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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 April 3, 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 305,993,167 shares of the Registrant's Common Stock issued
and outstanding as of April 29, 2005.
1
LINEAR TECHNOLOGY CORPORATION
FORM 10-Q
THREE AND NINE MONTHS ENDED APRIL 3, 2005
INDEX
Page
----
Part I: Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the three and nine months 3
ended April 3, 2005 and March 28, 2004
Consolidated Balance Sheets at April 3, 2005 and 4
June 27, 2004
Consolidated Statements of Cash Flows for the nine months 5
ended April 3, 2005 and March 28, 2004
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial 9-13
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
Part II: Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 Nine Months Ended
--------------------------- ---------------------------
April 3, March 28, April 3, March 28,
2005 2004 2005 2004
-------- -------- -------- --------
Net sales $250,734 $209,133 $753,883 $569,231
Royalty revenue 40,000 -- 40,000 --
-------- -------- -------- --------
Total revenue 290,734 209,133 793,883 569,231
-------- -------- -------- --------
Cost of sales 56,600 47,596 165,329 132,782
-------- -------- -------- --------
Gross profit 234,134 161,537 628,554 436,449
-------- -------- -------- --------
Expenses:
Research and development 36,002 26,633 99,049 75,960
Selling, general and administrative 32,172 20,553 81,551 57,364
-------- -------- -------- --------
68,174 47,186 180,600 133,324
-------- -------- -------- --------
Operating income 165,960 114,351 447,954 303,125
Interest income, net 7,802 6,140 20,514 19,909
-------- -------- -------- --------
Income before income taxes 173,762 120,491 468,468 323,034
Provision for income taxes 52,129 34,942 140,541 93,679
-------- -------- -------- --------
Net income $121,633 $ 85,549 $327,927 $229,355
======== ======== ======== ========
Basic earnings per share $ 0.39 $ 0.27 $ 1.07 $ 0.73
======== ======== ======== ========
Shares used in the calculation of basic
earnings per share 307,960 311,993 307,811 312,924
======== ======== ======== ========
Diluted earnings per share $ 0.39 $ 0.27 $ 1.04 $ 0.71
======== ======== ======== ========
Shares used in the calculation of diluted
earnings per share 315,617 321,507 316,452 322,614
======== ======== ======== ========
Cash dividends per share $ 0.10 $ 0.08 $ 0.26 $ 0.20
======== ======== ======== ========
See accompanying notes
3
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
April 3, June 27,
2005 2004
----------- -----------
(unaudited) (audited)
Assets
Current assets:
Cash and cash equivalents $ 183,910 $ 203,542
Short-term investments 1,553,219 1,452,998
Accounts receivable, net of allowance for
doubtful accounts of $1,713
($1,762 at June 27, 2004) 112,485 79,142
Inventories:
Raw materials 3,685 3,353
Work-in-process 21,919 22,217
Finished goods 7,041 7,134
----------- -----------
Total inventories 32,645 32,704
Deferred tax assets 43,627 44,912
Prepaid expenses and other current assets
60,468 18,797
----------- -----------
Total current assets 1,986,354 1,832,095
----------- -----------
Property, plant and equipment, at cost:
Land, buildings and improvements 163,392 143,077
Manufacturing and test equipment 365,863 338,208
Office furniture and equipment 3,399 3,399
----------- -----------
532,654 484,684
Accumulated depreciation and amortization (314,317) (283,604)
----------- -----------
Net property, plant and equipment 218,337 201,080
----------- -----------
Other non current assets
53,035 54,528
----------- -----------
Total assets $ 2,257,726 $ 2,087,703
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 12,293 $ 14,410
Accrued payroll and related benefits 46,311 54,339
Deferred income on shipments to distributors 43,607 41,862
Income taxes payable 69,547 71,985
Other accrued liabilities
20,681 20,018
----------- -----------
Total current liabilities 192,439 202,614
----------- -----------
Deferred tax and other long-term liabilities 70,826 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; 308,195 shares issued and
outstanding at April 3, 2005 (308,548 shares
at June 27, 2004) 308 309
Additional paid-in capital 907,561 815,163
Accumulated other comprehensive income, net of tax (3,309) (2,460)
Retained earnings 1,089,901 997,593
----------- -----------
Total stockholders' equity 1,994,461 1,810,605
----------- -----------
Total liabilities and stockholders' equity $ 2,257,726 $ 2,087,703
=========== ===========
See accompanying notes
4
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended
---------------------------------
April 3, March 28,
2005 2004
--------- ---------
Cash flow from operating activities:
Net income $ 327,927 $ 229,355
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 36,718 36,725
Tax benefit from stock option transactions 31,543 29,466
Stock-based compensation 15,139 --
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (33,343) (18,325)
Decrease (increase) in inventories 59 (962)
Decrease (increase) in prepaid expenses and
other current assets and deferred tax assets (40,386) 2,865
Decrease (increase) in other non current assets -- (1,875)
Increase (decrease) in accounts payable,
accrued payroll and other accrued liabilities (12,559) (6,852)
Increase (decrease) in deferred income on
shipments to distributors 1,745 1,500
Increase (decrease) in income taxes payable and
deferred tax liabilities (2,488) 20,682
--------- ---------
Cash provided by operating activities 324,355 292,579
--------- ---------
Cash flow from investing activities:
Purchase of short-term investments (899,576) (687,291)
Proceeds from sales and maturities of short-
term investments 794,225 704,078
Purchase of property, plant and equipment (48,732) (8,057)
--------- ---------
Cash provided by (used in) investing activities (154,083) 8,730
--------- ---------
Cash flow from financing activities:
Issuance of common shares under employee
stock plans 58,085 44,212
Purchase of common stock (167,066) (204,906)
Payment of cash dividends (80,923) (62,707)
--------- ---------
Cash provided by (used in) financing activities (189,904) (223,401)
--------- ---------
Increase (decrease) in cash and cash equivalents (19,632) 77,908
--------- ---------
Cash and cash equivalents, beginning of period 203,542 136,276
--------- ---------
Cash and cash equivalents, end of period $ 183,910 $ 214,184
========= =========
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 nine month
periods ended April 3, 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,
the Company's second-quarter. Fiscal 2004 was a 52-week year. The three
months ended April 3, 2005 and March 28, 2004 are 13-week periods.
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 Nine Months Ended
----------------------------- -----------------------------
April 3, March 28, April 3, March 28,
2005 2004 2005 2004
--------- -------- --------- --------
Numerator - Net income $ 121,633 $ 85,549 $ 327,927 $229,355
Denominator for basic earnings
per share - weighted average
shares 307,960 311,993 307,811 312,924
Effect of dilutive securities -
employee stock options 7,657 9,514 8,641 9,690
--------- -------- --------- --------
Denominator for diluted
earnings per share 315,617 321,507 316,452 322,614
========= ======== ========= ========
Basic earnings per share $ 0.39 $ 0.27 $ 1.07 $ 0.73
========= ======== ========= ========
Diluted earnings per share $ 0.39 $ 0.27 $ 1.04 $ 0.71
========= ======== ========= ========
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
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
6
for the difference between the grant date fair value and the exercise price on a
straight-line basis over the vesting period.
During the third quarter of fiscal 2005, the Company 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
$37.04, the closing price of the stock on January 18, 2005. Unvested options to
purchase approximately 4.5 million 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 was to
enable the Company to avoid recognizing in its income statement, compensation
expense associated with these options in future periods, upon adoption of SFAS
123R (Share-Based Payment) in July 2005. The pretax charge to the income
statement that will be avoided for fiscal 2006 onwards amounts to approximately
$75 million over the course of the original vesting period, of which $36 million
would have occurred in fiscal 2006. The accumulated effect of the acceleration
from January 18, 2005 onwards caused proforma stock-based compensation expense
to increase for the three-month period ended April 3, 2005 over the
corresponding period in fiscal 2004 by approximately $88 million pretax, ($55
million net of tax) which had a significant one-time impact on the quarterly
proforma stock-based compensation expense disclosed in the chart below.
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 Nine Months Ended
---------------------------------- --------------------------------
April 3, March 28, April 3, March 28,
2005 2004 2005 2004
------------- ------------- ------------- -----------
Net income, as reported $ 121,633 $ 85,549 $ 327,927 $ 229,355
Add: Stock based employee
compensation expense
included in reported net
income, net of related tax effects 4,929 -- 10,613 --
Deduct: Total stock-based
compensation expense
determined under the fair
value method, net of tax (78,693) (19,238) (124,800) (56,800)
------------- ------------- ------------- -----------
Pro forma net income $ 47,869 $ 66,311 $ 213,740 $ 172,555
============= ============= ============= ===========
Earning per share:
Basic-as reported $ 0.39 $ 0.27 $ 1.07 $ 0.73
============= ============= ============= ===========
Basic-pro forma $ 0.16 $ 0.21 $ 0.69 $ 0.55
============= ============= ============= ===========
Diluted-as reported $ 0.39 $ 0.27 $ 1.04 $ 0.71
============= ============= ============= ===========
Diluted-pro forma $ 0.15 $ 0.21 $ 0.68 $ 0.53
============= ============= ============= ===========
7
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 Nine Months Ended
------------------------------ -------------------------------
April 3, March 28, April 3, March 28,
2005 2004 2005 2004
--------- --------- --------- ---------
Net income $ 121,633 $ 85,549 327,927 $ 229,355
Increase (decrease) in
unrealized gains and losses on
available-for-sale securities (2,731) 123 (849) (3,875)
--------- --------- --------- ---------
Total comprehensive income $ 118,902 $ 85,672 $ 327,078 $ 225,480
========= ========= ========= =========
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 October 2004, the Financial Accounting Standards Board (FASB) released FSP
No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004 ("Jobs
Act")" which provides guidance under FASB Statement No. 109, "Accounting for
Income Taxes," with respect to recording the potential impact of the
repatriation provisions of the Jobs Act on enterprises' income tax expense and
deferred tax liability. FSP 109-2 states that an enterprise is allowed time
beyond the financial reporting period of enactment to evaluate the effect of the
Jobs Act on its plan for reinvestment or repatriation of foreign earnings for
purposes of applying FASB Statement No. 109. The Company has not yet completed
evaluating the impact of the repatriation provisions. Accordingly, as provided
for in FSP No. 109-2, the Company has not adjusted its tax expense or deferred
tax liability to reflect the effect of the repatriation provisions of the Jobs
Act.
In December 2004, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standard 123 (SFAS 123R), "Share-Based
Payment." SFAS 123R 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 SFAS 123R's fair value
method will have a significant impact on the Company's results of operations due
to the amortization of the outstanding unvested share-based awards through their
vesting period, although it will have no added impact on its overall financial
position. The financial impact in future periods will depend on the level of
share-based awards granted in the future. However, had the Company adopted SFAS
8
123R in prior periods, the impact of that standard would have approximated the
impact of SFAS 123 as described in the disclosure of pro-forma net income and
earnings per share in Note 4.
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
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
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 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 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
nine months ended April 3, 2005 and March 28, 2004 as a percentage of total
revenue and provides the percentage change in absolute dollars of such items
comparing the interim periods ended April 3, 2005 to the corresponding periods
from the prior fiscal year:
Three Months Ended Nine Months Ended
------------------------------------------------ ------------------------------------------------
April 3, March 28, Increase/ April 3, March 28, Increase/
2005 2004 (Decrease) 2005 2004 (Decrease)
------------- -------------- ------------- ------------- -------------- ------------
Total revenue 100.0% 100.0% 39% 100.0% 100.0% 39%
Cost of sales 19.5 22.8 19 20.8 23.3 25
------------- -------------- ------------- --------------
Gross profit 80.5 77.2 45 79.2 76.7 44
------------- -------------- ------------- --------------
Expenses:
Research and development 12.4 12.7 35 12.5 13.3 30
Selling, general and
administrative 11.0 9.8 57 10.3 10.1 42
------------- -------------- ------------- --------------
23.4 22.5 44 22.8 23.4 35
------------- -------------- ------------- --------------
Operating income 57.1 54.7 45 56.4 53.3 48
Interest income, net 2.7 2.9 27 2.6 3.5 3
------------- -------------- ------------- --------------
Income before income taxes 59.8% 57.6% 44 59.0% 56.8% 45
============= ============== ============= ==============
Effective tax rates 30.0% 29.0% 30.0% 29.0%
============= ============== ============= ==============
Net sales for the quarter ended April 3, 2005 were $250.7 million, an
increase of $41.6 million or 20% over net sales of $209.1 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 third quarter of
fiscal 2005 was unchanged at $1.41 per unit as compared to the third quarter of
fiscal 2004. Geographically, international sales were $178.9 million or 71% of
net sales, an increase of $35.8 million as compared to international sales of
$143.1 million or 69% 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 $106.4 million or 42% of net sales, while sales to
Europe and Japan were $40.9 million or 16% of net sales and $31.6 million or 13%
of net sales, respectively. Domestic sales were $71.8 million or 29% of net
sales in the third quarter of fiscal 2005 compared to $66.0 million or 31% of
net sales in the same period in fiscal 2004.
During the third quarter of fiscal 2005 the Company entered into a
long-term royalty agreement that accounted for $40.0 million of total revenues
for the quarter. During the ordinary course of business it is customary for
technology companies to enter into such agreements. The $40.0 million represents
past royalties under terms of a settlement and license agreement with another
company. The Company expects to earn future royalties, which are dependent on
sales of licensed products, quarterly from July 2005 through June 2013. Such
ongoing quarterly royalty revenue is not expected to be material to each
individual quarter's total revenue.
Net sales for the nine months ended April 3, 2005 were $753.9 million,
an increase of $184.7 million or 32% over net sales of $569.2 million for the
same period of the previous fiscal year. The increase in net sales for the
nine-month period was due to similar factors as the three-month period discussed
above. The average selling price for the first nine-month period of fiscal 2005
was relatively unchanged at $1.41 per unit as compared to $1.40 per unit in the
same period of fiscal 2004. Geographically, international sales were $546.8
million or 73% of net sales for the first nine-month period of fiscal 2005, an
increase of $147.0 million as compared to international sales of $399.8 million
or 70% of net sales for the same period in fiscal 2004. Internationally, sales
to ROW, represented $315.6 million or 42% of net sales, while sales to Europe
and Japan were $128.1 million or 17% of net sales and $103.1 million or 14% of
net sales, respectively. Domestic sales were $207.1 million or 27% of net sales
in the first nine-month period of fiscal 2005 compared to $169.4 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.
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. Accordingly, the extra
10
week will affect the results for the nine-month period ending April 3, 2005 and
not the three-month period ending April 3, 2005. For the nine months ended April
3, 2005, the extra week had a minimal effect on revenue. 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 $234.1 million and $628.6 million for the third
quarter and first nine-month period of fiscal 2005, an increase of $72.6 million
and $192.1 million, respectively, from the corresponding periods of fiscal 2004.
Gross profit as a percentage of total revenue increased to 80.5% of total
revenue in the third quarter of fiscal 2005 as compared to 77.2% of net sales
for the same period in the previous fiscal year. Gross profit as a percentage of
total revenue increased to 79.2% of total revenue for the first nine-month
period of fiscal 2005 as compared to 76.7% of net sales for the same period of
the previous fiscal year. The increases in gross profit as a percentage of total
revenue for the three and nine-month periods were primarily due to the addition
of royalty revenue in the third quarter of fiscal 2005 as explained above. 2.2 %
of the 3.3% improvement in gross profit was related to the royalty, net of
associated expenses. The remaining 1.1% improvement was due to the favorable
effect of fixed costs allocated across higher production volumes in support of
higher net sales. The royalty revenue recognized during the third quarter of
fiscal 2005 had associated costs: legal expenses were charged to R&D and SG&A;
increased profit sharing related to the royalty was charged to Costs of Goods
Sold, R&D, and SG&A.
Research and development ("R&D") expenses for the quarter ended April
3, 2005 were $36.0 million, an increase of $9.4 million or 35% over R&D expenses
of $26.6 million for the same period in the previous fiscal year. The increase
in R&D was primarily due to a $6.6 million increase in compensation costs.
Compensation related to increased headcount, and annual merit increases totaled
$1.4 million; compensation expense related to restricted stock grants totaled
$1.8 million; and, since the Company had better operating results, R&D profit
sharing grew $2.7 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 $2.8 million increase in other R&D related expenses primarily related to
third party technology licenses and legal fees related to patent litigation.
Research and development expenses for the nine-month period ended April
3, 2005 were $99.0 million, an increase of $23.0 million or 30% over R&D
expenses of $76.0 million for the same period in the previous fiscal year. The
increase in R&D was primarily due to a $19.1 million increase in compensation
costs. The increase in compensation expense related to the extra week of labor,
increased headcount and annual merit increases totaled $5.3 million; the
increase in compensation expense related to restricted stock grants totaled $5.1
million; and since the Company had better operating results, R&D profit sharing
grew $7.1 million. The related employer taxes and other fringe costs on these
increases was $1.5 million. In addition to compensation costs, the Company had a
$4.0 million increase in R&D related expenses such as third party technology
licenses, legal fees, supplies, mask costs and test wafers.
Selling, general and administrative expenses ("SG&A") for the quarter
ended April 3, 2005 were $32.2 million, an increase of $11.6 million or 57% over
SG&A expenses of $20.6 million for the same period in the previous fiscal year.
The increase in SG&A was primarily due to a $7.4 million increase in
compensation costs. Compensation related to increased headcount and annual merit
increases totaled $0.7 million; compensation expense related to restricted stock
grants totaled $4.5 million; and, since the Company had better operating
results, SG&A profit sharing grew $2.0 million. The related employer taxes and
other fringe costs on these increases was $0.2 million. In addition to
compensation costs, the Company had a $3.9 million increase in legal expenses
and a $0.3 million increase in other expenses such as advertising and travel
costs.
Selling, general and administrative expenses for the nine-month period
ended April 3, 2005 were $81.6 million, an increase of $24.2 million or 42% over
SG&A expenses of $57.4 million for the same period in the previous fiscal year.
The increase in SG&A was primarily due to a $17.1 million increase in
compensation costs. Compensation related to the extra week of labor, increased
headcount and annual merit increases totaled $3.2 million; compensation expense
related to restricted stock grants totaled $7.9 million; and, since the Company
had better operating results, SG&A profit sharing grew $5.2 million. The related
employer taxes and other fringe costs on these increases was $0.8 million. In
addition to compensation costs, the Company had a $3.9 million increase in legal
expenses and a $3.2 million increase in expenses related to advertising,
increases in foreign sales office costs resulting from the weakening of the
dollar, commissions for the Company's independent sales representatives and
travel costs.
Interest income, net was $7.8 million and $20.5 million for the third
quarter and first nine-month period of fiscal 2005, an increase of $1.7 million
and an increase of $0.6 million, respectively, from the corresponding periods of
fiscal 2004. The increase for the three-month period is primarily due to an
increase in the average interest rate earned on the Company's investment balance
and an increase in the Company's average cash balance. The increase for the
nine-month period is primarily due to the increase in interest income earned on
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the increase of the Company's average cash balance and due to the extra week of
accrued interest income; these increases were offset by the decrease in the
average interest rate earned on the Company's cash balance.
The Company's effective tax rate was 30% for the third quarter and
first nine-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% for fiscal 2005 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 third quarter of fiscal 2005 the Company reported a 39% and 42%
increase in revenue and profits, respectively, over the similar quarter in the
previous fiscal year. Net product sales for the quarter ended April 3, 2005 were
similar to sales in the December quarter, thereby meeting the Company's
expectations. In addition, the Company's current quarters results were enhanced
by $40.0 million in royalty revenue derived from the long-term royalty
agreement. Going forward it continues to be a challenging environment in which
to forecast upcoming results. Inventory appears to be in balance throughout the
various user channels. However, many customers are cautious given the general
concerns in the macroeconomic environment due in part to rising interest rates
and rising oil prices. Bookings were steady throughout last quarter and grew
slightly over the previous quarter. In the upcoming quarter the Company expects
demand to be relatively stable with product bookings increasing slightly over
the just completed quarter. Additional royalty revenue under the royalty
agreement does not commence until the September quarter. However, the Company
expects sequential product revenues in the June quarter to increase 2% to 3%
over the quarter just ended. Consequently, the Company expects total revenue to
be in the range of $255 to 258 million.
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 April 3, 2005, cash, cash equivalents and short-term investments
totaled $1,737.1 million, and working capital was $1,793.9 million.
Accounts receivable totaled $112.5 million at the end of the third
quarter of fiscal 2005, an increase of $33.4 million from the end of the fourth
quarter of fiscal 2004. The increase is primarily due to higher shipments and
days sales outstanding increased from a historic low of 30 days at the end of
the fourth quarter of fiscal 2004 to 41 days at the end of the third quarter of
fiscal 2005. The Company's prepaid and other current asset balance increased
$41.7 million primarily due to the royalty receivable related to the long-term
royalty agreement signed during the third quarter of fiscal 2005. Accrued
payroll benefits decreased $8.0 million due to the Company paying profit sharing
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during the third quarter. The Company accrues for profit sharing on a quarterly
basis while distributing payouts to employees on a semi-annual basis during the
first and third quarters.
During the first nine months of fiscal 2005, the Company generated
$324.4 million of cash from operating activities and $58.1 million in proceeds
from common stock issued under employee stock plans.
During the first nine months of fiscal 2005, significant cash
expenditures included the repurchase of approximately 4.5 million shares of
common stock for $167.1 million, $105.4 million from net purchases of short-term
investments, payments of $80.9 million in cash dividends, and purchases of $48.7
million of capital assets. In April, the Company's Board of Directors declared a
quarterly cash dividend of $0.10 per share. The $0.10 per share dividend will be
paid during the June quarter of fiscal 2005. The payment of future dividends
will be based on quarterly financial performance.
As of April 3, 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.
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 April 3, 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. Fluctuations in foreign currency exchange rates have caused the
Company's foreign sales offices and manufacturing locations to have higher
operating expenses; however, they have not had a material impact on the results
of operations.
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 third 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 Shares Average Price Paid per Publicly Announced Under the Plans or
Period Purchased Share Plans or Programs Programs (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Month #1 (January 3, 2005 -
January 30, 2005) 1,500,000 $ 37.70 1,500,000 7,158,952
- ------------------------------------------------------------------------------------------------------------------------------------
Month #2 (January 31, 2005 -
February 27, 2005) 32,770 $ 37.74 32,770 7,126,182
- ------------------------------------------------------------------------------------------------------------------------------------
Month #3 (February 28, 2005
- - April 3, 2005) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,532,770 $ 37.70 1,532,770 7,126,182
- ------------------------------------------------------------------------------------------------------------------------------------
(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 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.
14
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: May 13, 2005 BY /s/ Paul Coghlan
-----------------------------------
Paul Coghlan
Vice President, Finance &
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
15