| Description Of Business And Significant Accounting Policies | 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," “Linear Technology” or the “Company”), a member of the S&P 500, has been designing, manufacturing and marketing a broad line of high performance analog integrated circuits for major companies worldwide for over three decades. The Company’s products provide an essential bridge between our analog world and the digital electronics in communications, networking, industrial, automotive, computer, medical, instrumentation, consumer, and military and aerospace systems. Linear Technology produces power management, data conversion, signal conditioning, RF and interface ICs, µModule ® subsystems, and wireless sensor network products. The Company is a Delaware corporation; it was originally organized and incorporated in California in 1981.
Basis of Presentation
The Company operates on a 52/53-week fiscal year ending on the Sunday nearest June 30. Fiscal years 2015 , 2014 and 2013 were 52-week years. Fiscal year 2016 will be a 53-week fiscal year, with the additional week falling in the second quarter of fiscal year 2016.
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 remeasured using the U.S. dollar as the functional currency.
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Cash Equivalents and Marketable Securities
Cash equivalents are highly liquid investments purchased with original maturities of three months or less at the time of purchase. Cash equivalents consist of investment grade securities in commercial paper, bank certificates of deposit, and money market funds.
Investments with maturities over three months at the time of purchase are classified as marketable securities. At June 28, 2015 and June 29, 2014 , the Company’s marketable securities balance consisted primarily of debt securities in municipal bonds, corporate bonds, commercial paper, U.S. and foreign government and agency securities. The Company’s marketable securities are managed by outside professional managers within investment guidelines set by the Company. The Company’s investment guidelines generally restrict the professional managers to high quality debt instruments with a credit rating of AAA. Within the Company ’ s investment policy there is a provision that allows the Company to hold AA+ securities under certain circumstances. The Company’s investments in debt securities are classified as available-for-sale. Investments in available-for-sale securities are reported at fair value with unrealized gains and losses, net of tax, as a component of “Accumulated other comprehensive income” in the Consolidated Balance Sheets. The Company classifies investments with maturities greater than twelve months as current as it considers all investments as a potential source of operating cash regardless of maturity date. The cost of securities matured or sold is based on the specific identification method.
Accounts Receivable
The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on the aging of its accounts receivable, historical experience, known troubled accounts, management judgment and other currently available evidence. The Company writes off accounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues collection of the receivable.
Concentrations of Credit Risk
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, customer end-markets, and customer geographical locations. The Company performs ongoing credit evaluations of its customers ’ financial condition and requires collateral, primarily letters of credit, as deemed necessary.
Arrow Electronics In c . ( “ Arrow ” ), the Company’s largest distributor, distributes the Company’s products worldwide. Arrow is one of the largest distributors of electronic components in the world with revenues of $22.8 billion in their December 2014 fiscal year-end. Arrow’s global components business segment covers the world’s largest electronics markets - the Americas, EMEA (Europe, Middle East, and Africa), and Asia Pacific regions. As of June 28, 2015 and June 29, 2014 , Arrow worldwide accounted f or 36% and 38% of the Company’s total net accounts receivable, respectively. Arrow worldwide accounted for 32% , 31% and 31% of the Company’s worldwide net revenues in fiscal 2015 , 2014 and 2013 , respectively. Arrow, like the Company’s other distributors, is not an end customer, but rather serves as a channel of sale to many end users of the Company ’ s products.
No end customer accounted for more than 10% of the Company’s worldwide net revenues for any of the periods presented.
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. For the three years ended June 28, 2015 , the Company did not utilize derivative instruments to hedge foreign currency risk or for any other purpose. Gains and losses resulting from foreign currency fluctuations are recognized in income.
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, judgmental assessments are calculated for the remaining inventory based on salability, obsolescence, historical experience and current business conditions.
Property, Plant and Equipment and Other Non-Current Assets
Property , plant and equipment is stated at cost and depreciated using t he straight-line method over the estimated useful lives of the assets, which is generally 5 - 10 years for equipment and 10 - 30 years for buildings . Leasehold improvements are amortized over the shorter of the asset’s useful life or t he expected term of the lease. Depreciation expense for fiscal years 2015 , 2014 , and 2013 was $51.9 million, $49.1 million and $49.4 million, respectively.
Other non-current assets consist of intangible assets totaling $9.4 million and goodwill totaling $2.2 million. Intangible assets are amortized over their estimated useful lives of 5 to 10 years using the straight-line method of amortization.
The Company performs reviews of its long-lived assets for impairment whenever events or changes in circumstance indicate the carrying value may not be recoverable or that the useful life is shorter than originally estimated.
Long-lived assets by geographic area were as follows, net of accumulated depreciation:
June 28,
June 30,
In thousands
2015
2014
United States
$
$
Malaysia
Singapore
Other
Total long-lived assets
$
$
Goodwill and Intangible Assets
The Company reviews goodwill and purchased intangible assets with indefinite lives for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Reviews are performed to determine whether the carrying value of an asset is impaired, based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using: (i) quoted market prices or (ii) discounted expected future cash flows utilizing a discount rate consistent with the guidance. Impairment is based on the excess of the carrying amount over the fair value of those assets.
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The Company tests goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis or more frequently if the Company believes indicators of impairment exist. During fiscal year 2015 , the Company performed a qualitative assessment to test goodwill for impairment. Based on the qualitative assessment, if the Company determines that the fair value of a reporting unit is more likely than not (i.e. , a likelihood of more than 50 percent) to be less than its carrying amount, the two step impairment test will be performed. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company generally determines the fair value of the Company’s reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. No impairment charges were recor ded associated with the Company’ s goodwill and intangible assets for any of the periods presented.
Advertising Expense
The Company expenses advertising costs in the period in which they occur. Advertising expenses for fiscal years 2015 , 2014 , and 2013 were approximately $5.9 million, $5.5 million and $5.4 million, respectively.
Revenue Recognition
The Company recognizes revenues when the earnings process is complete, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection is reasonably assured. The Company recognized approximately 15% of net revenues in fiscal year 2015 from North American (“domestic”) distributors. Domestic distributor revenues are recognized under agreements which provide for certain sales price rebates and limited product return privileges. Given the uncertainties associated with the levels of pricing rebates, the ultimate sales price on domestic distributor sales transactions is not fixed or determinable until domestic distributors sell the merchandise to the end-customer. Domestic distributor agreements permit the following: price protection on certain domestic distribution inventory if the Company lowers the prices of its products; exchanges up to 5% of certain purchases on a quarterly basis; and ship and debit transactions. Ship and debit transactions occur when the Company agrees to accept a lower selling price for a specific quantity of product at the request of the domestic distributor in order to complete a sales transaction in the domestic distributor channel. For such sales, the Company rebates the negotiated price decrease to the distributor upon shipment as a reduction in the accounts receivable from the distributor.
At the time of shipment to domestic distributors, the Company records a trade receivable and deferred revenue at the distributor’s purchase price since there is a legally enforceable obligation from the distributor to pay for the products delivered. The Company relieves inventory as title has passed to the distributor and recognizes deferred cost of sales in the same amount. “Deferred income on shipments to distributors” represents the difference between deferred revenue and deferred costs of sales and is recognized as a current liability until such time as the distributor confirms a final sale to its end customer. “Deferred income on shipments to distributors” effectively represents the deferred gross margin on the sale to the distributor, however, the actual amount of gross margin the Company ultimately recognizes in future periods may be less than the originally recorded amount as a result of price protection, negotiated price rebates and exchanges as mentioned above. The wide range and variability of negotiated price rebates granted to distributors does not allow the Company to accurately estimate the portion of the balance in the “Deferred income on shipments to distributors” that will be remitted back to the distributors. During fiscal years 2015 and 2014 , t hese price rebates that have been remitted back to distributors have ranged from $3.5 million to $4.4 million per quarter. The Company does not reduce deferred income by anticipated future price rebates. Instead, price rebates are recorded against “Deferred income on shipments to distributors” when incurred, which is generally at the time the distributor sells the product to the end customers.
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. Revenue on international distributor 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 revenues and costs based on these estimated returns.
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 product warranty in the event that an epidemic failure of its parts was to take place. To date there have been no significant occurrences of epidemic failure . Warranty expense historically has been immaterial.
The Company provides a limited indemnification for certain customers against intellectual property infringemen t claims related to the Company’ s products. In certain cases, there are limits o n 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, which 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
The Company has equity incentive plans, which are described more fully in “ Note 2: Stock-Based Compensation .” Stock-based compensation is measured at the grant date, based on the fair v alue of the award. The Company’ s equity awards granted in fiscal years 2015 and 2014 were restricted stock awards. Stock-based compensation cost for restricted stock awards is based on the fair market value of the Company’s stock on the date of grant. Stock-based compensation cost for stock options is calculated on the date of grant using the fair value of stock options as determined using the Black-Scholes valuation model. The Black-Scholes valuation model requires the Company to estimate key assumptions such as expected option term and stock price volatility to determine the fair value of a stock option. The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends. The Company amortizes restricted stock and stock option award compensation cost straight-line over the awards vesting period, which is generally 5 years.
Income Taxes
The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company recognizes liabilities for uncertain tax positions based on the two-step process prescribed in the authoritative accounting literature. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires the Company to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. See “ Note 11. Income Taxes ” for further information.
Earnings Per Share
Basic earnings per share is calculated using the weighted average shares of common stock and unvested restricted 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 and restricted stock units calculated using the treasury stock method , and prior to fiscal year 2015, the dilutive effect of the conversion premium related to the Convertible Senior Notes ( the “Notes”). The dilutive effect of stock options and restricted stock units for fiscal years 2015 , 2014 , and 2013 was 810,000 , 1,173,000 , and 1,050,000 shares, respectively. There were no out-of-the-money stock options that had to be excluded from the weighted average diluted common shares outstanding for fiscal years 2015 and 2014. The weighted average diluted common shares outstanding for fiscal years 2013 excludes the effect of approximately 4,391,000 stock options that if included would be anti-dilutive.
There was no dilutive effect from the conversion premium in the calculation of diluted earnings per common shares for the current fiscal year, because of the debt extinguishment of the Notes at the end of fiscal year 2014. In fiscal year 2014 the Company included the dilutive effect of 879,000 shares for the conversion premium related to the Notes in the calculation of diluted earnings per common share because the average-per-share market price of the Company’ s common stock was above the conversion price during the fiscal year prior to the conversion on May 1, 2014. The conversion premium was not included in the calculation of diluted e arnings per common share in fiscal year 2013 because the av erage-per-share market price was below the conversion price during that fiscal year.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss components include unrealized gains or losses on available-for-sale securities, net of tax.
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.
Export sales by geographic area in fiscal years 2015 , 2014 , and 2013 were as follows:
June 28,
June 29,
June 30,
In thousands
2015
2014
2013
Europe
$
$
$
Japan
Rest of the world
Total export sales
$
$
$
Recently Announced Accounting Pronouncements
In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 Revenue from Contracts with Customers (Topic 606). On July 9, 2015, the FASB agreed to delay the effective date by one year from the first quarter of fiscal year 2018. In accordance with the agreed upon delay, the new standard is effective for us beginning in the first quarter of 2019. Early adoption is permitted, but not before the original effective date of the standard. The core principle of ASU No. 2014-09 is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU No. 2014-09 provides for one of the two methods of transition: retrospective application to each prior period presented; or recognition of the cumulative effect of retrospective application of the new standard in the period of initial application. The Company is currently evaluating the impact of ASU No. 2014-09 on its consolidated financial statements and which transition method to elect.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Each reporting period, management is required to assess whether there is substantial doubt about an entity’s ability to continue as a going concern and if so to provide related footnote disclosures. The new guidance is effective for annual and interim periods ending after December 15, 2016. Early adoption is permitted. This ASU is not expected to have an impact on the Company’s financial statements or disclosures . |
