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Linear Technology Corporation (LLTC)

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Linear Technology (LLTC)

Q4 2011 Earnings Call

July 27, 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

Romit Shah - Lehman Brothers

James Covello - Goldman Sachs Group Inc.

Craig Berger - FBR Capital Markets & Co.

Terence Whalen - Citigroup Inc

Uche Orji - UBS Investment Bank

Christopher Danely - JP Morgan Chase & Co

Ross Seymore - Deutsche Bank AG

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

Sumit Dhanda - Citadel Securities, LLC

JoAnne Feeney - Longbow Research LLC

Craig Ellis - Caris & Company

Christopher Caso - Susquehanna Financial Group, LLLP

Romit Shah - Nomura Securities Co. Ltd.

Ambrish Srivastava - BMO Capital Markets U.S.

Jonathan Smigie - Raymond James & Associates, Inc.

John Pitzer - Crédit Suisse AG

Presentation

Operator

Good day, everyone, and welcome to the Linear Technology Corporation Fiscal 2011 Fourth Quarter Earnings Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Paul Coghlan, Chief Financial Officer. Please go ahead.

Paul Coghlan

Hello. Good morning. I'm going to be joined this morning by Lothar Maier, our CEO; and Bob Swanson, our Executive Chairman.

Welcome to the Linear Technology Conference Call. I will give you a brief overview of our recently completed fourth quarter and 2011 fiscal year 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 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 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 companies 10-Q for the quarter ended April 3, 2011, particularly, management's discussion and analysis of financial condition and results of operations.

Secondly, SEC Regulation FD regarding selective disclosure influences our interaction with investors. We've opened up this conference call to enable all interested investors to listen in. The press release and this conference call will be our form to respond to questions regarding our estimated financial performance going forward.

Consequently, should you have any questions regarding our estimates of sales, 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, we reported revenue results for the quarter at the midpoint of our guidance. This was a quarter that started strong in April, but did not continue that momentum as the quarter progress. Customers that had increased their inventories and safety stocks due to supply chain uncertainties related to the Japan earthquake and tsunami have begun to now reduce inventories as Japanese supply is becoming less of an issue. This impacted our bookings, which although, increasing from the prior quarter, still resulted in a negative book-to-bill ratio for us.

Although sales in the June quarter increased by 1.5%, net income increased substantially more by $16.7 million or 11.8%, due primarily to lower income taxes. Cost of goods sold was flat, benefiting from an improved mix and operating expenses increased 1.9% in line with the increase in sales. Interest income benefited both this quarter and last quarter from gains on the settlements of lawsuits, $2.5 million in this quarter and $1.7 million last quarter.

There was a large positive impact from our tax position, which at 9.5% was significantly lower than the 17% reported in the prior quarter. Both the June and March quarters tax provisions include quarterly tax benefits from settlements with the IRS, related to its audit of our prior fiscal years.

Operating income as a percent of sales was a very strong 50.9% versus 50.7% last quarter, improving due to the modest increase in sales. Headcount increased 3%, largely due to increased direct labor at our overseas manufacturing plant, where we now do almost all of our module assembly. This assembly had previously mostly been done at an outside subcontract.

In summary, the effect of the items I just listed on the published quarterly results was that revenue was $358.6 million for the fourth quarter of fiscal year 2011 compared to the previous quarter's revenue of $353.2 million and compared to $366.2 million reported in the fourth quarter of fiscal year 2010.

GAAP diluted earnings per share of $0.68 increased $0.07 or 11% from the previous quarter's EPS, while increasing $0.14 or 26% from the $0.54 per share reported in the fourth quarter of fiscal 2010. GAAP net income was $158.2 million compared with $141.6 million last quarter and $124.5 million reported in the fourth quarter of last year.

Earnings per share would be $0.76 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 have potentially had to pay if it had used straight bank debt.

During the June quarter, the company's cash and short-term investments balance increased by $112 million to $922.5 million. The company announced it would again pay a quarterly dividend of $0.24 per share. This current dividend will be paid on August 31 to stockholders of record on August 19th.

The June quarter is also the end of our fiscal year. Fiscal 2011 is a milestone year, since it marks our 30th anniversary as a company. The company has been very profitable and cash flow positive from operations throughout this period and 2011 was no exception.

In 2011, we had record revenues, record net profits and record earnings per share. Revenues of $1,484,000,000 grew 27% or $314 million over the prior year. Net income of $580.8 million grew 61% or $219.4 million dollars and earnings per share of $2.50 grew 58%.

Our cash and cash equivalents and short-term investments decreased $35.5 million, after retiring $395.8 million of convertible debt, repurchasing 38.2 million of common stock and paying $217.2 million in dividends. Overall, 2011 was a great year.

Looking ahead to the September quarter, we believe we will get off to a temporary slow start. Japan has been recovering from the tragic earthquake, faster than initially expected. Customers that had built up their inventories are now dialing them back. This inventory correction and the general economic sluggishness relating to U.S. and European debt issues appear to have left customers cautious and delaying orders and shipments until the current economic picture becomes clearer.

On a positive note, in-demand expectations at [ph] our customers appeared generally unchanged, and automotive production is expected to pick up in the fall. We continue to be optimistic about our long-term growth prospects, as our business is healthy, and we are encouraged by the high level of interest in our products that indicate they are well targeted to meet the needs of our customers and their demand for innovative high-performance analog solutions.

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