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 October 2, 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1630 McCarthy Boulevard, Milpitas, California 95035
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including are code (408) 432-1900
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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 [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
There were 304,766,364 shares of the Registrant's Common Stock issued and
outstanding as of October 30, 2005.
1
LINEAR TECHNOLOGY CORPORATION
FORM 10-Q
THREE MONTHS ENDED OCTOBER 2, 2005
INDEX
-----
Page
----
Part I: Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the three months 3
ended October 2, 2005 and September 26, 2004
Consolidated Balance Sheets at October 2, 2005 and 4
July 3, 2005
Consolidated Statements of Cash Flows for the three months 5
ended October 2, 2005 and September 26, 2004
Notes to Consolidated Financial Statements 6-10
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 12-13
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
-----------------------
October 2, September 26,
2005 2004
-------- --------
Net sales $256,013 $253,028
Cost of sales (1) 55,999 54,839
-------- --------
Gross profit 200,014 198,189
-------- --------
Expenses:
Research and development (1) 37,779 30,634
Selling, general and administrative (1) 31,150 23,058
-------- --------
68,929 53,692
-------- --------
Operating income 131,085 144,497
Interest income, net 11,622 5,468
-------- --------
Income before income taxes 142,707 149,965
Provision for income taxes 43,526 46,489
-------- --------
Net income $ 99,181 $103,476
======== ========
Basic earnings per share $ 0.32 $ 0.34
======== ========
Shares used in the calculation of basic
earnings per share 306,336 308,201
======== ========
Diluted earnings per share $ 0.31 $ 0.33
======== ========
Shares used in the calculation of diluted
earnings per share 315,940 316,918
======== ========
Cash dividends per share $ 0.10 $ 0.08
======== ========
(1) Includes stock based compensation charges as follows:
Cost of sales (Net of $1,200 capitalized
in inventory) $ 1,207 $ 520
Research and development 5,923 1,430
Selling, general and administrative 6,208 1,299
-------- --------
Total stock-based compensation $ 13,338 $ 3,249
======== ========
See accompanying notes
3
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
October 2, July 3,
2005 2005
----------- -----------
(unaudited) (audited)
Assets
Current assets:
Cash and cash equivalents $ 405,020 $ 323,181
Short-term investments 1,429,499 1,467,731
Accounts receivable, net of allowance for
doubtful accounts of $1,713 ($1,713
at July 3,2005) 120,829 125,864
Inventories:
Raw materials 3,655 3,664
Work-in-process 23,909 22,854
Finished goods 9,617 7,810
----------- -----------
Total inventories 37,181 34,328
Deferred tax assets 41,502 38,298
Prepaid expenses and other current assets 20,684 17,907
----------- -----------
Total current assets 2,054,715 2,007,309
----------- -----------
Property, plant and equipment, at cost:
Land, buildings and improvements 162,664 167,218
Manufacturing and test equipment 378,165 375,163
Office furniture and equipment 3,336 3,389
----------- -----------
544,165 545,770
Accumulated depreciation and amortization (317,633) (324,742)
----------- -----------
Net property, plant and equipment 226,532 221,028
----------- -----------
Other non current assets 52,075 57,897
----------- -----------
Total assets $ 2,333,322 $ 2,286,234
=========== ===========
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 16,606 $ 11,800
Accrued payroll and related benefits 44,945 63,787
Deferred income on shipments to distributors 42,896 43,708
Income taxes payable 98,682 68,389
Other accrued liabilities 20,906 20,055
----------- -----------
Total current liabilities 224,035 207,739
----------- -----------
Deferred tax and other long-term liabilities 70,405 71,461
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; 306,095 shares issued and
outstanding at October 2, 2005 (306,587 shares
at July 3, 2005) 306 307
Additional paid-in capital 950,688 926,456
Accumulated other comprehensive income, net of tax (4,122) (2,839)
Retained earnings 1,092,010 1,083,110
----------- -----------
Total stockholders' equity 2,038,882 2,007,034
----------- -----------
Total liabilities and stockholders' equity $ 2,333,322 $ 2,286,234
=========== ===========
See accompanying notes
4
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended
------------------------
October 2, September 26,
2005 2004
--------- ---------
Cash flow from operating activities:
Net income $ 99,181 $ 103,476
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 12,068 11,467
Tax benefit from stock option transactions 1,805 7,108
Stock-based compensation 13,338 3,249
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable 5,035 (12,487)
Decrease (increase) in inventories (1,652) 1,286
Decrease (increase) in prepaid expenses and
other current assets and deferred tax assets (5,228) (225)
Decrease (increase) in long-term assets 4,117 --
Increase (decrease) in accounts payable,
accrued payroll and other accrued liabilities (14,241) (12,494)
Increase (decrease) in deferred income on
shipments to distributors (812) 1,973
Increase (decrease) in income taxes payable 30,293 26,803
--------- ---------
Cash provided by operating activities 143,904 130,156
--------- ---------
Cash flow from investing activities:
Purchase of short-term investments (227,351) (278,233)
Proceeds from sales and maturities of short-
term investments 263,547 311,068
Purchase of property, plant and equipment (15,867) (15,367)
--------- ---------
Cash provided by (used in) investing activities 20,329 17,468
--------- ---------
Cash flow from financing activities:
Excess tax benefit received on exercise of stock
options 3,478 --
Issuance of common shares under employee
stock plans 9,416 10,425
Purchase of common stock (64,450) (54,614)
Payment of cash dividends (30,838) (24,983)
--------- ---------
Cash provided by (used in) financing activities (82,394) (69,172)
--------- ---------
Increase (decrease) in cash and cash equivalents 81,839 78,452
--------- ---------
Cash and cash equivalents, beginning of period 323,181 203,542
--------- ---------
Cash and cash equivalents, end of period $ 405,020 $ 281,994
========= =========
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 months ended
October 2, 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 July 3, 2005 included in the
Company's Annual Report on Form 10-K. The accompanying balance sheet at
July 3, 2005 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 year 2006 is a 52-week year, fiscal year 2005 was a 53-week
year, with the additional week falling in the three month period ended
January 2, 2005, the Company's second-quarter.
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
-------------------------
October 2, September 26,
2005 2004
-------- --------
Numerator - Net income $ 99,181 $103,476
Denominator for basic earnings
per share - weighted average
shares 306,336 308,201
Effect of dilutive securities -
employee stock options 9,604 8,717
-------- --------
Denominator for diluted
earnings per share 315,940 316,918
Basic earnings per share $ 0.32 $ 0.34
======== ========
Diluted earnings per share $ 0.31 $ 0.33
======== ========
4. Stock-Based Compensation
Stock-Based Benefit Plans
The Company has stock option plans under which options to purchase shares of the
Company's common stock may be granted to employees and directors. At October 2,
2005, the total authorized number of shares under all plans was 184 million. At
October 2, 2005, 17.2 million shares were available for grant under all plans.
Options generally become exercisable over a five-year period (generally 10%
every six months.) Options granted prior to January 11, 2005 expire ten years
after the date of grant; options granted after January 11, 2005 expire seven
years after the date of the grant.
The Company's employee stock purchase plan (ESPP) permitted eligible employees
to purchase common stock through payroll deductions at the lower of 85% of the
fair market value of common stock at the beginning or end of each six month
offering
6
period. The offering periods commence on approximately May 1 and November 1 of
each year. At October 2, 2005, 0.5 million shares were available for grant under
the Company's ESPP plan.
Adoption of SFAS 123R
Beginning in fiscal 2006, the Company accounts for stock-based compensation
arrangements in accordance with the provisions of Financial Accounting Standard
Board Statement (FASB) No. 123(R) (SFAS 123R), "Share-Based Payment." Under SFAS
123R, compensation cost is calculated on the date of grant using the fair value
of the option as determined using the Black Scholes method. The compensation
cost is then amortized straight-line over the vesting period. The Black Scholes
valuation calculation requires the Company to estimate key assumptions such as
expected term, volatility and forfeiture rates to determine the stock options
fair value. The estimate of these key assumptions is based on historical
information and judgment regarding market factors and trends.
Prior to July 4, 2005, the Company accounted for stock options under the
recognition and measurement provisions of APB Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees," and related Interpretations, as
permitted by FASB Statement No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation." No stock-based compensation was recognized on employee stock
options or ESPP in the Consolidated Income Statement before July 4, 2005.
However, as required by APB 25 the Company recognized stock-based compensation
related to restricted stock grants prior to July 4, 2005. The Company began
issuing restricted stock grants to employees during the first quarter of fiscal
year 2005. The right to sell the shares generally vests over a period of three
to five years based upon continued employment. Upon termination of employment
the Company has the right to buy back unvested shares at the exercise price.
Effective for fiscal year 2006 commencing July 4, 2005, the Company adopted the
fair value recognition provisions of SFAS 123R using the modified prospective
transition method. Under the modified prospective transition method, prior
periods are not restated for the effect of SFAS 123R. Commencing with the first
quarter of fiscal year 2006 compensation cost includes all share-based payments
granted prior to, but not yet vested as of July 4, 2005, based on the grant date
fair value estimated in accordance with the original provisions of SFAS 123, and
compensation for all share-based payments granted subsequent to July 4, 2005,
based on the grant date fair value estimated in accordance with the provisions
of SFAS 123R.
As a result of adopting SFAS 123R on July 4, 2005, total stock-based
compensation resulted in a decrease to income before income taxes for the
quarter ended October 2, 2005 of $13.3 million and a decrease to net income of
$9.3 million after tax. Total stock-based compensation includes the impact of
stock options, restricted stock and the employee stock purchase plan. Throughout
fiscal 2005 the Company, in accordance with APB 25, recognized the impact of
restricted stock in its reported financial results. Accordingly, the Company's
income before income taxes and net income for the three months ended October 2,
2005, are $7.9 million and $5.5 million lower, respectively than if the Company
had continued to account for share-based compensation under APB 25. These
amounts represent solely the impact of stock options and the employee stock
purchase plan since restricted stock is accounted for similarly under both APB
25 and SFAS 123R.
During the first quarter of fiscal 2006, the Company capitalized $1.2 million in
inventory related to stock-based compensation for stock option grants that were
made to manufacturing personnel. As a result of adopting SFAS 123R, the shares
used in calculating diluted earnings per share increased 2.5 million shares as
compared to the diluted shares calculated under APB 25 due to the diluted shares
calculation under the treasury stock method of SFAS 123R. As of October 2, 2005
there was approximately $121.0 million of total unrecognized stock-based
compensation cost related to share-based payments granted under the Company's
stock option plans that will be recognized over a period of five years. Future
grants will add to this total whereas quarterly amortization and the vesting of
the existing grants will reduce this total.
7
The table below outlines the effects of total stock based compensation for the
first quarter of fiscal 2006 and 2005:
October 2, September 26,
2005 2004
--------- ---------
Net income $ 99,181 $ 103,476
Stock-based compensation 13,338 3,249
Tax effect (4,068) (1,007)
--------- ---------
Net income without stock-based compensation $ 108,451 $ 105,718
========= =========
--------- ---------
Basic EPS with stock-based compensation $ 0.32 $ 0.34
========= =========
Shares used in basic EPS with stock-based
compensation 306,336 308,201
========= =========
--------- ---------
Diluted EPS with stock-based compensation $ 0.31 $ 0.33
========= =========
Shares used in diluted EPS with stock-based
compensation 315,940 316,918
========= =========
--------- ---------
Basic EPS without stock-based compensation $ 0.35 $ 0.34
========= =========
Shares used in basic EPS without stock-based
compensation 306,336 308,201
========= =========
--------- ---------
Diluted EPS without stock-based compensation $ 0.35 $ 0.33
========= =========
Shares used in diluted EPS without stock-based
compensation 313,429 316,918
========= =========
Prior to the adoption of SFAS 123R, the Company presented all tax benefits
resulting from the exercise of stock options as operating cash flows in the
Statement of Cash Flows. SFAS 123R requires the cash flows resulting from the
tax benefits from tax deductions in excess of deferred tax asset (hypothetical
and actual) recorded for stock compensation costs (excess tax benefits) to be
classified as financing cash flows. The $3.5 million excess tax benefit
classified as a financing cash inflow for the quarter ended October 2, 2005
would have been classified as an operating cash inflow if the Company had not
adopted SFAS 123R.
The Company issues new shares of common stock upon exercise of stock options.
During the first quarter of fiscal year 2006 0.6 million stock options were
exercised for a gain (aggregate intrinsic value) of $14.3 million determined as
of the date of option exercise.
Determining Fair Value
The fair value of each option award is estimated on the date of grant using the
Black Scholes option-pricing model that uses the assumptions in the following
table. Expected volatilities are based on implied volatilities from traded
options on the Company's stock. Expected volatility was lower in the first
quarter of fiscal year 2006 when compared to the same period in the previous
fiscal year as the Company changed its expected volatility assumption from
historical volatility to implied volatility during fiscal 2005. The Company
believes that implied volatility is more reflective of market conditions and a
better indicator of expected volatility than historical volatility. The Company
uses the simplified calculation of expected life, described in the SEC's Staff
Accounting Bulletin 107, as the Company shortened the contractual life of
employee stock options from ten years to seven years. The dividend yield is
determined by dividing the expected per share dividend during the coming year by
the average fair market value of the stock during the quarter. The risk-free
interest rate is based on the U.S. Treasury yield curve in effect at the time of
grant. The weighted-average grant date fair value of options granted during the
first quarter of fiscal 2006 and 2005 using the below assumptions were $11.68
and $24.03, respectively. The estimated fair value of the employee stock options
are amortized to expense using the straight-line method over the vesting period.
8
October 2, September 26,
2005 2004
--------------- ----------------
Expected lives in years 4.88 6.99
Expected volatility 30.0% 65.0%
Dividend yields 1.0% 0.9%
Risk free interest rates 3.8% 3.1%
Pro-forma Disclosures
As stated above, the Company implemented SFAS 123R in its financial statements
for the three-month period ended October 2, 2005 and was not required to restate
results for prior periods. However, the following table illustrates the effect
on net income and earnings per share if the Company had applied the fair value
recognition provision of SFAS 123 to options granted under the Company's stock
option plans for the first quarter of fiscal 2005. For the quarter ended
September 26, 2004 stock-based compensation for restricted stock grants resulted
in a decrease to income before income taxes of $3.2 million and a decrease to
net income of $2.2 million. For purposes of the pro forma disclosure, the value
of the options is estimated using the Black Scholes option-pricing model and
amortized to expense straight-line, over the options' vesting periods. Note that
the below pro forma disclosures are provided for the first quarter of fiscal
2005 only because employee stock options were not accounted for using the fair
value method during that period. When the Company presents its financial
statements for first quarter of fiscal 2007, it will not present any comparative
pro-forma disclosures because share-based payments will have been accounted for
under SFAS 123R fair value method for the first quarter of both fiscal years
2006 and 2007.
Thee months
ended
--------------
September 26,
2004
--------------
Net income as reported $ 103,476
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 2,242
Deduct: Total stock-based compensation
expense determined under the fair value
method, net of tax (19,950)
--------------
Pro forma net income $ 85,768
==============
Earning per share:
Basic-as reported $ 0.34
==============
Basic-pro forma $ 0.28
==============
Diluted-as reported $ 0.33
==============
Diluted-pro forma $ 0.27
==============
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
--------------------------------------
October 2, September 26,
2005 2004
----------------- -----------------
Net income $ 99,181 $ 103,476
(Increase) and decrease in
unrealized losses on
available-for-sale securities (1,283) 1,538
----------------- -----------------
Total comprehensive income $ 97,898 $ 105,014
================= =================
9
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
There have been no significant changes to the Company's critical accounting
policies during the quarter ended October 2, 2005 other than the policy
associated with the adoption of SFAS 123R noted below as compared to the
previous disclosures in Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Annual Report on
Form 10-K for the fiscal year ended July 3, 2005.
Accounting for Stock-Based Compensation
Beginning in fiscal 2006, the Company accounts for stock-based compensation
arrangements in accordance with the provisions of SFAS 123R. Under SFAS 123R,
compensation cost is calculated on the date of grant using the Black Scholes
method. The compensation cost is then amortized straight-line over the vesting
period. The Company uses Black Scholes in determining the fair value of its
stock options at the date of grant. Black Scholes requires the Company to
estimate key assumptions such as expected term, volatility and forfeiture rates
that determine the stock options fair value. The estimate of these key
assumptions is based on historical information and judgment regarding market
factors and trends. If actual results are not consistent with the Company's
assumptions and judgments used in estimating the key assumptions, the Company
may be required to increase or decrease compensation expense or income tax
expense, which could be material to its results of operations.
Results of Operations
The table below states the income statement items for the three months ended
October 2, 2005 and September 26, 2004 as a percentage of net sales and provides
the percentage change in absolute dollars of such items comparing the interim
period ended October 2, 2005 to the corresponding period from the prior fiscal
year:
Three Months Ended
------------------------------------------------
October 2, September 26, Increase/
2005 2004 (Decrease)
-------------- -------------- -----------
Net sales 100.0% 100.0% 1%
Cost of sales 21.9 21.7 2
-------------- --------------
Gross profit 78.1 78.3 1
-------------- --------------
Expenses:
Research and development 14.8 12.1 23
Selling, general and
administrative 12.1 9.1 35
-------------- --------------
26.9 21.2 28
-------------- --------------
Operating income 51.2 57.1 (9)
Interest income, net 4.5 2.1 113
-------------- --------------
Income before income taxes 55.7% 59.2% (5)
============== ==============
Effective tax rate 30.5% 31.0%
============== ==============
Net sales for the quarter ended October 2, 2005 were $256.0 million, an
increase of $3.0 million or 1% over net sales of $253.0 million for the same
quarter of the previous fiscal year. The average selling price ("ASP") for the
first quarter of fiscal year 2006 was $0.14 higher, at $1.55 per unit as
compared to $1.41 per unit in the first quarter of fiscal year 2005. The
increase in ASP is the result of a change in sales mix to products with higher
10
prices. Geographically, international sales were $183.5 million or 72% of net
sales, an increase of $0.4 million as compared to international sales of $183.1
million or 72% of net sales for the same period in fiscal year 2005.
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 $40.1 million or 16% of net sales and $37.0 million or 14%
of net sales, respectively. Domestic sales were $72.5 million or 28% of net
sales in the first quarter of fiscal year 2006 compared to $69.9 million or 28%
of net sales in the same period in fiscal year 2005.
Gross profit was $200.0 million for the first quarter of fiscal year 2006,
an increase of $1.8 million from the corresponding period of fiscal year 2005.
Gross profit as a percentage of net sales decreased to 78.1% in the first
quarter of fiscal year 2006 as compared to 78.3% for the same period in the
previous fiscal year. The decrease in gross profit as a percentage of net sales
was primarily due to the $0.7 million dollar increase in costs related to
stock-based compensation. In addition to the $1.2 million of stock-based
compensation that was expensed, the Company capitalized $1.2 million into
inventory for grants issued to production employees causing the Company's
inventory balance to increase $1.2 million.
Research and development ("R&D") expenses for the quarter ended October 2,
2005 were $37.8 million, an increase of $7.1 million or 23% over R&D expenses of
$30.6 million for the same period in the previous fiscal year. The increase in
R&D is primarily due to costs related to stock-based compensation, which
increased $4.5 million. The increase in R&D was also due to a $2.4 million
increase in compensation costs related to increases in employee headcount and
annual merit increases, offset by $0.2 million decrease in profit sharing. In
addition to compensation costs, the Company had a $0.4 million increase in other
R&D related expenses.
Selling, general and administrative expenses ("SG&A") for the quarter ended
October 2, 2005 were $31.2 million, an increase of $8.1 million or 35% over SG&A
expenses of $23.1 million for the same period in the previous fiscal year. The
increase in SG&A is primarily due to costs related to stock-based compensation,
which increased $4.9 million. The increase in SG&A was also due to a $1.7
million increase in compensation costs related to increases in employee
headcount and annual merit increases, offset by $0.3 million decrease in profit
sharing. In addition to compensation costs, the Company had a $1.0 million
increase in legal expenses. Lastly, other SG&A costs increased $0.8 million.
Interest income, net was $11.6 million for the first quarter of fiscal year
2006, an increase of $6.2 million from the corresponding period of fiscal year
2005. Interest income, net increased due to the increase in the average interest
rate earned on the Company's higher average cash investment balance.
The Company's effective tax rate for the first quarter of fiscal year 2006
was 30.5% as compared to 31% in the corresponding period of fiscal year 2005 due
to temporary changes in the R&D credit. The tax rate is lower than the federal
statutory rate primarily due to business activity in foreign jurisdictions with
lower tax rates and tax-exempt interest income. The increase in the effective
tax rate from 30% in the fourth quarter of fiscal year 2005 to 30.5% in the
current quarter is due to a minor decrease in the Company's offshore tax
benefits.
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 July 3, 2005.
As forecasted, sales for the three-months ended October 2, 2005 were
largely unchanged. During the quarter, bookings increased and cancellations were
minor and the Company had a positive book to bill ratio. The Company's ending
on-hand inventory at distributors is lean and lead times have remained unchanged
at 4 to 6 weeks. However, there are general macro-economic concerns in the
marketplace and accordingly customers in many end-markets are generally cautious
and therefore tend to order just to current demand. On the other hand, the
Company is well positioned at certain high-end consumer-based customers that are
leaders in their fields that have positive business opportunities in their
December quarter. Consequently, the Company estimates that the December quarters
sales and profits will grow in the 3% to 4% range.
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
11
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 October 2, 2005, cash, cash equivalents and short-term investments
totaled $1,834.5 million, and working capital was $1,830.7 million.
Accrued payroll and related benefits totaled $44.9 million at the end of
the first quarter of fiscal year 2006, a decrease of $18.8 million from the
fourth quarter of fiscal year 2005. The decrease is due to the payment of profit
sharing. 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. Income taxes payable totaled $98.7 million at the end of the
first quarter of fiscal year 2006, an increase of $30.3 million over the fourth
quarter of fiscal year 2005. The increase is due to the timing of payments to
the taxing authorities within the year.
During the first three months of fiscal year 2006, the Company generated
$143.9 million of cash from operating activities, $9.4 million in proceeds from
common stock issued under employee stock plans, $3.5 million from excess tax
benefits received on the exercise of stock option and $36.2 million from net
sales and maturities of short-term investments.
During the first three months of fiscal year 2006, significant cash
expenditures included repurchasing $64.5 million of common stock, payments of
$30.8 million in cash dividends to stockholders, representing $0.10 per share,
and purchases of $15.9 million for capital assets. In October, the Company's
Board of Directors declared a quarterly cash dividend of $0.10 per share to be
paid during the December quarter of fiscal 2006. The payment of future dividends
will be based on quarterly financial performance.
As of October 2, 2005, the Company had no off-balance sheet financing
arrangements. At the end of fiscal year 2005, the Company entered into a
purchase agreement of approximately $22.0 million for two buildings it currently
leases. The agreement is contingent upon the owner selling a third building that
the Company currently leases. The effect of the agreement will not be
significant to the Company's overall results of operations or financial
position. The Company does not have any other significant contractual
obligations outside of operating leases.
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 July 3, 2005. 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
year 2005. At October 2, 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.
12
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. To date, fluctuations in foreign currency exchange rates 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, with the participation of the Chief Executive
Officer and the Chief Financial Officer, evaluated 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 year 2006 that has
materially affected, or is reasonably likely to materially affect, its internal
control over financial reporting.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
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 (July 4, 2005 -
July 31, 2005) -- -- -- 14,626,182
- ---------------------------------------------------------------------------------------------------------------------------------
Month #2 (August 1, 2005 -
August 28, 2005) 1,656,165 $38.91 1,656,165 12,970,017
- ---------------------------------------------------------------------------------------------------------------------------------
Month #3 (August 29, 2005 -
October 2, 2005) -- -- -- 12,970,017
- ---------------------------------------------------------------------------------------------------------------------------------
Total 1,656,165 $38.91 1,656,165 12,970,017
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) On July 26, 2005, the Company's Board of Directors authorized the Company to purchase up to 10,000,000
shares of its common stock in the open market over a two-year period.
</FN>
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matter to a Vote of Security Holder
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit
Number Description
- ------ -----------
3.4 (1) Amended and Restated Bylaws of Registrant
10.50 (2) Amended and Restated Employment Agreement between Registrant and
Robert H. Swanson, Jr. dated October 18, 2005
10.53 2005 Equity Incentive Plan, form of Stock Option Agreement, form
of Restricted Stock Agreement, and form of Restricted Stock Unit
Agreement
10.54 (3) 2005 Employee Stock Purchase Plan and enrollment form
31.1 Certification of Principal Executive Officer pursuant to Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer and Principal
Accounting Officer pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification 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
(1) Incorporated by reference to the Registrant's current report on Form
8-K filed with the Securities and Exchange Commission on September 9,
2005.
(2) Incorporated by reference to the Registrant's current report on Form
8-K filed with the Securities and Exchange Commission on October 24,
2005
(3) Incorporated by reference to the Registrant's Statement on Form S-8
filed with the Securities and Exchange Commission on September 30,
2005
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: November 14, 2005 BY /s/Paul Coghlan
--------------------------------
Paul Coghlan
Vice President, Finance &
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
15