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Linear Technology 10-K 2007 Documents found in this filing:UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
For
the fiscal year ended July 1, 2007
Commission
File Number 0-14864
 LINEAR
TECHNOLOGY CORPORATION
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Registrant’s
telephone number, including area code (408) 432-1900
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 x 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 x
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 xNo o
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. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YesoNo
x
The
aggregate market value of voting stock held by non-affiliates of the Registrant
was approximately $6,225,000,000 as of December 29, 2006 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 221,997,445 shares of the registrant's common stock issued and outstanding
as of July 27, 2007.
PART
I
Except
for historical information contained in this 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; 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,” “intend,” “plan,”
“believe,” “seek,” “estimate,” and variations of such words and similar
expressions are intended to identify such forward-looking
statements. See “Risks and Competition” in the “Business” section of
this Annual Report on Form 10-K for a more thorough list of potential risks
and
uncertainties.
General
Linear
Technology Corporation (together with its consolidated subsidiaries, "Linear
Technology" or the "Company") designs, manufactures and markets a broad line
of
standard high performance linear integrated circuits. Applications for the
Company's products include telecommunications, cellular telephones, networking
products, notebook computers, computer peripherals, video/multimedia, industrial
instrumentation, security monitoring devices, high-end consumer products such
as
digital cameras, global positioning systems and MP3 players, complex medical
devices, automotive electronics, factory automation, process control, and
military and space systems. The Company is a Delaware corporation; it was
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, 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
450 Fifth Street, NW, 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 them 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
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 generally involves a 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. 2
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. 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, higher speed,
more subsystem integration on a single chip and many other special features.
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 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 several hundred megahertz for applications such as video, fast
data
acquisition and 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.
Interface
- Interface circuits act as an intermediary to transfer digital signals between
or within electronic systems. These circuits are used in computers,
modems, instruments and remote data acquisition systems.
Data
Converters - These circuits change linear (analog) signals into digital
signals, or visa 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 visa
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 megahertz sample rate.
3
Radio
Frequency Circuits - These circuits include mixers, modulators,
demodulators, amplifiers, drivers, and power detectors and
controllers. They are used in wireless and cable infrastructure,
cellphones, and wireless data communications infrastructure.
DC/DC
µModule Power Systems - A DC/DC µModule simplifies the design of a
complex DC/DC regulator circuit 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 allows
a
quick time-to-market power supply solution for digital systems using FPGAs,
ASICs, DSPs, or microcontrollers.
Other
- Other linear circuits include buffers, battery monitors, motor controllers,
hot swap circuits, comparators, sample-and-hold devices, drivers and filters
(both switched capacitor and continuous time) which are used to limit and/or
manipulate signals in such applications as cellular telephones, base stations,
navigation systems and industrial applications.
Linear
circuits are used in various applications including telecommunications, cellular
telephones, networking products such as power over Ethernet switches, notebook
computers, computer peripherals, video/multimedia, industrial instrumentation,
security monitoring devices, high-end consumer products such as digital cameras
and MP3 players, global positioning systems, complex medical devices, automotive
electronics, factory automation, process control, and military and space
systems. 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
application and end-market:
4
5
Marketing
and Customers
The
Company markets its products worldwide, through a direct sales staff,
electronics distributors and a small network of independent sales
representatives, to a broad range of customers in diverse industries. The
Company sells to over 15,000 Original Equipment Manufacturer (OEM) customers
directly and/or through the sales distributor channel. Distributor
and direct customers generally buy on an individual purchase order basis, rather
than pursuant to long-term agreements. The Company’s primary domestic
distributor, Arrow Electronics, accounted for 14% of revenues during fiscal
year
2007 and 16% of accounts receivable as of fiscal year 2007 year-end; 14% of
revenues during fiscal year 2006 and 15% of accounts receivable as of fiscal
year 2006 year-end; and 13% of revenues during fiscal year 2005 and 18% of
accounts receivable as of fiscal year 2005 year-end. Distributors are
not end customers, but rather serve as a channel of sale to many end users
of
the Company's products. No other distributor or customer accounted for 10%
or
more of revenues for fiscal years 2007, 2006 or 2005.
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 located in the United States
are in the following metropolitan areas: Seattle, Detroit, Boston, Baltimore,
Denver, Salt Lake City, Philadelphia, Raleigh, Chicago, Dallas, Austin, Houston,
San Jose, Los Angeles, Irvine, San Diego, Huntsville, Minneapolis, Cleveland,
Portland and Kansas City. Internationally, the Company has sales offices in:
London, Stockholm, Ascheberg, Munich, Stuttgart, Paris, Milan, Helsinki, Tokyo,
Nagoya, Osaka, Taipei, Singapore, Seoul, Hong Kong, Bejing, Shanghai and
Shenzhen.
The
Company has agreements with 3 independent sales representatives in the United
States, 1 in Canada and 1 in South America. Commissions are paid to
sales representatives upon shipments either directly from the Company or through
distributors. The Company has agreements with 3 independent distributors in
North America, 6 in Europe, 3 in China, 7 in Japan, 3 in Taiwan, 2 in India,
and
1 each in Korea, Singapore, Malaysia, Thailand, South Africa, Philippines,
Israel, Brazil, Australia, and New Zealand. The Company's distributors purchase
the Company's products for resale to customers. 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
domestic distributor agreements also generally permit distributors to exchange
up to 3% of certain purchases on a semi-annual basis.
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 purchases on a semi-annual basis. See Critical Accounting
Estimates and Note 1 of Notes to Consolidated Financial Statements of this
Annual Report on Form 10-K, which contains information regarding the Company’s
revenue recognition policy.
During
fiscal years 2007, 2006 and 2005, export sales were primarily to Europe, Japan
and Rest of the World (“ROW”), which is primarily Asia excluding Japan, and
represented approximately 68%, 70% and 70% 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. Although export sales
are subject to certain control restrictions, including approval by the Office
of
Export Administration of the United States Department of Commerce, the Company
has not experienced any material difficulties relating to such
restrictions. During fiscal years 2007, 2006 and 2005, domestic
revenues were $345.0 million or 32% of revenues, $332.6 million or 30% of
revenues, and $318.7 million or 30% of revenues, respectively.
The
Company's backlog of released and firm orders was approximately $112.2 million
at July 1, 2007 as compared with $93.7 million at July 2, 2006. In
addition to its backlog, the Company had $36.2 million of products sold to
and
held by domestic distributors at July 1, 2007 as compared to $45.8 million
at
July 2, 2006. Generally, shipments to domestic distributors are not
recognized as revenues until the distributor has sold the products to its
customers. 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. The ordering practices of many semiconductor
customers has shifted from a practice of placing orders with delivery dates
extending over several months to the practice of placing orders with shorter
delivery dates in concert with the Company’s lead times. Also, the
Company's agreements with certain 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 fiscal quarter
of each year are impacted slightly by customary summer holidays, particularly
in
Europe. In addition, in the past three years the Company has had
increased revenues of parts that go into consumer end-market devices,
which can cause a slightly favorable impact to revenues and profits during
the
Company’s first and second fiscal quarters.
6
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 Annual Report on 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 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 Hillview and Camas facilities.
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 CMOS products, is done at an independent foundry. The accompanying chart
provides a brief overview of the Company's IC process capabilities:
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.
7
Processed
wafers are sent to either the Company's assembly facility in Penang, Malaysia
or
to offshore independent assembly contractors where the wafers are separated
into
individual circuits and packaged. The Penang facility opened in fiscal 1995
and
services approximately 80% of the Company's assembly requirements for plastic
packages. The Penang facility completed a 90,000 square feet expansion during
the fourth quarter of fiscal 2007 which added to its existing production
assembly space. The Company’s primary subcontractors currently are Carsem Sdn,
located in Malaysia; and NSE, 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. The expansion of the Singapore facility was completed in
the first quarter of fiscal year 2006. The expansion increased the
facility’s capacity for test and distribution operations by an additional
117,000 square feet.
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
2008.
Patents,
Licenses and Trademarks
The
Company has been awarded 380 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 continuously assesses whether to seek formal
protection for particular innovation and technologies. As part of the
Company’s enforcement of its intellectual property, the Company entered into a
royalty agreement during fiscal year 2005. The agreement resulted in
a $40.0 million increase to the Company’s revenues in fiscal 2005 for past
royalties. Under the terms of the agreement the Company also expects
to earn future royalties, which are dependent on the other company’s sales of
licensed products, quarterly through June 2013.
As
is
common in the semiconductor industry, the Company has at times been notified
of
claims that it may be infringing patents issued to others. If it
appears necessary or desirable, the Company may seek licenses under such
patents, 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: power management, signal conditioning, mixed signal and high
frequency. Linear Technology's product development strategy
emphasizes a broad line of standard 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
July 1, 2007, the Company had 1,022 employees involved in research, development
and engineering related functions, as compared to 950 employees at the end
of
fiscal year 2006. The Company is committed to investing in the
technology development of analog circuits as shown by its year over year
increases to R&D spending and headcount. In recent years, the Company has
opened remote design centers throughout the United States, Singapore, Malaysia
and Germany as part of the Company’s strategy of obtaining and retaining analog
engineering design talent. For fiscal years 2007, 2006, and 2005, the
Company spent approximately $183.6 million, $160.8 million and $131.4 million,
respectively, on R&D. The increase in R&D expenses in fiscal
year 2007 over fiscal year 2006 was primarily due to increases in stock-based
compensation and labor expense due to increased headcount. In fiscal
2007 the Company opened a new remote design center in Dallas.
8
Government
Sales
The
Company currently has no material U.S. Government contracts.
Employees
As
of
July 1, 2007, the Company had 3,837 employees, including 419 in marketing and
sales, 1,022 in research, development and engineering related functions, 2,299
in manufacturing and production, and 97 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.
Executive
Officers of the Registrant
The
executive officers of the Company, and their ages as of August 1, 2007, are
as
follows:
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 1983 to 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 most recently 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.
9
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 Linear, he was Vice President of Operations at NanoOpto
Corporation in Somerset, NJ from 2002 to 2003, Vice President of Worldwide
Operations at Anadigics Inc. in Warren, NJ from 1998 to 2002 and held various
management positions at National Semiconductor UK Ltd. from 1985 to 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 1990 to 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 1989 to 1991, Honeywell
Signal Processing Technologies from 1984 to 1989, and Bell Laboratories from1979
to 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 LTC as a design engineer in December 1987
after serving as a design engineer at Precision Monolithics, Inc. from 1981
until 1985, and Analog Devices Inc. from 1985 until 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, 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’s business 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.
10
Downturns
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 increased price
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 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
sales and profitability and limit our ability to predict such
levels.
Historically,
we have maintained low lead times, which has 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 product. As a result, in any quarterly
fiscal period we are subject to the risk of cancellation of orders leading
to a
fall-off of sales 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 unsaleable 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. However, the loss of, or
a
significant reduction of purchases by a portion of our customer base could
adversely affect our results of operations. We can lose a customer due to a
change in the customer’s design or purchasing practices. 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 introductions are a critical factor for future sales growth and
sustained profitability and 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, 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, sales 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.
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, although we depend on outside silicon foundries
for a small portion (less than 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 increased 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.
11
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 20%) are processed offshore by independent assembly
subcontractors located in Malaysia and Thailand. These subcontractors separate
wafers into individual circuits and assemble them into various finished package
types. 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 (less than 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.
We
rely on third party suppliers for materials, supplies, and subcontract services
that may not have adequate capacity to meet 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 of 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 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 the components, which could adversely
affect future sales 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
products or could have quality problems that could affect our ability to meet
customer commitments. 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
are exposed to business, economic, political and other risks through our
significant worldwide operations.
During
fiscal year 2007, 68% of our revenues were derived from customers in
international markets. Also, we have test and assembly facilities outside the
United States in Singapore and Malaysia. Accordingly, we are subject to the
economic and political risks inherent in international 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 as well as the economic disruption from acts of
terrorism, and the response to them by the United States and its
allies.
We
are subject to litigation risks, including litigation relating to allegations
regarding our stock option granting practices.
We
are
subject to various legal proceedings arising out of a wide range of matters,
including, among others, patent suits, securities issues and employment claims.
From time to time, as is typical in the semiconductor industry, we receive
notice from third parties alleging that our products or processes infringe
the
third parties’ intellectual property rights. If we are unable to obtain a
necessary license, and one or more of our products or processes are determined
to infringe intellectual property rights of others, a court might enjoin us
from
further manufacture and/or sale of the affected products. In that case, we
would
need to re-engineer the affected products or processes in such a way as to
avoid
the alleged infringement, which may or may not be possible. An adverse result
in
litigation arising from such a claim could involve an injunction to prevent
the
sales of a portion of our products, a reduction or the elimination of the value
of related inventories, and/or the assessment of a substantial monetary award
for damages related to past sales. We do not believe that our current lawsuits
will have a material impact on our business or financial condition. However,
current lawsuits and any future lawsuits will divert resources and could result
in the payment of substantial damages. In addition, we may incur significant
legal costs to assert our intellectual property rights when we believe our
products or processes have been infringed by third parties.
12
We
previously disclosed that the Securities and Exchange Commission (“SEC”) and the
United States Justice Department have initiated informal inquiries into our
stock option granting practices. In addition, on September 5, 2006, we received
an Information Document Request from the Internal Revenue Service (“IRS”)
concerning our stock option grants and grant practices. We are cooperating
with
the SEC, IRS and the Department of Justice. In addition, various of our current
and former directors and officers have been named as defendants in two
consolidated stockholder derivative actions filed in the United States District
Court for the Northern District of California, captioned In re Linear
Technology Corporation Stockholder Derivative Litigation (N.D. Cal.) (the
“Federal Action”); and three substantially similar consolidated stockholder
derivative actions filed in California state court, captioned In re Linear
Technology Corporation Stockholder Derivative Litigation (Santa Clara
County Superior Court) (the “State Action”). Plaintiffs in the Federal and State
Actions allege that the defendant directors and officers backdated stock option
grants during the period from 1997 through 2002. Both actions assert claims
for
breach of fiduciary duty and unjust enrichment. The Federal Action also alleges
that the defendants breached their fiduciary duty by allegedly violating Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, while the State Action also alleges that certain of the defendants
aided and abetted one another’s alleged breach of fiduciary duty, wasted
corporate assets, engaged in insider trading in connection with the purportedly
backdated option grants, in violation of the California Corporations Code.
Both
Actions seek to recover unspecified money damages, disgorgement of profits
and
benefits, equitable relief and attorneys’ fees and costs. The State Action also
seeks restitution, rescission of certain defendants’ option contracts, and
imposition of a constructive trust over the option contracts. We are named
as a
nominal defendant in both the Federal and State Actions, thus no recovery
against us is sought.
More
recently, certain of our current and former directors and officers were named
as
defendants in a stockholder derivative action filed in the Court of Chancery
of
the State of Delaware, captioned Weiss v. Swanson, et al. (the
“Delaware Action”). Plaintiff in the Delaware Action alleges that the
defendant directors and officers made “spring-loaded” and “bullet-dodged” stock
option grants to certain of our officers and directors during the period from
1996 through 2005. Plaintiff asserts claims for breach of fiduciary
duty against all of the defendants and claims for unjust enrichment against
those defendants who received challenged grants. Plaintiff seeks to
recover unspecified money damages, disgorgement of profits and benefits,
restitution, rescission of certain defendants’ option contracts, imposition of a
constructive trust over the option contracts, and attorneys’ fees and
costs. We are also named as a nominal defendant in the Delaware Action,
thus no recovery against us is sought.
For
a
further discussion on legal matters see “Legal Proceedings” in Part I,
Item 3 of this Form 10-K.
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, in fact 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 undertaken or will not be breached or that we will have adequate
remedies for any breach.
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.
13
The
transition to lead-free products may adversely affect our results of
operations.
Customers
are requiring that we offer our products in lead-free packages. Governmental
regulations in certain countries and customers’ intention to produce products
that are less harmful to the environment has resulted in a requirement from
many
of our customers to purchase integrated circuits that do not contain lead.
We
have responded by offering our products in lead-free versions. While the
lead-free versions of our products are expected to be more friendly to the
environment, the ultimate impact is uncertain. The transition to lead-free
products may produce sudden changes in demand depending on the packaging method
used, which may result in excess inventory of products packaged using
traditional methods. This may have an adverse effect on our results of
operations. In addition, the quality, cost and manufacturing yields of the
lead
free products may be less favorable compared to the products packaged using
more
traditional materials which may result in higher costs to us.
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
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 and 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 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.
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 market. Our competitors
include among others, Analog Devices, Inc., Intersil, Maxim Integrated Products,
Inc., National Semiconductor Corporation and Texas Instruments, Inc. Competition
among manufacturers of linear integrated circuits is intense, and certain of
our
competitors may 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 it
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.
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 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. 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.
14
We
are leveraged, and our debt obligations may affect our business, operating
results and financial condition.
In
April
2007, we issued $1.0 billion aggregate principal amount of our 3.00% Convertible
Senior Notes due May 1, 2027 and $700 million aggregate principal amount of
our
3.125% Convertible Senior Notes due May 1, 2027 (collectively, the
“Notes”). Debt service obligations arising from the Notes could
adversely affect us in a number of ways, including by:
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
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 general economic
conditions. 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. As our Notes are convertible into shares of our
common stock, volatility or depressed prices of our common stock could have
a
similar effect on the trading price of our Notes. In addition, to the
extent we deliver common stock on conversion of the Notes, the ownership
interests of our existing stockholders may be diluted. Sales in the public
market of common stock issuable upon such conversion could adversely affect
prevailing market prices of our common stock, as could the anticipated
conversion of the Notes.
Our
accelerated share repurchase transactions may affect the value of our common
stock and the Notes.
Concurrently
with the pricing of the Notes offering, we entered into an accelerated share
repurchase transaction with an affiliate of Credit Suisse Securities (USA)
LLC,
whom we refer to as the repurchase counterparty. In connection with establishing
its initial hedge of this transaction, the repurchase counterparty or its
affiliate entered into various derivative transactions with respect to our
common stock and/or purchased shares of our common stock in secondary market
transactions concurrently with or shortly after the pricing of the Notes. These
activities could have had the effect of increasing, or preventing, a decline
in,
the price of our common stock concurrently with or shortly after the pricing
of
the Notes. In addition, the repurchase counterparty or its affiliate purchased
shares of our common stock, and is likely to modify its hedge position by
entering into or unwinding various derivative transactions with respect to
our
common stock and/or by purchasing or selling our common stock in secondary
market transactions, prior to the final settlement of the accelerated share
repurchase transaction, which is expected to occur approximately nine months
from the pricing date for the Notes.
The
effect, if any, of any of these transactions and activities on the market prices
of our common stock or Notes will depend in part on market conditions and cannot
be ascertained at this time, but any of these activities could adversely affect
the value of our common stock and the value of the Notes. Such event
could also affect the amount of cash and/or number of shares of our common
stock, if any, as well as the value of such common stock that noteholders may
receive upon the conversion of the Notes and, under certain circumstances,
their
ability to convert the Notes.
We
may not have the ability to repurchase the Notes or to pay cash upon their
conversion if and as required by the indentures governing the
Notes.
Holders
of the Notes have the right to require us to repurchase, and we intend to
repurchase, the Notes for cash on specified dates or upon the occurrence of
a
fundamental change. However, we may not have sufficient funds to
repurchase the Notes in cash or to make the required repayment at such time
or
have the ability to arrange necessary financing on acceptable terms. In
addition, upon conversion of the Notes we will be required to make cash payments
to the holders of the Notes equal to the lesser of the principal amount of
the
Notes being converted and the conversion value of those Notes. Such
payments could be significant, and we may not have sufficient funds to make
them
at such time.
15
Our
failure to repurchase the Notes or convert the Notes into cash or a combination
of cash and shares upon exercise of a holder’s conversion right in accordance
with the provisions of the indentures would constitute a default under the
applicable indenture. In addition, a default under either indenture could lead
to a default under existing and future agreements governing our indebtedness.
If, due to a default, the repayment of the related indebtedness were to be
accelerated after any applicable notice or grace periods, we may not have
sufficient funds to repay such indebtedness and the Notes.
A
fundamental change may also constitute an event of default under, or result
in
the acceleration of the maturity of, our then-existing indebtedness. In
addition, our ability to repurchase the Notes in cash or make any other required
payments may be limited by law or the terms of other agreements relating to
our
indebtedness outstanding at the time.
The
terms of the Notes and related provisions in the indentures subject noteholders
to risks. Noteholders should be aware of the following risks, in
addition to those described for holders of our common
stock:
The
accounting method for convertible debt securities with net share settlement
features, like the Notes, may be subject to change.
For
the
purpose of calculating diluted earnings per share, a convertible debt security
providing for net share settlement of the conversion value and meeting specified
requirements under Emerging Issues Task Force (“EITF”), Issue No. 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock,” is accounted for interest expense purposes
similarly to non-convertible debt, with the stated coupon constituting interest
expense and any shares issuable upon conversion of the security being accounted
for under the treasury stock method. The effect of the treasury stock method
is
that the shares potentially issuable upon conversion of the Notes are not
included in the calculation of our earnings per share, except to the extent
that
the conversion value of the Notes exceeds their principal amount, in which
event
the number of shares of our common stock necessary to settle the conversion
are
treated as having been issued for earnings per share purposes.
16
On
July
25, 2007 the Financial Accounting Standards Board (“FASB”) elected to add a
project to its agenda with the objective of issuing a FASB Staff Position
(“FSP”) to address the accounting for convertible debt instruments that require
or permit cash settlement upon conversion, including partial cash
settlement. This issue had previously been discussed by the EITF at
its March 2007 and June 2007 meetings. However, the EITF was unable
to reach a decision on this issue, the FASB subsequently expressed a willingness
to address the accounting of these instruments. The convertible bond
in question are referred to as “Instrument C,” a type of convertible debt
detailed in EITF issue No. 90-19. Instrument C convertible debt is structured
so
that upon conversion, the principal amount of the obligation is repaid in cash
and the conversion spreads are settled in shares. The proposed FSP would
also address any other convertible debt instruments that allow settlement in
any
combination of cash and shares at the issuer's option. The proposed FSP would
require the issuer to separately account for the liability and equity components
of the instrument in a manner that reflects the issuer's economic interest
cost
and would also require bifurcation of a component of the debt, classification
of
that component in equity, and then accretion of the resulting discount on the
debt to result in the “economic interest cost” being reflected in the income
statement. The Board members emphasized the need for clarity around the term
“economic interest cost” in the proposed FSP. A draft of the FSP is
expected to be issued in late August 2007 and would then be subject to a 45-day
comment period. We cannot predict the outcome of the FASB deliberations or
any
other changes in GAAP that may be made affecting accounting for convertible
debt
securities. Any change in the accounting method for convertible debt securities
could have an adverse impact on our past or future financial
results.
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.
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 COMMMENTS
None 17
At
July
1, 2007, the Company owned the major facilities described below:
(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: Bedford, New Hampshire; Raleigh,
North Carolina; Burlington, Vermont; Santa Barbara, California; Grass Valley,
California; Phoenix, Arizona, and Dallas, Texas. The Company leases
sales offices in the United States in the areas of Sacramento, Seattle, Denver,
Philadelphia, Raleigh, Chicago, Detroit, Dallas, Austin, Houston, Los Angeles,
Irvine, San Diego, Minneapolis, Cleveland, Portland; and internationally in
London, Stockholm, Helsinki, Ascheberg, Munich, Stuttgart, Paris, Milan, Tokyo,
Nagoya, Osaka, Taipei, Singapore, Seoul, Hong Kong, Bejing, Shanghai and
Shenzhen. See Note 9 of Notes to Consolidated Financial Statements of
this Annual Report on Form 10-K. The Company believes that its
existing facilities are suitable and adequate for its business purposes through
fiscal year 2008.
The
Company completed a 20,000 square foot design center in Auburn, New Hampshire
a
town near Manchester, New Hampshire during the third quarter of fiscal year
2007. In addition, a 10,000 square foot expansion of the Colorado
design center is expected to be completed by the fourth quarter of fiscal
2008.
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 of
the
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.
The
Company has previously disclosed that the Securities and Exchange Commission
(“SEC”) and the United States Justice Department have initiated informal
inquiries into the Company’s stock option granting practices. The Company has
also disclosed that on September 5, 2006, it received an Information Document
Request from the Internal Revenue Service (“IRS”) concerning its stock option
grants and grant practices. The Company is cooperating with the SEC, IRS and
the
Department of Justice. In addition, certain current and former
directors and officers of the Company have been named as defendants in two
shareholder derivative actions filed in the United States District Court for
the
Northern District of California, which have been consolidated under the caption
In re Linear Technology Corporation Shareholder Derivative Litigation
(the “Federal Action”), and in three substantially similar consolidated
shareholder derivative actions filed in the Superior Court for Santa Clara
County, California, also captioned In re Linear Technology Corporation
Shareholder Derivative Litigation (the “State Action”). More
recently, certain current and former directors, officers and executives of
the
Company have been named as defendants in a shareholder derivative complaint
filed in Delaware Chancery Court. The Company has been named in each of these
Actions as a nominal defendant against which no recovery is sought. The Company
has engaged its outside counsel to represent it in the government inquiries
and
pending lawsuits.
18
Plaintiffs
in the Federal and State Actions allege that the individual defendants breached
their fiduciary duties to the Company in connection with the alleged backdating
of stock option grants during the period from 1995 through 2002, and that
certain defendants were unjustly enriched. Plaintiffs in the Federal Action
also
asserted derivative claims against the individual defendants based on alleged
violations of Section 10(b) of the Securities Exchange Act of 1934
(“Exchange Act”), and Rule 10b-5 promulgated thereunder. In the State Action,
plaintiffs also allege that the defendants aided and abetted one another’s
alleged breaches of duty, that the director defendants wasted corporate assets,
and that the officer defendants engaged in insider trading in connection with
the purportedly backdated option grants, in violation of the California
Corporations Code. Both Actions seek to recover unspecified money damages,
disgorgement of profits and benefits, equitable relief and attorneys’ fees and
costs. The State Action also seeks restitution, rescission of certain
defendants’ option contracts, and imposition of a constructive trust over
executory option contracts. The Company is named as a nominal defendant in
both
the Federal and State Actions, thus no recovery against the Company is
sought.
On
October 4, 2006, the Company filed a motion to dismiss the Federal Action on
the
ground that the plaintiffs had not made a pre-litigation demand on the Company’s
Board of Directors and had not demonstrated that such a demand would have been
futile. The defendant directors and officers joined in that motion, and filed
a
motion to dismiss the Federal Action for failure to state a claim against each
of them. On December 7, 2006, the District Court granted the
Company’s motion; the Court did not address the individual defendants’
motion. Pursuant to the Court’s Order, plaintiffs filed an amended
complaint on January 5, 2007. The amended complaint asserted
derivative claims against the individual defendants for alleged violations
of
Sections 10(b), 14(a), and 20(a) of the Exchange Act, and Rules 10b-5 and 14a-9
promulgated thereunder. The parties agreed to stay the Federal Action
in favor of permitting the State Action to proceed, and the District Court
entered an order staying the Federal Action on February 14, 2007.
On
October 2, 2006, the Company filed a motion to stay the State Action in favor
of
the earlier-filed Federal Action. The defendant directors and officers joined
in
that motion. The individual defendants also demurred to the State Action, on
the
basis that the operative complaint failed to state a cause of action as to
each
of them. Following the stay of the Federal Action, the parties in the State
Action filed a stipulation withdrawing the Company’s Motion to Stay Proceedings
as moot, setting out a schedule for the filing of a demurrer by the Company,
continuing the hearing of the individual defendants’ demurrer, and setting April
3, 2007 as the date for the hearing of both demurrers. On January 22,
2007, the State Court issued an order approving the Company’s withdrawal of the
Motion to Stay Proceedings. Thereafter, the Company demurred to
the complaint on the ground that plaintiffs had not demonstrated that a pre-suit
demand would have been futile; the individual defendants joined in that
demurrer. The Court held a hearing on the demurrers on July 13,
2007. The Court sustained the Company’s demurrer, and granted the
plaintiffs leave to amend the complaint within thirty days of the
hearing. The Court did not address the individual defendants’
demurrers. On August 13, 2007, plaintiffs filed an amended
complaint. No schedule has been set for the defendants to respond to
the complaint.
On
March
23, 2007, certain current and former directors and officers of the Company
were
named as defendants in a stockholder derivative action filed in the Court of
Chancery of the State of Delaware, captioned Weiss v. Swanson, et al.
(the “Delaware Action”). Plaintiff in the Delaware Action alleges
that the defendant directors and officers made “spring-loaded” and
“bullet-dodged” stock option grants to certain of the Company’s officers and
directors during the period from 1996 through 2005. Plaintiff asserts
claims for breach of fiduciary duty against all of the defendants and claims
for
unjust enrichment against those defendants who received challenged
grants. Plaintiff seeks to recover unspecified money damages,
disgorgement of profits and benefits, restitution, rescission of certain
defendants’ option contracts, imposition of a constructive trust over the option
contracts, and attorneys’ fees and costs. The Company is also named as a
nominal defendant in the Delaware Action, thus no recovery against the Company
is sought. The defendants moved to dismiss the Delaware Action on May
25, 2007. Rather than responding to the defendants’ motion, plaintiff
filed an amended complaint on August 10, 2007. No schedule has been
set for the defendants to respond to the complaint.
The
Company reviewed its historical option-granting practices and option grants
with
the assistance of outside counsel and an independent forensic accounting
firm. The primary scope of the review covered the periods calendar
year 1995 through 2006. Based on the findings of the review, the
Company has concluded that there is no need to restate any previously filed
financial statements. The review found no evidence of fraud or
misconduct of any kind in the Company’s practices in granting of stock
options.
No
matters were submitted to a vote of the Company’s security holders during the
fourth quarter of fiscal year 2007.
19
PART
II
The
information regarding historical market, market price range and dividend
information for the past two fiscal years may be found in “Note 10.
Quarterly Information” in Part II, Item 8 of this Form 10-K.
The
information required by this item regarding equity compensation plans is
incorporated by reference to the information set forth in Item 12 of this Annual
Report on 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 July 1,
2007. In addition to the shares purchased in the table below, the
Company also purchased a total of 6.6 million shares in the first, second and
third quarters of fiscal year 2007. During fiscal year 2007, the
Company purchased and retired a total of 78.9 million shares of its common
stock.
(1) On
April 17, 2007 the Company’s Board of Directors authorized a $3.0 billion
accelerated stock repurchase transaction (“ASR”). As part of the ASR,
the Company entered into two $1.5 billion confirmations totaling $3.0 billion
during the fourth quarter of fiscal 2007. Under these confirmations,
the Company provided a financial institution with an up−front payment totaling
$3.0 billion. The number of shares of common stock that will be
delivered to the Company for the first confirmation will be determined based
on
the daily volume weighted average price of the Company’s common stock over an
approximately three-month period that commenced shortly after the issuance
of
the Company’s $1.7 billion Convertible Senior Notes in April
2007. Under the terms of the first $1.5 billion confirmation, the
Company was delivered 33.3 million shares of its common stock during the fourth
quarter of fiscal 2007. The first confirmation ended during the first
quarter of fiscal 2008 and the Company was delivered an additional 7.7 million
shares. Accordingly, under the first confirmation the Company
received a total of 41.0 million shares at an average purchase price of
$36.57. Under the terms of the second $1.5 billion confirmation, the
Company was delivered 38.9 million shares of its common stock during the fourth
quarter of fiscal 2007. The exact number of shares for the second confirmation
will be determined based on the daily volume weighted average price of the
Company’s common stock (subject to a per share floor price and cap price
resulting in a purchase by the Company under that part of the ASR of no fewer
than approximately 38.9 million shares of common stock and not more than
approximately 42.5 million shares of common stock) over the subsequent
approximately six-month period.
In
addition, on July 25, 2006 the Company’s Board of Directors authorized the
Company to purchase up to 20.0 million shares of its outstanding common stock
in
the open market over a two year time period of which 18.3 million shares still
remain for purchase over the next 12 month period.
20
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, 2002 and ending June 29, 2007. The graph assumes that $100 was invested
on June 28, 2002 in each of Linear common stock, the S&P 500 Index, and the
Philadelphia Semiconductor Index.
* The
results for fiscal years 2007 and 2006 were impacted by all forms of stock-based
compensation as a result of the Company implementing Statement of Financial
Accounting Standards 123(R) at the beginning of fiscal year 2006. For
more information on Stock-Based Compensation see “Note 2.
Stock-Based Compensation” in Part II, Item 8 of this Form
10-K.
21
Critical
Accounting Estimates
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 stock-based compensation, 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.
Stock-Based
Compensation
Beginning
in fiscal year 2006, the Company accounts for stock-based compensation
arrangements in accordance with the provisions of Statement of Financial
Accounting Standards 123(R) (“SFAS 123R”). Under SFAS 123R, stock option cost is
calculated on the date of grant using the Black-Scholes valuation model. The
compensation cost is then amortized straight-line over the vesting
period. The Company uses the Black-Scholes valuation model to
determine the fair value of its stock options at the date of
grant. The Black-Scholes valuation model requires the Company to
estimate key assumptions such as expected term, volatility, dividend yields
and
risk free interest rates that determine the stock options fair value. If actual
results are not consistent with the Company’s assumptions and judgments used in
estimating the key assumptions, the Company may be required to increase or
decrease compensation expense or income tax expense, which could be material
to
its results of operations. In addition, SFAS 123R requires
forfeitures to be estimated at the time of grant. In subsequent periods, if
actual forfeitures differ from the estimate, the forfeiture rate may be
revised. The Company estimates forfeitures based on its historical
activity, as it believes these forfeiture rates to be indicative of its expected
forfeiture rate.
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.
Revenue
Recognition
Revenue
from product sales made directly to customers is recognized upon the transfer
of
title, which generally occurs at the time of shipment. Revenue from
the Company’s sales to domestic distributors is generally recognized under
agreements which provide for certain sales price rebates and limited product
return privileges. As a result, the Company defers recognition of
such sales until the domestic distributors sell the merchandise. The
Company relieves inventory and records a receivable on the initial sale to
the
distributor as title has passed to the distributor and payment is collected
on
the receivable within normal trade terms. The income to be derived
from distributor sales is recorded under current liabilities on the balance
sheet as “deferred income on shipments to distributors” until such time as the
distributor confirms a final sale to its end customer.
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.
22
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, such as the tax
benefit for export sales, 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 dealing with uncertainties
in the application of complex tax regulations. The Company recognizes
liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on its estimate of whether, and the extent to which,
additional tax payments are probable. If the Company determines that payment
of
these amounts is unnecessary, in concert with a review of its total tax
liabilities, it may reverse the liability and recognize a tax benefit during
the
period in which it determines that the liability is no longer
necessary. The Company will also record an additional charge to its
provision for taxes in the period in which it determines that the recorded
tax
liability is less than it expects the ultimate assessment to be. For a
discussion of current tax matters, see “Note 8. Income Taxes” in
Part II, Item 8 of this Form 10-K.
Results
of Operations
Effective
July 4, 2005, the Company adopted the provisions of SFAS 123R, which requires
the Company to measure all employee stock−based compensation awards using a fair
value method and record such expense in the consolidated financial
statements. Prior to July 4, 2005, the Company accounted for
stock−based compensation awards in accordance with Accounting Principles Board
(“APB”) Opinion No. 25. The Company implemented SFAS 123R using the modified
prospective method. Under this method, periods prior to July 4, 2005 are not
restated to reflect stock−based compensation using a fair value
method. The adoption of SFAS 123R to some extent affects the
comparability of financial performance between fiscal years 2007 and 2006 versus
2005 because fiscal year 2005 does not have stock option expense.
The
table
below states the income statement items as a percentage of revenues and provides
the percentage change of such items compared to the prior fiscal year
amount.
Revenues
for the twelve months ended July 1, 2007 were $1,083.1 million, a decrease
of
$9.9 million or 1% from revenues of $1,093.0 million for fiscal year
2006. Fiscal year 2007 revenues decreased in most of the Company’s
end-markets except automotive. The average selling price (“ASP”) for
fiscal year 2007 was relatively flat at $1.60 per unit compared to $1.62 per
unit in fiscal year 2006. Geographically, international revenues were
$738.1 million or 68% of revenues for the twelve months ended July 1, 2007,
a
decrease of $22.3 million as compared to international revenues of $760.4
million or 70% of revenues for the same period in the previous fiscal
year. Internationally, sales to Rest of the World (“ROW”), which is
primarily Asia excluding Japan, represented $402.4 million or 37% of revenues,
while sales to Europe and Japan were $193.1 million or 18% of revenues and
$142.6 million or 13% of revenues, respectively. Domestic
revenues were $345.0 million or 32% of revenues for the twelve months ended
July
1, 2007, an increase of $12.4 million over domestic revenues of $332.6 million
or 30% of revenues in the same period in fiscal year 2006.
23
Royalty
revenues included in revenue for fiscal years 2007 and 2006 were not
material. During the third quarter of fiscal year 2005, the Company
entered into a long-term royalty agreement that accounted for $40.0 million
of
total revenues for the quarter and the fiscal year. The $40.0 million
represented past royalties under the terms of a settlement and license agreement
with another company. The Company expects to earn future royalties,
which are dependent on sales of licensed products, quarterly through June
2013. Such ongoing quarterly royalty revenue is not expected to be
material to each individual quarter’s total revenue.
Revenues
for the twelve months ended July 2, 2006 were $1,093.0 million, an increase
of
$43.3 million or 4% over revenues of $1,049.7 million for fiscal year
2005. Fiscal year 2005 revenue had two components, net product sales
of $1,009.7 million and as discussed above, royalty revenue of $40.0
million. Fiscal year 2006 revenues increased in the Company’s
industrial, high-end consumer and automotive end-markets and decreased in the
computer end-market when compared to fiscal year 2005. The average
selling price (“ASP”) for fiscal year 2006 increased to $1.62 per unit over
$1.44 per unit in fiscal year 2005. The increase in ASP over the
prior year was due to a shift in the mix of products sold. Increases
in sales of products that go into industrial and automotive end-markets that
have higher ASP’s were partially offset by a decrease in sales of products that
go into the handset portion of the communication end-market and the computer
end-market.
Geographically,
international revenues were $760.4 million or 70% of revenues for the twelve
months ended July 2, 2006, an increase of $29.4 million as compared to
international revenues of $731.0 million or 70% of revenues for the same period
in fiscal year 2005. Internationally, sales to Rest of the World
(“ROW”), which is primarily Asia excluding Japan, represented $415.2 million or
38% of revenues, while sales to Europe and Japan were $191.7 million or 18%
of
revenues and $153.5 million or 14% of revenues,
respectively. Domestic revenues were $332.6 million or 30% of
revenues for the twelve months ended July 2, 2006, an increase of $13.9 million
as compared to domestic revenues of $318.7 million or 30% of revenues in the
same period in fiscal year 2005.
Gross
profit for the year ended July 1, 2007 was $841.6 million, a decrease of $13.0
million or 2% from gross profit of $854.6 million in fiscal year
2006. Gross profit as a percentage of revenues decreased to 77.7% of
revenues in fiscal year 2007 as compared to 78.2% of revenues in fiscal year
2006. The decrease in gross profit as a percentage of revenues in
fiscal year 2007 was primarily due to increases in costs related to stock-based
compensation of $3.2 million and spreading fixed costs over a lower revenue
base. These decreases were partially offset by lower profit
sharing.
Gross
profit for the year ended July 2, 2006 was $854.6 million, an increase of $24.1
million or 3% over gross profit of $830.5 million in fiscal year
2005. Gross profit as a percentage of revenues decreased to 78.2% of
revenues in fiscal year 2006 as compared to 79.1% of revenues in fiscal year
2005. The decrease in gross profit as a percentage of revenues in
fiscal year 2006 was primarily due to increased costs related to stock-based
compensation and profit sharing. In addition, the $40.0 million
dollar royalty recognized in fiscal year 2005 caused a one-time improvement
in
gross profit as a percentage of revenues due to the royalty having minimal
incremental production costs.
Research
and development (“R&D”) expense for the year ended July 1, 2007 was $183.6
million, an increase of $22.7 million or 14% over R&D expense of $160.8
million in fiscal year 2006. The increase in R&D was due to an
$11.1 million increase in compensation costs related to employee headcount
and
annual merit. The increase in R&D expense was also due to higher
costs related to stock-based compensation, which increased $12.5 million. In
addition, the Company had a $6.0 million increase in other R&D related
expenses such as legal costs, mask costs and small tool charges. Offsetting
these increases was a decrease in profit sharing of $6.9 million.
R&D
expense for the year ended July 2, 2006 was $160.8 million, an increase of
$29.4
million or 22% over R&D expense of $131.4 million in fiscal year
2005. The increase in R&D was primarily due to costs related to
stock-based compensation as required under SFAS 123R, which was adopted by
the
Company in fiscal year 2006. As a result, stock-based compensation
increased $17.7 million over fiscal year 2005. In addition, R&D
increased $9.1 million due to increases in employee compensation costs caused
by
increases in employee headcount and annual merit. Profit sharing
increased $1.7 million. Other R&D expenses were up $0.9 million
mainly due to mask costs and software maintenance agreements.
Selling
general and administrative (“SG&A”) expense for the year ended July 1, 2007
was $133.7 million, an increase of $3.9 million or 3% over SG&A expense of
$129.8 million in fiscal year 2006. The increase in SG&A was due
to a $6.5 million increase in compensation costs related to employee headcount
and annual merit. In addition to compensation costs the Company had a
$0.9 million increase in stock-based compensation and a $3.0 million increase
in
legal expenses. Offsetting these increases was a $5.0 million
decrease in profit sharing and a $1.5 million decrease in other SG&A
costs.
SG&A
expense for the year ended July 2, 2006 was $129.8 million, an increase of
$20.4
million or 19% over SG&A expense of $109.4 million in fiscal year
2005. The increase in SG&A was primarily due to costs related to
stock-based compensation as required under SFAS 123R, which was adopted by
the
Company in fiscal year 2006. As a result, stock-based compensation
increased $10.8 million over fiscal year 2005. In addition, SG&A
increased $6.8 million due to increases in employee compensation costs caused
by
increases in employee headcount and annual merit. Profit sharing
increased $1.3 million. Other SG&A costs were up $1.5 million
mainly due to legal and travel expenses.
24
Interest
expense for the twelve months ended July 1, 2007 was $12.1 million, an increase
of $10.2 million over interest expense of $1.9 million in fiscal year
2006. The increase in interest expense was due to the Company’s
issuance of $1.7 billion Convertible Senior Notes during the fourth quarter
of
fiscal year 2007 bearing interest at 3.0% and 3.125%. Total interest expense
of
$12.1 million included charges of $10.4 million related to the convertible
debt
which comprised convertible debt interest, amortization of the convertible
debt
discount and amortization of service fees. Interest expense for the
twelve months ended July 2, 2006 was $1.9 million, which was relatively flat,
in
comparison with the $2.0 million interest expense for fiscal year
2005.
Interest
income for the twelve months ended July 1, 2007 was $57.7 million, an increase
of $3.0 million or 5% over interest income of $54.7 million in fiscal year
2006. Interest income increased in fiscal year 2007 when compared to
fiscal year 2006 primarily due to the higher average interest rate earned on
the
Company’s average cash balance. Offsetting the effect of higher
interest rates was the decrease in the Company’s average cash and short-term
investment balance as the Company used $1.3 billion of its cash to fund a $3.0
billion ASR transaction during the fourth quarter of fiscal year
2007.
Interest
income for the twelve months ended July 2, 2006 was $54.7 million, an increase
of $22.3 million or 69% over interest income of $32.4 million in fiscal year
2005. Interest income increased due to the increase in the average
interest rate earned on the Company’s cash and short-term investment balance,
partially offset by a decrease in the Company’s average cash and short-term
investment balance.
The
Company’s effective tax rate was 27.8% in fiscal year 2007, 30.5% in fiscal year
2006 and 30% in fiscal year 2005. The decrease in the effective tax
rate from fiscal year 2006 to fiscal year 2007 is primarily the result of the
reinstatement of the R&D tax credit legislation during the second quarter of
fiscal year 2007, an increase in foreign earnings in lower tax jurisdictions
and
higher tax-exempt interest. In addition, the Company received a
one-time tax benefit during the fourth quarter of fiscal year 2007 as the
Company settled with the Internal Revenue Service certain disputed tax benefits
for fiscal years 1997-2001 related to its Foreign Sales Corporation
(“FSC”). The Company revised its tax reserves accordingly as a result
of settling the FSC issue.
The
increase in the tax rate from 30% in fiscal year 2005 to 30.5% in fiscal year
2006 is due to lower tax benefits received from the Company’s export sales, as
well as qualified research and development expenditures offset partially by
an
increase in tax exempt interest income and the new deduction received for
domestic manufacturing activities. The Company’s effective tax rate
is lower than the federal statutory rate of 35% primarily as a result of lower
tax rates on the earnings of its wholly-owned foreign subsidiaries, principally
Singapore and Malaysia. The Company has a partial tax holiday through
July 2015 in Malaysia and a partial tax holiday in Singapore through 2011 that
may be extended through 2014 provided that the Company fulfills additional
investment requirements in qualifying activities. In addition, the Company
receives a tax benefit from certain R&D spending and non-taxable interest
income.
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 the quarter, 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 and in “Item 1A – Risk Factors” section
of this Annual Report on Form 10-K.
The
Company ended its 2007 fiscal year on a positive note with sequential quarterly
increases to revenues and operating margin as a percentage of
revenues. During the fourth quarter of fiscal 2007, the Company
significantly improved its capital structure through the issuance of $1.7
billion of Convertible Senior Notes and a subsequent $3.0 billion ASR
transaction that was funded by the Notes and $1.3 billion of the Company’s
cash. The Company’s bookings grew in the quarter and the Company is
going into the September quarter with a larger backlog and a slightly lower
turns requirement than in previous quarters. Turns are orders that
must be both booked and shipped in the same quarter. The Company’s
lead times have remained unchanged at 4 to 6 weeks. Looking ahead to the
September quarter the Company believes that most of the major inventory
corrections are over and that orders placed on the Company and the corresponding
shipments should reflect improving market demand. Most of the
Company’s customers continue to be cautious, but not as guarded, in their
outlook. Although the overall semiconductor market growth outlook is
not strong the financial performance of the Company and most of its competitors
improved in the June quarter over the March quarter. Considering
these factors, the Company currently expects revenue to grow approximately
4% to
6% in the September quarter with EPS increasing more in the high end of that
range, as the September quarter will have the full impact of the $3.0 billion
ASR. The Company anticipates that net interest expense will be
approximately $9.3 million; the effective income tax rate before discrete
items
will be 29.5%; and diluted shares outstanding will be approximately 235.0
million.
25
Estimates
of future performance are uncertain, and past performance of the Company
may not
be a good indicator of future performance due to factors affecting the Company,
its competitors, the semiconductor industry and the overall
economy. The semiconductor industry is characterized by rapid
technological change, price erosion, cyclical market patterns, periodic
oversupply conditions, occasional shortages of materials, capacity constraints,
variations in manufacturing efficiencies and significant expenditures for
capital equipment and product development. Furthermore, new product
introductions and patent protection of existing products, as well as exposure
related to patent infringement suits if brought against the Company, are
factors
that can influence future sales growth and sustained
profitability. The Company’s headquarters, and a portion of its
manufacturing facilities and research and development activities and certain
other critical business operations are located near major earthquake fault
lines
in California. Consequently, the Company could be adversely affected
in the event of a major earthquake.
Although
the Company believes that it has the product lines, manufacturing facilities
and
technical and financial resources for its current operations, sales and
profitability could be significantly affected by factors described above
and
other factors. Additionally, the Company’s common stock could be
subject to significant price volatility should sales and/or earnings fail
to
meet expectations of the investment community. Furthermore, stocks of high
technology companies are subject to extreme price and volume fluctuations
that
are often unrelated or disproportionate to the operating performance of these
companies.
Liquidity
and Capital Resources
At
July
1, 2007, cash, cash equivalents and short-term investments totaled $633.3
million and working capital was $681.2 million. These amounts were substantially
reduced during the fourth quarter of fiscal year 2007 as a result of the
Company’s $3.0 billion ASR transaction of which the Company used $1.3 billion of
its own cash to fund; the remaining $1.7 billion was funded through the
Convertible Senior Note offering. The Company’s cash and short-term
investment balance decreased $1.2 billion from the prior fiscal year primarily
due to the ASR. The Company believes that repurchasing stock
represents an opportunity to use its large cash and short-term investment
balance, together with some leveraging of the Company’s strong cashflow from
operations, to enhance long-term shareholder value. Presently, the
Company intends to repay its debt, when due, with cash generated from operations
over the debt period.
The
Company’s accounts receivable balance decreased $23.8 million from $154.3
million at the end of fiscal year 2006 to $130.5 million at the end of fiscal
year 2007. The decrease is primarily due to lower shipments. The
Company’s inventory balance increased $12.0 million due to an increase in the
Company’s work in process inventory, primarily in unpackaged die or “die
bank.” Inventory remained flat between the third and fourth quarter
of fiscal 2007. The Company’s prepaid expense and other current asset
balance decreased $8.4 million due to lower accrued interest income as a result
of the Company using $1.3 billion of its cash and short-term investments to
fund
the $3.0 billion ASR.
Net
property, plant and equipment increased $18.6 million during fiscal year 2007.
Additions totaled $62.0 million primarily due to the purchase of production
equipment. These increases were offset by depreciation of $43.4
million. The Company’s other non-current assets increased $25.4
million over the prior fiscal year primarily due to the Company capitalizing
the
$22.0 million offering discount related to its Convertible Senior Notes
offering. The offering discount will be amortized over the debt periods of
3.5
years and 7 years.
Accrued
payroll and related benefits totaled $54.5 million at the end of fiscal year
2007, a decrease of $15.0 million from the fourth quarter of fiscal year
2006. The decrease is primarily due to the lower profit sharing
accrual. The Company accrues for profit sharing on a quarterly basis
while distributing payouts to employees on a semi-annual basis during the first
and third quarters. Income taxes payable of $45.3 million at the end
of fiscal year 2007 decreased $39.3 million from the previous fiscal year due
to
higher tax payments primarily as a result of the Company’s payments for settling
certain tax audits related to the FSC.
Deferred
income on shipments to distributors decreased by $8.1 million from the prior
fiscal year due to distributors managing their inventories more
tightly. This is partially in response to suppliers utilizing shorter
order lead times, inventory reductions at distributors end customers, and
movement within the industry to reduce leaded inventory while moving to
lead-free integrated circuits. Other accrued liabilities increased
$8.8 million over the prior fiscal year primarily due the increase in accrued
interest of $9.7 million as a result of the Company’s $1.7 billion convertible
debt transaction during the fourth quarter of fiscal year
2007. Interest payments on the convertible debt are made
semi-annually on May 1 and November 1 of each year, beginning on November 1,
2007.
Convertible
Senior Notes increased $1.7 billion during the fourth quarter of fiscal year
2007. The Company issued $1.0 billion aggregate principal amount of
its 3.00% Convertible Senior Notes due May 1, 2027 and $700 million aggregate
principal amount of its 3.125% Convertible Senior Notes (“the Notes”) due May 1,
2027. The Company used the entire net proceeds of the offering to
fund a portion of its repurchase of approximately $3.0 billion of its common
stock pursuant to an ASR transaction it entered into with an affiliate of the
initial purchaser simultaneously with the offering of the Notes. As a result
of
the $3.0 billion ASR transaction the Company's stockholders' equity reduced
into
a deficit of $708 million at July 1, 2007 from a positive balance of $2.1
billion at July 2, 2006 because, for accounting purposes the market value of
the
shares repurchased were recorded as a reduction to common stock, additional
paid-in capital, and retained earnings in stockholders' equity.
26
During
fiscal year 2007, the Company generated $1.7 billion in cash from the issuance
of Convertible Senior Notes, $478.0 million of cash from operating activities,
$808.8 million of net proceeds from sales and maturities of
short-term investments, $84.5 million in proceeds from common stock issued
under
employee stock plans, and $14.2 million from excess tax benefits received on
the
exercise of stock awards. During fiscal year 2007, significant cash
expenditures included $3.2 billion for repurchases of common stock, payments
of
$192.4 million for cash dividends to stockholders, representing $0.66 per share,
and purchases of $62.0 million for capital assets. In July 2007, the
Company’s Board of Directors declared a cash dividend of $0.18 per
share. The $0.18 per share dividend will be paid during the September
quarter of fiscal year 2008. 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 strong financial condition and performance, the
Company believes that current capital resources and cash generated from
operating activities will be sufficient to meet its liquidity and capital
expenditures requirements for the foreseeable future.
Contractual
Obligations
The
following table summarizes the Company’s significant contractual obligations at
July 1, 2007 and the effect such obligations are expected to have on the
Company’s liquidity and cash flows in future periods.
Off-Balance
Sheet Arrangements
As
of
July 1, 2007, the Company had no off-balance sheet financing
arrangements.
The
Company’s cash equivalents and short-term investments 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 July 1, 2007, 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 $3.6
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)
equity. 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. To date, fluctuations in foreign currency exchange
rates have not had a material impact on the results of
operations. 27
LINEAR
TECHNOLOGY CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands, except per share amounts)
See
accompanying notes. 28
LINEAR
TECHNOLOGY CORPORATION
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except par value)
See
accompanying notes. 29
LINEAR
TECHNOLOGY CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
See
accompanying notes. 30
LINEAR
TECHNOLOGY CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(in
thousands, except per share amounts)
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