December 21, 2004
VIA FACSIMILE AND OVERNIGHT DELIVERY
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-1004
Attention: Daniel Gordon
Re: Linear Technology Corporation
Form 10-K for the Fiscal Year Ended June 27, 2004
File No. 1-14864
Ladies and Gentlemen:
On behalf of Linear Technology Corporation (the "Company"), I submit
this letter in response to comments from the Staff of the Securities and
Exchange Commission received by letter dated December 7, 2004, relating to the
Company's Form 10-K for the fiscal year ended June 27, 2004.
In this letter, I have recited the comments from the Staff in
italicized, bold type and have followed each comment with the Company's
response. Capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Company's Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations-Page 15
1. We note on page 8 you briefly reference a license agreement with Texas
Instruments. Supplementally tell us and revise your Management's
Discussion and Analysis in future filings to provide additional details
regarding this and any other similar material agreements. Discuss the
significant terms of the agreement and how the agreement will impact
your business going forward, including discussions of any royalty
payments that may be due under these agreements.
Response:
The Company supplementally advises the Staff that in March of fiscal
2003 the Company entered into a ten-year patent portfolio cross license
agreement with Texas Instruments, Inc. (TI). Under the terms of the
agreement, the Company may use TI's patents for the term of the
agreement and TI may use the Company's patents for the term of the
agreement. In addition, the Company must pay TI a fixed royalty on a
quarterly basis for the term of the agreement. The amount of $56.6
million originally capitalized represents the ten-year obligation of
the Company, which is being amortized equitably over the ten-year
period. The annual amortization expense represents roughly 1% of
pre-tax income in fiscal 2004.
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The only material obligation of the Company under the TI Agreement is
the obligation to pay the royalty. This obligation is reflected on the
Company's balance sheet, and the accounting treatment of the TI
Agreement is disclosed in the Footnote 3. "Intangible Assets" in the
Company's Form 10-K. Accordingly, the Company believes that additional
disclosure is not necessary. Furthermore, the Company advises the Staff
that it has from time-to-time entered into similar agreements and thus
considers the TI Agreement to be in the ordinary course of its
business.
The Company accounted for the agreement under the provisions of
Accounting Principles Board Opinion 21 (APB 21), "Interest on
Receivables and Payables" and Financial Accounting Standard No. 142
(SFAS 142) "Goodwill and Other Intangible Assets." Under APB 21, the
Company valued the asset and corresponding liability by using the net
present value of the fixed royalty payments. Under SFAS 142 the Company
is amortizing the asset on a straight-line basis over the term of the
agreement because the license's useful life is finite. The
straight-line method was utilized as required by SFAS 142 because there
was no more reliable method of amortization that reflected the pattern
in which the economic benefits of the intangible asset would be
consumed. In addition, the Company is amortizing the related liability
using the effective interest method. The imputed interest calculated
using the effective interest method accounts for all of the Company's
interest expense included in "interest income, net" on the Income
Statement and disclosed in the MD&A. On a going-forward basis, the
impact of the agreement will continue to be fixed quarterly cash
payments made to TI, amortization of the asset, and imputed interest
expense through the term of the agreement.
The Company respectfully submits to the Staff that its disclosure
regarding the TI agreement has been adequate, as the amortization
charge does not fluctuate from period-to-period and interest expense
changes minimally, and the quarterly cash payments are immaterial to
the Company's cashflows.
The Company is not currently a party to any similar agreements that are
material to it, but undertakes to disclose in future filings the
details of any other material agreements that the Company may enter
into.
2. Tell us more about the long-term royalty agreement you refer to under
Interest Income, net, on page 15. Tell us how a royalty agreement
impacts your interest expense. Support your accounting for this with
reference to appropriate accounting literature.
Response:
The Company supplementally advises the Staff that the interest expense
relating to the long-term royalty agreement is the imputed interest on
the license agreement with TI discussed above in our response to
Comment 1. In response to the Staff's comment, commencing with the
filing of the Company's Form 10-Q for the three and six-month periods
ending January 2, 2005, the Company will refer to the interest expense
as the imputed interest on the Company's long-term license agreement.
The Company's response to Comment 1 provides details of the accounting
literature that it relied upon to support the manner in which it
accounts for this agreement.
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Critical Accounting Policies - Page 15
3. Your critical account policy disclosures do not provide the information
related to the underlying estimates and judgments required by FR-72 and
SEC Release no. 33-8098. The critical accounting policies discussion
should supplement, not duplicate, the description of accounting
policies that are disclosed in the notes to the financial statements.
While accounting policy notes in the financial statements generally
describe the method used to apply an accounting principle, the
discussion in MD&A should present a company's analysis of the
uncertainties involved in applying a principle at a given time. Please
revise future filings to specifically address the following:
a. Provide information regarding how you arrived at the estimate;
b. How accurate the estimate or assumption has been in the past;
c. How much the estimate or assumption has changed in the past; and
d. Whether the estimate or assumption is reasonably likely to change in
the future.
Response:
In response to the Staff's comment, commencing with the filing of the
Company's Form 10-Q for the three and six-month periods ending January
2, 2005, the Company will expand its disclosure with regard to critical
accounting policies, as appropriate.
Consolidated Financial Statements
Note 1. Description of Business and Significant Accounting Policies
Segment Reporting-Page26
4. Revise future filings to provide the disclosures required by paragraph
37 of SFAS 131, or supplementally tell us why you don't believe it is
required.
Response:
Paragraph 37 of SFAS 131 provides that "an enterprise shall report the
revenues from external customers for each product and service or each
group of products and services unless it is impracticable to do so."
The Company respectfully submits that it currently complies with
paragraph 37 of SFAS 131, as the Company derives revenue from only one
group of similar products - analog (or linear) integrated circuits.
More specifically, the Company is an electronics company; within
electronics, the Company specializes in integrated circuits (IC's);
within IC's, the Company focuses exclusively on analog (or linear)
IC's. The Company's business activities consist entirely of designing,
manufacturing and marketing analog IC's, as currently disclosed in the
"Business Section" in Item 1 of the Company's Form 10-K. The World
Semiconductor Trade Statistics Organization (WSTS), in concert with the
Semiconductor Industry Association (SIA), separates the IC industry
into the following distinct product categories: analog, microprocessors
and controllers, logic, and memory, of which analog is the smallest. As
the Company operates solely within the analog segment of the
semiconductor industry, it believes that it has adequately fulfilled
the disclosure requirements of paragraph 37 as it operates solely
within the analog segment of the semiconductor industry. In addition,
given the similarity of products and end-markets within the analog IC
segment, the Company believes that further disaggregation of revenues
within the analog IC segment would not be meaningful.
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5. We note on page 10 that you appear to have managers of three different
product groups. Supplementally tell us why you believe you have only
one segment, considering the guidance of SFAS 131. Supplementally
provide details of the information that your chief operating decision
maker reviews in making decisions regarding resource allocation and in
assessing performance.
Response:
As noted in the Company's response to Comment 4, the Company derives
revenue from only one group of similar products - analog integrated
circuits. The Company supplementally advises the Staff that the Company
has created four different product design groups for research and
development purposes only, as explained in more detail below. Once
products pass the research and development stage, they are no longer
tracked separately nor are they distinguished by these product
categories for operational or management purposes. Reports that the
Company may prepare relating to its product design groups are not used
by the Company's Chief Operating Decision Maker, as such term is
defined in SFAS 131, to make decisions about the allocation of the
Company's resources or to assess performance. As such, the Company
believes its segment disclosures are consistent with the objectives and
basic principles of SFAS 131.
More specifically, subsection (a) of paragraph 10 of SFAS 131 states
the following (in italics):
10. An operating segment is a component of an enterprise:
a. That engages in business activities from which it may earn
revenues and incur expenses (including revenues and expenses
relating to transactions with other components of the same
enterprise) and,
The Company's only business is designing, manufacturing and marketing
analog IC's. Although the Company has four analog design groups (Power
Management, Signal Conditioning, Mixed Signal and High Frequency),
these groups focus on new product design. Accordingly, only the
Company's research and development employees are included in these
design groups. There are slight technical variations amongst these
product groups, which are generally separated by end-market
application, although often these end-markets overlap. Since the
Company is essentially a technology company, Vice-Presidents lead the
product selection (end-market application) and R&D design efforts only.
However, the Vice-Presidents of the Company's design groups do not
manage the Company's manufacturing operations or sales force. The
employees of the Company's manufacturing operations and sales force
instead report to different executives who have responsibility for all
products (without distinguishing which design groups they come from).
In addition, subsection (b) of Paragraph 10 states the following (in
italics):
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b. Whose operating results are regularly reviewed by the
enterprise's chief operating decision maker to make decisions
about resources to be allocated to the segment and assess its
performance, and
The method for determining operating segments under SFAS 131 is often
referred to as the "management approach." Paragraph 4 of SFAS 131
states that the management approach is based on "the way that
management organizes the segments within the enterprise for making
operating decisions and assessing performance." In other words, the
focus of the management approach is on the operational and financial
information that an enterprise's decision makers use to make decisions
about the enterprise's operations.
The Company identified its Chief Executive Officer (CEO) as its Chief
Operating Decision Maker (CODM) as defined by SFAS 131.
The CODM uses the Company's overall financial results of operations to
evaluate the Company's performance and to allocate resources as
necessary. For example, the Company's bonus and profit sharing programs
are allocated based on individual and overall Company performance only.
As such, the Company's current practice of reporting the results of
operations in one reportable segment complies with subsection (b) of
Paragraph 10 as it reflects how the Company is managed.
In assessing the Company's performance as part of the Company's
quarterly close procedures the CODM analyzes the Company's detailed
results of operations as follows:
o By factory spending: The CODM reviews the spending and absorption
at each of the Company's manufacturing facilities located in
Hillview, California; Camas, Washington; Singapore and Malaysia
o By natural class: The CODM reviews the Company's expenses by
Natural Class (Labor, Depreciation, Outside Services,
Advertising, etc.)
o By headcount: The CODM reviews the Company's headcount by Cost of
Goods Sold, Research and Development; and Selling and General
Administrative Expense
o By average selling price (ASP): The CODM reviews the Company's
ASP by package type (size of package generally determines ASP)
o By the overall Income Statement: The CODM reviews the Company's
overall performance by the results of operations as expressed in
the external Income Statement
Lastly, subsection (c) of Paragraph 10 states the following (in
italics):
c. For which discrete financial information is available
The Company does not provide the CODM with discrete financial
information for management purposes with regard to product groups other
than revenue information, which, as noted above, overlaps several
end-markets. The Company manufactures, assembles and tests all its
products in the same manufacturing facilities and sells all its
products through one uniform sales force and therefore does not have
discrete costing data available by product group.
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In summary, the Company believes that it has given adequate disclosure
throughout Item 1. of Form 10-K as to why it views itself as one
operating segment under the guidance of SFAS 131.
6. If you are aggregating segments, supplementally tell us why you believe
you are in compliance with paragraph 17 and 19 of SFAS 131. In
addition, revise future filings to disclose that you are aggregating
segments and address why you meet the criteria in paragraphs 17 and 19
of SFAS 131, including why you believe the segments have similar
economic characteristics.
Response:
The Company believes that in compliance with paragraph 17 and 19 of
SFAS 131, it is not aggregating segments, but rather that it operates
in only one segment as noted in our responses to Comments 4 and 5,
above. As such, the Company respectfully submits that there is no basis
to disclose that it is aggregating segments under the aggregation
criteria listed in paragraphs 17 and 19 of SFAS 131.
* * *
As per your instructions in the letter, the Company acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the filings;
o Staff comments or changes to disclosure in response to Staff
comments in the filings reviewed by the Staff do not foreclose
the Commission from taking any action with respect to the filing;
and
o the Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Please direct any comments or questions regarding the Company's
responses to the attention of the undersigned at (408) 432-1900.
Sincerely,
LINEAR TECHNOLOGYCORPORATION
Paul Coghlan
Vice President, Finance & CFO
cc: Herbert P. Fockler/WSGR
Stephen Almassy/EY
Daniel Gordon/SEC
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