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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 2, 2005
[ ] 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1630 McCarthy Boulevard
Milpitas, California 95035
(408) 432-1900
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE
AND TELEPHONE NUMBER)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
There were 307,074,399 shares of the Registrant's Common Stock issued
and outstanding as of January 28, 2005.
1
LINEAR TECHNOLOGY CORPORATION
FORM 10-Q
THREE AND SIX MONTHS ENDED JANUARY 2, 2005
INDEX
Page
----
Part I: Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the three and six months 3
ended January 2, 2005 and December 28, 2003
Consolidated Balance Sheets at January 2, 2005 and 4
June 27, 2004
Consolidated Statements of Cash Flows for the six months 5
ended January 2, 2005 and December 28, 2003
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial 8-12
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 13
Part II: Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 4. Submission of Matter to a Vote of Security Holder 14
Item 6. Exhibits 14
Signatures: 15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
---------------------------- ------------------------------
January 2, December 28, January 2, December 28,
2005 2003 2005 2003
-------- -------- -------- --------
Net sales $250,121 $186,021 $503,149 $360,098
Cost of sales 53,890 43,777 108,729 85,186
-------- -------- -------- --------
Gross profit 196,231 142,244 394,420 274,912
-------- -------- -------- --------
Expenses:
Research and development 32,413 24,992 63,047 49,327
Selling, general and administrative 26,321 19,240 49,379 36,811
-------- -------- -------- --------
58,734 44,232 112,426 86,138
-------- -------- -------- --------
Operating income 137,497 98,012 281,994 188,774
Interest income, net 7,244 6,684 12,712 13,769
-------- -------- -------- --------
Income before income taxes 144,741 104,696 294,706 202,543
Provision for income taxes 41,923 30,361 88,412 58,737
-------- -------- -------- --------
Net income $102,818 $ 74,335 $206,294 $143,806
======== ======== ======== ========
Basic earnings per share $ 0.33 $ 0.24 $ 0.67 $ 0.46
======== ======== ======== ========
Shares used in the calculation of basic
earnings per share 307,856 313,369 307,879 313,389
======== ======== ======== ========
Diluted earnings per share $ 0.33 $ 0.23 $ 0.65 $ 0.44
======== ======== ======== ========
Shares used in the calculation of diluted
earnings per share 315,797 323,440 315,967 323,167
======== ======== ======== ========
Cash dividends per share $ 0.08 $ 0.06 $ 0.16 $ 0.12
======== ======== ======== ========
See accompanying notes
3
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
January 2, June 27,
2005 2004
----------- -----------
(unaudited) (audited)
Assets
Current assets:
Cash and cash equivalents $ 185,108 $ 203,542
Short-term investments 1,546,803 1,452,998
Accounts receivable, net of allowance for
doubtful accounts of $1,727
($1,762 at June 27, 2004) 97,518 79,142
Inventories:
Raw materials 3,772 3,353
Work-in-process 21,368 22,217
Finished goods 6,772 7,134
----------- -----------
Total inventories 31,912 32,704
Deferred tax assets 44,912 44,912
Prepaid expenses and other current assets 18,409 18,797
----------- -----------
Total current assets 1,924,662 1,832,095
----------- -----------
Property, plant and equipment, at cost:
Land, buildings and improvements 145,703 143,077
Manufacturing and test equipment 369,349 338,208
Office furniture and equipment 3,399 3,399
----------- -----------
518,451 484,684
Accumulated depreciation and amortization (303,834) (283,604)
----------- -----------
Net property, plant and equipment 214,617 201,080
----------- -----------
Other non current assets 56,359 54,528
----------- -----------
Total assets $ 2,195,638 $ 2,087,703
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 10,576 $ 14,410
Accrued payroll and related benefits 60,298 54,339
Deferred income on shipments to distributors 45,257 41,862
Income taxes payable 60,663 71,985
Other accrued liabilities 17,172 20,018
----------- -----------
Total current liabilities 193,966 202,614
----------- -----------
Deferred tax and other long-term liabilities 73,620 74,484
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; 308,271 shares issued and
outstanding at January 2, 2005 (308,548 shares
at June 27, 2004) 308 309
Additional paid-in capital 875,462 815,163
Accumulated other comprehensive income, net of tax (578) (2,460)
Retained earnings 1,052,860 997,593
----------- -----------
Total stockholders' equity 1,928,052 1,810,605
----------- -----------
Total liabilities and stockholders' equity $ 2,195,638 $ 2,087,703
=========== ===========
See accompanying notes
4
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months Ended
--------------------------------------
January 2, December 28,
2005 2003
----------------- -----------------
Cash flow from operating activities:
Net income $ 206,294 $ 143,806
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 23,311 24,512
Tax benefit from stock option transactions 20,801 20,755
Stock-based compensation 8,097 --
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (18,376) (9,397)
Decrease (increase) in inventories 792 (973)
Decrease (increase) in prepaid expenses and
other current assets and deferred tax assets 388 (1,433)
Decrease (increase) in non current assets -- (875)
Increase (decrease) in accounts payable,
accrued payroll and other accrued liabilities (2,762) 2,888
Increase (decrease) in deferred income on
shipments to distributors 3,395 (836)
Increase (decrease) in income taxes payable and
deferred tax liabilities (11,323) 11,091
--------- ---------
Cash provided by operating activities 230,617 189,538
--------- ---------
Cash flow from investing activities:
Purchase of short-term investments (617,493) (480,743)
Proceeds from sales and maturities of short-
term investments 522,088 466,012
Purchase of property, plant and equipment (34,019) (4,247)
--------- ---------
Cash provided by (used in) investing activities (129,424) (18,978)
--------- ---------
Cash flow from financing activities:
Issuance of common shares under employee
stock plans 39,415 35,775
Purchase of common stock (109,282) (83,716)
Payment of cash dividends (49,760) (37,644)
--------- ---------
Cash provided by (used in) financing activities (119,627) (85,585)
--------- ---------
Increase (decrease) in cash and cash equivalents (18,434) 84,975
--------- ---------
Cash and cash equivalents, beginning of period 203,542 136,276
--------- ---------
Cash and cash equivalents, end of period $ 185,108 $ 221,251
========= =========
See accompanying notes
5
LINEAR TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim financial statements and information are unaudited; however, in the
opinion of management all adjustments necessary for a fair and accurate
presentation of the interim results have been made. All such adjustments
were of a normal recurring nature. The results for the three and six month
periods ended January 2, 2005 are not necessarily an indication of results
to be expected for the entire fiscal year. All information reported in this
Form 10-Q should be read in conjunction with the Company's annual
consolidated financial statements for the fiscal year ended June 27, 2004
included in the Company's Annual Report on Form 10-K. The accompanying
balance sheet at June 27, 2004 has been derived from audited financial
statements as of that date. Because the Company is viewed as a single
operating segment for management purposes, no segment information has been
disclosed.
2. The Company operates on a 52/53-week work year, ending on the Sunday
nearest June 30. Fiscal year 2005 is a 53-week work year, with the
additional week falling in the three month period ended January 2, 2005.
Fiscal 2004 was a 52-week year. Accordingly, the three months ended January
2, 2005 and December 28, 2003 are 14 and 13-week periods, respectively.
3. 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 following table sets forth the reconciliation of weighted
average common shares outstanding used in the computation of basic and
diluted earnings per share:
Three Months Ended Six Months Ended
-------------------------- -------------------------
January 2, December 28, January 2, December 28,
2005 2003 2005 2003
-------- -------- -------- --------
Numerator - Net income $102,818 $ 74,335 $206,294 $143,806
Denominator for basic earnings
per share - weighted average
shares 307,856 313,369 307,879 313,389
Effect of dilutive securities -
employee stock options 7,941 10,071 8,088 9,778
-------- -------- -------- --------
Denominator for diluted
earnings per share 315,797 323,440 315,967 323,167
Basic earnings per share $ 0.33 $ 0.24 $ 0.67 $ 0.46
======== ======== ======== ========
Diluted earnings per share $ 0.33 $ 0.23 $ 0.65 $ 0.44
======== ======== ======== ========
4. 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. Compensation expense is recorded if on the date of grant the
current fair value per share of the underlying stock exceeds the exercise price
per share.
During the first quarter of fiscal 2005, the Company issued restricted stock to
certain officers and employees who have been with the Company at least three
years to encourage employee retention. Under this program, the Company issued
1,578,440 restricted shares with an exercise price of $0.001 per share and a
grant date fair value of $37.05 per share. The right to sell the shares vests
annually at the rate of 1/3 per year based upon continued employment; upon
6
employee termination the Company has the right to buy back unvested shares at
the exercise price. Pursuant to APB 25, the Company records compensation expense
for the difference between the grant date fair value and the exercise price on a
straight-line basis over the vesting period.
Had expense been recognized for stock options granted with a grant price equal
to the current fair market value of the stock at the date of grant 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:
Three Months Ended Six Months Ended
----------------------------- ----------------------------
January 2, December 28, January 2, December 28,
2005 2003 2005 2003
------------- ------------- ------------- -----------
Net income as reported $ 102,818 $ 74,335 $ 206,294 $ 143,806
Add: Stock based employee
compensation expense
included in reported net
income, net of related tax
effects 3,443 -- 5,685 --
Deduct: Total stock-based
compensation expense
determined under the fair
value method, net of tax (25,469) (19,036) (45,383) (37,563)
------------- ------------- ------------- -----------
Pro forma net income $ 80,792 $ 55,299 166,596 $ 106,243
============= ============= ============= ===========
Earning per share:
Basic-as reported $ 0.33 $ 0.24 $ 0.67 $ 0.46
============= ============= ============= ===========
Basic-pro forma $ 0.26 $ 0.18 $ 0.54 $ 0.34
============= ============= ============= ===========
Diluted-as reported $ 0.33 $ 0.23 $ 0.65 $ 0.44
============= ============= ============= ===========
Diluted-pro forma $ 0.26 $ 0.17 $ 0.53 $ 0.33
============= ============= ============= ===========
5. Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of unrealized gains and losses
on available-for-sale securities. The Company, in practice, primarily holds its
cash and short-term investments until maturity. The components of comprehensive
income were as follows:
Three Months Ended Six Months Ended
-------------------------- --------------------------
January 2, December 28, January 2, December 28,
2005 2003 2005 2003
--------- --------- --------- ---------
Net income $ 102,818 $ 74,335 $ 206,294 $ 143,806
Increase (decrease) in
unrealized gains on
available-for-sale securities 344 (2,029) 1,882 (3,998)
--------- --------- --------- ---------
Total comprehensive income $ 103,162 $ 72,306 $ 208,176 $ 139,808
========= ========= ========= =========
7
6. 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 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.
7. Recent Accounting Pronouncements
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. In October 2004, the
FASB delayed the effective date of the accounting provisions of EITF 03-1. The
disclosure requirements are effective for annual periods ending after June 15,
2004. The Company believes that the adoption of EITF 03-1 will not affect the
overall results of operations or financial position of the Company.
In December 2004, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) 123 (Revised 2004),
"Shared-Based Payment". Revised SFAS 123 addresses the requirements that an
entity measure the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of the award. The cost of
such award will be recognized over the period during which an employee is
required to provide services in exchange for the award. The Company will be
required to adopt this Statement during the first quarter of fiscal year 2006.
As permitted by SFAS 123, the Company currently accounts for share-based
payments by applying the accounting provisions of APB 25's intrinsic value
method and, as such, the Company generally recognizes no compensation cost for
employee stock options. Accordingly, the adoption of Revised SFAS 123's fair
value method will have a significant impact on the Company's results of
operations, although it will have no added impact on its overall financial
position. The impact of adoption of Revised Statement 123 cannot be predicted at
this time because it will depend on the level of share-based payments granted in
the future. However, had the Company adopted Revised SFAS 123 in prior periods,
the impact of that standard would have approximated the impact of Statement 123
as described in the disclosure of pro-forma net income and earnings per share in
Note 4.
8. Subsequent Event
On January 18, 2005, the Company announced that it had accelerated the vesting
of unvested stock options awarded more than one year prior to employees and
officers under its stock option plans that had exercise prices greater than the
current price of the stock January 18, 2005 ($37.04). Unvested options to
purchase approximately 4.5 million additional shares became exercisable as a
result of the vesting acceleration. Typically, the Company grants stock options
that vest equally over a five-year period. The purpose of the accelerated
vesting is to enable the Company to avoid recognizing in its income statement
compensation expense associated with these options in future periods, upon
adoption of FASB Statement No. 123R (Share-Based Payment) in July 2005. The
charge to the income statement to be avoided amounts to approximately $75
million over the course of the original vesting period, of which $36 million
would have occurred in fiscal 2006.
Item 2. 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
8
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. The Company arrives
at the estimate for newly released parts by analyzing sales and customer backlog
against ending inventory on hand. The Company reviews the assumptions on a
quarterly basis and makes decisions with regard to the reserve based on the
current business climate. If actual market conditions are less favorable than
those projected by management, additional inventory write-downs may be required
that could adversely affect our operating results. If actual market conditions
are more favorable, the Company may have higher gross margins when products are
sold. Sales to date of such products have not had a significant impact on our
gross margin. In addition to writedowns based on newly introduced parts,
statistical and judgmental assessments are calculated for the remaining
inventory based on salability, obsolescence, historical experience and current
business conditions.
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 generally 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 has reserves to cover expected product returns. If product returns
for a particular fiscal period exceed or are below expectations, the Company may
determine that additional or less sales return allowances are required to
properly reflect its estimated exposure for product returns. Generally, changes
to sales return allowances have not had a significant impact on operating
margin.
9
Results of Operations
The table below states the income statement items for the three and six months
ended January 2, 2005 and December 28, 2003 as a percentage of net sales and
provides the percentage change in absolute dollars of such items comparing the
interim periods ended January 2, 2005 to the corresponding periods from the
prior fiscal year:
Three Months Ended Six Months Ended
------------------------------------------------ ------------------------------------------------
January 2, December 28, Increase/ January 2, December 28, Increase/
2005 2003 (Decrease) 2005 2003 (Decrease)
------------- ------------- ------------- ------------ -------------- ------------
Net sales 100.0% 100.0% 34% 100.0% 100.0% 40%
Cost of sales 21.5 23.5 23 21.6 23.7 28
------------- ------------- ------------ --------------
Gross profit 78.5 76.5 38 78.4 76.3 43
------------- ------------- ------------ --------------
Expenses:
Research and development 13.0 13.4 30 12.5 13.7 28
Selling, general and
administrative 10.5 10.4 37 9.8 10.2 34
------------- ------------- ------------ --------------
23.5 23.8 33 22.3 23.9 31
------------- ------------- ------------ --------------
Operating income 55.0 52.7 40 56.1 52.4 49
Interest income, net 2.9 3.6 8 2.5 3.8 (8)
------------- ------------- ------------ --------------
Income before income taxes 57.9% 56.3% 38 58.6% 56.2% 46
============= ============= ============ ==============
Effective tax rates 29.0% 29.0% 30.0% 29.0%
============= ============= ============ ==============
Net sales for the quarter ended January 2, 2005 were $250.1 million, an
increase of $64.1 million or 34% over net sales of $186.0 million for the same
quarter of the previous fiscal year. The increase in net sales was primarily due
to the Company selling more units into a wide variety of end-markets in response
to improving overall demand. The average selling price for the second quarter of
fiscal 2005 was relatively unchanged at $1.42 per unit as compared to $1.39 per
unit in the second quarter of fiscal 2004. Geographically, international sales
were $184.8 million or 74% of net sales, an increase of $54.6 million as
compared to international sales of $130.2 million or 70% of net sales for the
same period in fiscal 2004. Internationally, sales to Rest of the World (ROW),
which is primarily Asia excluding Japan, represented $107.2 million or 43% of
net sales, while sales to Europe and Japan were $42.6 million or 17% of net
sales and $35.0 million or 14% of net sales, respectively. Domestic sales were
$65.3 million or 26% of net sales in the second quarter of fiscal 2005 compared
to $55.8 million or 30% of net sales in the same period in fiscal 2004. The
decline in the percentage of domestic sales and the related increase in the
percentage of international sales primarily results from the Company's domestic
customers shifting more of their manufacturing operations overseas.
Net sales for the six months ended January 2, 2005 were $503.1 million,
an increase of $143.0 million or 40% over net sales of $360.1 million for the
same period of the previous fiscal year. The increase in net sales for the
six-month period was due to similar factors as the three-month period discussed
above. The average selling price for the first six-month period of fiscal 2005
was relatively unchanged at $1.42 per unit as compared to $1.39 per unit in the
same period of fiscal 2004. Geographically, international sales were $367.9
million or 73% of net sales for the first six-month period of fiscal 2005, an
increase of $111.2 million as compared to international sales of $256.7 million
or 71% of net sales for the same period in fiscal 2004. Internationally, sales
to ROW, represented $209.2 million or 42% of net sales, while sales to Europe
and Japan were $87.2 million or 17% of net sales and $71.5 million or 14% of net
sales, respectively. Domestic sales were $135.2 million or 27% of net sales in
the first six-month period of fiscal 2005 compared to $103.4 million or 29% of
net sales in the same period in fiscal 2004. The decline in the percentage of
domestic sales and the related increase in the percentage of international sales
primarily results from the Company's domestic customers shifting more of their
manufacturing operations overseas.
The Company ends every fiscal quarter on the Sunday nearest calendar
month-end. Roughly, every five years the Company has a 53-week rather than a
52-week fiscal year. Fiscal 2005 is a 53-week year with the additional week
falling in the three-month period ending January 2, 2005. The extra week had a
minimal affect on revenue as it occurred during the final holiday week. The
extra week resulted in slightly higher compensation costs in the Research and
Development and Selling, General and Administrative lines of the Income
Statement. The increase in compensation costs for Cost of Goods Sold was largely
offset by lower per unit manufacturing costs resulting from an extra week of
production volume. The Company received a benefit from the extra week in
Interest Income because it accrued an extra week of interest income from its
cash investment balance.
Gross profit was $196.2 million and $394.4 million for the second
quarter and first six-month period of fiscal 2005, an increase of $54.0 million
and $119.5 million, respectively, from the corresponding periods of fiscal 2004.
Gross profit as a percentage of net sales increased to 78.5% of net sales in the
second quarter of fiscal 2005 as compared to 76.5% of net sales for the same
period in the previous fiscal year. Gross profit as a percentage of net sales
increased to 78.4% of net sales for the first six-month period of fiscal 2005 as
compared to 76.3% of net sales for the same period of the previous fiscal year.
The increase in gross profit as a percentage of net sales for the three and
six-month periods was primarily due to the favorable effect of fixed costs
allocated across higher production volumes in support of higher net sales. Net
sales increased 34% and 40% for the three and six-month periods in fiscal 2005.
Research and development ("R&D") expenses for the quarter ended January
2, 2005 were $32.4 million, an increase of $7.4 million or 30% over R&D expenses
of $25.0 million for the same period in the previous fiscal year. The increase
in R&D was primarily due to a $6.7 million increase in compensation costs.
Compensation related to the extra week of labor, increased headcount, and annual
merit increases together totaled $2.4 million; compensation expense related to
restricted stock grants totaled $1.9 million; and, since the Company had better
operating results, R&D profit sharing grew $1.7 million. The related employer
taxes and other fringe costs on these increases was $0.7 million. In addition to
compensation costs, the Company had a $0.7 million increase in other R&D related
expenses such as supplies and test wafers.
10
Research and development expenses for the six-month period ended
January 2, 2005 were $63.0 million, an increase of $13.7 million or 28% over R&D
expenses of $49.3 million for the same period in the previous fiscal year. The
increase in R&D was primarily due to a $12.5 million increase in compensation
costs. The increase in compensation expense related to the extra week of labor,
increased headcount and annual merit increases together totaled $3.8 million;
the increase in compensation expense related to restricted stock grants totaled
$3.3 million; and, since the Company had better operating results, R&D profit
sharing grew $4.3 million. The related employer taxes and other fringe costs on
these increases was $1.1 million. In addition to compensation costs, the Company
had a $1.2 million increase in R&D related expenses such as supplies, mask costs
and test wafers.
Selling, general and administrative expenses ("SG&A") for the quarter
ended January 2, 2005 were $26.3 million, an increase of $7.1 million or 37%
over SG&A expenses of $19.2 million for the same period in the previous fiscal
year. The increase in SG&A was primarily due to a $5.0 million increase in
compensation. Compensation related to the extra week of labor, increased
headcount and annual merit increases together totaled $1.3 million; compensation
expense related to restricted stock grants totaled $2.1 million; and, since the
Company had better operating results, SG&A profit sharing grew $1.2 million. The
related employer taxes and other fringe costs on these increases was $0.4
million. In addition to compensation costs, the Company had a $2.1 million
increase in expenses related to advertising, increases in foreign sales office
cost resulting from the weakening of the dollar, increases in commissions for
the Company's independent sales representatives and travel costs.
Selling, general and administrative expenses for the six-month period
ended January 2, 2005 were $49.4 million, an increase of $12.6 million or 34%
over SG&A expenses of $36.8 million for the same period in the previous fiscal
year. The increase in SG&A was primarily due to a $9.7 million increase in
compensation costs. Compensation related to the extra week of labor, increased
headcount and annual merit increases together totaled $2.5 million; compensation
expense related to restricted stock grants totaled $3.4 million; and, since the
Company had better operating results, SG&A profit sharing grew $3.2 million. The
related employer taxes and other fringe costs on these increases was $0.6
million. In addition to compensation costs, the Company had a $2.9 million
increase in expenses related to advertising, increases in foreign sales office
cost resulting from the weakening of the dollar, commissions for the Company's
independent sales representatives and travel costs.
Interest income, net was $7.2 million and $12.7 million for the second
quarter and first six-month period of fiscal 2005, an increase of $0.6 million
and a decrease $1.1 million, respectively, from the corresponding periods of
fiscal 2004. The increase for the three-month period is primarily due to the
extra week of accrued interest income. The decrease for the six-month period is
primarily due to the decrease in the average interest rate earned on the
Company's cash investment balance, partially offset by the extra week of accrued
interest income and higher average cash investment balances.
The Company's effective tax rate was 29% and 30% for the second quarter
and first six-month period of fiscal 2005. The Company anticipates that its
effective tax rate for fiscal 2005 will be 30%. The increase in the effective
tax rate from 29% to 30% results primarily from the diminishing percentage that
tax-exempt interest income is of total taxable income.
Factors Affecting Future Operating Results
Except for historical information contained herein, the matters set
forth in this Form 10-Q, including the statements in the following paragraphs,
are forward-looking statements that are dependent on certain risks and
uncertainties including such factors, among others, as the timing, volume and
pricing of new orders received and shipped during the quarter, the timely
introduction of new processes and products, general conditions in the world
economy and financial markets and other factors described below and in the
Company's 10-K for the fiscal year ended June 27, 2004.
In the second quarter of fiscal 2005 the Company reported a 34% and 38%
increase in sales and profits, respectively, over the similar quarter in the
previous fiscal year. The quarter ended January 2, 2005 met the Company's
expectations with sales and profits down slightly from the September quarter. It
has been a challenging business environment due to inventory corrections
throughout the various sales channels and also due to some moderation in the
rate of growth of end-user demand. However, the Company believes its ending
on-hand inventory at distributors is lean, and inventory turn ratios are high by
historic standards. Also, the Company's distributors are projecting moderate
increases in sales volume in the March quarter and lead times have remained
unchanged at 4 to 6 weeks. Accordingly, although these are difficult times for
the Company to forecast, based upon these and other factors, the Company
11
forecasts that revenues for the March quarter will be similar to that just
achieved during the December quarter, while profits will be down slightly due to
the increase in the effective tax rate from 29% to 30%.
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
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 January 2, 2005, cash, cash equivalents and short-term investments
totaled $1,731.9 million, and working capital was $1,730.7 million.
Accounts receivable totaled $97.5 million at the end of the second
quarter of fiscal 2005, an increase of $18.4 million from the end of the fourth
quarter of fiscal 2004. The increase is primarily due to higher shipments. Days
sales outstanding increased slightly from 30 days to 36 days at the end of the
second quarter of fiscal 2005.
Income taxes payable totaled $60.7 million at the end of the second
quarter of fiscal 2005, a decrease of $11.3 million from the fourth quarter of
fiscal 2004. The decrease is due to the higher income tax payments and tax
benefits from stock option transactions partially offset by higher income tax
expense.
During the first six months of fiscal 2005, the Company generated
$230.6 million of cash from operating activities and $39.4 million in proceeds
from common stock issued under employee stock plans.
During the first six months of fiscal 2005, significant cash
expenditures included the repurchase of $109.3 million in common stock, $95.4
million from net purchases of short-term investments, payments of $49.8 million
in cash dividends to stockholders representing $0.08 per share, and purchases of
$34.0 million for capital assets. In January, the Company's Board of Directors
declared an increase to the quarterly cash dividend to $0.10 per share from
$0.08 per share. The $0.10 per share dividend will be paid during the March
quarter of fiscal 2005. The payment of future dividends will be based on
quarterly financial performance.
As of January 2, 2005 the Company had no off-balance sheet financing
arrangements.
Historically, the Company has satisfied its liquidity needs through
cash generated from operations. 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.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For additional quantitative and qualitative disclosures about market
risk affecting the Company, see item 7A of the Company's Form 10-K for the
fiscal year ended June 27, 2004. There have been no material changes in the
market risk affecting the Company since the filing of the Company's Form 10-K
for fiscal 2004. At January 2, 2005, the Company's cash and cash equivalents
consisted primarily of bank deposits, commercial paper and money market funds.
The Company's short-term investments consisted of municipal bonds, federal
agency bonds, commercial paper, and related securities. The Company did not hold
any derivative financial instruments. The Company's interest income is sensitive
to changes in the general level of interest rates. In this regard, changes in
interest rates can affect the interest earned on cash and cash equivalents and
short-term investments.
The Company's sales outside the United States are transacted in U.S.
dollars; accordingly the Company's sales are not 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.
13
Item 4. 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 Quarterly Report on Form 10-Q. 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 control over financial
reporting that occurred during the second quarter of fiscal 2005 that has
materially affected, or is reasonably likely to materially affect, its internal
control over financial reporting.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
c) Stock Repurchases
- ---------------------------------------------------------------------------------------------------------------------------------
Total Number of Shares Maximum Number of Shares
Purchased as Part of that May Yet be purchased
Total Number of Average Price Paid Publicly Announced Under the Plans or
Period Shares Purchased per Share Plans or Programs Programs (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Month #1 (September 27, 2004
- - October 24, 2004) 1,089,000 $ 36.44 1,089,000 9,069,952
- ---------------------------------------------------------------------------------------------------------------------------------
Month #2 (October 25, 2004 -
November 21, 2004) 411,000 $ 36.46 411,000 8,658,952
- ---------------------------------------------------------------------------------------------------------------------------------
Month #3 (November 22, 2004
- - January 2, 2005) -- -- -- 8,658,952
- ---------------------------------------------------------------------------------------------------------------------------------
Total 1,500,000 $ 36.44 1,500,000 8,658,952
- ---------------------------------------------------------------------------------------------------------------------------------
(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 common stock in the open market over the subsequent two-year period.
Item 4. Submission of Matter to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company, held on November 3, 2004,
in Milpitas, California, the stockholders elected members of the Company's Board
of Directors, and ratified the Company's proposal to appoint Ernst & Young LLP
as independent auditors.
The vote for nominated directors was as follows:
NOMINEE FOR WITHHELD
- ------- --- --------
Robert H. Swanson, Jr. 276,583,223 8,486,958
David S. Lee 275,711,729 9,358,452
Leo T. McCarthy 278,589,702 6,480,478
Richard M. Moley 278,556,773 6,513,408
Thomas S. Volpe 267,613,320 17,456,860
The vote to ratify the appointment of Ernst & Young LLP as independent auditors
for fiscal 2004 was as follows:
FOR AGAINST ABSTAIN
--- ------- -------
242,417,634 41,188,933 1,463,613
Item 6. Exhibits
a) Exhibits:
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to
Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to
Exchange Act Rule 13a-14(a) or 15d-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 32.1 Certifications of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LINEAR TECHNOLOGY CORPORATION
DATE: February 11, 2005 BY /s/Paul Coghlan
--------------------------------
Paul Coghlan
Vice President, Finance &
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
16