FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 1998
[ ] 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)
California 94-2778785
---------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1630 McCarthy Blvd.
Milpitas, California 95035-7417
(408) 432-1900
--------------
(Address, including zip code and telephone number, including area code of
registrant's principal executive offices)
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
----- -----
There were 75,316,987 shares of the Registrant's Common Stock issued
and outstanding as of December 27, 1998.
LINEAR TECHNOLOGY CORPORATION
FORM 10-Q
THREE AND SIX MONTHS ENDED DECEMBER 27, 1998
INDEX
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Page
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Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the 2
three and six months ended December 27, 1998 and
December 28, 1997
Condensed Consolidated Balance Sheets at 3-4
December 27, 1998 and June 28, 1998
Condensed Consolidated Statements of Cash Flows for the 5
six months ended December 27, 1998 and December 28, 1997
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial 8-10
Condition and Results of Operations
Part II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
LINEAR TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
-------- -------- -------- --------
Net sales $120,020 $117,004 $236,052 $226,806
Cost of sales 34,029 33,646 67,691 65,030
-------- -------- -------- --------
Gross profit 85,991 83,358 168,361 161,776
-------- -------- -------- --------
Expenses:
Research and development 12,623 10,777 24,160 21,395
Selling, general and administrative 12,405 12,906 25,043 25,067
-------- -------- -------- --------
25,028 23,683 49,203 46,462
-------- -------- -------- --------
Operating income 60,963 59,675 119,158 115,314
Interest income 6,543 5,665 13,615 10,961
-------- -------- -------- --------
Income before income taxes 67,506 65,340 132,773 126,275
Provision for income taxes 21,602 21,758 42,487 42,050
-------- -------- -------- --------
Net income $ 45,904 $ 43,582 $ 90,286 $ 84,225
======== ======== ======== ========
Basic earnings per share $ 0.61 $ 0.57 $ 1.19 $ 1.10
======== ======== ======== ========
Shares used in the calculation of
basic earnings per share 75,197 76,212 75,646 76,222
======== ======== ======== ========
Diluted earnings per share $ 0.59 $ 0.55 $ 1.15 $ 1.05
======== ======== ======== ========
Shares used in the calculation of diluted
earnings per share 78,405 79,849 78,777 79,960
======== ======== ======== ========
Cash dividends declared per share $ 0.07 $ 0.06 $ 0.14 $ 0.12
======== ======== ======== ========
<FN>
See accompanying notes
</FN>
2
LINEAR TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
December 27, June 28,
1998 1998
--------- ---------
(unaudited) (audited)
Current assets:
Cash and cash equivalents $ 95,788 $ 128,733
Short-term investments 515,314 509,160
Accounts receivable, net of allowance for
doubtful accounts of $803 ($803 at
June 28, 1998) 63,383 68,539
Inventories:
Raw materials 3,691 4,726
Work-in-process 8,096 6,502
Finished goods 4,157 4,892
--------- ---------
Total inventories 15,944 16,120
Deferred tax assets 35,817 35,817
Prepaid expenses and other current assets 8,215 9,807
--------- ---------
Total current assets 734,461 768,176
--------- ---------
Property, plant and equipment, at cost:
Land, building and improvements 76,111 54,893
Manufacturing and test equipment 155,921 151,484
Office furniture and equipment 3,190 3,147
--------- ---------
235,222 209,524
Less accumulated depreciation and
amortization (95,379) (84,878)
--------- ---------
Net property, plant and equipment 139,843 124,646
--------- ---------
$ 874,304 $ 892,822
========= =========
See accompanying notes
3
LINEAR TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES & SHAREHOLDERS' EQUITY
(In thousands)
December 27, June 28,
1998 1998
-------- --------
(unaudited) (audited)
Current liabilities:
Accounts payable $ 6,501 $ 8,241
Accrued payroll and related benefits 29,142 32,130
Deferred income on shipments to distributors 32,105 33,377
Income taxes payable 31,346 32,749
Other accrued liabilities 18,934 16,529
-------- --------
Total current liabilities 118,028 123,026
Deferred tax liabilities 13,883 13,883
Shareholders' equity:
Common stock, no par value, 120,000
shares authorized; 75,317
shares issued and outstanding at
December 27, 1998 (76,823 shares
at June 28, 1998) 240,176 230,655
Retained earnings 502,217 525,258
-------- --------
Total shareholders' equity 742,393 755,913
-------- --------
$874,304 $892,822
======== ========
See accompanying notes
4
LINEAR TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
(unaudited)
Six Months Ended
-------------------------
December 27, December 28,
1998 1997
------------ ------------
Cash flow from operating activities:
Net income $ 90,286 $ 84,225
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,501 9,670
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 5,156 7,981
Decrease (increase) in inventories 176 (2,922)
Decrease (increase) in deferred tax assets,
prepaid expenses and other current assets 1,592 314
Increase (decrease) in accounts payable,
accrued payroll, income taxes payable and
other accrued liabilities (3,726) 20,351
Tax benefit from stock option transactions 7,258 13,976
Increase (decrease) in deferred income (1,272) 250
--------- ---------
Cash provided by operating activities 109,971 133,845
--------- ---------
Cash flow from investing activities:
Purchase of short-term investments (303,708) (214,468)
Proceeds from sales and maturities of short-term
investments 297,554 155,893
Purchase of property, plant and equipment (25,698) (15,274)
--------- ---------
Cash used in investing activities (31,852) (73,849)
--------- ---------
Cash flow from financing activities:
Issuance of common stock under employee stock plans 8,300 10,399
Purchase of common stock (108,736) (50,540)
Payment of cash dividends (10,628) (9,169)
--------- ---------
Cash used in financing activities (111,064) (49,310)
--------- ---------
Increase (decrease) in cash and cash equivalents (32,945) 10,686
Cash and cash equivalents, beginning of period 128,733 50,114
--------- ---------
Cash and cash equivalents, end of period $ 95,788 $ 60,800
========= =========
Supplemental disclosure of non-cash financing activities:
Accrued liability for purchase and retirement of common stock $ 0 $ 5,905
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 31,925 $ 14,999
========= =========
<FN>
See accompanying notes
</FN>
5
LINEAR TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Interim financial statements and information are unaudited; however, in the
opinion of management all adjustments necessary for a fair and accurate
presentation of the interim results have been made. All such adjustments
were of a normal recurring nature. The results for the three months and six
months ended December 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. 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.
4. The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
Three Months Ended Six Months Ended
------------------ ----------------
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
------- ------- ------- -------
Numerator - net income $45,904 $43,582 $90,286 $84,225
------- ------- ------- -------
Denominator for basic earnings
per share - weighted average
shares 75,197 76,212 75,646 76,222
Effect of dilutive securities -
employee stock options 3,208 3,637 3,131 3,738
------- ------- ------- -------
Denominator for diluted
earnings per share 78,405 79,849 78,777 79,960
------- ------- ------- -------
Basic earnings per share $ 0.61 $ 0.57 $ 1.19 $ 1.10
======= ======= ======= =======
Diluted earnings per share $ 0.59 $ 0.55 $ 1.15 $ 1.05
======= ======= ======= =======
5. In June 1997, the FASB issued Statement of Financial Accounting Standards
Number 131, Disclosures About Segments of an Enterprise and Related
Information. This statement replaces Statement Number 14 and changes the
way public companies report segment information. This statement is
effective for fiscal years beginning after December 15, 1997 and will be
adopted by the Company for the fiscal year ending June 27, 1999.
6
6. In January 1999, the Company's Board of Directors declared a two-for-one
split of the Company's common stock to be effective February 19, 1999, for
shareholders of record as of January 29, 1999. All share and per share
information have been presented on a pre-split basis and therefore do not
reflect the stock split.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The table below states the income statement items for the three and six
months ended December 27, 1998 and December 28, 1997 as a percentage of net
sales and provides the percentage change in absolute dollars of such items
comparing the interim periods ended December 27, 1998 to the corresponding
periods from the prior fiscal year:
Three Months Ended Six Months Ended
- --------------------------------------------------------------------------------------------------------------------------------
December 27, December 28, Increase/ December 27, December 28, Increase
1998 1997 (Decrease) 1998 1997
Net sales 100.0% 100.0% 3% 100.0% 100.0% 4%
Cost of sales 28.4 28.8 1 28.7 28.7 4
------ ------ ------ ------
Gross profit 71.6 71.2 3 71.3 71.3 4
------ ------ ------ ------
Expenses:
Research & development 10.5 9.2 17 10.2 9.4 13
Selling, general &
administrative 10.3 11.0 (4) 10.6 11.0 --
------ ------ ------ ------
20.8 20.2 6 20.8 20.4 6
------ ------ ------ ------
Operating income 50.8 51.0 2 50.5 50.9 3
Interest income 5.4 4.8 15 5.7 4.8 24
------ ------ ------ ------
Income before income taxes 56.2% 55.8% 3 56.2% 55.7% 5
====== ====== ====== ======
Effective tax rates 32.0% 33.3% 32.0% 33.3%
====== ====== ====== ======
Net sales for the second quarter ended December 27, 1998 increased $3.0
million or 3% as compared to the second quarter of the prior fiscal year. This
increase was due primarily to higher unit shipments as the average unit selling
price was down slightly from the prior year quarter. International sales
increased by 12%. Gains in Europe and rest of Asia were partially offset by a
decrease in Japan from the prior year quarter. Sales to the domestic market were
down 7% primarily due to a reduction in sales in the U.S. distribution channel
as the OEM channel remained relatively unchanged. The Company added a third
major distributor, Wyle Electronics, late in the quarter, who is expected to
have a gradual positive impact on sales in future quarters. For the second
quarter of fiscal 1999, U.S. sales and International sales represented
approximately 45% and 55% of total net sales, respectively, with Europe, Japan
and rest of world representing 26%, 12% and 17% of total net sales,
respectively. The Company's major end-markets are communication, computer and
industrial. Sales into the communication end-market increased whereas sales into
the other areas were relatively unchanged.
Net sales for the six months ended December 27, 1998 increased $9.2
million or 4% as compared to the prior fiscal period due to higher shipment
volumes partially offset by lower average unit selling prices. International
sales were 12% higher during this period while domestic sales declined 4%,
primarily in U.S. distribution.
Gross profit increased $2.6 million and $6.6 million, respectively, for
the second quarter and first six months of fiscal 1999 over the corresponding
periods in fiscal 1998. Gross profit increased in line with the higher net sales
levels achieved during the fiscal 1999 periods as gross profit as a percentage
of net sales remained relatively stable at 71.6% and 71.3% for the second
quarter and first six months of fiscal 1999, respectively. During each of these
periods, gross profit improved due to the favorable effect of fixed costs
allocated across a higher sales base, and slightly better manufacturing
efficiencies and yields achieved at the Company's fabrication, assembly and test
facilities.
Research and development ("R&D") expenses increased $1.8 million and
$2.8 million, respectively, for the second quarter and first six months of
fiscal 1999 and have increased to 10.5% and 10.2% of net sales, for the second
quarter and first six months of fiscal 1999, respectively. The increases in R&D
expenses as compared with the prior year periods were due primarily to an
increase in design and test engineering personnel
8
and higher compensation costs due to higher profit sharing. During the quarter
the Company opened another satellite design center in New Hampshire.
Selling, general and administrative expenses ("SG&A") decreased $0.5
million for the second quarter and were flat for the first six months of fiscal
1999 as compared with the prior year periods. The decrease in SG&A as compared
to the prior year period in fiscal 1998 was primarily due to lower external
commission costs resulting from both fewer external sales representatives, as
the Company went to a direct sales force in three domestic regions, and from a
lower overall external commission rate due to a lower sales growth rate in the
first half of fiscal 1999 versus fiscal 1998. The lower external commissions
expense was partially offset by higher labor costs associated with an increase
in staffing and profit sharing.
Interest income was $6.5 million and $13.6 million for the second
quarter and first six months of fiscal 1999, respectively, an increase of $0.9
million and $2.7 million over the corresponding periods of fiscal 1998. The
increase in interest income resulted from the significant increase in cash, cash
equivalents and short-term investments during the fiscal 1999 periods.
The Company's effective tax rate for the second quarter and first six
months of fiscal 1999 was 32.0%, down from 33.3% in the prior year periods of
fiscal 1998. The lower tax rate is due to higher business activity in foreign
jurisdictions and an increase in assets employed outside of California into
states where the Company experiences lower tax rates.
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,
and under the heading "Year 2000", 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 and the timely introduction
of new processes and products, and general conditions in the world's economies
and financial markets.
Management of the Company believes the long-term prospects for the
business are excellent and the Company continues to invest in the plant
infrastructure and technical talent to maximize its opportunities. In the
short-term the Company has resumed sequential quarterly sales growth and has had
two quarters of growing bookings which appear to be well diversified both
geographically and by end-market. Although there are concerns about the rate of
worldwide economic growth, the pessimism that prevailed in the financial markets
in the late summer has turned around. However, customers continue to be cautious
and generally order only to meet immediate needs. Consequently the Company
continues to be dependent on orders that book and ship in the same quarter. Lead
times are low and customers appear to have relatively low inventories and
generally order for rapid delivery. In summary, given the acceleration of
bookings throughout last quarter, the acceptance of new products at customers,
the historical seasonal strengthening of business in the March quarter,
particularly at U.S. distribution, and the first signs of some improvement in
Japan, the Company currently expects to grow sales in the near-term in the mid
to high single digit range sequentially over the quarter just reported. The
Company also 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.
9
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 December 27, 1998, cash, cash equivalents and short-term investments
totaled $611.1 million, and working capital was $616.4 million.
During the first half of fiscal 1999, the Company generated $110.0
million of cash from operating activities. Additionally, the Company generated
$8.3 million in proceeds from common stock issued under employee stock option
and stock purchase plans.
Significant cash expenditures include the purchase of 2.0 million
shares of the Company's common stock for $108.7 million and capital expenditures
totaling $25.7 million. Capital expenditures include the purchase of land and a
building located in Milpitas, California. The Company intends to build a new
wafer fabrication facility at this location for a total capitalized cost of
approximately $95.0 million. This new facility is not expected to be operational
until the second half of fiscal 2000. The Company also paid $10.6 million for
cash dividends to shareholders representing $0.07 per share. In January 1999,
the Company's Board of Directors declared a quarterly cash dividend of $0.07 per
share to be paid during the third 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.
Year 2000
The Company has a Year 2000 Compliance Program that is progressing on
plan and the Company does not foresee any problems in its ability to service
customers in the year 2000. This program encompasses both internal and external
systems. Internally, it covers enterprise-wide systems from order entry to EDI,
planning, manufacturing, design and shipping. Externally, it covers all
suppliers and service subcontractors, utilities, banks, insurance and telephone
companies. The Company's goal is to achieve year 2000 compliance by June 27,
1999, the end of the Company's 1999 fiscal year. To date, the Company is close
to implementing all the required changes to be year 2000 compliant and has
initiated the year 2000 compliance testing phase. This compliance testing is
designed to ensure that the order processing, production, delivery and invoicing
of the Company's product is not affected by dates prior to, during, and after
January 1, 2000. Progress is reviewed monthly, at a minimum, by senior
management.
Since the Company's products are not date sensitive, its finished
products are not affected by the year 2000 problem.
The Company estimates the cost of implementation for its internal
computer systems to be under $1.5 million dollars, and consequently, will not
have a material impact on the Company's financial position or results of
operations. However, year 2000 issues could have a significant impact on the
Company's operations and its financial results if modifications to internal
systems and equipment cannot be completed on a timely basis; unforeseen needs or
problems arise; or if the systems operated by third parties are not year 2000
compliant. Should any of these unforeseen events occur, the Company will attempt
to mitigate their adverse impacts. The Company is currently reviewing
contingency plans including, but not limited to, manual back-up systems for
current automated internal systems and alternate suppliers, where available, for
external systems and services.
10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the Company, held on November
4, 1998, in Milpitas, California, the shareholders elected members of the
Company's Board of Directors and ratified the Company's proposals to amend the
1996 Incentive Stock Option Plan and to appoint Ernst & Young LLP as independent
auditors.
The vote for nominated directors was as follows:
NOMINEE FOR WITHHELD
- ------- --- --------
Robert H. Swanson, Jr. 60,396,988 343,150
David S. Lee 60,391,798 348,340
Thomas S. Volpe 60,397,165 342,973
Leo T. McCarthy 60,386,946 353,192
Richard M. Moley 60,396,983 343,155
The vote to ratify the amendment of the 1996 Incentive Stock Option Plan was as
follows:
FOR AGAINST ABSTAIN
--- ------- -------
38,544,214 14,770,998 377,185
The vote to ratify the appointment of Ernst & Young LLP as independent auditors
for fiscal 1999 was as follows:
FOR AGAINST ABSTAIN
--- ------- -------
60,647,853 39,774 52,511
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.25 1996 Incentive Stock Option Plan, as amended
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LINEAR TECHNOLOGY CORPORATION
DATE: February 9, 1999 BY /s/Paul Coghlan
----------------------------
Paul Coghlan
Vice President, Finance &
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
12