LINEAR TECHNOLOGY CORPORATION
FORM 10-Q
THREE AND SIX MONTHS ENDED JANUARY 2, 2000
INDEX
Page
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Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the 2
three and six months ended January 2, 2000 and
December 27, 1998
Condensed Consolidated Balance Sheets at January 2, 2000 3-4
and June 27, 1999
Condensed Consolidated Statements of Cash Flows for the 5
six months ended January 2, 2000 and December 27, 1998
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7-9
Condition and Results of Operations
Part II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
LINEAR TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
January 2, Dec. 27, January 2, Dec. 27,
2000 1998 2000 1998
----------------- ---------------- ----------------- -----------------
Net sales $ 162,294 $ 120,020 $ 309,825 $ 236,052
Cost of sales 41,538 34,029 79,507 67,691
--------- --------- --------- ---------
Gross profit 120,756 85,991 230,318 168,361
--------- --------- --------- ---------
Expenses:
Research and development 18,757 12,623 36,642 24,160
Selling, general and administrative 18,169 12,405 33,684 25,043
--------- --------- --------- ---------
36,926 25,028 70,326 49,203
--------- --------- --------- ---------
Operating income 83,830 60,963 159,992 119,158
Interest income 10,304 6,543 18,862 13,615
--------- --------- --------- ---------
Income before income taxes 94,134 67,506 178,854 132,773
Provision for income taxes 29,183 21,602 55,446 42,487
--------- --------- --------- ---------
Net income $ 64,951 $ 45,904 $ 123,408 $ 90,286
========= ========= ========= =========
Basic earnings per share $ 0.42 $ 0.31 $ 0.80 $ 0.60
========= ========= ========= =========
Shares used in the calculation
of basic earnings per share 154,872 150,394 154,416 151,292
========= ========= ========= =========
Diluted earnings per share $ 0.40 $ 0.29 $ 0.76 $ 0.57
========= ========= ========= =========
Shares used in the calculation of diluted
earnings per share 163,023 156,810 162,697 157,554
========= ========= ========= =========
Cash dividends per share $ 0.04 $ 0.035 $ 0.08 $ 0.07
========= ========= ========= =========
<FN>
See accompanying notes
</FN>
2
LINEAR TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
January 2, June 27,
2000 1999
----------- ----------
(unaudited) (audited)
Current assets:
Cash and cash equivalents $ 184,361 $ 154,220
Short-term investments 769,213 632,487
Accounts receivable, net of allowance for
doubtful accounts of $803 ($803 at
June 27, 1999) 69,109 62,188
Inventories:
Raw materials 3,955 2,705
Work-in-process 8,375 8,178
Finished goods 5,845 4,641
---------- ----------
Total inventories 18,175 15,524
Deferred tax assets 28,116 28,116
Prepaid expenses and other current assets 9,138 12,577
---------- ----------
Total current assets 1,078,112 905,112
---------- ----------
Property, plant and equipment, at cost:
Land, building and improvements 80,788 78,555
Manufacturing and test equipment 188,487 166,863
Office furniture and equipment 3,238 3,234
---------- ----------
272,513 248,652
Less accumulated depreciation and
amortization (118,870) (106,850)
---------- ----------
Net property, plant and equipment 153,643 141,802
---------- ----------
$1,231,755 $1,046,914
========== ==========
<FN>
See accompanying notes
</FN>
3
LINEAR TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES & SHAREHOLDERS' EQUITY
(In thousands)
January 2, June 27,
2000 1999
--------------- ----------------
(unaudited) (audited)
Current liabilities:
Accounts payable $ 11,892 $ 7,873
Accrued payroll and related benefits 43,975 33,653
Deferred income on shipments to distributors 42,691 35,464
Income taxes payable 16,076 27,404
Other accrued liabilities 24,473 20,881
---------- ----------
Total current liabilities 139,107 125,275
Deferred tax liabilities 14,845 14,845
Shareholders' equity:
Common stock, no par value, 240,000
shares authorized; 155,547
shares issued and outstanding at
January 2, 2000 (153,731 shares
at June 27, 1999) 371,951 312,027
Retained earnings 705,852 594,767
---------- ----------
Total shareholders' equity 1,077,803 906,794
---------- ----------
$1,231,755 $1,046,914
========== ==========
<FN>
See accompanying notes
</FN>
4
LINEAR TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
(unaudited)
Six Months Ended
---------------------------------------------
January 2, Dec. 27,
2000 1998
--------------------- -------------------
Cash flow from operating activities:
Net income $ 123,408 $ 90,286
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,020 10,501
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (6,921) 5,156
Decrease (increase) in inventories (2,651) 176
Decrease (increase) in deferred tax assets,
prepaid expenses and other current assets 3,439 1,592
Increase (decrease) in accounts payable,
accrued payroll, income taxes payable and
other accrued liabilities 6,605 (3,726)
Tax benefit from stock option transactions 34,997 7,258
Increase (decrease) in deferred income 7,227 (1,272)
---------- ---------
Cash provided by operating activities 178,124 109,971
---------- ---------
Cash flow from investing activities:
Purchase of short-term investments (296,354) (303,708)
Proceeds from sales and maturities of short-term
investments 159,628 297,554
Purchase of property, plant and equipment (23,861) (25,698)
---------- ---------
Cash used in investing activities (160,587) (31,852)
---------- ---------
Cash flow from financing activities:
Issuance of common stock under employee stock
plans 24,927 8,300
Purchase of common stock -- (108,736)
Payment of cash dividends (12,323) (10,628)
---------- ---------
Cash used in financing activities 12,604 (111,064)
---------- ---------
Increase (decrease) in cash and cash equivalents 30,141 (32,945)
Cash and cash equivalents, beginning of period 154,220 128,733
---------- ---------
Cash and cash equivalents, end of period $ 184,361 $ 95,788
========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 31,647 $ 31,925
========== =========
<FN>
See accompanying notes
</FN>
5
LINEAR TECHNOLOGY CORPORATION
NOTES TO CONDENSED 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 months and six
months ended January 2, 2000 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, 1999
included in the Company's Annual Report to Shareholders. The accompanying
balance sheet at June 27, 1999 has been derived from audited financial
statements as of that date. All share and per share information has been
adjusted for the effect of the Company's two-for-one stock split which
occurred in February 1999. On January 18, 2000 the Company announced
another two-for-one stock split. However, this stock split will not be
effective until March 2000 and therefore the financial information
presented in this report has not been adjusted to reflect this most recent
stock split announcement. There were no material differences between
comprehensive income and net income for all periods presented. 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 year ending on the Sunday nearest June
30. Fiscal 2000 will consist of 53 weeks, compared to 52 weeks for fiscal
1999. The three months ended January 2, 2000 consists of fourteen weeks, as
compared to thirteen weeks for the three months ended December 27, 1998.
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 27, January 2, December 27,
2000 1998 2000 1998
----------------- ----------------- ----------------- -----------------
Numerator - Net income $ 64,951 $ 45,904 $ 123,408 $ 90,286
--------- --------- ---------- ----------
Denominator for basic earnings
per share - weighted average
shares 154,872 150,394 154,416 151,292
Effect of dilutive securities
- employee stock options 8,151 6,416 8,281 6,262
--------- --------- ---------- ----------
Denominator for diluted
earnings per share 163,023 156,810 162,697 157,554
--------- --------- ---------- ----------
Basic earnings per share $ 0.42 $ 0.31 $ 0.80 $ 0.60
========= ========= ========== ==========
Diluted earnings per share $ 0.40 $ 0.29 $ 0.76 $ 0.57
========= ========= ========== ==========
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The table below states the income statement items for the three and six
months ended January 2, 2000 and December 27, 1998 as a percentage of net sales
and provides the percentage change in absolute dollars of such items comparing
the interim periods ended January 2, 2000 to the corresponding periods from the
prior fiscal year:
Three Months Ended Six Months Ended
--------------------------------------------------- --------------------------------------------
January 2, Dec. 27, Increase/ January 2, Dec. 27, Increase/
2000 1998 (Decrease) 2000 1998 (Decrease)
Net sales 100.0% 100.0% 35% 100.0% 100.0% 31%
Cost of sales 25.6 28.4 22 25.7 28.7 17
------ ------ ------ ------
Gross profit 74.4 71.6 40 74.3 71.3 37
------ ------ ------ ------
Expenses:
Research & development 11.6 10.5 49 11.8 10.2 52
Selling, general &
administrative 11.2 10.3 46 10.9 10.6 35
------ ------ ------ ------
22.8 20.8 48 22.7 20.8 43
------ ------ ------ ------
Operating income 51.6 50.8 38 51.6 50.5 34
Interest income 6.4 5.4 57 6.1 5.7 39
------ ------ ------ ------
Income before income taxes 58.0% 56.2% 39 57.7% 56.2% 35
====== ====== ====== ======
Effective tax rates 31.0% 32.0% 31.0% 32.0%
====== ====== ====== ======
Net sales for the quarter ended January 2, 2000 were a record $162.3
million, an increase of $42.3 million or 35% over net sales for the same quarter
of the previous year. This increase was due to higher unit shipments, while the
average selling price declined slightly. Sales increased in all geographic
areas, with Asia, including Japan, and the United States leading Europe.
International sales for the second quarter of fiscal 2000 were 57% of net sales
compared with 55% of net sales in the same period of fiscal 1999. Relative to
end-market applications, sales increased significantly over the prior year's
quarter in each of the Company's three major end markets: communications,
computer and industrial.
Net sales for the six months ended January 2, 2000 increased $73.8
million or 31% over net sales for the same period of the previous year. This
increase was due primarily to higher unit shipments while the average selling
price declined slightly. Sales increased in all geographic areas, particularly
Asia and the United States, and in all major end market applications.
Gross profit increased $34.8 million or 40% and $62.0 million or 37%
for the second quarter and first six months of fiscal 2000 over the
corresponding periods in fiscal 1999. The improvement in gross profit as a
percentage of net sales was primarily due to the favorable effect of fixed costs
allocated across a higher sales base and improved manufacturing efficiencies and
yields achieved at the Company's fabrication, assembly and test facilities.
Research and development ("R&D") expenses increased by $6.1 million or
49% and $12.5 million or 52% for the second quarter and first six months of
fiscal 2000, respectively, as compared to the same periods in fiscal 1999. The
increases in R&D expenses compared to the prior year periods were due to a
significant increase in staffing levels of design and test engineering personnel
which resulted in higher compensation costs, increased profit sharing costs
driven by the increases in sales and profitability, and development costs in new
product areas.
Selling, general and administrative expenses ("SG&A") increased by $5.8
million or 46% and $8.6 million or 35% for the second quarter and first six
months of fiscal 2000, respectively, as compared to the same periods in fiscal
1999. The increases in SG&A expenses compared to the prior year periods were due
primarily to an increase in staffing levels to support the increased sales
volume, higher profit sharing costs and higher commissions resulting from the
increase in sales.
7
Part of the increase in costs in all labor expense categories was due
to an extra weeks payroll. Every seven years the Company has an extra week since
its fiscal calendar always ends on a Sunday. This extra week is in this fiscal
year and occurred in the holiday period at the end of December; therefore it had
more of an effect on costs than sales.
Interest income was $10.3 million and $18.9 million for the second
quarter and first six months of fiscal 2000, an increase of $3.8 million and
$5.2 million respectively, over the corresponding periods of fiscal 1999. The
increase in interest income resulted from the increase in cash, cash equivalents
and short-term investments over this period, partially offset both by the
repurchase of common stock in fiscal 1999 and by a decline in the average rate
of return due to lower short-term interest rates.
The Company's effective tax rate for the second quarter and the first
six months of fiscal 2000 was 31.0%, down from 32.0% in fiscal 1999. The lower
tax rate is due primarily to increased business activity in foreign
jurisdictions and an increase in assets deployed outside of California in
jurisdictions where the Company experiences lower tax rates. Although the
Company's tax holiday in Singapore expired in September 1999, it is anticipated
that the Company will receive at least a partial rate reduction for its
Singapore operations going forward.
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, timely ramp-up of
new facilities, the timely introduction of new processes and products, general
conditions in the world economy and financial markets and other factors
described below.
Management of the Company believes the long-term prospects for the
business are excellent and the Company continues to invest in the plant
infrastructure and technical talent to maximize its opportunities. In the
short-term the Company has had five consecutive strong bookings quarters both in
the magnitude of bookings and in their breadth across end-market applications
and geographic regions. Management believes that the recent strength in bookings
has resulted from the improvement in worldwide economic conditions since the
first quarter of fiscal 1999, as well as the strength of the Company's product
offerings. The Company's lead times continue to be low. Customers are generally
positive in their business outlook, continue to order to meet our lead times and
do not appear to be building inventories. However, as general business
conditions continue strong, customers are more watchful of product availability.
Consequently, the Company continues to be dependent on orders that book and ship
in the same quarter, although to a slightly lesser extent than previous
quarters. In summary, given the acceleration of bookings throughout last quarter
and the acceptance of new products at customers, the Company currently expects
to grow sales in the near-term in the high single digit range sequentially over
the quarter just reported. The Company expects that its profitability as a
percentage of sales will be generally unchanged during this period.
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 are critical factors
for future sales growth and sustained profitability.
Although the Company believes that it has the product lines,
manufacturing facilities and technical and financial resources for its current
operations, sales and profitability can be significantly affected by the above
and other factors. Additionally, the Company's common stock could be subject to
significant price volatility should sales and/or earnings fail to meet
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.
8
Liquidity and Capital Resources
At January 2, 2000, cash, cash equivalents and short-term investments
totaled $953.6 million, and working capital was $939.0 million.
During the first six months of fiscal 2000, the Company generated
$178.1 million of cash from operating activities. Additionally, the Company
generated $24.9 million in proceeds from common stock issued under employee
stock option and stock purchase plans.
During the first six months of fiscal 2000, significant cash
expenditures included net purchases of short-term investments of $136.7 million
and $23.9 million for the purchase of capital assets, primarily manufacturing
equipment for the Company's fabrication, assembly and test facilities. The
Company also paid $12.3 million for cash dividends to shareholders representing
$0.04 per share per quarter. The payment of future dividends will be based on
quarterly financial performance.
Historically, the Company has satisfied its liquidity needs through
cash generated from operations and the placement of equity securities. Given its
strong financial condition and performance, the Company believes that current
capital resources and cash generated from operating activities will be
sufficient to meet its liquidity and capital expenditures requirements for the
foreseeable future.
Year 2000 Readiness Disclosure
The Company's Year 2000 Readiness Program was completed in accordance
with plan and the Company did not experience any problems that impaired its
ability to service customers and vendors in calendar year 2000. The cost of
implementation of the Company's Year 2000 Readiness Program did not have a
material impact on the Company's financial position or results of operations.
9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the Company, held on November
3, 1999, in Milpitas, California, the shareholders 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. 138,387,300 1,698,649
David S. Lee 138,380,374 1,705,575
Thomas S. Volpe 138,379,074 1,706,875
Leo T. McCarthy 138,353,338 1,732,611
Richard M. Moley 138,381,717 1,704,232
The vote to ratify the appointment of Ernst & Young LLP as independent auditors
for fiscal 2000 was as follows:
FOR AGAINST ABSTAIN
--- ------- -------
139,312,213 698,775 74,961
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27.1 Financial Data Schedule for the six months ended January 2,
2000
b) Reports on Form 8-K
None
10
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 15, 2000 BY /s/Paul Coghlan
--------------------------------------
Paul Coghlan
Vice President, Finance &
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
11