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EX-31.1 - EX-31.1 - LINEAR TECHNOLOGY CORP /CA/lltc-20140629ex311844156.htm
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EX-32.1 - EX-32.1 - LINEAR TECHNOLOGY CORP /CA/lltc-20140629ex321191f65.htm
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EX-23.1 - EX-23.1 - LINEAR TECHNOLOGY CORP /CA/lltc-20140629ex23158e7f3.htm
EX-21.1 - EX-21.1 - LINEAR TECHNOLOGY CORP /CA/lltc-20140629ex211e913fe.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

 

 

 

 

 

 

(Mark One)

 

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

 

 

For the fiscal year ended June 29, 2014

 

 

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

 

 

For the transition period from

 

to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commission File Number 0-14864

 

Image - Image1.jpeg

 

LINEAR TECHNOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

DELAWARE

 

94-2778785

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

1630 McCarthy Boulevard, Milpitas, California

 

95035

(Address of principal executive offices)

 

(Zip Code)

 

 

 

 

 

Registrant's telephone number, including area code

 

(408) 432-1900

 

 

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Name of each exchange on which registered

Common Stock, $0.001 par value

 

The Nasdaq Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act:

 

 

None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   No  

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   No   

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

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   No  

 

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No  

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer (Do not check if a smaller reporting company)

 

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No  

 

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $6,328,000,000 as of December 27, 2013 based upon the closing sale price on the Nasdaq Global Market reported for such date. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

There were 238,511,332 shares of the registrant's common stock issued and outstanding as of July 25, 2014.

 

DOCUMENTS INCORPORATED BY REFERENCE:

(1)

Items 10, 11, 12 and 14 of Part III incorporate information by reference from the definitive proxy statement (the "2014 Proxy Statement") for the 2014 Annual Meeting of Stockholders, to be filed subsequently.

 


 

2


 

LINEAR TECHNOLOGY CORPORATION

 

FORM 10-K

For the Fiscal Year Ended June 29, 2014

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

Page

Part I: 

 

 

 

Item 1.

Business

 

Item 1A.

Risk Factors

14 

 

Item 1B.

Unresolved Staff Comments

20 

 

Item 2.

Properties

21 

 

Item 3.

Legal Proceedings

21 

 

Item 4.

Mine Safety Disclosures

21 

 

 

 

 

Part II: 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

21 

 

Item 6.

Selected Financial Data

23 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

30 

 

Item 8.

Financial Statements and Supplementary Data

31

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

54 

 

Item 9A.

Controls and Procedures

54 

 

Item 9B.

Other Information

54 

 

 

 

 

Part III: 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

55 

 

Item 11.

Executive Compensation

55 

 

Item 12.

Security Ownership of Certain Beneficial Owner and Managements and Related Stockholder Matters

55 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

55 

 

Item 14.

Principal Accounting Fees and Services

55 

 

 

 

 

Part IV: 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

55 

 

 

 

 

Signatures 

 

 

59 

 

 

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PART I

 

ITEM 1.     BUSINESS

 

Except for historical information contained in this Annual Report on Form 10-K ("Form 10-K"), certain statements set forth herein, including statements regarding future revenues and profits; future conditions in the Company’s markets; availability of resources and manufacturing capacity; resolution of certain tax matters; and the anticipated impact of current and future lawsuits and investigations 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 for the Company’s products, timely ramp-up of new facilities, the timely introduction of new processes and products, general conditions in the world economy and financial markets and other factors described below.  Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements.  Words such as “expect,” “anticipate,” "forecast," “intend,” “plan,” “believe,” “seek,” “estimate,” and variations of such words and similar expressions are intended to identify such forward-looking statements.  See “Risk Factors” in the “Business” section of this Form 10-K for a more thorough list of potential risks and uncertainties.

 

 

General

 

Linear Technology Corporation (together with its consolidated subsidiaries, "Linear," “Linear Technology” or the “Company”), a member of the S&P 500, has been designing, manufacturing and marketing a broad line of high performance analog integrated circuits for major companies worldwide for over three decades. The Company's products provide an essential bridge between our analog world and the digital electronics in communications, networking, industrial, automotive, computer, medical, instrumentation, consumer, and military and aerospace systems. Linear Technology produces power management, data conversion, signal conditioning, RF and interface ICs, µModule® subsystems, and wireless sensor network products.  The Company is a Delaware corporation; it was originally organized and incorporated in California in 1981.  The Company competes primarily on the basis of performance, functional value, quality, reliability and service.

 

Available Information

 

The Company makes available free of charge through its website, www.linear.com, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and all amendments to those reports as soon as reasonably practicable after such materials are electronically filed with the Securities and Exchange Commission (“SEC”).  These reports may also be requested by contacting Paul Coghlan, Vice President of Finance and Chief Financial Officer, 1630 McCarthy Blvd., Milpitas, CA 95035. The Company’s Internet website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.  In addition, the public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or may obtain information by calling the SEC at 1-800-SEC-0330. Moreover, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding reports that the Company files electronically with the SEC at http://www.sec.gov.

 

The Linear Circuit Industry

 

Semiconductor components are the electronic building blocks used in electronic systems and equipment.  These components are classified as either discrete devices (such as individual transistors) or integrated circuits (in which a number of transistors and other elements are combined to form a more complicated electronic circuit).  Integrated circuits ("ICs") may be divided into two general categories, digital and linear (or analog).  Digital circuits, such as memory devices and microprocessors, generally process on-off electrical signals, represented by binary digits, “1” and “0.”  In contrast, linear integrated circuits monitor, condition, amplify or transform continuous analog signals associated with physical properties, such as temperature, pressure, weight, light, sound or speed, and play an important role in bridging between real world phenomena and a variety of electronic systems.  Linear integrated circuits also provide voltage regulation and power control to electronic systems, especially in hand-held and larger battery powered systems where battery management and high power efficiency are needed.

 

The Company believes that several factors generally distinguish the linear integrated circuit business from the digital integrated circuit business, including:

 

Importance of Individual Design Contribution.  The Company believes that the creativity of individual design engineers is of particular importance in the linear integrated circuit industry.  The design of a linear integrated circuit

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generally involves greater variety and less repetition of integrated circuit elements than digital design.  In addition, the interaction of linear integrated circuit elements is complex, and the exact placement of these elements in the integrated circuit is critical to the circuit's precision and performance.  Computer-aided engineering and design tools for linear integrated circuits are not as accurate in modeling circuits as those tools used for designing digital circuits.  As a result, the contributions of a relatively small number of individual design engineers are generally of greater importance in the design of linear integrated circuits than in the design of digital circuits.

 

Smaller Capital Requirements.  Digital circuit design attempts to minimize device size and maximize speed by increasing circuit densities.  The process technology necessary for increased density requires very expensive wafer fabrication equipment.  In contrast, linear integrated circuit design focuses on precise matching and placement of integrated circuit elements, and linear integrated circuits often require large feature sizes to achieve precision and high voltage operation.  Accordingly, the linear integrated circuit manufacturing process generally requires smaller initial capital expenditures, particularly for photomasking equipment and clean room facilities, and less frequent replacement of manufacturing equipment because the equipment has, to date, been less vulnerable to technological obsolescence.

 

Market Diversity; Relative Pricing Stability.  Because of the varied applications for linear integrated circuits, manufacturers typically offer a greater variety of device types to a more diverse group of customers, who typically have smaller volume requirements per device, than is true for digital IC manufacturers.  As a result, linear integrated circuit manufacturers are often less dependent upon particular products or customers; linear integrated circuit markets are generally more fragmented; and competition within those markets tends to be more diffused.

 

The Company believes that competition in the integrated linear market is particularly dependent upon performance, functional value, quality, reliability and service.  As a result, linear integrated circuit pricing has generally been more stable than most digital circuit pricing.

 

Products and Markets

 

Linear Technology produces a wide range of products for a variety of customers and markets.  The Company emphasizes standard products and multi-customer application specific products to address larger markets and to reduce the risk of dependency upon a single customer's requirements.  The Company targets the high performance segment of the analog integrated circuit market.  “High performance” may be characterized by higher precision, higher efficiency, lower noise, lower power, higher linearity, higher speed, higher voltage, more subsystem integration on a single chip and many other special features.  Increased demand for more complex integrated analog solutions has fostered the expansion of the Company's products to include fully integrated module solutions for system power, signal processing and data acquisition applications. The Company's SmartMesh IP and SmartMesh WirelessHART technology offers complete wireless network based solutions using low power electronic components, board level products with mesh networking and software addressing high level applications such as industrial process automation, data center energy management, building energy management, renewable energy monitoring, and transportation management systems.  The Company focuses virtually all of its design efforts on proprietary products, which at the time of introduction are original designs by the Company offering unique characteristics differentiating them from those offered by competitors.

Although the types and mix of linear products vary by application, the Company's principal product categories are as follows:

Amplifiers - These circuits amplify the output voltage or current of a device.  The amplification represents the ratio of the output voltage or current to the input voltage or current.  The most widely used device is the operational amplifier due to its versatility and precision.

 

High Speed Amplifiers - These amplifiers are used to amplify signals from 5 megahertz to 2 Gigahertz for applications such as video, fast data acquisition and wireless communications.

 

Voltage Regulators - Voltage regulators deliver a tightly controlled voltage to power electronic systems.  This category of product consists primarily of two types, the linear regulator and the switch-mode regulator.  Switch-mode regulators are also used to convert voltage up or down within an electronic system for power management and battery charging.

 

Voltage References - These circuits serve as electronic benchmarks providing a constant voltage for measurement systems usage.  Precision references have a constant output independent of input, temperature changes or time.

 

5


 

Interface - Interface circuits act as an intermediary to transfer digital signals between or within electronic systems.  These circuits are used in computers, modems, instruments, networking equipment and remote data acquisition systems.

 

Data Converters - These circuits change linear (analog) signals into digital signals, or vice versa, and are often referred to as data acquisition subsystems, A/D converters and D/A converters.  The accuracy and speed with which the analog signal is converted to its digital counterpart (and vice versa) is considered a key characteristic for these devices.  Low speed data converters may have resolution up to 24 bits, while high speed converters may operate in the region of 100’s of megahertz sample rates.

 

Battery Stack Monitors- These circuits monitor the voltage on individual battery cells that are connected in series.  By combining many of these circuits, the voltage of every cell in very high voltage battery string can be monitored.  This is a necessary function to maintain the health, longevity and safety of such systems.  High voltage battery strings are used in electric and hybrid electric vehicles, battery back-up systems, portable power systems and other high power battery systems.

 

Silicon Oscillators and Timer BloxTM- These general purpose circuits provide a wide range of timing functions and clock signals for frequencies ranging from less than 1Hz up to 170MHz.  They operate without a quartz crystal or ceramic resonator, and are designed to be simple, small and robust.  The functions provided by these parts cover a broad range of applications, including event synchronization and timing, switching regulation, signal-generation, analog-to-digital conversion and digital-to-analog conversion.

 

PLL Synthesizers and Clock Distribution- A phase locked loop ("PLL") locks the phase and frequency of a higher frequency device (usually a voltage controlled oscillator) to a more stable, lower frequency device.  As a black box, the PLL can be viewed as a frequency multiplier.  A PLL is employed when there is the need for a stable reference high frequency local oscillator source.  Example applications are numerous and include wireless/optical communications and networking, medical devices and instrumentation.

 

SmartMesh® Embedded Wireless Sensor Network- SmartMesh®IP and SmartMesh WirlessHART products consist of low power electronic components, board level products, and software.  SmartMesh® sensor networks are comprised of a self-forming mesh of nodes, or "motes," which collect and relay data, and a network manager that monitors and manages network performance and sends data to the host application, enabling wireless monitoring/control of physical attributes such as temperature, pressure, light, sound and motion.

 

Isolated µModule Transceivers- Isolated µModule transceivers use magnetically coupled technology to provide data and power isolation in a system in a package module.  They integrate inductive/magnetic components, dedicated integrated circuit functions and power on a single substrate printed circuit board, all encapsulated in a standard plastic package.

 

Radio Frequency Circuits - These circuits include mixers, modulators, demodulators, amplifiers, drivers, filters, oscillators/synthesizers and power detectors and controllers.  They are used in 2G, 3G, 4G LTE (and beyond) wireless and cable infrastructure, cellphones, wireless data communications, microwave, backhaul, military, radars, precision GPS and satellite communications.

 

Power Over Ethernet Controllers (“PoE”) - PoE controller circuits enable efficient transmission of voltage and current over standard Ethernet cables to power equipment or devices connected to the network.

 

µModule Power Products - A DC/DC µModule simplifies the design of a complex power circuit, such as point of load regulation, LED drivers and battery charging by integrating a complete circuit into a protective and encapsulated package that is tiny, thin and light-weight.  These devices are so small that they resemble a surface-mount IC.  The customer design requires limited knowledge of analog and DC/DC regulator circuits and these products enable a quick time-to-market power supply solution for digital systems using FPGAs, ASICs, DSPs, or microcontrollers.

 

Signal Chain µModule products- Complete signal chain functions utilizing data converters, filter, amplifiers, RF circuits, and related passive components are encapsulated as system-in-a-package modules.  Signal Chain µModule products simplify the design and eliminate circuit board layout problems and individual component selection for high performance systems, while requiring only normal IC handling and board manufacturing processes.

 

Other - Other linear circuits include buffers, power monitors, motor controllers, coulomb counters, diodes/bridges, hot swap circuits, comparators, sample-and-hold devices, timers, drivers and filters (both switched capacitor and continuous

6


 

time) which are used to limit and/or manipulate signals in such applications as base stations, navigation systems and industrial applications.

 

Linear circuits are used in various applications including factory automation, process control, industrial and laboratory instrumentation, security monitoring devices, complex medical devices, telecommunications, networking products such as power over Ethernet switches; automotive electronics, tablet, notebook and desktop computers; computer peripherals, video/multimedia, military, space and other harsh environment systems; and high-end consumer products.  The Company focuses its product development and marketing efforts on high performance applications where the Company believes it can position itself competitively with respect to product performance and functional value.  The following table sets forth examples of product families by end-market applications:

 

 

 

 

 

 

Market

 

End Applications/Products

 

Example Product Families

Industrial/Medical

 

Flow or rate metering

 

D to A converters

 

 

Position/pressure/temperature sensing and controls

 

Power monitors and controllers

 

 

Robotics

 

Current sense amplifiers

 

 

Energy management/harvesting

 

Differential amplifier

 

 

High brightness lighting

 

High speed A/D converters

 

 

Process control data communication

 

SAR A/D and Delta-Sigma converters

 

 

Factory automation

 

High speed operational amplifiers

 

 

Security and surveillance system

 

Interface (RS 485/232) products

 

 

Remote meter reading

 

Precision operational amplifiers

 

 

Wireless sensor networks

 

Instrumentation amplifiers

 

 

RFID transponders

 

Silicon oscillators

 

 

GPS surveying instruments

 

Precision comparators and voltage references

 

 

Scanning electron microscopes

 

Monolithic filters

 

 

Solar power

 

Switching voltage regulators

 

 

Machine vision equipment

 

Hot swap circuits

 

 

Voltmeters/multimeters/ oscilloscopes/curve tracers

 

DC-DC converters

 

 

Test equipment

 

µModule power products

 

 

Logic/network analyzers

 

PoE interface controllers

 

 

Weighing scales

 

Push button controllers

 

 

Analytic and test equipment

 

Ideal diode controllers

 

 

Gas chromatographs

 

Surge stoppers

 

 

X-Ray, EKG, MRI, PET, CAT scanners

 

Battery stack monitors

 

 

Particle accelerators

 

Smartmesh® embedded wireless sensor networks

 

 

DNA and blood analyzers

 

 

 

 

Patient monitors

 

 

 

 

Infusion pumps

 

 

 

 

IR cameras

 

 

 

 

Ultra sound diagnostic equipment

 

 

 

 

 

 

 

Space/Military/Harsh

 

Communications

 

Space qualified (JAN/QML)

Environment

 

Satellites

 

Radiation hardened

 

 

Guidance and navigation systems

 

Military plastic

 

 

Displays

 

Military hermetic (SMD's)

 

 

Firing controls

 

Extreme temperature

 

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Ground support equipment

 

 

 

 

Sonar systems

 

 

 

 

Surveillance equipment

 

 

 

 

Ordnance

 

 

 

 

Radar systems

 

 

 

 

GPS

 

 

 

 

JTRS manpacks

 

 

 

 

 

 

 

Automotive

 

Entertainment systems

 

Battery gas gauges

 

 

Hybrid/electric vehicle battery systems

 

Isolated µModule power products

 

 

Navigation and safety system

 

Low drop out voltage regulators

 

 

Headlamps

 

LED driver controllers

 

 

Daytime running lights

 

Li-ion battery chargers

 

 

Dashboard instrumentation

 

CAN transceivers

 

 

Emission controls

 

Ideal diodes

 

 

Collision avoidance systems

 

Surge Stoppers

 

 

Radar adaptive cruise control

 

Monitors over/under voltage

 

 

Heads-up-displays

 

Protection controllers

 

 

Idle stop and go systems

 

Timer Blox

 

 

Electronic steering and braking

 

Battery management systems

 

 

Antenna power supplies

 

Precision voltage references

 

 

LED lighting

 

Comparators

 

 

Parking assistance

 

Current sense amplifiers

 

 

Lane recognition

 

High speed and SAR ADC’s

 

 

 

 

 

Communications

 

Smart phones

 

DC - DC converters

 

 

Cellular phones

 

V.35 transceivers

 

 

Cellular base stations (CDMA/WCDMA/

 

Isolated µModule power products

 

 

GSM/LTE/ WiMAX)

 

Variable gain amplifiers

 

 

Point-to-point wireless modems

 

High-speed amplifiers

 

 

PBX switches

 

High speed A/D converters

 

 

Optical networking

 

Digital power monitors

 

 

Channel service units/data service units

 

Active diode bridge controllers

 

 

Cable modems/networks

 

RF Power detectors

 

 

Internet appliances

 

Low noise operational amplifiers

 

 

Servers/ routers/switches

 

Micropower products

 

 

Power over Ethernet

 

Power management products

 

 

Wireless access points

 

Switched capacitor filters

 

 

Wireless microphones

 

I2C bus buffers

 

 

Software defined radios

 

Voltage references

 

 

Wireless sensor networks

 

Voltage regulators/supervisors

 

 

 

 

Data converter products

 

 

 

 

Hot Swap controllers

 

 

 

 

Multi-protocol circuits

 

 

 

 

Thermoelectric coolers

 

 

 

 

µModule power products

 

8


 

 

 

 

 

Power amplifier controllers

 

 

 

 

Ideal diode bridge controller

 

 

 

 

Mixers/Modulators/Demodulators

 

 

 

 

Battery chargers

 

 

 

 

Power over Ethernet controllers

 

 

 

 

Multi-Phase switching regulators

 

 

 

 

Smartmesh® wireless sensor networks

 

 

 

 

 

Computer/High-End

 

Communications/interface modems

 

 

Consumer

 

Disk drives

 

Battery chargers

 

 

Solid state disc drives

 

DC - DC converters

 

 

Notebook computers

 

Electronic circuit breakers

 

 

Desktop computers

 

Hot Swap controllers

 

 

Workstations

 

Line drivers/ receivers

 

 

LCD monitors/projectors

 

USB power controller/ chargers

 

 

Plotters/printers

 

Low drop out linear regulators

 

 

Digital still cameras

 

Micropower products

 

 

Satellite radios

 

Multi-Phase switching regulators

 

 

Battery chargers

 

PCMCIA power switching

 

 

Electronic toys

 

Power management

 

 

Video/multimedia systems

 

Power sequencing/monitoring

 

 

Digital video recorders

 

Isolated µModule transceivers

 

 

Set top boxes/Satellite TV receivers

 

Video amplifiers

 

 

LCD display TVs

 

High speed A/D converters

 

 

Bluetooth headsets

 

Nano current voltage supervisors

 

 

Hand-held GPS units

 

Operational amplifiers

 

 

Tablet PCs

 

Voltage references

 

 

Media players

 

 

 

 

Video/multimedia systems

 

 

 

 

Wearables

 

 

 

 

 

 

 

 

Marketing and Customers

 

The Company markets its products worldwide primarily through a direct sales staff and through electronics distributors to a broad range of customers in diverse industries.  Arrow Electronics Inc. (Arrow), the Company’s largest distributor, distributes the Company’s products worldwide.  Arrow is one of the largest distributors of electronic components in the world with revenues of $21.4 billion in their December 2013 fiscal year-end.  Arrow's global components business segment covers the world's largest electronics markets - the Americas, EMEA (Europe, Middle East, and Africa), and Asia Pacific regions.  As of June 29, 2014 and June 30, 2013, Arrow accounted worldwide for 38% and 36% of the Company’s total net accounts receivable, respectively.  Arrow worldwide accounted for 31%, 31% and 29% of the Company’s worldwide net revenues in fiscal 2014, 2013 and 2012, respectively.  As of June 29, 2014 and June 30, 2013, Arrow domestic accounted for 10% and 13% of the Company’s total net accounts receivable, respectively.  Arrow domestic accounted for 12%, 13% and 13% of the Company’s worldwide net revenues in fiscal 2014, 2013 and 2012, respectively.  Arrow, like the Company’s other distributors, is not an end customer, but rather serves as a channel of sale to many end users of the Company's products.

 

No end customer accounted for more than 10% of the Company’s worldwide net revenues for any of the periods presented.

 

The Company’s products typically require a sophisticated technical sales effort.  The Company's sales organization is divided into domestic and international regions. The Company’s sales offices are located throughout most major metropolitan

9


 

areas in the United States.  Internationally, the Company has sales offices in or near: Dortmund, Helsinki, London, Milan, Munich, Paris, Lyon, Stockholm, Oulu, Stuttgart, Sydney, Melbourne, Beijing, Hong Kong, Tokyo, Nagoya, Osaka, Seoul, Shanghai, Shenzhen, Chengdu, Xian, Wuhan, Singapore, Taipei, Tel Aviv, Bangalore, Montreal, Ottawa, Toronto, Calgary, and Vancouver.

 

The Company has an agreement with one independent sales representative in South America.  Commissions are paid to sales representatives upon shipments either directly from the Company or through distributors.  The Company has agreements with four independent distributors in North America, five in Europe, two in China, seven in Japan, three in Taiwan, three in Russia, and one each in Korea, Singapore, Malaysia, Thailand, India, South Africa, Philippines, Israel, Brazil, Australia, and New Zealand.

 

The Company’s agreements with domestic distributors allow for price protection on certain distribution inventory if the Company lowers the prices of its products.  The Company’s agreements with domestic distributors also allow for stock rotation privileges (up to 3%-5% of quarterly purchases), which enable distributors to rotate slow moving inventory.  The Company’s sales to international distributors are made under agreements which permit limited stock return privileges but not sales price rebates.  The agreements generally permit distributors to exchange up to 5% of eligible purchases on a semi-annual basis.  See Critical Accounting Policies and Note 1 of Notes to Consolidated Financial Statements of this Form 10-K, which contains information regarding the Company’s revenue recognition policy.

 

During fiscal years 2014, 2013 and 2012, international revenues were $1,010.3 million or 73% of revenues, $912.5 million or 71% of revenues, and $900.1 million or 71% of revenues, respectively. Because the Company's export sales are billed and payable in United States dollars, export sales are generally not directly subject to fluctuating currency exchange rates.  During fiscal years 2014, 2013 and 2012, domestic revenues were $378.1 million or 27% of revenues, $369.7 million or 29% of revenues, and $366.5 million or 29% of revenues, respectively.

 

The Company’s backlog of released and firm orders was approximately $187.4 million at June 29, 2014 as compared with $151.1 million at June 30, 2013.  The Company defines backlog as consisting of distributor stocking orders and OEM orders for which a delivery schedule has been specified by the OEM customer for product shipment within six months.  Although the Company receives volume purchase orders, most of these purchase orders are cancelable, generally outside of thirty days of delivery, by the customer without significant penalty.  Lead-time for the release of purchase orders depends upon the scheduling practices of the individual customer and the availability of individual products, so the rate of booking new orders varies from month to month.   Also, the Company’s agreements with certain domestic distributors provide for price protection.  Consequently, the Company does not believe that its backlog at any time is necessarily representative of actual sales for any succeeding period.

 

In the operating history of the Company, seasonality of business has not been a material factor, although the results of operations for the first and second fiscal quarters of each year are slightly impacted by customary summer vacation and calendar year-end holidays. In addition, industrial customers typically have stronger demand in the first half of the calendar year.

 

The Company warrants that its products, until they are incorporated in other products, are free from defects in workmanship and materials and conform to the Company's published specifications. Warranty expense has been nominal to date.  Refer to Note 1 of Notes to Consolidated Financial Statements of this Form 10-K, which contains information regarding the Company’s warranty policy.

 

Manufacturing

 

The Company’s wafer fabrication facilities are located in Camas, Washington (“Camas”) and Milpitas, California (“Hillview”).  Each facility was built to Company specifications to support a number of sophisticated process technologies and to satisfy rigorous quality assurance and reliability requirements of United States military specifications and major worldwide OEM customers.  In addition to wafer fabrication facilities, the Company has an assembly and test facility located in Malaysia and a test and distribution facility located in Singapore.  All of the Company’s wafer fabrication, assembly, and test facilities have received ISO 9001, TS 16949 and ISO 14001 certifications.

 

The Company’s wafer fabrication facilities located in Camas and Hillview produce six-inch diameter wafers for use in the production of the Company’s devices.  The Company currently uses similar manufacturing processes in both its Camas and Hillview facilities.

 

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The Company’s basic process technologies include high-speed bipolar, high gain low noise bipolar, radio frequency bipolar, silicon gate complementary metal-oxide semiconductor (“CMOS”) and BiCMOS. The Company also has two proprietary complementary bipolar processes. The Company’s bipolar processes are typically used in linear integrated circuits where high voltages, high power, high frequency, low noise or effective component matching is necessary.  The Company’s proprietary silicon gate CMOS processes provide switch characteristics required for many linear integrated circuit functions, as well as an efficient mechanism for combining linear and digital circuits on the same chip.  The Company’s CMOS processes were developed to address the specific requirements of linear integrated circuit functions.  The complementary bipolar processes were developed to address higher speed analog functions. The Company’s basic processes can be combined with a number of adjunct processes to create a diversity of IC components.  A minor portion of the Company’s wafer manufacturing, particularly very small feature size products is done at two independent foundries. The accompanying chart provides a brief overview of the Company’s IC process capabilities:

 

 

 

 

Process Families

Benefits/ Market Advantages

Product Application

P-Well SiGate CMOS

General purpose, stability

Switches, filters, data conversion, chopper amplifiers

N-Well SiGate CMOS

Speed, density, stability

Switches, data conversion

Bi-CMOS

Speed, density, stability, flexibilities

Data conversion, power controller, battery management

High Power Bipolar

Power (100 watts), high current (10 amps)

Linear and smart power products, switching regulators

Low Noise Biploar

Precision, low current, low noise, high gain

Op amps, voltage references

High Speed Bipolar

Fast, wideband, video high data rate

Op amps, video, comparators, switching regulators

JFETS

Speed, precision, low current

Op amps, switches, sample and hold

Rad-Hard

Total dose radiation hardened

All space products

Complementary Bipolar

Speed, low distortion, precision

Op amps, video amps, converters

CMOS/Thin Films

Stability, precision

Filters, data conversion

High Voltage CMOS

High voltage general purpose compatible with Bipolar

Switches, chopper amplifiers

Bipolar/Thin Films

Precision, stability, matching

Converters, amplifiers

RF Bipolar

High speed, low power

RF wireless, high speed data communications

BCD (Bipolar CMOS DMOS)

Higher density, high speed, lower current

Switchers, controllers

 

The Company emphasizes quality and reliability from initial product design through manufacturing, packaging and testing. The Company’s design team focuses on fault tolerant design and optimum location of integrated circuit elements to enhance reliability.  Linear Technology’s wafer fabrication facilities have been designed to minimize wafer handling and the impact of operator error through the use of microprocessor-controlled equipment.  The Company has received Defense Supply Center, Columbus (DSCC,) Jan Class S Microcircuit Certification, which enables the Company to manufacture products intended for use in space or for critical applications where replacement is extremely difficult or impossible and where reliability is imperative.  The Company has also received MIL-PRF-38535 Qualified Manufacturers Listing (QML) certification for military products from DSCC.

 

The majority of processed wafers are sent to the Company’s assembly facility in Penang, Malaysia and a small portion are sent to offshore independent assembly subcontractors. The Penang facility opened in fiscal year 1995 and generally services approximately 80%-85% of the Company’s assembly requirements.  In fiscal year 2012, the Penang facility was expanded and has approximately 245,000 square feet of manufacturing floor space.  The Company’s primary assembly subcontractor is UTAC, located in Thailand. The Company also maintains domestic assembly operations to satisfy particular customer requirements, especially those for military applications, and to provide rapid turnaround for new product development.

 

After assembly, most products are sent to the Company's Singapore facility for final testing, inspection and packaging as required.  The Singapore facility opened in fiscal year 1990.  Some products are returned to Milpitas for the same back-end processing.  The Company’s Singapore facility serves as a major warehouse and distribution center with the bulk of the Company’s shipments to end customers originating from this facility.

 

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Manufacturing of individual products, from wafer fabrication through final testing, may take from eight to sixteen weeks.  Since the Company sells a wide variety of device types, and customers typically expect delivery of products within a short period of time following order, the Company maintains a substantial work-in-process and finished goods inventory.

 

Based on its anticipated production requirements, the Company believes it will have sufficient available resources and manufacturing capacity for fiscal year 2015.

 

Patents, Licenses and Trademarks

 

The Company has been awarded 1,081 United States and international patents and has considerable pending and published patent applications outstanding. Although the Company believes that these patents and patent applications may have value, the Company's future success will depend primarily upon the technical abilities and creative skills of its personnel, rather than on its patents.

 

The Company relies on patents, trademarks, international treaties and organizations, and foreign laws to protect and enforce its intellectual property.  The Company continually assesses whether to seek formal protection for particular innovations and technologies, such litigation is likely to be expensive and time consuming to resolve. In addition, such litigation can result in the diversion of management’s time and attention away from business operations.

 

As is common in the semiconductor industry, the Company has at times been notified of claims that it may be infringing patents issued to, or other proprietary rights held by others and has periodically been involved in litigation pertaining to such matters.  If it appears necessary or desirable, the Company may seek licenses under such patents or rights, although there can be no assurance that all necessary licenses can be obtained by the Company on acceptable terms.  In addition, from time to time the Company may negotiate with other companies to license patents, products or process technology for use in its business.

 

Research and Development

 

The Company’s ability to compete depends in part upon its continued introduction of technologically innovative products on a timely basis.  To facilitate this need, the Company has organized its product development efforts into four groups:  two power product groups (D power and S power); mixed signal products; and signal conditioning products including high frequency products and wireless sensor network products.  Linear Technology’s product development strategy emphasizes a broad line of standard high performance products to address a diversity of customer applications.  The Company’s research and development (“R&D”) efforts are directed primarily at designing and introducing new products and to a lesser extent developing new processes and advanced packaging.

 

As of June 29, 2014, the Company had 1,244 employees involved in research, development and engineering related functions, as compared to 1,165 employees at the end of fiscal year 2013.  The Company has remote design centers throughout the United States, as well as in Singapore, China and Germany as part of the Company’s strategy of obtaining and retaining analog engineering design talent.  For fiscal years 2014, 2013, and 2012, the Company's R&D expense was $250.4 million, $235.2 million and $224.5 million, respectively.  The increase in R&D expense in fiscal year 2014 over fiscal year 2013 was primarily due to increases in employee compensation costs of $8.0 million and employee profit sharing costs of $4.5 million.

 

Government Contracts

 

The Company currently has no material U.S. Government contracts.

 

Employees

 

As of June 29, 2014, the Company had 4,661 employees, including 468 in marketing and sales, 1,244 in research, development and engineering related functions, 2,849 in manufacturing and production, and 100 in management, administration and finance. The Company has never had a work stoppage, no employees are represented by a labor organization, and the Company considers its employee relations to be good.

 

Competition

 

The Company competes in the high performance segment of the linear market.  The Company’s major competitors include Analog Devices, Intersil, Maxim Integrated Products and Texas Instruments.  The principal elements of competition include product performance, functional value, quality and reliability, technical service and support, price, diversity of product

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line and delivery capabilities.  The Company believes it competes favorably with respect to these factors, although the Company may be at a disadvantage in comparison to larger companies with broader product lines and greater technical service and support capabilities.

 

Executive Officers of the Registrant

 

The executive officers of the Company, and their ages as of August 1, 2014, are as follows:

 

 

 

 

 

 

Name

 

Age

 

Position

Robert H. Swanson, Jr.

 

75

 

Executive Chairman of the Board of Directors

Lothar Maier

 

59

 

Chief Executive Officer

Paul Chantalat

 

64

 

Vice President Quality and Reliability

Paul Coghlan

 

69

 

Vice President of Finance and Chief Financial Officer; Secretary

Robert C. Dobkin

 

70

 

Vice President of Engineering and Chief Technical Officer

Alexander R. McCann

 

48

 

Vice President and Chief Operating Officer

Richard Nickson

 

64

 

Vice President of North American Sales

David A. Quarles

 

48

 

Vice President of International Sales

Donald Paulus

 

57

 

Vice President and General Manager, D Power Products

Steve Pietkiewicz

 

54

 

Vice President and General Manager, S Power Products

Robert Reay

 

53

 

Vice President and General Manager, Mixed Signal Products

Erik M. Soule

 

50

 

Vice President and General Manager, Signal Conditioning Products

 

Mr. Swanson, a founder of the Company, has served as Executive Chairman of the Board of Directors since January 2005.  Prior to that time he served as Chairman of the Board of Directors and Chief Executive Officer since April 1999, and prior to that time as President, Chief Executive Officer and a director of the Company since its incorporation in September 1981. From August 1968 to July 1981, he was employed in various positions at National Semiconductor Corporation (“National”), a manufacturer of integrated circuits, including Vice President and General Manager of the Linear Integrated Circuit Operation and Managing Director in Europe. Mr. Swanson has a B.S. degree in Industrial Engineering from Northeastern University.

 

Mr. Maier was named Chief Executive Officer of Linear Technology in January 2005.  Prior to that, Mr. Maier served as the Company’s Chief Operating Officer from April 1999 to January 2005.  Before joining Linear Technology, Mr. Maier held various management positions at Cypress Semiconductor Corp. from July 1983 to March 1999, most recently as Senior Vice President and Executive Vice President of Worldwide Operations.  He holds a B.S. degree in Chemical Engineering from the University of California at Berkeley.

 

Mr. Chantalat has served as Vice President of Quality and Reliability since July 1991. From January 1989 to July 1991, he held the position of Director of Quality and Reliability. From July 1983 to January 1989, he held the position of Manager of Quality and Reliability. From February 1976 to July 1983, he was employed in various positions at National where his most recent position was Group Manager of Manufacturing Quality Engineering. Mr. Chantalat received a B.S. and an M.S. in Electrical Engineering from Stanford University in 1970 and 1972, respectively.

 

Mr. Coghlan has served as Vice President of Finance and Chief Financial Officer of the Company since December 1986. From October 1981 until joining the Company, he was employed in various positions at GenRad, Inc., a manufacturer of automated test equipment, including Corporate Controller, Vice President of Corporate Quality and Vice President and General Manager of the Structural Test Products Division. Before joining GenRad, Inc., Mr. Coghlan was associated with Price Waterhouse & Company in the United States and Paris, France for twelve years. Mr. Coghlan received a B.A. from Boston College in 1966 and an MBA from Babson College in 1968.

 

Mr. Dobkin, a founder of the Company, has served as Vice President of Engineering and Chief Technical Officer since April 1999, and as Vice President of Engineering from September 1981 to April 1999. From January 1969 to July 1981, he was employed in various positions at National, where his most recent position was Director of Advanced Circuit Development. Mr. Dobkin has extensive experience in linear integrated circuit design. Mr. Dobkin attended the Massachusetts Institute of Technology.

 

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Mr. McCann was named Chief Operating Officer of Linear Technology in January 2005, prior to that Mr. McCann served as Vice President of Operations since January 2004. Prior to joining the Company, he was Vice President of Operations at NanoOpto Corporation in Somerset, NJ from July 2002 to December 2003, Vice President of Worldwide Operations at Anadigics Inc. in Warren, NJ from December 1998 to June 2002 and held various management positions at National Semiconductor UK Ltd. from August 1985 to September 1998. Mr. McCann received a B.S. (equivalent) in Electrical and Electronic Engineering in 1985 from James Watt College and an MBA in 1998 from the University of Glasgow Business School.

 

Mr. Nickson has served as Vice President of North American Sales since October 2001. From July 2001 until October 2001 he was Director of USA Sales.  From February 1998 until July 2001, he was European Sales Director. From August 1993 until January 1998, he held the position of Northwest Area Sales Manager. From April 1991 to August 1993, he was President and Co-founder of Focus Technical Sales. From August 1983 to April 1991, he served with National in various positions where his most recent position was Vice President of North American Sales. Mr. Nickson was Founder and President of Micro-Tex, Inc. from June 1980 to August 1983. Prior to 1980, Mr. Nickson spent seven years in semiconductor sales, including four years with Texas Instruments. He received a B.S. in Mathematics from Illinois Institute of Technology in 1971.

 

Mr. Quarles has served as Vice President of International Sales since August 2001. From October 2000 to August 2001, he held the position of Director of Marketing.  From July 1996 to September 2000, he held the position of Director of Asia-Pacific Sales stationed in Singapore.  From June 1991 to July 1996, he worked as a Sales Engineer and later as District Sales Manager for the Bay Area sales team.  Prior to Linear, Mr. Quarles worked two years as a Sales Engineer at National.  Mr. Quarles received a B.S. in Electrical Engineering in 1988 from Cornell University.

 

Mr. Paulus has served as Vice President and General Manager of D Power Products since June 2003.  He joined the Company in October 2001 as Director of Satellite Design Centers.  Prior to joining the Company, he was a founder of Integrated Sensor Solutions, Inc. (“ISS”) serving as Vice President of Engineering and Chief Operating Officer from November 1991 to August 1999.  ISS was acquired by Texas Instruments, Inc. (“TI”) in 1999, and Mr. Paulus served as TI’s General Manager, Automotive Sensors and Controls in San Jose until October 2001.  Prior to ISS, Mr. Paulus served in various engineering and management positions with Sierra Semiconductor from February 1989 to November 1991, Honeywell Signal Processing Technologies from December 1984 to February 1989, and Bell Laboratories from June 1979 to December 1984.  Mr. Paulus received a B.S. in Electrical Engineering from Lehigh University, an M.S. in Electrical Engineering from Stanford University and an MBA from the University of Colorado.

 

Mr. Pietkiewicz has served as Vice President and General Manager of S Power Products since July 2007 and as General Manager of S Power Products since April 2005. From March 1995 until April 2005 he was a Design Engineering Manager responsible for switching regulator and linear regulator integrated circuits.  Mr. Pietkiewicz began his employment at the Company as a design engineer in December 1987 after serving as a design engineer at Precision Monolithics, Inc. from May 1981 until July 1985, and Analog Devices Inc. from July 1985 until December 1987. Mr. Pietkiewicz received his BSEE degree from the University of California at Berkeley in 1981.

 

Mr. Reay has served as Vice President and General Manager of Mixed Signal Products since January 2002 and as General Manager of Mixed Signal Products since November 2000.  From January 1992 to October 2000 he was the Design Engineering Manager responsible for a variety of product families including interface, supervisors, battery chargers and hot swap controllers.  Mr. Reay joined Linear Technology in April 1988 as a design engineer after spending four years at GE Intersil.  Mr. Reay received a B.S. and M.S. in Electrical Engineering from Stanford University in 1984.

 

Mr. Soule has served as Vice President and General Manager of Signal Conditioning Products since July 2007 and as General Manager of Signal Conditioning Products since October 2004. He joined the Company in September 2002 as Product Marketing Manager of Signal Conditioning Products.  Prior to Linear Technology, Mr. Soule was Director of Marketing at Sensory, Inc. from 1997 to 2002. Prior to Sensory, he held various engineering and management positions at National from 1994 to 1997 and from 1986 to 1990 and Avocet, Inc. from 1990 to 1994.  Mr. Soule received a B.S. in Electrical Engineering from Rensselaer Polytechnic Institute in 1986 and an MBA from San Jose State University in 1996.

 

 

ITEM 1A.     RISK FACTORS

 

A description of the risk factors associated with the Company is set forth below. In addition to the risk factors discussed below, see “Factors Affecting Future Operating Results” included in “Management's Discussion and Analysis” for further discussion of other risks and uncertainties that may affect the Company.

 

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Erratic consumer and/or corporate spending due to uncertainties in the macroeconomic environment could adversely affect our revenues and profitability.

 

We depend on demand from the industrial, communication, computer, consumer and automotive end-markets we serve. Our revenues and profitability are based on certain levels of consumer and corporate spending. Reductions or other fluctuations in consumer and/or corporate spending as a result of uncertain conditions in the macroeconomic environment, such as government economic or fiscal instability, restricted global credit conditions, reduced demand, imbalanced inventory levels, mortgage failures, fluctuations in interest rates, higher energy prices, or other conditions, could adversely affect our revenues and profitability. The impact of general economic sluggishness relating to US and European debt, government debt limits, unemployment issues and other causes can cause customers to be cautious, or delay or reduce orders for our products until these economic uncertainties improve.

 

Sudden adverse shifts in the business cycle could adversely affect our revenues and profitability.

 

The semiconductor market has historically been cyclical and subject to significant economic downturns at various times.  The cyclical nature of the semiconductor industry may cause us to experience substantial period-to-period fluctuations in our results of operations.  The growth rate of the global economy is one of the factors affecting demand for semiconductor components.  Many factors could adversely affect regional or global economic growth including turmoil or depressed conditions in financial or credit markets, depressed business or consumer confidence, inventory excesses, increased unemployment, inflation for goods, services or materials, rising interest rates in the United States and the rest of the world, a significant act of terrorism which disrupts global trade or consumer confidence, geopolitical tensions including war and civil unrest, reduced levels of economic activity, or disruptions of international transportation.

 

Typically, our ability to meet our revenue and profitability goals and projections is dependent to a large extent on the orders we receive from our customers within the period and by our ability to match inventory and current production mix with the product mix required to fulfill orders on hand and orders received within a period for delivery in that period.  Because of this complexity in our business, no assurance can be given that we will achieve a match of inventory on hand, production units, and shippable orders sufficient to realize quarterly or annual revenue and net income goals.

 

Volatility in customer demand in the semiconductor industry could affect future levels of revenue and profitability and limit our ability to predict such levels.

 

Historically, we have maintained low lead times, which have enabled customers to place orders close to their true needs for product. In defining our financial goals and projections, we consider inventory on hand, backlog, production cycles and expected order patterns from customers.  If our estimates in these areas become inaccurate, we may not be able to meet our revenue goals and projections.  In addition, some customers require us to manufacture product and have it available for shipment, even though the customer is unwilling to make a binding commitment to purchase all, or even some, of the products.  As a result, in any quarterly fiscal period we are subject to the risk of cancellation of orders leading to a fall-off of revenue and backlog.  Further, those orders may be for products that meet the customer's unique requirements so that those cancelled orders would, in addition, result in an inventory of unsalable products, and thus potential inventory write-offs.  We routinely estimate inventory reserves required for such products, but actual results may differ from these reserve estimates.

 

We generate revenue from thousands of customers worldwide and our revenues are diversified by end-market and geographical region.  Our results in any period, or sequence of periods, may be positively affected by the fact that a customer has designed one of our products into one of their high selling products.  This positive effect may not last, however, as our customers frequently redesign their high selling products, especially to lower their products' costs.  In such redesigns, they may decide to no longer use our product or may seek pricing terms from us that we choose not to accede to, thus resulting in the customer ceasing or significantly decreasing its purchases from us.  The loss of, or a significant reduction in purchases by a portion of our customer base, for this or other reasons, such as changes in purchasing practices, could adversely affect our results of operations.  In addition, the timing of customers' inventory adjustments may adversely affect our results of operations.

 

We may be unsuccessful in developing and selling new products required to maintain or expand our business.

 

The markets for our products depend on continued demand for our products in the communications, industrial, computer, high-end consumer and automotive end-markets. The semiconductor industry is characterized by rapid technological change, variations in manufacturing efficiencies of new products, and significant expenditures for capital equipment and product development.  New product offerings by competitors and customer demands for increasing linear integrated circuit performance or lower prices may render our products less competitive over time, thus necessitating our continual development

15


 

of new products.  New product introductions are thus a critical factor for maintaining or increasing future revenue growth and sustained or increased profitability, but they can present significant business challenges because product development commitments and expenditures must be made well in advance of the related revenues.  The success of a new product depends on a variety of factors including accurate forecasts of long-term market demand and future technological developments, accurate anticipation of competitors' actions and offerings, timely and efficient completion of process design and development, timely and efficient implementation of manufacturing and assembly processes, product performance, quality and reliability of the product, and effective marketing, revenue and service.

 

Although we believe that the high performance segment of the linear integrated circuit market is generally less affected by price erosion or by significant expenditures for capital equipment and product development than other semiconductor market sectors, future operating results may reflect substantial period-to-period fluctuations due to these or other factors.

 

In addition, with respect to our acquisition of Dust Networks, we may not achieve benefits we expected to achieve, and we may incur write-downs, impairment charges or unforeseen liabilities that could negatively affect our operating results or financial position or could otherwise harm our business.

 

Our manufacturing operations may be interrupted or suffer yield problems.

 

We rely on our internal manufacturing facilities located in California and Washington to fabricate most of our wafers. We depend on outside silicon foundries for a small portion (roughly 5%) of our wafer fabrication. We could be adversely affected in the event of a major earthquake, which could cause temporary loss of capacity, loss of raw materials, and damage to manufacturing equipment.  Additionally, we rely on our internal and external assembly and testing facilities located in Singapore and Malaysia.  We are subject to economic and political risks inherent to international operations, including changes in local governmental policies, currency fluctuations, transportation delays and the imposition of export controls or import tariffs. We could be adversely affected if any such changes are applicable to our foreign operations.

 

Our manufacturing yields are a function of product design and process technology, both of which are developed by us.  The manufacture and design of integrated circuits is highly complex.  We may experience manufacturing problems in achieving acceptable yields or experience product delivery delays in the future as a result of, among other things, capacity constraints, equipment malfunctioning, construction delays, upgrading or expanding existing facilities or changing our process technologies, any of which could result in a loss of future revenues or increases in fixed costs.  To the extent we do not achieve acceptable manufacturing yields or there are delays in wafer fabrication, our results of operations could be adversely affected.  In addition, operating expenses related to increases in production capacity may adversely affect our operating results if revenues do not increase proportionately.

 

Our dependence on third party foundries and other manufacturing subcontractors may cause delays beyond our control in delivering our products to our customers.

 

A portion of our wafers (approximately 15%-20%) are processed offshore by independent assembly subcontractors primarily located in Thailand.  These subcontractors separate wafers into individual circuits and assemble them into various finished package types.  During periods of increasing demand and volatile lead times, sub-contractors can become over committed and therefore unable to meet all of their customer demand requirements thereby causing inconsistencies in availability of supply. In addition, reliability problems experienced by our assemblers could cause problems in delivery and quality, resulting in potential product liability to us.  We could also be adversely affected by political disorders, labor disruptions, and natural disasters in these locations.

 

We are dependent on outside silicon foundries for a small portion (roughly 5%) of our wafer fabrication.  As a result, we cannot directly control delivery schedules for these products, which could lead to product shortages, quality assurance problems and increases in the cost of our products.  We may experience delays in delivering our products to our customers.  If these foundries are unable or unwilling to produce adequate supplies of processed wafers conforming to our quality standards, our business and relationships with our customers for the limited quantities of products produced by these foundries could be adversely affected.  Finding alternate sources of supply or initiating internal wafer processing for these products may not be economically feasible.  In addition, the manufacture of our products is a highly complex and precise process, requiring production in a highly controlled environment.  Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by a third party foundry could adversely affect the foundry's ability to achieve acceptable manufacturing yields and product reliability.

 

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We rely on third party vendors for materials, supplies, critical manufacturing equipment and freight services that may not have adequate capacity or may be impacted by outside influences such as natural disasters or material sourcing that could impact our product delivery requirements.

 

The semiconductor industry has experienced a very large expansion of fabrication capacity and production worldwide over time. As a result of increasing demand from semiconductor and other manufacturers, availability of certain basic materials and supplies, such as chemicals, gases, polysilicon, silicon wafers, ultra-pure metals, lead frames and molding compounds, and subcontract services, like epitaxial growth, ion implantation and assembly of integrated circuits into packages, have from time to time, over the past several years, been in short supply and could come into short supply again if overall industry demand continues to increase in the future. In addition, from time to time natural disasters can lead to a shortage of some of the above materials due to disruption of the manufacturer's production.  We do not have long-term agreements providing for all of these equipment, materials, supplies, and services, and shortages could occur as a result of capacity limitations or production constraints on suppliers that could have a materially adverse effect on our ability to achieve our planned production.

 

A number of our products use components that are purchased from third parties.  Supplies of these components may not be sufficient to meet all customer requested delivery dates for products containing these components, which could adversely affect future revenue and earnings.  Additionally, significant fluctuations in the purchase price for these components could affect gross margins for the products involved.  Suppliers could also discontinue the manufacture of such purchased components or could have quality problems that could affect our ability to meet customer commitments.

 

Our manufacturing processes rely on critical manufacturing equipment purchased from third party suppliers. During periods of increasing demand we could experience difficulties or delays in obtaining additional critical manufacturing equipment.  In addition, suppliers of semiconductor manufacturing equipment are sometimes unable to deliver test and/or fabrication equipment to a schedule or equipment performance specification that meets our requirements.  Delays in delivery of equipment needed for growth could adversely affect our ability to achieve our manufacturing and revenue plans in the future.

 

We rely on third parties including freight forwarders, airlines, and ground transportation companies to deliver our products to customers. Interruptions in the ability of these third parties to deliver our products to customers due to geological events such volcanic eruptions, earthquakes, hurricanes or other such natural disasters may cause a temporary delay in meeting our shipping estimates and schedules.

 

We are exposed to business, economic, political and other risks through our significant worldwide operations.

 

During fiscal year 2014, 73% of our revenues were derived from customers in international markets. In addition, we have test and assembly facilities in Singapore and Malaysia. Accordingly, we are subject to the economic and political risks inherent in international revenue and operations and their impact on the United States economy in general, including the risks associated with ongoing uncertainties and political and economic instability in many countries around the world, economic disruption from financial and economic declines or turmoil, dysfunction in the credit markets, acts of terrorism, natural disasters or the response to any of the foregoing by the United States and other major countries. In past years, natural disasters in Japan and Thailand have affected the global marketplace.

 

We may be unable to adequately protect our proprietary rights, which may impact our ability to compete effectively.

 

Our success depends in part on our proprietary technology. While we attempt to protect our proprietary technology through patents, copyrights and trade secret protection, we believe that our success also depends on increasing our technological expertise, continuing our development of new products and providing comprehensive support and service to our customers.  However, we may be unable to protect our technology in all instances, or our competitors may develop similar or more competitive technology independently.  We currently hold a number of United States and foreign patents and pending patent applications.  However, other parties may challenge or attempt to invalidate or circumvent any patents the United States or foreign governments issue to us or these governments may fail to issue patents for pending applications.  In addition, the rights granted or anticipated under any of these patents or pending patent applications may be narrower than we expect or provide no competitive advantages.  Furthermore, effective patent, trademark, copyright, maskwork and trade secret protection may be unavailable, limited or not applied for in certain foreign countries. We may incur significant legal costs to protect our intellectual property.

 

We also seek to protect our proprietary technology, including technology that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors' rights agreements with our collaborators, advisors, employees and consultants.  We cannot assure you that these agreements will always be entered into or will not be breached or that we will have adequate remedies for any breach.

17


 

 

We have received, and may receive in the future, notices of claims of infringement and misappropriation of other parties' proprietary rights.  In the event of an adverse decision in a patent, trademark, copyright, maskwork or trade secret action, we could be required to withdraw the product or products found to be infringing from the market or redesign products offered for sale or under development.  Whether or not these infringement claims are successfully asserted, we would likely incur significant costs and diversion of our resources with respect to the defense of these claims.  In the event of an adverse outcome in any litigation, we may be required to pay substantial damages, including enhanced damages for willful infringement, and incur significant attorneys' fees, as well as indemnify customers for damages they might suffer if the products they purchase from us infringe intellectual property rights of others.  We could also be required to stop our manufacture, use, sale or importation of infringing products, expend significant resources to develop or acquire non-infringing technology, discontinue the use of some processes, or obtain licenses to intellectual property rights covering products and technology that we may, or have been found to, infringe or misappropriate such intellectual property rights.

 

Our products may contain defects that could affect our results of operations.

 

Our products may contain undetected errors or defects.  Such problems may cause delays in product introductions and shipments, result in increased costs and diversion of development resources, cause us to incur increased charges due to obsolete or unusable inventory, require design modifications, or decrease market acceptance or customer satisfaction with these products, which could result in loss of sales or product returns.  In addition, we may not find defects or failures in our products until after commencement of commercial shipments, which may result in loss or delay in market acceptance that could significantly harm our operating results.  Our current or potential customers also might seek to recover from us any losses resulting from defects or failures in our products; further, such claims might be significantly higher than the revenues and profits we receive from those of our products involved as we are usually a component supplier with limited value content relative to the value of a complete system or sub-system.  In most cases we have contractual provisions in our customer contracts that seek to limit our liability to the replacement of the defective parts shipped.  Nonetheless, liability claims could require us to spend significant time and money in litigation or to pay significant damages for which we may have insufficient insurance coverage.  Any of these claims, whether or not successful, could seriously damage our reputation and business.

 

If we fail to attract and retain qualified personnel, our business may be harmed.

 

Our performance is substantially dependent on the performance of our executive officers and key employees.  The loss of the services of key officers, technical personnel or other key employees could harm the business.  Our success depends on our ability to identify, hire, train, develop and retain highly qualified technical and managerial personnel.  Failure to attract and retain the necessary technical and managerial personnel could harm us.

 

We may not be able to compete successfully in markets within the semiconductor industry in the future.

 

We compete in the high performance segment of the linear integrated circuit market. Our competitors include among others, Analog Devices, Inc., Intersil, Maxim Integrated Products, Inc. and Texas Instruments, Inc. Competition among manufacturers of linear integrated circuits is intense, and certain of our competitors have significantly greater financial, technical, manufacturing and marketing resources than us.  The principal elements of competition include product performance, functional value, quality and reliability, technical service and support, price, diversity of product line and delivery capabilities. We believe we compete favorably with respect to these factors, although we may be at a disadvantage in comparison to larger companies with broader product lines and greater technical service and support capabilities.

 

Environmental liabilities could force us to expend significant capital and incur substantial costs.

 

Federal, state and local regulations impose various environmental controls on the storage, use, discharge and disposal of certain chemicals and gases used in semiconductor processing.  Our facilities have been designed to comply with these regulations, and we believe that our activities conform to present environmental regulations.  Increasing public attention has, however, been focused on the environmental impact of electronics manufacturing operations.  While we to date have not experienced any materially adverse business effects from environmental regulations, there can be no assurance that changes in such regulations will not require us to acquire costly remediation equipment or to incur substantial expenses to comply with such regulations.  Any failure by us to control the storage, use or disposal of, or adequately restrict the discharge of hazardous substances could subject us to significant liabilities.

 

We are subject to a variety of domestic and international laws and regulations, including the use of "conflict minerals", U.S. Customs and Export Regulations and the Foreign Corrupt Practices Act.

 

18


 

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Act"), the SEC has promulgated disclosure requirements regarding the use of certain minerals (tantalum, tin, tungsten and gold), which are mined from the Democratic Republic of Congo and adjoining countries, known as conflict minerals.  Certain of the Company’s products contain gold, tungsten and tin.  As a result of the Act, the Company must annually publicly disclose whether it manufactures (as defined in the Act) any products that contain conflict minerals.  Additionally, customers typically rely on the Company to provide critical data regarding the parts they purchase, including conflict mineral information.  The Company's material sourcing is broad-based and multi-tiered, and it is difficult to verify the origins for conflict minerals used in the products it sells. The Company has many suppliers and each provides conflict mineral information in a different manner, if at all. Accordingly, because the supply chain is complex, the Company may face reputational challenges if it is unable to sufficiently verify the origins of conflict minerals used in its products.  Additionally, customers may demand that the products they purchase be free of conflict minerals. This may limit the number of suppliers that can provide products in sufficient quantities to meet customer demand or at competitive prices.

 

Among other laws and regulations, the Company is also subject to U.S. Customs and Export Regulations, including U.S. International Traffic and Arms Regulations and similar laws, which collectively control import, export and sale of technologies by companies and various other aspects of the operation of the Company’s business, and the Foreign Corrupt Practices Act and similar anti-bribery laws, which prohibit companies from making improper payments to government officials for the purposes of obtaining or retaining business.  While the Company’s policies and procedures mandate compliance with such laws and regulations, there can be no assurance that the Company’s employees and agents will always act in strict compliance. Failure to comply with such laws and regulations may result in civil and criminal enforcement, including monetary fines and possible injunctions against shipment of product or other activities of the Company, which could have a material adverse impact on the Company’s results of operations and financial condition.

 

Our financial results may be adversely affected by increased tax rates and exposure to additional tax liabilities.

 

As a global company, our effective tax rate is highly dependent upon the geographic composition of our worldwide earnings and tax regulations governing each region.  We are subject to income taxes in both the United States and various foreign jurisdictions, and significant judgment is required to determine worldwide tax liabilities.  We have a partial tax holiday through July 2015 in Malaysia which we expect to extend if certain conditions are met and a partial tax holiday in Singapore through August 2019.  Our effective tax rate as well as the actual tax ultimately payable could be adversely affected by changes in the split of earnings between countries with differing statutory tax rates, in the valuation of deferred tax assets, in tax laws or by material audit assessments, which could affect our profitability.  In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect our profitability. Finally, jurisdictions could change their tax regulations to include profits that were previously exempt.

 

We have not provided for U.S. federal and state income taxes on a portion of our undistributed earnings of our non-U.S. subsidiaries that are considered permanently reinvested outside the United States.  If in the future we decide to repatriate such foreign earnings to fund U.S. operations, we would incur incremental U.S. federal and state income taxes.  However, it is our intent to keep these funds permanently reinvested outside of the United States and current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

 

Our stock price may be volatile.

 

The trading price of our common stock may be subject to wide fluctuations. Our stock price may fluctuate in response to a number of events and factors, such as general United States and world economic and financial conditions, our own quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to us, the hedging of our common stock and other derivative transactions by third parties, and new reports relating to trends in our markets or those of our customers.  Additionally, lack of positive performance in our stock price may adversely affect our ability to retain key employees.

 

The stock market in general, and prices for companies in our industry in particular, has experienced extreme volatility that often has been unrelated to the operating performance of a particular company.  These broad market and industry fluctuations may adversely affect the price of our common stock, regardless of our operating performance.

 

Our certificate of incorporation and by-laws include anti-takeover provisions that may enable our management to resist an unwelcome takeover attempt by a third party.

 

19


 

Our organizational documents and Delaware law contain provisions that might discourage, delay or prevent a change in control of our company or a change in our management.  Our Board of Directors may also choose to adopt further anti-takeover measures without stockholder approval.  The existence and adoption of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.

 

 

ITEM 1B.     UNRESOLVED STAFF COMMENTS

 

None

20


 

ITEM 2.     PROPERTIES

 

At June 29, 2014, the Company owned the major facilities described below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No. of Bldgs

 

Location

 

Total Sq. Ft

 

Use

 

6

 

Milpitas, California

 

430,000 

 

Executive and administrative offices, wafer fabrication, test and assembly operations, research and development, sales and marketing, and warehousing and distribution

 

 

 

 

 

 

 

 

 

1

 

Camas, Washington

 

105,000 

 

Wafer fabrication

 

1

 

Chelmsford, Massachusetts

 

30,000 

 

Research and development; sales and administration

 

1

 

Colorado Springs, Colorado

 

20,000 

 

Research and development

 

1

 

Auburn, New Hampshire

 

20,000 

 

Research and development

 

1

 

Raleigh, North Carolina

 

20,000 

 

Research and development; sales and administration

 

2

 

Singapore (A)

 

260,000 

 

Test and packaging operations, warehousing and distribution, research and development, and sales and administration

 

1

 

Malaysia (B)

 

338,000 

 

Assembly operations, research and development

 

 

(A)           Leases on the land used for this facility expire in 2021 through 2022 with an option to extend the lease for an additional 30 years.

 

(B)           Leases on the land used for this facility expire in 2054 through 2057.

 

The Company leases design facilities located in: Burlington, Vermont; Santa Barbara, California; Grass Valley, California; Phoenix, Arizona; Dallas, Texas; Munich, Germany; and Hangzhou, China. The Company leases sales offices in the United States in the areas of Chicago, Cleveland, Minneapolis, Philadelphia, Sacramento, San Jose, Denver, Portland, Seattle, Austin, Irvine, Los Angeles and San Diego; and internationally in London, Stockholm, Helsinki, Dortmund, Munich, Stuttgart, Paris, Milan, Sydney, Tokyo, Nagoya, Osaka, Taipei, Singapore, Seoul, Hong Kong, Beijing, Shanghai, Shenzhen, Chengdu, Xian, Wuhan and Bangalore.  See Note 11 of Notes to Consolidated Financial Statements contained in this Form 10-K.  The Company believes that its existing facilities are suitable and adequate for its business purposes through fiscal year 2014.

 

ITEM 3.     LEGAL PROCEEDINGS

 

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business on a wide range of matters, including, among others, patent suits and employment claims.  The Company does not believe that any such current suits will have a material impact on its business or financial condition.  However, current lawsuits and any future lawsuits will divert resources and could result in the payment of substantial damages.

 

ITEM 4.     MINE SAFETY DISCLOSURES

 

None

 

PART II

 

ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Item 12 of this Form 10-K.

 

The following table sets forth certain information with respect to common stock purchased by the Company for the three-month period ended June 29, 2014.  For the majority of restricted stock awards and units granted, the number of shares issued on the date the restricted stock awards and units vest is net of the minimum statutory tax withholding requirements that the Company pays in cash to the appropriate taxing authorities on behalf of its employees.  These withheld shares are not

21


 

included in the common stock repurchase totals in the following table, even though they are treated as common stock repurchases in our financial statements because they reduce the number of shares that would have been issued upon vesting.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of Shares

 

Maximum Number of

 

 

 

Total Number

 

Average

 

Purchased as Part of

 

Shares that May Yet be

 

 

 

of Shares

 

Price Paid

 

Publicly Announced

 

Purchased Under the

 

Period

 

Purchased

 

per Share

 

Plans or Programs

 

Plans or Programs (1)

 

Month #1 (March 31, 2014 – April 27, 2014)

 

 —

 

$

 —

 

 —

 

7,613,980 

 

Month #2 (April 28, 2014 - May 25, 2014)

 

650,000 

 

 

44.55 

 

650,000 

 

6,963,980 

 

Month #3 (May 26, 2014 – June 29, 2014)

 

 —

 

 

 —

 

 —

 

6,963,980 

 

Total

 

650,000 

 

$

44.55 

 

650,000 

 

6,963,980 

 

 

(1) On October 16, 2012, the Company’s Board of Directors authorized the Company to purchase up to 10.0 million shares of its outstanding common stock in the open market over a two-year time period.

22


 

Stock Performance Graph

 

The following graph presents a comparison of the cumulative total stockholder return on the Company’s stock with the cumulative total return of the S&P 500 and the Philadelphia Semiconductor Index for the period of five years commencing June 28, 2009 and ending June 29, 2014.  The graph assumes that $100 was invested on June 28, 2009 in each of Linear Technology common stock, the S&P 500 Index, and the Philadelphia Semiconductor Index.

 

Picture 5

 

 

ITEM 6.     SELECTED FINANCIAL DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FIVE FISCAL YEARS ENDED June 29, 2014

 

2014

 

2013

 

2012

 

2011

 

2010

 

In thousands, except per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income statement information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,388,386 

 

$

1,282,236 

 

$

1,266,621 

 

$

1,483,962 

 

$

1,169,988 

 

Net income

 

 

459,961 

 

 

406,925 

 

 

398,111 

 

 

580,782 

 

 

361,341 

 

Basic earnings per share

 

$

1.91 

 

$

1.72 

 

$

1.71 

 

$

2.52 

 

$

1.59 

 

Diluted earnings per share

 

 

1.90 

 

 

1.71 

 

 

1.70 

 

 

2.50 

 

 

1.58 

 

Weighted average shares outstanding – Basic

 

 

240,498 

 

 

236,703 

 

 

233,013 

 

 

230,806 

 

 

227,723 

 

Weighted average shares outstanding – Diluted

 

 

242,551 

 

 

237,753 

 

 

234,298 

 

 

232,772 

 

 

228,860 

 

Balance sheet information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and marketable securities

 

$

1,012,787 

 

$

1,524,741 

 

$

1,203,059 

 

$

922,537 

 

$

958,069 

 

Total assets

 

 

1,655,578 

 

 

2,098,341 

 

 

1,851,068 

 

 

1,594,066 

 

 

1,590,718 

 

Convertible senior notes

 

 

 —

 

 

826,629 

 

 

805,599 

 

 

785,732 

 

 

1,159,886 

 

Cash dividends per share

 

$

1.06 

 

$

1.02 

 

$

0.98 

 

$

0.94 

 

$

0.90 

 

 

 

 

23


 

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Linear Technology Corporation, a member of the S&P 500, has been designing, manufacturing and marketing a broad line of high performance analog integrated circuits for major companies worldwide for over three decades. The Company's products provide an essential bridge between our analog world and the digital electronics in communications, networking, industrial, automotive, computer, medical, instrumentation, consumer, and military and aerospace systems. Linear Technology produces power management, data conversion, signal conditioning, RF and interface ICs, µModule® subsystems, and wireless sensor network products.

 

Quarterly revenues of $365.4 million for the fourth quarter of fiscal year 2014 increased $17.4 million or 5.0% over the previous quarter's revenue of $348.0 million and increased $38.2 million or 11.7% over $327.3 million reported in the fourth quarter of fiscal year 2013.  Net income of $129.7 million increased $12.1 million or 10.3% over the third quarter of fiscal year 2014 and increased $27.8 million or 27.3% over the fourth quarter of fiscal year 2013.  Diluted earnings per share of $0.53 per share in the fourth quarter of fiscal year 2014 increased $0.05 per share or 10.4% over the third quarter of fiscal year 2014 and increased $0.10 per share or 23.3% over the fourth quarter of fiscal year 2013. 

 

Revenue for fiscal year 2014 was $1,388.4 million, an increase of 8.3% or $106.2 million over revenue of $1,282.2 million in the prior fiscal year.  Net income of $460.0 million for fiscal year 2014 increased $53.0 million or 13.0% over $406.9 million reported in the previous fiscal year. The results for fiscal year 2014 benefited from lower interest expense as a result of the Convertible Senior Note conversion in May 2014 offset by a slightly higher effective tax rate of 23.5% compared to 23.1% in fiscal year 2013. Diluted earnings per share for fiscal year 2014 was $1.91, an increase of $0.19 per share or 11.1% over the prior fiscal year. 

 

Critical Accounting Policies

 

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require it to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The Company regularly evaluates these estimates, including those related to inventory valuation, revenue recognition and income taxes. These estimates are based on historical experience and on assumptions that are believed by management to be reasonable under the circumstances. Actual results may differ from these estimates, which may impact the carrying values of assets and liabilities.

 

The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.

 

Revenue Recognition

 

The Company recognizes revenues when the earnings process is complete, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection is reasonably assured.  During fiscal years 2014 and 2013, the Company recognized approximately 15% of net revenues from domestic distributors that are recognized under agreements which provide for certain sales price rebates and limited product return privileges.  Given the uncertainties associated with the levels of pricing rebates, the ultimate sales price on domestic distributor sales transactions is not fixed or determinable until domestic distributors sell the merchandise to the end-user.  At the time of shipment to domestic distributors, the Company records a trade receivable and deferred revenue at the distributor purchasing price since there is a legally enforceable obligation from the distributor to pay for the products delivered.  The Company relieves inventory as title has passed to the distributor and recognizes deferred cost of sales in the same amount. “Deferred income on shipments to distributors” represents the difference between deferred revenue and deferred cost of sales and is recognized as a current liability until such time as the distributor confirms a final sale to its end customer.  At June 29, 2014, the Company had approximately $56.8 million of deferred revenue and $11.2 million of deferred cost of sales recognized as $45.6 million of “Deferred income on shipments to distributors.” At June 30, 2013, the Company had approximately $54.8 million of deferred revenue and $10.7 million of deferred cost of sales recognized as $44.1 million of “Deferred income on shipments to distributors.”  The Company believes that its deferred costs of revenues have limited risk of material impairment, as the Company offers stock rotation privileges to distributors (up to 3% to 5% of quarterly purchases) which enable distributors to rotate slow moving inventory. In addition, stock rotated inventory that is returned to the Company is generally resalable.  The Company reviews distributor ending on-hand inventory balances, as well as orders placed on the Company to ensure that distributors are not overstocking parts and are ordering to forecasted demand. To the extent the Company were to

24


 

have a significant reduction in distributor price or grant significant price rebates, there could be a material impact on the ultimate revenue and gross profit recognized. The price rebates that have been remitted back to distributors have ranged from $2.7 million to $4.2 million per quarter.

 

The Company’s sales to international distributors are made under agreements which permit limited stock return privileges but not sales price rebates.  Revenue on these sales is recognized upon shipment at which time title passes.  The Company has reserves to cover expected product returns.  If product returns for a particular fiscal period exceed or are below expectations, the Company may determine that additional or less sales return allowances are required to properly reflect its estimated exposure for product returns.  Generally, changes to sales return allowances have not had a significant impact on operating margin.

 

Inventory Valuation

 

The Company values inventories at the lower of cost or market.  The Company records charges to write-down inventories for unsalable, excess or obsolete raw materials, work-in-process and finished goods.  Newly introduced parts are generally not valued until success in the market place has been determined by a consistent pattern of sales and backlog among other factors.  The Company arrives at the estimate for newly released parts by analyzing sales and customer backlog against ending inventory on hand.  The Company reviews the assumptions on a quarterly basis and makes decisions with regard to inventory valuation based on the current business climate.  In addition to write-downs based on newly introduced parts, judgmental assessments are calculated for the remaining inventory based on salability, obsolescence, historical experience and current business conditions.  If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that could adversely affect operating results. If actual market conditions are more favorable, the Company may have higher gross margins when products are sold.  Sales to date of such products have not had a significant impact on gross margin.

 

Income Taxes

 

The Company must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, tax benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to the tax provision in a subsequent period.

 

The calculation of the Company’s tax liabilities involves uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on the two-step process prescribed in the authoritative accounting literature. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires the Company to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as the Company has to determine the probability of various possible outcomes.  The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. Refer to Note 11 of Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for a discussion of current tax matters.

 

 

25


 

Results of Operations

 

The table below presents the income statement items as a percentage of revenues and provides the percentage change of such items in dollars compared to the prior fiscal year amount.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended

 

Percentage Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 29,

 

June 30,

 

July 1,

 

2014 Over

 

2013 Over

 

 

 

2014

 

2013

 

2012

 

2013

 

2012

 

Revenues

 

100.0 

%

 

100.0 

%

 

100.0 

%

 

%

 

%

 

Cost of sales

 

24.4 

 

 

25.2 

 

 

24.7 

 

 

 

 

 

 

Gross margin

 

75.6 

 

 

74.8 

 

 

75.3 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research & development

 

18.0 

 

 

18.3 

 

 

17.7 

 

 

 

 

 

 

Selling, general & administrative

 

11.5 

 

 

11.8 

 

 

11.7 

 

 

 

 

 

 

 

 

29.5 

 

 

30.1 

 

 

29.4 

 

 

 

 

 

 

Operating margin

 

46.1 

 

 

44.7 

 

 

45.9 

 

 

12 

 

 

(2)

 

 

Interest expense

 

(3.0)

 

 

(3.8)

 

 

(3.8)

 

 

(15)

 

 

(2)

 

 

Acquisition related costs

 

 —

 

 

 —

 

 

(0.2)

 

 

 —

 

 

 —

 

 

Interest and other income

 

0.2 

 

 

0.3 

 

 

0.4 

 

 

(34)

 

 

(11)

 

 

Income before income taxes

 

43.3 

%

 

41.2 

%

 

42.3 

%

 

14 

 

 

(1)

 

 

Tax rate

 

23.5 

%

 

23.1 

%

 

25.7 

%

 

 

 

 

 

 

 

 

 Fiscal year 2014 revenues of $1,388 million increased $106.2 million or 8% over revenues of $1,282 million in fiscal year 2013.  Fiscal year 2014 revenues increased over the prior fiscal year due to increases in revenues in the Industrial, Automotive, Communication and Consumer end-markets partially offset by lower revenues in the Computer and Military end-markets. The Company continues to reduce its exposure to the Consumer and cell-phone end-markets in favor of the Industrial, Automotive, Communication infrastructure and Military end-markets.  The Company's bookings in the Industrial, Automotive, Communication infrastructure, and Military end-markets in aggregate were 88% of bookings in fiscal year 2014, as compared to 86% of bookings for fiscal year 2013 and 84% in fiscal 2012.

 

Revenues in fiscal year 2014 increased over the prior fiscal year due to an increase in the number of units shipped while the average selling price (“ASP”) remained flat. The number of units shipped in fiscal year 2014 increased 9% to 753.8 million units over 691.0 million units in the fiscal year 2013.  The ASP of $1.84 per unit in fiscal years 2014 was flat compared to fiscal year 2013.

 

Revenues in fiscal year 2014 increased in each major geographic region.  International revenues were $1,010.3 million or 73% of revenues in fiscal year 2014, an increase of $97.8 million over international revenues of $912.5 million or 71% of revenues in the previous fiscal year.  Internationally, sales to Rest of World (“ROW”) represented $520.3 million or 38% of revenues, while sales to Europe and Japan were $267.2 million or 19% of revenues and $222.8 million or 16% of revenues, respectively.  Domestic revenues were $378.1 million or 27% of revenues in fiscal year 2014, an increase of $8.4 million over domestic revenues of $369.7 million or 29% of revenues in fiscal year 2013.

 

Fiscal year 2013 revenues of $1,282 million increased $15.6 million or 1% over revenues of $1,267 million in fiscal year 2012.  Fiscal year 2013 revenues increased over the prior fiscal year due to increases in revenues in the Industrial and Automotive end-markets partially offset by lower revenues in the Communication and Consumer end-markets. The Company's Computer and Military end-market revenues were generally unchanged from the prior year. The Company's bookings in the Industrial, Automotive, Communication infrastructure, and Military end-markets in aggregate were 86% of bookings in fiscal year 2013, as compared to 82% of bookings for fiscal year 2011, 76% in fiscal 2010, and 64% in fiscal 2005.

 

Revenues in fiscal year 2013 increased over the prior fiscal year due to an increase in the ASP while the number of units shipped was down slightly.  The ASP for fiscal year 2013 increased $0.03 or 2% to $1.84 per unit in fiscal year 2013 over $1.81 per unit in fiscal year 2012.  The number of units shipped was down slightly to 691.0 million units in fiscal year 2013 from 692.1 million units in the fiscal year 2012.   

26


 

 

Geographically, revenues in fiscal year 2013 increased in ROW and the United States offset by decreases in Japan and Europe. International revenues were $912.5 million or 71% of revenues in fiscal year 2013, an increase of $12.4 million over international revenues of $900.1 million or 71% of revenues in the previous fiscal year.  Internationally, sales to ROW represented $486.8 million or 38% of revenues, while sales to Europe and Japan were $235.3 million or 18% of revenues and $190.4 million or 15% of revenues, respectively.  Domestic revenues were $369.7 million or 29% of revenues in fiscal year 2013, an increase of $3.2 million over domestic revenues of $366.5 million or 29% of revenues in fiscal year 2012.

 

Gross profit for fiscal year 2014 was $1,049.8 million, an increase of $90.1 million or 9% over gross profit of $959.7 million in fiscal year 2013.  Gross margin increased to 75.6% in fiscal year 2014 as compared to 74.8% in fiscal year 2013.  The increase in gross margin in fiscal year 2014 was primarily due to spreading fixed costs over a higher sales base.

 

Gross profit for fiscal year 2013 was $959.7 million, an increase of $5.6 million or 1% over gross profit of $954.1 million in fiscal year 2012.  Gross margin decreased to 74.8% in fiscal year 2013 as compared to 75.3% in fiscal year 2012.  The decrease in gross margin in fiscal year 2013 was primarily due to a slight change in mix of products sold and higher factory costs primarily due to stronger foreign currencies partially offset by slightly higher ASP's and lower royalty costs.

 

Research and development (“R&D”) expense for fiscal year 2014 was $250.4 million, an increase of $15.2 million or 6% over R&D expense of $235.2 million in fiscal year 2013.  The increase in R&D expense was primarily due to an $8.0 million increase in compensation costs as a result of increases in headcount, annual salary increases and increases in related fringe benefit costs.  In addition, employee profit sharing increased $4.5 million and employee stock-based compensation costs increased $0.7 million.  Other R&D expense increased $2.0 million primarily due to patent fees and travel costs.

 

R&D expense for fiscal year 2013 was $235.2 million, an increase of $10.7 million or 5% over R&D expense of $224.5 million in fiscal year 2012.  The increase in R&D expense was primarily due to a $6.3 million increase in compensation costs due to increased headcount from the acquisition of Dust Networks ("Dust") that occurred at the end of the second quarter of fiscal 2012, annual salary increases and increases in related fringe benefit costs.  In addition, stock-based compensation costs increased $1.5 million and employee profit sharing increased $0.6 million.  Other R&D expense increased $2.3 million primarily due to $1.6 million in intangible asset amortization and retention bonus costs related to the Dust acquisition as well as an increase in mask costs of $0.6 million.

 

Selling general and administrative (“SG&A”) expense for fiscal year 2014 was $159.6 million, an increase of $8.2 million or 5% over SG&A expense of $151.4 million in fiscal year 2013.   The increase in SG&A expense was primarily due to a $4.8 million increase in compensation costs primarily due to annual salary increases, commission costs and increases in related fringe benefit costs. In addition, employee profit sharing increased $3.5 million and employee stock-based compensation increased $0.4 million.  These increases were partially offset by a $0.5 million decrease in other SG&A expenses primarily due to lower legal expenses.

 

SG&A expense for fiscal year 2013 was $151.4 million, an increase of $3.8 million or 3% over SG&A expense of $147.6 million in fiscal year 2012.   The increase in SG&A expense was primarily due to a $3.2 million increase in compensation costs primarily due to annual salary increases and increases in related fringe benefit costs. In addition, employee profit sharing increased $0.8 million and employee stock-based compensation increased $0.8 million.  Other SG&A expense decreased $1.0 million primarily due to lower legal expenses.

 

Interest expense for fiscal year 2014 was $41.2 million, a decrease of $7.1 million from $48.3 million in fiscal year 2013 due to the May 1, 2014 conversion of the Company's 3.00% Convertible Senior Notes (“Notes”). As a result of the conversion, holders of the Notes received the principal amount of $845.1 million in cash.  The remaining conversion premium was settled in shares of the Company’s common stock totaling approximately 2.9 million shares.  There was no gain or loss recognized as a result of the conversion.

 

Interest expense for fiscal year 2013 was $48.3 million, an increase of $0.8 million over $47.5 million in fiscal year 2012  primarily due to higher non-cash interest expense from the amortization of the discount on the Notes.

 

Interest and other income for fiscal year 2014 was $2.7 million, a decrease of $1.4 million or 34% from interest and other income of $4.1 million in fiscal year 2013.   Interest income decreased primarily due to a decrease in the average interest rate earned on the Company’s cash, cash equivalents and marketable securities balance and due to lower cash, cash equivalent and marketable securities balances as a result of the cash conversion of $845.1 million of the Notes on May 1, 2014.

 

27


 

Interest and other income for fiscal year 2013 was $4.1 million, a decrease of $0.5 million or 11% from interest and other income of $4.6 million in fiscal year 2012.   Interest income decreased due to a lower average interest rate earned on the Company's cash, cash equivalents and marketable securities balances partially offset by higher cash, cash equivalents and marketable securities balances.

 

The Company's effective income tax rate was 23.5% in fiscal year 2014 compared to 23.1% in fiscal year 2013.  The increase in the effective income tax rate from the prior year periods was primarily due to the expiration of the Federal Research and Development Tax Credit (“R&D Tax Credit”) that had occurred on December 31, 2013.  Accordingly, the annual effective tax rate for fiscal 2014 includes the benefit of the R&D Tax Credit for six months.  Excluding quarterly discrete tax adjustments, the Company estimates that its annual effective income tax rate for fiscal 2015 will be in the range of 25.5% to 26.5%.

 

The Company’s effective income tax rate was 23.1% in fiscal year 2013 compared to 25.7% in fiscal year 2012. The decrease in the effective tax rate from fiscal year 2012 to fiscal year 2013 was primarily due to discrete tax benefits recognized in the third quarter of fiscal year 2013.  During fiscal 2013, the Company's annual effective tax rate was positively impacted by the reinstatement of the federal R&D tax credit legislation commencing with the third quarter of fiscal 2013, which resulted in a discrete tax benefit of $4.5 million.  In addition, the Company recognized a $6.1 million discrete tax benefit in the third quarter primarily for the reversal of estimated liabilities for uncertain tax positions for the expiration of open tax years (i.e. fiscal years that are no longer subject to IRS audit). 

 

The Company's effective tax rate is lower than the federal statutory rate of 35% as a result of lower tax rates on the earnings of its wholly-owned foreign subsidiaries, principally in Singapore and Malaysia.  The Company has a partial tax holiday in Singapore through August 2019 and a partial tax holiday through July 2015 in Malaysia, which the Company expects to extend if certain conditions are met.  In addition, the Company receives tax benefits as a domestic manufacturer and from R&D tax credits when that benefit is in effect.

 

Factors Affecting Future Operating Results

 

Except for historical information contained herein, the matters set forth in this Annual Report on Form 10-K, including the statements in the following paragraphs, 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 a fiscal period, timely ramp-up of new facilities, the timely introduction of new processes and products; increases in costs associated with utilities, transportation and raw materials; currency fluctuations; the effects of adverse economic and financial conditions in the United States and throughout the world; and other factors described below and in “Item 1A – Risk Factors” section of this Annual Report on Form 10-K.

 

Quarterly revenues of $365.4 million for the fourth quarter of fiscal year 2014 increased $17.4 million or 5.0% sequentially over the third quarter of fiscal year 2014 due to increased revenues in each of the Company’s end-markets over the preceding sequential quarter led by the Industrial end-market. The Company maintained industry leading gross margin and operating margin, which increased to 76% and 47%, respectively.  During the fourth quarter the Company converted with internally generated funds its outstanding Notes with a principal value of $845.1 million, which led to lower interest expense for the period.

 

The Company believes it has good momentum heading into the new fiscal year and the book to bill ratio for the quarter was positive and improved over the previous quarter.  The Company is in a good position to grow in the core end-markets it serves and has the innovative products to take advantage of its positioning.  Historically, the Company’s first fiscal quarter is a seasonally weaker period, but given the current bookings levels and backlog the Company is currently forecasting revenue growth in its first quarter of fiscal year 2015 of 1% to 3% sequentially over the prior quarter which would be 8% to 11% on an annual basis over the same quarter in the prior fiscal year.

 

Liquidity and Capital Resources

 

At June 29, 2014, cash, cash equivalents and marketable securities totaled $1,012.8 million, a decrease of $512.0 million from the June 30, 2013 balance. The decrease was primarily due to the conversion of $845.1 million principal amount of the Company’s Notes on May 1, 2014; the payment of cash dividends of $255.3 million, representing $1.06 per share for fiscal year 2014; $81.8 million to purchase common stock, of which $54.3 million was used to purchase 1.3 million shares of the Company's common stock in the open market and $27.5 million was used to purchase 0.6 million shares to satisfy minimum statutory withholding requirements related to the vesting of employee restricted stock awards. Working capital at June 29, 2014 was $1,149.6 million. 

28


 

 

The Company’s accounts receivable balance of $173.3 million at the end of fiscal year 2014 increased $28.0 million over the June 30, 2013 balance of $145.3 million. The increase is primarily due to higher shipments in the fourth quarter of fiscal year 2014 as compared to the fourth quarter of fiscal year 2013.  Inventory totaled $91.3 million at the end of the fourth quarter of fiscal year 2014, an increase of $4.1 million over the prior year fourth quarter balance.  The increase in inventory was primarily due to an increase in the Company's work in process inventory, primarily diebank. The Company maintains a relatively high quantity of diebank inventory, which are unpackaged integrated circuits in wafer form, to maintain low lead-times on customer orders.  Current deferred tax assets increased $46.3 million over the fourth quarter of fiscal year 2013. In the prior fiscal year deferred tax assets were netted against deferred tax liabilities arising from the Notes.  As a result of the conversion of the Notes on May 1, 2014 the Company’s related current deferred tax liabilities arising from the Notes were partially reclassified to income taxes payable and the balance was charged against additional paid-in capital as required.

 

Net property, plant and equipment decreased $11.4 million from the fourth quarter of fiscal year 2013 due to $49.1 million of depreciation expense offset by fixed assets additions of $37.7 million.  Fixed asset additions of $37.7 million were made primarily to increase production at the Company’s Singapore and Penang facilities.

 

Convertible Senior Notes-current portion decreased $826.6 million due to the conversion of the 3.00% Convertible Senior Notes on May 1, 2014.  As a result of the conversion, holders of the Notes received the principal amount of $845.1 million in cash.  The remaining conversion premium was settled in shares of the Company’s common stock totaling approximately 2.9 million shares.  There was no gain or loss recognized as a result of the conversion.

 

As of June 29, 2014, the Company has not provided for U.S. federal and state income taxes on approximately $852 million which pertain to a portion of the undistributed earnings of non-U.S. subsidiaries, since such earnings are considered permanently reinvested outside the United States. If in the future the Company decides to repatriate such foreign earnings, the Company would incur incremental U.S. federal and state income taxes.  However, the Company's intent is to keep these funds permanently reinvested outside of the United States and current plans do not demonstrate a need to repatriate them to fund U.S. operations.

 

In July 2014, the Company’s Board of Directors declared a cash dividend of $0.27 per share.  The $0.27 per share dividend will be paid on August 27, 2014 to stockholders of record on August 15, 2014.  The payment of future dividends will be based on financial performance.

 

Historically, the Company has satisfied its liquidity needs through cash generated from operations.  Given its financial condition and historical operating performance, the Company believes that current capital resources and cash generated from operating activities should be sufficient to meet its liquidity and capital expenditures for the foreseeable future.

 

On October 23, 2013, the Company entered into a $100.0 million credit agreement by and between the Company and Wells Fargo Bank, National Association (the “Credit Agreement”).  The Company entered into the Credit Agreement to enhance cash deployment flexibility in connection with the conversion of its Notes and potential onshore cash requirements post conversion.  Presently, the Company has not utilized the Credit Agreement. For further information on the credit facility see Note 8 of Notes to Consolidated Financial Statements. 

 

Recently Issued Accounting Pronouncements

 

On May 28, 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 Revenue from Contracts with Customers (Topic 606), which will supersede most existing revenue recognition guidance under current US General Accepted Accounting Principles (“GAAP”). The new standard will become effective for the first annual fiscal period beginning after December 15, 2016; accordingly, the standard is effective for the Company beginning in fiscal year 2018, with no option to early adopt under US GAAP.  The core principle of ASU No. 2014-09 is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.  ASU No. 2014-09 provides for one of the two methods of transition: retrospective application to each prior period presented; or recognition of the cumulative effect of retrospective application of the new standard in the period of initial application.  The Company is currently evaluating the impact of ASU No. 2014-09 on its consolidated financial statements and which transition method to elect.

 

Contractual Obligations

 

The following table summarizes the Company’s significant contractual obligations at  June 29, 2014 and the effect such obligations are expected to have on the Company’s liquidity and cash flows in future periods.

29


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2019 and

 

 

 

Fiscal 2015

 

Fiscal 2016

 

Fiscal 2017

 

Fiscal 2018

 

thereafter

 

Operating lease obligations (1)

 

$

2,762 

 

$

2,235 

 

$

1,154 

 

$

764 

 

$

1,535 

 

$100.0 million Credit Agreement (2)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

2,762 

 

$

2,235 

 

$

1,154 

 

$

764 

 

$

1,535 

 

 

(1)

The Company leases some of its facilities under noncancelable operating leases that expire at various dates through fiscal 2057.  See Note 11 of Notes to Consolidated Financial Statement contained in this Form 10-K for additional information about operating leases.

(2)

During the second quarter of fiscal year 2014, the Company entered into a credit agreement with Wells Fargo Bank, National Association providing for a $100.0 million unsecured revolving line of credit.  Presently, the Company has not utilized the Credit Agreement. 

 

Off-Balance Sheet Arrangements

 

As of June 29, 2014, the Company had no off-balance sheet financing arrangements.

 

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company’s cash equivalents and marketable securities are subject to market risk, primarily interest rate and credit risk.  The Company’s investments are managed by outside professional managers within investment guidelines set by the Company.  Such guidelines include security type, credit quality and maturity and are intended to limit market risk by restricting the Company’s investments to high quality debt instruments with relatively short-term maturities.  The Company does not use derivative financial instruments in its investment portfolio. Based upon the weighted average duration of the Company’s investments at June 29, 2014, a hypothetical 100 basis point increase in short-term interest rates would result in an unrealized loss in market value of the Company’s investments totaling approximately $9.2 million.  However, because the Company’s debt securities are classified as available-for-sale, no gains or losses are recognized by the Company in its results of operations due to changes in interest rates unless such securities are sold prior to maturity.  These investments are reported at fair value with the related unrealized gains or losses reported in accumulated other comprehensive income, a component of stockholders’ deficit. The Company generally holds securities until maturity.

 

The Company’s sales outside the United States are transacted in U.S. dollars; accordingly, the Company’s sales are not generally impacted by foreign currency rate changes.

 

30


 

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

LINEAR TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE YEARS ENDED JUNE 29, 2014

 

2014

 

2013

 

2012

 

Revenues

 

$

1,388,386 

 

$

1,282,236 

 

$

1,266,621 

 

Cost of sales(1)

 

 

338,580 

 

 

322,516 

 

 

312,539 

 

Gross profit

 

 

1,049,806 

 

 

959,720 

 

 

954,082 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

Research and development (1)

 

 

250,434 

 

 

235,184 

 

 

224,467 

 

Selling, general and administrative(1)

 

 

159,642 

 

 

151,382 

 

 

147,579 

 

Total operating expenses

 

 

410,076 

 

 

386,566 

 

 

372,046 

 

Operating income

 

 

639,730 

 

 

573,154 

 

 

582,036 

 

Interest expense(2)

 

 

(41,168)

 

 

(48,343)

 

 

(47,517)

 

Acquisition related costs

 

 

 —

 

 

 —

 

 

(3,195)

 

Interest income and other income

 

 

2,706 

 

 

4,070 

 

 

4,586 

 

Income before income taxes

 

 

601,268 

 

 

528,881 

 

 

535,910 

 

Provision for income taxes

 

 

141,307 

 

 

121,956 

 

 

137,799 

 

Net income

 

$

459,961 

 

$

406,925 

 

$

398,111 

 

Basic earnings per share

 

$

1.91 

 

$

1.72 

 

$

1.71 

 

Shares used in the calculation of basic earnings per share

 

 

240,498 

 

 

236,703 

 

 

233,013 

 

Diluted earnings per share

 

$

1.90 

 

$

1.71 

 

$

1.70 

 

Shares used in the calculation of diluted earnings per share

 

 

242,551 

 

 

237,753 

 

 

234,298 

 

Cash dividends per share

 

$

1.06 

 

$

1.02 

 

$

0.98 

 

 

 

 

 

 

 

 

 

 

 

 

Includes the following non-cash charges:

 

 

 

 

 

 

 

 

 

 

(1) Stock-based compensation

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

$

8,074 

 

$

7,912 

 

$

7,579 

 

Research and development

 

 

37,624 

 

 

36,904 

 

 

35,389 

 

Selling, general and administrative

 

 

19,430 

 

 

19,049 

 

 

18,257 

 

(2) Amortization of debt discount (non-cash interest expense)

 

 

18,458 

 

 

21,029 

 

 

19,868 

 

 

See accompanying notes.

31


 

LINEAR TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THREE YEARS ENDED JUNE 29, 2014

 

2014

 

2013

 

2012

 

Net income

 

$

459,961 

 

$

406,925 

 

$

398,111 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

Net changes in unrealized gains (losses) on available-for-sale securities

 

 

621 

 

 

(431)

 

 

(965)

 

Total comprehensive income

 

$

460,582 

 

$

406,494 

 

$

397,146 

 

 

 

32


 

LINEAR TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 29, 2014 AND JUNE 30, 2013

 

2014

 

2013

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

157,323 

 

$

126,650 

 

Marketable securities

 

 

855,464 

 

 

1,398,091 

 

Accounts receivable, net of allowance for doubtful accounts of $1,653 ($1,891 in 2013)

 

 

173,340 

 

 

145,274 

 

Inventories:

 

 

 

 

 

 

 

Raw materials

 

 

10,544 

 

 

9,348 

 

Work-in-process

 

 

62,695 

 

 

59,532 

 

Finished goods

 

 

18,071 

 

 

18,349 

 

Total inventories

 

 

91,310 

 

 

87,229 

 

Deferred tax assets

 

 

46,294 

 

 

 —

 

Prepaid expenses and other current assets

 

 

40,982 

 

 

36,646 

 

Total current assets

 

 

1,364,713 

 

 

1,793,890 

 

Property, plant and equipment, at cost:

 

 

 

 

 

 

 

Land

 

 

28,837 

 

 

28,837 

 

Buildings and improvements

 

 

237,809 

 

 

235,748 

 

Manufacturing and test equipment

 

 

681,071 

 

 

651,194 

 

Office furniture and equipment

 

 

6,028 

 

 

5,494 

 

 

 

 

953,745 

 

 

921,273 

 

Accumulated depreciation and amortization

 

 

(676,665)

 

 

(632,807)

 

Net property, plant and equipment

 

 

277,080 

 

 

288,466 

 

Identified intangible assets, net and goodwill

 

 

13,785 

 

 

15,985 

 

Total noncurrent assets

 

 

290,865 

 

 

304,451 

 

Total assets

 

$

1,655,578 

 

$

2,098,341 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

28,221 

 

$

10,258 

 

Accrued payroll and related benefits

 

 

88,326 

 

 

77,659 

 

Deferred income on shipments to distributors

 

 

45,619 

 

 

44,088 

 

Income taxes payable

 

 

41,731 

 

 

12,834 

 

Other accrued liabilities

 

 

11,218 

 

 

18,933 

 

Convertible senior notes- current portion

 

 

 —

 

 

826,629 

 

Deferred tax liabilities- current portion

 

 

 —

 

 

35,479 

 

Total current liabilities

 

 

215,115 

 

 

1,025,880 

 

Deferred tax liabilities

 

 

67,999 

 

 

48,026 

 

Other long-term liabilities

 

 

41,095 

 

 

42,527 

 

Total liabilities

 

 

324,209 

 

 

1,116,433 

 

Commitments and contingencies