TheHenryFund
HenryB.TippieSchoolofManagement
JonKerr[jonathan-kerr@uiowa.edu]
LinearTechnology(LLTC)
Linear Technology targets the high performance segment of the analog
integrated circuit market with application-specific products that are not
subject to commodity pricing like digital and standard analog integrated
circuits. The cyclicality of the semiconductor industry will keep revenues
downincalendaryear2015butthecompanyispositionedwellinboththe
industrial and automotive segments and should see substantial revenue
growth in 2016 due to the increasing data connectivity of these markets.
However,thestockpricerose11%inthemonthofOctober,whichlimitsthe
upside on this stock. Therefore, we recommend a no action on Linear
Technology.
DriversofThesis
• LinearTechnologyhashistoricallyhadstrongcashflowgenerationwitha
long history of returning value to shareholders through both dividend
payments and stock repurchases. They have averaged a 55% dividend
payoutratioanda69%totalpayoutratiosince2009.
• The company has no debt on their balance sheet and they have a high
levelofliquiditybasedontheircurrentratioof8.4in2015.
• LinearTechnologyisaleanandwell-runcompanydominatingtheirpeers
ingrossmargins,operatingmargins,ROE,andROIC.
RiskstoThesis
• If the current downturn in the industry does not end in Q4 2015 as
expected,companyrevenuescouldbehitevenharderthanpredicted.
• Larger companies have broader product lines with greater technical
service and support capabilities which could make major automobile
partssuppliesshyawayfromLinearTechnologyproducts.
2014
$1.91
11.25%
2015
$2.13
11.45%
2016E
$1.97
-7.68%
2017E
$2.17
10.26%
2018E
$2.27
3.71%
LLTC
40
20
LLTC
10%
5%
0%
-5%
-10%
-15%
N
D
J
F
M
A
M
$10,996
244.5
97.0%
1.17
2.70%
10.9%
21.40
7.54
0.0%
46.28%
35.32%
29.44%
35.81%
Industry
35.8
30
15.4
10
Sector
35.3
21.4 21.8 20.5
17.1
17.3
13.2
0
P/E
12MonthPerformance
15%
NoAction
$45-49
$46.92
$47.83
$41.03
$44.31
$36.41–49.57
$42.61
TargetPrice
HenryFundDCF
HenryFundDDM
RelativeP/EMultiple
PriceData
CurrentPrice
52wkRange
Consensus1yrTarget
KeyStatistics
MarketCap(M)
SharesOutstanding(M)
InstitutionalOwnership
FiveYearBeta
DividendYield
Est.5yrGrowth
Price/Earnings(TTM)
Price/Sales(TTM)
Debt/Equity
Profitability
OperatingMargin
NetProfitMargin
ReturnonAssets(TTM)
ReturnonEquity(TTM)
EarningsEstimates
2013
$1.75
0.62%
November17,2015
StockRating
InformationTechnology–Semiconductors
InvestmentThesis
Year
EPS
Growth
ROE
ProfitMargin
Source:YahooFinance
CompanyDescription
Linear Technology Corporation designs,
S&P500
manufacturers,andmarketsadiverselineof
analog integrated circuits for companies
worldwide. They target high performance
application-specific products in the analog
semiconductor market. The company’s
productsbridgethegapbetweentheanalog
world and digital electronics in
communications, networking, industrial,
computer,
medical,
Source:YahooFinance automotive,
instrumentation,consumer,andmilitaryand
J
J
A
S
O
aerospacesystems.
Importantdisclosuresappearonthelastpageofthisreport.
EXECUTIVESUMMARY
Linear Technology is a leading supplier of highperformanceanalogintegratedcircuits.
The company operates in the cyclical semiconductor
industry, which is expected to have a slight downturn in
the remaining calendar year of 2015 before rebounding
incalendaryear 2016.LinearTechnologyisexpectedto
haveadeclineintheirFY2016revenuesbeforeincreasing
inFY2017duetotheindustrycyclicality.
Linear Technology competes in the analog sector of the
semiconductorindustry,whichischaracterizedbylonger
design cycles, longer product lives, and lower capital
expenditures than the digital sector. Therefore,
companiesintheanalogsectortendtohavehigherprofit
margins than companies competing in the digital sector.
Linear Technology has consistently had industry leading
margins. We have modeled gross profit margins to
maintain historical levels of around 75% with operating
profit margin decreasing slightly from 46.3% in 2015 to
45.5%into2020.
(1)
integrated circuit market. The company designs and
manufactures a vast portfolio of different integrated
circuits(IC)forthousandsofdifferentcustomersglobally,
withnosinglecustomeraccountingformorethan10%of
company revenue. The products Linear Technology
produces link the analog world to the digital world. For
example, their products may measure light, sound,
pressure,orpowerandoutputadigitalrepresentationof
that input. Linear Technology is a highly profitably
company with 116 consecutive quarters of positive cash
flow.In2010,Forbesmagazinecalledthecompany“one
ofthetechindustry’smostprofitablecompanies.”(2)
RevenueTypes
FY2015%Revenueper
Segment
3.0%
Automomve
9.0%
We expect revenue growth for the company to come
fromtheindustrialandautomotivesegmentsduetothe
growingnumberofdevicesconnectingtotheInternetof
Things and from the increased demand for hybrid and
electric vehicles as well as the increasing amount of
electronicsbeingaddedtovehicles.
The company has a long track record of high dividend
paymentsandconsistentdividendgrowth.Thecompany
has historically had a dividend payout ratio of around
55% and a total payout ratio of around 65% with that
numberincreasingto75%thelastfouryears.Weexpect
thetotalpayoutratiotoaverage80%into2020because
of the company’s large amount of cash and short-term
marketable securities on its balance sheet, $4.92 per
share.
EvenwiththeexpectedgrowthafterFY2016andthehigh
value returned to shareholders each year, we
recommend“noaction”onLinearTechnology.Thestock
price has risen approximately 11% since the time
coveragewasinitiatedonthecompanyandwefeelthere
islimitedupsideleftinthepriceofthestock.
COMPANYDESCRIPTION
Industrial
6.0%
43.0%
19.0%
Communicamons
Computer
20.0%
Military/Harsh
Environment
Consumer
Source:LinearTechnologyYearEnd2015EarningsCall
LinearTechnologyhassixoperatingsegments:Industrial,
Automotive, Communications, Computer, Military/Harsh
Environment, and Consumer. The company targets the
Industrial and Automotive segments, as these are the
fasting growing markets in the analog industry. These
two markets are also characterized by longer design
cycles and longer product lives and customers in these
markets are more likely to pay a premium for Linear
Technology’sproductsandservices.
Linear Technology’s main revenue segment is the
Industrial segment. This segment has consistently
accounted for over 40% of the company’s revenue since
2011. The industrial segment serves a very diverse
customer base with applications ranging from DNA and
blood analyzers to solar power to factory automation.
Demand for this segment is determined by global
Linear Technology Corporation was founded in 1981 in
Milpitas, California. The company targets the high
performance segment of the $47.5 billion analog
Page2
macroeconomic factors and is highly correlated to the
Global GDP. We expect Industrial segment revenues to
decline 3% in 2016. However, we believe segment
revenues will rebound in 2017 and into 2020 with
revenuesgrowingata5.1%five-yearCAGR.
this is a market the company “does not actively chase.”
Because of this, we have modeled the Consumer
segment’srevenuetogrowata1.0%CAGRinto2020but
to slightly decrease as a percent of overall revenue to
2.5%.
In 2015, the Automotive segment surpassed the
Communications segment to become the company’s
second largest segment generating 20% of company
revenue. This segment is experiencing the most growth
for the company. Since 2010, the Automotive segment
has grown at an 18% CAGR. The growth is due to the
increasing amount of electronics in cars. In the future,
theincreaseinhybridandelectriccarsaswellasInternet
equipped automobiles will drive growth in this segment.
In2016,weexpectanincreaseof5%insegmentrevenue
before a 13% increase in 2017. We expect segment
revenuestogrowatan8.7%CAGRinto2020.
GeographicDiversification
The company’s third largest segment is the
Communicationssegment,accountingfor19%ofrevenue
in 2015. This segment includes ICs for mobile phones,
Ethernet and networking products, and wireless radios.
Historically,salesinthissegmenthavebeenverycyclical.
In 2011, Communications segment revenues were $341
millionbeforedeclining21%to$269millionin2013.We
expectrevenuestoonceagaindeclineforthissegmentin
2016, decreasing 4%. However, we do expect future
growthforthesegmentduetoincreasingpenetrationof
smartphones with overall revenues increasing at a 2.3%
five-yearCAGR.
The next largest segment is the Computer segment. In
2015, this segment accounted for 9% of company
revenue.Productsinthissegmentareusedinnotebooks,
desktops, tablet PCs, servers, and printers. Revenues in
this segment had been steadily declining from 2011 to
2014.However,in2015revenuesgrewby6%.In2016,
we expect revenues to decline by 6%. The increased
adoption of the tablet PC will generate slight growth in
the future. We have modeled revenue growth for the
Computersegmenttoincreaseata1.0%CAGRinto2020.
The Military/Aerospace/Harsh Environment segment
accountedfor6%oftotalcompanyrevenuein2015.We
expect sales in this segment to decrease 6% in 2016
mainly due to a decrease in government spending.
Overall we expect the segment to grow at a 1.1% CAGR
into2020.
The Consumer segment accounted for 3% of total
companyrevenuein2015.Managementhasstatedthat
Linear Technology segments their revenue into four
different regions. Domestic revenues consistently
accountforaround28%oftotalrevenue.
FY2015RegionalSales
Europe
27.7%
19.8%
Japan
15.5%
37.0%
RestofWorld
(ROW)
NorthAmerica
Source:LinearTechnology201510-K
(3)
More than 85% of Linear Technology’s manufacturing is
performed at two U.S. locations. The company’s export
sales are billed and payable in US dollars. Thus export
sales are not directly subject to fluctuating currency
exchange rates. The strengthening of the U.S. dollar
results in Linear Technology’s products being more
expensiveforsomeinternationalcustomers.Theadverse
effect to revenue may be partially offset in operating
expenses since the company generally incurs its foreign
operatingexpensesinthecorrespondinglocalcurrency.
RECENTDEVELOPMENTS
Q12016Earnings
OnOctober13,2015,LinearTechnologyannouncedtheir
first quarter of FY2016 results. Quarterly revenue
decreased 7.9% year-over-year to $341.9 million. The
company’snetincomeof$112.0milliondecreased13.4%
from the first quarter of FY2015. These numbers are
weakwhencomparedtolastyear.However,theresults
wereexpectedandmatchedconsensusanalystestimates
of$0.46pershare.Managementhasstatedtheybelieve
Page3
this decrease in revenues is an expected correction and
will be relatively short lived. It is management’s view
thatthisdowncyclewillnotbeprolongedandcustomer
inventorieswillberebalancedbyQ3.Thecompanygave
positive revenue guidance for Q2 with revenues
increasing0-3%fromQ1.Analystswereexpectinga1-2%
decline from Q1 so the street viewed this guidance very
positively as the stock price increased 6.2% the day
followingtheearningsrelease.
2015DividendIncrease
ConnectedAutomobiles
A connected car has internet access providing the driver
withmultiplediagnosticoptionssuchasenginecontrols,
automatic crash notifications, and safety alerts. Each of
thesediagnosticreadingsrequiresmultipleanalogICsto
perform the measurement. By 2020, Gartner estimates
therewillbe25billionconnectedvehiclesglobally,a38%
CAGR from 2015. (5) These vehicles will provide new invehicleservicesandautomateddrivingcapabilities.
NumberofConnected
AutomobilesWorldwide
On January 13, 2015, Linear Technology announced an
11% increase in its quarterly dividend payment from
$0.27 to $0.30. 2015 marked the 23rd consecutive year
thatLinearTechnologyhasincreaseditsdividend.
BillionsofAutomobiles
30.0
DividendPaymentGrowth
$2.50
$2.00
$1.50
25.0
25.0
20.0
15.0
10.0
5.0
3.8
4.9
2014
2015
0.0
$1.00
Source:Gartner
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
EPS
AnnualDividend/Share
Source:Nasdaq
(4)
Since 2009, the company has averaged a 55% dividend
payout ratio. In the last four years that number has
increased to 57% with the dividend payment per share
growingata5.2%CAGR.
INDUSTRYTRENDS
LinearTechnologyandotheranalogICmanufacturersare
in a unique position as the world becomes more and
more connected. The digitization and connectivity of
deviceswilldriveanalogsales.
(5)
ElectricandHybridCars
$0.50
$-
2020*
In the FY2015 earnings call, Linear Technology
management stated that their battery monitoring
products are driving growth in the automotive segment
duetohybridandelectriccars.By2023,salesofelectric
vehiclesareexpectedtomakeup2.4%oftotalworldwide
light-duty vehicles sales. According to a Navigant
Researchstudy,globalsalesforlightdutyelectricvehicles
is expected to increase from 2.7 million in 2014 to 6.4
millionin2023,a10%CAGR.(6)
The growth in connected cars along with the increase in
hybridandelectricvehicleswillcontinuetodrivesalesin
the automotive segment for Linear Technology. These
new capabilities and benefits will require added
electronichardware,whichwillincludenumerousanalog
sensors developed by analog IC manufacturers. We
expect revenue’s for Linear Technology’s automobile
segmenttoincreaseatan8.7%CAGRinto2020.
Page4
InternetofThings
The Internet of Things (IoT) is a network of devices that
communicate with one another sharing diagnostic data
and other measurements creating smart homes and
eventually smart cities. The number of IoT connected
devicesisexpectedtoincrease23.5%CAGRfrom2015to
2020.Thenumberofdevicesisexpectedtoincreasefrom
13.4 billion to 38.5 billion during those years. (7) The
industrial sector, which includes agriculture, smart
buildings, and smart grid applications, will drive the
majority of the growth. For example, John Deere is
connectingfarmmachineryandirrigationsystemstosoil
nutrient sources with information on weather, crop
prices, and commodity futures to optimize overall farm
performance. As well, Michelin is placing sensors inside
tiresthatcancoachtruckfleetdriverstodriveinamore
fuel-efficientmanner.
Theincreaseinconnecteddeviceswillrequirenumerous
analogsensorstomeasuretheanalogworldandconvert
it to digital data that can easily be transmitted between
devices. The Industrial segment is currently the largest
segment for Linear Technology. With the growth of the
IoT connected devices we expect the Industrial segment
to continue to be Linear Technology’s largest segment
andgrowata5.1%CAGRinto2020.
bytheincreasedadoptionofsmartphonesamongmobile
phone users. Smartphones are expected to account for
80% of mobile phone shipments in 2018 with Asia and
otheremergingmarketsbeingthelargestcontributorsto
the growth. (9) With this expected growth, we have
modeled Linear Technology’s Communications segment
toincreaseata2.3%five-yearCAGR.
PCSales
The introduction of the tablet and large screen
smartphoneshashadanadverseaffectonPCandlaptop
sales, which have been declining since 2011. According
to IDC, Q2 2015 PC shipments for the top 5 vendors
decreased 11.8% over the past year. IDC is forecasting
overallPCshipmentstoremainsteadyinthenearfuture
withgrowthofzeroto-3%.(10)
GlobalPCShipments
400
364
349
350
315
308
2013
2014
300
Millionsofunits
282
279
282
250
200
150
100
50
SmartphoneGrowth
0
2011
WorldwideMobilePhoneShipments
2012
2015* 2016* 2019*
Source:Statista
(11)
Due to the expected decline in the near term and slow
growth in the long term, we have modeled Computer
segmentrevenuestoincreaseata1.0%CAGRfrom2015
to2020.
MARKETSANDCOMPETITION
Source:S&PNetAdvantage
(9)
Thesmartphoneindustryhasexperiencedalargeamount
of growth in recent years. In 2014, smartphone
shipmentsgrew27.6%fromthepreviousyear.However,
growth of shipments in the industry is expected to slow
toan11.3%increasein2015.Evenwithslowinggrowth,
global shipments are expected to reach 1.9 billion by
2019,an8.2%4-yearCAGR.(8)Thegrowthisbeingcaused
The analog integrated circuit industry is unique to the
restofthesemiconductorindustryasitsproductssolvea
specific problem and are not easily commoditized.
Because each product is unique and not easily replaced
with a competitors product, when an analog supplier
winsaspotinacustomersnewproductdesign,theprice
tendstobefixedforthelifeoftheproduct.Thismakes
for more price stability than digital IC markets, which is
subjecttocommoditypricingpressure.
CompaniesintheanalogICindustryhavesmallercapital
requirementsthandigitalcircuitdesigners.Digitalcircuit
designs require very dense circuits, which minimize
Page5
device size and maximize speed. These designs require
expensive wafer fabrication equipment. Analog circuit
designers are not concerned with size and focus on
precise matching and placement of circuit elements.
Therefore, manufacturing of analog integrated circuits
generally requires smaller capital expenditures and less
frequent replacement of manufacturing equipment
because the equipment will not become obsolete as
quicklyasdigitalICmanufacturingequipment.
The analog IC industry is a highly fragmented industry.
The top ten companies in the industry account for only
58%ofthetotalindustrysales,withindustryleaderTexas
Instrumentsaccountingforaround18%ofmarketshare.
Company
Revenue
MarketShare
TexasInstruments*
$8,104*
18%
ST
$2,836
6%
Infineon
$2,770
6%
AnalogDevices
$2,615
SkyworksSolutions
Texas Instruments is the largest player in the overall
analogmarket.TexasInstrumentsdoescompeteinother
markets in the semiconductor industry but analog
accountsfor62%oftheirrevenue.LinearTechnologyisa
medium sized company in the analog IC market space
with a market cap of $11 billion. Linear Technology is
among the most profitable companies in the entire
semiconductor industry, which is a testament to strong
leadershipinthecompany.
Mkt
Cap
($B)
P/E
(ttm)
Price/
Sales
(ttm)
Price/
CF
(ttm)
Price/
Book
TexasInstruments
58.46
20.3
4.43
14.84
5.39
AnalogDevices
19.35
25.1
5.51
18.11
3.25
InfineonTechnologies
12.73
17.1
2.13
9.38
2.21
MaximIntegrated
11.53
48.9
4.35
14.47
4.32
6%
LinearTechnology
11.00
21.4
7.54
18.58
6.89
$2,570
6%
4.79
23.6
1.42
9.33
2.70
Maxim
$2,035
4%
NXP
$1,730
4%
ONSemiconductor
Fairchild
Semiconductor
1.47
10.91
1.71
LinearTechnology
$1,437
3%
Intersil
1.88
35.9
3.47
26.61
1.95
OnSemi
$1,291
3%
0.409
16.7
1.17
Renesas
$910
*CompanyrevenuesfromanalogICsalesonly
IXYSCorporation
2.07
-
2%
(12)
Source:ICInsights Whileitisafragmentedindustry,thebarrierstoentryfor
new companies are huge. There are high startup costs
and significant capital investments required for the
developmentofatechnologytocompeteagainstexisting
playersintheanalogICindustry.
PeerComparison
TheanalogICindustryisexpectedtohavesalesof$47.5
billion in 2015 and account for 16.8% of the total
semiconductor industry sales. (1) Linear Technology
distinguishes itself from other IC manufacturers by the
creativity of their individual design engineers, smaller
capitalrequirementsandmarketdiversity.
LinearTechnologystatesintheir10-Kthattheirfourmain
competitors are Texas Instruments, Maxim Integrated
Products,AnalogDevices,andIntersil.Thesecompanies
as well as Linear Technology all compete in the same
markets segments but they prioritize the market
segments differently. Texas Instruments and Maxim
focus most of their efforts on the Consumer Electronics
segment with Industrial and Communication Equipment
being their second and third priority markets. Analog
Devices is very similar to Linear Technology in that
Industrial,Automotive,andCommunicationsaretheirtop
threemarketsegments.
8.24
1.46
Source:Factset
Gross
Margin
Op
Margin
TexasInstruments
54.5
30.0
26.2
19.2
10.4
AnalogDevices
62.9
29.0
13.3
11.2
19.5
InfineonTechnologies
38.1
13.4
12.3
11.8
12.7
MaximIntegrated
56.7
20.7
8.7
6.1
22.6
LinearTechnology
75.9
46.3
35.8
35.8
18.1
ONSemiconductor
Fairchild
Semiconductor
32.2
8.6
12.3
7.9
11.6
32.5
6.0
-2.8
-2.4
11.6
Intersil
54.1
14.0
5.7
5.7
22.4
IXYSCorporation
28.3
8.2
8.8
8.5
7.9
Source:Factset
ROE
ROIC
R&D%
Rev
Company’s that survive in the industry optimize ROIC.
Linear Technology is one of the few company’s in the
industrythatstillownsandoperatesit’sownfabrication
facilitiesratherthanoutsourcingtheseactivities.Thishas
allowed Linear Technology to stream line its production
process and create an ROIC of 35.8%, which dominates
thepeergroupwithTexasInstrumentsbeingtheclosest
competitorat19.2%.
High research and development expense is a common
characteristic among all analog IC manufacturers. Linear
TechnologyspendsmoreonR&Dasapercentofrevenue
Page6
than the overall peer average but their ratio is less than
threeoutoffouroftheirmaincompetitors.
600.0
000'sofUSD
10.0%
2015RevenueperEmployee
7.9%
10.4%
11.6%
15.0%
11.6%
12.7%
18.1%
19.5%
20.0%
22.4%
25.0%
22.6%
2015R&D%ofRevenue
Linear Technology is in the middle of the pack when it
comparing revenue generated per employee. They are
very similar to Analog Devices, generating nearly $300K
per employee. Intersil and Texas Instruments lead this
category generating $545K per employee and $420K per
employee,respectively.
5.0%
0.0%
500.0
400.0
300.0
200.0
100.0
0.0
Source:MergentOnline
While Linear Technology lags its direct peers slightly in
R&D expenses, they dominate in profitability. Linear
Technology consistently has industry-leading gross
margins. A combination of competing in the high
performancesegmentoftheanalogmarket,owningtheir
own foundries, and strong management has allowed
Linear Technology to maintain a gross margin of 75.9%
andanoperatingmarginof46.3%in2015.
2015GrossandOperabngsMargin
GrossMargin
Source:MergentOnline
However, when comparing operating income per
employee, Linear Technology and Texas Instruments
dominate the peer group. Linear Technology leads with
$140K per employee with Texas Instruments generating
$127Kperemployee.ThisresultisexpectedsinceLinear
Technology has much higher margins than the peer
group.
2015OperabngIncomeper
Employee
OperamngMargin
80.0%
70.0%
000'sofUSD
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
0.0%
Source:MergentOnline
Source:Bloomberg
Page7
ECONOMICOUTLOOK
Linear Technology tends to sell its products to original
equipment manufacturers and not direct to consumers.
ThetargetmarketsofthecompanyaretheIndustrialand
Automotive markets, which collectively accounted for
63% of company revenue in FY 2015. While Linear
Technology does not specifically target the consumer
productmarkets,asignificantportionoftheirrevenueis
derived from sales of their products that are used in
consumerproducts.
The semiconductor industry is a cyclical industry. The
industrytendstoperformbestaftertheaggregatebookto-bill ratio has reached a trough. (13) Due to Linear
Technology’s short lead-times and quick production
processes, management does not believe its backlog is
representative of actual sales for a succeeding period.
However,thebook-to-billratiooftheindustrycangivea
goodindicationwhentheindustryasawholewillbeina
period of expansion verses contraction. A book-to-bill
belowoneindicatesaperiodofcontractionwhilearatio
above one indicates a period of expansion. In May and
June of 2015 the book-to-bill ratio for the industry was
around0.98buthasreboundedsince.ThisfollowsLinear
Technology management’s guidance that the industry
contractionseenthissummerwasgoingtobeshort.
SemiconductorIndustryBook-toBillRabo
1.15
1.10
Since the Automotive segment is the company’s second
largestsegmentandhasseenthemostgrowthinrecent
years, vehicle sales are a good indication of growth for
Linear Technology. Light vehicle sales are expected to
increaseata4.3%CAGRinto2015to2020.(15)
OutlookonWorldwideLight
VehicleSales
Salesinmillionsofunits
120
100
80
100 104
95
90
84 87
77 81
107 111
60
40
20
0
Source:KPMG
LinearTechnology’sproductsareusedinavarietyofend
products and 51% of company’s revenues come from
markets that create consumer products, including
automobiles, computers, and mobile phones. When
consumerspendingisdown,salesfortheseproductswill
alsobedown.PersonalConsumptionExpenditureshave
been on the rise since 2009 and have maintained
approximately 3% growth per year. High personal
consumptionexpenditureisagoodindicationforgrowth
inLinearTechnologyrevenues.
1.05
PersonalConsumpbon
Expenditure-PercentChange
fromYearAgo
1.00
2.0
Sep-15
Jun-15
Mar-15
Dec-14
Sep-14
Jun-14
Mar-14
0.0
Dec-13
1.0
Sep-13
One of the four primary components of the GDP is
corporate spending, which will drive sales in the
Industrial segment of Linear Technology. In the near
term,weexpecttheRealGDPgrowthratetobe2.7%and
increasingto3%overthenexttwoyears.
3.0
Jun-13
4.0
Mar-13
(14)
5.0
Dec-12
Source:Semi.org
6.0
Sep-12
0.90
PercentChangefromYearAgo
0.95
Source:FRED
(15)
Page8
(16)
CATALYSTSFORGROWTH
water usage, which could affect production output or
increase cost of goods sold. An increase in COGS would
impact operating margin if they were not able to pass
alongapriceincreasetocustomers.
IncreasingPresenceinAutomotiveMarket
Thepredictedgrowthintheautomotivemarketpresents
a significant growth opportunity for Linear Technology.
The company currently has a strong presence in the
automotive market but with the expected surge in car
electronicsandupturnindemandforhybridandelectric
vehicles,LinearTechnologycouldgainsignificantrevenue
growth by increasing its presence in the automotive
market.
RetainingKeyEmployees
Intheir2015annualreport,LinearTechnologystatesthat
one characteristic that distinguishes them from
competitors is the creativity of individual design
engineers. They require engineers skilled in the art and
science of analog circuit design. Engineers require
numerous years of experience to become proficient at
analog design. In FY2015, the company had 1,289
employees involved in research, development, and
engineering related functions. Nearly 30% of their
employee population is involved in new product design.
In order to continue to grow their product portfolio,
Linear Technology must retain key design engineers as
well as recruit and develop new talent within the
organization.
INVESTMENTPOSITIVES
•
LinearTechnologyhashistoricallyhadstrongcash
flowgenerationwithalonghistoryofreturningvalueto
shareholders through both dividendpayments and stock
repurchases.
•
Linear Technology has no debt on their balance
sheet and has a high level of liquidity based on their
extremelyhighcurrentratioof8.4in2015.
•
Linear Technology is a lean and well run
company. They have industry leading gross margins,
operatingmargins,andROE.
INVESTMENTNEGATIVES
•
85% of Linear Technology’s manufacturing is
located in California and Washington. California is in its
fourth year of drought. The fabrication process
consumes a significant amount of water. The company
could see rate increases or mandatory reductions in
•
Thestockpricehasincreasedapproximately11%
sincewebegancoverageonLinearTechnology.Because
of the significant increase in price, the stock has limited
upside.
VALUATION
We used a Discounted Cash Flow (DCF), Dividend
Discount Model (DDM), and Relative Price to Earnings
(P/E) analysis to value Linear Technology. Through the
valuation process we calculated a stock price range of
$45to$49forthecompany.
Linear Technology generates revenue through six
different segments. The Computer segment is declining
due to increased adoption of large screen smartphones.
The Military/Harsh Environment segment is going to see
limited growth due to decreased government spending.
Theconsumersegmentisnotamarketthatthecompany
attempts to generate growth in. The main revenue
generators for the company are the Industrial,
Automotive, and Communications segment. Together
thesethreesegmentshaveaccountedformorethan75%
of company revenue since 2011 and 82% of company
revenue in 2015 so we have focused our valuation on
thesesegments.
WeexpectsignificantgrowthintheAutomotivesegment
due to an increase in the amount of electronics in cars
from growing popularity in Hybrid and Electric vehicles
and the increasing connectivity of cars. We expect
revenues for the Automotive segment to increase at an
8.7% five-year CAGR and account for 24% of company
revenuein2020.DuetothenumberofInternetofThings
connected devices we expect the Industrial segment to
grow at a 5.1% CAGR into 2020 and still be the largest
revenue generating segment at 44% of overall company
revenue. We expect the Communications segment to
increase at a 2.3% five-year CAGR due to the increase
adoption of smartphones. With slower growth than the
Industrial and Automotive segments, we expect the
Communications segment percentage of overall revenue
to shrink from 19% in 2015 to 17% in 2020. We expect
these three segments to increase from 82% of company
revenuein2015to85%ofrevenuein2020.Overall,we
have modeled total company revenues to increase at a
4.7%CAGRfrom2015to2020.
Page9
Thegrossprofitmarginforthecompanyhasconsistently
been above 74% since 2003. In 2015, gross profit was
75.9%ofrevenue.Wehavemodeledgrossprofitmargins
todropslightlyin2016to75.0%andthenmaintain75.5%
into2020.
R&D expenses for Linear Technology have averaged
around18.2%ofrevenuethelastthreeyears.Weexpect
this trend to continue and have modeled R&D expenses
of18.3%ofrevenuethrough2020.SG&Aexpensesasa
percent of revenue averaged 11.6% from 2013 through
2015.Webelievethislevelofexpensewillcontinueand
havemodeledSG&Aexpensesof11.7%ofrevenuefrom
2016to2020.
The company has consistently had net profit margins
above 30% since the mid-1990s. In 2015, the net profit
margin was 35.3%. We have modeled the net profit
margin to decrease to 33.0% in 2016 with net profit
marginsmaintainingapproximately33.3%into2020.
GrossProfitMargin
NetProfitMargin
Source:LinearTechnology201510-K
We have estimated earnings per share to be $1.97 in
2016 and $2.17 in 2017 before increasing to $2.64 in
2020. The 2016 and 2017 EPS estimates are above
consensus analyst estimates of $1.93 and $2.14,
respectfully.OurEPSestimatesaremoreoptimisticthan
consensus analyst because we believe analysts are
forecasting the current industry downturn to last longer
than expected. We have followed management’s
guidance in our assumption and feel sales will begin to
pickbackuptheremainderofFY2016.
$2.50
$2.40
$2.30
$2.20
$2.10
$2.00
$1.90
$1.80
$1.70
$1.60
$1.50
2012 2013 2014 2015 2016E 2017E 2018E
AnalystHighEst.
AnalystLowEst.
HenryFundEst.
Source:FactSet
In years of slow growth, Linear Technology has
historically limited capital expenditures. We are
expectingrevenuestodecline2.1%in2016andtherefore
wearepredictingcapitalexpenditurestoincreasebyonly
$28.8 million, 2.8% growth, in 2016. In 2017, we have
modeled revenues to increase by 8.2% from 2016 and
thereforehavemodeledcapitalexpenditurestoincrease
by 6.4%, which is in line with historic growth rates.
Overall,wehavemodeledcapitalexpenditurestogrowat
a5.7%CAGRinto2020.
As previously stated, we valued Linear Technology using
DCF, DDM, and relative P/E analysis using the above
assumptions. The DCF model computed a price of
$46.92, the DDM model computed a stock price of
$47.83,andtherelativeP/Eanalysiscomputedapriceof
$41.03.
2020E
2019E
2018E
2017E
2016E
2015
2014
2013
2012
2011
2010
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2009
ProfitMargins
LinearTechnologyEPSEsbmate
We did not agree with the relative P/E analysis. Linear
Technology has a similar P/E ratio as nearly all of its
peers. However, Linear Technology has industry leading
margins and should trade at a premium compared to its
peers. We do not believe the market accurately values
theprofitabilityofLinearTechnology.
TheDDMmodelcomputedapriceof$47.83andverifies
our DCF model price. Linear Technology has a long
history of dividend payments and fairly consistent
dividend growth and consistent dividend payout ratio.
The company maintains approximately a 55% dividend
payoutratioeachyear.Wemodeledanaveragedividend
payoutratioofaround59%forthenextfiveyears.
Page10
DividendPayoutRaboPerYear
marginsshouldbemonitoredtoseeifthisstrategyallows
them to increase their profitability compared to Linear
Technology.
70.00%
IndustryDownturn
60.00%
Linear Technology competes in a cyclical industry.
Management has stated they feel the current downturn
willbeshortlived.Wehavemodeledrevenuestodecline
2.1% in 2016 and then increasing 8.2% in 2017. The
overallindustrybook-to-billratioshouldbemonitoredas
itcangiveagoodindicationofthedirectiontheindustry
is headed. If the downturn lasts longer than expected,
Linear Technology may have a difficult time raising their
dividend for the 18th consecutive year, which could
significantly hurt the share price as investors have come
toexpectadividendincreaseofatleast4%everyyear.
50.00%
40.00%
30.00%
20.00%
Source:MergentOnline
Over last ten years, earnings per share have risen an
average of 6.7% per year. We chose a continuing value
growthofearningspersharetobe5%.Wefeelthisisa
reasonable number given the actual EPS growth
throughoutthehistoryofthecompany.
The DCF model calculated a price of $46.92. We based
our price range of $45 to $49 on sensitivity analysis
around our DCF model. There are currently 24 analysts
covering Linear Technology with a target price range of
$38 to $52 with a median target price of $42.61. Our
price range is on the high side of analyst estimates but
within the range. Our price range is a 1.6% to 10.6%
premiumoverthecurrentstockprice.
Webelievetheindustrydownturnin2016willbeshortlived and also believe Linear Technology will see
significant growth in both the automotive and industrial
segments coming out of the down turn. Therefore, we
feelourpricerangeof$45to$49isjustified.
KEYSTOMONITOR
CompetitorProfitMargins
REFERENCES
1. EETimes, 12/3/2014, “Chip Market Forecast Raised
for2014,2015”
http://www.analog-eetimes.com/en/chip-marketforecast-raised-for-20142015.html?cmp_id=7&news_id=222906861
2. Forbes,8/20/10,“LongLiveAnalog”
http://www.forbes.com/2010/08/19/linear-lotharmaier-intelligent-technology-analog.html
3. LinearTechnology201510-K
4. Linear Technology Corporation Dividend Date &
History
http://www.nasdaq.com/symbol/lltc/dividendhistory
5. Gartner, “By 2020, a Quarter Billion Connected
Vehicles Will Enable New In-Vehicle Services and
AutomatedDrivingCapabilties,”January26,2015
http://www.gartner.com/newsroom/id/2970017
6. Navigant Research, “Electric Vehicle Market
Forecasts,”October23,2014
http://www.navigantresearch.com/research/electricvehicle-market-forecasts
7. Juniper Research, “Internet of Things Connected
Devices to Almost Triple to Over 38 Billion Units By
2020,”July28,2015
http://www.juniperresearch.com/press/pressreleases/iot-connected-devices-to-triple-to-38-bn-by2020
8. Statista,“Globalsmartphoneshipmentsforecastfrom
2010to2019”
http://www.statista.com/statistics/263441/globalsmartphone-shipments-forecast/
Linear Technology has been able to maintain industry
leading profit margins for the past decade. There is an
industry trend of companies outsourcing the
semiconductor manufacturing operations and becoming
dedicated design houses. By doing this, companies are
able to focus all their resources on core designing
competencies. Linear Technology has not followed the
industrytrendandonlyoutsourcesapproximately15%of
their fabrication and manufacturing. Competitor profit
Page11
LinearTechnologyIncorporated
RevenueDecomposition
FiscalYearsEnding30-Jun
Industrial
Automotive
Communications
Computer
Military/HarshEnvironment
Consumer
TotalRevenue
2013
538,539
217,980
269,270
141,046
76,934
38,467
1,282,236
2014
597,006
263,793
277,677
124,955
83,303
41,652
1,388,386
2015
634,310
295,028
280,276
132,763
88,508
44,254
1,475,139
2016E
615280
309779
269065
124797
83198
41599
1,443,719
2017E
664503
350050
287900
128541
87358
43263
1,561,615
2018E
684438
367553
290779
131111
88231
43696
1,605,808
2019E
773415
430037
302410
135045
90878
45006
1,776,791
2020E
812086
447239
314506
139096
93605
46357
1,852,888
Industrial
Automotive
Communications
Computer
Military/HarshEnvironment
Consumer
%TotalRevenue
42.00%
17.00%
21.00%
11.00%
6.00%
3.00%
100.00%
43.00%
19.00%
20.00%
9.00%
6.00%
3.00%
100.00%
43.00%
20.00%
19.00%
9.00%
6.00%
3.00%
100.00%
42.62%
21.46%
18.64%
8.64%
5.76%
2.88%
100.00%
42.55%
22.42%
18.44%
8.23%
5.59%
2.77%
100.00%
42.62%
22.89%
18.11%
8.16%
5.49%
2.72%
100.00%
43.53%
24.20%
17.02%
7.60%
5.11%
2.53%
100.00%
43.83%
24.14%
16.97%
7.51%
5.05%
2.50%
100.00%
Industrial
Automotive
Communications
Computer
Military/HarshEnvironment
Consumer
TotalRevenueGrowthRate
3.70%
7.56%
-3.37%
-7.20%
1.23%
1.23%
1.23%
10.86%
21.02%
3.12%
-11.41%
8.28%
8.28%
8.28%
6.25%
11.84%
0.94%
6.25%
6.25%
6.25%
6.25%
-3.00%
5.00%
-4.00%
-6.00%
-6.00%
-6.00%
-2.13%
8.00%
13.00%
7.00%
3.00%
5.00%
4.00%
8.17%
3.00%
5.00%
1.00%
2.00%
1.00%
1.00%
2.83%
13.00%
17.00%
4.00%
3.00%
3.00%
3.00%
10.65%
5.00%
4.00%
4.00%
3.00%
3.00%
3.00%
4.28%
959,720
74.85%
1,049,806
75.61%
1,119,412
75.89%
1,082,789
75.00%
1,179,019
75.50%
1,212,385
75.50%
1,341,478
75.50%
1,398,930
75.50%
28.8%
71.2%
27.2%
72.8%
27.7%
72.3%
27.9%
72.1%
27.9%
72.1%
27.9%
72.1%
27.9%
72.1%
27.9%
72.1%
TotalGrossProfit
TotalGrossProfitMargin
DomesticRevenue%
InternationalRevenue%
LinearTechnologyIncorporated
IncomeStatement
FiscalYearsEnding30-Jun
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
1,282,236
267,150
55,366
959,720
1,388,386
287,325
51,255
1,049,806
1,475,139
301,629
54,098
1,119,412
1,443,719
1,561,615
1,605,808
1,776,791
1,852,888
312,258
48,672
333,095
49,500
341,334
52,089
381,083
54,231
395,640
58,318
1,082,789
1,179,019
1,212,385
1,341,478
1,398,930
Research & development expenses
Selling, general & administrative expenses
Restructuring charges
Total operating expenses
235,184
151,382
0
386,566
250,434
159,642
0
410,076
266,761
169,952
0
436,713
263,479
169,637
0
433,116
284,995
183,490
0
468,484
293,060
188,682
0
481,742
324,264
208,773
0
533,037
338,152
217,714
0
555,866
Operating income (loss)
573,154
639,730
682,699
649,673
710,535
730,643
808,440
843,064
Interest income
Interest expense
Acquisition related costs
(Loss) gain on early retirement of convertible senior notes
Total other income (expense), net
4,070
-48,343
0
0
-44,273
2,706
-41,168
0
0
-38,462
2,690
0
0
0
2,690
3,608
4,038
4,269
4,592
4,819
0
0
0
3,608
0
0
0
4,038
0
0
0
4,269
0
0
0
4,592
0
0
0
4,819
Income (loss) before income taxes
Provision (benefit) for income taxes
528,881
121,956
601,268
141,307
685,389
164,426
653,282
714,573
734,912
813,032
847,883
177,336
193,974
199,495
220,701
230,162
Net income (loss)
406,925
459,961
520,963
475,945
520,599
535,416
592,331
617,721
Year end shares outstanding
Weighted average shares outstanding-basic
Net earnings (loss) per share-basic
233,025
236,703
1.72
239,096
240,498
1.91
242,751
244,408
2.13
240,975
241,863
238,901
239,938
236,992
237,946
234,799
235,895
232,781
233,790
1.97
2.17
2.25
2.51
2.64
1.02
1.06
1.14
1.22
1.30
1.38
1.46
1.54
Revenues
Cost of sales
Depreciation & Amortization
Gross profit (loss)
Cash dividends per share
LinearTechnologyIncorporated
BalanceSheet
FiscalYearsEnding30-Jun
2013
2014
2015
2016E
126,650
1,398,091
157,323
855,464
195,679
1,007,043
308,809
349,442
414,123
433,981
460,866
1,037,254
1,073,558
1,116,501
1,172,326
1,236,803
147,165
1,891
145,274
174,993
1,653
173,340
180,915
1,651
179,264
176,278
1,763
196,763
1,968
202,332
2,023
223,876
2,239
233,464
2,335
174,515
194,796
200,309
221,637
231,129
Total inventories
87,229
91,310
99,861
96,729
104,628
107,589
119,045
124,143
Prepaid expenses & other current assets
36,646
40,982
54,412
53,418
57,780
59,415
65,741
68,557
1,793,890
1,318,419
1,536,259
1,670,725
1,780,204
1,897,936
2,012,729
2,121,499
921,273
632,807
288,466
953,745
676,665
277,080
1,010,260
722,518
287,742
1,039,134
768,990
1,106,284
816,790
1,152,852
867,679
1,241,692
920,710
1,334,336
977,828
270,144
289,494
285,173
320,981
356,508
2,200
13,785
0
2,200
11,585
0
2,200
9,385
0
2,200
7,185
2,200
5,485
2,200
4,285
2,200
3,085
2,200
1,885
0
0
0
0
0
2,098,341
1,609,284
1,835,586
1,950,255
2,077,383
2,189,594
2,338,996
2,482,092
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable
Accrued payroll & related benefits
Deferred income on shipments to distributors
Income taxes payable
Other accrued liabilities
Convertible senior notes - current portion
10,258
77,659
44,088
12,834
18,933
826,629
28,221
88,326
45,619
41,731
11,218
0
17,608
98,498
46,860
5,822
14,130
0
17,769
94,318
47,643
17,734
14,437
0
19,220
102,020
51,533
19,397
15,616
0
19,764
104,907
52,992
19,950
16,058
0
21,868
116,078
58,634
22,070
17,768
0
22,805
121,049
61,145
23,016
18,529
0
Total current liabilities
990,401
215,115
182,918
191,901
207,787
213,671
236,418
246,544
Total Deferred Taxes (Liabilities - Assets)
83,505
21,705
37,119
53,201
58,192
59,849
66,210
69,049
Convertible senior notes
Other long-term liabilities
0
42,527
0
41,095
0
37,622
0
36,493
0
35,399
0
34,337
0
33,306
0
32,307
Total Liabilities
1,116,433
277,915
257,659
281,595
301,378
307,856
335,935
347,900
Stockholders' Equity:
Common stock and Additional Paid in Capital
Accumulated other comprehensive income (loss), net of tax
Retained earnings (accumulated deficit)
1,736,729
-266
-754,555
1,948,006
355
-616,992
2,052,490
561
-475,124
2,063,434
2,063,449
2,063,449
2,063,449
2,063,449
561
-395,335
561
-288,005
561
-182,271
561
-60,949
561
70,182
981,908
1,331,369
1,577,927
1,668,660
1,776,005
1,881,739
2,003,061
2,134,192
2,098,341
1,609,284
1,835,586
1,950,255
2,077,383
2,189,594
2,338,996
2,482,092
ASSETS
Cash & cash equivalents
Marketable securitites
Accounts receivable, gross
Allowance for doubtful accounts
Accounts receivable, net
Total current assets
Gross property, plant & equipment
Accumulated depreciation
Net property, plant & equipment
Goodwill
Identified intangible assets, net
Other non current assets
Total assets
Total stockholders' equity (deficit)
TotalLiabilitesandStockholders'Equity
2017E
2018E
2019E
2020E
LinearTechnologyIncorporated
CashFlowStatement
FiscalYearsEnding30-Jun
2011
2012
2013
2014
2015
580,782
50,137
69,221
21,675
5,110
0
7,237
-18,151
-6,344
11,819
-52,210
13,887
-12,228
0
670,935
398,111
55,934
61,225
19,868
-2,575
0
17,290
-5,965
12,001
4,581
-22,330
-6,254
33,333
0
565,219
406,925
55,366
63,865
21,029
-521
0
7,816
-7,565
-2,159
1,426
-4,206
2,755
19,203
0
563,934
459,961
51,255
65,128
18,458
-11,038
0
-28,066
-4,081
1,464
0
21,038
1,531
20,777
0
596,427
520,963
54,098
72,131
0
-15,190
0
-5,924
-8,551
-3,816
0
-1,496
1,241
-14,537
0
598,919
Cash flows from investing activities:
Purchase of marketable securities
Proceeds from sales & maturities of available-for-sale securities
Acquisition of Dust Networks, net of cash assumed
Purchase of property, plant & equipment
Net cash flows from investing activities
-805,146
813,568
0
-120,415
-111,993
-1,046,120
707,791
-23,365
-35,731
-397,425
-1,181,592
772,968
0
-17,640
-426,264
-1,496,652
2,039,216
0
-37,669
504,895
-886,222
734,961
0
-62,560
-213,821
Cash flows from financing activities:
Retirement of convertible senior notes
Excess tax benefit from stock-based compensation
Issuance of common stock under employee stock plans
Purchase of common stock
Payment of cash dividends
Net cash flows from financing activities
-395,830
0
66,932
-38,173
-217,202
-584,273
0
0
79,650
-76,066
-228,483
-224,899
0
0
102,590
-85,699
-241,329
-224,438
-845,087
11,038
100,491
-81,786
-255,305
-1,070,649
0
15,190
40,712
-124,240
-278,404
-346,742
Increase (decrease) in cash & cash equivalents
-25,331
-57,105
-86,768
30,673
38,356
Cash & cash equivalents, beginning of year
Cash & cash equivalents, end of year
Cash paid for income taxes
Cash paid for interest expense
295,854
270,523
189,575
32,334
270,523
213,418
91,315
25,831
213,418
126,650
99,720
25,485
126,650
157,323
119,797
21,127
157,323
195,679
186,920
0
Cash flows from operating activities:
Net income (loss)
Depreciation & amortization
Stock-based compensation
Amortization of convertible senior notes discount
Excess tax benefit from stock-based compensation
Loss (gain) on early retirement of convertible senior notes
Accounts receivable
Inventories
Prepaid expenses, other current assets & deferred tax assets
Long-term assets
Accounts payable, accrued payroll & other accrued liabilities
Deferred income on shipments to distributors
Income taxes payable
Long-term liabilities
Net cash flows from operating activities
LinearTechnologyIncorporated
ForecastedCashFlowStatement
FiscalYearsEnding30-Jun
Cashflowsfromoperatingactivities:
2016E
2017E
2018E
2019E
2020E
Net income (loss)
Add: Depreciation
Add: Amortization
Changes in:
Accounts Receivable Net
Inventories
Prepaid expenses & other current assets
Other non current assets
Accounts payable
Accrued payroll & related benefits
Deferred income on shipments to distributors
Income taxes payable
Other accrued liabilities
Total Deferred Taxes (Liabilities - Assets)
Other liabilities
475,945
46,472
2,200
520,599
47,800
1,700
535,416
50,889
1,200
592,331
53,031
1,200
617,721
57,118
1,200
4,749
3,132
994
0
161
-4180
783
11912
307
16082
-1129
-20,281
-7,899
-4,362
0
1451
7702
3891
1664
1179
4991
-1095
-5,513
-2,961
-1,635
0
544
2887
1458
552
442
1656
-1062
-21,328
-11,456
-6,326
0
2104
11170
5642
2121
1710
6362
-1030
-9,492
-5,098
-2,816
0
937
4971
2511
946
761
2838
-999
Net cash flows from operating activities
557,428
557,340
583,875
635,530
670,598
Cash flows from investing activities:
Marketable securities
Property & equipment, gross
Goodwill
-30,211
-28,874
0
-36,304
-67,149
0
-42,942
-46,568
0
-55,825
-88,840
0
-64,478
-92,644
0
Net cash flows from investing activities
-59,086
-103,453
-89,511
-144,665
-157,122
Cash flows from financing activities:
Convertible senior notes
Payment of cash dividend
Treasury Stock
Common Stock and Additional paid-in capital
Accumulated other comprehensive income
0
-296,156
-100,000
10,944
0
0
-313,268
-100,000
15
0
0
-329,683
-100,000
0
0
0
-346,009
-125,000
0
0
0
-361,590
-125,000
0
0
Net cash flows from financing activities
-385,212
-413,253
-429,683
-471,009
-486,590
Cash flows from all activities:
Net increase (decrease) in cash & cash equivalents
113,130
40,634
64,681
19,857
26,885
Cash & cash equivalents, beginning of year
Cash & cash equivalents, end of year
195,679
308,809
308,809
349,442
349,442
414,123
414,123
433,981
433,981
460,866
LinearTechnologyIncorporated
CommonSizeIncomeStatement
FiscalYearsEnding30-Jun
2013
100.00%
20.83%
4.32%
74.85%
2014
100.00%
20.69%
3.69%
75.61%
2015
100.00%
20.45%
3.67%
75.89%
2016E
100.00%
21.63%
3.37%
75.00%
2017E
100.00%
21.33%
3.17%
75.50%
2018E
100.00%
21.26%
3.24%
75.50%
2019E
100.00%
21.45%
3.05%
75.50%
2020E
100.00%
21.35%
3.15%
75.50%
Research & development expenses
Selling, general & administrative expenses
Restructuring charges
Total operating expenses
18.34%
11.81%
0.00%
30.15%
18.04%
11.50%
0.00%
29.54%
18.08%
11.52%
0.00%
29.60%
18.25%
11.75%
0.00%
30.00%
18.25%
11.75%
0.00%
30.00%
18.25%
11.75%
0.00%
30.00%
18.25%
11.75%
0.00%
30.00%
18.25%
11.75%
0.00%
30.00%
Operating income (loss)
44.70%
46.08%
46.28%
45.00%
45.50%
45.50%
45.50%
45.50%
Interest income
Interest expense
Acquisition related costs
(Loss) gain on early retirement of convertible senior notes
Total other income (expense), net
0.32%
-3.77%
0.00%
0.00%
-3.45%
0.19%
-2.97%
0.00%
0.00%
-2.77%
0.18%
0.00%
0.00%
0.00%
0.18%
0.25%
0.00%
0.00%
0.00%
0.25%
0.26%
0.00%
0.00%
0.00%
0.26%
0.27%
0.00%
0.00%
0.00%
0.27%
0.26%
0.00%
0.00%
0.00%
0.26%
0.26%
0.00%
0.00%
0.00%
0.26%
9.51%
10.18%
11.15%
12.28%
12.42%
12.42%
12.42%
12.42%
31.74%
33.13%
35.32%
32.97%
33.34%
33.34%
33.34%
33.34%
Revenues
Cost of sales
Depreciation & Amortization
Gross profit (loss)
Provision (benefit) for income taxes
Net income (loss)
LinearTechnologyIncorporated
CommonSizeBalanceSheet
FiscalYearsEnding30-Jun
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
9.88%
109.04%
11.33%
61.62%
13.27%
68.27%
21.39%
71.85%
22.38%
68.75%
25.79%
69.53%
24.42%
65.98%
24.87%
66.75%
11.48%
0.15%
11.33%
12.60%
0.12%
12.49%
12.26%
0.11%
12.15%
12.21%
0.12%
12.09%
12.60%
0.13%
12.47%
12.60%
0.13%
12.47%
12.60%
0.13%
12.47%
12.60%
0.13%
12.47%
Total inventories
6.80%
6.58%
6.77%
6.70%
6.70%
6.70%
6.70%
6.70%
Prepaid expenses & other current assets
2.86%
2.95%
3.69%
3.70%
3.70%
3.70%
3.70%
3.70%
139.90%
94.96%
104.14%
115.72%
114.00%
118.19%
113.28%
114.50%
Gross property, plant & equipment
Accumulated depreciation & amortization
Net property, plant & equipment
71.85%
49.35%
22.50%
68.69%
48.74%
19.96%
68.49%
48.98%
19.51%
71.98%
53.26%
18.71%
70.84%
52.30%
18.54%
71.79%
54.03%
17.76%
69.88%
51.82%
18.07%
72.01%
52.77%
19.24%
Goodwill
Identified intangible assets, net & goodwill
Other non current assets
0.17%
1.08%
0.00%
0.16%
0.83%
0.00%
0.15%
0.64%
0.00%
0.15%
0.50%
0.00%
0.14%
0.35%
0.00%
0.14%
0.27%
0.00%
0.12%
0.17%
0.00%
0.12%
0.10%
0.00%
163.65%
115.91%
124.43%
135.09%
133.03%
136.35%
131.64%
133.96%
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable
Accrued payroll & related benefits
Deferred income on shipments to distributors
Income taxes payable
Other accrued liabilities
Convertible senior notes - current portion
0.80%
6.06%
3.44%
1.00%
1.48%
64.47%
2.03%
6.36%
3.29%
3.01%
0.81%
0.00%
1.19%
6.68%
3.18%
0.39%
0.96%
0.00%
1.23%
6.53%
3.30%
1.23%
1.00%
0.00%
1.23%
6.53%
3.30%
1.24%
1.00%
0.00%
1.23%
6.53%
3.30%
1.24%
1.00%
0.00%
1.23%
6.53%
3.30%
1.24%
1.00%
0.00%
1.23%
6.53%
3.30%
1.24%
1.00%
0.00%
Total current liabilities
77.24%
15.49%
12.40%
13.29%
13.31%
13.31%
13.31%
13.31%
Total Deferred Taxes (Liabilities - Assets)
6.51%
1.56%
2.52%
3.68%
3.73%
3.73%
3.73%
3.73%
Convertible senior notes
Other long-term liabilities
0.00%
3.32%
0.00%
2.96%
0.00%
2.55%
0.00%
2.53%
0.00%
2.27%
0.00%
2.14%
0.00%
1.87%
0.00%
1.74%
87.07%
20.02%
17.47%
19.50%
19.30%
19.17%
18.91%
18.78%
Stockholders' Equity:
Common stock and Additional Paid in Capital
135.45%
Accumulated other comprehensive income (loss), net of tax -0.02%
Retained earnings (accumulated deficit)
-58.85%
140.31%
0.03%
-44.44%
139.14%
0.04%
-32.21%
142.92%
0.04%
-27.38%
132.14%
0.04%
-18.44%
128.50%
0.03%
-11.35%
116.13%
0.03%
-3.43%
111.36%
0.03%
3.79%
76.58%
95.89%
106.97%
115.58%
113.73%
117.18%
112.73%
115.18%
163.65%
115.91%
124.43%
135.09%
133.03%
136.35%
131.64%
133.96%
ASSETS
Cash & cash equivalents
Marketable securitites
Accounts receivable, gross
Allowance for doubtful accounts
Accounts receivable, net
Total current assets
Total assets
Total Liabilities
Total stockholders' equity (deficit)
TotalLiabilitesandStockholders'Equity
LinearTechnologyIncorporated
ValueDriverEstimation
FiscalYearsEnding30-Jun
MarginalTaxRate
Federalstatutorytaxrate
Stateincometaxes,netoffederalbenefit
Foreignratedifferential
MarginalTaxRate
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
35.00%
0.27%
-7.66%
27.61%
35.00%
-0.50%
-8.17%
26.33%
35.00%
0.17%
-8.02%
27.15%
35.00%
0.17%
-8.02%
27.15%
35.00%
0.17%
-8.02%
27.15%
35.00%
0.17%
-8.02%
27.15%
35.00%
0.17%
-8.02%
27.15%
35.00%
0.17%
-8.02%
27.15%
1,282,236
-267,150
-55,366
-235,184
-151,382
0
242
573,396
1,388,386
-287,325
-51,255
-250,434
-159,642
0
241
639,971
1,475,139
-301,629
-54,098
-266,761
-169,952
0
261
682,960
1,443,719
-312,258
-48,672
-263,479
-169,637
0
294
649,967
1,561,615
-333,095
-49,500
-284,995
-183,490
0
276
710,810
1,605,808
-341,334
-52,089
-293,060
-188,682
0
295
730,938
1,776,791
-381,083
-54,231
-324,264
-208,773
0
291
808,731
1,852,888
-395,640
-58,318
-338,152
-217,714
0
328
843,392
121,956
141,307
164,426
177,336
193,974
199,495
220,701
230,162
-1,124
13,346
0
0
67
134,245
-712
10,839
0
0
63
151,497
-730
0
0
0
71
163,767
-979
0
0
0
80
176,437
-1,096
0
0
0
75
192,953
-1,159
0
0
0
80
198,417
-1,246
0
0
0
79
219,534
-1,308
0
0
0
89
228,943
Deferred income tax provision (benefit)
22,533
-61,800
15,414
16,082
4,991
1,656
6,362
2,838
NetChangeinDTLiabilities
22,533
-61,800
15,414
16,082
4,991
1,656
6,362
2,838
461,684
426,674
534,607
489,612
522,849
534,178
595,559
617,287
2%
1,282,236
25,645
126,650
2%
1,388,386
27,768
157,323
2%
1,475,139
29,503
195,679
2%
1,443,719
28,874
308,809
2%
1,561,615
31,232
349,442
2%
1,605,808
32,116
414,123
2%
1,776,791
35,536
433,981
2%
1,852,888
37,058
460,866
25,645
145,274
87,229
36,646
294,794
27,768
173,340
91,310
40,982
333,400
29,503
179,264
99,861
54,412
363,040
28,874
174,515
96,729
53,418
353,536
31,232
194,796
104,628
57,780
388,436
32,116
200,309
107,589
59,415
399,429
35,536
221,637
119,045
65,741
441,959
37,058
231,129
124,143
68,557
460,887
10,258
77,659
44,088
12,834
18,933
163,772
28,221
88,326
45,619
41,731
11,218
215,115
17,608
98,498
46,860
5,822
14,130
182,918
17,769
94,318
47,643
17,734
14,437
191,901
19,220
102,020
51,533
19,397
15,616
207,787
19,764
104,907
52,992
19,950
16,058
213,671
21,868
116,078
58,634
22,070
17,768
236,418
22,805
121,049
61,145
23,016
18,529
246,544
288,466
277,080
287,742
270,144
289,494
285,173
320,981
356,508
7,147
7,739
8,713
8,180
8,766
8,635
9,719
10,795
Identified intangible assets, net
Other non current assets
13,785
0
11,585
0
9,385
0
7,185
0
5,485
0
4,285
0
3,085
0
1,885
0
TotalOtherLong-TermOperatingAssets
13,785
11,585
9,385
7,185
5,485
4,285
3,085
1,885
42,527
42,527
41,095
41,095
37,622
37,622
36,493
36,493
35,399
35,399
34,337
34,337
33,306
33,306
32,307
32,307
397,893
373,594
448,340
410,652
448,995
449,515
506,020
551,224
NOPLAT
/BeginningIC
ROIC:
461,684
430,346
107.28%
426,674
397,893
107.23%
534,607
373,594
143.10%
489,612
448,340
109.21%
522,849
410,652
127.32%
534,178
448,995
118.97%
595,559
449,515
132.49%
617,287
506,020
121.99%
BeginningIC
x(ROIC-WACC)
EP
430,346
98.54%
424,065
397,893
98.49%
391,892
373,594
134.36%
501,949
448,340
100.46%
450,420
410,652
118.58%
486,951
448,995
110.23%
494,928
449,515
123.75%
556,264
506,020
113.25%
573,053
NOPLAT
-CapEx
FCF
461,684
-32,453
494,137
426,674
-24,299
450,973
534,607
74,746
459,861
489,612
-37,688
527,300
522,849
38,343
484,506
534,178
520
533,658
595,559
56,505
539,054
617,287
45,204
572,083
EBITA:
Net sales
- Cost of sales
- Depreciation & Amortization
- Research & development expense
- Selling, general & administrative expense
- Restructuring Charge
+ImpliedInterestonOperatingLeases
EBITA
Less:AdjustedTaxes:
Income tax provision (benefit)
- Tax Shield on Interest income
+ Tax Benefit on Interest expense
+ Tax Shield Acqusisition related Costs
+ Tax Shield Early Retirement of Convertible Notes
+TaxShieldonImpliedLeaseInterest
AdjustedTaxes
Plus:ChangeinDeferredTax:
NOPLAT
NOPLAT:EBITA-AdjustedTaxes+ChangeinDT
OperatingCurrentAssets:
"Normal"Cash%
xRevenue
"Normal"Cash(RevenuexAvg%)
Cashandcashequivalents
Lowerof"Normal"CashorActualCash
Accounts receivable, net
Inventories
Prepaid expenses & other current assets
OperatingCurrentAssets
OperatingCurrentLiabilities:
Accounts payable
Accrued payroll & related benefits
Deferred income on shipments to distributors
Income taxes payable
Other accrued liabilities
OperatingCurrentLiabilities
NetPPE:
Property & equipment, net
PVofOperatingLeases:
PVofOperatingLeases
OtherOperatingAssets:
OtherOperatingLiabilities:
Other liabilities
TotalOtherLong-TermOperatingLiabilities
InvestedCapital:
InvestedCapital
ValueDrivers:
LinearTechnologyIncorporated
WeightedAverageCostofCapital(WACC)Estimation
WACC=Re*(E/V)+Rd*(1-t)*(D/V)+Rpfd*(PFD/V)
CostofEquity
Re=Rf+B*(E[Rm]-Rf)
Rf
E[Rm]-Rf
Beta
Re
2.820%
4.85%
1.222
8.75%
Costofdebt
Rd
3.37%
CostofPreferredStock
Rpfd
0.00%
MarketValueofEquity
Sharesoutstanding
xSharesPrice
E
242751
$44.31
$10,756,297
MarketValueofDebt
Long-term debt
+ Operating Leases
D
MarketValueofPreferred
Sharesoutstanding
PFD
MarketValueofFirm
V=E+D+PFD
weightofequity
weightofdebt
weightofpreferred
MarginalTaxRate
WACC
0
$8,713
$8,713
0
0
$10,765,010
99.92%
0.08%
0.00%
27.15%
8.74%
---------->
TexasInstrumentsBond,maturity5/1/23
-(10-yrBond(YahooFinance))
+(30-yearTreasuryYield(YahooFinance))
=CostofDebt
2.68%
2.13%
2.82%
3.37%
LinearTechnologyIncorporated
DiscountedCashFlow(DCF)andEconomicProfit(EP)ValuationModels
KeyInputs:
CVGrowth
CVROIC
WACC
CostofEquity
FiscalYearsEnding30-Jun
DCFModel
Period
FCF
ContinuingValue
PV
V(operating)
Non-operatingAssets:
ExcessCash
Marketable Securities
V(non-operating)
3.50%
122.00%
8.74%
8.75%
2016E
2017E
2018E
2019E
2020E
1
527,306
2
484,514
3
533,665
4
539,064
484,916
9,876,000
409,746
415,031
385,528
5
572,095
11,438,764
8,180,779
1
450,430
2
486,960
3
494,938
4
556,274
414,220
9,427,688
448,311
9,876,000
411,814
384,913
397,836
166,176
1,007,043
1,173,219
Non-operatingLiabilities:
Convertible senior notes
Employee Stock Options
PVofOperatingLeases
V(other)
V(e)
SharesOutstanding
IntrinsicValueofStock(FYEnd'14)
EPModel
Period
EconomicProfit
ContinuingValue
PV
NPV
BeginningInvestedCapital(end2014)
V(operating)
Non-operatingAssets:
ExcessCash
Marketable Securities
V(non-operating)
0
10,241
8,685
18,926
11,030,293
242,751
45.44
166,176
1,007,043
1,173,219
Non-operatingLiabilities:
Convertible senior notes
Employee Stock Options
PVofOperatingLeases
V(other)
V(e)
SharesOutstanding
IntrinsicValueofStock(FYEnd'14)
IntrinsicValueofStock(Today)
0
10,241
8,685
18,926
11,030,293
242,751
45.44
$46.92
5
573,063
10,932,776
7,818,906
LinearTechnologyIncorporated
DividendDiscountModel(DDM)orFundamentalP/EValuationModel
FiscalYearsEnding30-Jun
EPS
KeyAssumptions
CVgrowth
CVROE
CostofEquity
FutureCashFlows
P/EMultiple(CVYear)
EPS(CVYear)
FutureStockPrice
DividendsPerShare
FutureCashFlows
Period
DiscountedCashFlows
IntrinsicValue(FYEnd'14)
IntrinsicValueofStock(Today)
2016E
2017E
2018E
2019E
2020E
$1.97 $2.17 $2.25 $2.51 $2.64
5.00%
29.86%
8.75%
1.22
1.30
1.38
1
1.12
2
1.10
3
1.07
$46.32
$47.83
22.22
$2.64
$58.71
1.46
1.54
58.71
4
1.04
4
41.98
LinearTechnologyIncorporated
RelativeValuationModels
PeerComparison
Ticker
MXIM
ON
FCS
IXYS
IFX-DE
MELE-BE
ADI
ISIL
TXN
Company
MaximIntegratedProducts
ONSemiconductorCorp
FairchildSemiconductor
IXYSCorporation
InfineonTechnologiesAG
MelexisNV
AnalogDevices,Inc
IntersilCorporation
TexasInstrumentsInc
Price
$40.56
$11.60
$18.26
$13.00
€11.28
€47.69
$61.70
$14.19
$57.63
EPS
2015E
$1.72
$0.83
$0.57
$0.71
€0.57
€2.45
$3.03
$0.61
$2.72
LLTC
LinearTechnologyCorp
$44.31
$1.97
ImpliedValue:
RelativeP/E(EPS15)
RelativeP/E(EPS16)
$41.03
$38.40
EPS
2016E
$2.10
$0.93
$0.88
$1.22
€0.70
€2.59
$3.40
$0.65
$2.97
Average
P/E15
23.6
14.0
32.0
18.3
19.8
19.5
20.4
23.3
21.2
20.9
P/E16
19.3
12.5
20.8
10.7
16.1
18.4
18.1
21.8
19.4
17.7
$2.17 22.5 20.4
LinearTechnologyIncorporated
KeyManagementRatios
FiscalYearsEnding31-Dec
LiquidityRatios
CurrentAssets
/CurrentLiabilities
=CurrentRatio
2013
2014
2015
2016E
2017E
2018E
2019E
2020
1,793,890
990,401
1.811
1,318,419
215,115
6.129
1,536,259
182,918
8.399
1,670,725
191,901
8.706
1,780,204
207,787
8.567
1,897,936
213,671
8.883
2,012,729
236,418
8.513
2,121,499
246,544
8.605
(CurrentAssets
-Inventory)
/CurrentLiabilities
=QuickRatio
1,793,890
87,229
990,401
1.723
1,318,419
91,310
215,115
5.704
1,536,259
99,861
182,918
7.853
1,670,725
96,729
191,901
8.202
1,780,204
104,628
207,787
8.064
1,897,936
107,589
213,671
8.379
2,012,729
119,045
236,418
8.010
2,121,499
124,143
246,544
8.101
(Cash
+MarketableSecurities)
/CurrentLiabilities
=CashRatio
126,650
1,398,091
990,401
1.540
157,323
855,464
215,115
4.708
195,679
1,007,043
182,918
6.575
308,809
1,037,254
191,901
7.014
349,442
1,073,558
207,787
6.848
414,123
1,116,501
213,671
7.163
433,981
1,172,326
236,418
6.794
460,866
1,236,803
246,544
6.886
ActivityorAsset-ManagementRatios
AnnualSales
/AverageAccountsReceivable
ReceivablesTurnover
1,282,236
149,182
8.60
1,388,386
159,307
8.72
1,475,139
176,302
8.37
1,443,719
176,890
8.16
1,561,615
184,656
8.46
1,605,808
197,552
8.13
1,776,791
210,973
8.42
1,852,888
226,383
8.18
369
8.60
42.93
370
8.72
42.45
371
8.37
44.34
371
8.16
45.46
371
8.46
43.87
371
8.13
45.64
371
8.42
44.05
371
8.18
45.33
CostofGoodsSold
/AverageInventory
InventoryTurnover
267,150
83,447
3.201
287,325
89,270
3.219
301,629
95,586
3.156
312,258
98,295
3.177
333,095
100,679
3.309
341,334
106,109
3.217
381,083
113,317
3.363
395,640
121,594
3.254
365
/InventoryTurnover
InventoryPeriod
369
3.201
115.260
370
3.219
114.956
371
3.156
117.569
371
3.177
116.786
371
3.309
112.135
371
3.217
115.331
371
3.363
110.319
371
3.254
114.022
7,123
2,098,341
0.34%
7,714
1,609,284
0.48%
8,685
1,835,586
0.47%
8,153
1,950,255
0.42%
8,737
2,077,383
0.42%
8,607
2,189,594
0.39%
9,688
2,338,996
0.41%
10,760
2,482,092
0.43%
7,123
981,908
0.73%
7,714
1,331,369
0.58%
8,685
1,577,927
0.55%
8,153
1,668,660
0.49%
8,737
1,776,005
0.49%
8,607
1,881,739
0.46%
9,688
2,003,061
0.48%
10,760
2,134,192
0.50%
959,720
1,282,236
74.85%
1,049,806
1,388,386
75.61%
1,119,412
1,475,139
75.89%
1,082,789
1,443,719
75.00%
1,179,019
1,561,615
75.50%
1,212,385
1,605,808
75.50%
1,341,478
1,776,791
75.50%
1,398,930
1,852,888
75.50%
406925
1282236
31.74%
459961
1388386
33.13%
520963
1475139
35.32%
475945
1443719
32.97%
520599
1561615
33.34%
535416
1605808
33.34%
592331
1776791
33.34%
617721
1852888
33.34%
406,925
1,956,282
20.80%
459,961
1,853,813
24.81%
520,963
1,722,435
30.25%
475,945
1,892,920
25.14%
520,599
2,013,819
25.85%
535,416
2,133,489
25.10%
592,331
2,264,295
26.16%
617,721
2,410,544
25.63%
406,925
859,208
47.36%
459,961
1,156,639
39.77%
520,963
1,454,648
35.81%
475,945
1,623,293
29.32%
520,599
1,722,332
30.23%
535,416
1,828,872
29.28%
592,331
1,942,400
30.49%
617,721
2,068,626
29.86%
$1.02
1.72
59.3%
$1.06
1.91
55.4%
$1.14
2.13
53.5%
$1.22
1.97
62.0%
$1.30
2.17
59.9%
$1.38
2.25
61.3%
$1.46
2.51
58.1%
$1.54
2.64
58.3%
241,329
85,699
406,925
80.37%
255,305
81,786
459,961
73.29%
278,404
124,240
520,963
77.29%
296,156
100,000
475,945
83.24%
313,268
100,000
520,599
79.38%
329,683
100,000
535,416
80.25%
346,009
125,000
592,331
79.52%
361,590
125,000
617,721
78.77%
365
/ReceivablesTurnover
AverageCollectionPeriod
FinancialLeverageRatios
TotalDebt(includesoperatingleases)
/TotalAssets
DebtRatio
TotalDebt
/TotalEquity
Debt-to-EquityRatio
ProfitabilityRatios
(Sales-(COGS&Depreciation))
/Sales
GrossProfitMargin
NetIncome
/Sales
NetProfitMargin
NetIncome
/AverageTotalAssets
ReturnonAssets
NetIncome
/AverageShareholderEquity
ReturnonEquity
PayoutPolicyRatios
DividendsperShare
/EarningsperShare
PayoutRatio
(TotalDividend
+StockRepurchases)
/NetIncome
TotalPayoutRatio
PresentValueofOperatingLeaseObligations(2015)
PresentValueofOperatingLeaseObligations(2014)
Operating
Leases
3154
2062
1312
972
1078
951
9529
844
8685
FiscalYearsEnding30-Jun
2016
2017
2018
2019
2020
Thereafter
TotalMinimumPayments
Less:Interest
PVofMinimumPayments
CapitalizationofOperatingLeases
CapitalizationofOperatingLeases
Pre-TaxCostofDebt
NumberYearsImpliedbyYear6Payment
Year
1
2
3
4
5
6&beyond
PVofMinimumPayments
Lease
Commitment
3154
2062
1312
972
1078
951
3.50%
1.0
PVLease
Payment
3047.4
1925.0
1183.5
847.1
907.8
773.8
8684.6
PresentValueofOperatingLeaseObligations(2013)
Pre-TaxCostofDebt
NumberYearsImpliedbyYear6Payment
Year
1
2
3
4
5
6&beyond
PVofMinimumPayments
Lease
Commitment
2762
2235
1154
764
535
535
3.50%
1.9
PVLease
Payment
2668.7
2086.5
1040.9
665.9
450.5
801.7
7714.2
PresentValueofOperatingLeaseObligations(2012)
Operating
Leases
2634
1816
1026
690
480
1200
7846
723
7123
FiscalYearsEnding30-Jun
2014
2015
2016
2017
2018
Thereafter
TotalMinimumPayments
Less:Interest
PVofMinimumPayments
CapitalizationofOperatingLeases
Operating
Leases
2785
1918
1010
567
484
1100
7864
694
7170
FiscalYearsEnding30-Jun
2013
2014
2015
2016
2017
Thereafter
TotalMinimumPayments
Less:Interest
PVofMinimumPayments
CapitalizationofOperatingLeases
Pre-TaxCostofDebt
NumberYearsImpliedbyYear6Payment
Year
1
2
3
4
5
6&beyond
PVofMinimumPayments
Operating
Leases
2762
2235
1154
764
535
1000
8450
736
7714
FiscalYearsEnding30-Jun
2015
2016
2017
2018
2019
Thereafter
TotalMinimumPayments
Less:Interest
PVofMinimumPayments
Lease
Commitment
2634
1816
1026
690
480
480
3.50%
2.5
PVLease
Payment
2545.0
1695.4
925.5
601.4
404.2
951.8
7123.2
Pre-TaxCostofDebt
NumberYearsImpliedbyYear6Payment
Year
1
2
3
4
5
6&beyond
PVofMinimumPayments
Lease
Commitment
2785
1918
1010
567
484
484
3.50%
2.3
PVLease
Payment
2690.9
1790.6
911.0
494.2
407.6
875.8
7170.1
EffectsofESOPExerciseandShareRepurchasesonCommonStockBalanceSheetAccountandNumberofSharesOutstanding
NumberofOptionsOutstanding(shares):
AverageTimetoMaturity(years):
ExpectedAnnualNumberofOptionsExercised:
CurrentAverageStrikePrice:
CostofEquity:
CurrentStockPrice:
481.762
0.55
874.281
IncreaseinSharesOutstanding:
AverageStrikePrice:
IncreaseinCommonStockAccount:
$22.75
8.75%
$44.31
1
2
3
4
5
2016E
2017E
2018E
2019E
2020E
481.262
0.500
0.0
0
0
$22.74 $29.71 $$$10,944 15 -
ChangeinTreasuryStock
ExpectedPriceofRepurchasedShares:
NumberofSharesRepurchased:
-100,000
-100,000
-100,000
-125,000
-125,000
$44.31 $48.19 $52.40 $56.98 $61.97
(2,257) (2,075) (1,908) (2,194) (2,017)
SharesOutstanding(beginningoftheyear)
Plus:SharesIssuedThroughESOP
Less:SharesRepurchasedinTreasury
SharesOutstanding(endoftheyear)
242,751
481.26
2,256.83
240,975
240,975
238,901
236,992
234,799
0.50
0
0
0
2,075.31 1,908 2,194 2,017
238,901
236,992
234,799
232,781
VALUATIONOFOPTIONSGRANTEDINESOP
TickerSymbol
CurrentStockPrice
RiskFreeRate
CurrentDividendYield
AnnualizedSt.Dev.ofStockReturns
Rangeof
OutstandingOptions
Range1
Range2
Total
Number
ofShares
481.262
0.500
LLTC
$44.31
2.82%
2.75%
33.94%
Average
Exercise
Price
22.74
29.71
482 $22.75
Average
B-S
Value
Remaining
Option
ofOptions
Life(yrs)
Price
Granted
0.55 $21.26 $10,233
1.55 $15.35 $8
0.55 $21.92 $10,241
SensitivityAnalysis
DCFPrice
$46.92
5.00%
7.00%
9.00%
11.00%
AutomotiveSegment
13.00%
RevenueGrowth2017
15.00%
17.00%
19.00%
21.00%
0.00%
$44.98
$45.15
$45.32
$45.48
$45.65
$45.82
$45.98
$46.15
$46.32
2.00%
$45.30
$45.47
$45.63
$45.80
$45.97
$46.14
$46.30
$46.47
$46.64
4.00%
$45.62
$45.79
$45.95
$46.12
$46.29
$46.45
$46.62
$46.79
$46.95
6.00%
$45.94
$46.10
$46.27
$46.44
$46.60
$46.77
$46.94
$47.11
$47.27
IndustrialSegmentRevenueGrowth2017
8.00%
10.00%
12.00%
$46.26
$46.57
$46.89
$46.42
$46.74
$47.06
$46.59
$46.91
$47.23
$46.76
$47.07
$47.39
$46.92
$47.24
$47.56
$47.09
$47.41
$47.73
$47.26
$47.58
$47.89
$47.42
$47.74
$48.06
$47.59
$47.91
$48.23
14.00%
$47.21
$47.38
$47.54
$47.71
$47.88
$48.04
$48.21
$48.38
$48.55
16.00%
$47.53
$47.70
$47.86
$48.03
$48.20
$48.36
$48.53
$48.70
$48.86
DCFPrice
$46.92
6.50%
7.00%
7.50%
8.00%
WACC
8.74%
9.00%
9.50%
10.00%
10.50%
1.50%
$52.40
$48.09
$44.50
$41.46
$37.74
$36.61
$34.65
$32.91
$31.37
2.00%
$56.66
$51.50
$47.28
$43.77
$39.52
$38.26
$36.05
$34.13
$32.43
2.50%
$61.98
$55.67
$50.62
$46.49
$41.59
$40.15
$37.66
$35.51
$33.62
3.00%
$68.83
$60.88
$54.71
$49.77
$44.03
$42.36
$39.52
$37.08
$34.97
CVgrowthofNOPLAT
3.50%
4.00%
$77.96
$90.74
$67.59
$76.52
$59.81
$66.37
$53.76
$58.76
$46.92
$50.43
$44.98
$48.11
$41.68
$44.24
$38.90
$41.02
$36.51
$38.29
4.50%
$109.91
$89.03
$75.12
$65.18
$54.76
$51.94
$47.31
$43.52
$40.37
5.00%
$141.86
$107.80
$87.37
$73.75
$60.25
$56.73
$51.06
$46.53
$42.82
5.50%
$205.77
$139.08
$105.74
$85.74
$67.44
$62.89
$55.76
$50.21
$45.77
DCFPrice
$46.92
0.00%
2.00%
4.00%
6.00%
IndustrialSegment
8.00%
RevenueGrowth2017
10.00%
12.00%
14.00%
16.00%
71.00%
$41.95
$42.23
$42.52
$42.81
$43.10
$43.39
$43.68
$43.97
$44.25
72.00%
$42.87
$43.17
$43.46
$43.76
$44.06
$44.35
$44.65
$44.94
$45.24
73.00%
$43.80
$44.10
$44.40
$44.71
$45.01
$45.31
$45.62
$45.92
$46.23
74.00%
$44.72
$45.03
$45.35
$45.66
$45.97
$46.28
$46.59
$46.90
$47.21
GrossProfitMargin
75.00%
$45.65
$45.97
$46.29
$46.60
$46.92
$47.24
$47.56
$47.88
$48.20
76.00%
$46.58
$46.90
$47.23
$47.55
$47.88
$48.20
$48.53
$48.86
$49.18
77.00%
$47.50
$47.84
$48.17
$48.50
$48.83
$49.17
$49.50
$49.83
$50.17
78.00%
$48.43
$48.77
$49.11
$49.45
$49.79
$50.13
$50.47
$50.81
$51.15
79.00%
$49.35
$49.70
$50.05
$50.40
$50.75
$51.09
$51.44
$51.79
$52.14
DCFPrice
$46.92
2.50%
3.00%
3.50%
4.00%
CapEx%Increase
4.30%
5.00%
5.50%
6.00%
6.50%
71.00%
$43.40
$43.32
$43.23
$43.15
$43.10
$42.98
$42.90
$42.82
$42.73
72.00%
$44.35
$44.27
$44.19
$44.11
$44.06
$43.94
$43.86
$43.77
$43.69
73.00%
$45.31
$45.23
$45.14
$45.06
$45.01
$44.90
$44.81
$44.73
$44.65
74.00%
$46.27
$46.18
$46.10
$46.02
$45.97
$45.85
$45.77
$45.69
$45.60
GrossProfitMargin
75.00%
$47.22
$47.14
$47.06
$46.97
$46.92
$46.81
$46.72
$46.64
$46.56
76.00%
$48.18
$48.09
$48.01
$47.93
$47.88
$47.76
$47.68
$47.60
$47.51
77.00%
$49.13
$49.05
$48.97
$48.88
$48.83
$48.72
$48.64
$48.55
$48.47
78.00%
$50.09
$50.01
$49.92
$49.84
$49.79
$49.67
$49.59
$49.51
$49.43
79.00%
$51.04
$50.96
$50.88
$50.80
$50.75
$50.63
$50.55
$50.46
$50.38
9. S&P Capital IQ – Technology Hardware, Storage &
Peripherals,April2015
http://www.netadvantage.standardandpoors.com.pr
oxy.lib.uiowa.edu/NASApp/NetAdvantage/simpleSea
rchRun.do?ControlName=IndustriesSurveySearch
10. BusinessInsider, 07/10/2015, “PC Sales are
Imploding”
http://www.businessinsider.com/pc-sales-plummetin-q2-2015-gartner-idc-say-2015-7?r=UK&IR=T
11. Statista,“GlobalPCShipments(desktopandportable)
from2009to2019”
http://www.statista.com.proxy.lib.uiowa.edu/statisti
cs/269049/global-pc-shipment-forecast-since-2009/
12. IC Insights, “TI Strengthens Analog Marketshare;
SkyworksGainsfromApple’sFavor,”May11,2015
http://www.icinsights.com/news/bulletins/TIStrengthens-Analog-Marketshare-Skyworks-GainsFrom-Apples-Favor/
13. FisherInvestmentsonTechnology,pgs46-47
14. Semi.org,HistoricalBook-to-BillPressReleaseData
http://www.semi.org/en/MarketInfo/Book-to-Bill
15. KPMGGlobalAutomotiveExecutiveSurvey2015,
pg12
https://www.kpmg.com/Global/en/IssuesAndInsights
/ArticlesPublications/global-automotive-executivesurvey/Documents/2015-report-v1.pdf
16. FederalReserveBankofSt.Louis,07/2015,“Personal
ConsumptionExpenditures”
https://research.stlouisfed.org/fred2/series/PCE#
IMPORTANTDISCLAIMER
HenryFundreportsarecreatedbystudentenrolledinthe
AppliedSecuritiesManagement(HenryFund)programat
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential
employersandotherinterestedpartiesanexampleofthe
analytical skills, investment knowledge, and
communication abilities of Henry Fund students. Henry
Fund analysts are not registered investment advisors,
brokers or officially licensed financial professionals. The
investment opinion contained in this report does not
representanofferorsolicitationtobuyorsellanyofthe
aforementionedsecurities.Unlessotherwisenoted,facts
and figures included in this report are from publicly
available sources. This report is not a complete
compilation of data, and its accuracy is not guaranteed.
From time to time, the University of Iowa, its faculty,
staff, students, or the Henry Fund may hold a financial
interestinthecompaniesmentionedinthisreport.
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