Linear Technology CEO Discusses Q2 2011 Earnings Call Transcript

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Linear Technology (LLTC)

Q2 2011 Earnings Call

January 19, 2011 11:30 am ET

Executives

Paul Coghlan - Chief Financial Officer, Principal Accounting Officer, Vice President of Finance and Secretary

Robert Swanson - Co-Founder and Executive Chairman

Lothar Maier - Chief Executive Officer and Director

Analysts

Shawn Webster - Macquarie Research

David Wong - Wells Fargo Securities, LLC

Craig Berger - FBR Capital Markets & Co.

Romit Shah - Lehman Brothers

James Covello - Goldman Sachs Group Inc.

Blayne Curtis - Jefferies & Company, Inc.

Uche Orji - UBS Investment Bank

Phillip Marriott

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Jonathan Smigie - Raymond James & Associates

Christopher Danely - JP Morgan Chase & Co

Ross Seymore - Deutsche Bank AG

Sumit Dhanda - Citadel Securities, LLC

Craig Ellis - Caris & Company

Christopher Caso - Susquehanna Financial Group, LLLP

Timothy Luke - Barclays Capital

John Pitzer - Crédit Suisse AG

Presentation

Operator

Good day, everyone, and welcome to the Linear Technology Corporation Fiscal 2011 Second Quarter Earnings Conference Call. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Paul Coghlan, Chief Financial Officer. Please go ahead.

Paul Coghlan

Hello. Good morning. Welcome to the Linear Technology Conference Call. I'll be joined this morning by Bob Swanson, our Executive Chairman; and Lothar Maier, our CEO. I will give you a brief overview of our recently completed second quarter of our fiscal year 2011 and then address the current business climate. We will then open up the conference call to questions to be directed at Bob, Lothar or myself. I trust you've all seen copies of our press release which was published last night.

First, however, I'd like to remind you that except for historical information, the matters that we will be describing this morning will be forward-looking statements that are dependent on certain risks and uncertainties, including such factors, among others, as new orders received and shipped during the quarter, the timely introduction of new processes and products and general conditions in the world economy and financial markets. In addition to these risks which we described in our press release issued yesterday, we refer you to the risk factors listed in the company's Form 10-Q for the quarter ended September 26, 2010, particularly management discussion and analysis of financial condition and results of operations.

Secondly, SEC Regulation FD regarding selective disclosure influences our interaction with investors. We have opened up this conference call to enable all interested investors to listen in. The press release and this conference call will be our forum to respond to questions regarding our estimated financial performance going forward. Consequently, should you have any questions regarding our estimates of sales and profits or other financial matters for the upcoming quarter, as well as how they might impact our income statement model and our balance sheet, this is the time we're free to respond to these questions.

As you can tell from our press release, this was a transitional quarter for us. As expected, the company's revenues decreased slightly from the first quarter of fiscal 2011 as shipments and orders began to slow, following a very rapid sequential growth the company had experienced over the past several quarters. Although revenues were down 1%, they were at the high end of our guidance and up 50% over the prior year quarter.

During the second quarter, customer order patterns began to respond to our lower lead times and their need for lower safety stock inventory. Our lead times are now at their historical four to six weeks level, from as high as 10 to 12 weeks in previous quarters. As a result, bookings declined and we had a negative book-to-bill ratio for the quarter. Bookings declined across all end markets, with industrial declining the least proportionately and computer the most.

Although sales in the December quarter decreased by 1%, net income increased by 5% or $6.7 million due to several factors: gross margin decreased by $3.8 million due to the 1% reduction in sales; operating expenses were down slightly; the December quarter had 14 weeks rather than the customary 13 weeks; our fiscal quarterly calendar always ends on a Sunday, therefore, once every five or six years, we have an additional week to closely align our fiscal quarter with the calendar quarter. We do this in a December quarter so that the extra week corresponds with a holiday week and therefore has little impact on revenues. However, there was an extra week of expenses, primarily labor and the impact was roughly $4 million. This increase in expenses was offset by a reduction in legal fees of roughly $5 million, as the one-time legal charge that occurred in the September quarter did not repeat in the December quarter. The net effect of these gross margin and operating expense events on operating income was a decrease of $3.5 million. Operating income as a percent of sales was a very strong 52.4% versus 52.6% last quarter.

During the quarter, the company redeemed one of its convertible notes for $396 million. And this caused interest expense net to be reduced by $3.3 million, thereby roughly offsetting the decreased operating income.

Finally, the December quarter benefited from a lower tax rate of 24% versus 27.5% in the prior quarter, largely due to the reinstatement of the research and development tax credit as part of U.S. tax legislation enacted at the end of the calendar year. This had an impact of $6.7 million, which largely equated with a quarterly 5% increase in net income. Headcount did not change during the quarter.

In summary, the effect of the items I just listed on the published quarterly results was that revenue was $383.6 million for the second quarter of fiscal year 2011, compared to the previous quarter's record revenue of $388.6 million and $256.4 million reported in the second quarter of fiscal year 2010.

GAAP diluted earnings per share of $0.62 improved $0.03 over the previous quarter's earnings per share and almost doubled from the $0.33 per share reported in the second quarter of fiscal 2010. GAAP net income of $143.7 million increased 5% or $6.7 million from the previous quarter and increased 90% or $68.2 million from the $75.5 million reported in the second quarter of last fiscal year.

Earnings per share would be $0.70 on a pro forma basis, which excludes the impact of stock option accounting and the amortization of debt discount, which is the theoretical difference between the company's convertible debt, actual interest and the interest it would potentially have had to pay if it had used straight bank debt.

During the December quarter, the company's cash and short-term investments balances decreased by $303.6 million to $748.2 million as, during the quarter, the company paid $395.8 million to redeem one of its two convertible debt notes. The company announced that it would increase its quarterly dividend from $0.23 to $0.24 per share. The company has raised its dividend every year since it began paying a dividend. This marks the 19th consecutive year the company has increased its dividend. The company's commitment to increasing its dividend, despite various economic cycles, underscores its belief in the strength of its business model and its strong financial position. This cash dividend will be paid on March 2 to stockholders of record on February 18.

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