Linear Technology's Buyback Plan: Quite An Improvement To EPS

Linear Technology (LLTC) had the following to say in its press release following Tuesday's market close:

Linear Technology Reports Lower Revenue and Net Income From the Third Quarter of the Previous Fiscal Year and Announces Plans for a $3.0 Billion Accelerated Stock Repurchase Transaction

Linear Technology Corporation, a leading, independent manufacturer of high performance linear integrated circuits, today announced that revenue for its quarterly period ended April 1, 2007, was $255.0 million, a decrease of 9% or $23.9 million from revenue of $278.9 million for the third quarter of the previous fiscal year. Net income computed in accordance with U.S. Generally Accepted Accounting Principles [GAAP] for the third quarter of fiscal year 2007 of $98.6 million or $0.32 diluted earnings per share decreased 11% or $12.0 million from net income of $110.6 million or $0.35 diluted earnings per share for the third quarter of the previous fiscal year.

As we noted in our preview, Consensus wanted $0.32 on $254 million this quarter and $0.34 on $263 million next. So while the current earnings came in pretty much in line, the estimates for next quarter are at the lower end of management’s guidance:

In summary, we currently expect revenue to increase 3% to 6% with operating margins up similarly.

That would put revenue in the $263-$270 range, with earnings pretty much on target. Furthermore, inventory levels continued to creep up, adding $5 million (10%) sequentially and $13 million (30%) year/year compared to the respective sales growth figures of negative 4.5% sequentially and negative 9% year/year. That is, for lack of a better word, horrible.

So operationally we were not very impressed with the report. However, it wasn’t the operations that sent the stock up 12+% in trading today. In part investors were likely expecting worse from semiconductor stocks this quarter. We know we were. But most importantly, the company announced plans to buy back $3 billion worth of its own stock:

The Company also announced its plans to enter into an accelerated stock repurchase transaction, subject to market and other conditions, pursuant to which it will repurchase approximately $3 billion of its shares of common stock. The Company intends to finance such repurchase with existing cash and the proceeds of a $1.7 billion convertible note offering. The accelerated stock repurchase transaction would be conditioned on the closing of the convertible note offering.

We’ve talked about the smoke-and-mirrors nature of these buybacks funded by convertible note issues in previous posts. We don’t have the details on this one, but note that the buyback could reduce the current share count by nearly 30%. While the added interest expense and foregone interest on cash balances will affect that somewhat, we estimate roughly a 15-20% gain in EPS based on the following back-of-the-envelope calculation using estimated FY 2007 earnings:

Even allowing for some smoke and mirrors, that is quite an improvement to EPS. Certainly enough for investors to overlook some operational issues that were already fairly well-known anyway.

LLTC 1-yr chart: