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Linear Technology Corporation (LLTC)

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Linear Technology (LLTC)

Q3 2011 Earnings Call

April 20, 2011 11:30 am ET

Executives

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

Lothar Maier - Chief Executive Officer and Director

Analysts

Craig Berger - FBR Capital Markets & Co.

James Covello - Goldman Sachs Group Inc.

Shawn Webster - Macquarie Research

Romit Shah - Lehman Brothers

Uche Orji - UBS Investment Bank

Terence Whalen - Citigroup Inc

Sanil V. Daptardar - Sentinel Asset Management

Sameer Kalucha - Barclays Capital

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

Christopher Danely - JP Morgan Chase & Co

Evan Wang - Stifel, Nicolaus & Co., Inc.

Ross Seymore - Deutsche Bank AG

JoAnne Feeney - Longbow Research LLC

Sumit Dhanda - Citadel Securities, LLC

Craig Ellis - Caris & Company

Christopher Caso - Susquehanna Financial Group, LLLP

Romit Shah - Nomura Securities Co. Ltd.

Jonathan Smigie - Raymond James & Associates, Inc.

John Pitzer - Crédit Suisse AG

Doug Freedman - Gleacher & Company, Inc.

Presentation

Operator

Good day, everyone, and welcome to today's Linear Technology Corp. Fiscal 2011 Third Quarter Earnings Conference Call. [Operator Instructions] At this time, for opening remarks and introductions, I would now like to turn the conference over to Mr. Paul Coghlan, Chief Financial Officer. Please go ahead, sir.

Paul Coghlan

Hello. Good morning. Welcome to the Linear Technology Conference Call. I'm joined this morning by Bob Swanson, our Executive Chairman; and Lothar Maier, our Chief Executive Officer. I will give you a brief overview of our recently completed third 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 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 and country-specific 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 January 2, 2011, 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 in 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 are free to respond to these questions.

As you can tell from our press release, this was a transitional quarter for us. As forecasted, the company's revenues decreased from the second quarter of fiscal year 2011, as shipments and orders were reduced in the computer end market. Also during the quarter customers, through their order patterns, largely completed rebalancing their inventories to our load lead times and their need for lower safety stock inventory. Throughout the quarter, our lead times were at their historical 4 to 6 week levels from as high as 10 to 12 weeks in previous quarters. Revenues were down 8% and were at the midrange of our guidance. Although we had a negative book-to-bill ratio for the quarter, bookings increased over the prior quarter and strengthened as the quarter progressed. Industrial and automotive showed the greatest strength whereas computer, as expected, was the weakest. Although sales in the March quarter decreased by 8%, net income decreased by only $2.2 million or 1.5% due to several factors. Cost of goods sold and operating expenses decreased at 4% and 5%, respectively, lower than the sales decrease. These reductions were partially offset by higher interest income which included a gain of $1.7 million on the settlement of a lawsuit.

Also, there was a large positive impact from our tax provision which at 17%, was significantly lower than the 24% reported in the prior quarter. This March quarter tax provision includes a quarterly tax benefit from a settlement with the IRS related to disputed export tax benefits taken in previous years. Operating income as a percent of sales was a very strong 51% versus 52% last quarter, declining due to the reduced revenues being only partially offset by reduced operating expenses.

Headcount decreased 2% due to reductions in our overseas manufacturing plants.

In summary, the effect of the items I just listed on the published quarterly results was that revenue was $353.2 million for the third quarter of fiscal year 2011 compared to the previous quarter's revenue of $383.6 million and compared to $311.3 million reported in the third quarter of fiscal year 2010. GAAP and diluted earnings per share of $0.61 declined $0.01 from the previous quarter's earnings per share, while increasing $0.17 or 39% from the $0.44 per share reported in the third quarter of fiscal 2010.

GAAP net income of $141.6 million compared with $143.7 million last quarter and $100.6 million reported in the third quarter of last year. Earnings per share would be $0.69 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 March quarter, the company's cash and short-term investments balance increased by $62.3 million to $810.5 million. The company announced that it would again pay a quarterly dividend of $0.24 per share, which is the per share rate the dividend was raised to in the previous quarter.

That marked the 19th consecutive year the company had increased its dividend. This current dividend will be paid on June 1, 2011 to stockholders of record on May 20, 2011.

Looking ahead to the June quarter, we believe that the impact from the rebalancing of inventory by our customers is behind us. And we continue to see recovery among certain of our customers in our core analog markets. However, we do have at least near-term uncertainty pertaining to the impact of our business from the tragedies caused by the earthquake and tsunami in Japan. Geographically, the Japan market represents approximately 15% of our business and we do expect some negative impact in shipments to Japan, particularly in the automotive market that appears to be the most impacted from the tragedy.

Japan is also a source of raw materials to ourselves and to our competitors. We have alternate sources for silicon wafers and most other critical materials and therefore, do not expect a supply issue for us in the near term. However, uncertainties of supply are causing concern at some customers. Our low lead times and ability to supply to demand may help us in this uncertain environment. These Japan-related issues lead to uncertainties that make financial forecasting difficult. In our case, since all of these Japanese issues could potentially offset each other, we are currently forecasting for the June quarter modest sequential growth in the range of flat to up 3%.

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