Dividend Policy at Linear TechnologyHarvard Business School Case 9-204-066Case Software 2-204-702 (Version 2, Revised 2/12/04)

Copyright © 2004 by the President and Fellows of Harvard College

This case was prepared as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Exhibit 2 Selected Linear Financial Data in Millions of Dollars (Except Share Data), 1992–2003

June Fiscal Year 1992 1993 1994 1995 1996 1997

Income Statement

Sales 119.4 150.9 200.5 265 377.8 379.3

-Cost of Goods Sold 49.5 57 67.6 83.3 106.8 109.8

-Research and Development Expense 12.3 14.8 18.4 23.9 31.1 35.4

-Other Expenses 19.1 23.3 28 29.4 36 29.6

Income Before Taxes 38.5 55.7 86.5 128.5 203.9 204.5

-GAAP Income Taxes 13.5 19.3 29.7 43.8 69.9 70.2

Net Income 25 36.4 56.8 84.7 134 134.4

Common Shares Outstanding 280.2 285.4 290.5 294.3 298.6 303.8

Earnings Per Share $0.09 $0.13 $0.20 $0.29 $0.45 $0.44

Dividends Paid – Preferred 0.0 0.0 0.0 0.0 0.0 0.0

Dividends Paid - Common 0.0 5.3 8.3 9.8 11.9 15.0

Share Price, Fiscal Year Close $2.36 $3.61 $5.50 $8.25 $7.50 $12.94

Cash Flow Statement

Net Income 25 36.4 56.8 84.7 134 134.4

+Depreciation and Amortization 4.5 5.8 6.3 8.6 10.3 12.4

-Capital Expenditure 9.8 7.6 16.2 22.1 70.4 21.9

-Working Capital Investments 7.2 2.6 6.8 -4.5 -9.1 21.2

6.4 2.8 6.1 6.2 11.3 25.3

Operating Cash Flow 19 34.8 46.3 81.8 94.3 129.1

+Stock Issuance 11.7 9.1 13.7 7.6 12.7 18.5

-Stock Purchases 0.7 1.2 1.3 6.1 22.9 11.6

-Dividends Paid 0 5.3 8.3 9.8 11.9 15

0 4.7 1.5 0 0 0

Net Cash Flow 30 32.6 48.9 73.4 72.3 121

Cash and Short-Term Investments 95.3 127.9 176.8 250.2 322.5 443.4

Source: Adapted from Compustat

+Tax Adjustmentb

-Other Itemsc

aFirst thee quarters of FY2003.bThe difference between the exercise price and the market value of LLTC stock could be expensed for tax purposes, leading to large tax adjustments on the cash flow statement.cOther Items includes long-term investments and acquisitions (other than capital expenditure), extraordinary items, and other adjustments to net income.

Selected Linear Financial Data in Millions of Dollars (Except Share Data), 1992–2003

1998 1999 2000 2001 2002

484.8 506.7 705.9 972.6 512.3 440.8

137.8 139.8 179 231.1 144.7 114.6

46.2 54.7 78.3 102.5 79.8 67

29.6 26.5 31.4 28.4 9.4 18.9

271.3 285.7 417.3 610.7 278.4 240.3

90.4 91.4 129.4 183.2 80.7 69.7

180.9 194.3 287.9 427.5 197.6 170.6

307.3 307.5 315.2 318.9 316.2 312.4

$0.59 $0.63 $0.91 $1.34 $0.63 $0.55

0.0 0.0 0.0 0.0 0.0 0.0

18.3 22.1 28.0 41.2 54.0 47.0

$15.08 $33.63 $63.94 $44.22 $31.43 $30.87

180.9 194.3 287.9 427.5 197.6 170.6

20.1 22 25 35.8 46.3 33.5

24.4 39.1 80.3 127.9 17.9 9.8

-7.4 -9.6 -26.6 19.2 42 14.9

58.6 54.6 102.9 115.5 55.2 0.7

242.6 241.3 362 431.7 239.3 180.1

26.6 38.3 54.8 52.7 39.3 27.4

56.5 108.7 0 69.8 221.6 165.7

18.3 22.1 28 41.2 54 47

0 0 0 0 0 -18.4

194.5 148.8 388.9 373.4 3 13.2

637.9 786.7 1,175.60 1,549.00 1,552.00 1,565.20

2003a

The difference between the exercise price and the market value of LLTC stock could be expensed for tax purposes, leading to large tax adjustments on the cash flow statement.Other Items includes long-term investments and acquisitions (other than capital expenditure), extraordinary items, and other adjustments to net income.

Exhibit 3 Linear Payout Policy, 1992-2003

Market Reaction

Q1 93 0.00000 2.70 281.3 13-Oct 14-Oct

Q2 93 0.00625 2:1 (11/3) 3.19 283.1 12-Jan

Q3 93 1.2 0.00625 3.16 283.4 13-Apr

Q4 93 0.00625 3.61 285.4 20-Jul

Q1 94 0.00625 4.28 294.1 12-Oct 12-Oct

Q2 94 0.00750 4.84 287.7 19-Jan

Q3 94 0.5 0.00750 5.28 289.6 19-Apr

Q4 94 0.8 0.00750 5.50 290.5

Q1 95 6.1 0.00750 5.54 290.0 17-Oct 17-Oct

Q2 95 0.00875 6.19 290.5 18-Jan

Q3 95 0.00875 7.00 293.2 18-Apr

Q4 95 0.00875 8.25 294.3 25-Jul 27-Jul

Q1 96 0.01000 2:1(8/11) 10.38 295.2 17-Oct

Q2 96 3.5 0.01000 9.81 296.3 17-Jan

Q3 96 5.0 0.01000 10.44 299.3 16-Apr

Q4 96 14.4 0.01000 7.50 298.6 23-Jul 23-Jul

Q1 97 11.6 0.01250 9.22 297.5 16-Oct

Q2 97 0.01250 10.97 299.5 15-Jan

Q3 97 0.01250 11.06 301.6 16-Apr

Q4 97 0.01250 12.94 303.8 23-Jul 22-Jul

Q1 98 0.01500 17.19 306.0 14-Oct

Q2 98 50.5 0.01500 14.41 303.0 13-Jan

Q3 98 5.9 0.01500 17.25 306.0 14-Apr

Q4 98 0.01500 15.08 307.3 21-Jul 21-Jul

Q1 99 100.0 0.01750 12.50 300.7 13-Oct

Q2 99 8.8 0.01750 22.39 301.3 12-Jan

Q3 99 0.01750 2:1(1/29) 25.63 306.1 13-Apr 13-Apr

Q4 99 0.02000 33.63 307.5 20-Jul

Q1 00 0.02000 29.39 308.5 12-Oct

Q2 00 0.02000 35.78 311.1 18-Jan

Q3 00 0.02000 2:1(3/6) 55.00 313.1 18-Apr 18-Apr

Q4 00 0.03000 63.94 315.2 25-Jul

Q1 01 0.03000 64.75 316.6 17-Oct

Q2 01 52.3 0.03000 46.25 316.0 16-Jan

Q3 01 11.0 0.03000 41.06 317.8 17-Apr 17-Apr

Q4 01 6.5 0.04000 44.22 318.9 24-Jul

Q1 02 114.8 0.04000 32.80 316.3 16-Oct

Q2 02 3.0 0.04000 39.04 317.2 15-Jan

Q3 02 37.3 0.04000 44.22 317.1 16-Apr 17-Apr

Q4 02 66.5 0.05000 31.43 316.2 23-Jul

Q1 03 125.0 0.05000 20.72 311.8 15-Oct

Q2 03 1.5 0.05000 25.72 313.4 14-Jan

Q3 03 39.2 0.05000 30.87 312.4

Fiscal Quarter

Stock Re-Purchase

($M)

Dividends Per Sharea

($)Stock Splits

(Date)Share Pricea

($) Sharesa (M) Dividendb Earningsb

Source: Adapted from Compustat, the Center for Research on Security Prices, Datastream

aAdjusted for splits.bAnnouncement date. The quarterly earnings announcement date for Q4 1994 is not available from Compustat.cReturn on the day before, the day of, and the day after the earnings announcement. The SOX index begins in October 1994.

Market Reaction

-1.6

-1

11

-1.2

11.7

0.6

-4.1

2.2

4.7 0.5

1.8 -5

11.7 0.2

14.3 7.3

10.6 3.6

-14.3 4.6

-1.4 -5.8

-11 -1.3

11.4 2.3

-2.3 -0.7

8.3 3.9

5.4 -4

6.6 6.4

13.3 6.8

-15.5 -5

11.9 9

7.9 3.1

0.3 -6.2

-10.7 -6.4

-3.5 -1.4

6.1 -0.5

15.2 13.5

-2 -4.5

-18.3 -14.6

8.8 1

8.5 7.2

-11.3 -3.6

-10.1 -9.5

-1.1 -6.5

4.9 3.7

0.5 -2.9

4.3 -0.3

-2.4 -4.2

LLTC Returnc(%)

SOX Returnc(%)

Exhibit 4 Top 10 Institutional Shareholders, 2003

Institution Shares

Janus Capital Management 34,151,384Capital Research and Management Company 23,807,150State Farm Mutual Automobile Insurance 14,599,700Fidelity Management & Research (FMR) 10,902,153Barclays Bank 10,561,160Oak Associates 9,754,731State Street 9,468,226Northern Trust 7,473,564AXA Financial 7,429,952Massachusetts Financial Services 7,309,046

Source: Adapted from Thomson Financial Spectrum Database

Top 10 Institutional Shareholders, 2003

10.917.614.663.483.373.123.032.392.372.34

Percent of Shares Outstanding

Exhibit 5 Dividend Policy for the S&P 500, Annual Data from 1993-2002

Sector Dividend Yield Earnings Yield

Utilities 4.80% 7.10% 11.40%Telecommunications Services 2.30% 5.20% 14.40%Materials 2.20% 5.40% 12.20%Energy 1.80% 5.20% 9.80%Financials 2.30% 7.00% 16.50%Industrials 1.80% 5.60% 15.20%Consumer Staples 1.80% 4.60% 21.10%Consumer Discretionary 1.40% 5.40% 15.50%Health Care 0.90% 3.90% 16.90%Information Technology 0.30% 3.60% 14.90%

Weighted Average 1.80% 5.40% 15.10%

Return on Book Equity

aThe sample includes S&P 500 firms in 2002. Not all firms have data back to 1993.Source: Adapted from Goldman Sachs Portfolio Strategy (July 1, 2003 Research Report)

Exhibit 6 Cumulative Executive Compensation, 1993-2002

Company Salary ($M) Bonus ($M)

2.6 12.6 3,000 1,297 29.1 1,003

Cisco Systems 2.3 3.3 45,840 43,090 344.9 35,400

Intel 4.3 17.8 5,005 10,752 196.6 5,005

Maxim John Gifford 2.7 12 10,913 10,522 206.3 4,946

Microsoft 3.5 2 0 0 0 0

Source: Adapted from Execucomp, Yahoo Finance

Name (CEO Year)

Stock Options

Grantsa (000)

Stock Options

Exercisea,b (000)

Value Realized

from Exercise

($M)

Options Ownedc

(000)

Linear Technology

Robert Swanson

John Chambers (1995)

Craig Barrett (1998)

Steven A. Ballmer (2000)

aAdjusted for splits.bIncludes the exercise of options granted prior to 1993.cAs reported in the proxy statement in 2002. In 2002, Robert Swanson and John Chambers forfeited 700,000 options and 2 million options, respectively.

530 316

2,047 7,303

2,732 6,575

2,047 320

410,968 5,359

Shares Ownedc (000)

Common Shares (M)

As reported in the proxy statement in 2002. In 2002, Robert Swanson and John Chambers forfeited 700,000 options and 2 million options, respectively.

Exhibit 8 Municipal and corporate bond yields

Year

Annual Average Month-End Yield (%):

1995 6.25 4.171996 5.89 3.811997 5.94 3.921998 5.44 3.681999 5.73 3.642000 6.71 4.492001 3.87 2.942002 2.37 1.87

Source: Adapted from Bloomberg

Bloomberg 1-year AAA Corporate

DebtBloomberg 1-year

AAA Muni Debt

Exhibit 11 Data on Companies in the Semiconductor Index (SOX) in Millions of Dollars (Except Share Data), 2002

Company Ticker Shares (M) Net Income

Advanced Micro Devices AMD 6.18 344.5 -1303.0 -794.1Altera ALTR 13.54 383.5 91.3 237.8Applied Materials AMAT 12.58 1648.0 269.0 75.1Broadcom BRCM 12.35 277.8 -2236.6 -144.4Intel INTC 16.28 6575.0 3117.0 4426.0Kla-Tencor KLAC 35.94 189.8 216.2 215.4Linear Technology LLTC 30.87 316.2 197.6 239.3Lsi Logic LSI 4.52 375.1 -292.4 115.1Maxim Integrated Products MXIM 36.12 320.1 259.2 313.4

Micron Technology MU 8.14 602.9 -907.0 -181.8Motorola MOT 8.26 2315.3 -2485.0 732.0National Semiconductor NSM 17.04 183.8 -33.3 49.8Novellus Systems NVLS 27.27 149.1 22.9 188.1

STM 18.90 887.5 429.0 718.0

TSM 6.84 3703.2 413.8 951.3Teradyne TER 11.64 183.2 -718.5 -80.6Texas Instruments TXN 16.37 1730.6 -344.0 1190.0Xilinx XLNX 23.41 339.0 125.7 299.0

Source: Adapted from Compustat, Center for Research on Security Prices

Share Pricea Cash Flowb

STMicroelectronicsf

Taiwan Semiconductorg

aShare price on March 31, 2003.bCompustat operating cash flow (Item 308) less capital expenditures (Item 128).cCash and short-term investments.dSpecial (non-recurring) dividend.eMicron discontinued its dividend in 1996.fSTMicroelectronics is an American Depository Receipt (ADR), based in France.gTaiwan Semiconductor is an ADR, based in Taiwan.

Data on Companies in the Semiconductor Index (SOX) in Millions of Dollars (Except Share Data), 2002

Dividends

1037.7 1779.8 0.0 0.0942.7 0.0 0.0 139.5

4929.5 573.9 0.0 125.0502.7 1.2 0.0 0.0

12587.0 929.0 533.0 4014.0 Sep-92673.3 0.0 0.0 123.2

1552.0 0.0 54.0 221.6 Oct-92990.0 1241.2 0.0 0.0765.5 0.0 0.0 864.0 2-Oct

985.7 360.8 0.0 0.06566.0 7674.0 364.0 0.0 Nov-46

915.4 19.9 0.0 0.01019.7 0.0 0.0 78.2

2564.0 2797.0 36.0 115.0 May-99

1113.0 1701.7 0.0 0.0325.4 450.6 0.0 0.0

3012.0 833.0 147.0 370.0 26-Apr675.6 0.0 0.0 60.8

CashcLong-Term

Debt Stock Re-purchases

Dividend Initiation

Date

Apr-95d

Sep-91e

Exhibit 12 Selected Financial Data in Millions of Dollars (Except Share Data), 1998–2002

1998 1999 2000 2001 2002

Sales 8,458.8 12,154.0 18,928.0 22,293.0 18,915.0

Income Before Taxes 2,302.5 3,316.0 4,343.0 -874.0 2,710.0

-GAAP Income Taxes 952.4 1,220.0 1,675.0 140.0 817.0

Net Income 1,350.1 2,096.0 2,668.0 -1,014.0 1,893.0

+Depreciation and Amortization 327.3 486.0 863.0 2,236.0 1,957.0

-Capital Expenditure 414.8 584.0 1,086.0 2,271.0 2,641.0

-Working Capital Investments -688.7 -937.0 -1,262.0 -5,078.0 -2,829.0

+Tax Adjustment 514.4 919.0 1,348.0 92.0 -92.0

Operating Cash Flow 2,465.7 3,854.0 5,055.0 4,121.0 3,946.0

+Stock Issuance 488.5 740.0 1,564.0 1,262.0 655.0

-Stock Purchases 0.0 0.0 0.0 0.0 1,854.0

-Dividends Paid 0.0 0.0 0.0 0.0 0.0

2,538.3 4,269.5 3,110.0 4,001.0 -3,002.0

Net Cash Flow 415.9 324.5 3,509.0 1,382.0 5,749.0

Cash and Short-Term Investments 1,691.5 2,016.0 5,525.0 6,907.0 12,656.0

Common Shares Outstanding 1,041.7 3,271.0 7,138.0 7,324.0 7,303.0

Share Price, Fiscal Year Close $95.75 $62.13 $65.44 $19.22 $13.19

Sales 26,273.0 29,389.0 33,726.0 26,539.0 26,764.0

Income Before Taxes 9,137.0 11,228.0 15,141.0 2,183.0 4,204.0

-GAAP Income Taxes 3,069.0 3,914.0 4,606.0 892.0 1,087.0

Net Income 6,068.0 7,314.0 10,535.0 1,291.0 3,117.0

+Depreciation and Amortization 2,807.0 3,186.0 4,807.0 6,052.0 5,042.0

-Capital Expenditure 3,557.0 3,403.0 6,674.0 7,309.0 4,703.0

-Working Capital Investments -31.0 180.0 2,912.0 -1,627.0 -358.0

+Tax Adjustment 285.0 1,015.0 397.0 -316.0 612.0

Operating Cash Flow 5,634.0 7,932.0 6,153.0 1,345.0 4,426.0

+Stock Issuance 2,127.0 543.0 797.0 762.0 681.0

-Stock Purchases 6,785.0 4,612.0 4,007.0 4,008.0 4,014.0

-Dividends Paid 168.0 366.0 470.0 538.0 533.0

3,109.0 -665.0 438.0 -166.0 -477.0

Net Cash Flow -2,301.0 4,162.0 2,035.0 -2,273.0 1,037.0

Cash and Short-Term Investments 7,626.0 11,788.0 13,823.0 11,550.0 12,587.0

Common Shares Outstanding 1,658.0 3,334.0 6,721.0 6,690.0 6,575.0

Share Price, Fiscal Year Close $118.56 $82.31 $30.06 $31.45 $15.57

CISCO (July Fiscal Year)

-Other Itemsa

INTEL (December Fiscal Year)

-Other Itemsa

MAXIM (June Fiscal Year)

Sales 560.2 607.0 864.9 1,576.6 1,025.1

Income Before Taxes 269.9 297.2 425.2 505.0 386.8

-GAAP Income Taxes 91.8 101.0 144.6 170.0 127.7

Net Income 178.1 196.1 280.6 334.9 259.2

+Depreciation and Amortization 15.1 17.6 19.7 90.9 56.3

-Capital Expenditure 109.4 54.3 176.1 336.5 90.4

-Working Capital Investments -18.8 -34.8 -26.2 -235.6 48.4

+Tax Adjustment 83.5 57.7 157.3 148.3 136.8

Operating Cash Flow 186.1 251.9 307.7 473.1 313.4

+Stock Issuance 37.2 51.1 79.3 114.3 109.3

-Stock Purchases 123.1 113.9 257.0 250.7 864.0

-Dividends Paid 0.0 0.0 0.0 6.0 0.0

1.2 -2.7 3.7 -248.7 13.5

Net Cash Flow 99.0 191.8 126.2 579.4 -454.9

Cash and Short-Term Investments 322.9 514.7 640.9 1,220.4 765.5

130.8 135.8 282.8 330.2 320.1

Share Price, Fiscal Year Close $31.69 $66.50 $67.94 $44.21 $38.33

Sales 14,484.0 19,747.0 22,956.0 25,296.0 28,365.0

Income Before Taxes 7,117.0 11,891.0 14,275.0 11,525.0 11,513.0

-GAAP Income Taxes 2,627.0 4,106.0 4,854.0 3,804.0 3,684.0

Net Income 4,490.0 7,785.0 9,421.0 7,721.0 7,829.0

+Depreciation and Amortization 528.0 483.0 668.0 1,536.0 1,014.0

-Capital Expenditure 656.0 583.0 879.0 1,103.0 770.0

-Working Capital Investments -335.0 1,470.0 182.0 -1,661.0 -3,882.0

+Tax Adjustment 1,527.0 3,232.0 4,054.0 2,504.0 1,784.0

Operating Cash Flow 6,224.0 9,447.0 13,082.0 12,319.0 13,739.0

+Stock Issuance 2,512.0 4,457.0 2,245.0 1,620.0 1,497.0

-Stock Purchases 2,468.0 2,950.0 4,896.0 6,074.0 6,069.0

-Dividends Paid 28.0 28.0 13.0 0.0 0.0

1,279.0 7,617.0 3,856.0 63.0 2,115.0

Net Cash Flow 4,961.0 3,309.0 6,562.0 7,802.0 7,052.0

Cash and Short-Term Investments 13,927.0 17,236.0 23,798.0 31,600.0 38,652.0

Common Shares Outstanding 2,470.0 5,109.0 5,283.0 5,383.0 5,359.0

Share Price, Fiscal Year Close $108.38 $90.19 $80.00 $73.00 $54.70

-Other Itemsa

Common Shares Outstandingb

MICROSOFT (June Fiscal Year)

-Other Itemsa

aOther Items includes long-term investments and acquisitions, extraordinary items, and other adjustments to net income.bOn April 11, 2001, Maxim acquired Dallas Semiconductor Corporation with 41 million shares of stock.Source: Adapted from Compustat

Selected Financial Data in Millions of Dollars (Except Share Data), 1998–2002