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 September 28, 2003
[ ] 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 NUMER)
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 312,404,599 shares of the Registrant's Common Stock issued
and outstanding as of October 24, 2003.
1
LINEAR TECHNOLOGY CORPORATION
FORM 10-Q
THREE MONTHS ENDED SEPTEMBER 28, 2003
INDEX
Page
----
Part I: Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the three months 3
ended September 28, 2003 and September 29, 2002
Consolidated Balance Sheets at September 28, 2003 4-5
and June 29, 2003
Consolidated Statements of Cash Flows for the three 6
months ended September 28, 2003 and September 29, 2002
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial 10-12
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 12
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures: 14
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
------------------------------------
September 28, September 29,
2003 2002
----------------- ---------------
Net sales $174,077 $142,011
Cost of sales 41,409 36,568
-------- --------
Gross profit 132,668 105,443
-------- --------
Expenses:
Research and development 24,335 23,074
Selling, general and administrative 17,571 16,947
-------- --------
41,906 40,021
-------- --------
Operating income 90,762 65,422
Interest income, net 7,085 10,355
-------- --------
Income before income taxes 97,847 75,777
Provision for income taxes 28,376 21,975
-------- --------
Net income $ 69,471 $ 53,802
======== ========
Basic earnings per share $ 0.22 $ 0.17
======== ========
Shares used in the calculation of basic
earnings per share 313,409 314,190
======== ========
Diluted earnings per share $ 0.22 $ 0.17
======== ========
Shares used in the calculation of diluted
earnings per share 322,894 322,253
======== ========
Cash dividends per share $ 0.06 $ 0.05
======== ========
See accompanying notes
3
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands, except per share amounts)
September 28, June 29,
2003 2003
----------- -----------
(unaudited) (audited)
Current assets:
Cash and cash equivalents $ 145,974 $ 136,276
Short-term investments 1,521,142 1,457,291
Accounts receivable, net of allowance for
doubtful accounts of $1,762 ($1,762 at 95,709 80,094
June 29, 2003)
Inventories:
Raw materials 3,200 3,196
Work-in-process 26,068 25,471
Finished goods 3,638 3,427
----------- -----------
Total inventories 32,906 32,094
Deferred tax assets 51,181 51,181
Prepaid expenses and other current assets 18,661 19,064
----------- -----------
Total current assets 1,865,573 1,776,000
----------- -----------
Property, plant and equipment, at cost:
Land, buildings and improvements 142,355 142,361
Manufacturing and test equipment 324,518 324,314
Office furniture and equipment 3,399 3,399
----------- -----------
470,272 470,074
Accumulated depreciation and amortization (256,475) (246,630)
----------- -----------
Net property, plant and equipment 213,797 223,444
----------- -----------
Other non current assets 56,020 57,435
----------- -----------
Total assets $ 2,135,390 $ 2,056,879
=========== ===========
See accompanying notes
4
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES & STOCKHOLDERS' EQUITY
(in thousands, except per share amounts)
September 28, June 29,
2003 2003
---------- ----------
(unaudited) (audited)
Current liabilities:
Accounts payable $ 7,158 $ 7,480
Accrued payroll and related benefits 28,985 39,471
Deferred income on shipments to distributors 46,198 44,678
Income taxes payable 61,258 53,279
Other accrued liabilities 17,194 17,121
---------- ----------
Total current liabilities 160,793 162,029
---------- ----------
Deferred tax and other long-term liabilities 77,958 79,921
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 2,000
shares authorized; none issued or outstanding -- --
Common stock, $0.001 par value, 2,000,000
shares authorized; 314,244 shares issued
and outstanding at September 28, 2003
(312,706 shares at June 29, 2003) 314 313
Additional paid-in capital 774,700 740,084
Accumulated other comprehensive income,net 4,981 6,950
Retained earnings 1,116,644 1,067,582
---------- ----------
Total stockholders' equity 1,896,639 1,814,929
---------- ----------
Total liabilities and stockholders' equity $2,135,390 $2,056,879
========== ==========
See accompanying notes
5
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
----------------------------------
September 28, September 29,
2003 2002
--------- ---------
Cash flow from operating activities:
Net income $ 69,471 $ 53,802
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 12,234 11,570
Tax benefit from stock option transactions 12,793 3,613
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (15,615) (11,628)
Decrease (increase) in inventories (812) (1,818)
Decrease (increase) in prepaid expenses
and other current assets 403 3,459
Increase (decrease) in accounts payable,
accrued payroll and other accrued liabilities (11,466) (8,280)
Increase (decrease) in deferred income on
shipments to distributors 1,520 1,196
Increase (decrease) in income taxes payable 7,979 4,479
--------- ---------
Cash provided by operating activities 76,507 56,393
--------- ---------
Cash flow from investing activities:
Purchase of short-term investments (282,207) (98,539)
Proceeds from sales and maturities of short-
term investments 215,155 156,313
Purchase of property, plant and equipment (1,172) (1,439)
--------- ---------
Cash provided by (used in) investing activities (68,224) 56,335
--------- ---------
Cash flow from financing activities:
Issuance of common shares under employee
stock plans 21,954 3,716
Purchase of common stock (1,758) (125,017)
Payment of cash dividends (18,781) (15,751)
--------- ---------
Cash provided by (used in) financing activities 1,415 (137,052)
--------- ---------
Increase (decrease) in cash and cash equivalents 9,698 (24,324)
--------- ---------
Cash and cash equivalents, beginning of period 136,276 211,706
--------- ---------
Cash and cash equivalents, end of period $ 145,974 $ 187,382
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes $ 7,195 $ 13,825
========= =========
See accompanying notes
6
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 months ended
September 28, 2003 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 29, 2003 included in
the Company's Annual Report on Form 10-K. The accompanying balance sheet at
June 29, 2003 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 year ending on the Sunday nearest June
30. Fiscal years 2004 and 2003 are 52 week years.
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
----------------------------------
September 28, September 29,
2003 2002
-------- --------
Numerator - Net income $ 69,471 $ 53,802
-------- --------
Denominator for basic earnings per share - weighted
average shares 313,409 314,190
Effect of dilutive securities - employee stock
options 9,485 8,063
-------- --------
Denominator for diluted earnings per share 322,894 322,253
======== ========
Basic earnings per share $ 0.22 $ 0.17
======== ========
Diluted earnings per share $ 0.22 $ 0.17
======== ========
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. No employee compensation expense has
been recorded as all options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant. Had
expense been recognized using the fair value method described in SFAS 123,
using the Black-Scholes option-pricing model, the Company would have
reported the following results of operations:
7
Three Months Ended
--------------------------------
September 28, September 29,
2003 2002
------------- ----------
Net income as reported $ 69,471 $ 53,802
Deduct: total stock-based
compensation expense
determined under the fair
value method, net of tax (18,527) (18,965)
------------- ----------
Pro forma net income $ 50,944 $ 34,837
============= ==========
Earning per share:
Basic-as reported $ 0.22 $ 0.17
============= ==========
Basic-pro forma $ 0.16 $ 0.11
============= ==========
Diluted-as reported $ 0.22 $ 0.17
============= ==========
Diluted-pro forma $ 0.16 $ 0.11
============= ==========
5. Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of unrealized gains 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
-------------------------------------
September 28, September 29,
2003 2002
---------------- ----------------
Net income $ 69,471 $ 53,802
Increase (decrease) in
unrealized gains on
available-for-sale securities (1,969) ---
---------------- ----------------
Total comprehensive income $ 67,502 $ 53,802
================ ================
6. Product Warranty and Indemnification
The Company's warranty policy provides for replacement of defective parts.
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 Pronouncements
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46 requires
an investor with a majority of the variable interests (primary beneficiary) in a
variable interest entity (VIE) to consolidate the entity and also requires
majority and significant variable interest investors to provide certain
disclosures. A VIE is an entity in which the voting equity investors do not have
a controlling interest, or the equity investment at risk is insufficient to
finance the entity's activities without receiving additional subordinated
financial support from other parties. FIN 46 clarifies the application of
Accounting Research Bulletin No. 51 and applies immediately to any variable
interest entities created after January 31, 2003 and to variable interest
entities in which an interest is obtained after that date. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied
8
for the first interim or annual period ending after December 15, 2003. The
Company believes the adoption of FIN 46 will not have an impact on its results
of operations or financial position.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
Management believes there have been no significant changes to the
Company's critical accounting policies during the quarter ended September 28,
2003 as compared to the previous disclosures in Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the Annual
Report on Form 10-K for the year ended June 29, 2003.
Results of Operations
The table below states the income statement items for the three months
ended September 28, 2003 and September 29, 2002 as a percentage of net sales and
provides the percentage change in absolute dollars of such items comparing the
interim period ended September 28, 2003 to the corresponding period from the
prior fiscal year:
Three Months Ended
-----------------------------------
September 28, September 29, Increase/
2003 2002 (Decrease)
---------------- --------------- -------------
Net sales 100.0% 100.0% 23%
Cost of sales 23.8 25.8 13
---------------- ---------------
Gross profit 76.2 74.2 26
---------------- ---------------
Expenses:
Research and development 14.0 16.2 5
Selling, general, and administrative 10.1 11.9 4
---------------- ---------------
24.1 28.1 5
---------------- ---------------
Operating income 52.1 46.1 39
Interest income, net 4.1 7.3 (32)
---------------- ---------------
Income before income taxes 56.2% 53.4% 29
================ ===============
Effective tax rates 29.0% 29.0%
================ ===============
Net sales for the quarter ended September 28, 2003 were $174.1 million,
an increase of $32.1 million or 23% over net sales for the same quarter of the
previous year. The increase in net sales was primarily due to an increase in
unit shipments, which was partially offset by a decrease in the average selling
price. The decrease in average selling price is the result of a continuing
change in mix to smaller package products and due to slight price reductions
when compared to the same quarter of the previous fiscal year. Geographically,
international sales represented 73% of net sales, 7% higher compared to the same
quarter of the previous fiscal year. Internationally, sales to Rest of the World
(ROW), which is primarily Asia excluding Japan, represented 38% of net sales,
while sales to Europe and Japan were 19% and 16% of net sales, respectively.
Domestic sales were approximately 27% of net sales for the first quarter of
fiscal 2004 compared to 34% in the same quarter of the previous fiscal year. The
decline in domestic sales and the related increase in international sales
primarily results from the Company's domestic customers shifting more of their
manufacturing operations overseas. The Company's major end-markets are
communications, industrial and computer. Sales rose in all major end-markets
when compared to the same quarter of the previous fiscal year.
Gross profit increased $27.2 million or 26% in the first quarter of
fiscal 2004 over the corresponding period in fiscal 2003. The increase 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 as well as an increase in
factory efficiencies. These impacts were partially offset by an increase in
employee profit sharing. The decrease in average selling price referred to above
did not have a commensurate effect on gross margin since most of the reduction
was due to a change in product mix as the Company has had increased sales of
products with smaller die and package types, which have a lower average selling
price but also lower costs.
Research and development ("R&D") expenses increased by $1.3 million or
5% for the first quarter of fiscal 2004, as compared to the same period in
fiscal 2003. The increase in R&D expenses compared to the same quarter of the
previous
10
fiscal year was due to increases in labor related expenses, primarily in the
area of design engineering headcount and employee profit sharing. Offsetting the
increases in labor was a decrease in mask costs.
Selling, general and administrative expenses ("SG&A") increased by $0.6
million or 4% for the first quarter of fiscal 2004, as compared to the same
period in fiscal 2003. The increase in SG&A expenses compared to the same
quarter of the previous fiscal year was due primarily to an increase in
compensation costs as a result of increases in profit sharing, merit and
commissions due to higher sales. Offsetting the increases in compensation costs
was a decrease in legal expenses.
Interest income, net decreased 32% in the first quarter of fiscal 2004
to $7.1 million when compared to the same period in fiscal 2003. The decrease in
interest income was primarily due to the decrease in the average interest rates
earned on the Company's cash investment balances. Also contributing to the
decline in interest income, net was the addition of interest expense in the
first quarter of fiscal 2004 related to a long-term royalty agreement.
Offsetting these decreases in interest income, net was the interest earned on
the $95.0 million increase on the first quarter's average cash and investments
balance when compared to the first quarter in the previous fiscal year.
The Company's effective tax rate for the first quarter of fiscal 2004
and 2003 was 29%. The effective tax rate is impacted by business activity in
foreign jurisdictions with lower tax rates, by tax-exempt interest income and by
research and development credits.
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 our 10-K
for the fiscal year ended June 29, 2003.
During the quarter ended September 28, 2003 the Company exceeded its
projections by growing sales and profits by 5% over the previous calendar
quarter. The Company's backlog coming out of the first quarter of fiscal 2004 is
up from the fourth quarter of fiscal 2003. Although still low by historic
standards, backlog is higher than what the Company has operated under in the
past two years. The conditions external to the Company appear to be improving;
general economic conditions are stabilizing and several companies are reporting
upward trends. Looking forward, the Company is experiencing good bookings
momentum in most major geographies; its inventory is well positioned and it
continues to have responsive lead times. Consequently, should these positive
trends continue, the Company estimates similar percentage growth sequentially in
sales and profits in the December quarter to that just achieved in the September
quarter.
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 the above
factors described 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 September 28, 2003, cash, cash equivalents and short-term
investments totaled $1,667.1 million, and working capital was $1,704.8 million.
11
Accounts receivable totaled $95.7 million at the end of the first
quarter of fiscal 2004, an increase of $15.6 million over the fourth quarter of
fiscal 2003. The increase in accounts receivable was due to several factors:
sales increased $8.3 million from the previous sequential quarter; the shipment
profile in every summer quarter involves more shipments in September than in the
vacation months of July and August; and the Company shipped more to the U.S.
distribution channel than what was sold by U.S distribution. The Company does
not recognize a sale on shipments to this channel until distribution sells the
product to its end customer. Therefore the Company has a larger receivable
balance without a current similar increase in sales. Compared with the similar
quarter in the previous fiscal year, day sales outstanding (DSO) in accounts
receivable decreased from 60 days to 50 days.
During the first quarter of fiscal 2004, the Company generated $76.5
million of cash from operating activities and $22.0 million in proceeds from
common stock issued under employee stock plans.
During the first quarter of fiscal 2004, significant cash expenditures
included net purchases of short-term investment of $67.1 million, the payment of
$18.8 million in cash dividends to stockholders representing $0.06 per share per
quarter, repurchases of $1.8 million of common stock and capital asset purchases
of $1.2 million. The payment of future dividends will be based on future
quarterly financial performance.
As of September 28, 2003, the Company had no off-balance sheet
financing arrangements or activities.
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.
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 29, 2003. 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 2003. At September 28, 2003, 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 commercial paper, municipal
bonds, federal agency 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.
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 first quarter of fiscal 2004 that has
materially affected, or is reasonably likely to materially affect, its internal
control over financial reporting.
12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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.
b) Reports on Form 8-K:
During the quarter ended September 28, 2003, the Company filed
one report on Form 8-K as follows:
A report on Form 8-K was filed July 22, 2003, furnishing to
the Securities and Exchange Commission a press release
announcing the Company's annual and quarterly financial
results.
13
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: November 12, 2003 BY /s/ Paul Coghlan
------------------------------------------
Paul Coghlan
Vice President, Finance &
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
14