Executive Summary
Entering the 4th quarter of Linear Technology’s fiscal year 2003 the market continues to show signs of improvement. The company has shown steady growth in the last year and revenues are estimated to increase 19% over FY 2002. Based on this estimate, FY 2003 net income will hit $222.7 million ($0.71 earnings per share); a 12.6% growth from the previous year. Operating cash flow; while lower than 2000 and 2001 has shown a modest increase since 2002 and continues to be positive due to the company’s variable cost structure. This is in-part is due to more efficient working capital investments and “other” adjustments to income, awarding the company a 10% increase in net cash flow year-over-year. Linear Technology has increased its cash holdings to excess of $1.5 billion through employing cost savings initiatives, though these holdings have only shown investors modest returns in the neighborhood of 4.25% ($0.10 earnings per share). While modest, investors have come to expect this form of conservativeness and there has been little outcry of agency issues. Looking ahead, based on an analog “fabs” life expectancy of 10 plus years, capital investments, for a new “fab”, will be required in the next one or two years in excess of $200 million; leaving more than sufficient cash holdings while requiring no leveraging. Based on these financials, Linear Technology should look to increase its dividend payout by $0.01 per share. This has become the expected trend over the last 3 plus years and any adjustment to this could show signs of weakening in the businesses outlook. This increase would raise dividend payouts to an estimated $66 million, a 22% increase from the FY 2002. An estimated 8.5% increase in the payout ratio, from 27.31% to estimated 29.64%; ranking Linear Technology higher than any other company in the SOX for the dividend-to-earnings payout ratio.