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LINEAR TECHNOLOGY CORP /CA/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 7, 2014

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. 14 -------------------------------------------------------------------------------- Quarterly revenues of $334.6 million for the second quarter of fiscal year 2014 decreased $5.8 million or 1.7% from the previous quarter's revenue of $340.4 million and increased $29.3 million or 9.6% over $305.3 million reported in the second quarter of fiscal year 2013. Net income of $104.8 million decreased $3.1 million or 2.9% from the first quarter of fiscal year 2014 and increased $15.9 million or 17.9% over the second quarter of fiscal year 2013. Diluted earnings per share of $0.44 in the second quarter of fiscal year 2014 decreased $0.01 per share or 2.2% from the first quarter of fiscal year 2014 and increased $0.06 per share or 15.8% over the second quarter of fiscal year 2013. Critical Accounting Estimates There have been no significant changes to the Company's critical accounting policies during six months ended December 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 and six months ended December 29, 2013 and December 30, 2012 as a percentage of total revenue and provides the percentage change in absolute dollars of such items comparing the interim periods ended December 29, 2013 to the corresponding period from the prior fiscal year: Three Months Ended Six Months Ended Increase/ Increase/ December 29, 2013 December 30, 2012 (Decrease) December 29, 2013 December 30, 2012 (Decrease) Revenues 100.0% 100.0% 10% 100.0% 100.0% 5% Cost of sales 24.7 25.6 6 24.7 25.3 3 Gross profit 75.3 74.4 11 75.3 74.7 6 Expenses: Research and development 18.5 18.8 8 18.3 18.1 6 Selling, general and administrative 11.6 12.1 5 11.5 11.6 4 30.1 30.9 7 29.8 29.7 5 Operating income 45.2 43.5 14 45.5 45.0 7 Interest expenses (3.7) (3.9) 2 (3.6) (3.8) 2 Interest and other income 0.2 0.3 (24) 0.2 0.3 (18) Income before income taxes 41.7% 39.9% 15 42.1% 41.5% 7 Tax rate 25.00% 27.00% 25.25% 27.00% Revenue for the quarter ended December 29, 2013 was $334.6 million, an increase of $29.3 million or 10% over revenue of $305.3 million for the same quarter of the previous fiscal year. 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 primarily in the Computer end-market. Revenue for the quarter ended December 29, 2013 increased over the prior fiscal year quarter due to higher number of units shipped offset by a slightly lower average selling price ("ASP"). The ASP of $1.83 per unit in the second quarter of fiscal year 2014 decreased slightly compared to the ASP of $1.85 per unit in the second quarter of fiscal year 2013. The number of units shipped in the second quarter of fiscal 2014 increased by approximately 11% to 180.9 million units from 163.3 million units shipped in the second quarter of fiscal year 2013. Geographically, revenues for the quarter ended December 29, 2013 increased in each major geographical region. International revenues for the quarter ended December 29, 2013 were $242.0 million or 72% of revenues, an increase of $25.0 million as compared to international revenues of $217.0 million or 71% of revenues for the same period in the previous fiscal year. Revenues for the quarter ended December 29, 2013 for Rest of World ("ROW"), which is primarily Asia excluding Japan, represented $127.3 million or 38% of revenues, while sales to Europe and Japan were $59.4 million or 18% of revenues and $55.3 million or 16% of revenues, respectively. Domestic revenues were $92.6 million or 28% of revenues in the second quarter of fiscal year 2014. Domestic revenues increased $4.3 million over $88.3 million or 29% of revenues in the same period of fiscal year 2013.



Revenue for the six months ended December 29, 2013 was $675.0 million, an increase of $34.6 million or 5% over revenue of $640.4 million for the same period of the previous fiscal year. The increase in revenues for the six months ended December 29,

15 -------------------------------------------------------------------------------- 2013 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 primarily in the Computer end-market. The number of units shipped increased by approximately 7% from 346.0 million units in the prior year period to 368.9 million units in the current year period. The ASP for the first six-month period of fiscal year 2014 was flat at $1.82 per unit as compared to the same period of fiscal year 2013. Geographically, revenues for the six months ended December 29, 2013 increased in each major geographical region. International revenues for the six months ended December 29, 2013 were $489.2 million or 72% of revenues, an increase of $29.6 million as compared to international revenues of $459.6 million or 72% of revenues for the same period in the previous fiscal year. Revenues for the six months ended December 29, 2013 for ROW, represented $254.5 million or 38% of revenues, while sales to Europe and Japan were $124.6 million or 18% of revenues and $110.1 million or 16% of revenues, respectively. Domestic revenues were $185.8 million or 28% of revenues for the six months ended December 29, 2013, an increase of $5.0 million over $180.8 million or 28% of revenues in the same period of fiscal year 2013. Gross profit of $252.1 million for the quarter ended December 29, 2013 increased $25.0 million or 11% over gross profit of $227.1 million in the second quarter of fiscal year 2013. Gross profit of $508.4 million for the six months ended December 29, 2013 increased $29.9 million or 6% over gross profit of $478.5 million in the same period of fiscal year 2013. Gross profit as a percentage of revenues increased to 75.3% in the second quarter of fiscal year 2014 as compared to 74.4% for the same period in the previous fiscal year. Gross profit as a percentage of revenues increased to 75.3% for the six months ended December 29, 2013 as compared to 74.7% for the same period in the previous fiscal year. The increase in gross profit as a percentage of revenues for the quarter and for the six months ended December 29, 2013 was primarily due to spreading fixed costs over a higher sales base. Research and development ("R&D") expense for the quarter ended December 29, 2013 was $62.0 million, an increase of $4.7 million or 8% over R&D expense of $57.3 million for the same period in the previous fiscal year. R&D increased $2.2 million due to higher labor costs primarily due to increased merit compensation and fringe benefit costs. In addition, employee profit sharing increased $1.1 million and employee stock-based compensation increased $0.6 million. Other R&D expenses increased $0.8 million primarily due to higher mask costs. R&D expense for the six months ended December 29, 2013 was $123.5 million, an increase of $7.4 million or 6% over R&D expense of $116.1 million for the same period in the previous fiscal year. R&D increased $3.7 million due to higher labor costs primarily due to increased merit compensation and fringe benefit costs. In addition, employee profit sharing increased $1.4 million and employee stock-based compensation increased $0.5 million. Other R&D expenses increased $1.8 million primarily due to higher mask costs. Selling, general and administrative expense ("SG&A") for the quarter ended December 29, 2013 was $38.9 million, an increase of $1.8 million or 5% over SG&A expense of $37.1 million for the same period in the previous fiscal year. The increase in SG&A expense was due to a $1.2 million increase in compensation costs primarily due to increased merit compensation and fringe benefit costs. In addition, employee profit sharing increased $0.9 million and employee stock-based compensation increased $0.3 million. These increases were partially offset by a $0.6 million decrease in other SG&A expense. SG&A for the six months ended December 29, 2013 was $77.5 million, an increase of $2.9 million or 4% over SG&A expense of $74.6 million for the same period in the previous fiscal year. The increase in SG&A expense was primarily due to a $2.1 million increase in compensation costs primarily due to increased merit compensation and fringe benefit costs. In addition, employee profit sharing increased $1.1 million and employee stock-based compensation increased $0.3 million. These increases were partially offset by a $0.6 million decrease in other SG&A expense. Interest expense was $12.3 million and $24.6 million for the quarter and six months ended December 29, 2013, an increase of $0.3 million and $0.5 million, respectively, over the corresponding periods of fiscal year 2013 primarily due to higher non-cash interest expense. Interest income was $0.8 million and $1.7 million for the quarter and six months ended December 29, 2013, a decrease of $0.3 million and $0.4 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 second quarter and the first six months of fiscal year 2014 was 25.00% and 25.25%, respectively as compared to 27.00% in the same periods of fiscal year 2013. The decrease in the effective income tax rate 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 and an increase in earnings of the Company's wholly-owned foreign subsidiaries that are taxed at lower rates. The R&D Tax credit expired once again effective December 31, 2013. 16 -------------------------------------------------------------------------------- Accordingly, the annual effective tax rate for fiscal 2014 includes the benefit of the R&D Tax Credit for six months. 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 $334.6 million for the second quarter of fiscal year 2014 decreased $5.8 million or 1.7% from the first quarter of fiscal year 2014. Revenue in the Automotive and Communications end-markets grew modestly over the previous quarter, however was offset by a decrease in the Industrial end-market. Gross margin was flat at 75.3% and the Company managed expenses to minimize the impact of lower revenues on earnings, which were down 2.9% or one cent per share. The book-to-bill ratio was slightly positive in the December quarter and the Company typically sees improved bookings in the Automotive and Industrial end-markets in its March quarter. Accordingly, the Company is currently forecasting revenues to grow sequentially by 3% to 6% in the third 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 December 29, 2013, the Company's cash, cash equivalents and marketable securities balances were $1,717.6 million in aggregate, representing an increase of $192.9 million over the June 30, 2013 balances of $1,524.7 million. The increase was primarily due to positive cash flows from operations of $292.8 million and to a lesser extent the issuance of stock under employee stock plans of $59.5 million. These were partially offset by $124.1 million for the payment of cash dividends, representing $0.52 per share for the six months ended December 29, 2013, $26.9 million to purchase common stock; and $7.9 million for capital additions. Working capital at December 29, 2013 was $954.9 million. Accounts receivable totaled $138.5 million at the end of the second quarter of fiscal year 2014, a decrease of $6.7 million from the June 30, 2013 balance of $145.3 million as calendar year end 2013 collections were marginally greater than collections in the June 30, 2013 quarter. Net property, plant and equipment decreased $16.6 million from the fourth quarter of fiscal year 2013 due to fixed assets additions of $7.9 million offset by $24.5 million in depreciation expense. Income taxes payable totaled $2.4 million at the end of the second quarter of fiscal year 2014, a decrease of $10.4 million from the fourth quarter of fiscal year 2013 primarily due to two quarterly tax payments made during the second quarter offset by the tax provision. In January 2014, the Company's Board of Directors approved an increase in the Company's quarterly dividend from $0.26 per share to $0.27 per share. This marked the 22nd consecutive year the Company has increased its dividend. The dividend will be paid on February 26, 2014 to stockholders of record on February 14, 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, capital expenditures requirements, and debt retirement for the near future. On December 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 has sufficient domestic cash balances to do so. As of December 29, 2013 the Company expects the conversion price of the convertible senior notes will be approximately $40.68 at the redemption date of May 1, 2014. The conversion premium will result in approximately 450 thousand shares being issued for each dollar the Company's stock price is greater than $40.68. It is at the Company's election to pay for the conversion premium in cash or in shares. 17 -------------------------------------------------------------------------------- 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 planned redemption of its Convertible Senior Notes.



Off Balance-Sheet Arrangements

As of December 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 second 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 December 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 has sufficient domestic cash balances to do so. 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 December 29, 2013, the Company's cash equivalents and marketable securities investments in debt securities had a fair value of $1,598.9 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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Source: Edgar Glimpses


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