LINEAR TECHNOLOGY CORPORATION
FORM 10-Q
THREE MONTHS ENDED SEPTEMBER 27, 1998
INDEX
Page
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the 2
three months ended September 27, 1998 and
September 28, 1997
Condensed Consolidated Balance Sheets at 3-4
September 27, 1998 and June 28, 1998
Condensed Consolidated Statements of Cash Flows for the 5
three months ended September 27, 1998 and
September 28, 1997
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 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
-----------------------
September 27, September 28,
1998 1997
-------- --------
Net sales $116,032 $109,802
Cost of sales 33,662 31,384
-------- --------
Gross profit 82,370 78,418
-------- --------
Expenses:
Research and development 11,537 10,618
Selling, general and administrative 12,638 12,161
-------- --------
24,175 22,779
-------- --------
Operating income 58,195 55,639
Interest income 7,072 5,296
-------- --------
Income before income taxes 65,267 60,935
Provision for income taxes 20,885 20,292
-------- --------
Net income $ 44,382 $ 40,643
======== ========
Earnings per share:
Basic $ 0.58 $ 0.53
======== ========
Diluted $ 0.56 $ 0.51
======== ========
Shares used in the calculation of earnings per share:
Basic 76,094 76,232
======== ========
Diluted 79,149 80,070
======== ========
Cash dividends declared per share $ 0.07 $ 0.06
======== ========
See accompanying notes
2
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
September 27, June 28,
1998 1998
----------- ---------
(unaudited) (audited)
Current assets:
Cash and cash equivalents $ 100,841 $ 128,733
Short-term investments 474,632 509,160
Accounts receivable, net of allowance for
doubtful accounts of $803 ($803 at
June 28, 1998) 65,394 68,539
Inventories:
Raw materials 4,381 4,726
Work-in-process 7,103 6,502
Finished goods 4,174 4,892
--------- ---------
Total inventories 15,658 16,120
Deferred tax assets 35,817 35,817
Prepaid expenses and other current assets 7,287 9,807
--------- ---------
Total current assets 699,629 768,176
--------- ---------
Property, plant and equipment, at cost:
Land, building and improvements 74,309 54,893
Manufacturing and test equipment 152,868 151,484
Office furniture and equipment 3,184 3,147
--------- ---------
230,361 209,524
Less accumulated depreciation and
amortization (90,141) (84,878)
--------- ---------
Net property, plant and equipment 140,220 124,646
--------- ---------
$ 839,849 $ 892,822
========= =========
See accompanying notes
3
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES & SHAREHOLDERS' EQUITY
(In thousands)
September 27, June 28,
1998 1998
-------- --------
(unaudited) (audited)
Current liabilities:
Accounts payable $ 6,778 $ 8,241
Accrued payroll and related benefits 20,652 32,130
Deferred income on shipments to distributors 32,051 33,377
Income taxes payable 50,049 32,749
Other accrued liabilities 17,324 16,529
-------- --------
Total current liabilities 126,854 123,026
Deferred tax liabilities 13,882 13,883
Shareholders' equity:
Common stock, no par value, 120,000
shares authorized; 75,173
shares issued and outstanding at
September 27, 1998 (76,823 shares
at June 28, 1998) 229,431 230,655
Retained earnings 469,682 525,258
-------- --------
Total shareholders' equity 699,113 755,913
-------- --------
$839,849 $892,822
======== ========
See accompanying notes
4
LINEAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
(unaudited)
Three Months Ended
--------------------------------------
September 27, September 28,
1998 1997
------------- --------------
Cash flow from operating activities:
Net income $ 44,382 $ 40,643
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,263 4,732
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 3,145 6,732
Decrease (increase) in inventories 462 (1,401)
Decrease (increase) in deferred tax assets/liabilities,
prepaid expenses and other current assets 2,519 1,362
Increase (decrease) in accounts payable,
accrued payroll, income taxes payable and
other accrued liabilities 5,154 6,701
Tax benefit from stock option transactions 2,404 9,898
Increase (decrease) in deferred income (1,326) (1,156)
--------- ---------
Cash provided by operating activities 62,003 67,511
--------- ---------
Cash flow from investing activities:
Purchase of short-term investments (78,621) (135,455)
Proceeds from maturities of short-term investments 113,149 77,003
Purchase of property, plant and equipment (20,837) (6,448)
--------- ---------
Cash provided by (used in) investing activities 13,691 (64,900)
--------- ---------
Cash flow from financing activities:
Issuance of common stock under employee stock
plans 1,776 6,056
Purchase of common stock (99,983) --
Payment of cash dividends (5,379) (4,574)
-------- --------
Cash provided by (used in) financing activities (103,586) 1,482
--------- --------
Increase (decrease) in cash and cash equivalents (27,892) 4,093
Cash and cash equivalents, beginning of period 128,733 50,114
-------- --------
Cash and cash equivalents, end of period $100,841 $ 54,207
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 1,146 $ 53
======== =========
<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 ended
September 27, 1998 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 28, 1998 included in
the Company's Annual Report to Shareholders. The accompanying balance sheet
at June 28, 1998 has been derived from audited financial statements as of
that date.
2. The Company operates on a 52/53 week year ending on the Sunday nearest June
30. Fiscal 1999 and 1998 each have 52 weeks.
3. In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("FAS 128"). Prior periods presented
have been restated to conform to the requirements of FAS 128. Basic
earnings per share is based upon the weighted average number of common
shares outstanding during the period. Diluted earnings per share includes
the dilutive effect of employee stock options outstanding. 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 27, September 28,
1998 1997
------ ------
Denominator for basic earnings
per share - weighted average
shares outstanding 76,094 76,232
Effect of dilutive securities -
employee stock options 3,055 3,838
------ ------
Denominator for diluted
earnings per share 79,149 80,070
====== ======
4. During the first quarter of fiscal 1999 the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
("FAS 130"). FAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. Components of comprehensive income
include net income and certain transactions that have generally been
reported in the consolidated statement of shareholders' equity. FAS 130
requires that these transactions be included with net income and presented
separately as comprehensive income in the financial statements. The
adoption of this Statement had no impact on the Company's net income or
shareholders' equity and, during the periods presented, the Company had no
material transactions other than net income that should be reported as
comprehensive income.
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 months
ended September 27, 1998 and September 28, 1997 as a percentage of net sales and
provides the percentage change in absolute dollars of such items comparing the
three months ended September 27, 1998 to the corresponding period from the prior
fiscal year:
Three Months Ended
------------------------------------------------------------
September 27, 1998 September 28,
1997 Increase
-------------------- ------------------ -------------
Net sales 100.0% 100.0% 6%
Cost of sales 29.0 28.6 7
------ ------
Gross profit 71.0 71.4 5
------ ------
Expenses:
Research & development 9.9 9.6 9
Selling, general & administrative 10.9 11.1 4
------ ------
20.8 20.7 6
------ ------
Operating income 50.2 50.7 5
Interest income 6.1 4.8 34
------ ------
Income before income taxes 56.3% 55.5% 7
====== ======
Effective tax rates 32.0% 33.3%
====== ======
Net sales for the first quarter of fiscal 1999 were $116.0 million and
increased $6.2 million or 6% over net sales of $109.8 million for the first
quarter of fiscal 1998. This increase was due primarily to higher unit
shipments, while the average selling price was slightly lower for the first
quarter of fiscal 1999. International sales increased 12% led by strong growth
in Europe. Sales increased throughout Asia except for Japan, which had a slight
decline. Sales to the domestic market were relatively flat as compared to the
first quarter in fiscal 1998. International sales for the first quarter of
fiscal 1999 were 52% of net sales compared with 49% of net sales in the same
period of fiscal 1998. Relative to end-market applications, all of the sales
growth over the prior year's quarter was in the communications and computer
areas, whereas the industrial and military markets were down slightly.
Gross profit increased $4.0 million or 5% in the first quarter of
fiscal 1999 over the corresponding quarter in fiscal 1998. Gross profit as a
percentage of net sales declined slightly to 71.0% from 71.4% of net sales. The
slight decline in gross profit as a percentage of net sales results primarily
from the effects of a slightly lower average selling price. This was partially
offset by two factors: lower offshore manufacturing costs primarily due to
favorable currency exchange rates; and the benefit of fixed costs absorbed over
a larger sales base.
Research and development expenses were $11.5 million and increased $0.9
million or 9% for the first quarter of fiscal 1999 over the first quarter of
fiscal 1998. This increase was due primarily to an increase in staffing and
compensation, particularly for new design and test engineering personnel, offset
partially by lower spending for development mask sets.
Selling, general and administrative ("SG&A") expenses were $12.6
million and increased $0.5 million or 4% for the first quarter of fiscal 1999
over the first quarter of fiscal 1998. This increase was due primarily to an
increase in sales personnel as the Company moved to a direct sales force in
certain domestic sales regions and also higher legal expenses due to
intellectual property suits where the Company is the plaintiff. The increase in
labor costs for the direct sales force was largely offset by a reduction in
external sales commissions.
7
Interest income increased $1.8 million to $7.1 million for the first
quarter of fiscal 1999 compared to $5.3 million for the first quarter of fiscal
1998. The increase in interest income resulted primarily from the increase in
cash, cash equivalents and short-term investments over this period as the
average rate of return declined slightly due to lower short-term interest rates.
The Company's effective tax rate for the first quarter of fiscal 1999
was 32.0%, down from 33.3% in the first quarter of fiscal 1998. The lower tax
rate is due to increases in assets employed outside of California, manufacturing
and shipping activity offshore and tax-exempt interest income.
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 continues to invest in the plant infrastructure and
technical talent to maximize its opportunities. In the short-term, the Company's
sales for the first quarter of fiscal 1999 declined 12% sequentially from the
record level achieved in the fourth quarter of fiscal 1998. This decline
resulted from several factors including a prolonged weakness in the Asian
markets and a delay in customer orders as customers took advantage of lower
supplier lead times. However, bookings increased during the quarter as compared
with the fourth quarter of fiscal 1999 and backlog increased. This increase in
bookings along with the historic seasonality of the Company's business and the
acceptance and potential of certain of the Company's newer products generally
indicates that the Company will grow sales at least slightly over the near-term.
However, as in most financial quarters an increase in sales is dependent on
orders that can be booked and shipped within the same quarter and, as discussed
above, order visibility is limited due to lower supplier lead times. Given this
fact and the continuation of the weakness in Japan and other Asian markets and
the general pessimism that currently exist in the business community and
financial markets, management of the Company is cautious relative to its
near-term outlook and therefore expects little to no sales growth in the second
quarter of fiscal 1999. The Company expects that its profitability as a
percentage of sales will be maintained 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.
Liquidity and Capital Resources
At September 27, 1998 cash, cash equivalents and short-term investments
totaled $575.5 million, and working capital was $572.8 million.
During the first quarter of fiscal 1999, the Company generated $62.0
million of cash from operating activities and $1.8 million from proceeds from
common stock issued under the employee stock option plan. Significant cash
expenditures included the purchase of 1.8 million shares of the Company's common
stock for approximately $100 million and capital expenditures totaling $20.8
million. Capital expenditures during the quarter include the purchase of land
and a building located in San Jose, California. The Company intends to build a
new
8
fabrication facility at this location for a total capitalized cost of
approximately $95 million. This new facility is not expected to be operational
until fiscal 2000. The Company also paid $5.4 million in cash dividends to
shareholders representing $0.07 per share. In October 1998, the Company's Board
of Directors announced that a quarterly cash dividend of $0.07 per share will be
paid during the second quarter of fiscal 1999. The payment of future dividends
will be based on quarterly financial performance.
The Company continues to satisfy its liquidity needs through its
existing cash and investment balances and 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.
9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27.1 Financial Data Schedule
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: November 11, 1998 BY /s/Paul Coghlan
----------------------------
Paul Coghlan
Vice President, Finance &
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
11