Linear Technology Corporation (LLTC)’s Q2 2015 Earnings Conference Call Transcript

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Industrial continues to be our largest area. Industrial was 44% of our bookings, up from 43% the previous quarter. Within industrial, USA and Japan were up and Europe was down. This increase in industrial positions us well for the March quarter. Our industrial business is very broad-based both, geographically and by end-products. The communications area at 19% was down from 20% last quarter. Europe was flat, whereas China and USA networking and infrastructure companies were down, which is the opposite of last quarter. Cell phone continues to be a very small part of business and rounds to less than 1% of our business. Computer remained at 9% of our business again, while down modestly in absolute dollars. Within computer, we service opportunities in notebooks, desktops, tablets, servers, storage devices and printing and imaging end-products. Automotive continues to be a focused area for us and remained at 19% of our bookings while down modestly in absolute dollars. In the last 10 years, as we have emphasized this market, it has quadrupled as a percent of our bookings.

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 remained at 3% of our business while down in absolute dollars. Finally, the military, space and harsh environment products remained at 6%, although up in absolute dollars. The USA and Europe are the predominant geographic areas for this business.

In summary, this is a good distribution of business by end-markets for us, with our largest areas continuing to show the most overall analog market share. 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 and industrial has grown from 35% to 44% of our business.

With regard to where our booking are actually created, 59% are created internationally and 41% in the USA. Internationally over time, we have been helped by the strength of our Japanese and European automotive customers. Moving from bookings to sales, net sales decreased 5% from the prior quarter while improving 5% from the similar quarter in the prior year. Sales decreased similarly both, internationally and in the USA. Within international, sales decreased the most in Europe and the least in Japan. In summary, the USA is 27% of sales similar to last quarter, Europe at 19% was down from 20% last quarter, which is not unusual for Europe in the December quarter. Japan at 16% was up from 15% last quarter. Asia-Pacific at 38% of sales was similar to last quarter. Gross margin at 75.4% of sales was down from 76% last quarter. Slightly higher ASP was more than offset by lower factory efficiencies, largely due to absorbing fixed costs over lower sales base. ASP at $1.88, increased from $1.87 last quarter. The company did shut down for the December holiday week this quarter as it usually has.

R&D. R&D at $65.1 million, decreased $500,000 from last quarter, while increasing as a percent of sales from 17.7% last quarter to 18.5% this quarter due to the decrease in sales. Savings and labor related costs, due to lower profit sharing and the holiday week shutdown were partially offset by R&D related supplies and other expense. SG&A. Selling, general and administrative expense at $42.5 million increased $448,000 from the previous quarter’s $42.1 million. An increased as a percent of sales from 11.3% to 12.1%, due largely to the decrease in sales. As in R&D, labor costs were lower due to lower profit sharing and the holiday shutdown. These savings were offset by higher non-labor related communications costs and other expenses.

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