                                                               Increase/
                                    September 29, 2013   September 30, 2012    (Decrease)
Revenues                                  100.0%               100.0%              2%
Cost of sales                              24.7                 25.0              0.3
Gross profit                               75.3                 75.0               2
Expenses:
Research and development                   18.1                 17.5               5
Selling, general and administrative        11.4                 11.2               3
                                           29.5                 28.7               4
Operating income                           45.9                 46.3               1
Interest expenses                         (3.6)                (3.6)               2
Interest and other income                  0.3                  0.3               (13)
Income before income taxes                42.5%                43.0%              0.5
Tax rate                                  25.5%                27.0%

Revenue for the quarter ended September 29, 2013 was $340.4 million, an increase of $5.2 million or 2% over revenue of $335.1 million for the same quarter of the previous fiscal year. Revenues grew over the prior year quarter in the Automotive and Industrial end-markets partially offset by lower revenues in the Company's other end-markets, primarily the Computer end-market. Revenue for the quarter ended September 29, 2013 increased over the prior fiscal year quarter due to a higher average selling price ("ASP") and a higher number of units shipped. The ASP of $1.81 per unit in the first quarter of fiscal year 2014 increased compared to the ASP of $1.80 per unit in the first quarter of fiscal year 2013. The number of units shipped increased by approximately 1% from 187.7 million units in the first quarter of fiscal year 2013 to 188.0 million units in the first quarter of fiscal year 2014.


Geographically, revenues for the quarter ended September 29, 2013 increased in each major geographical region except Rest of World ("ROW"), which is primarily Asia excluding Japan. International revenues for the quarter ended September 29, 2013 were $247.1 million or 72% of revenues, an increase of $4.5 million as compared to international revenues of $242.6 million or 72% of revenues for the same period in the previous fiscal year. Revenues for the quarter ended September 29, 2013 for ROW, represented $127.1 million or 37% of revenues, while sales to Europe and Japan were $65.2 million or 19% of revenues and $54.8 million or 16% of revenues, respectively. Domestic revenues were $93.3 million or 28% of revenues in the first quarter of fiscal year 2014. Domestic revenues increased $0.8 million over $92.5 million or 28% of revenues in the same period of fiscal year 2013.

Gross profit of $256.4 million for the quarter ended September 29, 2013 increased $5.0 million or 2% over gross profit of $251.4 million in the first quarter of fiscal year 2013. Gross profit as a percentage of revenues increased to 75.3% in the first quarter of fiscal year 2014 as compared to 75.0% for the same period in the previous fiscal year. The increase in gross profit as a percentage of revenues for the quarter ended September 29, 2013 was due to a slight change in mix of products sold and spreading fixed costs over a slightly higher sales base.

Research and development ("R&D") expense for the quarter ended September 29, 2013 was $61.5 million, an increase of $2.7 million or 5% over R&D expense of $58.8 million for the same period in the previous fiscal year. R&D increased $1.4 million due to higher labor costs primarily due to increased merit compensation and fringe costs. In addition, employee profit sharing increased $0.3 million. Other R&D expenses increased $1.0 million primarily due to higher mask and legal costs.

Selling, general and administrative expense ("SG&A") for the quarter ended September 29, 2013 was $38.7 million, an increase of $1.2 million or 3% over SG&A expense of $37.5 million for the same period in the previous fiscal year. The increase in SG&A expense was due to a $0.9 million increase in compensation costs primarily due to an increase in annual merit compensation and fringe costs. In addition, employee profit sharing increased $0.3 million.

Interest expense was $12.3 million for the quarter ended September 29, 2013, an increase of $0.3 million over the corresponding period of fiscal year 2013 primarily due to higher non-cash interest expense.

Interest income was $0.9 million for the quarter ended September 29, 2013, a decrease of $0.1 million from the corresponding period of fiscal year 2013. Interest income decreased due to a decrease in the average interest rate earned on the Company's cash, cash equivalents and marketable securities balance partially offset by a higher cash, cash equivalents and marketable security balance.

The Company's effective income tax rate for the first quarter of fiscal year 2014 was 25.50% as compared to 27.00% in the same period of fiscal year 2013. The decrease in the effective income tax rate from the prior year period was primarily due to the reinstatement during the third quarter of fiscal 2013 of the Federal Research and Development Tax Credit ("R&D Tax Credit") that had expired December 31, 2011 and an increase in earnings of the Company's wholly-owned foreign subsidiaries that are taxed at lower rates. Excluding quarterly discrete tax adjustments, the Company estimates that its annual effective income tax rate for fiscal 2014 will be in the range of 25% to 26%.

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; changes in costs associated with utilities, transportation and raw materials; currency fluctuations; the effects of adverse economic conditions in the United States and/or international markets and other factors described below and in "Item 1A - Risk Factors" section of this Quarterly Report on Form 10-Q.

Quarterly revenues of $340.4 million for the first quarter of fiscal year 2014 increased $13.1 million or 4.0% sequentially over the fourth quarter of fiscal year 2013. The increase in revenues of 4.0% was at the higher end of the Company's guidance. Growth in the Company's major end-markets was led by the Automotive and Industrial end-markets. The Automotive end-market represented 19% of bookings in the first quarter which was a historical high for the Company. Operating margin of 45.9% is industry leading. Looking ahead, the second fiscal quarter has been challenging over the past three years partially due to the December quarter being a historically slow quarter for the Automotive and Industrial end-markets. The book to bill ratio for the first quarter was slightly positive, however, bookings normally weaken in the last month of the December quarter due to the holiday period. In addition, business in the United States may be impacted by budgeting uncertainty at the Federal Government level. Accordingly, the Company is forecasting revenue for the second quarter to be flat to down 4% from the first quarter of fiscal year 2014.


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.

Liquidity and Capital Resources

At September 29, 2013, the Company's cash, cash equivalents and marketable securities balances were $1,589.4 million in aggregate, representing an increase of $64.7 million over the June 30, 2013 balances of $1,524.7 million. The increase was primarily due to positive cash flows from operations of $123.7 million and to a lesser extent the issuance of stock under employee stock plans of $21.7 million; these were partially offset by $62.1 million for the payment of cash dividends, representing $0.26 per share for the quarter ended September 29, 2013, $14.7 million to purchase common stock; and $3.9 million for capital additions. Working capital at September 29, 2013 was $849.9 million.

Accounts receivable totaled $182.2 million at the end of the first quarter of fiscal year 2014, an increase of $36.9 million over the June 30, 2013 balance of $145.3 million primarily due to temporary payment processing delays at one of the Company's large distributors and due to higher shipments in the first quarter of fiscal year 2014 as compared to the fourth quarter of fiscal year 2013. Inventory totaled $87.0 million at the end of the first quarter of fiscal year 2014, a decrease of $0.2 million over the fourth quarter of fiscal year 2013.

Net property, plant and equipment decreased $8.4 million from the fourth quarter of fiscal year 2013 due to fixed assets additions of $3.9 million offset by $12.3 million in depreciation expense.

Accrued payroll and related benefits decreased $17.4 million from the fourth quarter of fiscal year 2014 primarily due to the payment of employee profit sharing. The Company accrues for profit sharing on a quarterly basis, but distributes payouts to employees on a semi-annual basis during the first and third quarters of each fiscal year. Income taxes payable totaled $38.5 million at the end of the first quarter of fiscal year 2013, an increase of $25.7 million over the fourth quarter of fiscal year 2013 primarily due to quarterly tax provisions offset by the tax payments.

In October 2013, the Company's Board of Directors declared a cash dividend of $0.26 per share. The dividend will be paid on November 27, 2013 to stockholders of record on November 15, 2013. 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. On September 29, 2013, the Company had debt outstanding of $845.1 million that can be redeemed by the Company at any time on or after May 1, 2014. The Company presently intends to redeem the debt on May 1, 2014, and presently anticipates having sufficient domestic cash balances to do so. On October 23, 2013, the Company entered into a Credit Agreement by and between the Company and Wells Fargo Bank, National Association. The Company entered into the Credit Agreement to enhance cash deployment flexibility in connection with the planned redemption of its Convertible Senior Notes. For further information on the Credit Agreement, see Note 14 to the consolidated financial statements, included in Part 1, "Financial Information."

Off Balance-Sheet Arrangements

As of September 29, 2013, the Company had no off-balance sheet financing arrangements.

Contractual Obligations

In April 2007, the Company issued $1.0 billion principal amount of its 3.0% Convertible Senior Notes due May 1, 2027. Through the first quarter of fiscal year 2014, the Company has retired $154.9 million in face value, leaving a remaining balance of $845.1 million. The Company pays cash interest at an annual rate of 3.0%, payable semiannually on November 1 and May 1 of each year. See Note 9 to the consolidated financial statements, included in Part 1, "Financial Information," for additional information.

Fair Value

As of September 29, 2013, the Company's cash equivalents and marketable securities investments in debt securities had a fair value of $1,503.4 million. The Company's 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. See Note 5 to the consolidated financial statements, included in Part 1, "Financial Information," for additional information. Most of the Company's investments in debt instruments have an investment rating of AA+ to AAA.

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