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LLTC > SEC Filings for LLTC > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for LINEAR TECHNOLOGY CORP /CA/

Form 10-Q for LINEAR TECHNOLOGY CORP /CA/


9-May-2014

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, ÁModule subsystems, and wireless sensor network products.

Quarterly revenues of $348.0 million for the third quarter of fiscal year 2014 increased $13.4 million or 4.0% over the previous quarter's revenues of $334.6 million and increased $33.5 million or 10.6% over $314.5 million reported in the same quarter of fiscal year 2013. Net income of $117.6 million increased $12.9 million or 12.3% over the second quarter of fiscal year 2014 and increased $6.6 million or 6.0% over the same quarter of fiscal year 2013. Diluted earnings per share of $0.48 in the third quarter of fiscal year 2014 increased $0.04 per share or 9.1% over the second quarter of fiscal year 2014 and increased $0.02 per share or 4.3% over the same quarter of fiscal year 2013. Net income for the third quarter fiscal 2014 benefited from a lower tax rate of 21% compared to the second quarter of fiscal 2014 rate of 25% due primarily to the release of estimated tax liabilities for fiscal years that are no longer subject to audit. The prior year quarter had a lower tax rate of 12.75% due to the reinstatement of the federal R&D tax credit and secondarily due to the release of estimated tax liabilities for fiscal years that are no longer subject to audit. Critical Accounting Estimates

There have been no significant changes to the Company's critical accounting policies during nine months ended March 30, 2014, 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 and nine
months ended March 30, 2014 and March 31, 2013 as a percentage of total revenues
and provides the percentage change in absolute dollars of such items comparing
the interim periods ended March 30, 2014 to the corresponding period from the
prior fiscal year:

                                     Three Months Ended                             Nine Months Ended
                                                          Increase/                                      Increase/
                        March 30, 2014   March 31, 2013   (Decrease)   March 30, 2014   March 31, 2013   (Decrease)
Revenues                    100.0%           100.0%          11%           100.0%           100.0%           7%
Cost of sales                24.3             25.2            6             24.5             25.3            4
Gross profit                 75.7             74.8            12            75.5             74.7            8
Expenses:
Research and
development                  17.8             18.6            6             18.1             18.3            6
Selling, general and
administrative               11.7             12.2            6             11.6             11.8            5
                             29.5             30.8            6             29.7             30.1            6
Operating income             46.2             44.0            16            45.8             44.6            10
Interest expense            (3.6)            (3.8)            3            (3.6)            (3.8)            2
Interest and other
income                       0.2              0.3            (42)           0.2              0.3            (26)
Income before income
taxes                       42.8%            40.5%            17           42.4%            41.1%            10
Tax rate                    21.00%           12.75%                        23.79%           22.39%

Revenues for the quarter ended March 30, 2014 was $348.0 million, an increase of $33.5 million or 11% over revenues of $314.5 million for the same quarter of fiscal year 2013. Revenues grew over the prior year quarter primarily due to revenue increases in the Automotive, Industrial and Communications end-markets partially offset by lower revenues in the Computer end-market. Revenues for the quarter ended March 30, 2014 increased over the prior fiscal year quarter primarily due to a higher number of units


shipped offset by a slightly lower average selling price (ASP). The ASP of $1.83 per unit in the third quarter of fiscal year 2014 decreased as compared to the ASP of $1.84 per unit in the same quarter of fiscal year 2013. The number of units shipped in the third quarter of fiscal 2014 increased by approximately 12% to 189.4 million units from 168.5 million units shipped in the same quarter of fiscal year 2013.

Geographically, revenues for the quarter ended March 30, 2014 increased in each major geographical region. International revenues for the quarter ended March 30, 2014 were $254.4 million or 73% of revenues, an increase of $32.5 million as compared to international revenues of $221.9 million or 71% of revenues for the same period in fiscal year 2013. Revenues for the quarter ended March 30, 2014 for Rest of World ("ROW"), which is primarily Asia excluding Japan, represented $127.9 million or 37% of revenues, while revenues to Europe and Japan were $72.2 million or 21% of revenues and $54.3 million or 15% of revenues, respectively. Domestic revenues were $93.6 million or 27% of revenues in the third quarter of fiscal year 2014. Domestic revenues increased $1.0 million over $92.6 million or 29% of revenues in the same period of fiscal year 2013.

Revenues for the nine months ended March 30, 2014 was $1,023.0 million, an increase of $68.0 million or 7% over revenues of $955.0 million for the same period of fiscal year 2013. The increase in revenues for the nine months ended March 30, 2014 compared to the same period in the prior fiscal year was primarily due to increases in revenues in the Automotive, Industrial and Communications end-markets partially offset by lower revenues in the Computer end-market. The number of units shipped increased by approximately 9% from 514.5 million units in the prior year period to 558.4 million units in the current year period. The ASP of $1.82 per unit for the first nine-month period of fiscal year 2014 decreased slightly compared to the ASP of $1.83 per unit in the same period of fiscal year 2013.

Geographically, revenues for the nine months ended March 30, 2014 increased in each major geographical region. International revenues for the nine months ended March 30, 2014 were $743.5 million or 73% of revenues, an increase of $62.1 million as compared to international revenues of $681.4 million or 71% of revenues for the same period in fiscal year 2013. Revenues for the nine months ended March 30, 2014 for ROW, represented $382.3 million or 37% of revenues, while revenues to Europe and Japan were $196.8 million or 19% of revenues and $164.4 million or 17% of revenues, respectively. Domestic revenues were $279.5 million or 27% of revenues for the nine months ended March 30, 2014, an increase of $5.9 million over $273.6 million or 29% of revenues in the same period of fiscal year 2013.

Gross profit of $263.5 million for the quarter ended March 30, 2014 increased $28.2 million or 12% over gross profit of $235.3 million in the same quarter of fiscal year 2013. Gross profit of $772.0 million for the nine months ended March 30, 2014 increased $58.2 million or 8% over gross profit of $713.8 million in the same period of fiscal year 2013. Gross profit as a percentage of revenues increased to 75.7% in the third quarter of fiscal year 2014 as compared to 74.8% for the same period in fiscal year 2013. Gross profit as a percentage of revenues increased to 75.5% for the nine months ended March 30, 2014 as compared to 74.7% for the same period in fiscal year 2013. The increase in gross profit as a percentage of revenues for the quarter and for the nine months ended March 30, 2014 was primarily due to spreading fixed costs over a higher revenue base.

Research and development ("R&D") expense for the quarter ended March 30, 2014 was $62.1 million, an increase of $3.6 million or 6% over R&D expense of $58.5 million for the same period in fiscal year 2013. R&D increased $2.2 million due to higher labor costs primarily due to increased headcount, merit compensation and fringe benefit costs. In addition, employee profit sharing increased $1.4 million and legal expense increased $0.7 million. These increases were partially offset by a $0.2 million decrease in employee stock-based compensation and a $0.5 million decrease in other R&D expense.

R&D expense for the nine months ended March 30, 2014 was $185.6 million, an increase of $11.0 million or 6% over R&D expense of $174.6 million for the same period in fiscal year 2013. R&D increased $5.9 million due to higher labor costs primarily due to increased headcount, merit compensation and fringe benefit costs. In addition, employee profit sharing increased $2.8 million and employee stock-based compensation increased $0.3 million. Other R&D expenses increased $2.0 million primarily due to legal expense.

Selling, general and administrative expense ("SG&A") for the quarter ended March 30, 2014 was $40.7 million, an increase of $2.2 million or 6% over SG&A expense of $38.5 million for the same period in fiscal year 2013. The increase in SG&A expense was due to a $1.7 million increase in compensation costs primarily due to increased merit compensation, commissions and fringe benefit costs. In addition, employee profit sharing increased $1.1million. These increases were partially offset by a $0.1 million decrease in employee stock-based compensation and a $0.5 million decrease in other SG&A expense.

SG&A for the nine months ended March 30, 2014 was $118.2 million, an increase of $5.1 million or 5% over SG&A expense of $113.1 million for the same period in fiscal year 2013. The increase in SG&A expense was primarily due to a $3.8 million increase in compensation costs primarily due to increased merit compensation, commissions and fringe benefit costs. In addition, employee


profit sharing increased $2.2 million and employee stock-based compensation increased $0.2 million. These increases were partially offset by a $1.1 million decrease in other SG&A expense.

Interest expense was $12.4 million and $37.0 million for the quarter and nine months ended March 30, 2014, an increase of $0.3 million and $0.9 million, respectively, over the corresponding periods of fiscal year 2013 primarily due to higher non-cash interest expense.

Interest income was $0.6 million and $2.3 million for the quarter and nine months ended March 30, 2014, a decrease of $0.4 million and $0.8 million, respectively, from the corresponding periods 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 balances.

The Company's effective income tax rate for the third quarter and the first nine months of fiscal year 2014 was 21.00% and 23.79%, respectively as compared to 12.75% and 22.39%, respectively, in the same periods of fiscal year 2013. The increase in the effective income tax rates from the prior year periods 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. As a result of reinstatement, during the third quarter of fiscal 2013 the Company adjusted its effective income tax rate for a full year's R&D Tax Credit and recorded a discrete tax benefit for the prior fiscal year 2012 R&D Tax Credit. The R&D Tax Credit legislation expired once again effective December 31, 2013. Accordingly, the annual effective tax rate for fiscal 2014 includes the benefit of the R&D Tax Credit for six months whereas fiscal year 2013 included a full year's tax benefit. In addition, the effective tax rates for each of the quarterly periods were favorably impacted by certain discrete tax benefits, primarily from the release of unrecognized tax benefits attributable to tax periods no longer subject to audit. The release of these tax benefits in fiscal 2013 had a greater impact on the effective tax rate recognized for the fiscal third quarter of 2013 as compared to the same period of fiscal 2014.
Excluding the effect of 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 25.5%.

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.

The Company grew revenues 4% sequentially and 10.6% year-over-year in the third quarter of fiscal year 2014. The book-to-bill ratio was positive for the quarter and bookings increased sequentially in all of the Company's major end-markets, with the Automotive, Industrial and Communications end-markets showing the most gains. The Company is encouraged by its current bookings momentum and the breadth of the bookings across its major end-markets. Accordingly, the Company is currently estimating sequential revenue growth of 2% to 6% for its fiscal fourth quarter. The redemption of the convertible notes on May 1 will favorably impact the Company's profitability going forward as interest expense related to the notes terminated. Shares of common stock increased modestly as a result of the premium on the Notes.

Although the Company believes that it has the product lines, manufacturing facilities and technical and financial resources for its current operations, revenue 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 revenue and/or earnings fail to meet expectations of the investment community.

Liquidity and Capital Resources

At March 30, 2014, the Company's cash, cash equivalents and marketable securities balances were $1,762.7 million in aggregate, representing an increase of $238.0 million over the June 30, 2013 balances of $1,524.7 million. The increase was primarily due to positive cash flows from operations of $399.6 million and to a lesser extent the issuance of stock under employee stock plans of $90.6 million. These were partially offset by $189.2 million for the payment of cash dividends, representing $0.79 per share for the nine months ended March 30, 2014, $45.6 million to purchase common stock; and $16.6 million for capital additions. Working capital at March 30, 2014 was $1,045.5 million.


At March 30, 2014, the Company's cash, cash equivalents balance was $806.4 million an increase of $679.7 million over the June 30, 2013 balance of $129.7 million due to the Company shortening the duration of its investment balances as a result of the $845.1 million Note redemption on May 1, 2014.

Accounts receivable totaled $182.0 million at the end of the third quarter of fiscal year 2014, an increase of $36.8 million from the June 30, 2013 balance of $145.3 million primarily due to higher shipments in the third quarter of fiscal year 2014 as compared to the fourth quarter of fiscal year 2013 and a higher days sales outstanding of 48 days compared to 41 days. Inventory was up slightly over the fourth quarter of fiscal year 2013. Net property, plant and equipment decreased $20.1 million from the fourth quarter of fiscal year 2013 due to fixed assets additions of $16.6 million offset by $36.7 million in depreciation expense.

Accrued payroll and related benefits decreased $18.1 million from the fourth quarter of fiscal year 2013 primarily due to a decrease in the profit sharing accrual balance. The Company accrues for profit sharing on a quarterly basis, but distributes pay-outs to employees on a semi-annual basis during the first and the third quarter of each fiscal year. Income taxes payable totaled $4.0 million at the end of the third quarter of fiscal year 2014, a decrease of $8.8 million from the fourth quarter of fiscal year 2013 primarily due to tax payments partially offset by the fiscal 2014 tax provision.

In April 2014, the Company's Board of Directors declared a cash dividend of $0.27 per share. The dividend will be paid on May 28, 2014 to stockholders of record on May 16, 2014. 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 and capital expenditures requirements. On March 30, 2014, the Company had debt outstanding of $845.1 million that was redeemed by the Company on May 1, 2014. For further information see Note 15 of Notes to Consolidated Financial Statements.

On October 23, 2013, the Company entered into a $100.0 million 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 redemption of its Convertible Senior Notes. For further information on the credit facility see Note 10 of Notes to Consolidated Financial Statements. Presently, the Company has not utilized the credit agreement.

Off Balance-Sheet Arrangements

As of March 30, 2014, 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 third 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. On March 30, 2014, the Company had debt outstanding of $845.1 million that was redeemed by the Company on May 1, 2014. For further information see Note 15 of Notes to Consolidated Financial Statements. During the second quarter of fiscal 2014, the Company entered into a $100.0 million Credit Agreement by and between the Company and Wells Fargo Bank, National Association. Presently, the Company has not utilized the credit agreement.

Fair Value

As of March 30, 2014, the Company's cash equivalents and marketable securities investments in debt securities had a fair value of $1,646.0 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. For further information see Note 5 of Notes to 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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