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Linear Technology Corporation (LLTC)

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Linear Technology (LLTC)

Q2 2012 Earnings Call

January 18, 2012 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., Research Division

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

John Pitzer - Crédit Suisse AG, Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Unknown Analyst

James Covello - Goldman Sachs Group Inc., Research Division

David M. Wong - Wells Fargo Securities, LLC, Research Division

Craig A. Ellis - Caris & Company, Inc., Research Division

Uche X. Orji - UBS Investment Bank, Research Division

Auguste Gus Richard - Piper Jaffray Companies, Research Division

Mark Lipacis - Jefferies & Company, Inc., Research Division

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

JoAnne Feeney - Longbow Research LLC

Shawn R. Webster - Macquarie Research

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

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Linear Technology Corp. Fiscal 2012 Second Quarter Earnings Conference Call. Just a reminder, today's conference is being recorded. Now for opening remarks and introductions, I'd like to turn the conference over to Mr. Paul Coghlan, Chief Financial Officer. Paul, please go ahead.

Paul Coghlan

Hello, good morning. Welcome to the Linear Technology Conference Call. I'll be joined today by Lothar Maier, our Chief Executive Officer; and Bob Swanson, our Executive Chairman. I will give you a brief overview of our recently completed second quarter 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 the press release which was published last night. However, first, I would 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 October 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've 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, although we are in a difficult business environment, we believe our business will improve in the upcoming March quarter. We reported revenue results for the quarter at the midpoint of our guidance. Going into the quarter, our expectations were low. We did not expect any pickup until the new calendar year. Following that guidance, bookings were down in October and November. However, that changed and they were stronger in December than we had anticipated.

Generally, throughout this quarter, customers continued to be very cautious and concerned over general global macroeconomic conditions. They acknowledged in-demand opportunities but were in a wait-and-see mode and running tight inventories. However, after the pickup in our December bookings, bookings activity has continued improving in January. We did not see many cancellations or push-outs but did experience some pull-ins late in the quarter. In summary, our bookings were down from the prior quarter and we did have a negative book-to-bill ratio, although closer to parity than in recent quarters.

Sales decreased by 11%. Gross margin decreased from 75.8% to 74.9%. We again had shutdowns in all our factories and this, coupled with absorbing fixed costs over a lower sales base, detracted from gross margin. ASP improved modestly from $1.78 to $1.83, largely due to overall mix. Operating expenses decreased 5.5% or $5.1 million as we reduced some variable spending, primarily in the labor area by having shutdowns in the holiday weeks and by reducing profit sharing.

Operating income at 45.2% of sales, down from 47.8% last quarter was within our forecasted range, having been impacted mostly by the decrease in sales. Below the operating line, interest income expense was unchanged. However, we did incur $3.2 million in acquisition costs related to our purchase of Dust Networks.

Finally, income taxes decreased due to lower profits, resulting largely from decreased sales. Our effective tax rate of 26.25% was similar to the prior quarter. The resulting net income of $87,885,000 is a 30% return on sales. Although down from last quarter, still a very strong result especially in these economic times.

Headcount decreased slightly as increases in the technical talent from our acquisition of Dust Networks was more than offset by reductions in direct labor at our overseas manufacturing plants. In summary, the effect of the items I just listed on the published quarterly results was that revenue was $294.3 million for the second quarter of fiscal year 2012, compared with the previous quarter's revenue of $329.9 million and $383.6 million reported in the second quarter of fiscal year 2011.

GAAP earnings per share of $0.38 decreased $0.09 from the previous quarter's EPS, of which $0.01 was due to acquisition-related costs this quarter, and EPS decreased $0.24 from the $0.62 per share reported in the second quarter of fiscal 2011. GAAP net income was $87.9 million compared with $108.4 million last quarter and $143.7 million reported in the second quarter of last year.

Earnings per share would be $0.45 on a pro forma basis, which excludes the impact of stock option accounting, acquisition costs 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.

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