The Henry Fund Henry B. Tippie School of Management Jon Kerr

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1 The Henry Fund Henry B. Tippie School of Management Jon Kerr Linear Technology (LLTC) November 17, 2015 Information Technology Semiconductors Stock Rating No Action Investment Thesis Target Price $45-49 Henry Fund DCF $46.92 Henry Fund DDM $47.83 Relative P/E Multiple $41.03 Price Data Current Price $ wk Range $ Consensus 1yr Target $42.61 Key Statistics Market Cap (M) $10,996 Shares Outstanding (M) Institutional Ownership 97.0% Five Year Beta 1.17 Dividend Yield 2.70% Est. 5yr Growth 10.9% Price/Earnings (TTM) Price/Sales (TTM) 7.54 Debt/Equity 0.0% Profitability Operating Margin 46.28% Net Profit Margin 35.32% Return on Assets (TTM) 29.44% Return on Equity (TTM) 35.81% 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 down in calendar year 2015 but the company is positioned well in both the industrial and automotive segments and should see substantial revenue growth in 2016 due to the increasing data connectivity of these markets. However, the stock price rose 11% in the month of October, which limits the upside on this stock. Therefore, we recommend a no action on Linear Technology. Drivers of Thesis Linear Technology has historically had strong cash flow generation with a long history of returning value to shareholders through both dividend payments and stock repurchases. They have averaged a 55% dividend payout ratio and a 69% total payout ratio since The company has no debt on their balance sheet and they have a high level of liquidity based on their current ratio of 8.4 in Linear Technology is a lean and well-run company dominating their peers in gross margins, operating margins, ROE, and ROIC. Risks to Thesis If the current downturn in the industry does not end in Q as expected, company revenues could be hit even harder than predicted. Larger companies have broader product lines with greater technical service and support capabilities which could make major automobile parts supplies shy away from Linear Technology products. Earnings Estimates Year E 2017E 2018E EPS $1.75 $1.91 $2.13 $1.97 $2.17 $2.27 Growth 0.62% 11.25% 11.45% -7.68% 10.26% 3.71% 15% 10% 5% 0% -5% -10% -15% Month Performance Company Description LLTC S&P 500 Source: Yahoo Finance N D J F M A M J J A S O Important disclosures appear on the last page of this report LLTC Industry Sector P/E ROE Profit Margin Source: Yahoo Finance Linear Technology Corporation designs, manufacturers, and markets a diverse line of analog integrated circuits for companies worldwide. They target high performance application-specific products in the analog semiconductor market. The company s products bridge the gap between the analog world and digital electronics in communications, networking, industrial, automotive, computer, medical, instrumentation, consumer, and military and aerospace systems.

2 EXECUTIVE SUMMARY Linear Technology is a leading supplier of highperformance analog integrated circuits. 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 in calendar year Linear Technology is expected to have a decline in their FY2016 revenues before increasing in FY2017 due to the industry cyclicality. Linear Technology competes in the analog sector of the semiconductor industry, which is characterized by longer design cycles, longer product lives, and lower capital expenditures than the digital sector. Therefore, companies in the analog sector tend to have higher profit 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% into We expect revenue growth for the company to come from the industrial and automotive segments due to the growing number of devices connecting to the Internet of Things and from the increased demand for hybrid and electric vehicles as well as the increasing amount of electronics being added to vehicles. The company has a long track record of high dividend payments and consistent dividend growth. The company has historically had a dividend payout ratio of around 55% and a total payout ratio of around 65% with that number increasing to 75% the last four years. We expect the total payout ratio to average 80% into 2020 because of the company s large amount of cash and short-term marketable securities on its balance sheet, $4.92 per share. Even with the expected growth after FY2016 and the high value returned to shareholders each year, we recommend no action on Linear Technology. The stock price has risen approximately 11% since the time coverage was initiated on the company and we feel there is limited upside left in the price of the stock. COMPANY DESCRIPTION Linear Technology Corporation was founded in 1981 in Milpitas, California. The company targets the high performance segment of the $47.5 billion analog integrated circuit market. (1) The company designs and manufactures a vast portfolio of different integrated circuits (IC) for thousands of different customers globally, with no single customer accounting for more than 10% 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, or power and output a digital representation of that input. Linear Technology is a highly profitably company with 116 consecutive quarters of positive cash flow. In 2010, Forbes magazine called the company one of the tech industry s most profitable companies. (2) Revenue Types 6.0% 19.0% FY 2015 % Revenue per Segment 9.0% 3.0% 20.0% 43.0% Industrial Automomve Communicamons Computer Military/Harsh Environment Consumer Source: Linear Technology Year End 2015 Earnings Call Linear Technology has six operating segments: 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 s products and services. Linear Technology s main revenue segment is the Industrial segment. This segment has consistently accounted for over 40% of the company s revenue since 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 Page 2

3 macroeconomic factors and is highly correlated to the Global GDP. We expect Industrial segment revenues to decline 3% in However, we believe segment revenues will rebound in 2017 and into 2020 with revenues growing at a 5.1% five-year CAGR. 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, the increase in hybrid and electric cars as well as Internet equipped automobiles will drive growth in this segment. In 2016, we expect an increase of 5% in segment revenue before a 13% increase in We expect segment revenues to grow at an 8.7% CAGR into The company s third largest segment is the Communications segment, accounting for 19% of revenue in This segment includes ICs for mobile phones, Ethernet and networking products, and wireless radios. Historically, sales in this segment have been very cyclical. In 2011, Communications segment revenues were $341 million before declining 21% to $269 million in We expect revenues to once again decline for this segment in 2016, decreasing 4%. However, we do expect future growth for the segment due to increasing penetration of smartphones with overall revenues increasing at a 2.3% five-year CAGR. The next largest segment is the Computer segment. In 2015, this segment accounted for 9% of company revenue. Products in this segment are used in notebooks, desktops, tablet PCs, servers, and printers. Revenues in this segment had been steadily declining from 2011 to However, in 2015 revenues grew by 6%. In 2016, 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 Computer segment to increase at a 1.0% CAGR into The Military/Aerospace/Harsh Environment segment accounted for 6% of total company revenue in 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 into The Consumer segment accounted for 3% of total company revenue in Management has stated that this is a market the company does not actively chase. Because of this, we have modeled the Consumer segment s revenue to grow at a 1.0% CAGR into 2020 but to slightly decrease as a percent of overall revenue to 2.5%. Geographic Diversification Linear Technology segments their revenue into four different regions. Domestic revenues consistently account for around 28% of total revenue. FY 2015 Regional Sales 27.7% 37.0% Source: Linear Technology 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 expensive for some international customers. The adverse effect to revenue may be partially offset in operating expenses since the company generally incurs its foreign operating expenses in the corresponding local currency. Q Earnings 19.8% 15.5% Europe Japan RECENT DEVELOPMENTS Rest of World (ROW) North America On October 13, 2015, Linear Technology announced their first quarter of FY2016 results. Quarterly revenue decreased 7.9% year-over-year to $341.9 million. The company s net income of $112.0 million decreased 13.4% from the first quarter of FY2015. These numbers are weak when compared to last year. However, the results were expected and matched consensus analyst estimates of $0.46 per share. Management has stated they believe Page 3

4 this decrease in revenues is an expected correction and will be relatively short lived. It is management s view that this down cycle will not be prolonged and customer inventories will be rebalanced by Q3. The company gave positive revenue guidance for Q2 with revenues increasing 0-3% from Q1. Analysts were expecting a 1-2% decline from Q1 so the street viewed this guidance very positively as the stock price increased 6.2% the day following the earnings release Dividend Increase On January 13, 2015, Linear Technology announced an 11% increase in its quarterly dividend payment from $0.27 to $ marked the 23 rd consecutive year that Linear Technology has increased its dividend. $2.50 $2.00 $1.50 $1.00 $0.50 $- Dividend Payment Growth EPS 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 growing at a 5.2% CAGR. INDUSTRY TRENDS Linear Technology and other analog IC manufacturers are in a unique position as the world becomes more and more connected. The digitization and connectivity of devices will drive analog sales Annual Dividend/Share Connected Automobiles A connected car has internet access providing the driver with multiple diagnostic options such as engine controls, automatic crash notifications, and safety alerts. Each of these diagnostic readings requires multiple analog ICs to perform the measurement. By 2020, Gartner estimates there will be 25 billion connected vehicles globally, a 38% CAGR from (5) These vehicles will provide new invehicle services and automated driving capabilities. Billions of Automobiles Number of Connected Automobiles Worldwide Electric and Hybrid Cars Source: Gartner (5) In the FY2015 earnings call, Linear Technology management stated that their battery monitoring products are driving growth in the automotive segment due to hybrid and electric cars. By 2023, sales of electric vehicles are expected to make up 2.4% of total worldwide light-duty vehicles sales. According to a Navigant Research study, global sales for light duty electric vehicles is expected to increase from 2.7 million in 2014 to 6.4 million in 2023, a 10% CAGR. (6) The growth in connected cars along with the increase in hybrid and electric vehicles will continue to drive sales in the automotive segment for Linear Technology. These new capabilities and benefits will require added electronic hardware, which will include numerous analog sensors developed by analog IC manufacturers. We expect revenue s for Linear Technology s automobile segment to increase at an 8.7% CAGR into * Page 4

5 Internet of Things 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 devices is expected to increase 23.5% CAGR from 2015 to The number of devices is expected to increase from 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 connecting farm machinery and irrigation systems to soil nutrient sources with information on weather, crop prices, and commodity futures to optimize overall farm performance. As well, Michelin is placing sensors inside tires that can coach truck fleet drivers to drive in a more fuel-efficient manner. The increase in connected devices will require numerous analog sensors to measure the analog world and convert 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 and grow at a 5.1% CAGR into Smartphone Growth Worldwide Mobile Phone Shipments by the increased adoption of smartphones among mobile phone users. Smartphones are expected to account for 80% of mobile phone shipments in 2018 with Asia and other emerging markets being the largest contributors to the growth. (9) With this expected growth, we have modeled Linear Technology s Communications segment to increase at a 2.3% five-year CAGR. PC Sales The introduction of the tablet and large screen smartphones has had an adverse affect on PC and laptop sales, which have been declining since According to IDC, Q PC shipments for the top 5 vendors decreased 11.8% over the past year. IDC is forecasting overall PC shipments to remain steady in the near future with growth of zero to -3%. (10) Millions of units Global PC Shipments * 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 segment revenues to increase at a 1.0% CAGR from 2015 to MARKETS AND COMPETITION Source: S&P NetAdvantage (9) The smartphone industry has experienced a large amount of growth in recent years. In 2014, smartphone shipments grew 27.6% from the previous year. However, growth of shipments in the industry is expected to slow to an 11.3% increase in Even with slowing growth, global shipments are expected to reach 1.9 billion by 2019, an 8.2% 4-year CAGR. (8) The growth is being caused The analog integrated circuit industry is unique to the rest of the semiconductor industry as its products solve a specific problem and are not easily commoditized. Because each product is unique and not easily replaced with a competitors product, when an analog supplier wins a spot in a customers new product design, the price tends to be fixed for the life of the product. This makes for more price stability than digital IC markets, which is subject to commodity pricing pressure. Companies in the analog IC industry have smaller capital requirements than digital circuit designers. Digital circuit designs require very dense circuits, which minimize Page 5

6 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 quickly as digital IC manufacturing equipment. The analog IC industry is a highly fragmented industry. The top ten companies in the industry account for only 58% of the total industry sales, with industry leader Texas Instruments accounting for around 18% of market share. Company Revenue Market Share Texas Instruments* $8,104* 18% ST $2,836 6% Infineon $2,770 6% Analog Devices $2,615 6% Skyworks Solutions $2,570 6% Maxim $2,035 4% NXP $1,730 4% Linear Technology $1,437 3% On Semi $1,291 3% Renesas $910 2% *Company revenues from analog IC sales only Source: IC Insights (12) While it is a fragmented industry, the barriers to entry for new companies are huge. There are high startup costs and significant capital investments required for the development of a technology to compete against existing players in the analog IC industry. Peer Comparison The analog IC industry is expected to have sales of $47.5 billion in 2015 and account for 16.8% of the total (1) semiconductor industry sales. Linear Technology distinguishes itself from other IC manufacturers by the creativity of their individual design engineers, smaller capital requirements and market diversity. Linear Technology states in their 10-K that their four main competitors are Texas Instruments, Maxim Integrated Products, Analog Devices, and Intersil. These companies 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, and Communications are their top three market segments. Texas Instruments is the largest player in the overall analog market. Texas Instruments does compete in other markets in the semiconductor industry but analog accounts for 62% of their revenue. Linear Technology is a medium sized company in the analog IC market space with a market cap of $11 billion. Linear Technology is among the most profitable companies in the entire semiconductor industry, which is a testament to strong leadership in the company. Mkt Cap ($B) P/E (ttm) Price / Sales (ttm) Price / CF (ttm) Price / Book Texas Instruments Analog Devices Infineon Technologies Maxim Integrated Linear Technology ON Semiconductor Fairchild Semiconductor Intersil IXYS Corporation Source: Factset Gross Margin Op Margin ROE ROIC R&D % Rev Texas Instruments Analog Devices Infineon Technologies Maxim Integrated Linear Technology ON Semiconductor Fairchild Semiconductor Intersil IXYS Corporation Source: Factset Company s that survive in the industry optimize ROIC. Linear Technology is one of the few company s in the industry that still owns and operates it s own fabrication facilities rather than outsourcing these activities. This has allowed Linear Technology to stream line its production process and create an ROIC of 35.8%, which dominates the peer group with Texas Instruments being the closest competitor at 19.2%. High research and development expense is a common characteristic among all analog IC manufacturers. Linear Technology spends more on R&D as a percent of revenue Page 6

7 than the overall peer average but their ratio is less than three out of four of their main competitors. 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2015 R&D % of Revenue 22.6% 22.4% 19.5% 18.1% 12.7% 11.6% 11.6% 10.4% 7.9% 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. 000's of USD Revenue per Employee Source: Mergent Online 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 performance segment of the analog market, owning their own foundries, and strong management has allowed Linear Technology to maintain a gross margin of 75.9% and an operating margin of 46.3% in Gross and Operabngs Margin Source: Mergent Online 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 $127K per employee. This result is expected since Linear Technology has much higher margins than the peer group. 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Gross Margin Operamng Margin 000's of USD Operabng Income per Employee Source: Bloomberg Source: Mergent Online Page 7

8 ECONOMIC OUTLOOK Linear Technology tends to sell its products to original equipment manufacturers and not direct to consumers. The target markets of the company are the Industrial and Automotive markets, which collectively accounted for 63% of company revenue in FY While Linear Technology does not specifically target the consumer product markets, a significant portion of their revenue is derived from sales of their products that are used in consumer products. The semiconductor industry is a cyclical industry. The industry tends to perform best after the aggregate bookto-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, the book-to-bill ratio of the industry can give a good indication when the industry as a whole will be in a period of expansion verses contraction. A book-to-bill below one indicates a period of contraction while a ratio above one indicates a period of expansion. In May and June of 2015 the book-to-bill ratio for the industry was around 0.98 but has rebounded since. This follows Linear Technology management s guidance that the industry contraction seen this summer was going to be short Semiconductor Industry Book-to- Bill Rabo Since the Automotive segment is the company s second largest segment and has seen the most growth in recent years, vehicle sales are a good indication of growth for Linear Technology. Light vehicle sales are expected to increase at a 4.3% CAGR into 2015 to (15) Sales in millions of units Outlook on Worldwide Light Vehicle Sales Source: KPMG (15) Linear Technology s products are used in a variety of end products and 51% of company s revenues come from markets that create consumer products, including automobiles, computers, and mobile phones. When consumer spending is down, sales for these products will also be down. Personal Consumption Expenditures have been on the rise since 2009 and have maintained approximately 3% growth per year. High personal consumption expenditure is a good indication for growth in Linear Technology revenues Personal Consumpbon Expenditure - Percent Change from Year Ago 0.90 Source: Semi.org (14) 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, we expect the Real GDP growth rate to be 2.7% and increasing to 3% over the next two years. Percent Change from Year Ago Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Source: FRED (16) Page 8

9 CATALYSTS FOR GROWTH Increasing Presence in Automotive Market The predicted growth in the automotive market presents 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 electronics and upturn in demand for hybrid and electric vehicles, Linear Technology could gain significant revenue growth by increasing its presence in the automotive market. Retaining Key Employees In their 2015 annual report, Linear Technology states that 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. INVESTMENT POSITIVES Linear Technology has historically had strong cash flow generation with a long history of returning value to shareholders through both dividend payments and stock repurchases. Linear Technology has no debt on their balance sheet and has a high level of liquidity based on their extremely high current ratio of 8.4 in Linear Technology is a lean and well run company. They have industry leading gross margins, operating margins, and ROE. INVESTMENT NEGATIVES 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 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 along a price increase to customers. The stock price has increased approximately 11% since we began coverage on Linear Technology. 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 $45 to $49 for the company. 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. The consumer segment is not a market that the company attempts to generate growth in. The main revenue generators for the company are the Industrial, Automotive, and Communications segment. Together these three segments have accounted for more than 75% of company revenue since 2011 and 82% of company revenue in 2015 so we have focused our valuation on these segments. We expect significant growth in the Automotive segment 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 revenue in Due to the number of Internet of Things 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 We expect these three segments to increase from 82% of company revenue in 2015 to 85% of revenue in Overall, we have modeled total company revenues to increase at a 4.7% CAGR from 2015 to Page 9

10 The gross profit margin for the company has consistently been above 74% since In 2015, gross profit was 75.9% of revenue. We have modeled gross profit margins to drop slightly in 2016 to 75.0% and then maintain 75.5% into R&D expenses for Linear Technology have averaged around 18.2% of revenue the last three years. We expect this trend to continue and have modeled R&D expenses of 18.3% of revenue through SG&A expenses as a percent of revenue averaged 11.6% from 2013 through We believe this level of expense will continue and have modeled SG&A expenses of 11.7% of revenue from 2016 to 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 margins maintaining approximately 33.3% into % 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Profit Margins Gross Profit Margin E 2017E 2018E 2019E Net Profit Margin 2020E Source: Linear Technology K We have estimated earnings per share to be $1.97 in 2016 and $2.17 in 2017 before increasing to $2.64 in The 2016 and 2017 EPS estimates are above consensus analyst estimates of $1.93 and $2.14, respectfully. Our EPS estimates are more optimistic than 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 pick back up the remainder of FY2016. $2.50 $2.40 $2.30 $2.20 $2.10 $2.00 $1.90 $1.80 $1.70 $1.60 $1.50 Linear Technology EPS Esbmate E 2017E 2018E Analyst High Est. Analyst Low Est. Henry Fund Est. Source: FactSet In years of slow growth, Linear Technology has historically limited capital expenditures. We are expecting revenues to decline 2.1% in 2016 and therefore we are predicting capital expenditures to increase by only $28.8 million, 2.8% growth, in In 2017, we have modeled revenues to increase by 8.2% from 2016 and therefore have modeled capital expenditures to increase by 6.4%, which is in line with historic growth rates. Overall, we have modeled capital expenditures to grow at a 5.7% CAGR into 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, and the relative P/E analysis computed a price of $ 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 the profitability of Linear Technology. The DDM model computed a price of $47.83 and verifies 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 payout ratio each year. We modeled an average dividend payout ratio of around 59% for the next five years. Page 10

11 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% Dividend Payout Rabo Per Year Source: Mergent Online Over last ten years, earnings per share have risen an average of 6.7% per year. We chose a continuing value growth of earnings per share to be 5%. We feel this is a reasonable number given the actual EPS growth throughout the history of the company. The DCF model calculated a price of $ 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 $ 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% premium over the current stock price. We believe the industry down turn in 2016 will be shortlived and also believe Linear Technology will see significant growth in both the automotive and industrial segments coming out of the down turn. Therefore, we feel our price range of $45 to $49 is justified. KEYS TO MONITOR Competitor Profit Margins 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 industry trend and only outsources approximately 15% of their fabrication and manufacturing. Competitor profit margins should be monitored to see if this strategy allows them to increase their profitability compared to Linear Technology. Industry Downturn Linear Technology competes in a cyclical industry. Management has stated they feel the current downturn will be short lived. We have modeled revenues to decline 2.1% in 2016 and then increasing 8.2% in The overall industry book-to-bill ratio should be monitored as it can give a good indication of the direction the industry is headed. If the downturn lasts longer than expected, Linear Technology may have a difficult time raising their dividend for the 18 th consecutive year, which could significantly hurt the share price as investors have come to expect a dividend increase of at least 4% every year. REFERENCES 1. EETimes, 12/3/2014, Chip Market Forecast Raised for 2014, forecast-raised-for html?cmp_id=7&news_id= Forbes, 8/20/10, Long Live Analog 3. Linear Technology K 4. Linear Technology Corporation Dividend Date & History 5. Gartner, By 2020, a Quarter Billion Connected Vehicles Will Enable New In-Vehicle Services and Automated Driving Capabilties, January 26, Navigant Research, Electric Vehicle Market Forecasts, October 23, Juniper Research, Internet of Things Connected Devices to Almost Triple to Over 38 Billion Units By 2020, July 28, releases/iot-connected-devices-to-triple-to-38-bn-by Statista, Global smartphone shipments forecast from 2010 to Page 11

12 Linear Technology Incorporated Revenue Decomposition Fiscal Years Ending 30-Jun E 2017E 2018E 2019E 2020E Industrial 538, , , Automotive 217, , , Communications 269, , , Computer 141, , , Military/Harsh Environment 76,934 83,303 88, Consumer 38,467 41,652 44, Total Revenue 1,282,236 1,388,386 1,475,139 1,443,719 1,561,615 1,605,808 1,776,791 1,852,888 Industrial 42.00% 43.00% 43.00% 42.62% 42.55% 42.62% 43.53% 43.83% Automotive 17.00% 19.00% 20.00% 21.46% 22.42% 22.89% 24.20% 24.14% Communications 21.00% 20.00% 19.00% 18.64% 18.44% 18.11% 17.02% 16.97% Computer 11.00% 9.00% 9.00% 8.64% 8.23% 8.16% 7.60% 7.51% Military/Harsh Environment 6.00% 6.00% 6.00% 5.76% 5.59% 5.49% 5.11% 5.05% Consumer 3.00% 3.00% 3.00% 2.88% 2.77% 2.72% 2.53% 2.50% % Total Revenue % % % % % % % % Industrial 3.70% 10.86% 6.25% -3.00% 8.00% 3.00% 13.00% 5.00% Automotive 7.56% 21.02% 11.84% 5.00% 13.00% 5.00% 17.00% 4.00% Communications -3.37% 3.12% 0.94% -4.00% 7.00% 1.00% 4.00% 4.00% Computer -7.20% % 6.25% -6.00% 3.00% 2.00% 3.00% 3.00% Military/Harsh Environment 1.23% 8.28% 6.25% -6.00% 5.00% 1.00% 3.00% 3.00% Consumer 1.23% 8.28% 6.25% -6.00% 4.00% 1.00% 3.00% 3.00% Total Revenue Growth Rate 1.23% 8.28% 6.25% -2.13% 8.17% 2.83% 10.65% 4.28% Total Gross Profit 959,720 1,049,806 1,119,412 1,082,789 1,179,019 1,212,385 1,341,478 1,398,930 Total Gross Profit Margin 74.85% 75.61% 75.89% 75.00% 75.50% 75.50% 75.50% 75.50% Domestic Revenue % 28.8% 27.2% 27.7% 27.9% 27.9% 27.9% 27.9% 27.9% International Revenue % 71.2% 72.8% 72.3% 72.1% 72.1% 72.1% 72.1% 72.1%

13 Linear Technology Incorporated Income Statement Fiscal Years Ending 30-Jun E 2017E 2018E 2019E 2020E Revenues 1,282,236 1,388,386 1,475,139 1,443,719 1,561,615 1,605,808 1,776,791 1,852,888 Cost of sales 267, , , , , , , ,640 Depreciation & Amortization 55,366 51,255 54,098 48,672 49,500 52,089 54,231 58,318 Gross profit (loss) 959,720 1,049,806 1,119,412 1,082,789 1,179,019 1,212,385 1,341,478 1,398,930 Research & development expenses 235, , , , , , , ,152 Selling, general & administrative expenses 151, , , , , , , ,714 Restructuring charges Total operating expenses 386, , , , , , , ,866 Operating income (loss) 573, , , , , , , ,064 Interest income 4,070 2,706 2,690 3,608 4,038 4,269 4,592 4,819 Interest expense -48,343-41, Acquisition related costs (Loss) gain on early retirement of convertible senior notes Total other income (expense), net -44,273-38,462 2,690 3,608 4,038 4,269 4,592 4,819 Income (loss) before income taxes 528, , , , , , , ,883 Provision (benefit) for income taxes 121, , , , , , , ,162 Net income (loss) 406, , , , , , , ,721 Year end shares outstanding 233, , , , , , , ,781 Weighted average shares outstanding-basic 236, , , , , , , ,790 Net earnings (loss) per share-basic Cash dividends per share

14 Linear Technology Incorporated Balance Sheet Fiscal Years Ending 30-Jun E 2017E 2018E 2019E 2020E ASSETS Cash & cash equivalents 126, , , , , , , ,866 Marketable securitites 1,398, ,464 1,007,043 1,037,254 1,073,558 1,116,501 1,172,326 1,236,803 Accounts receivable, gross 147, , , , , , , ,464 Allowance for doubtful accounts 1,891 1,653 1,651 1,763 1,968 2,023 2,239 2,335 Accounts receivable, net 145, , , , , , , ,129 Total inventories 87,229 91,310 99,861 96, , , , ,143 Prepaid expenses & other current assets 36,646 40,982 54,412 53,418 57,780 59,415 65,741 68,557 Total current assets 1,793,890 1,318,419 1,536,259 1,670,725 1,780,204 1,897,936 2,012,729 2,121,499 Gross property, plant & equipment 921, ,745 1,010,260 1,039,134 1,106,284 1,152,852 1,241,692 1,334,336 Accumulated depreciation 632, , , , , , , ,828 Net property, plant & equipment 288, , , , , , , ,508 Goodwill 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 Identified intangible assets, net 13,785 11,585 9,385 7,185 5,485 4,285 3,085 1,885 Other non current assets Total assets 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 10,258 28,221 17,608 17,769 19,220 19,764 21,868 22,805 Accrued payroll & related benefits 77,659 88,326 98,498 94, , , , ,049 Deferred income on shipments to distributors 44,088 45,619 46,860 47,643 51,533 52,992 58,634 61,145 Income taxes payable 12,834 41,731 5,822 17,734 19,397 19,950 22,070 23,016 Other accrued liabilities 18,933 11,218 14,130 14,437 15,616 16,058 17,768 18,529 Convertible senior notes - current portion 826, Total current liabilities 990, , , , , , , ,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 42,527 41,095 37,622 36,493 35,399 34,337 33,306 32,307 Total Liabilities 1,116, , , , , , , ,900 Stockholders' Equity: Common stock and Additional Paid in Capital 1,736,729 1,948,006 2,052,490 2,063,434 2,063,449 2,063,449 2,063,449 2,063,449 Accumulated other comprehensive income (loss), net of tax Retained earnings (accumulated deficit) -754, , , , , ,271-60,949 70,182 Total stockholders' equity (deficit) 981,908 1,331,369 1,577,927 1,668,660 1,776,005 1,881,739 2,003,061 2,134,192 Total Liabilites and Stockholders' Equity 2,098,341 1,609,284 1,835,586 1,950,255 2,077,383 2,189,594 2,338,996 2,482,092

15 Linear Technology Incorporated Cash Flow Statement Fiscal Years Ending 30-Jun Cash flows from operating activities: Net income (loss) 580, , , , ,963 Depreciation & amortization 50,137 55,934 55,366 51,255 54,098 Stock-based compensation 69,221 61,225 63,865 65,128 72,131 Amortization of convertible senior notes discount 21,675 19,868 21,029 18,458 0 Excess tax benefit from stock-based compensation 5,110-2, ,038-15,190 Loss (gain) on early retirement of convertible senior notes Accounts receivable 7,237 17,290 7,816-28,066-5,924 Inventories -18,151-5,965-7,565-4,081-8,551 Prepaid expenses, other current assets & deferred tax assets -6,344 12,001-2,159 1,464-3,816 Long-term assets 11,819 4,581 1, Accounts payable, accrued payroll & other accrued liabilities -52,210-22,330-4,206 21,038-1,496 Deferred income on shipments to distributors 13,887-6,254 2,755 1,531 1,241 Income taxes payable -12,228 33,333 19,203 20,777-14,537 Long-term liabilities Net cash flows from operating activities 670, , , , ,919 Cash flows from investing activities: Purchase of marketable securities -805,146-1,046,120-1,181,592-1,496, ,222 Proceeds from sales & maturities of available-for-sale securities 813, , ,968 2,039, ,961 Acquisition of Dust Networks, net of cash assumed 0-23, Purchase of property, plant & equipment -120,415-35,731-17,640-37,669-62,560 Net cash flows from investing activities -111, , , , ,821 Cash flows from financing activities: Retirement of convertible senior notes -395, ,087 0 Excess tax benefit from stock-based compensation ,038 15,190 Issuance of common stock under employee stock plans 66,932 79, , ,491 40,712 Purchase of common stock -38,173-76,066-85,699-81, ,240 Payment of cash dividends -217, , , , ,404 Net cash flows from financing activities -584, , ,438-1,070, ,742 Increase (decrease) in cash & cash equivalents -25,331-57,105-86,768 30,673 38,356 Cash & cash equivalents, beginning of year 295, , , , ,323 Cash & cash equivalents, end of year 270, , , , ,679 Cash paid for income taxes 189,575 91,315 99, , ,920 Cash paid for interest expense 32,334 25,831 25,485 21,127 0

16 Linear Technology Incorporated Forecasted Cash Flow Statement Fiscal Years Ending 30-Jun 2016E 2017E 2018E 2019E 2020E Cash flows from operating activities: Net income (loss) 475, , , , ,721 Add: Depreciation 46,472 47,800 50,889 53,031 57,118 Add: Amortization 2,200 1,700 1,200 1,200 1,200 Changes in: Accounts Receivable Net 4,749-20,281-5,513-21,328-9,492 Inventories 3,132-7,899-2,961-11,456-5,098 Prepaid expenses & other current assets 994-4,362-1,635-6,326-2,816 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 Net cash flows from operating activities 557, , , , ,598 Cash flows from investing activities: Marketable securities -30,211-36,304-42,942-55,825-64,478 Property & equipment, gross -28,874-67,149-46,568-88,840-92,644 Goodwill Net cash flows from investing activities -59, ,453-89, , ,122 Cash flows from financing activities: Convertible senior notes Payment of cash dividend -296, , , , ,590 Treasury Stock -100, , , , ,000 Common Stock and Additional paid-in capital 10, Accumulated other comprehensive income Net cash flows from financing activities -385, , , , ,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 195, , , , ,981 Cash & cash equivalents, end of year 308, , , , ,866

17 Linear Technology Incorporated Common Size Income Statement Fiscal Years Ending 30-Jun E 2017E 2018E 2019E 2020E Revenues % % % % % % % % Cost of sales 20.83% 20.69% 20.45% 21.63% 21.33% 21.26% 21.45% 21.35% Depreciation & Amortization 4.32% 3.69% 3.67% 3.37% 3.17% 3.24% 3.05% 3.15% Gross profit (loss) 74.85% 75.61% 75.89% 75.00% 75.50% 75.50% 75.50% 75.50% Research & development expenses 18.34% 18.04% 18.08% 18.25% 18.25% 18.25% 18.25% 18.25% Selling, general & administrative expenses 11.81% 11.50% 11.52% 11.75% 11.75% 11.75% 11.75% 11.75% Restructuring charges 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total operating expenses 30.15% 29.54% 29.60% 30.00% 30.00% 30.00% 30.00% 30.00% Operating income (loss) 44.70% 46.08% 46.28% 45.00% 45.50% 45.50% 45.50% 45.50% Interest income 0.32% 0.19% 0.18% 0.25% 0.26% 0.27% 0.26% 0.26% Interest expense -3.77% -2.97% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Acquisition related costs 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% (Loss) gain on early retirement of convertible senior notes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total other income (expense), net -3.45% -2.77% 0.18% 0.25% 0.26% 0.27% 0.26% 0.26% Provision (benefit) for income taxes 9.51% 10.18% 11.15% 12.28% 12.42% 12.42% 12.42% 12.42% Net income (loss) 31.74% 33.13% 35.32% 32.97% 33.34% 33.34% 33.34% 33.34%

18 Linear Technology Incorporated Common Size Balance Sheet Fiscal Years Ending 30-Jun E 2017E 2018E 2019E 2020E ASSETS Cash & cash equivalents 9.88% 11.33% 13.27% 21.39% 22.38% 25.79% 24.42% 24.87% Marketable securitites % 61.62% 68.27% 71.85% 68.75% 69.53% 65.98% 66.75% Accounts receivable, gross 11.48% 12.60% 12.26% 12.21% 12.60% 12.60% 12.60% 12.60% Allowance for doubtful accounts 0.15% 0.12% 0.11% 0.12% 0.13% 0.13% 0.13% 0.13% Accounts receivable, net 11.33% 12.49% 12.15% 12.09% 12.47% 12.47% 12.47% 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% Total current assets % 94.96% % % % % % % Gross property, plant & equipment 71.85% 68.69% 68.49% 71.98% 70.84% 71.79% 69.88% 72.01% Accumulated depreciation & amortization 49.35% 48.74% 48.98% 53.26% 52.30% 54.03% 51.82% 52.77% Net property, plant & equipment 22.50% 19.96% 19.51% 18.71% 18.54% 17.76% 18.07% 19.24% Goodwill 0.17% 0.16% 0.15% 0.15% 0.14% 0.14% 0.12% 0.12% Identified intangible assets, net & goodwill 1.08% 0.83% 0.64% 0.50% 0.35% 0.27% 0.17% 0.10% Other non current assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total assets % % % % % % % % LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable 0.80% 2.03% 1.19% 1.23% 1.23% 1.23% 1.23% 1.23% Accrued payroll & related benefits 6.06% 6.36% 6.68% 6.53% 6.53% 6.53% 6.53% 6.53% Deferred income on shipments to distributors 3.44% 3.29% 3.18% 3.30% 3.30% 3.30% 3.30% 3.30% Income taxes payable 1.00% 3.01% 0.39% 1.23% 1.24% 1.24% 1.24% 1.24% Other accrued liabilities 1.48% 0.81% 0.96% 1.00% 1.00% 1.00% 1.00% 1.00% Convertible senior notes - current portion 64.47% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 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 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other long-term liabilities 3.32% 2.96% 2.55% 2.53% 2.27% 2.14% 1.87% 1.74% Total Liabilities 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 % % % % % % % % Accumulated other comprehensive income (loss), net of -0.02% 0.03% 0.04% 0.04% 0.04% 0.03% 0.03% 0.03% Retained earnings (accumulated deficit) % % % % % % -3.43% 3.79% Total stockholders' equity (deficit) 76.58% 95.89% % % % % % % Total Liabilites and Stockholders' Equity % % % % % % % %