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Linear Technology Corporation (NASDAQ:LLTC)

Q4 2014 Earnings Conference Call

July 23, 2014, 11:30 AM ET

Executives

Paul Coghlan - Chief Financial Officer, Vice President, Finance and Secretary

Lothar Maier - Chief Executive Officer and Director

Robert Swanson - Executive Chairman

Analysts

Craig Hettenbach - Morgan Stanley

Tore Svanberg - Stifel

Chris Caso - Susquehanna Financial Group

John Pitzer - Credit Suisse

Jim Covello - Goldman Sachs

JoAnne Feeney - ABR Investment Strategy

Ross Seymore - Deutsche Bank

William Stein - SunTrust

Steve Smigie - Raymond James

Craig Ellis - B. Riley Investments

Romit Shah - Nomura Securities

C.J. Muse - ISI Group

Vivek Arya - Bank of America Merrill Lynch

Craig Berger - Hedgeye

Gil Alexander - Darfil Associates

Operator

Good day and welcome to the fiscal 2014 fourth quarter earnings call. Today's conference is being recorded. And at this time, I'd like to turn the call over to Mr. Paul Coghlan. Please go ahead, sir.

Paul Coghlan

Hello. Good morning. This is Paul Coghlan. I am joined today by Bob Swanson, our Executive Chairman; and Lothar Maier, our CEO.

Welcome to the Linear Technology conference call. I will give you a brief overview of our recently completed fourth fiscal quarter and the annual fiscal 2014 results, and then address the current business climate. We will then open up the conference call to questions to be directed at Bob, Lothar or myself.

I trust you've all seen copies of our press release, which was published yesterday. First, however, I'd 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 timing introduction of new processes and products, and general conditions in the world economy and financial markets.

In addition to these risks, which we described in our press release issued yesterday, we refer you to the risk factors listed in the company's Form 10-Q for the quarter ended March 30, 2014, 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 income statement model and our balance sheet, this is the time we are free to respond to these questions.

As you can tell from our press release, the just completed June quarter was a good quarter for us, with sales up 5%, which was towards the higher end of our guidance. Entering the June quarter, we had commented that global macroeconomic conditions, although not robust, had been improving, that we had had good bookings momentum and that we expect that the automotive and industrial markets to continue to be strong. These expectations developed as expected in the quarter.

In addition to 5% sequential sales growth, sales also grew 11.7% over the similar quarter of the prior year. Gross margin, operating margin and net profit also grew both in absolute dollars and as a percent of sales, with positive book-to-bill ratio and cancellations were once again miner.

Bookings grew over the previous quarter at a higher pace than sales. We continue to believe that inventories worldwide at customers were relatively lean existing the quarter. This growth in bookings was seen over all of our end-markets, as each one improved from the prior quarter, led by industrial and automotive.

With regard to our financial results, sales increased by 5% from the prior quarter. The gross margin percentage at 76% improved from 75.7%. For the first quarter and almost three years we had no shutdowns in any of our factories. Average selling price at $1.90 improved from $1.83 last quarter.

Operating expenses increased by $3.4 million, mostly due to labor-related increases. Operating income at 47% of sales increased from 46.2% last quarter, due primarily to the increase in sales. Below the line, interest expense decreased significantly. In early May, we redeemed our outstanding convertible debt and consequently had $8.3 million less interest expense in the quarter.

Pre-tax income at $167.9 million was $19.1 million or 12.8% more than the previous quarter. The company's effective tax rate increased to 22.75% from 21% last quarter, primarily due to marginally higher discreet tax items in the previous quarter. Finally, net income of $129,735,000 increased 10.3% from $117,607,000 reported last quarter, due to the benefits of higher sales and lower interest expense, partially offset by higher tax rate.

Our return on sales was 35.5% versus 33.8% last quarter. Worldwide headcount increased 5%, 80% of which was in our overseas factories in anticipation of improving sales.

In summary, the effect of the items I just listed on the published quarterly results was that, revenue was $365.4 million for the fourth quarter of fiscal year 2014 compared with the previous quarter's revenue of $348 million and $327.3 million reported in the fourth quarter of the previous fiscal year.

GAAP diluted earnings per share of $0.53 increased $0.05 from the previous quarter's earnings per share and also increased 10% from that reported in the fourth quarter of fiscal 2013, which had lower sales and higher interest expense compared with this quarter. Earnings per share would be $0.59 on a pro forma basis, which excludes the impact of stock option accounting and the amortization of debt discount.

During the fourth quarter, the company's cash, cash equivalents and marketable securities decreased by $749.9 million to $1,013 million, net of spending $845.1 million to redeem all of its outstanding 3% convertible senior notes. The company spent $29 million to purchase 650,000 shares of its common stock in the open market.

The company also announced that it would pay a quarterly dividend of $0.27 per share. At the current stock price, the company's dividend yield is 2.3%. The cash dividend will be paid on August 27 to stockholders of record on August 15.

The June quarter was also the end of our fiscal year. Fiscal 2014 was generally a good year for us. The macroeconomic environment improved from the previous year, particularly in our second half. This coupled with our product offerings and in-market focus, enabled us to grow 8.3% year-over-year, with the last two quarters growing at an 11% and 12% year-over-year growth rate.

By end-market served, industrial and automotive grew the most, with automotive bookings growing roughly 25% over the prior year. Computer was the only end-market that regressed. We redeemed our convertible senior notes of $845.1 million, all out of internally generated funds. This was a milestone for us.

In 2007, we incurred debt to buyback 83 million shares of our stock, representing 27% of our outstanding stock. In 2014, we paid off the debt with only $2.9 million shares issued related to the conversion premium.

Regarding the operating side of our business, 2014 was also a good year. Operating expenses grew, but at a lower rate than sales. Sales grew 8%; operating income increased 12%; net income increased 13%. Revenues of $1,388.4 million grew $106.2 million from the previous year.

Operating income at $639.7 million increased by $66.6 million, and was a respectable 46.1% of sales, up from 44.7% in the previous year. Our effective tax rate at 23.5% was similar to last year's 23.1%.

Net income of $460 million, improved $53 million from the prior year. Diluted earnings per share for fiscal 2014 were $1.90, an increase of $0.19 from the $1.71 reported for the prior fiscal year.

From a balance sheet standpoint, cash, cash equivalents and marketable securities decreased by $512 million, net of spending $845.1 million to retire debt; $81.8 million to purchase 1,897,000 shares of our stock and paying $255.3 million in cash dividends.

As has been consistently demonstrated by our business model, this was generally good cash flow generation and return to stockholders for the fiscal year. The company returned to stockholders 24% of its revenue or 73% of its net income in the form of dividends and stock repurchases.

As we turn our focus to 2015, we are optimistic about our future growth prospects and are forecasting to grow in the September quarter. We ended the 2014 fiscal year with a good bookings quarter and a book-to-bill ratio greater than 1. We have also gotten off to a booking start so far in July.

Historically, the first fiscal quarter is a seasonally weaker period for us, but given our current bookings level, we are currently forecasting that revenues for our first quarter of fiscal 2015 will be up 1% to 3% sequentially over the June quarter, which, if we meet the midpoint of our guidance, will be the fourth consecutive quarter that we have grown year-over-year quarterly revenue at roughly 10% annual growth rate.

Now, I would like to address the quarter's results on a line-by-line basis. Starting with bookings. Bookings increased this quarter over the previous quarter and we had a positive book-to-bill ratio, and June was the strongest month in the quarter. Geographically, bookings were up both in the USA and international.

Within international, bookings were up in each major geographic area, Europe, Asia-Pacific and Japan. Also bookings were up in absolute dollars in every end-market led by industrial. 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 continues to be our largest area and grew this quarter both in absolute dollars and as a percent of bookings. Industrial was 44% of our bookings, up from 43% in the previous quarter. Within industrial, every major geographic area showed growth. Our industrial business is very broad-based, both geographically and by end product. The communications area at 19% was down from 20% last quarter, but up in absolute dollars. This quarter, our USA multinational networking and infrastructure companies grew more than their international counterpart.

Cell phone continues to be a very small part of our business, and rounds to less than 1% of our business. Computer remained at 9% of our business, again, also up in absolute dollars. Within computer, we service opportunities in notebooks, desktops, tablets, servers, storage devices and printing and imaging end products. Notebooks showed the most improvement.

Automotive continues to be a focused area for us, and once again grew in absolute dollar. However, as a percent of bookings, automotive was down from 20% to 19% of our bookings, largely due to round. In the last 10 years, we have emphasized this market. It has quadrupled as a percent of our bookings.

The expansion of existing Linear parts into new car models and also new parts for new programs continue to help us. Our battery monitoring products for hybrid and electric vehicles are achieving expanding market acceptance. In addition, we continue to distinguish Linear as a high quality supplier in important international automotive manufacturers.

Consumer, which has been our smallest end-market, actually increased this quarter from 2% to 3% of our business. Finally, the military space and harsh environments products remained at 6% of our business, also up in absolute dollars. The USA and Europe are the predominant geographic areas for this business.

On a fiscal year basis, industrial was 43%, up 1% from the prior fiscal year. Communications at 20% was down 1%. Computer at 9% was down 2%. Automotive at 19% of our bookings was up 2% from 17% last year. Finally, consumer at 3% and the military space at 6% were unchanged.

In summary, this is a good distribution of business by end-markets for us, with our largest areas continuing to show the most overall market strength. Whereas five years ago, 14% of our business was in cell phone and high-end consumer-related markets, now only 3% of our business is in these generally commodity and volatile analog areas.

On the other hand, automotive, which was 8% of our business five years ago is now 19% of our business, reflective of the increasing electronic content in vehicles concurrent with high standards of quality and reliability.

In this five year period, industrial has grown from 35% to 44% of our business. With regard to where our bookings are actually created, 60% are created internationally and 40% in the USA. Internationally, we've been helped by the growth in our Japanese and European automotive customers.

Moving from bookings to sale. Sales increased 5% from the prior quarter, while improving 12% from the similar quarter in the prior year. Sales increased both internationally and in the USA. Within international, sales increased in Japan and Asia-Pacific and were down in Europe.

In summary, the USA is 27% of sales, similar to last quarter. Europe at 19% was down from 21% last quarter. This is not unusual for Europe since the March quarter is seasonally the strongest for Europe. Japan at 16% was similar to last quarter. Asia-Pacific at 38% of sales was up from 36%. For the fiscal year, the percentages were similar to the just completed fourth quarter. USA 27%, Europe 19%, Japan 16% and Asia-Pacific 38%.

Gross margin at 76% of sales improved from 75.7% in the previous quarter, largely due to absorbing fixed cost over higher sales. Average selling price at a $1.90 increased from a $1.83 last quarter. This was a strong quarter for micro-module sale that have a higher average selling price with commensurate higher cost of sales, but lower operating. The company did not have any shutdowns in any of its plants this quarter and none are planned for the September quarter.

R&D. R&D at $64.8 million increased $2.7 million from last quarter, but as a percent of sales declined to 17.7% from 17.9%. Labor increased due to modest headcount additions and higher profit sharing and stock compensation. Other non-related labor R&D costs also increased in the quarter, largely in the mass development area.

SG&A, selling, general and administrative expense at $41.4 million increased $726,000 from the previous quarters $40.7 million, but decreased as a percent of sales to 11.3% from 11.7%.

As an R&D, increases were primarily labor-related this quarter, as there was more profit sharing on the increased operating income. In addition, there was slightly higher communication and other non-labor related SG&A expenses in this quarter, partially offset by lower legal costs.

Operating income. As a result of the above operating income increased by $10.9 million or 6.8%, and as a percent of sales increased to 47% from 46.2% last quarter. Spreading fixed costs company-wide over a higher sales-base caused this improvement. This is strong profitability, and clearly puts us ahead of our peers in this financial performance measure.

There was a significant reduction in interest expense during the quarter. We redeemed our senior notes on May 1, and therefore had only one month of interest expense versus three months last quarter. Consequently, interest expense of $2.3 million and amortization of debt discount of $1.9 million were $4.5 million and $3.7 million, less than their respective amounts last quarter.

Going forward, we will have no interest expense or amortization of debt discount next quarter. Interest income of $452,000 was down from $581,000 last quarter, as a significant portion of our cash was employed to pay down our debt on May 1.

As a result of all the above, the company's pre-tax profits were $167.9 million, up from $19.1 million last quarter. Pre-tax profits are now 46% of sales versus 42.8% last quarter with the increase due primarily due to higher sales volume and the reduction of interest expense.

Our quarterly effective income tax rate of 22.75% increased from 21% last quarter, as we had fewer non-recurring discrete tax items this quarter. Those that we had related to the closing of open tax years for state tax purposes. We expect next quarter's tax rate to be 25.75%, before any discrete items and currently do not expect to have any discrete items next quarter.

The resulting net income of a $129.7 million is an increase of $12.1 million from the previous quarter, primarily due the increase in sales and the reduction in interest expense, partially offset by higher taxes. The result in return on sales was 35.5%, up from 33.8% reported in the previous quarter.

The average shares outstanding used in the calculation of earnings per share increased by 943,000. Shares related to stock option exercises, employee restricted stock grants and the convertible bond were only partially offset by the stock purchases in the open market.

GAAP earnings per share was $0.53, an increase of $0.05 from the prior quarter, again due to the increase in sales and lower interest expense partially offset by higher tax. On a pro forma basis, without the impact of stock-based compensation of $16.5 million and non-cash interest expense of $1.9 million, diluted earnings per share would have been $0.59 per share compared with $0.55 last quarter and $0.49 in the similar quarter last year.

Moving to the balance sheet. Cash and short-term investment deceased by $749.9 million, as this quarter's cash balance was significantly impacted by the $845.1 million redemption of our senior convertible notes. Exclusive of this transaction, cash and short-term investments would have increased by $95.2 million. $204 million was provided by operation and $14 million was provided from the exercise of stock options by employees. $66.1 million was paid in cash dividend. $21 million was used to purchase fixed asset. And $36.2 million was used to repurchase both common stock purchased in the open market and restricted stock from employee.

For the 113th consecutive quarter, the company had a positive cash flow from operation. Our cash and short-term investments balance is now $1,012.8 million and represent 61% of total asset.

Accounts receivable of a $173.3 million decreased by $8.7 million from last quarter, which is unusual given the $17.4 million increase in sales. Last quarter, we had the opposite, as we had an unusually large increase in accounts receivable. We then commented that we have large collections in early April and expected to reduce our days in accounts receivable from the high-40s to a more normal mid-to-low 40. We did that with DSO for the June quarter now being 43 day.

Inventory at $91.3 million increased $3.6 million from last quarter in anticipation of growing sales. The increase was relatively evenly distributed with raw materials increasing $1 million, WIP increasing $1 million and finished goods increasing $1.6 million. Our quarterly average inventory turns is 3.9x similar to the 3.9x of the prior quarter.

Deferred taxes and other current assets of $41.3 million increased by $46 million, largely due to the reduction in deferred tax liability pertaining to the redeemed convertible debt, which had been netted against the asset in the prior quarters.

Property, plant and equipment increased by $8.7 million. We had additions of $21,032,000 and depreciation of $12,300,000. Most of the additions were for manufacturing equipment in fabrication and primarily in test and assembly worldwide. We have increased our capital expenditures in response to an improvement in our sales outlook going forward.

For fiscal 2014, additions totaled $37,668,000 and depreciation was $49,055,000. For fiscal 2015, we expect additions to be roughly $80 million and depreciation roughly $50 million. Identified intangible assets decreased by $550,000 as in past quarters, due to quarterly amortization. Goodwill remain unchanged.

Finally, on the assets side of the balance sheet. Our return on assets was 25.9%, up from last quarter's 20.3%, again, reflective of our increased net income and a reduction in cash to redeem our convertible debt.

Moving to the liability side of the balance sheet. Accounts payable increased by $9.9 million, largely due to timing differences on recurring payable items. Accrued income taxes, payroll and other accrued liabilities, increased by $55.9 million.

Historically, the largest items here are our profit-sharing accrual, income taxes payable and accrued interest payable on our convertible debt. Since we have redeemed our convertible debt, we no longer have semiannual interest payout. Our profit sharing accrual increased as expected, since we had no semiannual payout this quarter. Payouts are made in our first and third fiscal quarters. Finally our accrued income tax payable increased due to the higher quarterly income taxes discussed earlier and the timing of our tax payments.

Deferred income on shipments to distribution increased by $2.4 million, as our shipments to U.S. distributors were greater than what they shipped out to their customers. At the request of our distribution channel, we have modestly increased their inventory to reflect there improved sales. Our accounting is conservative, as we do not record a sale on our books, until distribution has made a sale to their end-customers.

Worldwide, we continue to believe our inventory levels are lean. We continue to closely control our inventory distribution to properly position the inventory relative to potential demand. Our senior convertible notes decreased by $843.2 million, as we fully redeem these notes within the quarter, as discussed early.

Current deferred tax liabilities, no longer show a balance, as we have netted them against the current tax assets, due to the reduction in deferred taxes resulting from our convertible note redemption. Since we have redeemed our convertible notes and thereby reduced cash and the debt liability, our current ratio has improved to 6.3 to 1 versus last quarter's 2 to 1.

Deferred tax and other long-term liabilities of $109.1 million increased modestly by $4.6 million, largely due to increases in long-term taxes on various tax timing differences. Changes in the stockholder equity accounts were primarily the result of the usual quarterly transactions, for net income, dividends paid and employee stock activity.

As stated earlier, the company announced that it will pay a quarterly dividend of $0.27 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 pays approximately a 2.3% yield.

Looking forward. Looking forward, we see our business continuing to grow. For the last few quarters, our business has grown consistently, approximately 10% year-over-year, and we are currently forecast to continue at that pace. The global macroeconomic conditions, although not robust, have generally been improving. The greatest areas of concentration for us, automotive and industrial are expected to continue to be the strongest areas.

In calendar 2013, the overall analog market grew 2%. Whereas within analog, automotive and communications and industrial combined, those areas grew 6.6%. These areas are expected to continue to lead in analog growth, as the current projections are for calendar 2014 to grow faster than calendar 2013.

The September quarter is historically a weaker quarter for us. However, the following current trends within our business are encouraging that we can have some growth within the quarter.

For the fourth quarter in a row, we have a positive book-to-bill ratio going into this quarter. We ended last quarter with the last month being our strongest bookings month. Bookings momentum has continued strong in July-to-date. And our sense is that inventories continue to be generally lean and the customer base judging from the pull-in and expedite request we are receiving from some customers.

Summarizing these various data points, somewhat tempered by an improving, but not yet strong macroeconomic environment and knowledge that the summer quarter is generally a seasonal weaker period for us, gives us a positive bias in the short-term. And consequently, we are currently forecasting revenues for the September quarter to grow sequentially in the 1% to 3% range.

We're expecting operating income to grow in absolute dollars, but to remain generally similar as a percent of sales. Our effective tax rate will be 25.75%.

In summary, looking beyond these near-term market events, the major market opportunities that drive our business demonstrate continuing growth, particularly in the industrial and automotive end-markets. Increased analog innovations in our other end-markets will also benefit us.

Finally, we believe we are in the right markets, at the right time, with the right innovative products, to execute our strategy and exploit our growth opportunities. We are strong in the areas we want to be, industrial, communications infrastructure and networking and automotive, and believe that we are in an innovation-driven environment.

Our strategy is differentiated from our other analog competitors. We dominate in different end-markets. We are a more reliable supplier with consistently lower lead times and better support. And our technology and support is valued, as evidenced by our higher operating margins.

I would now like to open up the conference call to questions to be addressed by either Bob, Lothar or myself. Again, we'd now like to open up the conference call to questions to be addressed to Bob, Lothar or myself.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from Craig Hettenbach with Morgan Stanley.

Craig Hettenbach - Morgan Stanley

Can you provide an update on the traction you're seeing in the battery management solutions business? In particular, any trends you're seeing by geography and also implications for dollar content within autos?

Paul Coghlan

What we're seeing is really the continuum of the good progress we've made in the last several quarters. And it's a fixed number of customers, who are propagating it to additional model. That's kind of from a geographical standpoint. That's probably in the Korean and Japanese market.

And what we're also seeing is new models that we hadn't participated in before in other geographies, like Europe and China that are just beginning to get into production. We've got sort of these first generation and second generation, and now third generation products ramping into volume production. And it seems like every generation we bring out another product that allows us to penetrate into more and more geographies. So it's doing quite well for us.

Craig Hettenbach - Morgan Stanley

And then as a follow-up, on the wireless sensor network side. Can you talk about, what the implications -- I know this is a small piece today and to really getting underway. But just as you look out over time, what does that mean for the growth potential in your industrial business? And then, also, if it is helping to kind of pull along some of the kind of current power management and analog portfolio with that?

Paul Coghlan

It was actually not too bad of a quarter for the wireless sensor network products. We saw improved bookings and sales this quarter. And it really came from two fronts. And one is, it's the sort of historical customers that we had in that market just picking up their order rates. And probably even more importantly, we're seeing new customers who really weren't engaged until the Linear acquisition, and we're seeing those go into production and we're starting to see some sales from them as well.

The only challenge is that this is an emerging market. And even though we have great products into it, that market still has to develop, and I think we're kind of pushing that a little bit along. And internally we like to think about it a bit like our module business, where these things were brand new to the market, the market really didn't exist. It took us a few years to gain momentum in those markets. And then, the market developed and it became a significant part of our business. We feel presently very much that this market will be very similar to the module business.

Operator

And we'll take our next question from Tore Svanberg with Stifel.

Tore Svanberg - Stifel

My first question is on your outlook for the second quarter. So it sounds like bookings were up very nicely so far and July bookings are doing well. So are you being just a tad conservative given the macro environment or are you sort of assuming a reversal of bookings in the month of August due to the seasonality?

Paul Coghlan

Well, seasonally the first two quarters for us have lower growth than the third and fourth quarters of our business and you can see that as evidenced by our performance in the last two years, Tore. And we are going into the kind of central part of the summer now with August coming up. So that when we looked at our bookings, we look at our business, we look at the summer, particularly in industrial-type customers and in Europe and U.S. geographies as well. We thought that the appropriate guidance was 1% to 3%.

Tore Svanberg - Stifel

And my follow-up question. And I don't know if this is a fair question, because your business is so diversified. But there has been some chatter out there lately about the wireless infrastructure market slowing down again. I was hoping maybe you could comment on that market from what you can see?

Paul Coghlan

Well, the wireless infrastructure market, that seems to have its own particular cycles. It moves and down relatively frequently within a one or two-year period. We did comment last quarter that our international wireless infrastructure customers did better than our U.S. customers in our third quarter.

And now in our fourth quarter, we said our U.S. customers were doing better than our international customers. So you can see it kind of moves around, Tore. And so we did see it be a little weaker in the June quarter, but we didn't really and don't presently put much kind of power behind that as that that's any kind of significant trend.

Tore Svanberg - Stifel

But if I could just sneak in one last one. You now paid back the convert. So obviously, you will have more cash at your disposal. Just wondering, if we should not think about your level of buybacks increasing going forward?

Paul Coghlan

Well, you accurately said, we did payback the debt, which will give us more free cash flow to address to buybacks and dividends. And if you look at last quarter, we bought back more shares last quarter than we had in the previous three quarters. So we have already started to buyback a few more shares than we had while we were paying down the debt.

Operator

And we'll take our next question from Chris Caso with Susquehanna Financial Group.

Chris Caso - Susquehanna Financial Group

Just the follow-on with the question on seasonality. And it typically in the September quarter, you guys see a bit of a slowdown in Europe as they tend to go on vacation. I think the automotive market typically sees third quarter a little slower as well with the model year changeover. I suppose those are reflected in your guidance, and I'm not sure if there is any other factors that we should be mindful of.

And as a follow-on to that, in the December quarter, the last several years you did see a sequential decline. And it's far out and I'm sure you don't have good visibility on that just yet. But is that generally the way we should be looking at your December quarter?

Paul Coghlan

Chris, I think you're right about the September quarter. It is a model changeover for automotive customers. Europe has its vacations. U.S. also has vacations in the summer quarter, and we see a little impact of that in our industrial customers. So that's what led us to our guidance. And we did have as we said, we did have a strong bookings going into the quarter.

Relative to December quarter, it's early to project that quarter. We don't project the quarter out. But if you've looked in the recent years, our first two quarters don't grow as robustly as our third and fourth quarters. We're heavily in the industrial end-market, which is now 44% of our business. And the automotive market, which is 20% of our business.

Both of those, plus Europe returning from holidays, generally mean the March and the June quarters are stronger quarters for us. So at this time of the year, we would think we'll probably have somewhat similar pattern, but again I encourage you that it's early to make any projections.

Chris Caso - Susquehanna Financial Group

And as a follow-on with that in mind, the seasonality in the second half of the calendar year generally a bit slower, you have added some headcount in production, which I would assume implies that you've increased production some. It looks like you are going to add some CapEx in the next fiscal year. Can you give some clarification as to why you're taking those actions now? I supposed that's just sort of general business trends as you move into fiscal '15 overall?

Lothar Maier

Maybe I can comment. The headcount additions as Paul mentioned were really majority driven by, in fact 80% driven by the need for additional manufacturing output. And so we're growing sales from the last several quarters, we just have to add direct labor for the most part to support that. So those investments are really been driven by just the growth that we're seeing.

On the capital equipment side, it maybe just a little bit more complicated, because a lot of the capital equipment adds we're doing are for capacity expansion, but the capacity expansion maybe on some of the newer products that we don't have a lot of existing capacity on.

The module business has been growing double-digit percentages in the last few quarters and that has a unique set of capital equipment requirement. So we're buying capital equivalent to support that. And that's partially true for the BMS products that are doing well as well. So there is some unique capital requirements that are being driven by growth of certain new products.

Paul Coghlan

And Chris, if you look at the fact that we've been growing on an annualized basis each quarter 10% or plus quarter-over-quarter, that growth would require more additions to capacity and more additions to the headcount.

Operator

And we'll take our next question from John Pitzer with Credit Suisse.

John Pitzer - Credit Suisse

Paul, in the prepared comments and just on the last question you kind of referred to this 10% year-over-year growth rate. I am just kind of curious, is that guidance for the September quarter or is that what you think that the core business will grow over a longer period of time? And if it's not that, what is kind of a core growth rate we should be thinking about for Linear?

Paul Coghlan

Well, when we look at the last three quarters in our guidance, we have been growing 10%. When you look at the analog market, it grew 2% last year. It's projected to grow faster than that this year. And the fact that we are in that predominantly fastest growing areas of the analog market, automotive and industrial, we internally feel, given a kind of neutral macro environment, i.e. no dramatic changes, that we feel and we are driving the business to try to grow low-double digits year-over-year. So 10% is what we would hope to be able to achieve.

John Pitzer - Credit Suisse

And then I always feel a little bit silly asking this question, but I always seem to ask it every quarter. Just on the leverage profile from here, absolutely you guys have some of the best margin structures in the industry. But I can go back in periods of time on your P&L, we were at similar revenues or even lower revenues, you've had 200 basis points to 300 basis points higher gross, and kind of op margin.

And I'm just kind of curious from here how should I think about incremental margin? And is it important that this last quarter was the first quarter in three years you didn't have any shutdowns? And how does that kind of contribute to what I should think about as, on an incremental margin basis, for the September quarter and going forward?

Paul Coghlan

Well, my guidance on the incremental margins going into the September quarter was that if our sales grow 1% to 3%, that our operating income would grow on absolute dollars, but probably not changed much as a percent of sales. So we talked about that in the monologue.

Going forward, we think as we put in these added capacity, that's had some cost. We think our sales are going to continue to grow. Internally, we look optimistically at when we get to be over $400 million a quarter, that our cost structure would enable us to have some improvement in our margins. I don't know as they will get back to the high points we had many years ago. Some of the business is a little different.

We have more micro-module business now. We have kind of different types of newer products. We've added a company Dust, which has added some expenses to us, but has opportunities years out as Lothar addressed earlier to add to sales. So I think we can improve the margins somewhat, but I doubt they'll get to the highest levels they ever were. But as I think I said to you last quarter I always feel a little odd having to defend in this call with your question of 76% gross margin and 47% operating margin.

Operator

And we'll take our next question from Jim Covello with Goldman Sachs.

Jim Covello - Goldman Sachs

Paul, on the ASPs, really nice ASP improvement this quarter that I think at some point over the last couple of quarters the ASPs were ticking down a little bit, now you saw a nice improvement there. Is that a function of mix or is that a function of the market being a little tighter?

Paul Coghlan

Mostly mix.

Jim Covello - Goldman Sachs

And can you remind us the order of ASPs for the various segments?

Paul Coghlan

Well, we mentioned in our monologue and Lothar addressed, our micro-module business has improved. Now, that transcends the couple of business units. So we have micro-modules from more than one business unit, but those have high ASP. They have some purchased parts as part of their cost structure, so they tend to have a little bit higher cost structure. But those were probably the biggest product area that had an impact on raising the ASP from a $1.83 to a $1.90.

Jim Covello - Goldman Sachs

And so as a follow-up, you talked several times about the 10% year-over-year growth now for four or five quarters running if we look forward. The end-markets, recognizing you're very well-positioned in the end-markets and certainly geared toward the higher growth segment of the end-markets, but none of the end-markets are growing that fast. So the three options are, the inventory at your customers was just a little too low to begin with, or they're building inventory or some combination of both now. How would you help us frame that up?

Paul Coghlan

Well, a couple of things. One, in these fast growing areas where we believe we're taking market share by taking more than our fair share of the newer products and the newer applications that are needed in those. You said that there is no segment of the end-market that could grow 10%. My guess is automotive and analog might be growing or certainly has in the last couple of years might be growing 10% or more.

And when you look at the end-market, industrial end-market had grown pretty well in 2012, was a little flatter in 2013 from an analog standpoint. And a lot of the projections are that that market will pick up as there is pent-up demand in that market, if there is a pretty stable macroeconomic environment for people to fund these longer-term projects in industrial markets.

So when we look at it, we kind of look at the balance of automotive, industrial, the opportunities within that, the fact that we think our newer products can take market share, and we think that growing 10%, we would hope we could achieve.

Operator

And we'll take our next question from JoAnne Feeney with ABR Investment Strategies.

JoAnne Feeney - ABR Investment Strategy

A question on the auto, so obviously there has been a lot of content gains, new products, new applications. Now that we are heading into a seasonally slower period for builds, it sounds like we should start expecting the pace of auto-related shipments really to follow more closely to those seasonal patterns, whereas in the past you've talked more about the content gains being the driver. Is that an accurate way to think about auto? And if not, how much do the content gains weigh versus the seasonal patterns?

Lothar Maier

I think overall content is the driver, and layered on to that is the seasonality that happens. It's from our perspective and the design work we do, we're doing designs three and four years in the future, and that's not influenced at all by seasonality. And so the amount of electronics that's going into cars, just from our perspective, has really no bound; and all the improvements and safety, fuel economy, air quality, are all going to come through the electronics. So that's really, the content, is the driver and the seasonality is sort of just a ripple in the water.

JoAnne Feeney - ABR Investment Strategy

We haven't heard much about the communication equipment side. It's still roughly 20% of business. Can you give us some hint as to the dynamics in that segment over the last quarter and what you see for this quarter?

Lothar Maier

Paul had a little bit of comment on that. And for us, the communications is really three-parts, it's the infrastructure, it's networking and it's cell phone. Cell phones for us is virtually zero percentage of our sales. And the biggest part and probably the most interesting part of the communications market is the networking side, and that seems to be doing pretty well. There is just more and more data that's getting moved around and you need equipment to do it, the performance and speed, video that's being added to it, is driving a lot of network equipment.

To sort of the infrastructure side, that tends to be more lumpy, and depending on if somebody is doing a build out, so it will be strong for a period of time. And as Paul commented, that was strong last quarter and also strong this quarter. So that tends to be a more, I can't say seasonal, it's just whenever there is a buying opportunity out there.

Operator

We'll go next to Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank

Paul, you mentioned that the operating margin was going to stay unchanged. Is there any puts and takes between what OpEx versus gross margin are going to do? Are they going to be pretty consistent to get you to that flat operating margin?

Paul Coghlan

Well, again, I said for the September quarter, was my answer, when I gave those comments, and that was based on our 1% to 3% revenue growth. And my guess is there will be probably pretty similar or if you break it down within cost of sales and R&D and SG&A, but you have to let the quarter play out, you have to see what your mix is in the quarter from a product standpoint, and then you have to see how your expenses are going to play out.

So I don't really want to quote line-by-line what exactly it's going to be. I just think with the growth being at the weaker part of the spectrum that will probably grow over various quarters, that there won't be much of a change in the operating income as a percent of sales overall.

Ross Seymore - Deutsche Bank

Moving on to the cash side of things, about $1 billion dollars in cash on the balance sheet, after paying down the debt, can you talk to us about how much of that is onshore and offshore? And as far as cash usage goes, what sort of share repurchase plan do you guys actually have authorized right now?

Paul Coghlan

What language would you like me to answer the question, and 85% of our gas is offshore. So about 85% now is offshore. We just paid down the debt, which we paid down with U.S. generated funds. Relative to a buyback, we had been authorized two years ago to buyback 10 million shares and we bought back roughly 3 million of that authorization so far.

Ross Seymore - Deutsche Bank

If I can sneak in one other one, just because I do it every once a year, backlog ending the year, just to keep you happy, Paul.

Paul Coghlan

Ross, I said, oh, I can't believe Ross asked two questions and one of them is backlog. I was going to say, oh, my gosh, something is happening at Deutsche Bank. All right. It's $187.4 million, Ross.

Operator

And we'll take our next question from William Stein with SunTrust.

William Stein - SunTrust

I'm wondering if you can give us an update on the PC market. I think you said that that was one market that was weaker year-over-year. But I think we've heard comments from others about improving strength in that market. Any comments would be helpful.

Paul Coghlan

Well, it's a small part of our overall business. Computers, so put in that context, it's 9% our business. It was weak and declined from 11% year-over-year in our business. And I think if you go back a couple of quarters, a lot of people were having declining PC sales, not just us. This last quarter, we did say that it grew in absolute dollars, our bookings in the PC or computer area.

So again, I'd emphasize, it's 9% of four business. We have some good customers there that we enjoy doing business with, but overall that's a smaller portion of our business. And I think we've kind of followed the trend of also the PC guys that in this last quarter probably wasn't too bad, but the quarters prior to that, it's probably not as strong as other end-market.

William Stein - SunTrust

Paul, if I could just have one follow-up. I know people have asked a bit about automotive already. I've had a lot of questions from investors about potential inventory builds. It's clear that there is a big content growth trend that doesn't seem anywhere near the end. But I wonder in shorter-term you've seen any inventory build up in the supply chain or maybe you can talk about whether you see that and whether there is any realistic ability to measure it?

Paul Coghlan

Our experience with the car companies and the suppliers to the car companies is that they really don't like to carry very much inventory. They all have that sort of just-in-time mentality, which prevents a lot of inventory from building up from a component standpoint in those channels. I can't really comment about how many cars are on the showroom floors, if there is some inventory there, but the sort of general working procedures in the car business, in particular, is really not to grab a lot of inventory.

Operator

And we'll take our next question from Steve Smigie with Raymond James.

Steve Smigie - Raymond James

With regards to module business, right now it seems like the gross margins are a little bit lower, as you are installing equipment. Is that reversed at some point, where the gross margins come back more in line as you get your equipment in place?

Paul Coghlan

No. I think because there are components that we buy in general, and I'm not talking about a lot of gross margin being worse. They're slightly worse on the module, but there is obviously the amount of R&D and other sort of things that go in. So you might look at it as the gross margins being slightly worse, but the operating margins being better, because we don't have as much of R&D content in those. We don't have to design circuits specifically for modules. We use the circuits that we have already and just put them together in unique ways. So I think it's slightly worse gross margin, somewhat better operating margins.

Robert Swanson

I've been wanting to weigh in, in this a little bit, it's kind of complicated. So the standard cost to sales that some of these more complicated products that we're making now versus the historical days, the standard cost is a little higher, but we've added dollars to the topline. So overall it should be more favorable at the operating profit line.

Steve Smigie - Raymond James

And then I was hoping if you could talk about your mix of revenue in terms of product type, power management versus converter versus amplifiers and mixed signal? And part of that is it really important to think about things that way, are you more targeting your business based more on the end-market or something like that?

Paul Coghlan

Well, we look at our business in lots of ways, but overall power is the biggest part of our business, roughly 60% of our business. And then, the others are probably divided relatively equitably over the remaining 40%. And power has got lots of, lots of tentacles to it. When we look at end-markets, we very much look at the analog innovations first, like what can be invented, what are key functions that will be needed in several markets, not necessarily just one market.

So I think it's probably fair to say, over the years we've been kind of more power dominant than maybe some other analog companies, but we have a lot of innovation in the other areas as well here. So we try to be kind of across the board analog supplier.

Lothar Maier

I think going forward, it sometimes getting harder and harder to classify these products as power, mixed signal, signal conditioning, because as the products become more complicated, they have traits really to -- power products have some digital and some mixed signal content, mixed signal products have some power content to it. So there is a little bit of blurring that occurs, when you try to divide this stuff up. I think really the focus is more towards the end-market and trying to partition them internally.

Operator

And we'll take our next question from Craig Ellis with B. Riley Investments.

Craig Ellis - B. Riley Investments

I really just wanted to follow-up and clarify a few comments, Paul. On the CapEx, how should we think about the timing through the year for the $80 million? And then secondly, is the fiscal first quarter tax rate that you provided a fair number to use for the full fiscal year?

Paul Coghlan

I think our, as the best we can tell now, our capital will probably be purchased equitably over the four quarters. Relative to the tax rate, the tax rate we've given you for the first quarter is the tax rate, the ongoing effective tax rate, we think we'll probably have for the year.

However, there's a lot of talk about the R&D credit, which has expired as you know. And there's a lot of talk in Washington about overall tax reform. My guess is, if they don't do tax reform, which I would probably guess they will not, they will address things like the R&D credit, et cetera.

When that gets addressed, then we would have a discrete item in the quarter that gets addressed, as well as a drop of our rate. So I'll leave it to you to judge when and if that will happen. I can't judge the timing, but I would hope it happens sometime during the year.

Craig Ellis - B. Riley Investments

Well, I am not going to try and handicap Washington, Paul, but thanks for the color there.

Operator

And we'll take our next question from Romit Shah with Nomura Securities.

Romit Shah - Nomura Securities

I was hoping to just get your outlook on ASPs beyond the current quarter. It looks like ASPs have been rising on average by about 5% per year over the last three years. And I would have thought that the ASP gains would start to level off now with industrial, com and automotive, north of 80%. But the ASPs grew 4% last quarter, you guys are talking about micro-modules. So how do we think about ASPs over the medium-term?

Lothar Maier

I think everything that we have virtually in design right now has good ASPs. And that will continue to contribute to drive our ASPs up. There maybe, as last quarter Paul said there maybe blips up or down a few pennies because of mix issues, but I think the trend is going to be going forward is improving ASPs.

One is that the products just are more complicated, they bring more value to the customers. And quite frankly, it costs us more to make too, so they warrant these higher ASPs. So we're really in the market that value performance and we're going to give them some products going forward that customers are going to get a lot of value out of them.

Romit Shah - Nomura Securities

And Paul just given how low rates are, why wouldn't you consider taking on some debt on the balance sheet?

Paul Coghlan

The company historically from the Board on down, Romit, has believed that it continues to generate cash flow from operations. It can pay dividend, increase the dividend every year, it can buyback some stock with that, and doesn't really need to incur more debt to do more of that.

Operator

And we'll take our next question from C.J. Muse with ISI Group.

C.J. Muse - ISI Group

I guess, first question is where do you think we are in the industrial cycle? And what are you watching to feel, I guess more bullish or less bullish in terms of managing the business, adding headcount, reducing headcount, et cetera?

Paul Coghlan

You go back 10 years, the industrial business was about 7% of the overall analog market and it is in the last 10 years pretty monotonically grew as a percentage of the overall analog market for 10 years straight and it's now up to about little bit over 20%. So I don't see that trend changing. I think that there's going to be any huge step functions, but I think this is a decades long trend that it's just going to continue for decade.

C.J. Muse - ISI Group

And if I could ask a follow-up. In terms of CapEx, can you walk through where you are spending it in terms of test, assembly and whether this is sort of a new run rate that we should thinking about into calendar 2016 and beyond?

Paul Coghlan

Probably the majority of the spending we've got on the docket for what we've done so far and what we're planning to do is going into the backend into the assembly and test. And the only added color is, is that typically when you buy a piece of capital equipment for the backend, it's in the tens and hundreds of thousands of dollars prices. If we need a tool in the front-end, it tends to be in the $1 million to $4 million range. So we don't need a lot of tools, but some times, it drives a lot capital, but for the most part, right now most of it is destined towards our backend.

C.J. Muse - ISI Group

And is this a new kind of run rate or is this to reflect kind of your growth expectations into '15?

Paul Coghlan

No, I don't think it's a new run rate, I think it's the fact that we've got pretty good capacity in place in the front-end side and what we're seeing is growth in some new products in the backend and that's driving these capacity requirements to some extent.

Operator

And we'll take our next question from Vivek Arya with Bank of America Merrill Lynch.

Vivek Arya - Bank of America Merrill Lynch

I think you had outlined a goal of 10% growth in your fiscal '15. Could you help us rank one of the areas that should be above or below this growth number?

Paul Coghlan

Well, we said that automotive and industrial, we think are the key areas for us. We told you those are also the areas, if you look at the external prognosticators to us, SIA and WSDS, that they also project those would be the best the growing analog areas. So we would support that and think that will contribute to whatever growth we do get in '15. And probably the computer consumer wouldn't grow as much.

Vivek Arya - Bank of America Merrill Lynch

And communications, where would that fall, Paul?

Paul Coghlan

Communications, I'm guessing at the moment, my guess is communications would grow depending what's happening with the cloud and stuff that could -- I don't think it will grow as fast as automotive. It could industry-wide grow as fast as industrial, but I don't really know.

Vivek Arya - Bank of America Merrill Lynch

And then in auto, obviously very strong performance, I am curious how much of your auto exposure is to hybrid or electric cars? And what is the typical content in that part of the market?

Lothar Maier

The automotive sales that we have really are still dominated by conventional vehicle. And just by the nature that there's probably 20 times, 30 times more conventional vehicle built than there are hybrids and electric. With that said, though, that the content tends to be higher in a hybrid electric just because it's got everything electric. So for now, at least the majority of the sales are driven into conventional vehicles and not the hybrid electric.

And to be perfectly honest, the electrical opportunities we see going forward, there's just a lot of electronics that are going to continue to be added to the conventional cars. So the drive I think for automotive growth for analog is really not in the hybrid electric, that's kind of just added on top. It's really the added features for safety, comfort, fuel efficiency, that's going to be going into conventional vehicle is going to be a driver for a long time.

Vivek Arya - Bank of America Merrill Lynch

And just as a last one. I think, Paul, you had mentioned 85% of the cash is offshore. I am curious how much of your ongoing cash generation is onshore versus offshore and what implication does that have on your tax rate if any?

Paul Coghlan

Most of the generation of our cash probably, say 70%, is generated onshore. However, some of my corporate expenses need to come out of that onshore cash. So when I pay a dividend the funds are from onshore cash. When we buyback start those funds are from onshore cash. Given that though I would expect this time next year, probably how have that percentage will change a little bit and that it won't be 85%, it will be some number less than that will be offshore. But still the predominant part will be offshore.

Vivek Arya - Bank of America Merrill Lynch

But no change to tax rate going forward, right? If we are thinking about a longer-term model for Linear, should we assume a tax rate that you have right now or could there be any material changes to that?

Paul Coghlan

No, I'm not anticipating material changes for the tax rate.

Operator

And we'll take our next question from Craig Berger with Hedgeye.

Craig Berger - Hedgeye

In 2007 you were really good about calling the cycle then and just wanted to ask a little bit about that now. Sort of where are your product lead times? Have you seen any expansion? Have you seen any expansion at any of your competitors, I guess? And just what are your big picture thoughts on the cycle if we are in one?

Paul Coghlan

I don't think anything that we're seeing here is that we're forecasting any new big cycles. In fact, looking back the last few years now we can actually say that we're seeing the seasonality that we haven't seen for a number of years, because there were so many other macro things, swapping things out. So our feeling right now is based on last couple of years and what we're seeing near-term is that we're back in sort of the more seasonal bank and not really forecasting any big changes.

On the lead times, I think from a customer standpoint there is probably a bit of a bias that they were thinking that something in the future is going to happen were lead times might extend a little bit. I know we watch pretty closely how full the subcontractors and the foundries are, they are getting pretty full. So I think there is a little bit of edginess there, but right now I don't see anybody trying to either place a lot of orders or grab a lot of inventory trying to hedge against that. But I think there is a little bit of bias out there that we're feeling.

Craig Berger - Hedgeye

The follow-up, you've answered a lot on automotive, but I'll ask another one anyways, which is sort of what inning are we in, in the content penetration story for sort of developed economies? And then what inning are we in, in emerging economies, which I'm guessing it's really early? And what's your sort of split of business there?

Lothar Maier

Yes, I would say in developed economies, we're pretty good from a penetration standpoint, but the growth is going to come in more vehicles and more contenting of those on the emerging areas. I think we've just scratched the surface. I think that that inning hasn't been played out yet.

Operator

And we'll take our next question from Gil Alexander with Darfil Associates.

Gil Alexander - Darfil Associates

Can you give us just a general judgment --

Lothar Maier

Excuse me, could you speak a little bit.

Gil Alexander - Darfil Associates

Could you give us a general judgment as you approach $400 million in sales per quarter, what happens to your gross margin?

Paul Coghlan

Obviously, they're going to get better, but it kind of depends when it happens as well. As time goes by, cost go up, we buy raw material, fuel goes up, gold goes up. But if it's in the short-term, we'd expect gross margins to go up. Would they go up to 80%? Probably not. Do we have a good chance of getting to 78%? I would say there is a good shot at that.

Lothar Maier

I think based on our mix that we've been talking about, these more and more complicated products that carry some extra standard cost to sales, but many more dollars on the topline, maybe operating profit to compare to historical days might be a better measure of progress.

Gil Alexander - Darfil Associates

And as you look on sales visibility, is it really something like six months or is it a longer visibility that you have?

Paul Coghlan

Well, there is probably two ways to answer it. From a purchase order coverage standpoint, since we have relatively low lead times, six weeks say on average lead times, that would be about the sales visibility we would get.

From a standpoint of particularly maybe in automotive clients, knowing that we may have won a design, which is suppose to go into a model a year, we have some sense of when that model year will come to market. We don't have a great sense of how many units the automotive manufacturer will start out with and how well the model itself will be received in the public. So we have kind of different benchmarks that we can look out for sale.

Gil Alexander - Darfil Associates

Last question, if I may ask. Do you have a great need to hire more analog engineers at this point?

Lothar Maier

Not really. We've got a team of 200, 250 analog design engineers. And the position that we have, it's better to have a core team of very creative and inventive analog engineers than to have an army of them. And so for us, we tend to hire and train our own analog engineers. We recruit from number of universities. We have intern programs.

We attach them to seasoned and experienced design engineers. And after fiver years, they design their own products. And then after 10-plus years, they actually pick their own product. So it's not a numbers game. It's a quality game. And we get thereby hiring and training our own.

Operator

And Mr. Coghlan, there are no further questions, at this time. I'll turn the call back over to you for any closing comments.

Paul Coghlan

Thank you very much for your attention. We just finished fiscal 2014, which was a good year for us. We look forward to fiscal 2015 and hopefully executing another good year. Have a nice day. And thank you for your attention during the call.

Operator

And ladies and gentlemen, this does conclude today's conference. We appreciate your participation.

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Source: Linear Technology's (LLTC) CEO Lothar Maier on Q4 2014 Results - Earnings Call Transcript

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