Linear Technology Corporation F4Q09 (Qtr End 06/28/09) Earnings Call Transcript

Aug. 5.09 | About: Linear Technology (LLTC)

Linear Technology Corporation (NASDAQ:LLTC)

F4Q09 (Qtr End 06/28/09) Earnings Call Transcript

July 22, 2009 11:30 am ET

Executives

Paul Coghlan - Chief Financial Officer

Lothar Maier - Chief Executive Officer

Analysts

Tore Svanberg – Thomas Weisel Partners

Uche Orji – UBS

Auguste Richard - Piper Jaffray

Blayne Curtis – Jefferies

Craig Ellis - Caris & Company

Romit Shah – Barclays Capital

Steve Smigie – Raymond James

John Pitzer – Credit Suisse

Ross Seymore – Deutsche Bank

Joanne Feeney – FTN Equity Capital Markets

Jim Covello – Goldman Sachs

Craig Berger – FBR Capital Markets

Chris Stanley – JP Morgan

David Wu – Global Crown Research

Doug Freedman – Broadpoint AmTech

Operator

Good day everyone, and welcome to the Linear Technology Corporation fiscal 2009 fourth quarter earnings conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Paul Coghlan, Chief Financial Officer. Please go ahead.

Paul Coghlan

Good morning, everyone. Welcome to the Linear Technology conference call. I am joined today by Bob Swanson, our Executive Chairman and Lothar Maier, our Chief Executive Officer. I will give you a brief overview of our recently completed fourth quarter and 2009 fiscal year and then address the current business climate.

We will then open up the conference call to questions to be addressed at either Bob Lothar, or myself. I trust you have all seen copies of our press release, which was published last night.

First however, I would like to remind you that except for historical information, the matters we will be describing this morning will be forward-looking statements that are dependent on certain risks and uncertainties, including such factors among others, as new orders received and shipped during the quarter, the timely introduction of new processes and products, and general conditions in the world economy and financial markets.

In addition to these risks, which we described in our press release issued yesterday, we refer you to the risk factors listed in the Company's Form 10-Quarter, for the quarter ended March 29, 2008, Particularly, management discussion and analysis of financial condition and results of operations.

Secondly, SEC regulation FD regarding selective disclosure influences our interaction with investors. We have opened up this conference call to enable all interested investors to listen in.

The press release and this conference call will be our forum to respond to questions regarding our estimated financial performance going forward. Consequently, should you have any questions regarding our estimates of sales and profits, or other financial matters for the upcoming quarter, as well as how they might impact our statement model and our balance sheet, this is the time we're free to respond to these questions.

Starting with the just completed fourth fiscal quarter, sales increased by 4% from the previous quarter, which was at the high end of the range of down 2% to up 4% that we had forecasted in our last conference call.

On a year-over-year basis, sales were down 32%, as the company continues to experience the fall out from the ongoing global recession. Weakness continues among smaller to mid-size customers, particularly in US distribution and in Europe, which affects our industrial business the most.

However, quarterly sales were up sequentially, bookings were up, we had a positive book-to-bill ratio, and we currently expect these quarterly trends to continue in the September quarter.

Bookings grew each month within the quarter. There were improvements in automotive, cellular, computer, and high-end consumer end markets, partially offset by reduction in the infrastructure end market largely in China, which had been particularly strong in the March quarter due to the 3G build-out.

The Company is continuing to control its variable costs were possible during this recession. To this point, the Company reduced its ongoing operating expenses by a further $2 million, after reducing them by $12.8 million in the previous two quarters. Offsetting this $2 million savings in the current quarter was a restructuring charge of $2.3 million for employee severance costs related to a reduction in workforce of approximately 130 employees.

Including this charge, the Company still improved its operating income to 38% of sales versus 36% last quarter. Improved pretax income to 35% versus 34% last quarter and maintained positive cash flow from operations during this economically challenging time.

Below the operating line, the Company continued to take advantage of the discounted trading price of its convertible debt, by purchasing and retiring another $64.4 million in face value, of its three and an eighth convertible senior notes callable in November 2010. This resulted in a gain of $1.6 million net of deferred issuance costs.

The Company's quarterly tax rate of 23%, increased from 19.5% last quarter, as both quarters were positively impacted by discreet tax items. This quarter is related to truing up the annual rate and to state tax items. Whereas last quarter, is related to the Company's domestic manufacturing deductions.

In summary, the effects of the items I just listed on the published quarterly results was that revenue of $208 million for the fourth quarter of fiscal 2009, increased 4% compared to the previous quarters revenue of $200.9 million, and decreased 32%, or $99.1 million from the $307.1 million, reported in the fourth quarter of fiscal 2008.

Diluted earnings per share of $0.25 were flat compared to the third quarter of fiscal 2009, which had benefited from a lower tax rate and no restructuring charge. EPS decreased $0.21 per share or 46% from the fourth quarter of 2008. Net income of $56.2 million increased $1.8 million, or 3% from the third quarter of fiscal year 2009, and decreased $46.9 million or 45% from the fourth quarter of fiscal 2008.

During the June quarter, the Company's cash and short-term investments balance decreased by $51.3 million to $868.7 million net of spending approximately $62.8 million to purchase $64.4 million face value, of its convertible debt. The Company also announced, continuing payment of its quarterly dividend of $0.22 per share.

This cash dividend will be paid on August 26, to shareholders of record on August 14. June was also the end of our fiscal year. As with most companies fiscal 2009 was a very difficult year, as we dealt with the global recession instigated by worldwide credit crisis.

We started the year with record quarterly revenues of $310.4 million, and then the subsequent three quarters had substantial year-over-year revenue declines, with the low point being quarterly revenues of $200.9 million in the third quarter. The Company addressed its cost structure. The employee head count was reduced by approximately 10%.

Employees have also had to deal with shutdowns ongoing temporary reductions in base pay and substantially reduced profit share. These and concurrent reductions in non-employee related expenses, enable the Company to continue to report industry-leading operating income as a percent of sales of 42.5% versus 48.4% in the prior year.

Revenue for the year ended, June 28, 2009 was $968.5 million, a decrease of 18% or $206.7 million from revenue of $1.175 billion for the previous fiscal-year. Diluted earnings per share, for the year ended June 28, 2009 was $1.41, a decrease also of 18% or $0.30 per share from fiscal year 2008 diluted earnings per share of $1.71.

Net income for the fiscal year decreased $74.1 million or 19% from the $387.6 million reported in the previous fiscal year. During the year, we also reduced our debt from $1.7 billion to $1,405.6 million as we purchased $294.5 million of our convertible debt for gain of $24.3 million, net of deferred issuance costs.

Looking ahead to the September quarter, there was continued uncertainty in the marketplace and our customers continue to be cautious with their ordering patterns. Forecasting operating results in the current environment is difficult, particularly since lead times are shorter than usual, as customers tend to order only what they urgently need.

However, customers have become more consistent in their ordering patterns, and we have seen some improvement in the automotive, and recently the industrial end-markets. Our book-to-bill ratio was positive in the June quarter, accordingly although the summer quarter is historically a slow quarter for the Company, we are coming off of a recession impact at lower sales space, and expect this year that first-quarter revenues will be 2% to 5% over the fourth quarter.

In order to meet these expectations, turns business or bookings that recorded and shipped during the quarter will need to remain at a high level, as customers continue to order to current demand. The Company will continue to maintain tight expense controls and we expect to maintain operating margins in the upper 30s percent as a percent of sales.

As managers, we can control spending and deploy our talent to best position Linear for growth and profitability, when the markets return. In addition, we have shown good attention to asset management. As our receivables have been further reduced by $8.4 million this quarter and our ending balance now represents 42 days of sales and accounts receivable.

Also inventory, on a balance sheet was reduced this quarter by $700,000, and our return-on-assets was 15.4% up from 14.6% last quarter. Our current ratio is 8.7 to 1 up from 7.3 to 1 last quarter. Our ending-on-hand inventory at distributors was down from last quarter, and lead times have trended down to the low ends of the 2 to 4 week range.

Strategically, we believe industrial, communications infrastructure, and automotive will be attractive markets driven by the advances in communications capabilities, industrial innovation, and the need for energy and fuel efficiencies. Now, we would like to address the quarter's results on a line-by-line basis.

Bookings. Bookings improved this quarter over last quarter. Cancellations, similar to last quarter were relatively minor. Bookings increased in automotive, high-end consumer, and computer, while decreasing in industrial and communications. Geographically, bookings increased in Japan, Asia-Pacific, and USA OEM, while decreasing in USA distribution and Europe.

At this time every quarter, we give you a breakdown of our bookings percentages by end markets to give you insight into those markets that drive our business. Industrial and communications continue to be our largest areas. Industrial was 32% of our bookings, down from 34% last quarter.

Our industrial business is very broad-based and most of it is booked through distributors. Our distributors in the USA and Europe continue to reduce their inventories, which led to the reduction in our industrial business. The communications area has been moving around for us, as the four quarters of fiscal 2009 have gone from 29% to 25% to 34% back to 29%.

The decrease in the fourth quarter was due to a decrease in infrastructure and networking, from 28% to 22% of our business, primarily due to reduced infrastructure business in China, from a third-quarter highpoint. Cell phone activity improved from 6% to 7% of our business.

Computer at 12%, improved from 11% last quarter. Automotive at 9%, increased nicely from 7% last quarter with the largest increase being in Japan followed by Europe. Automotive, is an area that has been suffering in the economy. However, it is showing some signs of modest improvement. Given the move to more fuel-efficient vehicles, this is an area of emphasis for linear. We have introduced the path for battery monitoring in hybrid and electric vehicles that has received earlier claim.

In addition, we continue to distinguish Linear as a high quality supplier in important international automotive manufacturers. Consumer at 10% improved significantly from 6% last quarter. This improvement was spread over several accounts in several geographies.

Finally, the military space and harsh environment products at 8% were similar to last quarter. On an annual fiscal year basis, industrial was 35% of our business, communications was 29%, comprising cell phone of 5%, and telecom infrastructure and networking of 24%.

Computer was 12% of our business, automotive 8%, high-end consumer 9% and the military satellite business 5%.

In summary, we have been transitioning over the last several years into more traditional analog businesses, and less into consumer related end-markets. Whereas, 20% of our business was in cell phone and high-end consumer related markets in 2005 and 16% in fiscal 2008, this percentage was 14% in fiscal 2009. Note that 53% of our bookings were created internationally, similar to last quarter.

Moving from bookings to sales, net sales increased 4% from the prior quarter and decreased 32% from the similar quarter in the prior year. Domestically, OEM sales were flat, whereas sales to domestic distribution were down. Internationally, all areas, Asia-Pacific, Japan and Europe were up.

In summary, the USA was 30% of sales versus 32% last quarter. Europe had 16%, was similar to last quarter, but up modestly in absolute dollars. Japan was 13%, versus 12% last quarter, and Asia-Pacific was 41%, versus 40% last quarter.

On an annual basis, for the fiscal year, USA was 30% of sales, Europe 17%, Japan 13%, and Asia-Pacific was 40%. All are relatively similar to the prior fiscal year, but on a lower sales base. Gross margin, gross margin at 74.3% increased one-half of a percentage point from last quarter's 73.8%.

This increase was due largely to better factory efficiencies, due to improved absorption resulting from few weekly factory shut down, and to a lesser extent due to absorbing fixed cost over marginally higher sales base of $7.1 million. These increases were partially offset by a lower average selling price, as evidenced by higher cell phone and consumer product sales.

Our ASP for the quarter was $1.44 versus $1.59 in the prior quarter. R&D, R&D at $44.5 million was essentially the same as $44.7 million reported last quarter, but decreased as a percentage of sales to 21.4% from 22.3%, due to the higher sales volume.

Increases in labor were generally offset by increases in masks and other R&D related costs. We had some reductions in workforce in this area. Also within labor, we had fewer shutdown days, but this increase in labor costs was largely offset by a 10% reduction in based pay.

SG&A, selling general and administrative expense decreased by $1.7 million and also as a percentage of sales to 13.8% from 15.1% last quarter. For reasons similar to those mentioned in R&D, labor cost decreased. Sales commission also decreased as annual sales fell far short of prior year amounts. And finally, discretionary spending in several areas was also reduced modestly.

Restructuring charge, the Company incurred approximately $2.3 million in restructuring expenses in the June quarter for employee severance costs related to a reduction in workforce of approximately a 130 employees. The $2.3 million charge represents the total amount in connection with this workforce reduction and the majority of these severance amounts were paid in the June quarter.

Operating income, as a result of all the above operating income increased by $5.9 million, therefore operating income as a percent of sales increased from 34 -- from 36.4% last quarter to 38% this quarter. This is strong profitability in this recessionary period and clearly puts us ahead of our peers in this financial performance measurement.

Interest expense at $12.1 million was down $438,000 from last quarter, due to the elimination of interest expense relative to the retired portion of convertible debt. Interest income of $4.5 million decreased 927,000, due to both lower average cash, since $62.8 million was used to retire debt, and also due to lower effective interest rate, from 2.34% last quarter to 1.95% this quarter.

Since the government has responded to the economic crisis by lowering interest rates, net interest income will probably be reduced by similar amount next quarter.

Next quarter, new accounting standard, FSP APB 14-1 will impact the interest expense that the Company reports on its existing convertible debt. Under this new standard, the company must treat its convertible debt as if it were issued using the company's straight debt borrowing rate of 5.5%, as compared to the actual convert rate of 3%.

The Company will incur significant non-cash charges as a result of this new accounting. Q1 additional interest charge will be approximately $7.2 million or $0.02 per share. This is the non-cash charge and does not impact the actual cash amount of interest that the Company pays on its debt.

As such, we believe that financial analysts will exclude this charge in their pro forma earnings calculations for the Company. We had a gain on their retirement of debt. The Company reported a 1.6 million gain, net of deferred issuance costs on purchasing and retiring $64.4 million in face value of its senior debt, callable in November 2010.

In the March quarter, the Company recorded a similar gain of $1.6 million on the retirement of $30 million in that quarter in debt. As the bond approaches maturity and since the Company has purchased approximately one-half of the $700 million bond the pricing has firmed up in the discount has diminished.

The ne accounting announcement referred to above, will also impact this area, as gains on bond repurchases will be calculated differently. On to the new accounting, the repurchase in Q4 would have resulted in a gain of approximately $1.2 million, instead of the $1.6 million under the then current accounting.

As a result of all the transactions discussed above, the Company's pretax profits as a percent of sales, improved from 33.7% last quarter to 35.1% this quarter, which was well within the range, we had projected going into the quarter. Our tax rate was 23% this quarter, versus 19.5% last quarter.

The ongoing effective rate was 27.5% this quarter, slightly lower than last quarter's 28%. This quarter's rate was positively impacted by discrete cash items, related to state tax issues and the annual fourth-quarter true-up to our final effective tax rate. Last quarter's rate had been positively impacted by the Company's domestic manufacturing deduction.

The major tax savings items that will support our effective tax rate going forward are, the benefits from our tax holidays overseas, our (inaudible) and our domestic manufacturing tax benefits. The R&D credit is currently expected to expire during the next fiscal year and this is causing our effective tax rate for 2010 to be 29%, up from 27.5% this year.

The resulting net income of $56.2 million is an increase of $1.8 million from the previous quarter, as increased sales and lower operating expenses were largely offset by higher tax rate, restructuring charge, and lower net interest income. The resulting return on sales was 27%, versus 27.1% reported last quarter.

The average shares outstanding used in the calculation of earnings per share, increased by 414,000 shares during the quarter. Primarily, resulting from the vesting of some restricted stock awards. As of the end of the quarter, the Company had no non-qualified stock options that were in the money, so that both basic and diluted shares used in the calculation of earnings per share are similar.

The resulting EPS was $0.25. Unchanged from $0.25 reported in the prior quarter and down $0.21 from the $0.46 reported in the fourth quarter last year, when sales were $99 million higher. On a pro forma basis, without the impact of stock-based compensation, EPS would have been $0.31, again unchanged from the prior quarter.

Next quarter, new accounting standard EITF 03-6-1 changes how dividend paying unvested restricted stock awards are treated in the earnings per share calculation. Consequently for Linear, all unvested restricted stock awards will now be included in fully diluted earnings per share, where they had previously, under accounting regulations been included under the treasury stock computation for determining earnings per share.

Moving to the balance sheet, cash and short-term investments decreased by $51.3 million. During the quarter, the Company spent $62.8 million to retire a portion of its convertible debt, $67 million was provided by operations, $50 million was paid in cash dividends and $3.6 million was used to purchase fixed assets.

For the 93rd consecutive quarter, the Company had positive cash flow from operations. Our cash and short-term investment balance is now $868.7 million and represents 61% of total assets. Accounts receivable of $95.4 million decreased by $8.4 million from last quarter, even though quarterly revenue increased by $7.1 million, consequently our day sales and accounts receivable were reduced to 42 days from 47 days last quarter.

Inventory, at $52.5 million decreased 699,000 from last quarter. Most of our inventory is concentrated at the die bank stage in whip. From here it can relatively, quickly be packaged and tested to meet individual customer requests. Our inventory turns was four times compared to 3.9 times last quarter. Lead times are short and we have many different products. So, having adequate inventory is important in this environment to maximize customer response time.

Deferred taxes and other current assets decreased by $4.2 million from the March quarter, primarily due to lower interest income receivable and due to a decrease in prepaid taxis resulted from the lowering of our US adjusting inventory. Property plans and equipment decreased by $6.7 million.

We had additions of $3,647,000 million and we had depreciation of 10,377,000. Most of the additions were for the initial construction cost for our new R&D building in Milpitas and for test equipment in our foreign factories. We had plans to spend 65 million for capital additions in fiscal 2009, but due to the reduction in sales, due to the recession, we reduced that to $39 million for fiscal 2009, with appreciation of $42 million during the fiscal year.

For fiscal 2010, we expect that capital additions of $10 million and depreciation of $40 million. Other non-current assets totaling 73.9 million increased modestly by $1.4 million.

Moving to the liability side of the balance sheet, accounts payable increased modestly by 325,000, accrued income taxes in payroll and other accrued liabilities decreased significantly by $30.5 million. The largest items here are our profit sharing approvals, income taxes payable and accrued interest payable on our convertible debt.

Our interest payable accrual decreased as we hand one semiannual payout in May. Increases to the profit sharing accrual were partially offset by reduced payroll taxes. The largest change was in the income tax accrual as our tax payments increased in the quarter, largely due to taxes associated with gains on our convertible bonds over the last nine months and also due to taxes paid on intercompany products.

Deferred income on shipments to distribution was down $2.8 million this quarter, as our shipments to US distributors were less than what they had shipped out to their end customers. Our accounting on shipments to US distribution is conservative; we do not record a sale of more income in our results of operations until the distributor ships the product out to its in customer.

We continue to closely control our inventory at distribution to properly position the inventory without any unneeded build out. Convertibles senior notes were reduced as the Company paid $62.8 million to retire $64.4 million in face value of its notes. Deferred tax and other long-term liabilities increased by $5.1 million due to several tax related items.

Changes in the acquired accounts were primarily the result of the usual quarterly transactions, for net income, dividends paid, and employee stock or activity. The company announced that it will again pay a quarterly dividend of $0.22 per share. The Company believes that paying a dividend is an important way to return value to its shareholders.

The Company began paying a dividend in 1992 and has increased it every year since and currently now pays a yield of approximately 3.5%. Looking forward, I would now like to close out our introductory comments by revisiting of guidance.

Our guidance is based on inputs from our worldwide sales force and inputs from our production control personnel, who monitor bookings, cancellations, push outs, pull-ins, and customer lead-time requests.

In addition to these inputs, we talk with distribution personnel and analyze individual customer feedback. Forecasting is presently more complicated because there are conflicting opinions on the global economy. Some economic indicators are showing improvement, yet unemployment figures continue to rise, consumer and industrial confidence continues to be cautious, and government stimulus programs, particularly in the US have not yet met expectations.

However, despite general economic concerns, from a Linear specific point of view inventories are low, backlogs are no low, lead times are low, and cancellations have diminished. With regard to inventories we at linear have been reducing inventory in US distribution and internationally have generally been shipping less to our distributors and they have shipped to their end customers, thereby enabling most distributors to reduce their inventories.

Generally, although customers continue to be cautious they appear to be more consistent in their ordering frequency. Also we are just starting to see some improvement in our industrial and automotive businesses. In June, and so far in July, we have seen some modest improvement in our distribution business in the USA, and some modest improvement in ordering from our larger industrial clients.

Combining the considerations of a positive book to bill ratio for the June quarter diminished beginning inventory positions at distributors. A sense of some improvement in our industrial and automotive customers, offset by general concerns about global economic conditions leaves us to our guidance for the September quarter of revenues being in the range of up to the 5%.

This is the summer quarter, which is usually slow for us, especially in Europe. But given the fact that we're coming off a recession impacted lower sales base, we still believe we can meet this revenue forecast. In these uncertain times there are measures we have been taking to control costs, since many of our costs, particularly in the labor area are variable.

We will continue that weekly shutdowns in our factories this quarter, roughly similar to last quarter. All employees will continue to have a 10% reduction in base pay. Discretionary spending in communications travel and other areas will also be closely controlled.

As a result, we currently forecast that we can achieve operating margins in the upper 30% range of sales, which is in the mid-40% range on a pro forma basis. As I mentioned earlier in this presentation there have been two recent accounting pronouncements that will affect our profitability after operating income.

First, we will have additional non-cash interest expense of approximately $7 million and second we will have an increase in diluted shares outstanding of approximately 4.5 million shares. Combining, these will reduce earnings per share by approximately 2.5 cents per share, of which $0.02 most analysts will not consider in their pro forma numbers.

We want to emphasize that in another difficult economic period in 2001, during the dot com bust, we remained very profitable and cash flow positive, unlike many of our competitors. We are therefore in a position to continue to invest in the future, specifically in developing unique analog circuits to meet the needs and the communications, industrial, automotive, and other end markets.

In technology, the key is to be innovative and well positioned when growth resumes. Similar to the dot com era, we are seeing a pick up in designing activity. Customers often with fewer engineers as a result of layoffs are striving to get next generation and new innovative products to market.

In these circumstances, quality and timeliness of design support are often more highly regarded than more price breaks, which plays to our strength. After the dot com bust, our sales for the next three fiscal years grew 18%, 33%, and 30%.

Nowadays, these are difficult times, but we hope to emerge again well-positioned to outperform. I would now like to open up the conference call to questions be addressed to either Bob, Lothar, or myself.

Question-and-Answer Session

Operator

(Operator instructions) And our first question will come from Tore Svanberg – Thomas Weisel Partners.

Tore Svanberg – Thomas Weisel Partners

Yes, thank you, good morning. Just a few questions, first of all, Paul you mentioned that you have a seen a modest improvement in industrial -- in June and July, I was just hoping if you can elaborate a little bit on that is it broad-based, is it because distributors are just running to lower inventory, if you could add some color I would appreciate it?

Paul Coghlan

Well I think where we saw the pickup was in distribution, which for several quarters now has been going backwards. So, it was encouraging to see some improvement there in the month of June and in July. And it is broad-based, I believe within distribution. I don't think they are altering their inventory patterns. I think it is just reflective of demand that they have on them, as their book to bill ratio also is picking up in these months.

Tore Svanberg – Thomas Weisel Partners

Great, and you mentioned you anticipate to continue the weekly shutdowns this quarter, yet you are now starting to see improvement in almost all your businesses, so I'm just trying to understand where that is coming from, is it just being cautious, just because of the economy or do you think the uptick that we have seen so far is just going to continue to be very moderate?

Paul Coghlan

Well just four quarters ago Tore we had revenue of $310 million, and our factories were running at that rate or little higher, to make sure we had adequate inventory to grow. Since then, as you know the revenues have dropped pretty significantly.

Now, we have done some things to address that, we have had some minor reductions in workforce, but we have used factory shutdowns, particularly in our fab areas to make sure that we are not building too much inventory and that we are utilizing the die bank we had built.

So, I think, we will need to continue that being shut down, but I also think, we can have the shutdowns and continue to grow our revenues for several quarters.

Tore Svanberg – Thomas Weisel Partners

Very good, thanks, great quarter.

Paul Coghlan

Thank you.

Operator

Our next question will come from Uche Orji with UBS.

Uche Orji – UBS

Thank you very much. Paul when you talk about the turns business required being very high, anyhow you can quantify that for us in terms of what percentage of turns business you will need this quarter and relative to previous levels?

Paul Coghlan

Well it is very similar Uche to previous levels. So, we generally run about 60% turns and a quarter. Our lead times are at the low end to 2 to 4 weeks as I told you earlier, and this quarter lead time goals are similar to last quarter’s, which were similar to the quarters before.

Uche Orji – UBS

Okay, that is helpful. In automotive, you talk about recovery in Japan and also in Europe, how much of what you are seeing is you getting new business or, you know introducing new areas of business for the automotive industry, and how much of that is just in our recovery as markets in Europe and some other things like people replacing the old cost and new cost, so can you just talk about what you are saying within growth markets in terms of good market share gain for you, and just in our recovery in the auto market?

Paul Coghlan

Yes. For us the automotive improvement in sales that we saw last quarter was pretty encouraging, it was 2% of sales and it was strongest in Japan, my sense is that most of that recovery that we seen our improvement in sales is really existing business that is bouncing back, the design and time and the automotive is relatively long.

I anticipate that, you know we have been at this automotive focus for quite a while and a portion of that may be related to the fact that some new designs are finally going to production, there is one in Japan, in particular that I'm aware of that we have got a product that manages the charging and discharging and cell balancing of lithium batteries and that particular product, the 6802 was last quarter designed in and was brought to production in an all electric car in Japan.

So, I think part of it is new designs going into production, but I think the majority of it is really a bounce back of our existing business.

Uche Orji – UBS

Okay, and just one more question, if I looked at your comments on the wireless infrastructure market in China, having slowed down given the strength we have historically – or seen in the last few quarters, what is your sense as to how much this pause as I have to call it will last, and when do you think there will be a pick up again, because relatively in previous calls last week talked about multiyear spending in China and so I just want to get a sense of how long do you think the current pause will last?

Paul Coghlan

Well I think our sense was that Q3 was unusually strong in China for us and we had expected a pause, but we think that will pick up again. We are not, we don't believe it will pickup at the same accelerated rate it did in Q3, but we certainly think that there is going to be as China builds out smaller and smaller cities, you're going to have kind of bumpy, but good bumps if you will, business relative to their 3G build-outs throughout their country.

Uche Orji – UBS

And then just one last question on ASP, your ASPs are down this quarter, most of that being mixed – you know of computing and consumer being higher, question here is, do think you will – is it just a seasonal thing happening or do you expect that this is now -- ASP's will now start to drop much more significantly because most of the plans we see with all the smart phone companies, people suggest that they at least the cellular area will continue to remain strong.

Although as up small sort of a business, but just in general, what is your thought as to where ASPs will go and what impact could that have in your gross margins? What should we expect over time our gross margin to trend towards? Thank you.

Paul Coghlan

Well I think that ASPs more round in the quarter depending on the amount of consumer and cell phone business we have within that quarter. Perhaps this quarter, as we told you, we had a built-up in those two areas. Some of it tends to be seasonal generally like the markets quarter those numbers are historically low. I think overall, we have told you that we have been transitioning more into traditional analog businesses; only 14% of our business for fiscal 2009 was in consumer and cell phone.

On the other hand, we're opportunistic when good opportunities arise there. So, my guess is ASP's will generally tend to trend up and that will have some beneficial, but not significantly beneficial impact on gross margin because as you have seen over the years ASPs moved around for Linear, but the gross margin has remained relatively consistent in the mid-to-slightly high 70% range.

Uche Orji – UBS

Sure. Thank you very much Paul, thank you.

Operator

Our next question will come from Gus Richard with Piper Jaffray.

Auguste Richard – Piper Jaffray

Yes, thanks for taking my question. Your distributors, are they happy with their current levels of inventory, do they feel as business starts to improve that they are going to take those up?

Paul Coghlan

I think our distributors were never happy with the level of inventory. They would always prefer we carry all the inventory, but I think at the levels they are presently at, I think we are all very comfortable that they have got adequate inventory to cover their customer needs and that I don't think, we yet all feel that we have too much inventory in our distribution channel presently. And we did, as Paul mentioned did drop our inventory both in domestic and international distribution this past quarter.

Paul Coghlan

Gus, if you like this there is a lot of teamwork between the suppliers, particularly Linear in this case and the distributor. And what we try to emphasize with the distributor is that particularly the US guys is that we have lead times of 2 to 4 weeks, closer to the two week size.

So, we try to encourage the distributor and not to put too much inventory on his shelf by telling him, look, you order it, we get it to you quickly, you can turn it around, you can shift it to your customer, it is good for your asset management, goals, and it is good for our determination, what to build, how much the build, and our understanding of what the real true demand is.

So, we have over the years tried to work pretty closely with the distributor. Now when business gets weaker they are anxious to reduce their inventories obviously, when it gets stronger, sometimes there is a little push/pull and that they want a lot more inventory and we keep telling them, look calm down we will get to you when you need it, don't stricken on the shell.

Auguste Richard - Piper Jaffray

Okay and then, just one, my second question, on the high-end consumer that had a pretty good sequential increase and could you give a little more color as to what end market or types of circuits were driving that?

Paul Coghlan

Well, I'll start with where it was, maybe Lothar can help me answer that question, it was surprisingly broad-based both in the number of customers and in the geography areas, which means it was kind of small amounts in a lot of different places.

Sometimes it was -- we ran a new program and that obviously was helpful. In other times, there was a little bit of someone maybe not ordering much in the prior quarter and ordering a little bit more in this quarter as their business picked up, but it was really hard to isolate it on one or two things. It was generally broad-based.

Lothar Maier

And if I saw any sort of concentration I would say the pickup was in -- we saw several of our customers that we sell GPS systems, we saw those pickup last quarter.

Auguste Richard - Piper Jaffray

Okay got it. That is very helpful thank you.

Operator

Your next question will come from Blayne Curtis with Jefferies.

Blayne Curtis – Jefferies

Good morning guys, couple of questions, I just want to OpEx line, you had a $2 million restructuring, it seems to indicate that you are going to take the same cost reduction measures this quarter, if I am reading that right that OpEx should go down on a GAAP basis and then try to reconcile that with the guidance if revenue going up, operating margin is in the high 30s, does that imply gross margin ticks down a bit?

Paul Coghlan

No, it doesn't imply gross margins ticks down a little bit, you are right that we don't anticipate having a restructuring charge, so that if we continue, you know our disciplines in the expenses area, expenses should be down a bit, specifically as it is related to the restructuring charge.

Gross margin and sales pick up a little bit, you know again depending on factory utilization rates, ASP's, etcetera, like that, there is a potential of a little bit improvement there. We had operating income last quarter at 38%. I think we have guided to the high 30s, so that gives us a little room to improve that number, who knows it, we are fortunate and business is strong, and you know we will see how it goes.

Blayne Curtis – Jefferies

What was the utilization rate this quarter and how do you look at that going forward?

Paul Coghlan

Well it was just a few quarters ago that we were doing a $300 million of sales. So, we didn't get rid of that capacity that installed capacity is still there. We are running at $100 million yet less, so we are probably running in terms of plant utilization, you know at 70% to 75%.

What we have done though is, we have done cost controls, so that as we run at these lower utilization rates that we don't take a lot of cost associated with it, we were doing shutdowns, we have some layoffs, we have got pay reductions that effect all employees and we have idled some capital equipment, but for us to go from where we are back to where we were at over $300 million a quarter, it really is going to take just, you know adding a few direct labor.

Blayne Curtis – Jefferies

Okay and then just finally, you are seeing an uptick in industrial and auto, I was wondering if you can quantify the near term uptick here, how much of that is, the work done in inventory stopping versus the end customer actually picking up demand and then, I was wondering if you could just take a stab at, you know these business are running you know maybe done 30% to 50% year-over-year, you know the significantly off, you know what is your best guess to the timeframe that these things can get back close to previous levels of the quarters, years, just about to get there.

Paul Coghlan

We will need it to be a pure gas. We will certainly hope it is not years and we don't think it is going to be just a quarter or two. Relative to what it is, I think we believe in the distribution area, it is not inventory build-up at the distributor. So, was demand on the distributor, like the distributor’s end-customers? Now whether that end customer was building up its inventory? I can’t tell. My sense is it is more demand, but I don't really know the customer of the distributor.

Generally, all of our customers see us with this very low lead times and have known us over the years to consistently in good markets and poor markets be able to maintain low lead times. So, there is really no encouragement for our customers to build Linear inventory.

Since they are pretty confident they will get it supplied when they need it. So, I mean our sense is that this business pick up, is real business, but again it just started at the end of June and then in July, and you know we are not telling you to rent a hall and hire a band, we are telling you know it is kind of picked up a bit.

So - but we would hope it is not going to be years before it gets to the other level. We think, the economies pick up a little bit, stimulus packages work, you know hopefully this turn around year from now will be talking things are little better maybe than we all expect.

Blayne Curtis – Jefferies

Okay. Thanks Bob.

Operator

Our next question will come from Craig Ellis with Caris & Company.

Craig Ellis - Caris & Company

Thanks for taking the question and nice job. Paul you mentioned on the last call and again on this one that your customers in this type of environment, due to their own right sizing rely on Linear Technology more, in the past how long did it take that type of engagement to manifest and increase sales for Linear Tech, so -- say differently is this something that can help Linear Tech in the back half of this year or does the benefit really come more in 2010, as we think about the topline?

Paul Coghlan

Well the only model if you can call it that of a deep downturn, it wasn't recession, but it was more technology related downturn, was 2001 and we saw similar characteristics of high designing activity, a real need for innovation and getting new products to market on the overall customer base.

And back then the following year, we grew 18%, the year after that 33%, and the year after that 30%. So, I am not saying they will be exactly like that, but it wouldn't surprise me, if it is something in that kind of mode because these new products have to first come to market in this next year than get market acceptance and penetration, and so I think what happened in 2001 -- wouldn't surprise me if it repeated and I am not forecasting or predicting it well, but it wouldn't surprise me.

Craig Ellis - Caris & Company

Okay that is helpful context. And then maybe a similar type question on industrial, I think a lot of us are trying to understand what is happening in that end market since the signs of improvement are (inaudible), but as you look back over the history of Linear Tech in that market, when order improvement has begun, and I thought you said it had begun with some of your larger customers, how long has it historically taken from -- for that improvement to trickle down into the small-to-mid size customer base that is an important part of your business as well?

Paul Coghlan

You know Craig that is a very difficult question for us to answer at this time because this time you have got the credit issue. Last time, we did not have the credit issue. So, even now like you hear in banks are reporting outstanding earnings, big growth, but at our level we are still hearing companies, good companies having taking longer to get correct.

Good companies saying you know they have some credit issues and so that you know I have got this credit thing that is going to impact small-to-medium size companies. Now, it is not dire, it is not that they can't get it, it just takes them longer to get it, for levels they get or scrutinized more. So, I don't really know if I have got a good historical basis that I can say, "This smells and looks just like that. Therefore, I expect the following”. That’s one part of the answer. The second part of the answer is industrial is just so broad-based and just so big. It typically moves pretty slowly so that I think the trends will be more consistent than spikish when that market turns around.

Craig Ellis – Caris & Company

And what geographies are you seeing--

Paul Coghlan

You mentioned that -- one last point. You mentioned that we saw an up tick in our larger customers. Let me repeat again, what we saw was some of the larger customers starting to improve their ordering; but it's still -- you shouldn’t run with that. It’s still pretty small, it’s still got lot of room to go, but I mean it is different than it was last quarter, but it’s still the beginning stage.

Craig Ellis – Caris & Company

And I am sorry, Paul, are you seeing that in the US and Europe and Japan, or is it narrower than that?

Paul Coghlan

Well, we see a bit in the US. That's a hard question because if I can give you a lot of granularity on that it would mean it’s really gone pretty robustly, right? If I can answer that question, then I've told you it's at the starting stages, not a robustness.

Craig Ellis – Caris & Company

Sorry. Thanks for the help.

Operator

Our next question will come from Romit Shah with Barclays Capital.

Romit Shah – Barclays Capital

Thanks. Hi, Paul, looks like you guys had a pretty good June quarter. My question is more on the guidance, if I look back over the last five, six years, I think September quarter on average has been up about 3% which is where you are guiding it this year. And I guess my question is why are we not saying a bigger list given sort of the run rates you are coming off of and the improved activity we are seeing out of distribution?

Paul Coghlan

Well, I mean we are in the middle of a worldwide recession. We’ve told you some of these changes have been small. We told you that the distribution channel was down in the June quarter, it’s not like it was up Romit, it was down, we should have picked up a bit at the end of June. So what you have is you have some improvement in the distribution very late in the quarter, you have the summer quarter, which has its own issues, you have this worldwide recession, you have credit issues still out there, you have some concerns in the more volatile businesses of consumer computer, whether the pickups are just inventory pickups or whether they are real. So we thought actually given this current environment for summer quarter, projecting 2% to 5% was reasonably good for us.

Romit Shah – Barclays Capital

Do you think the main difference in growth rates between you and some of the other diversified semi-guys might be the level of exposure to some of these higher volume markets?

Paul Coghlan

Well, I have -- we have much less exposure to consumer and cell phone than any of our competitors. It’s 14% of our business. Quite a few of them, its 50% or greater, especially if you add computer into them. So I mean I just think we are different.

Romit Shah – Barclays Capital

Okay. It’s a follow-up question on inventories, why is it that you guys are choosing to manage your inventories by shutting down the plants versus just lowering your utilization? Is there some magic benefit to that strategy versus the other?

Lothar Maier

Well, by shutting down the factories, we actually save money. If we just lower the utilization, we would have less output, but we wouldn’t see the same benefit in cost reduction. So by shutting it down, we can turn off equipment, we don’t have to pay for the electrical to run it. So for us, it’s more cost effective to do it that way.

Paul Coghlan

-- trained labor force.

Romit Shah – Barclays Capital

Okay. Thank you.

Paul Coghlan

And plus, Romit, it means the labor force we have that's been excellent for us, which helps us maintain the quality standards we have continues employed. So that’s a big strength of us and we don’t want to lose it.

Lothar Maier

If things do bounce back, we have got the labor in place.

Romit Shah – Barclays Capital

Yes, it makes sense. I am surprised more companies don't do that. All right. Thank you.

Operator

Our next question will come from Steve Smigie with Raymond James.

Steve Smigie – Raymond James

Great. Thank you. I was wondering -- most questions today on the telecom side have been on China. On the US side, I was hoping you could give a little bit more color. It looks like, if you look at some of the carrier spending budgets, the carriers have not yet spend a lot of those budgets, there may have to be some acceleration there. Are you seeing any of that or is that may be yet to come?

Lothar Maier

This is spending in China?

Steve Smigie – Raymond James

No. This is spending in the US, by AT & T and Verizon for example. So these guys have to spent their budgets potentially by more equipment and I was wondering if you guys might be seeing some of that.

Lothar Maier

I don’t know of any granularity that I can add to that, may be Paul?

Paul Coghlan

No, I think the biggest build-out we saw in Q3 in China. We haven’t seen a build-out that big in the United States yet.

Steve Smigie – Raymond James

Okay. And then just curious if you could talk about plans for uses of cash, buying back more convert, et cetera.

Paul Coghlan

While the short convert, the one that was $700 million, that’s now about $405 million, that one is portable and callable in November 2010. So I think we will tend to concentrate our employment of cash on that particular bond either wait until it matures to retire it, or depending on the pricing in the bond market, we might to look at buying some of that.

Steve Smigie – Raymond James

Okay. And then last as we look forward maybe to December, do you think we are still trying to play catch up with demand in that quarter, so potentially better than seasonal December quarter as well?

Paul Coghlan

Well, that’s a top call. I mean we have been looking at this kind of month-by-month as you can tell, with our low lead times and stuff. We don't have any reason to believe that December is going to be a bad quarter, that’s what you are asking or do we have any reason at least linear to believe that some of the improvement we have seen in the June quarter and that we are forecasting in the September quarter was just inventory related and could evaporate on us in the December quarter. We don't see that happening, but the December quarter is just -- we just have to see how that plays out. There is a lot of big sub contractors in the December quarter that build for the holiday season, that’s not a big part of our business. So that shouldn’t impact this as much, but it is some of our business. So it’s really early for us to call December and we don’t really want to be on record as calling it at this stage.

Steve Smigie – Raymond James

Okay. Thank you.

Operator

Our next question will come from John Pitzer with Credit Suisse.

John Pitzer – Credit Suisse

Yes, good morning guys. Thanks for taking my question. I guess, Paul, my first question, when you look at the variable comp structure of your business model, I think I understand how things are trending in September. As revenue growth comes back, can you help me understand how we should think about variable costs? Should variable costs grow slower than revenue, or is there sort of a threshold where we might see some catch up and remind me the buckets on the variable costs as well.

Paul Coghlan

Well, I don’t know what you mean by buckets, but variable costs to me what happens is, we’ve been -- we’ve historically had a model with the high content of variable cost, particularly in the labor area. So that has -- as the economies have difficulties, rescission, dot com busts, whatever you want to talk about, we’ve been able to adjust our variable costs to at least soften some of the blow in that area, although it’s a painful softening. As business picks up, our variable costs will pick up as well. But if your question is would our variable costs pick up at a faster rate than our sales, I don’t think that way.

John Pitzer – Credit Suisse

That’s kind of what I was getting at, whether or not there's a revenue threshold where you reinstate some of the salaries or bonuses and you have to worry about a situation of variable costs outstripping revenue growth. It doesn't sound like it.

Paul Coghlan

No, I don’t think so.

John Pitzer – Credit Suisse

And then, Paul, on the lead time question, I understand you guys are at the low end of two to four weeks and that’s giving disties [ph] comfort to kind of go hand and mouth. Is there a revenue level in the near term where you think lead times stretch out, and at what lead time point do you think the disties get uncomfortable and start building some buffer?

Lothar Maier

We’ve had the ability to keep our lead time short during slow times and busy times. When sales were $100 million more a quarter than were presently, we still had short lead times. So I anticipate that, you know really what matter what the market conditions are, that our lead times will remain short. The only sort of oddity that we are seeing is, we get probably a lot more what we call pull-in activity. Somebody will give us an order schedule that out three or four weeks and then a few days later, call us and tell us he needs it right away. And so I think that type of activity is leading to some of these shorter lead times. But as far as if business picks up will it -- are we concerned about a push out of lead times not at all.

John Pitzer – Credit Suisse

I think I guess my last question, Paul, given your gross margin structure, there is always sort of that long term noise about can you maintain this margin structure and keep up your growth rate. And it seems like that noise gets louder going into a cyclical downturn because there is always a couple of quarters off the bottom where you undergrow the industry and I think in one, there was two sequential quarters you undergrew before you start to outgrow. Is that know we should think about this recovery as well and if we are out in December and March, and you are still undergrowing, your peers in the industry does the noise around margin versus revenue growth start to have some credibility in your mind?

Paul Coghlan

While we tried to explain that, we serve as a different end of the markets than lot of our competitors. They are much stronger in computer, consumer and cell phone, and we are stronger in the areas that require little more analog expertise and a little more precision that are product attributes. So that and that’s typically enables us to sell our products at their functional value, not an unfair price to the customer but one that’s really relates well to the function and value of the product. So that’s why we have been able to maintain these great margins overall the years. So you are kind of hypothetical question of what if we were to undergo, I think you realized we have not undergrown our competitors may be one individual quarter if you can look at one, but overall if you look at the fiscal years, if you look at the SIA data which just came out on analog on a down year, we were down but not down as much as the market last year on an up year, not a minor up year. We were up a little better than the market. So I think this concept that somehow Linear could or is losing market share is not sustained by the numbers and if your question is what if all of that were to change what would happen? We don’t anticipate that changing.

Lothar Maier

Still wouldn't pursue profits –

John Pitzer – Credit Suisse

Perfect guys. I really appreciate it. Thank you.

Lothar Maier

Okay. Good luck.

Operator

Our next question will come from Ross Seymore with Deutsche Bank.

Ross Seymore – Deutsche Bank

Hi guys, congrats on the profitability again through this downturn. Just a couple of questions on that, the gross margin side of things, how does mix -- with especially with your industrial commentary impact what gross margin is going to do?

Lothar Maier

Well, you know Ross, I don’t you mean, ASP moves around a bit, but our margin doesn’t move a great deal. We have kind of similar margin profiles in just about all of our products, not exactly the same but similar. So may be I don’t fully understand your question, can you maybe express a little differently of what you are asking me relative to my in-customer mix and how it would impact margin?

Ross Seymore – Deutsche Bank

I think you actually, you hit on what I was getting at. There is industrial improving help your gross margin and it sounds like the answer is no, I guess the follow-up on that point would be, is the bigger driver of that simply getting rid of the one week shut down growing revenues etc.

Lothar Maier

Yes, I think the biggest driver to gross margin would be having a larger sales base over which to absorb the fixed costs. Now, I think that's the biggest driver.

Ross Seymore – Deutsche Bank

Industrial definitely helps, but not much. And then I guess from that perspective and when that could occur, obviously there is a revenue side to the equation but there is also a desired inventory level. How should we think about where you would start ramping your fab back up, mainly vis-à-vis inventory more so than demand? Is there like a day's inventory target, et cetera?

Paul Coghlan

Well right now, we are running shutdowns because we have shutdowns, that means if we were to run full with no shutdowns would generate inventory. So as sufficient inventory, we are kind of balancing the inventory with current demand by having these shutdowns. So these shutdowns, we would anticipate should we grow at a reasonable rate which still have shutdowns for maybe a quarter or two, so but they will be diminished, so you would have fewer as you move on. So its kind of it’s a variable way of running your business. You look at that, then you look at the -- and that’s how I think we would control inventory.

Ross Seymore – Deutsche Bank

So you pretty much keep the absolute dollar of inventory flattish and then adjust the input side of the equation.

Paul Coghlan

Yes. I mean it could go up one quarter depending on what you are building late in the quarter et cetera, but I think in broad terms you are absolutely correct.

Ross Seymore – Deutsche Bank

Okay. Then, moving on quickly to the OpEx side of the equation, how should we think about when the one week shutdowns -- to the extent that has anything to do with OpEx or the 10% pay cuts come out of the equation? What are either the thresholds to get that to go back in that direction or how should we think of kind of OpEx versus revenue growth to the extent you have an answer to that question already.

Paul Coghlan

Well, I think if we do it right, you won't -- it won't be clearly visible to you. Like, I don’t think we are going to -- I hope we don’t wind up saying you one quarter, OpEx got lot higher because we made the following change in the quarter. We think as revenues increase, we will be able to gradually make changes so that we can continue to be very profitable, continue and maybe improve profitability and also reduce some of these employee labor restrictions. So I don’t think its ever going to be like a big visible thing to you.

Ross Seymore – Deutsche Bank

Got you. One quick housekeeping one. You usually give backlog at the end of the fiscal year, can you give that to us please?

Paul Coghlan

Yes, let me look it up.

Lothar Maier

$80 million isn’t it?

Paul Coghlan

$88 million. It was $88 million Ross.

Ross Seymore – Deutsche Bank

Great. Thank you very much.

Operator

Our next question will come from Joanne Feeney with FTN Equity.

Joanne Feeney - FTN Equity Capital Markets

So if I could, one last question to hopefully to get further clarity on the issue of variable costs as you ramp. Suppose we thought about that in terms of how much permanent cost reduction you have undertaken? So if you were to be able to think about returning to a run rate, I would say, 300 million, can you give us a sense of what your operating expenses would be as a percentage of revenue today versus when you were last at that level?

Paul Coghlan

No, I don’t have that answer. I know I reduced overall headcount by roughly 10%. So on the way back to 300 million, there would be some increases. My guess is that, it wouldn’t be the full 10%.

Joanne Feeney - FTN Equity Capital Markets

Okay. That’s helpful. And then other question, have you ever -- some of analog colleagues out there have moved to more of a consignment model and they argue that there's sort of better flexibility and they have better control over where their products sit. Have you guys ever looked at that, and is that something that you would define beneficial to your type of business and perhaps why or why not?

Lothar Maier

I think -- we’ve looked at it and there is some customers that have talked to us about it, but that’s not a practice that necessarily that we embrace and just for a number of reasons is that, to some extent it makes the sales somewhat unpredictable because you ship product into a warehouse and you don’t really know when you can recognize that as a sale until it finally moves from the warehouse to the end customer. And so that’s not a practice that we are very enthusiastic about.

Joanne Feeney - FTN Equity Capital Markets

Okay.

Paul Coghlan

And remember, we have extraordinarily low lead times vis-à-vis our competitors. So the big customer demand at this warehouse thing, we can generally offset that by selling them two to three week lead time -- do we really need to go through this drill and have you ever had any problems with us delivering on time. So we have -- we think if you run a more efficient factory it actually better for the customer and if you do some kind of path work [ph] thing like this consigned inventory to kind of cover up your lead time risks.

Joanne Feeney - FTN Equity Capital Markets

You guys can sort of withhold more inventory in house and that way control where it needs to be because you have short lead times.

Paul Coghlan

Exactly.

Joanne Feeney - FTN Equity Capital Markets

Yes. Okay. Thanks, that’s real helpful. Thanks, Paul.

Operator

Our next question will come from Jim Covello with Goldman Sachs.

Jim Covello – Goldman Sachs

Great, good morning. Thanks so much for taking the question. Just one pretty straight forward one, Paul, I am curious as to your forward-looking view on ever doing another levered buyback when all has been kind of set and down here with everything with the stock and now they are buying back the convert as we go through time.

Paul Coghlan

Well, certainly now when you asking that question, I would say to you if I knew in April '07 what I know in July '09, we wouldn't have done it. But no, it depends a lot on the time, it depends a lot on what you view your business to be, it depends on the availability of financing, it depends on whether you think Wall Street understands your strategy or not. So there's a lot of factors that go into it. So it's sort of it's an old expression never say never and never say it for sure always. So I think you just have to judge that on the times. So today, we have no interest in doing it, but you just have to judge the times on that.

Jim Covello – Goldman Sachs

It’s a hard question to answer, but if you were to guess three to five years out, do you think your share count would be meaningfully lower than it is today, one way or the other whether it's through levered buybacks or traditional buybacks?

Paul Coghlan

Well, it is significantly lower now and we certainly aren’t planning for it to go back up.

Jim Covello – Goldman Sachs

No, I understand not back up significantly, but is it more likely we are just going to see flattish or do you -- significantly lower share count as a good use of cash, again whether it’s to leveraged buybacks or traditional buybacks?

Paul Coghlan

Jim to ask me a question three to five years out now is just, as you prefaced it by "this is a difficult question”, it is.

Jim Covello – Goldman Sachs

Yes.

Paul Coghlan

And I don’t know what the market is going to be like that. What I know now is, we have some debt, we are concentrating the utilization of our cash on paying off that debt and that’s what we are going to do for the next couple of years.

Jim Covello – Goldman Sachs

Terrific.

Paul Coghlan

And you know whether we -- now, if for some reason that is a great advantage to buyback stock or something comes up, we would certainly look at that. But I mean I don’t I don't vision it at the moment, but that doesn't mean we are constitutionally opposed to it.

Jim Covello – Goldman Sachs

All right. Thank you so much. I really appreciate it and congratulations.

Operator

And we will move to Craig Berger with FBR Capital Markets.

Craig Berger – FBR Capital Markets

Good afternoon and thanks for taking my question. Embedded in your forward guidance for operating margins, we do assume that OpEx is going to increase in the September quarter?

Paul Coghlan

I think I could -- I mean I don’t think the percentage of OpEx relative to sales is going to increase, but do you mean the absolute dollars?

Craig Berger – FBR Capital Markets

Dollars.

Paul Coghlan

I don’t think that’s going to be a dramatic increase in them, no.

Craig Berger – FBR Capital Markets

And then on the continued fab closures, what’s the -- sort of as sales rise and you stop doing those furloughs, what's the cost of goods impact as those employees become more full time?

Paul Coghlan

Well, it's -- you're trying to work your way into the model, I can see. That's not easiest question to answer because what happens is, when they come in to the model full time, you pickup an expense which is labor expense. Concurrently, you hope your moves per operator remain the same at least. So you pick up an efficiency and that efficiency is in absorption. So what you have is, it’s almost a neutral affect actually for us whenever we have a fab shutdown, it generally has a negative P&L impact, but a little bit. So the shutdowns are more driven to control inventory than they are driven to make a major change in gross margin.

Craig Berger – FBR Capital Markets

Last question, can you just tell us what you are seeing in the military satellite area, especially as we are hearing of some of these new Dreamliners pushing out, et cetera?

Paul Coghlan

It was 8% of our business this quarter, was 8% last quarter. We think that’s -- the people have run that business here at our Company foresee that as a good strong business and encourage us to continue to invest, invest even more in it. It used to be many years ago just concentrated in the US, now there is a healthy bit of it that’s overseas particularly in Europe. So if you go back a couple of years, that was 5% of our business, its now 8% of our business. That’s -- I don’t think its going to be double digit but it’s a pretty good strong profitable hard to do, needs good quality, likes all the attributes, Linear has business.

Craig Berger – FBR Capital Markets

Thanks guys. Good luck.

Paul Coghlan

Thank you.

Operator

And our next question will come from Chris Stanley with JP Morgan.

Chris Stanley – JP Morgan

Hey, thanks guys. Given the restructuring that you guys have taken, what revenue level do you think you need to get to back to the peak gross margins?

Paul Coghlan

I haven’t calculated that. So I can’t answer that, but I would see as we grow up to the margins, we would probably -- if you look at what the sales were when we were at the peak and when we get back to those levels, the income statement will probably look pretty similar to what it was then. So I would be a little bit lower, they are not substantially lower I guess.

Lothar Maier

I mean at 75% gross margin. So if you're looking for something with an eight in front of it, I doubt you will ever see that.

Chris Stanley – JP Morgan

No, just wondering what the low leverage means to the model and then what I guess revenue level or level of inventory would you guys need before you start to crank up the utilization rates again?

Paul Coghlan

I -- which level -- the level we have right now? I don’t quite understand the question.

Chris Stanley – JP Morgan

So you guys are I think running at -- whatever you said, 70% or 75% utilization rates, is there a sort of target inventory level or a target revenue level or you have to start increasing you utilization rates?

Paul Coghlan

No, I think from our perspective, I think we are having and will continue to kind of hold overall inventory pretty flat -- some quarters a little bit down, maybe some quarters a little bit -- up a little bit, but as sales increase, what will happen is, inventory will stay constant or relatively constant and what we will do is just unwind some of the shutdowns that we have. So as sales go up, inventory will stay the same or close to same and we will just have less factory shutdowns and better utilization.

Chris Stanley – JP Morgan

Okay. That makes a lot of sense. And then, if you guys do experience one of these 10% to 15% sequential quarters like some of the other semiconductor companies do, would that pretty much wipe out the shutdowns, pay reductions, all that stuff.

Lothar Maier

I don’t think, as Paul said, there is going to be a step. It is going to be gradual and that as these improvements in sales occur even if there was a big jump, I am not sure that we would necessarily unwind all of the cost savings we have done. I think its going to be much more gradual.

Chris Stanley – JP Morgan

Yes. Thanks guys.

Operator

(Operator instructions) We will now hear from David Wu with Global Crown Research.

David Wu – Global Crown Research

Yes. Thanks for taking my question. Lothar, I wondered I read the interview you had with eTimes [ph]; and in there I don't know whether they misquote you or not that automotive revenue could double and it makes two to three years from the current run rate. Obviously, this is in light of the Mitsubishi electric car design win; but is that a realistic level expectation for the automotive business and its makes let’s say two to three years? And that would make it the fastest growing part of Liner Tech? Should I make that assumption?

Lothar Maier

Well, I can tell you that a few years ago, automotive was just a low single digit part of our business and before the market tanked it was at 10% and we got a lot of good opportunities and we’ve been working at this thing for a number of years. I would not be surprised if we -- automotive went beyond 10% and I personally kind of hopeful because and it went to 20% or 15% or 20% in the next few years, certainly I would not be disappointed and I think automotive for us is an excellent market for Linear. It values what we value as well. It values quality, it values robustness, it values performance, and once you are designed into an automotive socket, you are in it for the life of the program which often times is four to six years. So for us it’s a good marriage and it’s an area where I think we can be very successful and I would love it to be up to 20% and we are going to work pretty hard to make that happen.

David Wu – Global Crown Research

Well, I was thinking that if you would have ranked the gross margin profile of that business, I know it’s sticky and hot to get in, but therefore sticky in terms of product life cycle. Could we compare the gross margin of your business with your industrial customer base?

Lothar Maier

I think they are similar.

Paul Coghlan

Yes, similar.

David Wu – Global Crown Research

Similar?

Paul Coghlan

Yes.

David Wu – Global Crown Research

Wonderful. Well, good. Thank you.

Paul Coghlan

You are welcome.

Operator

Our next question will come from Doug Freedman with Broadpoint.

Doug Freedman – Broadpoint AmTech

Great. Thanks guys. Could you talk a little bit about some of the product segments, the high frequency group, how that's going? The power module business as well and lastly, if you had any 10% customers in the quarter?

Lothar Maier

Hi, Doug. This is Lothar. Let me talk a little bit about high frequency. The high frequency was kind of a sleepy business for us for a long time and really in the last several quarters, a lot of the designing that we’ve been talking about for long time finally went into production. Certainly, the build out of the 3G in China helped the high frequency business. And so last year was a pretty good year for high frequency for us. The modules that has been a very good business we have. We have probably 20 products now in the module family and they have shown pretty much steady year-over-year and quarter-over-quarter sales growth, so that’s continuing to do well for us as well.

Paul Coghlan

We don’t have any 10% customers.

Doug Freedman – Broadpoint AmTech

And then lastly Paul, on the -- I was a little surprised to hear no in-the-money grants at all. Is there -- do we need to start to start to take into account the possibility of new grants to employees to keep some motivation and golden handcuffs there?

Paul Coghlan

Well, what I refer to were your classical non-qualified stock options. You may be aware that several years ago, we revered to restricted stock. Now, we do a blend sometimes the restricted stock and the other stock depending on conditions etc. So we think we are doing a good job of -- we have been granting stock, we have granted some, Doug; so we are very cognizant of the employee base and keeping them motivated and keeping them wanting to look at Linear as a long-term career. So we do grant stock, we do have the bonus and profit sharing plans when you have talked about, so I think we are doing a good job on that front.

Doug Freedman – Broadpoint AmTech

Great. Thank you.

Operator

And Mr. Coghlan, it appears we have no further questions at this time. I will turn the conference back over to you.

Paul Coghlan

Well, thank you very much for your attention today and your good questions, and I wish you all a good day. Bye, bye.

Operator

Thank you. That does conclude today's conference call. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!