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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 27, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-14864
LINEAR TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2778785
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1630 McCarthy Boulevard, Milpitas, California 95035 (408) 432-1900
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES,
INCLUDING ZIP CODE AND TELEPHONE NUMBER)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $10,349,500,000 as of December 26, 2003 based
upon the closing sale price on the Nasdaq National Market System reported for
such date. Shares of common stock held by each officer and director and by each
person who owns 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were 307,504,014 shares of the Registrant's common stock issued
and outstanding as of August 20, 2004.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Items 10, 11, 12 and 14 of Part III incorporate information by reference
from the definitive proxy statement (the "2004 Proxy Statement") for the
2004 Annual Meeting of Stockholders.
PART I
ITEM 1. BUSINESS
Except for historical information contained in this Form 10-K, certain
statements set forth herein, including statements regarding future revenues and
profits; future conditions in the Company's markets; availability of resources
and manufacturing capacity; and the anticipated impact of current and future
lawsuits 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 for the Company's products, timely ramp-up of new
facilities, the timely introduction of new processes and products, general
conditions in the world economy and financial markets and other factors
described below. Therefore, actual outcomes and results may differ materially
from what is expressed or forecast in such forward-looking statements. Words
such as "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate,"
and variations of such words and similar expressions are intended to identify
such forward-looking statements. See "Risks and Competition" in the "Business"
section of this Annual Report on Form 10-K for a more thorough list of potential
risks and uncertainties.
General
Linear Technology Corporation (together with its consolidated
subsidiaries, "Linear Technology" or the "Company") designs, manufactures and
markets a broad line of standard high performance linear integrated circuits.
Applications for the Company's products include telecommunications, cellular
telephones, networking products, notebook computers, computer peripherals,
video/multimedia, industrial instrumentation, security monitoring devices,
high-end consumer products such as digital cameras and MP3 players, complex
medical devices, automotive electronics, factory automation, process control,
and military and space systems. The Company was organized and incorporated in
1981. The Company competes primarily on the basis of performance, functional
value, quality, reliability and service.
Available Information
We make available free of charge through our website, www.linear.com,
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports
on Form 8-K, proxy statements and all amendments to those reports as soon as
reasonably practicable after such materials are electronically filed with the
Securities and Exchange Commission ("SEC"). These reports may also be requested
by contacting Paul Coghlan, 1630 McCarthy Blvd., Milpitas, CA 95035. Our
Internet website and the information contained therein or incorporated therein
are not intended to be incorporated into this Annual Report on Form 10-K. In
addition, the public may read and copy any materials we file with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549 or may
obtain information by calling the SEC at 1-800-SEC-0330. Moreover, the SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding reports that we file electronically
with them at http://www.sec.gov.
The linear circuit industry
Semiconductor components are the electronic building blocks used in
electronic systems and equipment. These components are classified as either
discrete devices (such as individual transistors) or integrated circuits (in
which a number of transistors and other elements are combined to form a more
complicated electronic circuit). Integrated circuits ("ICs") may be divided into
two general categories, digital and linear (or analog). Digital circuits, such
as memory devices and microprocessors, generally process on-off electrical
signals, represented by binary digits, "1" and "0." In contrast, linear circuits
monitor, condition, amplify or transform continuous analog signals associated
with physical properties, such as temperature, pressure, weight, light, sound or
speed, and play an important role in bridging between real world phenomena and a
variety of electronic systems. Linear circuits also provide voltage regulation
and power control to electronic systems, especially in hand-held battery powered
systems.
The Company believes that several factors generally distinguish the
linear integrated circuit business from the digital circuit business, including:
Importance of Individual Design Contribution. The Company believes that
the creativity of individual design engineers is of particular
importance in the linear circuit industry. The design of a linear
integrated circuit generally involves a greater variety and less
repetition of circuit elements than digital design. In addition, the
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interaction of linear circuit elements is complex, and the exact
placement of these elements in the circuit is critical to the circuit's
precision and performance. Computer-aided engineering and design tools
for linear circuits are not as accurate in modeling circuits as those
tools used for designing digital circuits. As a result, the
contributions of a relatively small number of individual design
engineers are generally of greater importance in the design of linear
circuits than in the design of digital circuits.
Smaller Capital Requirements. Digital circuit design attempts to
minimize device size and maximize speed by increasing circuit
densities. The process technology necessary for increased density
requires very expensive wafer fabrication equipment. In contrast,
linear circuit design focuses on precise matching and placement of
circuit elements, and linear circuits often require large feature sizes
to achieve precision and high voltage operation. Accordingly, the
linear circuit manufacturing process generally requires smaller initial
capital expenditures, particularly for photomasking equipment and clean
room facilities, and less frequent replacement of manufacturing
equipment because the equipment has, to date, been less vulnerable to
technological obsolescence.
Market Diversity; Relative Pricing Stability. Because of the varied
applications for linear circuits, manufacturers typically offer a
greater variety of device types to a more diverse group of customers,
who typically have smaller volume requirements per device. As a result,
linear circuit manufacturers are often less dependent upon particular
products or customers; linear circuit markets are generally more
fragmented; and competition within those markets tends to be more
diffused.
The Company believes that competition in the linear circuit market is
particularly dependent upon performance, functional value, quality,
reliability and service. As a result, linear circuit pricing has
generally been more stable than most digital circuit pricing. In the
past two years the average selling price of the Company's products in
total has declined. This is primarily a result of an increase in sales
of smaller package products as a percentage of total units sold, which
have lower average selling prices and lower manufacturing costs.
Less Japanese And Other Asian Competition. To date, Japanese and other
Asian firms have concentrated their efforts on the high volume digital
and consumer linear markets, as opposed to the high performance end of
the linear circuit market served by the Company.
Products and markets
Linear Technology produces a wide range of products for a variety of
customers and markets. The Company emphasizes standard products to address
larger markets and to reduce the risk of dependency upon a single customer's
requirements. The Company targets the high performance segment of the linear
circuit market. "High performance" is characterized by higher precision, higher
efficiency, lower noise, higher speed, more subsystem integration on a single
chip and many other special features. The Company focuses virtually all of its
design efforts on proprietary products, which at the time of introduction are
original designs by the Company offering unique characteristics differentiating
them from those offered by competitors.
Although the types and mix of linear products vary by application, the
principal product categories are as follows:
Amplifiers - These circuits amplify the output voltage or current of a
device. The amplification represents the ratio of the output voltage or current
to the input voltage or current. The most widely used device is the operational
amplifier due to its versatility and precision.
High Speed Amplifiers - These amplifiers are used to amplify signals
from 5-megahertz to several hundred megahertz for applications such as video,
fast data acquisition and data communication.
Voltage Regulators - Voltage regulators deliver a tightly controlled
voltage to power electronic systems. This category of product consists primarily
of two types, the linear regulator and the switch mode regulator. Switch mode
regulators are also used to convert voltage up or down within an electronic
system for power management and battery charging.
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Voltage References - These circuits serve as electronic benchmarks
providing a constant voltage for measurement systems usage. Precision references
have a constant output independent of input, temperature changes or time.
Interface - Interface circuits act as an intermediary to transfer
digital signals between or within electronic systems. These circuits are used in
computers, modems, instruments and remote data acquisition systems.
Data Converters - These circuits change linear (analog) signals into
digital signals, or vica versa, and are often referred to as data acquisition
subsystems, A/D converters and D/A converters. The accuracy and speed with which
the analog signal is converted to its digital counterpart (and visa versa) is
considered a key characteristic for these devices. Low speed data converters may
have resolution up to 24 bits, while high speed converters may operate in the
region of 100-megahertz sample rate.
Radio Frequency Circuits - These circuits include mixers, modulators,
demodulators, amplifiers, drivers, and power detectors and controllers. They are
used in wireless and cable infrastructure, cellphones, and wireless data
communications.
Other - Other linear circuits include buffers, battery monitors, motor
controllers, hot swap circuits, comparators, sample-and-hold devices, drivers
and filters, both switched capacitor and continuous time, which are used to
limit and/or manipulate signals in such applications as cellular telephones,
base stations, navigation systems and industrial applications.
Linear circuits are used in various applications including
telecommunications, cellular telephones, networking products such as power over
Ethernet switches, notebook computers, computer peripherals, video/multimedia,
industrial instrumentation, security monitoring devices, high-end consumer
products such as digital cameras and MP3 players, complex medical devices,
automotive electronics, factory automation, process control, and military and
space systems. The Company focuses its product development and marketing efforts
on high performance applications where the Company believes it can position
itself competitively with respect to product performance and functional value.
The following table sets forth examples of product families by end-market
application and end-market:
Market End Applications/Products Example Product Families
- ------ ------------------------- ------------------------
--
Industrial Flow or rate metering |
Position/pressure/ |
temperature sensing and controls |
Robotics |
Energy management |
Process control data communication |
Network and factory automation |
Security and surveillance systems |
Curve tracers | Data acquisition products
Logic analyzers | High performance operational
Multimeters | amplifiers
Oscilloscopes | Interface (RS 485/232) products
Test equipment | Instrumentation amplifiers
Voltmeters | Line drivers
Network analyzers | Line receivers
Scales | Precision comparators
Analytic instruments | Precision voltage references
Gas chromatic graphs | Monolithic filters
EKG, CAT scanners | Switching voltage regulators
DNA analysis | Voltage references
Blood analyzers | Hot swap circuits
| DC-DC converters
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Space/Military Communications |
Satellites |
Guidance and navigation systems |
Displays |
Firing controls |
Ground support equipment |
Radar systems |
Sonar systems |
Surveillance equipment |
GPS |
|
Automotive Entertainment |
Navigation systems |
Daytime running lights |
Dashboard instrumentation |
Emission controls |
Safety systems |
Collision avoidance systems __|
--
Communications Cellular phones (CDMA/WCDMA/GPRS/3G) | DC - DC converters
Cellular basestations | V.35 transceivers
Pagers | High-speed amplifiers
Modems/fax machines | Line drivers
PBX switches | Line receivers
Optical networking | Low noise operational amplifiers
ADSL modems | Micropower products
Channel service unit/data service units | Power management products
Cable modems | Switched capacitor filters
Internet appliances | Voltage references
Servers | Voltage regulators
Routers | Data acquisition products
Switches | Hot Swap controllers
Power over Ethernet | Multi-protocol circuits
| Thermal electric coolers
| Power amplifier controllers
| Modulators/Demodulators
| Battery chargers
| Power over Ethernet controllers
__| Multi-Phase switching regulators
--
Computer/High- Communications/interface modems | Battery chargers
End Consumer Disk drives | DC - DC converters
Notebook computers | Data acquisition products
Desktop computers | Hot Swap controllers
Workstations | Line drivers
LCD monitors | Line receivers
Plotters/printers | Low drop out linear regulators
Digital still cameras | Micropower products
High Definition TVs | Multi-Phase switching regulators
Handheld PCs | PCMCIA power switching
Battery chargers | Power management
Electronic Toys | Power sequencing/monitoring
Video/multimedia systems |
MP3 players |
Digital video recorders |
Set top boxes/ Satellite receivers |
Plasma display TVs |
PDAs |
--|
4
Marketing and customers
The Company markets its products worldwide, through a direct sales
staff, electronics distributors and a small network of independent sales
representatives, to a broad range of customers in diverse industries. The
Company sells to over 15,000 Original Equipment Manufacturer (OEM) customers
directly and/or through the sales distributor channel. Distributor and direct
customers generally buy on an individual purchase order basis, rather than
pursuant to long-term agreements. The Company's primary domestic distributor,
Arrow Electronics, accounted for 15% of net sales during fiscal 2004 and 20% of
accounts receivable as of fiscal 2004 year-end; 15% of net sales during fiscal
2003 and 18% of accounts receivable as of fiscal 2003 year-end; and 16% of net
sales for fiscal 2002 and 17% of accounts receivable as of fiscal 2002 year-end.
Distributors are not end customers, but rather serve as a channel of sale to
many end users of the Company's products. No other distributor or customer
accounted for 10% or more of net sales for fiscal 2004, 2003 or 2002.
The Company's sales organization is divided into domestic and
international regions. The Company's sales offices located in the United States
are in the following metropolitan areas: Seattle, Baltimore, Denver,
Philadelphia, Raleigh, Chicago, Dallas, Austin, Houston, San Jose, Los Angeles,
Irvine, San Diego, Huntsville, Minneapolis, Cleveland and Portland.
Internationally, the Company has sales offices in: London, Stockholm, Helsinki,
Dusseldorf, Munich, Stuttgart, Paris, Lyon, Milan, Tokyo, Nagoya, Osaka, Taipei,
Singapore, Seoul, Hong Kong, Bejing, Shanghai and Shenzhen. The Company's
products typically require a sophisticated technical sales effort.
The Company has agreements with 3 independent sales representatives in
the United States and 2 in Canada. Commissions are paid to sales representatives
upon shipments either directly from the Company or through distributors. The
Company has agreements with 3 independent distributors in North America, 5 in
Europe, 2 each in China, Japan and Taiwan, and 1 each in Korea, Singapore,
Malaysia, Thailand, South Africa, Philippines, India, Israel, Brazil, Australia,
and New Zealand. The Company's distributors purchase the Company's products for
resale to customers. Additionally, domestic distributors often sell competitors'
products. Under certain agreements, the Company's domestic distributors are
entitled to price protection on inventory if the Company lowers the prices of
its products. The agreements also generally permit distributors to exchange up
to 3% of purchases on a semi-annual basis.
The Company's sales to international distributors are made under
agreements which permit limited stock return privileges but not sales price
rebates. The agreements generally permit distributors to exchange up to 5% of
purchases on a semi-annual basis. See Critical Accounting Policies and Note 1 of
Notes to Consolidated Financial Statements of this Annual Report on Form 10-K,
which contains information regarding the Company's revenue recognition policy.
During fiscal 2004, 2003 and 2002, export sales which were primarily to
Europe, Japan and Rest of the World ("ROW"), which is primarily Asia excluding
Japan, represented approximately 71%, 68% and 64% of net sales, respectively.
Because most of the Company's export sales are billed and payable in United
States dollars, export sales are generally not directly subject to fluctuating
currency exchange rates. Although export sales are subject to certain control
restrictions, including approval by the Office of Export Administration of the
United States Department of Commerce, the Company has not experienced any
material difficulties relating to such restrictions.
The Company's backlog of released and firm orders was approximately
$151.2 million at June 27, 2004 as compared with $57.2 million at June 29, 2003.
In addition to its backlog, the Company had $28.9 million of products sold to
and held by domestic distributors at June 27, 2004 as compared to $30.5 million
at June 29, 2003. Generally, shipments to domestic distributors are not
recognized as sales until the distributor has sold the products to its
customers. The Company defines backlog as consisting of distributor stocking
orders and OEM orders for which a delivery schedule has been specified by the
OEM customer for product shipment within six months. Although the Company
receives volume purchase orders, most of these purchase orders are cancelable,
generally outside of thirty days of delivery, by the customer without
significant penalty. Lead-time for the release of purchase orders depends upon
the scheduling practices of the individual customer and the availability of
individual products, so the rate of booking new orders varies from month to
month. The ordering practices of many semiconductor customers has shifted from a
practice of placing orders with delivery dates extending over several months to
the practice of placing orders with shorter delivery dates in concert with the
Company's lead times. Also, the Company's agreements with certain distributors
provide for price protection. Consequently, the Company does not believe that
its backlog at any time is necessarily representative of actual sales for any
succeeding period.
5
In the operating history of the Company, seasonality of business has
not been a material factor, although the results of operations for the first
fiscal quarter of each year are impacted slightly by customary summer holidays,
particularly in Europe.
The Company warrants that its products, until they are incorporated in
other products, are free from defects in workmanship and materials and conform
to the Company's published specifications. Warranty expense has been nominal to
date. Refer to Note 1 of Notes to Consolidated Financial Statements of this
Annual Report on Form 10-K, which contains information regarding the Company's
warranty policy.
Manufacturing
The Company's wafer fabrication and manufacturing facilities are
located in Camas, Washington ("Camas") and Milpitas, California ("Hillview").
Each facility was built to Company specifications to support a number of
sophisticated process technologies and to satisfy rigorous quality assurance and
reliability requirements of United States military specifications and major
worldwide OEM customers. All of the Company's manufacturing facilities have
received ISO 9001/ISO 9002, QS9000 and ISO 14001 certifications. In addition,
the Company's Milpitas and Singapore manufacturing facilities are certified to
TS 16949.
The Company's wafer fabrication facility located in Camas, Washington
commenced manufacturing operations during fiscal 1997. The facility is used to
produce six-inch diameter wafers for use in the production of the Company's
devices. During fiscal 2001, the Company purchased an additional 16.5 acres
adjacent to its Camas facility for future expansion. The Company's Hillview
facility was completed in fiscal 2001. Production at the Hillview six-inch wafer
fabrication plant commenced in the third quarter of fiscal 2001. The Company
currently uses similar manufacturing processes in both its Hillview and Camas
facilities. During fiscal 2002, the Company discontinued production in its
oldest four-inch wafer fabrication plant located at its Milpitas, California
headquarters. During the fourth quarter of fiscal 2004, the Company commenced
projects to add wafer fabrication capacity at Camas and Hillview.
The Company's basic process technologies include high-speed bipolar,
high gain low noise bipolar, radio frequency bipolar, silicon gate complementary
metal-oxide semiconductor ("CMOS") and BiCMOS processes. The Company also has
two proprietary complementary bipolar processes. The Company's bipolar processes
are typically used in linear circuits where high voltages, high power, high
frequency, low noise or effective component matching is necessary. The Company's
proprietary silicon gate CMOS processes provide switch characteristics required
for many linear circuit functions, as well as an efficient mechanism for
combining linear and digital circuits on the same chip. The Company's CMOS
processes were developed to address the specific requirements of linear circuit
functions. The complementary bipolar processes were developed to address higher
speed analog functions. The Company's basic processes can be combined with a
number of adjunct processes to create a diversity of IC components. A minor
portion of the Company's wafer manufacturing, particularly very small feature
size CMOS products, is done at an independent foundry. The accompanying chart
provides a brief overview of the Company's IC process capabilities:
Process Families Benefit/Market Advantage Product Application
- ---------------- ------------------------ -------------------
P-Well SiGate CMOS General purpose, stability Switches, filters, data conversion,
chopper amplifiers
N-Well SiGate CMOS Speed, density, stability Switches, data conversion
BiCMOS Speed, density, stability, flexibility Data conversion
High Power Bipolar Power (100 watts), high current Linear and smart power products,
(10 amps) switching regulators
Low Noise Bipolar Precision, low current, low noise, Op amps, voltage references
high gain
High Speed Bipolar Fast, wideband, video high data Op amps, video, comparators,
rate switching regulators
JFETS Speed, precision, low current Op amps, switches, sample and
hold
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Rad - Hard Total dose radiation hardened All space products
Complementary Bipolar Speed, low distortion, precision Op amps, video amps, converters
CMOS/ Thin Films Stability, precision Filters, data conversion
High Voltage CMOS High voltage general-purpose, Switches, chopper amplifiers
compatible with Bipolar
Bipolar/Thin Films Precision, stability, matching Converters, amplifiers
RF Bipolar High speed, low power RF wireless, high speed data
communications
The Company emphasizes quality and reliability from initial product
design through manufacturing, packaging and testing. The Company's design team
focuses on fault tolerant design and optimum location of circuit elements to
enhance reliability. Linear Technology's wafer fabrication facilities have been
designed to minimize wafer handling and the impact of operator error through the
use of microprocessor-controlled equipment. The Company has obtained Defense
Supply Center, Columbus (DSCC) qualification to participate in high reliability
JAN38510 (class B) military business. The Company has also received Jan Class S
Microcircuit Certification, which enables the Company to manufacture products
intended for use in space or for critical applications where replacement is
extremely difficult or impossible and where reliability is imperative. The
Company has also received MIL-PRF-38535 Qualified Manufacturers Listing (QML)
certification for military products from DSCC.
Processed wafers are sent to either the Company's assembly facility in
Penang, Malaysia or to offshore independent assembly contractors where the
wafers are separated into individual circuits and packaged. The Penang facility
opened in October 1994 and services approximately 60% to 90% of the Company's
assembly requirements for plastic packages. The Company's primary subcontractors
are Carsem Sdn, located in Malaysia; and NSE located in Thailand. The Company
also maintains domestic assembly operations to satisfy particular customer
requirements, especially those for military applications, and to provide rapid
turnaround for new product development.
After assembly, most products are sent to the Company's Singapore
facility for final testing, inspection and packaging as required. In addition,
the Company's Singapore facility serves as a major warehouse and distribution
center with the bulk of the Company's shipments to end customers originating
from this facility. Some products are returned to Milpitas for the same back-end
processing. During the fourth quarter of fiscal 2004, the Company commenced
development of a new building at its Singapore facility. The new building will
be used primarily to increase its capacity for test and distribution operations.
Linear Technology from time to time has experienced competition for
assembly services from other manufacturers seeking assembly of circuits by
independent contractors. The Company currently believes that alternative foreign
assembly sources could be obtained without significant interruption. Foreign
assembly is subject to risks normally associated with foreign operations,
including changes in local governmental policies, currency fluctuations,
transportation delays and the imposition of export controls or increased import
tariffs.
From time to time certain materials, including silicon wafers and
plastic molding compounds, have been in short supply. To date the Company has
experienced no delays in obtaining raw materials which could have adversely
affected production. As is typical in the industry, the Company must allow for
significant lead times in delivery of certain materials.
Manufacturing of individual products, from wafer fabrication through
final testing, may take from eight to sixteen weeks. Since the Company sells a
wide variety of device types, and customers typically expect delivery of
products within a short period of time following order, the Company maintains a
substantial work-in-process and finished goods inventory.
Based on its anticipated production requirements, the Company believes
it will have sufficient available resources and manufacturing capacity for
fiscal 2005.
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Patents, licenses and trademarks
The Company has been awarded 264 United States and International
patents and has filed 94 additional patent applications. Although the Company
believes that these patents and patent applications may have value, the
Company's future success will depend primarily upon the technical abilities and
creative skills of its personnel, rather than on its patents.
As is common in the semiconductor industry, the Company has at times
been notified of claims that it may be infringing patents issued to others. If
it appears necessary or desirable, the Company may seek licenses under such
patents, although there can be no assurance that all necessary licenses can be
obtained by the Company on acceptable terms. In addition, from time to time the
Company may negotiate with other companies to license patents, products or
process technology for use in its business. On March 7, 2003 the Company entered
into a ten-year patent portfolio cross license agreement with Texas Instruments,
Inc.
Research and development
The Company's ability to compete depends in part upon its continued
introduction of technologically innovative products on a timely basis. To
facilitate this need, the Company has organized its product development efforts
into four groups: power management, signal conditioning, mixed signal and high
frequency. Linear Technology's product development strategy emphasizes a broad
line of standard products to address a diversity of customer applications. The
Company's research and development ("R&D") efforts are directed primarily at
designing and introducing new products and to a lesser extent developing new
processes and advanced packaging.
As of June 27, 2004, the Company had 752 employees involved in
research, development and engineering related functions of which 390 employees
are engaged in new product design. The Company had 226 employees engaged in new
product design at its Milpitas headquarters as well as 14 employees at its
Singapore design center, 63 employees at its Boston design center, 29 employees
at its Colorado design center, 19 employees at its New Hampshire design center,
10 employees at its Raleigh design center, 10 employees at its Santa Barbara
design center, 12 employees at its Burlington design center and 7 employees at
its design center in Grass Valley, California which opened in August of fiscal
2004.
For the fiscal years 2004, 2003, and 2002, the Company spent
approximately $104.6 million, $91.4 million and $79.8 million, respectively, on
R&D. The increase in R&D expenses in 2004 over 2003 was primarily due to an
increase in labor expenses caused by increases to profit sharing and an increase
in headcount. Headcount in R&D personnel increased to 752 in fiscal 2004 from
689 in fiscal 2003.
Government sales
The Company currently has no material U.S. Government contracts.
Risks and Competition
In addition to the risks discussed below and elsewhere in this
"Business" section, see "Factors Affecting Future Operating Results" included in
"Management's Discussion and Analysis" for further discussion of other risks and
uncertainties that may affect the Company.
Semiconductor Industry. The semiconductor market has historically been cyclical
and subject to significant economic downturns at various times, including the
recent decline in demand experienced during fiscal 2002 and 2003. The cyclical
nature of the semiconductor industry may cause the Company to experience
substantial period-to-period fluctuations in its results of operations.
Typically, the Company's ability to meet its revenue goals and
projections is dependent to a large extent on the orders it receives from its
customers within the period. Historically, the Company has maintained low lead
times, which have enabled customers to place orders close to their true needs
for product. In defining its financial goals and projections, the Company
considers inventory on hand, backlog, production cycles and expected order
patterns from customers. If the Company's estimates in these areas become
inaccurate, it may not be able to meet its revenue goals and projections. In
addition, some customers require the Company to manufacture product and have it
8
available for shipment, even though the customer is unwilling to make a binding
commitment to purchase all, or even some, of the product.
The semiconductor industry is characterized by rapid technological
change, price erosion, occasional shortages of materials, capacity constraints,
variations in manufacturing efficiencies, and significant expenditures for
capital equipment and product development. New product introductions are a
critical factor for future sales growth and sustained profitability. Although
the Company believes that the high performance segment of the linear circuit
market is generally less affected by price erosion or by significant
expenditures for capital equipment and product development than other
semiconductor market sectors, future operating results may reflect substantial
period to period fluctuations due to these or other factors.
Manufacturing. The Company relies on its internal manufacturing facilities
located in California and Washington to fabricate most of its wafers; however,
the Company is dependent on outside silicon foundries for a small portion of its
wafer fabrication. The Company could be adversely affected in the event of a
major earthquake, which could cause temporary loss of capacity, loss of raw
materials, and damage to manufacturing equipment. Additionally, the Company
relies on its internal and external assembly and testing facilities located in
Singapore and Malaysia. The Company is subject to economic and political risks
inherent to international operations, including changes in local governmental
policies, currency fluctuations, transportation delays and the imposition of
export controls or increased import tariffs. The Company could be adversely
affected if any such changes are applicable to the Company's foreign operations.
The Company's manufacturing yields are a function of product design and
process technology, both of which are developed by the Company. The manufacture
and design of integrated circuits is highly complex. To the extent the Company
does not achieve acceptable manufacturing yields or there are delays in wafer
fabrication, its results of operations could be adversely affected.
Litigation. The Company is subject to various legal proceedings arising out of a
wide range of matters, including, among others, patent suits and employment
claims. From time to time, as is typical in the semiconductor industry, the
Company receives notice from third parties alleging that the Company's products
or processes infringe the third parties' intellectual property rights. If the
Company is unable to obtain a necessary license, and one or more of its products
or processes is determined to infringe intellectual property rights of others, a
court might enjoin the Company from further manufacture and/or sale of the
affected products. In that case, the Company would need to re-engineer the
affected products or processes in such a way as to avoid the alleged
infringement, which may or may not be possible. An adverse result in litigation
arising from such a claim could involve an injunction to prevent the sales of a
portion of the Company's products, a reduction or the elimination of the value
of related inventories, and/or the assessment of a substantial monetary award
for damages related to past sales. The Company does not believe that its current
lawsuits will have a material impact on its business or financial condition.
However, current lawsuits and any future lawsuits will divert resources and
could result in the payment of substantial damages. In addition, the Company may
incur significant legal costs to assert its intellectual property rights when
the Company believes its products or processes have been infringed by third
parties
Key Personnel. The Company's performance is substantially dependent on the
performance of its executive officers and key employees. The loss of the
services of key officers, technical personnel or other key employees could harm
the business. The success of the Company depends on its ability to identify,
hire, train, develop and retain highly qualified technical and managerial
personnel. Failure to attract and retain the necessary technical and managerial
personnel could harm the Company.
Competition. Linear Technology competes in the high performance segment of the
linear market. The Company's competitors include among others, Analog Devices,
Inc., Maxim Integrated Products, Inc., National Semiconductor Corporation and
Texas Instruments, Inc. Competition among manufacturers of linear integrated
circuits is intense, and certain of the Company's competitors may have
significantly greater financial, technical, manufacturing and marketing
resources than the Company. The principal elements of competition include
product performance, functional value, quality and reliability, technical
service and support, price, diversity of product line and delivery capabilities.
The Company believes it competes favorably with respect to these factors,
although it may be at a disadvantage in comparison to larger companies with
broader product lines and greater technical service and support capabilities.
Environmental regulations. Federal, state and local regulations impose various
environmental controls on the storage, use, discharge and disposal of certain
chemicals and gases used in semiconductor processing. The Company's facilities
have been designed to comply with these regulations, and the Company believes
that its activities conform to present environmental regulations. Increasing
9
public attention has, however, been focused on the environmental impact of
electronics manufacturing operations. While the Company to date has not
experienced any materially adverse business effects from environmental
regulations, there can be no assurance that changes in such regulations will not
require the Company to acquire costly remediation equipment or to incur
substantial expenses to comply with such regulations. Any failure by the Company
to control the storage, use or disposal of, or adequately restrict the discharge
of hazardous substances could subject it to significant liabilities.
Although the Company believes that it has the product lines,
manufacturing facilities and technical and financial resources for its current
operations, sales and profitability can be significantly affected by the 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 the
expectations of the investment community. Furthermore, stocks of high technology
companies are subject to extreme price and volume fluctuations that are often
unrelated or disproportionate to the operating performance of these companies.
Employees
As of June 27, 2004, the Company had 3,050 employees, including 291 in
marketing and sales, 752 in research, development and engineering related
functions, 1,916 in manufacturing and production, and 91 in management,
administration and finance. The Company has never had a work stoppage, no
employees are represented by a labor organization, and the Company considers its
employee relations to be good.
Executive Officers of the Registrant
The executive officers of the Company, and their ages as of September
3, 2004, are as follows:
Name Age Position
- ---- --- --------
Robert H. Swanson, Jr...........66 Chairman and Chief Executive Officer
David B. Bell...................48 President
Paul Chantalat..................54 Vice President Quality and Reliability
Paul Coghlan....................59 Vice President of Finance and Chief Financial Officer
Robert C. Dobkin................60 Vice President of Engineering and Chief Technical Officer
Lothar Maier....................49 Vice President and Chief Operating Officer
Alexander R. McCann ...........38 Vice President of Operations
Richard Nickson.................54 Vice President of North American Sales
David A. Quarles................38 Vice President of International Sales
Donald Paulus...................47 Vice President and General Manager, Power Products
William Gross...................55 Vice President and General Manager, Signal Conditioning Products
Robert Reay.....................43 Vice President and General Manager, Mixed Signal Products
Mr. Swanson, a founder of the Company, has served as Chairman of the
Board of Directors and Chief Executive Officer since April 1999, and prior to
that time as President, Chief Executive Officer and a director of the Company
since its incorporation in September 1981. From August 1968 to July 1981, he was
employed in various positions at National Semiconductor Corporation
("National"), a manufacturer of integrated circuits, including Vice President
and General Manager of the Linear Integrated Circuit Operation and Managing
Director in Europe. Mr. Swanson has a B.S. degree in Industrial Engineering from
Northeastern University.
Mr. Bell has served as President since June 2003. Prior to becoming
President, Mr. Bell served as Vice President and General Manager of Power
Products from January 2002 to June 2003 and as General Manager of Power Products
from February 1999. From June 1994 to January 1999, he held the position of
Manager of Strategic Product Development. From July 1991 to May 1994, he was
employed as Director of Electrical Engineering at IDEO Product Development.
Prior to July 1991, Mr. Bell was employed in various management and engineering
positions at Bell Associates, Inc., Sydis, Inc., and Hewlett Packard, Inc. Mr.
Bell has a B.S. degree in Electrical Engineering from the Massachusetts
Institute of Technology.
Mr. Chantalat has served as Vice President of Quality and Reliability
since July 1991. From January 1989 to July 1991, he held the position of
Director of Quality and Reliability. From July 1983 to January 1989 he held the
10
position of Manager of Quality and Reliability. From February 1976 to July 1983,
he was employed in various positions at National, where his most recent position
was Group Manager of Manufacturing Quality Engineering. Mr. Chantalat received a
B.S. and an M.S. in Electrical Engineering from Stanford University in 1970 and
1972, respectively.
Mr. Coghlan has served as Vice President of Finance and Chief Financial
Officer of the Company since December 1986. From October 1981 until joining the
Company, he was employed in various positions at GenRad, Inc., a manufacturer of
automated test equipment, including Corporate Controller, Vice President of
Corporate Quality and most recently Vice President and General Manager of the
Structural Test Products Division. Before joining GenRad, Inc., Mr. Coghlan was
associated with Price Waterhouse & Company in the United States and Paris,
France for twelve years. Mr. Coghlan received a B.A. from Boston College in 1966
and an MBA from Babson College in 1968.
Mr. Dobkin, a founder of the Company, has served as Vice President of
Engineering and Chief Technical Officer since April 1999, and as Vice President
of Engineering from September 1981 to April 1999. From January 1969 to July
1981, he was employed in various positions at National, where his most recent
position was Director of Advanced Circuit Development. Mr. Dobkin has extensive
experience in linear circuit design. Mr. Dobkin attended the Massachusetts
Institute of Technology.
Mr. Maier joined the Company as Vice President and Chief Operating
Officer in April 1999. From 1983 to 1999, he was employed at Cypress
Semiconductor Corporation in various management positions, mostly recently as
Senior Vice President and Executive Vice President of Worldwide Operations. Mr.
Maier received a B.S. in Chemical Engineering in 1978 from the University of
California at Berkeley.
Mr. McCann has served as Vice President of Operations since January
2004. Prior to joining Linear, he was Vice President of Operations at NanoOpto
Corporation in Somerset, NJ (2002-2003), Vice President of Worldwide Operations
at Anadigics Inc. in Warren, NJ (1998-2002) and held various management
positions at National Semiconductor UK Ltd. (1985-1998). Mr. McCann received a
B.S. (equivalent) in Electrical and Electronic Engineering in 1985 from James
Watt College and an MBA in 1998 from the University of Glasgow Business School.
Mr. Nickson has served as Vice President of North American Sales since
October 2001. From July 2001 until October 2001 he was Director of USA Sales.
From February 1998 until July 2001, he was European Sales Director. From August
1993 until January 1998, he held the position of Northwest Area Sales Manager.
From April 1991 to August 1993, he was President and Co-founder of Focus
Technical Sales. From August 1983 to April 1991, he served with National in
various positions where his most recent position was Vice President of North
American Sales. Mr. Nickson was Founder and President of Micro-Tex, Inc. from
June 1980 to August 1983. Prior to 1980, Mr. Nickson spent seven years in
semiconductor sales, including four years with Texas Instruments. He received a
B.S. in Mathematics from Illinois Institute of Technology in 1971.
Mr. Quarles has served as Vice President of International Sales since
August 2001. From October 2000 to August 2001 he held the position of Director
of Marketing. From July 1996 to September 2000 he held the position of Director
of Asia-Pacific Sales stationed in Singapore. From June 1991 to July 1996 he
worked as a Sales Engineer and later as District Sales Manager for the Bay Area
sales team. Prior to Linear, Mr. Quarles worked two years as a Sales Engineer at
National. Mr. Quarles received a B.S. in Electrical Engineering in 1988 from
Cornell University.
Mr. Paulus has served as Vice President and General Manager of Power
Products since June 2003. He joined the Company in October 2001 as Director,
Satellite Design Centers. Prior to joining the Company, he was a founder of
Integrated Sensor Solutions, Inc. (ISS) serving as Vice President of Engineering
and Chief Operating Officer from 1990 to 1999. ISS was acquired by Texas
Instruments, Inc. (TI) in 1999, and Mr. Paulus served as TI's General Manager,
Automotive Sensors and Controls in San Jose until October 2001. Prior to ISS,
Mr. Paulus served in various engineering and management positions with Sierra
Semiconductor (1989-1991), Honeywell Signal Processing Technologies (1984-1989)
and Bell Laboratories (1979-1984). Mr. Paulus received a B.S. in Electrical
Engineering from Lehigh University, an M.S. in Electrical Engineering from
Stanford University and an MBA from the University of Colorado.
Mr. Gross has served as Vice President and General Manager of Signal
Conditioning Products since January 2002 and as General Manager of Signal
Conditioning Products since February 1999. He held the position of Design
Manager from July 1989 to February 1999, responsible for amplifiers, comparators
and voltage references. Previously, he was Design Manager at Elantec from
January 1984 to June 1989. From January 1973 to December 1983 he held several
positions at National, including Design Engineer and Design Manager of the Japan
11
Design Center. Mr. Gross received a B.S. in electronics engineering from
California Polytechnic University in 1971 and a M.S. in electrical engineering
from University of Arizona in 1973.
Mr. Reay has served as Vice President and General Manager of Mixed
Signal Products since January 2002 and as General Manager of Mixed Signal
Products since November 2000. From January 1992 to October 2000 he was the
Design Engineering Manager responsible for a variety of product families
including interface, supervisors, battery chargers and hot swap controllers. Mr.
Reay joined Linear Technology in April 1988 as a design engineer after spending
four years at GE Intersil. Mr. Reay received a B.S. and M.S. in electrical
engineering from Stanford University in 1984.
ITEM 2. PROPERTIES
At the Company's headquarter campus in Milpitas, California, the
Company owns land and 3 buildings of approximately 41,000, 42,000 and 70,000
square feet. These buildings are used for support engineering services,
prototype testing of new products and worldwide headquarters. Additionally, in
the same campus the Company leases 165,000 square feet of buildings used
primarily for circuit design activities and future expansion. The Company also
owns a 96,000 square foot building located near its headquarter campus in
Milpitas, California ("Hillview".) The Hillview facility is the Company's newest
six-inch wafer fabrication plant. Production at the Hillview facility commenced
during fiscal 2001. During the fourth quarter of fiscal 2004, the Company
commenced projects to add wafer fabrication capacity at Hillview, primarily
through equipment additions.
The Company owns a six-inch wafer fabrication facility totaling 100,000
square feet located in Camas, Washington. Manufacturing operations commenced at
this facility in fiscal 1997. The Company also owns 16.5 acres of land adjacent
to its Camas facility, which may be used for expansion in the future. During the
fourth quarter of fiscal 2004, the Company commenced projects to expand clean
room space to increase wafer fabrication capacity at Camas.
The Company occupies a 72,000 square foot manufacturing facility in
Singapore. Test and packaging operations are performed at this facility along
with certain design and major warehousing and distribution activity. The Company
has a 30-year lease on the land where the plant is located that commenced in
1994, with an option to extend for an additional 30 years. During fiscal 2001,
the Company entered into an additional lease for 6 acres of land adjacent to its
Singapore facility for a term of 20 years with an option to extend for an
additional 30 years. During the fourth quarter of fiscal 2004, the Company
commenced development of the most recently acquired lease. The new building will
be used primarily to increase its capacity for test and distribution operations.
In 1994, the Company opened a 55,000 square foot assembly plant in
Penang, Malaysia. The Company has a 60-year lease on the land where the plant
was constructed. In fiscal 1999, the Company purchased a 23,400 square foot
building adjacent to its existing facility. The Company demolished the acquired
building, and built a 75,000 square foot extension to its existing facility on
the site.
The Company leases design facilities located in: Bedford, New
Hampshire; Raleigh, North Carolina; Burlington, Vermont; Santa Barbara,
California; and Grass Valley, California. In fiscal 2002, the Company purchased
land in Colorado Springs, Colorado and constructed a new 20,000 square foot
design center. In fiscal 1999, the Company purchased land in the Boston
metropolitan area and constructed a new 20,000 square foot design and sales
office. In fiscal 2002, the Company added 10,000 square feet to this facility.
The Company leases sales offices in the United States in the areas of Bellevue,
Baltimore, Denver, Milpitas, Philadelphia, Raleigh, Chicago, Dallas, Austin,
Houston, Los Angeles, Irvine, San Diego, Huntsville, Minneapolis, Cleveland and
Portland; and internationally in London, Stockholm, Helsinki, Dusseldorf,
Munich, Stuttgart, Paris, Lyon, Milan, Tokyo, Nagoya, Osaka, Taipei, Singapore,
Seoul, Hong Kong, Bejing, Shanghai and Shenzhen. See Note 4 of Notes to
Consolidated Financial Statements of this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of business which consist of a wide range of
matters, including, among others, patent suits and employment claims. The
12
Company does not believe that any of the current suits will have a material
impact on its business or financial condition. However, current lawsuits and any
future lawsuits will divert resources and could result in the payment of
substantial damages.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 2004.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The information regarding market, market price range and dividend
information may be found in Note 7 of Notes to Consolidated Financial Statements
on this Annual Report on Form 10-K.
The information required by this item regarding equity compensation
plans is incorporated by reference to the information set forth in Item 12 of
this Annual Report on Form 10-K.
The following table sets forth certain information with respect to
common stock purchased by the Company for the three-month period ended June 27,
2004. In addition to the shares purchased in the table below, the Company also
purchased a total of 5,005,000 shares in the first, second and third quarter of
fiscal 2004. During fiscal 2004, the Company purchased a total of 8,411,200
shares of common stock for $331.9 million.
- -------------------------------------------------------------------------------------------------------------------------
Total Number of Shares Maximum Number of
Purchased as Part of Shares that May Yet be
Period Total Number of Average Price Publicly Announced Purchased Under the
Shares Purchased Paid per Share Plans or Programs (1) Plans or Programs
- -------------------------------------------------------------------------------------------------------------------------
Month #1
(March 29, 2004 - April 25, 2004) 1,750,000 $ 38.36 1,750,000 3,315,152
- -------------------------------------------------------------------------------------------------------------------------
Month #2
(April 26, 2004 - May 23, 2004) 1,656,200 $ 36.17 1,656,200 1,658,952
- -------------------------------------------------------------------------------------------------------------------------
Month #3 -- -- -- --
(May 24, 2004 - June 27, 2004)
- -------------------------------------------------------------------------------------------------------------------------
Total 3,406,200 $ 37.30 3,406,200 1,658,952
- -------------------------------------------------------------------------------------------------------------------------
(1) On July 20, 2004, the Company's Board of Directors authorized the
Company to purchase up to an additional 10,000,000 shares of its outstanding
common stock in the open market over a two year time period.
ITEM 6. SELECTED FINANCIAL DATA
FIVE FISCAL YEARS ENDED JUNE 27, 2004 2004 2003 2002 2001 2000
- --------------------------------------------------- ----------- ----------- ----------- ----------- -----------
In thousands, except per share amounts
Income statement information
Net sales $ 807,281 $ 606,573 $ 512,282 $ 972,625 $ 705,917
Net income 328,171 236,591 197,629 427,456 287,906
Basic earnings per share 1.05 0.76 0.62 1.35 0.93
Diluted earnings per share 1.02 0.74 0.60 1.29 0.88
Weighted average shares outstanding - Basic 312,063 313,115 317,215 316,924 310,953
Weighted average shares outstanding - Diluted 321,456 321,375 328,538 332,527 328,002
Balance sheet information
Cash, cash equivalents and short-term
investments $1,656,540 $1,593,567 $1,552,030 $1,549,002 $1,175,558
Total assets 2,087,703 2,056,879 1,988,433 2,017,074 1,507,256
Long-term debt -- -- -- -- --
Cash dividends per share $ 0.28 $ 0.21 $ 0.17 $ 0.13 $ 0.09
- --------------------------------------------------- ----------- ----------- ----------- ----------- -----------
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 and revenue
recognition. 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
consolidated financial statements.
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. In
addition to writedowns based on newly introduced parts, statistical and
judgmental assessments are calculated for the remaining inventory based on
salability and obsolescence.
Revenue Recognition
Revenue from product sales made directly to customers is recognized
upon the transfer of title, which generally occurs at the time of shipment.
Revenue from the Company's sales to domestic distributors is recognized under
agreements which provide for certain sales price rebates and limited product
return privileges. As a result, the Company defers recognition of such sales
until the domestic distributors sell the merchandise. The Company relieves
inventory and records a receivable on the initial sale to the distributor as
title has passed to the distributor and payment is collected on the receivable
within normal trade terms. The income to be derived from distributor sales is
recorded under current liabilities on the balance sheet as "Deferred income on
shipments to distributors" until such time as the distributor confirms a final
sale to its end customer.
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 estimates international distributor returns based on
historical data and current business expectations and defers a portion of
international distributor sales and profits based on these estimated returns.
Such amounts are classified in "Deferred income on shipments to distributors" on
the accompanying balance sheet.
15
Results of Operations
The table below states the income statement items as a percentage of
net sales and provides the percentage change of such items compared to the prior
fiscal year amount.
Fiscal Year Ended Percentage Change
------------------------------------------- ------------------------------
June 27, June 29, June 30, 2004 Over 2003 Over
2004 2003 2002 2003 2002
----------- ----------- ------------ -------------- ------------
Net sales 100.0% 100.0% 100.0% 33% 18%
Cost of sales 23.0 25.6 28.2 20 7
---- ---- ----
Gross profit 77.0 74.4 71.8 38 23
---- ---- ----
Expenses:
Research & development 13.0 15.1 15.6 14 14
Selling, general &
administrative 9.9 10.8 12.2 22 5
--- ---- ----
22.9 25.9 27.8 18 10
---- ---- ----
Operating income 54.1 48.5 44.0 48 31
Interest income, net 3.2 6.4 10.3 (34) (27)
---- ---- ----
Income before income taxes 57.3% 54.9% 54.3% 39 20
==== ==== ====
Effective tax rates 29.0% 29.0% 29.0%
==== ==== ====
Net sales for the twelve months ended June 27, 2004 were $807.3
million, an increase of $200.7 million or 33% over net sales of $606.6 million
for the same period of the previous fiscal year. The increase in net sales for
the twelve-month period was due to a significant increase in unit volume as
demand increased for the Company's products in each of its major end-markets,
particularly in the industrial and communication markets. This increase in unit
volume was enhanced by significant growth in sales of smaller packaged products
that go into a wide variety of hand-held products such as cellular phones and
MP3 players. The significant increase in unit volume was offset partially by a
reduction in average selling price, which decreased to $1.40 in fiscal 2004 from
$1.57 in fiscal 2003, primarily as a result of the change in sales mix towards
smaller packages which carry lower average selling prices.
Geographically, international sales were $569.7 million or 71% of net
sales for the twelve months ended June 27, 2004, an increase of $156.3 million
as compared to international sales of $413.4 million or 68% of net sales for the
same period in fiscal 2003. Internationally, sales to Rest of the World ("ROW"),
which is primarily Asia excluding Japan, represented $309.1 million or 38% of
net sales, while sales to Europe and Japan were $140.4 million or 18% of net
sales and $120.2 million or 15% of net sales, respectively. Domestic sales were
$237.6 million or 29% of net sales for the twelve months ended June 27, 2004, an
increase of $44.4 million as compared to domestic sales of $193.2 million or 32%
of net sales in the same period in fiscal 2003. Sales increased in absolute
dollars both internationally and domestically, however the decline in domestic
sales as a percentage of net sales and the respective increase in international
sales as a percentage of net sales primarily resulted from the Company's
domestic customers shifting more of their manufacturing operations overseas.
Net sales for the year ended June 29, 2003 were $606.6 million, an
increase of $94.3 million or 18% over net sales of $512.3 million in fiscal
2002. The increase in net sales was primarily due to an increase in unit
shipments, which was partially offset by a decrease in the average selling price
primarily due to a change in sales mix to smaller packaged products. The average
selling price fell from $1.85 per unit in fiscal 2002 to $1.57 per unit in
fiscal 2003. In fiscal 2003 international sales represented $413.4 or 68% of net
sales, an increase of $87.2 million as compared to international sales of $326.2
million or 64% of net sales for the same period in fiscal 2002. In fiscal 2003
sales to ROW represented $203.5 million or 34% of net sales, while sales to
Europe and Japan were $111.1 million or 18% of net sales and $98.8 million or
16% of net sales, respectively. Domestic sales were $193.2 million or 32% of net
sales for the twelve months ended June 29, 2003 compared to $186.1 million or
36% of net sales in the same period in fiscal 2002.
Gross profit for the year ended June 27, 2004 was $621.3 million, an
increase of $169.8 million or 38% over gross profit of $451.5 million in fiscal
2003. Gross profit as a percentage of net sales increased to 77% of net sales in
fiscal 2004 as compared to 74.4% of net sales in fiscal 2003. The increase in
gross profit as a percentage of net sales in fiscal 2004 was primarily due to
the favorable effect of fixed costs allocated across higher net sales. Net sales
increased 33% in fiscal 2004. The decrease in average selling price referred to
16
above did not have a commensurate effect on gross margin. Most of the reduction
in average selling price was due to a change in product mix as the Company has
had increased sales of products with smaller die and package types, which have a
smaller average selling price, but also lower costs.
Gross profit for the year ended June 29, 2003 was $451.5 million, an
increase of $83.9 million or 23% over gross profit of $367.6 million in fiscal
2002. Gross profit was 74.4% of net sales in fiscal 2003 as compared to 71.8% in
fiscal 2002. The increase in gross profit as a percentage of net sales in fiscal
2003 was primarily due to the favorable effect of fixed costs allocated across
higher net sales. Net sales increased 18% in fiscal 2003 over fiscal 2002. This
effect was offset by increases to the employee profit sharing accrual and fewer
weekly plant shutdowns in fiscal 2003 when compared to fiscal 2002.
Research and development ("R&D") expense for the year ended June 27,
2004 was $104.6 million, an increase of $13.2 million or 14% over R&D expense of
$91.4 million in fiscal 2003. The increase in R&D was primarily due to a $10.6
million increase in compensation costs. Compensation costs increased as the
result of increases to the profit sharing accrual, employee headcount, annual
merit increases, and the related fringe on these increases. Since the Company
had better operating results, R&D profit sharing grew $5.5 million while
compensation related to headcount, annual merit increases and the related fringe
on these increases together totaled $5.1 million. In addition, the Company had a
$2.6 million increase in non-compensation costs, primarily software maintenance
amortization, supplies and depreciation.
R&D expense for the year ended June 29, 2003 was $91.4 million, an
increase of $11.6 million or 14% over R&D expense of $79.8 million in fiscal
2002. The increase in R&D in fiscal 2003 as compared to fiscal 2002 was due to
increases in compensation costs caused by higher profit sharing, increased
headcount, merit increases and fewer weekly plant shutdowns. Since the Company
had better operating results in fiscal 2003 over fiscal 2002, R&D profit sharing
grew $2.1 million while compensation related to headcount, fewer weekly plant
shutdowns, annual merit increases and the related fringe on these increases
together totaled $6.7 million. In addition, the Company had a $2.8 million
increase in non-compensation costs, primarily software maintenance amortization
and depreciation.
Selling, general and administrative ("SG&A") expense for the year ended
June 27, 2004 was $80.0 million, an increase of $14.4 million or 22% over SG&A
expense of $65.6 million in fiscal 2003. The increase in SG&A was due to a $10.5
million increase in compensation costs. Compensation costs grew as the result of
increases to the profit sharing accrual, employee headcount, annual merit
increases and commissions. Since the Company had better operating results, SG&A
profit sharing grew $4.0 million while compensation related to headcount, annual
merit increases and commissions together totaled $6.5 million. In addition to
compensation costs, the Company had a $3.9 million increase in SG&A related
expenses for advertising, outside services and travel costs.
SG&A expense for the year ended June 29, 2003 was $65.6 million, an
increase of $3.0 million or 5% over SG&A expense of $62.6 million in fiscal
2002. The increase in SG&A in fiscal 2003 as compared to fiscal 2002 was due to
increases in compensation costs caused by higher profit sharing, increased
headcount, merit increases and fewer weekly plant shutdowns. Since the Company
had better operating results in fiscal 2003 over fiscal 2002, SG&A profit
sharing grew $1.5 million while compensation related to headcount, fewer weekly
plant shutdowns, annual merit increases and the related fringe on these
increases together totaled $3.0 million. The increases in compensation costs
were offset by a $1.5 million decrease in outside service costs and legal
expenses.
Interest income, net decreased 34% in fiscal 2004 to $25.5 million from
$38.7 million in fiscal 2003. Interest income, net decreased in fiscal 2004 when
compared to fiscal 2003 due to the decline in average interest rates earned on
the Company's cash, cash equivalent and short-term investment balance which was
partially offset by the interest earned on the $63.0 million increase in cash,
cash equivalents and short-term investment balance. Also contributing to the
decline in interest income, net was the increase in interest expense on the
Company's long-term royalty agreement. Interest expense for the year ended June
27, 2004 was $2.1 million, an increase of $1.6 million over interest expense of
$0.5 million in fiscal 2003.
Interest income, net decreased 27% in fiscal 2003 to $38.7 million from
$53.3 million in fiscal 2002. Interest income, net decreased in fiscal 2003 when
compared to fiscal 2002 due to the decline in average interest rates earned on
the Company's cash, cash equivalent and short-term investment balance which was
partially offset by the interest earned on the $41.5 million increase in cash,
cash equivalent and short-term investment balance. Also contributing to the
17
decline in interest income, net was the addition of interest expense in fiscal
2003 relating to the Company's long-term royalty agreement.
The Company's effective tax rate was 29%, in fiscal 2004, 2003 and
2002. The tax rate is lower than the federal statutory rate primarily due to
business activity in foreign jurisdictions with lower tax rates, tax-exempt
interest income and the tax credits received by the Company for qualified R&D
expenditures. During the third quarter of fiscal 2004 the Singapore government
agreed to extend the Company's tax holiday for seven years, through August 2011
provided that the Company fulfills certain investment requirements in qualifying
activities. The tax holiday may be extended through August 2014 provided that
the Company fulfills additional investment requirements in qualifying
activities.
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, general conditions in the world economy and financial
markets and other factors described below and in "Risks and Competition" located
in the "Business" section of this Annual Report on Form 10-K.
The Company experienced strong yearly growth in fiscal 2004 by growing
sales and profits 33% and 39% respectively. The Company grew sales in each
geographic market area and in each of its end-markets: industrial communication,
computer, automotive, high-end consumer and space level/military. The
Semiconductor Industry Assn. (SIA) forecasts are projecting robust growth for
2004 through 2007 with analog growing from $26.8 billion at the start of 2004 to
$42.7 billion at the end of 2007. In light of the business outlook and the
Company's anticipated growth, the Company is developing its leasehold property
located in Singapore adjacent to its existing facility. The new building will be
used primarily to increase its capacity for test and distribution operations.
The Company anticipates that the building will be completed by the end of fiscal
2005. In addition to this expansion, the Company is also adding to wafer
fabrication capacity in both Camas and Hillview.
The Company continues to have a positive book to bill ratio, backlog of
$151.2 million at June 27, 2004 is up significantly from last year's backlog of
$57.2 million. The Company's inventory is well positioned and the Company
continues to have responsive lead times. Consequently, should these positive
trends continue, the Company expects to have a seasonally strong start to the
new fiscal year with sales growing roughly 5%-7% sequentially in the September
fiscal 2005 quarter from the June quarter just completed.
The Company anticipates that the effective tax rate will increase from
29% to 31% in the first part of fiscal 2005 as a result of the expiration of the
tax credit legislation for R&D expenses on June 30, 2004. Although its not
assured, the Company expects that Congress may extend the tax credit
legislation. Until such time however, the Company expects that its effective tax
rate will increase by 2 percentage points to 31% until the R&D credit is
extended. If the R&D credit is extended without interruption, the effective tax
rate will return to a 29% annual rate for fiscal 2005.
Estimates of future performance are uncertain, and past performance of
the Company may not be a good indicator of future performance due to factors
affecting the Company, its competitors, the semiconductor industry and the
overall economy. The semiconductor industry is characterized by rapid
technological change, price erosion, cyclical market patterns, periodic
oversupply conditions, occasional shortages of materials, capacity constraints,
variations in manufacturing efficiencies and significant expenditures for
capital equipment and product development. Furthermore, new product
introductions and patent protection of existing products, as well as exposure
related to patent infringement suits if brought against the Company, are factors
that can influence future sales growth and sustained profitability. The
Company's headquarters and a portion of its manufacturing facilities and
research and development activities and certain other critical business
operations are located near major earthquake fault lines in California,
consequently, the Company could be adversely affected in the event of a major
earthquake.
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. Furthermore, stocks of
18
high technology companies are subject to extreme price and volume fluctuations
that are often unrelated or disproportionate to the operating performance of
these companies.
Liquidity and Capital Resources
At June 27, 2004, cash, cash equivalents and short-term investments
totaled $1.7 billion and working capital was $1.6 billion. During fiscal 2004
the Company repurchased 8.4 million shares of its common stock for $331.9
million and distributed $87.5 million in dividends. After taking into
consideration the cash used for these purchases and dividend payments the
Company generated additional cash and short-term investments of $63.0 million.
During fiscal 2004, the Company generated $457.8 million of cash from
operating activities and $60.6 million in proceeds from common stock issued
under employee stock plans. During fiscal 2004, significant cash expenditures
included repurchasing $331.9 million of common stock, payments of $87.5 million
in cash dividends to stockholders, representing $0.06 per share per quarter for
the first and second quarters and $0.08 per share per quarter for the third and
fourth quarters, $20.7 million for the purchase of capital assets and net
purchases of short-term investments of $11.0 million. In July, the Company's
Board of Directors declared a quarterly cash dividend of $0.08 per share to be
paid during the September quarter of fiscal 2005. The payment of future
dividends will be based on quarterly financial performance.
During fiscal 2005 the Company anticipates roughly $75.0 million in
capital expenditures that will be used primarily to expand its wafer fabrication
facilities and its test and distribution operation noted above.
The Company has no debt and has historically satisfied its liquidity
needs through cash generated from operations and the initial placement of equity
securities. Given its strong financial condition and 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 for the foreseeable future.
As of June 27, 2004, the Company had no off-balance sheet financing
arrangements or activities outside of operating leases as disclosed in Note 4 of
Notes to Consolidated Financial Statements on this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's cash equivalents and short-term investments are subject
to market risk, primarily interest rate and credit risk. The Company's
investments are managed by outside professional managers within investment
guidelines set by the Company. Such guidelines include security type, credit
quality and maturity and are intended to limit market risk by restricting the
Company's investments to high quality debt instruments with relatively
short-term maturities. The Company does not use derivative financial instruments
in its investment portfolio. Based upon the weighted average duration of the
Company's investments at June 27, 2004, a hypothetical 100 basis point increase
in short-term interest rates would result in an unrealized loss in market value
of the Company's investments totaling approximately $10.2 million. However,
because the Company's debt securities are classified as available-for-sale, no
gains or losses are recognized by the Company in its results of operations due
to changes in interest rates unless such securities are sold prior to maturity.
These investments are reported at fair value with the related unrealized gains
being included in accumulated other comprehensive income, a component of
stockholders' equity. The Company generally holds securities until maturity.
The Company's sales outside the United States are transacted in U.S.
dollars; accordingly the Company's sales are not generally impacted by foreign
currency rate changes. To date, fluctuations in foreign currency exchange rates
have not had a material impact on the results of operations.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
THREE YEARS ENDED JUNE 27, 2004 2004 2003 2002
-------- -------- --------
Net sales $807,281 $606,573 $512,282
Cost of sales 185,960 155,066 144,719
-------- -------- --------
Gross profit 621,321 451,507 367,563
-------- -------- --------
Expenses:
Research and development 104,620 91,410 79,839
Selling, general and administrative 79,971 65,586 62,625
-------- -------- --------
184,591 156,996 142,464
-------- -------- --------
Operating income 436,730 294,511 225,099
Interest income, net 25,483 38,715 53,251
-------- -------- --------
Income before income taxes 462,213 333,226 278,350
Provision for income taxes 134,042 96,635 80,721
-------- -------- --------
Net income $328,171 $236,591 $197,629
======== ======== ========
Basic earnings per share $ 1.05 $ 0.76 $ 0.62
======== ======== ========
Shares used in the calculation of basic
earnings per share 312,063 313,115 317,215
======== ======== ========
Diluted earnings per share $ 1.02 $ 0.74 $ 0.60
======== ======== ========
Shares used in the calculation of diluted
earnings per share 321,456 321,375 328,538
======== ======== ========
Cash dividends per share $ 0.28 $ 0.21 $ 0.17
======== ======== ========
See accompanying notes.
20
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
JUNE 27, 2004 AND JUNE 29, 2003 2004 2003
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 203,542 $ 136,276
Short-term investments 1,452,998 1,457,291
Accounts receivable, net of allowance for
doubtful accounts of $1,762 ($1,762 in 2003) 79,142 80,094
Inventories:
Raw materials 3,353 3,196
Work-in-process 22,217 25,471
Finished goods 7,134 3,427
----------- -----------
Total inventories 32,704 32,094
Deferred tax assets 44,912 51,181
Prepaid expenses and other current assets 18,797 19,064
----------- -----------
Total current assets 1,832,095 1,776,000
----------- -----------
Property, plant and equipment, at cost:
Land, buildings and improvements 143,077 142,361
Manufacturing and test equipment 338,208 324,314
Office furniture and equipment 3,399 3,399
----------- -----------
484,684 470,074
Accumulated depreciation and amortization (283,604) (246,630)
----------- -----------
Net property, plant and equipment 201,080 223,444
----------- -----------
Other non current assets 54,528 57,435
----------- -----------
Total assets $ 2,087,703 $ 2,056,879
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 14,410 $ 7,480
Accrued payroll and related benefits 54,339 39,471
Deferred income on shipments to distributors 41,862 44,678
Income taxes payable 71,985 53,279
Other accrued liabilities 20,018 17,121
----------- -----------
Total current liabilities 202,614 162,029
----------- -----------
Deferred tax and other long-term liabilities 74,484 79,921
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 2,000 shares
authorized; none issued or outstanding -- --
Common stock, $0.001 par value, 2,000,000
shares authorized; 308,548 shares issued and
outstanding at June 27, 2004 (312,706 shares
at June 29, 2003) 309 313
Additional paid-in capital 815,163 740,084
Accumulated other comprehensive income, net of tax (2,460) 6,950
Retained earnings 997,593 1,067,582
----------- -----------
Total stockholders' equity 1,810,605 1,814,929
----------- -----------
Total liabilities and stockholders' equity $ 2,087,703 $ 2,056,879
=========== ===========
See accompanying notes.
21
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
THREE YEARS ENDED JUNE 27, 2004 2004 2003 2002
--------- --------- ---------
Cash flow from operating activities:
Net income $ 328,171 $ 236,591 $ 197,629
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 48,745 45,903 46,261
Tax benefit from stock option transactions 35,746 37,321 38,091
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable 952 1,353 8,389
Decrease (increase) in inventories (610) (3,152) (3,350)
Decrease (increase) in deferred tax assets 7,809 (7,427) (272)
Decrease (increase) in prepaid expenses
and other current assets 267 1,344 (1,472)
Decrease (increase) in long-term assets (2,750) (1,750) --
Increase (decrease) in accounts payable, accrued 21,225 (52) (46,933)
payroll and other accrued liabilities
Increase (decrease) in deferred income
on shipments to distributors (2,816) (1,490) 1,687
Increase (decrease) in income taxes payable 18,707 (10,075) 12,019
Increase (decrease) in deferred tax liabilities 2,382 (14,333) 5,089
--------- --------- ---------
Cash provided by operating activities 457,828 284,233 257,138
--------- --------- ---------
Cash flow from investing activities:
Purchase of short-term investments (908,557) (881,284) (961,041)
Proceeds from sales and maturities of short-term
investments 897,550 775,617 848,613
Purchase of property, plant and equipment (20,724) (6,609) (17,887)
--------- --------- ---------
Cash used in investing activities (31,731) (112,276) (130,315)
--------- --------- ---------
Cash flow from financing activities:
Issuance of common shares under employee stock plans 60,626 48,422 39,333
Purchase of common stock (331,937) (230,005) (221,551)
Payment of cash dividends (87,520) (65,804) (54,005)
--------- --------- ---------
Cash used in financing activities (358,831) (247,387) (236,223)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 67,266 (75,430) (109,400)
Cash and cash equivalents, beginning of period 136,276 211,706 321,106
--------- --------- ---------
Cash and cash equivalents, end of period $ 203,542 $ 136,276 $ 211,706
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the fiscal year for income taxes $ 68,496 $ 90,637 $ 25,483
========= ========= =========
See accompanying notes.
22
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share amounts)
THREE YEARS ENDED JUNE 27, 2004 Accumulated
Common Stock Additional Other Total
------------------- Paid-In Comprehensive Retained Stockholders'
Shares Amount Capital Income Earnings Equity
------- -------- ----------- ---------- ----------- -----------
Balance at July 1, 2001 318,908 $ 319 $ 607,883 $ -- $ 1,173,755 $ 1,781,957
Issuance of common stock for cash under employee
stock option and stock purchase plans 3,681 3 39,330 -- -- 39,333
Tax benefit from stock option transactions -- -- 38,091 -- -- 38,091
Purchase and retirement of common stock (6,439) (6) (12,704) -- (208,841) (221,551)
Cash dividends - $0.17 per share -- -- -- -- (54,005) (54,005)
Net income -- -- -- -- 197,629 197,629
------- -------- ----------- ---------- ----------- -----------
Balance at June 30, 2002 316,150 316 672,600 -- 1,108,538 1,781,454
Issuance of common stock for cash under employee
stock option and stock purchase plans 4,946 5 48,417 -- -- 48,422
Tax benefit from stock option transactions -- -- 37,321 -- -- 37,321
Purchase and retirement of common stock (8,390) (8) (18,254) -- (211,743) (230,005)
Cash dividends - $0.21 per share -- -- -- -- (65,804) (65,804)
Comprehensive income:
Unrealized gain on available for
sale investments, net of tax -- -- -- 6,950 -- 6,950
Net income -- -- -- -- 236,591 236,591
-----------
Comprehensive income -- -- -- -- -- 243,541
------- -------- ----------- ---------- ----------- -----------
Balance at June 29, 2003 312,706 313 740,084 6,950 1,067,582 1,814,929
Issuance of common stock for cash under employee
stock option and stock purchase plans 4,253 4 60,622 -- -- 60,626
Tax benefit from stock option transactions -- -- 35,746 -- -- 35,746
Purchase and retirement of common stock (8,411) (8) (21,289) -- (310,640) (331,937)
Cash dividends - $0.28 per share -- -- -- -- (87,520) (87,520)
Comprehensive income:
Unrealized loss on available for
sale investments, net of tax -- -- -- (9,410) -- (9,410)
Net income -- -- -- -- 328,171 328,171
-----------
Comprehensive income -- -- -- -- -- 318,761
------- -------- ----------- ---------- ----------- -----------
Balance at June 27, 2004 308,548 $ 309 $ 815,163 $ (2,460) $ 997,593 $ 1,810,605
======= ======== =========== ========== =========== ===========
See accompanying notes.
23
LINEAR TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of business and significant accounting policies
Description of business
Linear Technology Corporation (together with its consolidated
subsidiaries, "Linear Technology" or the "Company") designs, manufactures and
markets a broad line of standard high performance linear integrated circuits.
Applications for the Company's products include telecommunications, cellular
telephones, networking products, notebook computers, computer peripherals,
video/multimedia, industrial instrumentation, security monitoring devices,
high-end consumer products such as digital cameras and MP3 players, complex
medical devices, automotive electronics, factory automation, process control,
and military and space systems. The Company was organized and incorporated in
1981.
Basis of presentation
The Company's fiscal year ends on the Sunday nearest June 30. Fiscal
2004, 2003, and 2002 were 52 week periods. The accompanying consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries after elimination of all significant inter-company accounts and
transactions. Accounts denominated in foreign currencies have been translated
using the U.S. dollar as the functional currency.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash equivalents and short-term investments
Cash equivalents are highly liquid investments with original maturities
of three months or less at the time of purchase. Investments with maturities
over three months at the time of purchase are classified as short-term
investments.
At June 27, 2004 and June 29, 2003, all of the Company's investments in
debt securities were classified as available-for-sale, which means that,
although the Company principally holds securities until maturity, they may be
sold under certain circumstances. The debt securities are carried at fair market
value, determined using quoted market prices for these securities. Realized
gains and losses from short-term investments were not material for all periods
presented.
Concentrations of Credit Risk, Off Balance Sheet Risk and Contingencies
The Company's investment policy restricts investments to high credit
quality investments with maturities of three years or less and limits the amount
invested with any one issuer. Concentrations of credit risk with respect to
accounts receivable are generally not significant due to the diversity of the
Company's customers and geographic sales areas. The Company performs ongoing
credit evaluations of its customers' financial condition and requires
collateral, primarily letters of credit, as deemed necessary.
No single end customer has accounted for 10% or more of the Company's
net sales. The Company's primary domestic distributor, Arrow Electronics,
accounted for 15% of net sales during fiscal 2004 and 20% of accounts receivable
as of June 27, 2004; 15% of net sales during fiscal 2003 and 18% of accounts
receivable as of June 29, 2003. Distributors are not end customers, but rather
serve as a channel of sale to many end users of the Company's products. No other
distributor or end customer accounted for 10% or more of net sales for fiscal
2004, 2003, and 2002.
The Company's assets, liabilities and cash flows are predominantly U.S.
dollar denominated, including those of its foreign operations. However, the
Company's foreign subsidiaries have certain assets, liabilities and cash flows
that are subject to foreign currency risk. The Company considers this risk to be
minor and, for the three years ended June 27, 2004, had not utilized derivative
instruments to hedge foreign currency risk or for any other purpose. Gains and
24
losses resulting from foreign currency fluctuations are recognized in income
currently and were not material for all periods presented.
The Company is subject to contingencies, including legal proceedings
arising out of a wide range of matters, including, among others, patent suits
and employment claims. While it is impossible to ascertain the ultimate legal
and financial liability with respect to these lawsuits, the Company believes
that the aggregate amount of such liabilities, if any, will not have a material
adverse effect on the consolidated financial position or results of operation of
the Company.
Inventories
The Company values inventories at the lower of cost or market on a
first-in, first-out basis. 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. In addition to write-downs based on newly introduced parts,
statistical and judgmental assessments are calculated for the remaining
inventory based on salability and obsolescence.
Property, plant and equipment and Other Non Current Assets
Depreciation for property plant and equipment is provided using the
straight-line method over the estimated useful lives of the assets (3-7 years
for equipment and 10-30 years for buildings and building improvements).
Leasehold improvements are amortized over the shorter of the asset's useful life
or the expected term of the lease. Depreciation expense for fiscal 2004 and
fiscal 2003 was $43.1 million and $44 million, respectively. Other assets
principally relate to technology agreements that are generally amortized over
their contractual periods, primarily 3 to 10 years using the straight-line
method of amortization. The Company performs reviews of its long-lived assets to
determine whether facts and circumstances exist which indicate that the carrying
amount of the assets may not be recoverable or that the useful life is shorter
than originally estimated.
Long-lived assets (including property plant and equipment and intangible assets)
by geographic area were as follows:
In thousands 2004 2003
-------- --------
United States $209,795 $239,641
Malaysia 24,549 22,276
Singapore 21,246 18,944
Other 18 18
-------- --------
Total long-lived assets $255,608 $280,879
======== ========
Revenue Recognition
Revenue from product sales made directly to customers is recognized
upon the transfer of title, which generally occurs at the time of shipment.
Revenue from the Company's sales to domestic distributors is recognized under
agreements which provide for certain sales price rebates and limited product
return privileges. As a result, the Company defers recognition of such sales
until the domestic distributors sell the merchandise. The Company relieves
inventory and records a receivable on the initial sale to the distributor as
title has passed to the distributor and payment is collected on the receivable
within normal trade terms. The income to be derived from distributor sales is
recorded under current liabilities on the balance sheet as "Deferred income on
shipments to distributors" until such time as the distributor confirms a final
sale to its end customer.
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 estimates international distributor returns based on
historical data and current business expectations and defers a portion of
international distributor sales and profits based on these estimated returns.
Such amounts are classified in "Deferred income on shipments to distributors" on
the accompanying balance sheet.
Product Warranty and Indemnification
The Company's warranty policy provides for the replacement of defective
parts. In certain large contracts, the Company has agreed to negotiate in good
25
faith a warranty expense in the event that an epidemic failure of its parts were
to take place. To date there have been no such occurrences. Warranty expense
historically has been negligible.
The Company provides a limited indemnification of customers against
intellectual property infringement claims related to the Company's products. In
certain cases, there are limits on and exceptions to the Company's potential
liability for indemnification relating to intellectual property infringement
claims. To date, the Company has not incurred any significant indemnification
expenses relating to intellectual property infringement claims. The Company
cannot estimate the amount of potential future payments, if any, that the
Company might be required to make as a result of these agreements, and
accordingly, the Company has not accrued any amounts for its indemnification
obligations.
Stock Based Compensation
As permitted by SFAS 148 and SFAS 123, the Company continues to apply
the accounting provisions of APB 25, and related interpretations, with regard to
the measurement of compensation cost for options granted under the Company's
equity compensation plans. No employee compensation expense has been recorded as
all options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. Had expense been recognized using
the fair value method described in SFAS 123, using the Black-Scholes
option-pricing model, the Company would have reported the following results of
operations:
June 27, June 29, June 30,
In thousands 2004 2003 2002
----------- ----------- ----------
Net income, as reported $ 328,171 $ 236,591 $ 197,629
Deduct: total stock-based
compensation expense
determined under the fair value
method, net of tax (75,207) (75,867) (65,693)
----------- ----------- ----------
Pro forma net income $ 252,964 $ 160,724 $ 131,936
=========== =========== ==========
Earning per share:
Basic-as reported $ 1.05 $ 0.76 $ 0.62
=========== =========== ==========
Basic-pro forma $ 0.81 $ 0.51 $ 0.42
=========== =========== ==========
Diluted-as reported $ 1.02 $ 0.74 $ 0.60
=========== =========== ==========
Diluted-pro forma $ 0.79 $ 0.50 $ 0.40
=========== =========== ==========
See Note 5 for a discussion on the assumptions used in the
option-pricing model and estimated fair value of employee stock options.
Earnings Per Share
Basic earnings per share is calculated using the weighted average
shares of common stock outstanding during the period. Diluted earnings per share
is calculated using the weighted average shares of common stock outstanding,
plus the dilutive effect of stock options, calculated using the treasury stock
method. The dilutive effect of stock options was 9,393,000, 8,260,000, and
11,323,000 shares for fiscal 2004, 2003, and 2002, respectively. The weighted
average diluted common shares outstanding for fiscal 2004, 2003, and 2002
excludes the dilutive effect of approximately 9,069,000, 14,434,000, and
16,433,000 options, respectively, since such options have an exercise price in
excess of the average market value of the Company's common stock during the
fiscal year.
Comprehensive Income
Accumulated other comprehensive income consists entirely of unrealized
gains and losses on available-for-sale securities. The Company, in practice,
primarily holds its cash and short-term investments until maturity.
Segment Reporting
The Company competes in a single operating segment, and as a result, no
segment information has been disclosed outside of geographical information.
Disclosures about products and services, and major customers are included above
in Note 1.
26
Export sales by geographic area were as follows:
In thousands 2004 2003 2002
-------- -------- --------
Europe $140,486 $111,149 $102,413
Japan 120,180 98,785 60,759
Rest of the World 309,050 203,484 163,019
-------- -------- --------
Total export sales $569,716 $413,418 $326,191
======== ======== ========
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities."
FIN 46 requires an investor with a majority of the variable interests (primary
beneficiary) in a variable interest entity (VIE) to consolidate the entity and
also requires majority and significant variable interest investors to provide
certain disclosures. A VIE is an entity in which the voting equity investors do
not have a controlling interest, or the equity investment at risk is
insufficient to finance the entity's activities without receiving additional
subordinated financial support from other parties. FIN 46 clarifies the
application of Accounting Research Bulletin No. 51 and applies immediately to
any variable interest entities created after January 31, 2003 and to variable
interest entities in which an interest is obtained after that date. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 must be applied for the first interim or annual period ending after
March 15, 2004. The adoption of FIN 46 did not have an impact on the Company's
results of operations or financial position.
In March 2004, the Financial Accounting Standards Board (FASB) approved
the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." The objective of this Issue is to provide guidance for identifying
impaired investments. EITF 03-1 also provides new disclosure requirements for
investments that are deemed to be temporarily impaired. The accounting
provisions of EITF 03-1 are effective for all reporting periods beginning after
June 15, 2004, while the disclosure requirements are effective only for annual
periods ending after June 15, 2004. The Company has evaluated the impact of the
adoption of EITF 03-1 and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
Note 2. Short-term Investments
The Company accounts for its investments in marketable securities in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." All of the Company's cash equivalents and short-term
investments are treated as "available-for-sale" under SFAS No. 115. The
securities are reported at fair value with the related unrealized gains and
losses included in accumulated other comprehensive income, a component of
stockholder equity, net of tax.
The following is a summary of available-for-sale short-term investments at June
27, 2004:
In thousands Amortized Unrealized Unrealized Estimated Fair
Cost Gain (Loss) (1) Value
---------- ---------- ---------- ----------
U.S. Treasury securities and obligations
of U.S. government agencies $ 390,296 $ 207 $ (1,640) $ 388,863
Municipal bonds 685,036 407 (2,496) 682,947
Corporate debt securities and other 555,898 136 (614) 555,420
---------- ---------- ---------- ----------
Total $1,631,230 $ 750 $ (4,750) $1,627,230
========== ========== ========== ==========
Amounts included in:
Cash equivalents $ 174,232 $ -- $ -- $ 174,232
Short-term investments 1,456,998 750 (4,750) 1,452,998
---------- ---------- ---------- ----------
Total securities $1,631,230 $ 750 $ (4,750) $1,627,230
========== ========== ========== ==========
27
(1) The Company evaluated the nature of the investments with a loss
position at June 27, 2004, which are primarily obligations of the US government
and its agencies, municipal bonds and U.S. corporate notes. In evaluating the
investments the Company considered the duration of the impairments, and the
amount of the impairments relative to the underlying portfolio and concluded
that such amounts were not "other-than-temporary" as defined by SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." In addition,
as stated in Note 1. "Cash equivalents and short-term investments" the Company
principally holds securities until maturity, however they may be sold under
certain circumstances. Unrealized losses greater than twelve months old were not
significant as of June 27, 2004.
The following is a summary of available-for-sale short-term investments at June
29, 2003:
In thousands Amortized Unrealized Unrealized Estimated Fair
Cost Gain (Loss) (2) Value
---------- ---------- ---------- ----------
U.S. Treasury securities and obligations $ 475,339 $ 4,979 $ -- $ 480,318
of U.S. government agencies
Municipal bonds 697,184 5,560 -- 702,744
Corporate debt securities and other 350,029 761 -- 350,790
---------- ---------- --------- ----------
Total $1,522,552 $ 11,300 $ -- $1,533,852
========== ========== ========= ==========
Amounts included in:
Cash equivalents $ 76,561 $ -- $ -- $ 76,561
Short-term investments 1,445,991 11,300 -- 1,457,291
---------- ---------- --------- ----------
Total securities $1,522,552 $ 11,300 $ -- $1,533,852
========== ========== ========= ==========
(2) Unrealized losses were not significant at June 29, 2003.
The contractual maturities of short-term investments at June 27, 2004
were as follows: one year or less at the estimated fair value- $745,834; one
year to three years at the estimated fair value- $707,164. The contractual
maturities of short-term investments at June 29, 2003 were as follows: one year
or less at the estimated fair value- $714,118, one year to three years at the
estimated fair value- $743,173. Expected maturities may differ from contractual
maturities because the issuers of the securities may have the right to repay
obligations without prepayment penalties.
Note 3. Intangible Assets
The Company amortizes its intangible assets with definite lives over
periods ranging from 3 to 10 years using the straight-line method of
amortization. The weighted remaining amortization period at June 27, 2004 is 8.2
years. The Company's intangible assets consist of technology licenses only.
Amortizable intangible assets are classified within other non-current assets on
the balance sheet. Amortizable intangible assets at June 27, 2004 and June 29,
2003 are as follows:
In thousands June 27, June 29,
2004 2003
-------- --------
Gross Carrying Amount $ 61,070 $ 58,320
Accumulated Amortization (7,542) (1,885)
-------- --------
Total intangible assets $ 53,528 $ 56,435
======== ========
Amortization expense associated with intangible assets for fiscal 2004
and fiscal 2003 were $5.7 million and $1.9 million, respectively. Amortization
expense for the net carrying amount of intangible assets at June 27, 2004 is
estimated to be $6.4 million in fiscal 2005, $7.2 million in fiscal 2006, $7.2
million in fiscal 2007, $6.4 million in fiscal 2008, and $5.7 million in fiscal
2009.
28
Note 4. Lease commitments
The Company leases certain of its facilities under operating leases,
some of which have options to extend the lease period. In addition, the Company
has entered into long-term land leases for the sites of its Singapore and
Malaysia manufacturing facilities.
At June 27, 2004, future minimum lease payments under non-cancelable
operating leases having an initial term in excess of one year were as follows:
fiscal 2005: $4,259,000; fiscal 2006: $3,368,000; fiscal 2007: $2,971,000;
fiscal 2008: $2,756,000; fiscal 2009: $2,479,000; and thereafter: $4,993,000.
Total rent expense was $4,722,000, $4,044,000, and $3,418,000 in fiscal
2004, 2003 and 2002, respectively.
Note 5. Employee benefit plans
Stock Option Plans
The Company has stock option plans under which options to purchase
shares of the Company's common stock may be granted to employees and directors.
At June 27, 2004, the total authorized number of shares under all plans was
184,000,000. At June 27, 2004, 23,000,416 shares were available for grant under
all plans. Options become exercisable over a five-year period (generally 10%
every six months.) All options expire ten years after the date of the grant.
The following table summarizes the stock option activity under all stock option
plans:
Stock Weighted-
Options Average
Outstanding Exercise Price
---------------- ----------------
Outstanding options, July 1, 2001 41,795,320 21.21
----------
Granted 1,838,000 38.96
Forfeited and expired (1,220,650) 33.19
Exercised (3,519,710) 9.69
----------
Outstanding options, June 30, 2002 38,892,960 22.72
----------
Granted 8,075,530 25.68
Forfeited and expired (736,546) 34.85
Exercised (4,710,476) 9.06
----------
Outstanding options, June 29, 2003 41,521,468 $ 24.58
----------
Granted 4,360,000 39.66
Forfeited and expired (824,630) 37.31
Exercised (4,063,488) 13.49
----------
Outstanding options, June 27, 2004 40,993,350 $ 27.03
==========
Options exercisable at:
June 30, 2002 25,647,675 16.19
June 29, 2003 27,474,426 20.17
June 27, 2004 29,134,480 23.46
29
The following table sets forth certain information with respect to employee
stock options outstanding and exercisable at June 27, 2004:
Options Outstanding Options Exercisable
---------------- ------------ --------------- ---------------------------
Weighted
Weighted Average Weighted
Average Remaining Stock Average
Range of Stock Options Exercise Contractual Options Exercise
Exercise Prices Outstanding Price Life (Years) Exercisable Price
- ------------------------- ---------------- ------------ ------------- ------------- ---------
$ 5.63 - $ 12.97 10,713,200 $ 9.66 2.67 10,713,200 $ 9.66
$12.98 - $ 25.05 10,646,400 21.63 6.38 7,056,275 19.95
$25.06 - $ 40.90 13,443,400 34.84 7.00 7,492,970 32.61
$40.91 - $ 55.88 6,190,350 49.42 6.59 3,872,035 50.34
---------- ----------
$ 5.63 - $ 55.88 40,993,350 $27.03 5.64 29,134,480 $ 23.46
========== ==========
Stock purchase plan
The Company's stock purchase plan ("ESPP") permits eligible employees
to purchase common stock through payroll deductions at the lower of 85% of the
fair market value of common stock at the beginning or end of each six month
offering period. The offering periods commence on approximately May 1 and
November 1 of each year. At June 27, 2004, the shares reserved for issuance
under this plan totaled 8,400,000 and 7,703,823 shares had been issued under
this plan. During fiscal 2004, 189,303 shares were issued at a weighted-average
price of $31.27 per share pursuant to this plan.
FAS 123 Assumptions
Pro forma information regarding net income is required by SFAS 123,
which also requires that the information be determined as if the Company had
accounted for grants subsequent to December 31, 1994 under a method specified by
SFAS 123. The pro-forma information is presented in Note 1. Options granted were
estimated using the Black-Scholes valuation model. The following assumptions
were used for fiscal 2004, 2003 and 2002:
2004 2003 2002
------ ------ ------
Expected lives 6.9 6.4 6.1
Expected volatility 67.0% 66.0% 69.0%
Dividend yields 0.7% 0.7% 0.5%
Risk free interest rates 3.1% 3.1% 4.4%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of publicly traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of publicly traded options,
and because changes in these subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not
provide a reliable single measure of the fair value of its stock options.
Using the Black-Scholes option pricing model, the weighted average
estimated fair value of employee stock options granted in fiscal 2004, 2003 and
2002 was $26.06, $16.35 and $25.59 per share, respectively. For the purposes of
the pro-forma information, the estimated fair values of the employee stock
options are amortized to expense using the straight-line method over the vesting
period.
Retirement Plan
The Company has established a 401(k) retirement plan for its qualified
U.S. employees. Contributions made by the Company to this plan were
approximately $7,248,000, $5,718,000 and $8,873,000 in fiscal 2004, 2003 and
2002, respectively.
30
Note 6. Income taxes
The components of income before income taxes are as follows:
In thousands 2004 2003 2002
--------- --------- ---------
United States operations $ 422,786 $ 299,828 $ 245,830
Foreign operations 39,427 33,398 32,520
--------- --------- ---------
$ 462,213 $ 333,226 $ 278,350
========= ========= =========
The provision for income taxes consists of the following:
In thousands 2004 2003 2002
--------- --------- ---------
United States federal:
Current $ 117,024 $ 105,972 $ 66,465
Deferred 8,129 (15,347) 4,751
--------- --------- ---------
125,153 90,625 71,216
--------- --------- ---------
State:
Current 4,718 6,493 5,923
Deferred 2,324 (2,960) 66
--------- --------- ---------
7,042 3,533 5,989
--------- --------- ---------
Foreign:
Current 2,108 1,580 3,516
Deferred (261) 897 --
--------- --------- ---------
1,847 2,477 3,516
--------- --------- ---------
$ 134,042 $ 96,635 $ 80,721
========= ========= =========
Actual current federal and state tax liabilities are lower than the
amounts reflected above by the tax benefit from stock option activity of
approximately $35,746,000, $37,321,000, and $38,091,000, for fiscal 2004, 2003
and 2002, respectively. The tax benefit from stock option activity is recorded
as a reduction in current income taxes payable and an increase in
additional-paid-in-capital.
The provision for income taxes reconciles to the amount computed by
applying the statutory U.S. federal rate at 35% to income before income taxes as
follows:
In thousands 2004 2003 2002
--------- --------- ---------
Tax at U.S. statutory rate $ 161,775 $ 116,629 $ 97,423
State income taxes, net of federal benefit 4,577 2,296 3,894
Earnings of foreign subsidiaries
subject to lower rates (6,676) (5,007) (5,069)
Tax-exempt interest income (5,824) (8,142) (10,850)
Export sales benefit (11,550) (6,825) (3,640)
Other (8,260) (2,316) (1,037)
--------- --------- ---------
$ 134,042 $ 96,635 $ 80,721
========= ========= =========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
31
components of the Company's deferred tax assets and liabilities recorded in the
balance sheet as of June 27, 2004 and June 29, 2003 are as follows:
In thousands 2004 2003
------- -------
Deferred tax assets:
Inventory valuation $15,225 $19,174
Deferred income on shipments to distributors 15,446 16,485
Taxes of foreign subsidiaries 6,137 6,165
Other 8,104 9,357
------- -------
Total deferred tax assets 44,912 51,181
Deferred tax liabilities:
Depreciation and amortization $10,357 $11,792
Unremitted earnings of foreign subsidiaries 9,537 5,692
Interest income of foreign subsidiaries 6,137 6,165
Unrealized gain on investments -- 4,350
------- -------
Total deferred tax liabilities 26,031 27,999
------- -------
Net deferred tax assets $18,881 $23,182
======= =======
The Company has a partial tax holiday in Singapore whereby the local
statutory rate is significantly reduced. The tax holiday is effective through
August 2011 and may be extended through August 2014, if certain conditions are
met. The Company's Malaysia tax holiday is effective through July 2005.
The impact of the Singapore and Malaysia tax holidays was to increase
net income by approximately $4,271,000 ($0.01 per diluted share) in fiscal 2004,
$3,439,000 ($0.01 per diluted share) in fiscal 2003, and $4,328,000 ($0.01 per
diluted share) in fiscal 2002. The Company does not provide a residual U.S. tax
on a portion of the undistributed earnings of its Singapore and Malaysia
subsidiaries, as it is the Company's intention to permanently invest these
earnings overseas. Should these earnings be remitted to the U.S. parent,
additional U.S. taxable income would be approximately $213,677,000.
The Internal Revenue Service (IRS) has examined the Company's
consolidated income tax returns through the fiscal year ending July 1, 2001. As
a result of the most recent examination for the five fiscal years ending July 1,
2001, the IRS has proposed certain adjustments to the amounts reflected by the
Company as a tax benefit for its export sales. The Company disputes the proposed
adjustments and intends to pursue the matter through applicable IRS and judicial
procedures as appropriate. Although the final outcome of the proposed
adjustments is uncertain, management believes that an adequate amount of taxes
and related interest and penalty, if any, have been provided for any adjustment
that may result from these years.
The Company has state tax credit carryforwards of $1.2 million, which
do not expire.
Note 7. Quarterly Information (Unaudited)
In thousands, except per share amounts
Quarter Ended Fiscal 2004 June 27, 2004 March 28, 2004 Dec. 28, 2003 Sept. 28, 2003
- ------------------------------------------- ------------------ ------------------ ------------------ -----------------
Net sales $238,050 $209,133 $186,021 $174,077
Gross profit 184,872 161,537 142,244 132,668
Net income 98,816 85,549 74,335 69,471
Basic earnings per share 0.32 0.27 0.24 0.22
Diluted earnings per share 0.31 0.27 0.23 0.22
Cash dividends per share 0.08 0.08 0.06 0.06
Stock price range per share:
High 39.78 44.95 44.33 41.94
Low 35.37 35.88 35.93 32.38
32
In thousands, except per share amounts
Quarter Ended Fiscal 2003 June 29, 2003 March 30, 2003 Dec. 29, 2002 Sept. 29, 2002
- ------------------------------------------- ------------------ ------------------ ------------------ -----------------
Net sales $165,767 $153,750 $145,045 $142,011
Gross profit 125,312 114,360 106,392 105,443
Net income 66,004 60,622 56,163 53,802
Basic earnings per share 0.21 0.19 0.18 0.17
Diluted earnings per share 0.21 0.19 0.18 0.17
Cash dividends per share 0.06 0.05 0.05 0.05
Stock price range per share:
High 36.77 34.91 34.96 33.10
Low 30.48 25.72 19.61 20.10
The stock activity in the above table is based on the high and low
closing prices. These prices represent quotations between dealers without
adjustment for retail markups, markdowns or commissions, and may not represent
actual transactions. The Company's common stock is traded on the NASDAQ National
market System under the symbol LLTC.
At June 27, 2004, there were approximately 1,682 stockholders of
record.
33
REPORT OF ERNST & Young LLP, Independent REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Linear Technology Corporation
We have audited the accompanying consolidated balance sheets of Linear
Technology Corporation as of June 27, 2004 and June 29, 2003, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 27, 2004. Our audits also included
the financial statement schedule listed in Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Linear
Technology Corporation at June 27, 2004 and June 29, 2003, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 27, 2004, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
San Jose, California
July 20, 2004
34
ITEM 9. CHANGES IN AND DISAGREEEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
The Company's management evaluated, with the participation of the Chief
Executive Officer and the Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this Annual Report on Form 10-K. Based on this evaluation, the Chief
Executive Officer and the Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information that the Company is required to disclose in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
(b) Changes in internal controls over financial reporting
There was no change in the Company's internal controls over financial
reporting that occurred during the fourth quarter of fiscal 2004 that has
materially affected, or is reasonably likely to materially affect, its internal
controls over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICER OF THE REGISTRANT
The information required by this item for the Company's directors is
incorporated herein by reference to the 2004 Proxy Statement, under the caption
"Proposal One - Election of Directors," and for the executive officers of the
Company, the information is included in Part I hereof under the caption
"Executive Officers of the Registrant." The information required by this item
with respect to compliance with Section 16(a) of the Securities Exchange Act of
1934 is incorporated by reference to the 2004 Proxy Statement under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance."
The Company had adopted a Code of Business Conduct and Ethics that
applies to all of its employees, including its Chief Executive Officer, Chief
Financial Officer, and its principal accounting officers. The Company's Code of
Business Conduct and Ethics is posted on its website at
http://www.linear-tech.com/. The Company intends to satisfy the disclosure
requirement under Item 5.05 of Form 8-K regarding any amendment to, or waiver
from, a provision of the Code of Business Conduct and Ethics by posting such
information on its website, at the address specified above.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the 2004 Proxy Statement, under the
section titled "Executive Officer Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Incorporated by reference to the 2004 Proxy Statement, under the
section titled "Beneficial Security Ownership of Directors, Executive Officers
and Certain Other Beneficial Owners: and "Securities Authorized for Issuance
Under Equity Compensation Plans."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
35
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference to the 2004 Proxy Statement, under the
section titled "Fees Billed To The Company By Ernst & Young LLP During The
Fiscal Year Ended June 27, 2004."
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements are included in Item 8:
Consolidated Statements of Income for each of the three years
in the period ended June 27, 2004
Consolidated Balance Sheets as of June 27, 2004 and June 29,
2003
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 27, 2004
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended June 27, 2004
Report of Independent Registered Public Accounting Firm
2. Schedules
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Additions
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions(1) Period
--------- -------- ------------- ------
Allowance for doubtful accounts:
Year ended June 30, 2002................. $803 $800 $301 $1,302
====== ====== ==== ======
Year ended June 29, 2003................. $1,302 $1,000 $540 $1,762
====== ====== ==== ======
Year ended June 27, 2004................. $1,762 $ -- $ -- $1,762
====== ====== ==== ======
(1) Write-offs of doubtful accounts.
Schedules other than the schedule listed above have been omitted since
they are either not required or the information is included elsewhere.
3. Exhibits
The Exhibits which are filed with this report or which are incorporated
by reference herein are set forth in the Exhibit Index.
(b) Reports on Form 8-K.
During the quarter ended June 27, 2004, the Company filed one report on
Form 8-K as follows:
A report on Form 8-K was filed April 13, 2004, furnishing to the
Securities and Exchange Commission a press release announcing the
Company's third quarter financial results.
36
(c) Exhibit Index
3.1 Certificate of Incorporation of Registrant. (9)
3.3 Bylaws of Registrant. (9)
10.1 1981 Incentive Stock Option Plan, as amended, and form of Stock Option
Agreements, as amended (including Restricted Stock Purchase
Agreement).(*)(3)
10.11 Agreement to Build and Lease dated January 8, 1986 between
Callahan-Pentz Properties, McCarthy Six and the Registrant.(1)
10.25 1986 Employee Stock Purchase Plan, as amended, and form of Subscription
Agreement.(*)(2)
10.35 1988 Stock Option Plan, as amended, form of Incentive Stock Option
Agreement, as amended, and form of Non-statutory Stock Option
Agreement, as amended.(*)(6)
10.36 Form of Indemnification Agreement. (9)
10.45 Land lease dated March 30, 1993 between the Registrant and the
Singapore Housing and Development Board.(4)
10.46 Land lease dated November 20, 1993 between the Registrant and the
Penang Development Corporation. (5)
10.47 1996 Incentive Stock Option Plan, form of Incentive Stock Option
Agreement and form of Nonstatutory Stock Option Agreement.(*) (7)
10.48 1996 Senior Executive Bonus Plan, as amended July 25, 2000.(*) (8)
10.49 2001 Nonstatutory Stock Option Plan, as amended July 23, 2002, and form
of Stock Option Agreement.(*)(11)
10.50 Employment Agreement dated January 15, 2002 between the Registrant and
Robert H. Swanson, Jr. (*) (10)
10.51 Employment Agreement dated January 15, 2002 between the Registrant and
Paul Coghlan. (*) (10)
10.52 Employment Agreement dated January 15, 2002 between the Registrant and
Robert C. Dobkin. (*) (10)
11.1 Computation of earnings per share. (see Consolidated Statements of
Income in Item 8).
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Registered Public Accounting
Firm
24.1 Power of Attorney (see page 39)
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer.
32.1 Certification of Robert H. Swanson Jr. and Paul Coghlan Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
(*) The item listed is a compensatory plan of the Company.
37
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits," of the Registrant's Registration
Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto
(File No. 33-4766), which became effective on May 28, 1986.
(2) Incorporated by reference to identically numbered exhibit filed in
response to Item 6, "Exhibits and Reports on Form 8-K," of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 28, 1997.
(3) Incorporated by reference to identically numbered exhibit filed in
response to Item 6, "Exhibits and Reports on Form 8-K," of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 30, 1990.
(4) Incorporated by reference to identically numbered exhibit filed in
response to Item 14(a)(3) "Exhibits," of the Registrant's Annual Report
on Form 10-K for the fiscal year ended June 27, 1993.
(5) Incorporated by reference to identically numbered exhibit filed in
response to Item 14(a)(3) "Exhibits," of the Registrant's Annual Report
on Form 10-K for the fiscal year ended July 3, 1994.
(6) Incorporated by reference to identically numbered exhibit filed in
response to Item 6, "Exhibits and Reports on Form 8-K," of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 2, 1994.
(7) Incorporated by reference to Exhibits 4.1 and 4.2 of the Registrant's
Registration Statement on Form S-8 filed with the Commission on July
30, 1999.
(8) Incorporated by reference to identically numbered exhibit filed in
response to Item 14(a)(3) "Exhibits," of the Registrant's Annual Report
on Form 10-K for the fiscal year ended July 2, 2000.
(9) Incorporated by reference to identically numbered exhibit filed in
response to Item 14(a)(3) "Exhibits," of the Registrant's Annual Report
on Form 10-K for the fiscal year ended July 1, 2001.
(10) Incorporated by reference to identically numbered exhibit filed in
response to Item 6 "Exhibits and reports on Form 8-K," of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 2002.
(11) Incorporate by reference to identically numbered exhibit filed in
response to Item 14(a)(3) "Exhibits," of the Registrants's Annual
Report on Form 10-K for the fiscal year ended June 30, 2002.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
LINEAR TECHNOLOGY CORPORATION
-----------------------------
(Registrant)
By: /s/ Robert H. Swanson, Jr.
-----------------------------
Robert H. Swanson, Jr.
Chairman of the Board and
Chief Executive Officer
September 3, 2004
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature
appears below constitutes and appoints Robert H. Swanson, Jr. and Paul Coghlan,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Robert H. Swanson, Jr. /s/ Paul Coghlan
- -------------------------- ----------------
Robert H. Swanson, Jr. Paul Coghlan
Chairman of the Board and Vice President of Finance and Chief
Chief Executive Officer Financial Officer (Principal Financial
(Principal Executive Officer) Officer and Principal Accounting Officer)
September 3, 2004 September 3, 2004
/s/ David S. Lee /s/ Thomas S. Volpe
- ---------------- -------------------
David S. Lee Thomas S. Volpe
Director Director
September 3, 2004 September 3, 2004
/s/ Leo T. McCarthy /s/ Richard M. Moley
- ------------------- --------------------
Leo T. McCarthy Richard M. Moley
Director Director
September 3, 2004 September 3, 2004
39