UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED |
OR
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
Commission file number 0-20388
LITTELFUSE, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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(State or other jurisdiction | (I.R.S. Employer Identification No.) | ||||
of incorporation or organization) | |||||
8755 W. Higgins Road, Suite 500 | |||||
Chicago, Illinois |
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(Address of principal executive offices) | (Zip Code) |
(773) 628-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] | Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of July 24, 2015, 22,647,323April 29, 2016, 22,422,545 shares of common stock, $.01 par value, of the registrant were outstanding.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION | |||
Item 1. | Financial Statements. | Page | |
| Condensed Consolidated Balance Sheets as of April 2, 2016 (unaudited) and January 2, 2016 | 1 | ||
| Consolidated Statements of Net Income for the three months ended April 2, 2016 (unaudited) and March 28, 2015 (unaudited) | 2 | ||
| Consolidated Statements of Comprehensive Income for the three months ended April 2, 2016 (unaudited) and March 28, 2015 (unaudited) | 3 | ||
| Consolidated Statements of Cash Flows for the three months ended April 2, 2016 (unaudited) and March 28, 2015 (unaudited) | 4 | ||
| Notes to Condensed Consolidated Financial Statements (unaudited) | 5 | ||
Item 2. | Management’s Discussion and Analysis of Financial Conditionand Results of Operations. | 15 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 20 | |
Item 4. | Controls and Procedures. | 21 | |
PART II - OTHER INFORMATION | |||
Item 1. |
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| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. | Defaults Upon Senior Securities | 22 | |
Item 4. |
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Item 5. | Other Information | 22 | |
Item 6. | Exhibits | 23 | |
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Signatures |
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PART I – FINANCIAL INFORMATION
Item 1.Financial Statements
LITTELFUSE, INC.
Condensed Consolidated Balance Sheets
(In thousands of USD, except share amounts)
June 27, 2015 | December 27, 2014 | April 2, 2016 | January 2, 2016 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 311,915 | $ | 297,571 | $ | 272,864 | $ | 328,786 | ||||||||
Short-term investments | 3,954 | 4,302 | 4,354 | 4,179 | ||||||||||||
Accounts receivable, less allowances | 151,283 | 135,356 | 181,384 | 142,882 | ||||||||||||
Inventories | 97,735 | 97,391 | 133,162 | 98,629 | ||||||||||||
Deferred income taxes | 17,378 | 17,481 | ||||||||||||||
Prepaid expenses and other current assets | 15,357 | 13,904 | 14,024 | 8,238 | ||||||||||||
Assets held for sale | 5,500 | 5,500 | ||||||||||||||
Total current assets | 603,122 | 571,505 | 605,788 | 582,714 | ||||||||||||
Property, plant and equipment: | ||||||||||||||||
Land | 5,542 | 5,697 | 9,760 | 5,236 | ||||||||||||
Buildings | 63,546 | 64,609 | 90,839 | 71,383 | ||||||||||||
Equipment | 389,026 | 370,179 | 435,047 | 382,429 | ||||||||||||
| 458,114 | 440,485 | 535,646 | 459,048 | |||||||||||||
Accumulated depreciation | (291,735 | ) | (281,845 | ) | (305,413 | ) | (296,480 | ) | ||||||||
Net property, plant and equipment | 166,379 | 158,640 | 230,233 | 162,568 | ||||||||||||
Intangible assets, net of amortization: | ||||||||||||||||
Patents, licenses and software | 21,449 | 23,640 | ||||||||||||||
Patented and unpatented technologies, licenses and software | 75,972 | 20,221 | ||||||||||||||
Distribution network | 17,813 | 19,428 | 16,226 | 16,490 | ||||||||||||
Customer lists, trademarks and tradenames | 58,018 | 60,605 | 105,353 | 54,912 | ||||||||||||
Goodwill | 192,947 | 196,256 | 312,064 | 189,767 | ||||||||||||
Other investments | 14,503 | 12,056 | ||||||||||||||
Investments | 14,424 | 15,197 | ||||||||||||||
Deferred income taxes | 5,604 | 5,393 | 20,049 | 8,333 | ||||||||||||
Other assets | 19,456 | 23,303 | 23,001 | 14,058 | ||||||||||||
Total assets | $ | 1,099,291 | $ | 1,070,826 | $ | 1,403,110 | $ | 1,064,260 | ||||||||
Liabilities and Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 53,919 | $ | 50,793 | $ | 73,619 | $ | 51,658 | ||||||||
Accrued payroll | 25,501 | 30,511 | 28,492 | 32,611 | ||||||||||||
Accrued expenses | 19,668 | 13,059 | 40,350 | 24,145 | ||||||||||||
Accrued severance | 2,033 | 790 | 4,043 | 3,798 | ||||||||||||
Accrued income taxes | 8,547 | 9,045 | 9,929 | 10,621 | ||||||||||||
Current portion of accrued post-retirement benefits | 11,768 | 11,768 | ||||||||||||||
Consideration payable | 70,000 | — | ||||||||||||||
Current portion of long-term debt | 82,250 | 88,500 | 6,250 | 87,000 | ||||||||||||
Total current liabilities | 203,686 | 204,466 | 232,683 | 209,833 | ||||||||||||
Long-term debt, less current portion | 96,993 | 106,658 | 371,113 | 83,753 | ||||||||||||
Deferred income taxes | 11,173 | 11,076 | 6,191 | 8,014 | ||||||||||||
Accrued post-retirement benefits | 5,247 | 5,147 | 7,481 | 5,653 | ||||||||||||
Other long-term liabilities | 14,900 | 15,814 | 12,329 | 12,809 | ||||||||||||
Total equity | 767,292 | 727,665 | 773,313 | 744,198 | ||||||||||||
Total liabilities and equity | $ | 1,099,291 | $ | 1,070,826 | $ | 1,403,110 | $ | 1,064,260 | ||||||||
Common shares issued and outstanding of22,725,882 and 22,585,529, at June 27, 2015, and December 27, 2014, respectively. | ||||||||||||||||
Common shares issued of 22,470,690 and 22,420,785,at April 2, 2016, and January 2, 2016, respectively. | ||||||||||||||||
See accompanying notes.
LITTELFUSE, INC.
Consolidated Statements of Net Income
(In thousands of USD, except per share amounts, unaudited)
For the Three Months Ended | For the Six Months Ended | For the Three Months Ended | ||||||||||||||||||||||
June 27, 2015 | June 28, 2014 | June 27, 2015 | June 28, 2014 | April 2, 2016 | March 28, 2015 | |||||||||||||||||||
Net sales | $ | 222,021 | $ | 220,908 | $ | 432,334 | $ | 427,767 | $ | 219,398 | $ | 210,313 | ||||||||||||
Cost of sales | 136,740 | 137,913 | 270,723 | 266,278 | 132,243 | 133,983 | �� | |||||||||||||||||
Gross profit | 85,281 | 82,995 | 161,611 | 161,489 | 87,155 | 76,330 | ||||||||||||||||||
Selling, general and administrative expenses | 38,772 | 38,328 | 75,117 | 72,499 | 42,366 | 36,345 | ||||||||||||||||||
Research and development expenses | 7,361 | 7,810 | 14,745 | 15,384 | 8,565 | 7,384 | ||||||||||||||||||
Amortization of intangibles | 2,977 | 3,138 | 6,030 | 6,297 | 3,796 | 3,053 | ||||||||||||||||||
| 49,110 | 49,276 | 95,892 | 94,180 | 54,727 | 46,782 | |||||||||||||||||||
Operating income | 36,171 | 33,719 | 65,719 | 67,309 | 32,428 | 29,548 | ||||||||||||||||||
Interest expense | 948 | 1,228 | 2,099 | 2,444 | 2,045 | 1,151 | ||||||||||||||||||
Foreign exchange (gain) loss | (1,292 | ) | 2,375 | 1,825 | 2,123 | |||||||||||||||||||
Foreign exchange loss | 3,823 | 3,117 | ||||||||||||||||||||||
Other (income) expense, net | (1,202 | ) | (1,446 | ) | (2,328 | ) | (2,632 | ) | (517 | ) | (1,126 | ) | ||||||||||||
Income before income taxes | 37,717 | 31,562 | 64,123 | 65,374 | 27,077 | 26,406 | ||||||||||||||||||
Income taxes | 9,033 | 6,984 | 15,444 | 15,407 | 7,788 | 6,411 | ||||||||||||||||||
Net income | $ | 28,684 | $ | 24,578 | $ | 48,679 | $ | 49,967 | $ | 19,289 | $ | 19,995 | ||||||||||||
Net income per share (see Note 7): | ||||||||||||||||||||||||
Net income per share (see note 8): | ||||||||||||||||||||||||
Basic | $ | 1.26 | $ | 1.09 | $ | 2.15 | $ | 2.22 | $ | 0.86 | $ | 0.88 | ||||||||||||
Diluted | $ | 1.26 | $ | 1.08 | $ | 2.13 | $ | 2.20 | $ | 0.85 | $ | 0.88 | ||||||||||||
Weighted average shares and equivalent shares outstanding: | ||||||||||||||||||||||||
Basic | 22,691 | 22,579 | 22,645 | 22,536 | 22,438 | 22,600 | ||||||||||||||||||
Diluted | 22,835 | 22,750 | 22,810 | 22,738 | 22,621 | 22,781 | ||||||||||||||||||
Cash dividends paid per common share | $ | 0.25 | $ | 0.22 | $ | 0.50 | $ | 0.44 | $ | 0.29 | $ | 0.25 | ||||||||||||
See accompanying notes.
LITTELFUSE, INC.
Consolidated StatementsConsolidated Statements of Comprehensive Income Comprehensive Income
(In thousands of USD, unaudited)
For the Three Months Ended | For the Six Months Ended | For the Three Months Ended | ||||||||||||||||||||||
June 27, 2015 | June 28, 2014 | June 27, 2015 | June 28, 2014 | April 2, 2016 | March 28, 2015 | |||||||||||||||||||
Net income | $ | 28,684 | $ | 24,578 | $ | 48,679 | $ | 49,967 | $ | 19,289 | $ | 19,995 | ||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||
Pension liability adjustments (net of tax of $385 and $67, for the three months ended 2015 and 2014, and $416 and $160 for the six months ended 2015 and 2014, respectively) | (198 | ) | 39 | (124 | ) | (5 | ) | |||||||||||||||||
Reclassification adjustments to expense, (net of tax of ($249) and $0, for the three months ended 2015 and 2014, and ($498) and $0 for the six months ended 2015 and 2014, respectively) | 985 | — | 1,971 | — | ||||||||||||||||||||
Unrealized gain on investments | 1,380 | 2,276 | 3,336 | 3,584 | ||||||||||||||||||||
Pension liability adjustments, net (net of tax of ($25) and ($31), respectively) | 92 | 74 | ||||||||||||||||||||||
Reclassification adjustments to expense, (net of tax of ($0) and ($249), respectively) | 73 | 986 | ||||||||||||||||||||||
Unrealized (loss) gain on investments | (1,234 | ) | 1,956 | |||||||||||||||||||||
Foreign currency translation adjustments | 3,821 | 6,850 | (10,153 | ) | (311 | ) | 11,755 | (13,974 | ) | |||||||||||||||
Comprehensive income | $ | 34,672 | $ | 33,743 | $ | 43,709 | $ | 53,235 | $ | 29,975 | $ | 9,037 | ||||||||||||
See accompanying notes.
LITTELFUSE, INC.
Consolidated Statements of Cash Flows
(In thousands of USD, unaudited)
For the Six Months Ended | For the Three Months Ended | |||||||||||||||
June 27, 2015 | June 28, 2014 | April 2, 2016 | March 28, 2015 | |||||||||||||
Operating activities: | ||||||||||||||||
Net income | $ | 48,679 | $ | 49,967 | $ | 19,289 | $ | 19,995 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation | 14,761 | 14,459 | 7,230 | 7,365 | ||||||||||||
Amortization of intangibles | 6,030 | 6,297 | 3,796 | 3,053 | ||||||||||||
Stock-based compensation | 5,764 | 5,229 | 2,204 | 1,802 | ||||||||||||
Non-cash inventory charge | — | 2,769 | ||||||||||||||
Loss on product line sale | 1,391 | — | ||||||||||||||
Excess tax benefit on share-based compensation | (1,470 | ) | (2,230 | ) | (706 | ) | (672 | ) | ||||||||
Loss on sale of assets | 329 | 141 | 27 | 105 | ||||||||||||
Changes in operating assets and liabilities: | — | |||||||||||||||
Accounts receivable | (21,266 | ) | (17,871 | ) | (10,413 | ) | (3,910 | ) | ||||||||
Inventories | (1,199 | ) | 410 | (3,484 | ) | 149 | ||||||||||
Accounts payable | 3,440 | 2,533 | 3,716 | (2,963 | ) | |||||||||||
Accrued expenses (including post-retirement) | 11,129 | (7,578 | ) | 3,500 | 2,689 | |||||||||||
Accrued payroll and severance | (3,652 | ) | (7,323 | ) | (9,351 | ) | (8,894 | ) | ||||||||
Accrued taxes | (3,003 | ) | (2,101 | ) | ||||||||||||
Accrued and deferred taxes | (5,312 | ) | 932 | |||||||||||||
Prepaid expenses and other | 2,422 | (2,189 | ) | (2,395 | ) | 3,579 | ||||||||||
Net cash provided by operating activities | 61,964 | 42,513 | 9,492 | 23,230 | ||||||||||||
Investing activities: | ||||||||||||||||
Acquisition of business, net of cash acquired | — | (52,768 | ) | |||||||||||||
Acquisition of businesses, net of cash acquired | (264,098 | ) | — | |||||||||||||
Purchases of property, plant, and equipment | (26,388 | ) | (13,132 | ) | (9,139 | ) | (12,279 | ) | ||||||||
Decrease in entrusted loan receivable | 3,519 | — | ||||||||||||||
Proceeds from sale of assets | 48 | 37 | 18 | 6 | ||||||||||||
Net cash used in investing activities | (22,821 | ) | (65,863 | ) | (273,219 | ) | (12,273 | ) | ||||||||
FINANCING activities: | ||||||||||||||||
FINANCING activities: | ||||||||||||||||
Proceeds from revolving credit facility | 11,000 | 97,500 | 258,000 | 7,000 | ||||||||||||
Proceeds from term loan | 125,000 | — | ||||||||||||||
Payments of revolving credit facility | (21,000 | ) | (19,500 | ) | (90,500 | ) | (11,000 | ) | ||||||||
Payments of term loan | (2,500 | ) | (2,500 | ) | (85,000 | ) | (1,250 | ) | ||||||||
Payments of entrusted loan | (3,519 | ) | — | |||||||||||||
Debt issuance costs | (42 | ) | (108 | ) | (1,700 | ) | — | |||||||||
Cash dividends paid | (11,296 | ) | (9,921 | ) | (6,483 | ) | (5,635 | ) | ||||||||
Purchases of common stock | — | (14,283 | ) | |||||||||||||
Proceeds from exercise of stock options | 6,278 | 11,101 | 3,710 | 1,768 | ||||||||||||
Excess tax benefit on share-based compensation | 1,470 | 2,230 | 706 | 672 | ||||||||||||
Net cash (used in) provided by financing activities | (19,609 | ) | 64,519 | |||||||||||||
Net cash provided by (used in) financing activities | 203,733 | (8,445 | ) | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (5,190 | ) | 45 | 4,072 | (6,452 | ) | ||||||||||
Increase in cash and cash equivalents | 14,344 | 41,214 | ||||||||||||||
Decrease in cash and cash equivalents | (55,922 | ) | (3,940 | ) | ||||||||||||
Cash and cash equivalents at beginning of period | 297,571 | 305,192 | 328,786 | 297,571 | ||||||||||||
Cash and cash equivalents at end of period | $ | 311,915 | $ | 346,406 | $ | 272,864 | $ | 293,631 | ||||||||
Supplemental disclosure of non-cash investing activities: | ||||||||||||||||
Consideration payable recognized in relation to PolySwitch acquisition | $ | 70,000 | $ | — | ||||||||||||
See accompanying notes.
Notes toCONDENSEDConsolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of Littelfuse, Inc. and its subsidiaries (the “company”) have been prepared in accordance with U.S.Generally Accepted Accounting Principles (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10 of RegulationsRegulation S-X. Accordingly, certain information and disclosures normally included in the consolidated balance sheet, statements of net income and comprehensive income and cash flows prepared in conformity with U.S. GAAP have been condensed or omitted as permitted by such rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the period ended June 27, 2015April 2, 2016 are not necessarily indicative of the results that may be expected for the year ending January 2,December 31, 2016. For further information, refer to the company’s consolidated financial statements and the notes thereto incorporated by reference in the company’s Annual Report on Form 10-K for the year ended January 2, 2016.
The company’s unaudited Condensed Consolidated Financial Statements as of April 2, 2016 include the opening balance sheet for the PolySwitch business but do not include any income statement activity of the acquired business as the operating results are not material to the company's financial statements for the three months ended April 2, 2016. The operating results of PolySwitch for the nine day period of March 25, 2016 through April 2, 2016 will be included within the company’s statement of income for the quarter ended July 2, 2016.
2. Reclassifications
Certain amounts presented in the 2015 financial statements have been reclassified to conform to the 2016 presentation. In April 2015, the FASB issuedASU No. 2015-03,Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.The amended guidance is effective for financial statements issued for fiscal years beginning after December 27, 2014.15, 2015, including interim periods within those fiscal years. The amended guidance is to be applied on a retrospective basis. The company evaluated subsequent events throughadopted the datenew guidance on January 3, 2016 and has made the corresponding reclassification on its balance sheet for the fiscal year ended January 2, 2016. The adoption of its financial statements when filed with the Securities and Exchange Commission (“SEC”).new guidance had no effect on the company’s net income, cash flows or shareholder’s equity.
2.3. Acquisition of BusinessBusinesses
SymCom, Inc.PolySwitch
On January 3, 2014,March 25, 2016, the company acquired 100% of SymCom, Inc.the circuit protection business (“SymCom”PolySwitch”) of TE Connectivity Ltd. for $52.8$350.0 million, netsubject to certain post-closing adjustments. At April 2, 2016, $70.0 million of cash acquired. Locatedthe purchase price remained payable subject to certain Chinese regulatory approvals. The company expects to receive these approvals and pay the additional consideration during its fiscal 2016 second quarter. The PolySwitch business, which is split between the Automotive and Electronics segments, has a leading position in Rapid City, South Dakota, SymCom provides overload relayspolymer based resettable circuit protection devices, with a strong global presence in the automotive, battery, industrial, communications and pump controllers primarily to the industrial market.mobile computing markets. PolySwitch has operations in Menlo Park, California and manufacturing facilities in Shanghai and Kunshan, China and Tsukuba, Japan. The acquisition allows the company to strengthen its positionglobal circuit protection product portfolio, as well as strengthen its presence in the relay products market by adding new productsautomotive electronics and new customers within its Electrical business unit segment.battery end markets. The acquisition also significantly increases the company’s presence in Japan. The company funded the acquisition with available cash and proceeds from a new credit facilities.facility.
Notes to CONDENSED Consolidated Financial Statements (Unaudited)
3. Acquisition of Businesses, continued
The following table represents the preliminary allocation of the total consideration to assets acquired and liabilities assumed in the acquisition of PolySwitch based on the Company’s preliminary estimate of their respective fair values at the acquisition date (in thousands):
Total purchase consideration: | ||||
Cash | $ | 280,000 | ||
Consideration payable upon certain Chinese regulatory approvals | 70,000 | |||
Total purchase consideration | $ | 350,000 | ||
Preliminary allocation of consideration to assets acquired and liabilities assumed: | ||||
Cash | $ | 16,958 | ||
Current assets, net | 56,992 | |||
Property, plant and equipment | 63,903 | |||
Patented and unpatented technologies | 56,137 | |||
Customer relationships | 53,194 | |||
Goodwill | 120,208 | |||
Other long-term assets | 19,555 | |||
Current liabilities | (35,291 | ) | ||
Other non-current liabilities | (1,656 | ) | ||
| $ | 350,000 |
All PolySwitch goodwill and other assets and liabilities were recorded in the Automotive and Electronics segments and reflected both the Asia-Pacific and Europe geographical areas. The customer relationships are anticipated to be amortized over 15 years. The patented and unpatented technologies are anticipated to be amortized over 10 years. The goodwill resulting from this acquisition consists largely of the company’s expected future product sales and synergies from combining PolySwitch products with the company’s existing automotive and electronics product portfolio. A portion of the goodwill for the above acquisition is expected to be deductible for tax purposes.
As required by purchase accounting rules, the company recorded a $8.0 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up is anticipated to be amortized during the second quarter of 2016, as a portion of this inventory is sold and charged to cost of goods sold as a non-cash charge for this step-up.
The company’s unaudited Condensed Consolidated Financial Statements as of April 2, 2016 include the opening balance sheet for the PolySwitch business but do not include any income statement activity of the acquired business as the operating results are not material to the company's financial statements for the three months ended April 2, 2016. The operating results of PolySwitch for the nine day period of March 25, 2016 through April 2, 2016 will be included within the company’s statement of income for the quarter ended July 2, 2016.
The company incurred legal, professional and other costs related to this acquisition aggregating approximately $5.9 million for the three months ended April 2, 2016. These costs were recognized as selling and administrative expenses and reflected as other non-segment costs.
Sigmar S.r.l
On October 1, 2015, the company acquired 100% of Sigmar S.r.l. (“Sigmar”). The total purchase price for Sigmar was $6.2 million, net of cash acquired and including additional consideration of $1.1 million paid in the first quarter of 2016 relating to certain working capital related adjustments and an earn-out clause payment. The purchase price remains subject to an inventory related post-closing adjustment and additional payments of up to $0.4 million, subject to the achievement of certain milestones.
Notes to CONDENSED Consolidated Financial Statements (Unaudited)
3. Acquisition of Businesses, continued
Located in Ozegna, Italy, Sigmar is a leading global manufacturer of water-in-fuel and selective catalytic reduction (SCR) quality sensors, as well as diesel fuel heaters, solenoid valves and rotating oil filters for automotive and commercial vehicle applications. The acquisition further expanded the company’s automotive sensor product line offerings within its Automotive segment. The company funded the acquisition with available cash.
The following table sets forth the finalpreliminary purchase price allocation for SymComSigmar acquisition-date net assets, in accordance with the purchase method of accounting with adjustments to record the acquired net assets at their estimated fair values.values:
SymCom final purchase price allocation (in thousands): | ||||||||
Sigmar preliminary purchase price allocation (in thousands): | Sigmar preliminary purchase price allocation (in thousands): | |||||||
Cash | $ | 325 | $ | 230 | ||||
Current assets, net | 9,154 | 4,011 | ||||||
Property, plant and equipment | 11,193 | 1,097 | ||||||
Goodwill | 15,018 | 2,271 | ||||||
Trademarks | 17,020 | |||||||
Patents | 1,500 | 2,845 | ||||||
Other non-current assets | 20 | |||||||
Current liabilities | (1,137 | ) | (1,478 | ) | ||||
Other non-current liabilities | (2,568 | ) | ||||||
| $ | 53,093 | $ | 6,408 | |||||
All SymComSigmar goodwill and other assets and liabilities were recorded in the Electrical business unitAutomotive segment and reflected in the AmericasEurope geographical area. The trademarks are being amortized over 15 to 20 years. The patents are being amortized over 16 to 1710 years. The goodwill resulting from this acquisition consists largely of the company’s expected future product sales and synergies from combining SymCom’sSigmar’s products with the company’s existing electricalautomotive product offerings. Goodwill for the above acquisition is not expected to be deductible for tax purposes.
As required by purchase accounting rules,Pro Forma Results
The following table summarizes, on a pro forma basis, the combined results of operations of the company initially recorded a $2.6 million step-upand PolySwitch as though the acquisition had occurred as of inventoryDecember 28, 2014. The company has not provided Pro forma results of operations for Sigmar as these results were not material to itsthe company. The pro forma amounts presented are not necessarily indicative of either the actual consolidated results had the PolySwitch acquisition occurred as of December 28, 2014 or of future consolidated operating results.
For the Three Months Ended | ||||||||
(in thousands, except per share amounts) | April 2, 2016 | March 28, 2015 | ||||||
Net sales | $ | 253,608 | $ | 256,133 | ||||
Income before income taxes | 31,432 | 22,420 | ||||||
Net income | 24,424 | 18,560 | ||||||
Net income per share— basic | 1.09 | 0.82 | ||||||
Net income per share— diluted | 1.08 | 0.81 | ||||||
Pro forma results presented above primarily reflect: (1) incremental depreciation relating to fair value asadjustments to property, plant and equipment; (2) amortization adjustments relating to fair value estimates of the acquisition date basedintangible assets; (3) incremental interest expense on the preliminary valuation. During the first quarter of 2014, as a portion of this inventory was sold,assumed indebtedness; and (4) additional cost of goods sold included a $1.4 million non-cash chargerelating to the capitalization of gross profit which will be recognized during the company’s quarter ended July 2, 2016 as part of purchase accounting recognized for this step-up.
purposes of the pro forma as if it was recognized during the company’s first quarter of 2015. Pro forma financial information is not presented foradjustments described above have been tax affected using the SymCom acquisition due to amounts not being materially different than actual results.company's effective rate during the respective periods.
Notes toCONDENSEDConsolidated Financial Statements (Unaudited)
3. Acquisition of Businesses, continued
The historical PolySwitch results for the three months ended April 2, 2016 and March 28, 2015 do not include a provision for income taxes. Income tax expense for the historical PolySwitch business was only provided at the end of the business’s fiscal year ended September 25, 2015.
3.4. Inventories
The components of inventories at June 27, 2015April 2, 2016 and December 27, 2014January 2, 2016 are as follows (in thousands):
June 27, 2015 | December 27, 2014 | April 2, 2016 | January 2, 2016 | |||||||||||||
Raw material | $ | 33,193 | $ | 29,756 | $ | 36,772 | $ | 33,599 | ||||||||
Work in process | 16,404 | 15,164 | 26,201 | 16,479 | ||||||||||||
Finished goods | 48,138 | 52,471 | 70,189 | 48,551 | ||||||||||||
Total inventories | $ | 97,735 | $ | 97,391 | $ | 133,162 | $ | 98,629 | ||||||||
4.Other5. Investments
The company’s other investments represent shares of Polytronics Technology Corporation Ltd. (“Polytronics”), a Taiwanese company, and shares of Monolith Semiconductor, Inc. (“Monolith”), a Texas-based start-up company.
Polytronics
The Polytronics investment was acquired as part of the Heinrich Companies acquisition in 2004.Littelfuse GmbH acquisition. The fair value of the Polytronics investment was €12.9million€9.6 million (approximately $14.5$10.9 million) at June 27, 2015April 2, 2016 and €9.9€10.7 million (approximately $12.1$11.7 million) at December 27, 2014.January 2, 2016. Included in 20152016 other comprehensive income is an unrealized gainloss of $3.4$1.3 million, due to the increasedecrease in fair market value of the Polytronics investment. The remaining movement was due to the impact of changes in exchange rates.
Monolith
In December, 2015, the company invested $3.5 million in the preferred stock of Monolith, a U.S. start-up company developing silicon carbide technology, which represents approximately 12% of the common stock of Monolith on an as-converted basis. The company accounts for its investment in Monolith under the cost method. The value of the Monolith investment was $3.5 million at April 2, 2016 and January 2, 2016.
5.6. Debt
The carrying amounts of debt at June 27, 2015April 2, 2016 and December 27, 2014January 2, 2016 are as follows (in thousands):
June 27, 2015 | December 27, 2014 | April 2, 2016 | January 2, 2016 | |||||||||||||
Revolving credit facility | $ | 244,500 | $ | 77,000 | ||||||||||||
Term loan | $ | 91,250 | $ | 93,750 | 125,000 | 85,000 | ||||||||||
Revolving credit facility | 73,500 | 83,500 | ||||||||||||||
Entrusted loan | 14,493 | 17,908 | 9,536 | 9,474 | ||||||||||||
Unamortized debt issuance costs | (1,673 | ) | (721 | ) | ||||||||||||
Total debt | 179,243 | 195,158 | 377,363 | 170,753 | ||||||||||||
Less: Current maturities | 82,250 | 88,500 | 6,250 | 87,000 | ||||||||||||
Total long-term debt | $ | 96,993 | $ | 106,658 | $ | 371,113 | $ | 83,753 | ||||||||
TheNotes to CONDENSED Consolidated Financial Statements (Unaudited)
6. Debt, continued
Revolving Credit Facility / Term Loan
On March 4, 2016, the company currently hasentered into a new credit agreement with J.P Morgan Securities LLCBank of America, as agent, for up to $375.0$700.0 million which consists of an unsecured revolving credit facility of $275.0$575.0 million and an unsecured term loan credit facility of $100.0up to $125.0 million. The new credit agreement effective May 31, 2013, is for a five year period. The company incurred debt issuance costs of $0.1 millionnew credit agreement replaced the company’s previous credit agreement dated May 31, 2013, which will be amortized over the life of the existing credit agreement.was terminated on March 4, 2016. As of June 27, 2015,April 2, 2016, the company had available $200.9$330.4 million of borrowing capacity under the revolving credit agreementfacility at an interest rate of LIBOR plus 1.0% (1.19%1.5% (1.94% as of June 27, 2015)April 2, 2016). At June 27, 2015,April 2, 2016, the company was in compliance with all covenants under the revolving credit facility.
Entrusted Loan
During the fourth quarter of 2014, the company entered into an entrusted loan arrangement (“Entrusted Loan”) of RMB 110.0 million (approximately $17.9 million)million at that time) between two of its China legal entities, Littelfuse Semiconductor (Wuxi) Company (the “Lender”) and Suzhou Littelfuse OVS Ltd. (the “Borrower”), utilizing Bank of America, N.A., Shanghai Branch as agent. Direct borrowing and lending between two commonly owned commercial entities iswas strictly forbidden at the time under China’s regulations requiring the use of a third party agent to enable loans between Chinese legal entities. As a result, the Entrusted Loan is reflected as both a long-term asset and long-term debt on the company’s Consolidated Balance Sheets and is reflected in the investing and financing activities in its Consolidated Statements of Cash Flows. Interest expense and interest income will be recorded between the lender and borrower with no net impact on the company’s Consolidated Statements of Income since the amounts will be offsetting. The loan interest rate per annum is 5.25%. The Entrusted Loan is used to finance the operation and working capital needs of the borrower and matures in November 2019. The balance of the Entrusted Loan was RMB 61.5 million (approximately $9.5 million) at April 2, 2016.
Debt Issuance Costs
The company incurred debt issuance costs of $1.7 million in relation to the new credit agreement which will be amortized over the life of the new credit agreement.
In April 2015, the FASB issued ASU No. 2015-03,Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The company adopted this guidance in the current quarter, on a retrospective basis, and has reclassified the unamortized debt issuance costs into long-term debt as shown in the table above.
Notes toCONDENSEDConsolidated Financial Statements (Unaudited)
6.7. Fair Value of Assets and Liabilities
In determining fair value, the company uses various valuation approaches within the fair value measurement framework. Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability.
Applicable accounting literature establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Applicable accounting literature defines levels within the hierarchy based on the reliability of inputs as follows:
Level 1—Valuations based on unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2—Valuations based on quoted prices for similar assets or liabilities or identical assets or liabilities in less active markets, such as dealer or broker markets; and
Notes to CONDENSED ConsolidateD Financial Statements (Unaudited)
7. Fair Value of Assets and Liabilities, continued
Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable, such as pricing models, discounted cash flow models and similar techniques not based on market, exchange, dealer or broker-traded transactions.
Following is a description of the valuation methodologies used for instruments measured at fair value and their classification in the valuation hierarchy.
Investment in PolytronicsInvestments
The company holds an investment in the equity securities of Polytronics as described in Note 4.5. Equity securities listed on a national market or exchange are valued at the last sales price. Such securities are classified within Level 1 of the valuation hierarchy. The company also holds an investment in Monolith as described in Note 5 for which the value of the $3.5 million represents the cost of the investment.
There were no changes during the six monthsquarter ended June 27, 2015April 2, 2016 to the company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of June 27, 2015April 2, 2016 and December 27, 2014January 2, 2016 the company held no non-financial assets or liabilities that are required to be measured at fair value on a recurring basis.
The following table presents assets measured at fair value by classification within the fair value hierarchy as of June 27, 2015April 2, 2016 (in thousands):
Fair Value Measurements Using | Fair Value Measurements Using | |||||||||||||||||||||||||||||||
Quoted Pricesin Active Marketsfor IdenticalAssets | Significant | Significant | Total | Quoted Prices in | Significant | Significant | Total | |||||||||||||||||||||||||
Investment in Polytronics | $ | 14,503 | $ | — | $ | — | $ | 14,503 | $ | 10,927 | $ | — | $ | — | $ | 10,927 | ||||||||||||||||
Total | $ | 14,503 | $ | — | $ | — | $ | 14,503 | $ | 10,927 | $ | — | $ | — | $ | 10,927 | ||||||||||||||||
Notes toCONDENSEDConsolidated Financial Statements (Unaudited)
6. Fair Value of Assets and Liabilities, continued
The following table presents assets measured at fair value by classification within the fair value hierarchy as of December 27, 2014January 2, 2016 (in thousands):
Fair Value Measurements Using | Fair Value Measurements Using | |||||||||||||||||||||||||||||||
Quoted Prices in | Significant | Significant | Total | Quoted Prices in | Significant | Significant | Total | |||||||||||||||||||||||||
Investment in Polytronics | $ | 12,056 | $ | — | $ | — | $ | 12,056 | $ | 11,697 | $ | — | $ | — | $ | 11,697 | ||||||||||||||||
Total | $ | 12,056 | $ | — | $ | — | $ | 12,056 | $ | 11,697 | $ | — | $ | — | $ | 11,697 | ||||||||||||||||
The company’s other financial instruments include cash and cash equivalents, short-term investments, accounts receivable, accounts payable and debt. The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and debt approximate their fair values. The company’s debt fair value approximates book value at June 27, 2015April 2, 2016 and December 27, 2014,January 2, 2016, respectively, as the variable interest rates fluctuate along with market interest rates.
Notes to CONDENSED Consolidated Financial Statements (Unaudited)
7.8. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share for the periods ended June 27,of April 2, 2016 and March 28, 2015 and June 28, 2014 (in thousands, except per share amounts).
For the Three Months Ended | For the Six Months Ended | For the Three Months Ended | ||||||||||||||||||||||
June 27, 2015 | June 28, 2014 | June 27, 2015 | June 28, 2014 | April 2, 2016 | March 28, 2015 | |||||||||||||||||||
Net income | $ | 28.684 | $ | 24,578 | $ | 48,679 | $ | 49,967 | $ | 19,289 | $ | 19,995 | ||||||||||||
Average shares outstanding - Basic | 22,691 | 22,579 | 22,645 | 22,536 | 22,438 | 22,600 | ||||||||||||||||||
Net effect of dilutive stock options and restricted share units | 144 | 171 | 165 | 202 | 183 | 181 | ||||||||||||||||||
Average shares - Diluted | 22,835 | 22,750 | 22,810 | 22,738 | 22,621 | 22,781 | ||||||||||||||||||
Net income per share: | ||||||||||||||||||||||||
Basic | $ | 1.26 | $ | 1.09 | $ | 2.15 | $ | 2.22 | $ | 0.86 | $ | 0.88 | ||||||||||||
Diluted | $ | 1.26 | $ | 1.08 | $ | 2.13 | $ | 2.20 | $ | 0.85 | $ | 0.88 | ||||||||||||
Potential shares of common stock relating to stock options excluded from the earnings per share calculation because their effect would be anti-dilutive were113,878were 21,888 and 46,19064,520 for the three months ended June 27,April 2, 2016 and March 28, 2015, and June 28, 2014 and 90,875 and 22,708 for the six months ended June 27, 2015 and June 28, 2014, respectively.
8.9. Income Taxes
The effective tax rate for the secondfirst quarter of 20152016 was 23.9%28.8% compared to an effective tax rate of 22.1%24.3% in the secondfirst quarter of 2014. The effective tax rate for the six months ended June 27, 2015 was 24.1% as compared to an effective tax rate of 23.6% for the six months ended June 28, 2014.2015. The effective tax rates for both the second quarter2016 and six month periods of 2015 and 2014 are lower than the U.S. statutory tax rate primarily due to the result of more income earned in lowlower tax jurisdictions.
Notes toCONDENSEDConsolidated Financial Statements (Unaudited)
8. Income Taxes, continued
The company has restructured the legal ownership of its Mexican manufacturing operations as of June 28, 2015. Although the transaction was completed in the third quarter, the company considered the impact on the effective tax rate for the second quarter and determined such impact was not material.
9.10. Pensions
The components of net periodic benefit cost for the three and six months ended June 27, 2015,April 2, 2016, compared with the three and six months ended JuneMarch 28, 2014,2015, were (in thousands):
U.S. Pension Benefits | Foreign Plans | |||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | U.S. Plans | Foreign Plans | |||||||||||||||||||||||||||||||||||||||||||
June 27, 2015 | June 28, 2014 | June 27, 2015 | June 28, 2014 | June 27, 2015 | June 28, 2014 | June 27, 2015 | June 28, 2014 | Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||||
April 2, 2016* | March 28, 2015 | April 2, 2016 | March 28 2015 | |||||||||||||||||||||||||||||||||||||||||||||
Service cost | $ | 250 | $ | 150 | $ | 500 | $ | 300 | $ | 315 | $ | 311 | $ | 630 | $ | 622 | $ | — | $ | 250 | $ | 332 | $ | 315 | ||||||||||||||||||||||||
Interest cost | 1,031 | 971 | 2,062 | 1,942 | 513 | 592 | 1,026 | 1,183 | — | 1,031 | 497 | 513 | ||||||||||||||||||||||||||||||||||||
Expected return on plan assets | (916 | ) | (1,411 | ) | (1,832 | ) | (2,822 | ) | (601 | ) | (573 | ) | (1,201 | ) | (1,146 | ) | — | (916 | ) | (520 | ) | (600 | ) | |||||||||||||||||||||||||
Amortization of net loss | 290 | 137 | 580 | 274 | 62 | 47 | 123 | 95 | — | 290 | 73 | 61 | ||||||||||||||||||||||||||||||||||||
Total cost (credit) of the plan | 655 | (153 | ) | 1,310 | (306 | ) | 289 | 377 | 578 | 754 | ||||||||||||||||||||||||||||||||||||||
Expected plan participants’contribution | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
Net periodic benefit cost (credit) | $ | 655 | $ | (153 | ) | $ | 1,310 | $ | (306 | ) | $ | 289 | $ | 377 | $ | 578 | $ | 754 | ||||||||||||||||||||||||||||||
Total cost of the plan | 655 | 289 | ||||||||||||||||||||||||||||||||||||||||||||||
Expected plan participants’contribution | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Net periodic benefit cost | $ | — | $ | 655 | $ | 382 | $ | 289 | ||||||||||||||||||||||||||||||||||||||||
* The U.S. pension plan was terminated effective July 30, 2014 and, following receipt of a favorable Letter of Determination from the IRS (dated April14, 2015), all liabilities of the plan were settled during the third quarter of fiscal 2015.
The expected rate of return assumption on domestic pension assets iswas 3.90% and 6.75% in 2015 and 2014, respectively.2015. The expected return on foreign pension assets is 4.95% and 5.39% in 2016 and 5.14% in 2015, and 2014, respectively.
Plan TerminationNotes to CONDENSED Consolidated Financial Statements (Unaudited)
The company received approval from the IRS on April 14, 2015 on its Application for Determination for Terminating Plan to terminate the U.S. defined benefit pension plan, the Littelfuse Inc. Retirement Plan, effective July 30, 2014. The current liability balance of $11.8 million at June 27, 2015, represents the projected cost to settle the plan’s liability in conjunction with the upcoming plan termination. Settlement is expected to occur during the third quarter of 2015.
10.Business Unit11. Segment and Geographic Information
The company and its subsidiaries design, manufacture and sell circuit protection devices throughout the world. The company reports its operations by the following business unit segments: Electronics, Automotive, and Electrical.Industrial. Each operating segment is directly responsible for sales, marketing and research and development. Manufacturing, purchasing, logistics, customer service, finance, information technology and human resources are shared functions that are allocated back to the three operating segments. The CEO allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss) before interest and taxes, but does not evaluate the operating segments using discrete balance sheet information.
Sales, marketing and research and development expenses are charged directly into each operating segment. All other functions are shared by the operating segments and expenses for these shared functions are allocated to the operating segments and included in the operating results reported below. The company does not report inter-segment revenue because the operating segments do not record it. The company does not allocate interest and other income, interest expense, or taxes to operating segments. Although the CEO uses operating income (loss) to evaluate the segments, operating costs included in one segment may benefit other segments. Except as discussed above, the accounting policies for segment reporting are the same as for the company as a whole.
Notes toCONDENSEDConsolidated Financial Statements (Unaudited)
10.Business Unit Segment Information, continued
An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. The CODM is the company’s President and Chief Executive Officer (“CEO”).
Business unit segmentSegment information for the three and six months ended June 27,April 2, 2016 and March 28, 2015 and June 28, 2014 are summarized as follows (in thousands):
For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||
June 27, 2015 | June 28, 2014 | June 27, 2015 | June 28, 2014 | April 2, 2016 | March 28, 2015 | |||||||||||||||||||
Net sales | ||||||||||||||||||||||||
Electronics | $ | 105,553 | $ | 109,947 | $ | 204,933 | $ | 205,972 | $ | 98,796 | $ | 99,380 | ||||||||||||
Automotive | 85,918 | 82,042 | 169,989 | 164,444 | 91,933 | 84,071 | ||||||||||||||||||
Electrical | 30,550 | 28,919 | 57,412 | 57,351 | ||||||||||||||||||||
Industrial | 28,669 | 26,862 | ||||||||||||||||||||||
Total net sales | $ | 222,021 | $ | 220,908 | $ | 432,334 | $ | 427,767 | $ | 219,398 | $ | 210,313 | ||||||||||||
Depreciation and amortization | ||||||||||||||||||||||||
Electronics | $ | 5,775 | $ | 5,530 | $ | 11,573 | $ | 10,900 | $ | 5,372 | $ | 5,798 | ||||||||||||
Automotive | 3,303 | 3,646 | 6,639 | 7,174 | 3,266 | 3,336 | ||||||||||||||||||
Electrical | 1,295 | 1,414 | 2,579 | 2,682 | ||||||||||||||||||||
Industrial | 1,451 | 1,284 | ||||||||||||||||||||||
Other(1) | 937 | — | ||||||||||||||||||||||
Total depreciation and amortization | $ | 10,373 | $ | 10,590 | $ | 20,791 | $ | 20,756 | $ | 11,026 | $ | 10,418 | ||||||||||||
Operating income (loss) | ||||||||||||||||||||||||
Operating income | ||||||||||||||||||||||||
Electronics | $ | 22,167 | $ | 25,634 | $ | 40,832 | $ | 45,005 | $ | 22,416 | $ | 18,665 | ||||||||||||
Automotive | 12,699 | 11,049 | 23,870 | 22,931 | 17,491 | 11,171 | ||||||||||||||||||
Electrical | 4,709 | 571 | 7,439 | 4,317 | ||||||||||||||||||||
Industrial | 1,673 | 2,730 | ||||||||||||||||||||||
Other | (3,404 | ) | (3,535 | ) | (6,422 | ) | (4,944 | ) | (9,152 | ) | (3,018 | ) | ||||||||||||
Total operating income | 36,171 | 33,719 | 65,719 | 67,309 | 32,428 | 29,548 | ||||||||||||||||||
Interest expense | 948 | 1,228 | 2,099 | 2,444 | 2,045 | 1,151 | ||||||||||||||||||
Foreign exchange (gain) loss | (1,292 | ) | 2,375 | 1,825 | 2,123 | |||||||||||||||||||
Foreign exchange loss | 3,823 | 3,117 | ||||||||||||||||||||||
Other (income) expense, net | (1,202 | ) | (1,446 | ) | (2,328 | ) | (2,632 | ) | (517 | ) | (1,126 | ) | ||||||||||||
Income before income taxes | $ | 37,717 | $ | 31,562 | $ | 64,123 | $ | 65,374 | $ | 27,077 | $ | 26,406 | ||||||||||||
(1) For the three months ended June 27, 2015, “Other” consistsConsists of restructuringintangible impairments. (See Note 13).
(2) Consists of internal resorganization costs ($2.51.4 million), acquisition related expenses ($0.26.2 million) and pension wind-upimpairment and severance costs ($0.7 million). Forrelated to the six months ended June 27, 2015, “Other” consistplanned shut-down of restructuring coststhe company’s Roskilde, Denmark operations ($4.81.6 million), acquisition expenses ($0.3 million) (see Note 13).
Notes to CONDENSED Consolidated Financial Statements (Unaudited)
11. Segment and pension wind-up costs ($1.3 million).Geographic Information, continued
The company’s significant net sales by country for the three and six months ended June 27,April 2, 2016 and March 28, 2015 and June 28, 2014 are summarized as follows (in thousands):
For the Three Months Ended(a) | For the Six Months Ended(a) | Net sales(a) | ||||||||||||||||||||||
June 27, 2015 | June 28, 2014 | June 27, 2015 | June 28, 2014 | April 2, 2016 | March 28, 2015 | |||||||||||||||||||
United States | $ | 89,608 | $ | 80,492 | $ | 172,981 | $ | 152,366 | $ | 85,149 | $ | 83,373 | ||||||||||||
China | 49,920 | 39,987 | 94,349 | 77,200 | 48,509 | 44,429 | ||||||||||||||||||
Other countries | 82,493 | 100,429 | 165,004 | 198,201 | 85,740 | 82,511 | ||||||||||||||||||
Total | $ | 222,021 | $ | 220,908 | $ | 432,334 | $ | 427,767 | $ | 219,398 | $ | 210,313 | ||||||||||||
(a) Sales by country represent sales to customer or distributor locations.
Notes toCONDENSEDConsolidated Financial Statements (Unaudited)
10.Business Unit Segment Information, continued
The company’s significant long-lived assets and additions to long-lived assets by country as of June 27, 2015April 2, 2016 and December 27, 2014January 2, 2016 are summarized as follows (in thousands):
Long-lived assets(b) | Long-lived assets(b) | |||||||||||||||
June 27, 2015 | December 27, 2014 | April 2, 2016 | January 2, 2016 | |||||||||||||
United States | $ | 34,129 | $ | 34,179 | $ | 24,906 | $ | 23,965 | ||||||||
Mexico | 46,052 | 47,936 | ||||||||||||||
China | 40,416 | 40,981 | 78,840 | 37,241 | ||||||||||||
Canada | 11,069 | 10,488 | ||||||||||||||
Other countries | 45,782 | 35,544 | 115,050 | 90,874 | ||||||||||||
Total | $ | 166,379 | $ | 158,640 | $ | 229,865 | $ | 162,568 | ||||||||
(b) Long-lived assets consists of net property, plant and equipment.
The company’s additions to long-lived assets for the six months ended June 27, 201511. Segment and June 28, 2014 are summarized as follows (in thousands):Geographic Information, continued
Additions to long-lived assets | Additions to long-lived assets | |||||||||||||||
June 27, 2015 | June 28, 2014 | April 2, 2016 | March 28, 2015 | |||||||||||||
United States | $ | 6,615 | $ | 3,309 | $ | 1,618 | $ | 3,187 | ||||||||
Mexico | 4,190 | 4,694 | ||||||||||||||
China | 4,080 | 2,506 | 1,046 | 667 | ||||||||||||
Canada | 69 | 538 | ||||||||||||||
Other countries | 11,503 | 2,623 | 6,406 | 7,887 | ||||||||||||
Total | $ | 26,388 | $ | 13,132 | $ | 9,139 | $ | 12,279 | ||||||||
11.12. Accumulated Other Comprehensive Income (Loss) (AOCI)
The following table sets forth the changes in the components of AOCI by component (in thousands):
AOCI component | Balance at December 27, 2014 | Other comprehensive income (loss) activity | Reclassification adjustment for expense included in net income | Balance at June 27, 2015 | Balance at January 2, 2016 | Other comprehensive income (loss) activity | Reclassification adjustment for expense included in net income | Balance at April 2, 2016 | ||||||||||||||||||||||||
Pension liability adjustment(a) | $ | (29,615 | ) | $ | (124 | ) | $ | 1,971 | $ | (27,768 | ) | |||||||||||||||||||||
Pension and postemployment liability and reclassification adjustments(a) | $ | (8,722 | ) | $ | 92 | $ | 73 | $ | (8,557 | ) | ||||||||||||||||||||||
Unrealized gain on investments(b) | 10,791 | 3,336 | — | 14,127 | 11,584 | (1,234 | ) | — | 10,350 | |||||||||||||||||||||||
Foreign currency translation adjustment | (2,302 | ) | (10,153 | ) | — | (12,455 | ) | (48,533 | ) | 11,755 | — | (36,778 | ) | |||||||||||||||||||
AOCI (loss) income | $ | (21,126 | ) | $ | (6,941 | ) | $ | 1,971 | $ | (26,096 | ) | $ | (45,671 | ) | $ | 10,613 | $ | 73 | $ | (34,985 | ) | |||||||||||
(a) Balances are net of tax of $12,055$649 and $12,857$661 for 20152016 and 2014,2015, respectively.
(b) Balances are net of tax of $0 and $0 for 20152016 and 2014,2015, respectively.
Notes to CONDENSED Consolidated Financial Statements (Unaudited)
13. Product Line Sale
During the first quarter of 2016, the company sold its tangible and intangible assets relating to a marine product line. In connection with this sale, the company recorded asset charges of $1.4 million within Cost of sales ($0.4 million), Selling, general and administrative expenses (less than $0.1 million), Research and development expenses (less than $0.1 million) and Amortization of intangibles ($0.9) million. These charges were recognized as an “other” charge for segment reporting purposes.
14) Subsequent Event
On April 4, 2016, the company completed the acquisition of Menber’s S.p.A. (“Menber’s”) headquartered in Legnago, Italy. The purchase price of €16.7 million ($19.0 million) is subject to a working capital adjustment and was financed through a mixture of cash on hand and borrowings under the company's credit facility. The acquired business, which will be part of the company's Automotive segment, specializes in the design, manufacturing and selling of manual and electrical battery switches and trailer connectors for commercial vehicles. Menber’s had sales of approximately $23.0 million in 2015.
The initial accounting for the acquisition is not complete pending detailed analyses of the facts and circumstances that existed as of the acquisition date.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations.
Littelfuse Overview
Littelfuse, Inc. and its subsidiaries (the “company” or “Littelfuse”) is the worldwide leader in circuit protection offering the industry's broadest and deepest portfolio of circuit protection products and solutions. The company’s devices protect products in virtually every market that uses electrical energy, from consumer electronics to automobiles to industrial equipment. The company’s worldwide revenue in 20142015 was $852.0$867.9 million and net earnings were $99.4$82.5 million. The company conducts its business through three reportable segments, which are defined by markets and consist of Electronics, Automotive, and Electrical.Industrial. The company’s customer base includes original equipment manufacturers, tier one automotive suppliers and distributors.
In addition to protecting and growing its core circuit protection business, Littelfuse has been investingexpanding its portfolio in power control and sensing technologies. These newer platforms, combined with the company’s strong balance sheet and operating cash flow, provide opportunities for increased organic and acquisition growth. In 2012, the company set a five-year strategic plan to grow annual sales at 15% per year; 5% organically and 10% through acquisitions.
To maximize shareholder value, the company’s primary strategic goals are to:
● | Grow organically faster than its markets; |
● | Double the pace of acquisitions; |
● | Sustain high-teens operating margins; |
● | Improve return on investment; and |
● | Return excess cash to shareholders. |
The company serves markets that are directly impacted by global economic trends with significant exposures to the consumer electronics, automotive, industrial and mining end markets. The company’s results will be impacted positively or negatively by changes in these end markets.
Electronics Segment Segment
The Electronics segment sells passive and semiconductor components and modules as well as sensors primarily into the global consumer electronics, general industrial and telecommunications markets. The core electronics markets are characterized by significant AsiaAsia-Pacific competition and price erosion. As a result the company is focusing additional efforts on higher growth, less price sensitive niche markets (such as LED lighting) and higher-power industrial applications. The PolySwitch business acquisition in 2016 will expand the company’s product offering used in a wide variety of electronic products and utilize the same distribution channels as the company’s core electronics products.
Automotive Segment Segment
The Automotive segment is comprised of passenger vehicle circuit protection, commercial vehicle products and sensors for vehicle applications.sensors. The primary growth drivers for these businesses are increasing global demand for passenger and commercial vehicles and increasing content per vehicle for both circuit protection and sensing products. The move away from internal combustion engines to hybrid and electric drive systems that require more circuit protection is expectedcontinues to be an additional growth driver. The PolySwitch business acquisition in 2016 will add to the company’s strong global presence in the automotive market.
ElectricalIndustrial Segment Segment
The ElectricalIndustrial segment derives its revenues from power fuses, protection relays and custom products selling primarily into the industrial, mining, solar and oil and gas markets. Custom products sales, after several years of strong growth, have declined due to the completion of several large Canadian potash mining projects. The company has expanded this business by moving into new markets such as non-potash mining and oil and gas. Protection relay sales have also sloweddeclined due to the general slowdown in the global mining market.and oil and gas markets. Custom products sales, after declining over the past two years due to end market softness in the potash market, have begun to grow with the company’s diversification into e-houses used in the heavy industrial and utility markets.
The following table is a summary of the company’s net sales by business unit and geography:
Net Sales by Business Unitand Geography(inthousands, unaudited)unaudited)
Second Quarter | Year-to-Date | First Quarter | |||||||||||||||||||||||||||||||||||
2015 | 2014 | %Change | 2015 | 2014 | % Change | 2016 | 2015 | % Change | |||||||||||||||||||||||||||||
Business Unit | Business Unit | ||||||||||||||||||||||||||||||||||||
Electronics | $ | 105,553 | $ | 109,947 | (4 | %) | $ | 204,933 | $ | 205,972 | (1 | %) | $ | 98,796 | $ | 99,380 | (1% | ) | |||||||||||||||||||
Automotive | 85,918 | 82,042 | 5 | % | 169,989 | 164,444 | 3 | % | 91,933 | 84,071 | 9 | % | |||||||||||||||||||||||||
Electrical | 30,550 | 28,919 | 6 | % | 57,412 | 57,351 | 0 | % | |||||||||||||||||||||||||||||
Industrial | 28,669 | 26,862 | 7 | % | |||||||||||||||||||||||||||||||||
Total | $ | 222,021 | $ | 220,908 | 1 | % | $ | 432,334 | $ | 427,767 | 1 | % | $ | 219,398 | $ | 210,313 | 4 | % | |||||||||||||||||||
Geography(a) | |||||||||||||||||||||||||||||||||||||
Americas | $ | 103,033 | $ | 95,874 | 7 | % | $ | 200,087 | $ | 185,025 | 8 | % | |||||||||||||||||||||||||
Europe | 39,125 | 44,296 | (12 | %) | 78,093 | 88,223 | (11 | %) | |||||||||||||||||||||||||||||
Asia-Pacific | 79,863 | 80,738 | (1 | %) | 154,154 | 154,519 | (0 | %) | |||||||||||||||||||||||||||||
Total | $ | 222,021 | $ | 220,908 | 1 | % | $ | 432,334 | $ | 427,767 | 1 | % | |||||||||||||||||||||||||
First Quarter | ||||||||||||
2016 | 2015 | % Change | ||||||||||
Geography(a) | ||||||||||||
Americas | $ | 99,823 | $ | 97,054 | 3 | % | ||||||
Europe | 42,813 | 38,968 | 10 | % | ||||||||
Asia-Pacific | 76,762 | 74,291 | 3 | % | ||||||||
Total | $ | 219,398 | $ | 210,313 | 4 | % | ||||||
(a) Sales by geography represent sales to customer or distributor locations.
Results of Operations – SecondFirst Quarter, 20152016 compared to 20142015
The following table summarizes the company’s consolidated results of operations for the periods presented. During the secondfirst quarter of 2015,2016, there waswere approximately $3.4$9.2 million of additional special charges. These included $6.2 million of acquisition-related costs primarily related to legal and integration costs associated with the company’s acquisition of the PolySwitch business, $1.6 million in impairment charges ($6.4related to the closure of the company’s manufacturing facility in Denmark, $1.0 million year-to-date) consisting of $0.9 million ($1.9 million year-to-date) related to the company’s transfer of its reed sensor manufacturing operations from the U.S. and China to the Philippines $1.7and $0.4 million ($2.9 million year-to-date) related to internal legal restructuring $0.2 million ($0.3 million year-to-date) related to acquisition costs and $0.7 million ($1.3 million year-to-date) of expense related to the planned termination of the U.S. pension as described in Note 9.costs.
(In thousands, unaudited) | Second Quarter | Year-to-Date | First Quarter | |||||||||||||||||||||||||||||||||
2015 | 2014 | %Change | 2015 | 2014 | % Change | 2016 | 2015 | % Change | ||||||||||||||||||||||||||||
Sales | $ | 222,021 | $ | 220,908 | 1 | % | $ | 432,334 | $ | 427,767 | 1 | % | $ | 219,398 | $ | 210,313 | 4 | % | ||||||||||||||||||
Gross Profit | 85,281 | 82,995 | 3 | % | 161,611 | 161,489 | 0 | % | 87,155 | 76,330 | 14 | % | ||||||||||||||||||||||||
Operating expense | 49,110 | 49,276 | (0 | %) | 95,892 | 94,180 | 2 | % | 54,727 | 46,782 | 17 | % | ||||||||||||||||||||||||
Operating income | 36,171 | 33,719 | 7 | % | 65,719 | 67,309 | (2 | %) | 32,428 | 29,548 | 10 | % | ||||||||||||||||||||||||
Other (income) expense, net | (1,202 | ) | (1,446 | ) | (17 | %) | (2,328 | ) | (2,632 | ) | (12 | %) | (517 | ) | (1,126 | ) | (54% | ) | ||||||||||||||||||
Income before income taxes | 37,717 | 31,562 | 20 | % | 64,123 | 65,374 | (2 | %) | 27,077 | 26,406 | 3 | % | ||||||||||||||||||||||||
Net income | $ | 28,684 | $ | 24,578 | 17 | % | $ | 48,679 | $ | 49,967 | (3 | %) | $ | 19,289 | $ | 19,995 | (4% | ) | ||||||||||||||||||
Net sales increased $1.1$9.1 million or 1%4% to $222.0$219.4 million in the secondfirst quarter of 2016 compared to $210.3 million in the first quarter of 2015 compared to $220.9 million in the second quarter of 2014 due primarily to strong organic growth in automotivethe Automotive and electricalIndustrial segments. Electronics sales offset by lower electronics sales.were essentially flat with the first quarter of 2015. The company also experienced $11.3$3.5 million in unfavorable foreign currency effects in the secondfirst quarter of 20152016 as compared to the secondfirst quarter of 2014.2015. The unfavorable foreign currency impact primarily resulted from sales denominated in the euro. Excluding currency effects, net sales increased $12.4$12.6 million or 6% year-over-year.
Electronics sales decreased $4.4$0.6 million or 4%1% to $105.6$98.8 million in the secondfirst quarter of 2016 compared to $99.4 million in the first quarter of 2015 compared to $109.9 millionprimarily reflecting unfavorable currency effects in the secondcurrent year quarter, of 2014 due primarily to lower sales of semiconductor andpartially offset by growth in sensor products. The electronicsElectronics segment experienced $3.6$1.2 million in unfavorable currency effects in the secondfirst quarter of 20152016 primarily from sales denominated in euros.euro and Chinese yuan. Excluding currency effects, net sales decreased $0.8increased $0.6 million or 1% year-over-year.
Automotive sales increased $3.9$7.8 million or 5%9% to $85.9$91.9 million in the secondfirst quarter of 2016 compared to $84.1 million in the first quarter of 2015 compared to $82.0 million in the second quarter of 2014 due primarily to strong organic growth for sensors and commercial vehicle products partially offset by lower fuse sales.sensors. The automotiveAutomotive segment experienced $6.6$1.7 million in unfavorable currency effects in the secondfirst quarter of 20152016 primarily due to sales denominated in euros.euros and Chinese yuan. Excluding currency effects, net sales increased $10.5$9.5 million or 13%11% year-over-year.
ElectricalIndustrial sales increased $1.6$1.8 million or 6%7% to $30.6$28.7 million in the secondfirst quarter of 2016 compared to $26.9 million in the first quarter of 2015 compared to $28.9 million in the second quarter of 2014 as higher fusecustom and customfuse sales were partially offset by weaker relay sales. The electricalIndustrial segment experienced $1.0$0.6 million in unfavorable currency effects in the secondfirst quarter of 20152016 primarily from sales denominated in Canadian dollars and the euro.dollars. Excluding currency effects, net sales increased $2.6$2.4 million or 9% year-over-year.
On a geographic basis, sales in the Americas increased $7.2$2.8 million or 7%3% to $103.0$99.8 million in the secondfirst quarter of 20152016 compared to $95.9$97.1 million in the secondfirst quarter of 20142015 due primarily to strong organic growth in auto and electricalIndustrial segment sales offset by lower Electronics segment sales and $0.6 million in unfavorable currency effects from sales denominated in Canadian dollars. Excluding currency effects, the Americas sales increased $7.8$3.3 million or 8%3%.
Europe sales decreased $5.2increased $3.8 million or 12%10% to $39.1$42.8 million in the secondfirst quarter of 2016 compared to $39.0 million in the first quarter of 2015 compared to $44.3 million in the second quarter of 2014 mainlyprimarily due to $10.3strong sales of automotive products offset by $1.3 million in unfavorable currency effects reflecting a declineprimarily from sales denominated in the euro during the current year quarter.euro. Excluding currency effects, Europe sales increased $5.2 million or 12% reflecting13%.
Asia-Pacific sales increased $2.5 million or 3% to $76.8 million in the first quarter of 2016 compared to $74.3 million in the first quarter of 2015 due to strong demand for automotive products.
Asia-Pacific sales decreased $0.9 million or 1% to $79.9 million in the second quarter of 2015 compared to $80.7 million in the second quarter of 2014 due to a decline in electronics and electrical products and $0.3 million inoffset by unfavorable currency effects offset by strong demand for automotive products.of $1.6 million. Excluding currency effects, Asia-Pacific sales increased $0.6$4.1 million or 1%5% year-over-year.
Gross profit was $85.3$87.2 million or 38%40% of net sales for the secondfirst quarter of 20152016 compared to $83.0$76.3 million or 38%36% of net sales in the same quarter last year. Gross profit for the second quarter of 2015 included $0.92016 includes $1.0 million of charges related to the transfer of the company’s reed switch production from the U.S. and China to the Philippines.Philippines and $0.4 million related to internal legal restructuring costs. Gross profit for 2015 included $1.0 million related to the second quarter of 2014 included a $1.4 million non-cash charge to cost of goods sold for inventory that was stepped up to fair value as a result of the SymCom acquisition and $2.0 million in severance charges resulting from restructuring at the Hamlin-Mexico plant.reed switch production transfer. Excluding the impact of these charges, gross profit was 39%$88.5 million or 40% of net sales for both the secondfirst quarter of 2015 and 2014.2016 compared to $77.3 million or 37% of net sales in the first quarter of 2015. The increase in gross profit margin compared to the prior year was primarily attributable to increased sales of higher margin products in 2016.
Total operating expense was $49.1$54.7 million or 22%25% of net sales for the secondfirst quarter of 20152016 compared to $49.3$46.8 million or 22% of net sales for the same quarter in 2014. The slight decrease2015. Operating expense in operating expenses2016 included $7.8 million of charges primarily reflects lower research and developmentrelated to acquisition costs offset by higherassociated with the company’s acquisition of PolySwitch. Operating expense in 2015 included $2.0 million related to internal legal restructuring costs and costs related to the wind-up of the U.S. pension plan. Excluding these charges, total operating expense was $47.0 million or 21% of net sales for 2016 compared to $44.8 million or 21% of net sales in 2015.
Operating income for the secondfirst quarter of 20152016 was approximately $36.2$32.4 million compared to operating income of $33.7$29.5 million for the same quarter in 20142015. Excluding the impact of special charges as described above, operating income was $41.6 million for the first quarter of 2016 as compared to $32.6 million for the first quarter of 2015. The improvement in operating income is primarily attributable to higher margin sales as a result of higher sales and slightly lower operating expenses as describeddiscussed above.
Interest expense was $0.9$2.0 million in the secondfirst quarter of 2015 and2016 as compared to $1.2 million in the secondfirst quarter of 20142015, primarily reflecting comparative borrowings, facility fees and reflects interest incurred for borrowing onfinancing fee amortization between the company’s credit agreement.two periods.
Foreign exchange loss (gain), reflecting net gains and losses resulting from the effect of exchange rate changes on various foreign currency transactions worldwide, was approximately $1.3 million of income for the second quarter of 2015 as compared to $2.4$3.8 million of expense for the secondfirst quarter of 20142016 and $3.1 million of expense for the first quarter of 2015 and primarily reflects fluctuations in the euro and Philippine peso against the U.S. dollar.
Other (income) expense, net, consisting of interest income, royalties and non-operating income items was approximately $1.2$0.5 million of income for secondfirst quarter of 20152016 and $1.5$1.1 million of income for the secondfirst quarter of 2014.2015.
Income before income taxes was $37.7$27.1 million for the secondfirst quarter of 20152016 compared to $31.6$26.4 million for the secondfirst quarter of 2014.2015. Income tax expense was $9.0$7.8 million with an effective tax rate of 23.9%28.8% for the secondfirst quarter of 20152016 compared to income tax expense of $7.0$6.4 million with an effective tax rate of 22.1%24.3% in the secondfirst quarter of 2014.2015. The effective tax rates for both the secondfirst quarter of 20152016 and 20142015 are lower than the U.S. statutory tax rate primarily due to more income earned in low tax jurisdictions.
Net income for the second quarter of 2015 was $28.7 million or $1.26 per diluted share compared to net income of $24.6 million or $1.08 per diluted share for the same quarter of 2014.
Results of Operations – Six months, 2015 compared to 2014
Net sales increased $4.6 million or 1% to $432.3 million for the first six months of 2015 compared to $427.8 million in the first six months of 2014 due primarily to strong growth in automotive products, partially offset by lower electronics sales. The company also experienced $21.2 million in unfavorable foreign currency effects in the first six months of 2015 as compared to 2014 primarily resulting from sales denominated in the euro. Excluding currency effects, net sales increased $25.7 million or 6% year-over-year.
Electronics sales decreased $1.0 million or 1% to $204.9 million for the first six months of 2015 compared to $206.0 million in the first six months of 2014 due primarily to negative currency effects offset by strong growth for fuse products. The electronics segment experienced $6.6 million in unfavorable currency effects in the first six months of 2015 primarily from sales denominated in euro. Excluding currency effects, net sales increased $5.5 million or 3% year-over-year.
Automotive sales increased $5.5 million or 3% to $170.0 million in the first six months of 2015 compared to $164.4 million in the first six months of 2014 due to strong growth for sensors and commercial vehicle products offset by lower fuse sales. The automotive segment experienced $12.5 million in unfavorable currency effects in the first six months of 2015 primarily due to sales denominated in euros. Excluding currency effects, net sales increased $18.1 million or 11% year-over-year.
Electrical sales, before currency effects, were flat year-over year at $57.4 million in the first six months of 2015 compared to $57.4 million in the first six months of 2014 as higher custom and fuse sales were offset by weaker relay sales. The electrical segment experienced $2.1 million in unfavorable currency effects in the first six months of 2015 primarily from sales denominated in Canadian dollars and the euro. Excluding currency effects, net sales increased $2.1 million or 4% year-over-year.
On a geographic basis, sales in the Americas increased $15.1 million or 8% to $200.1 million in the first six months of 2015 compared to $185.0 million in the first six months of 2014 due primarily to strong growth in auto and electronics sales offset by $1.3 million in unfavorable currency effects from sales denominated in Canadian dollars. Excluding currency effects, the Americas sales increased $16.4 million or 9%.
Europe sales decreased $10.1 million or 11% to $78.1 million in the first six months of 2015 compared to $88.2 million in the first six months of 2014 mainly due to $19.2 million in unfavorable currency effects reflecting a decline in the euro during the first six months. Excluding currency effects, Europe sales increased $9.1 million or 10% reflecting strong demand for automotive products.
Asia-Pacific sales decreased $0.4 million or less than 1% to $154.2 million in the first six months of 2015 compared to $154.5 million in the first six months of 2014 due primarily to strong demand for automotive products offset by lower electronics sales and unfavorable currency effects of $0.6 million. Excluding currency effects, Asia-Pacific sales increased $0.3 million or less than 1% year-over-year.
Gross profit was $161.6 million or 37% of net sales for the first six months of 2015 compared to $161.5 million or 38% of net sales for the first six months of 2014. Gross profit for the first six months of 2015 included $1.9 million of charges related to the transfer of the company’s reed switch production from the U.S. and China to the Philippines. Gross profit for the first six months of 2014 included a $2.8 million non-cash charge to cost of goods sold for inventory that was stepped up to fair value as a result of the SymCom acquisition and $2.0 million in severance charges resulting from restructuring at the Hamlin-Mexico plant. Excluding the impact of these charges, gross profit was 38% of net sales for the first six months of 2015 as compared to 39% for the first six months of 2014. The decrease in gross profit margin compared to the prior year was primarily attributable to foreign exchange losses primarily due to the decline in the euro.
Total operating expense was $95.9 million or 22% of net sales for the first six months of 2015 compared to $94.2 million or 22% of net sales for the first six months of 2014. The increase in operating expenses primarily reflects higher wage and benefit costs, internal legal restructuring costs and costs related to the wind-up of the U.S. pension plan offset by lower amortization of intangibles and research and development costs
Operating income for the first six months of 2015 was approximately $65.7 million compared to operating income of $67.3 million for the first six months of 2014, primarily as a result of the negative impact of foreign exchange on sales and gross profit as discussed above.
Interest expense was $2.1 million for the first six months of 2015 compared to $2.4 million for the first six months of 2014 and reflects interest for borrowing on the company’s credit agreement.
Foreign exchange loss (gain), reflecting net gains and losses resulting from the effect of exchange rate changes on various foreign currency transactions worldwide, was approximately $1.8 million of expense for the first six months of 2015 compared to $2.1 million of expense for the first six months of 2014 and primarily reflects fluctuations in the euro and Philippine peso against the U.S. dollar.
Other (income) expense, net, consisting of interest income, royalties and non-operating income items was approximately $2.3 million of income for the first six months of 2015 compared to $2.6 million of income for the first six months of 2014.
Income before income taxes was $64.1 million for the second quarter of 2015 compared to $65.4 million for the first six months of 2014. Income tax expense was $15.4 million with an effective tax rate of 24.1% for the first six months of 2015 compared to income tax expense of $15.4 million with an effective tax rate of 23.6% in the first six months of 2014. The effective tax rates for both 2015 and 2014 are lower than the U.S. statutory tax rate primarily due to more income earned in low tax jurisdictions.
Net income for the first six monthsquarter of 20152016 was $48.7$19.3 million or $2.13$0.85 per diluted share compared to net income of $50.0$20.0 million or $2.20$0.88 per diluted share for the same periodquarter of 2014.2015.
Liquidity and Capital Resources
As of June 27, 2015, $302.1April 2, 2016, $260.5 million of the $311.9$272.9 million of the company’s cash and cash equivalents was held by foreign subsidiaries. Of the $302.1$260.5 million held by foreign subsidiaries, approximately $17.7$28.0 million could be repatriated with minimal tax consequences. The company expects to maintain its foreign cash balances (other than the aforementioned $17.7$28.0 million) for local operating requirements, to provide funds for future capital expenditures and for potential acquisitions. The company does not expect to repatriate these funds to the U.S.
The company historically has financed capital expenditures through cash flows from operations. Management expects that cash flows from operations and available lines of credit will be sufficient to support both the company’s operations and its debt obligations for the foreseeable future.
Revolving Credit FacilitiesFacility/Term Loan
In 2013,On March 4, 2016, the company entered into a new credit agreement with J.P. Morgan Securities LLCBank of America, as agent, for up to $325.0$700.0 million which consists of an unsecured revolving credit facility of $225.0$575.0 million and an unsecured term loan credit facility of $100.0up to $125.0 million. The new credit agreement is for a five year period.
On January 30, 2014, The new credit agreement replaced the company increased the unsecured revolvingcompany’s previous credit facility by $50.0 million thereby increasing the total revolver borrowing capacity from $225.0 million to $275.0 million. At June 27, 2015,agreement dated May 31, 2013, which was terminated on March 4, 2016. As of April 2, 2016, the company had available $200.9$330.4 million of borrowing capacity under the revolving credit agreement at an interest rate of LIBOR plus 1.0% (1.19%1.5% (1.94% as of June 27, 2015)April 2, 2016).
The company incurred debt issuance costs of $1.7 million which will be amortized over the life of the existing credit agreement.
This arrangement contains covenants that, among other matters, impose limitations on the incurrence of additional indebtedness, future mergers, sales of assets, payment of dividends, and changes in control, as defined in the agreement. In addition, the company is required to satisfy certain financial covenants and tests relating to, among other matters, interest coverage and leverage. At June 27, 2015,April 2, 2016, the company was in compliance with all covenants under the revolving credit facility.
The company also had $0.6$0.1 million outstanding in letters of credit at June 27, 2015.April 2, 2016. No amounts were drawn under these letters of credit at June 27, 2015.April 2, 2016.
Entrusted Loan
During the fourth quarter of 2014, the company entered into an entrusted loan arrangement (“Entrusted Loan”) of RMB 110.0 million (approximately $17.9 million)million at that time) between two of its China legal entities, Littelfuse Semiconductor (Wuxi) Company (the “Lender”) and Suzhou Littelfuse OVS Ltd. (the “Borrower”), utilizing Bank of America, N.A., Shanghai Branch as agent. Direct borrowing and lending between two commonly owned commercial entities iswas strictly forbidden at the time under China’s regulations requiring the use of a third party agent to enable loans between Chinese legal entities. As a result, the Entrusted Loan is reflected as both a long-term asset and long-term debt on the company’s Consolidated Balance Sheets and is reflected in the investing and financing activities in its Consolidated Statements of Cash Flows. Interest expense and interest income will be recorded between the lender and borrower with no net impact on the company’s Consolidated Statements of Net Income since the amounts will be offsetting. The loan interest rate per annum is 5.25%. The Entrusted Loan is used to finance the operation and working capital needs of the borrower and matures in November 2019. The balance of the Entrusted Loan was RMB 88.561.5 million (approximately $14.5$9.5 million) at June 27, 2015.April 2, 2016.
Cash Flow
The company started 20152016 with $297.6$328.8 million of cash and cash equivalents. Net cash provided by operating activities was approximately $62.0$9.5 million for the first sixthree months of 20152016 reflecting $48.7$19.3 million in net income and $25.4$13.9 million in non-cash adjustments (primarily $20.8$11.0 million in depreciation and amortization) offset by $12.1$23.7 million in net changes to various operating assets and liabilities.
Changes in operating assets and liabilities for the first sixthree months of 20152016 (including short-term and long-term items) that impacted cash flows negatively consisted of increases in accounts receivable ($21.310.4 million) and, inventory ($1.23.5 million), prepaid and decreases inother assets ($6.3 million), accrued payroll and severance ($3.79.4 million) and accrued and deferred taxes ($3.05.3 million). The increase in accounts receivable was due to increased sales in the first six months of 2015.quarter. The decrease in accrued payroll and severance was due primarily to payouts for the 20142015 management incentive plan which occurred in the first quarter. Other changes having a positive impact on cash flows were increases in prepaid and other assets ($2.4 million), accounts payable ($3.43.7 million) and accrued expenses ($11.17.4 million).
Net cash used in investing activities was approximately $22.8$273.2 million forand primarily related to the first six monthsacquisition of 2015the PolySwitch business ($263.0 million) and represented capital spendingexpenditures ($26.49.1 million) offset by a reduction in the entrusted loan receivable ($3.5 million) (see Note 5) .
Net cash used inprovided by financing activities was approximately $19.6$203.7 million and included $12.5$207.5 million in net paymentsproceeds on borrowings from the company’s credit agreement, $3.5 million in payments on the entrusted loan (see Note 5) andoffset by dividends paid of $11.3$6.5 million and debt issuance costs related to the new credit agreement of $1.7 million, partially offset by $7.7$4.4 million from the exercise of stock options including tax benefits. The effects of exchange rate changes decreasedincreased cash and cash equivalents by approximately $5.2$4.1 million. The net cash provided by operating activities combined with the effects of exchange rate changes less net cash used in investing and financing activities resulted in a $14.3$55.9 million increasedecrease in cash, which left the company with a cash and cash equivalents balance of $311.9$272.9 million at June 27, 2015.April 2, 2016.
The ratio of current assets to current liabilities was 3.02.6 to 1 at the end of the secondfirst quarter of 20152016 compared to 2.8 to 1 at year-end 20142015 and 2.23.0 to 1 at the end of the secondfirst quarter of 2014.2015. Days sales outstanding in accounts receivable was approximately 62 days at the end of the second quarter of 2015 compared to 60 days at the end of the second quarter of 2014 and 60 days at year-end 2014. Days inventory outstanding was approximately 65 days at the end of the secondfirst quarter of 2016 compared to 59 days at the end of the first quarter of 2015 and 59 days at year-end 2015. Days inventory outstanding was approximately 71 days at the end of the first quarter of 2016 compared to 6865 days at the year-end 20142015 and 6465 days at end of the first quarter of 2015.
Outlook
Net sales for the company’s core business (legacy businesses and the recent member’s acquisition) in the second quarter of 2014.2016 are expected to be in the range of $230 million to $240 million. The midpoint of this range represents 5% growth over the prior year quarter. In addition, revenue from the PolySwitch business is expected to be in the range of $35 million to $37 million for the second quarter of 2016. The total company 2016 second quarter Net sales is expected in the range of $265 million to $277 million.
The company believes it can grow 2016 revenue in its core business (excluding PolySwitch) in the low to mid single digits versus 2015. The company expects revenue of approximately $40 million per quarter in the second half of 2016 for its PolySwitch business.
Outlook
Sales are expected to be flat sequentially in the third quarter of 2015 due to expected less-than-normal seasonal strength for electronics while the electrical business continues to improve and automotive trends remain solid despite slowing growth in global car production. The mining sector is expected to remain weak at least through the remainder of this year. Foreign currency effects are expected to remain volatile. The company issued the following guidance for the third quarter of 2015:
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Cautionary Statement Regarding Forward-Looking Statements Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”).
The statements in this section and the other sections of this report that are not historical facts are intended to constitute “forward-looking statements” entitled to the safe-harbor provisions of the PSLRA. These statements may involve risks and uncertainties, including, but not limited to, risks relating to product demand and market acceptance, economic conditions, the impact of competitive products and pricing, product quality problems or product recalls, capacity and supply difficulties or constraints, coal mining exposures reserves, failure of an indemnification for environmental liability, exchange rate fluctuations, commodity price fluctuations, the effect of the company’s accounting policies, labor disputes, restructuring costs in excess of expectations, pension plan asset returns less than assumed, integration of acquisitions and other risks which may be detailed in the company’s other Securities and Exchange Commission filings. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual results and outcomes may differ materially from those indicated or implied in the forward-looking statements. This report should be read in conjunction with information provided in the financial statements appearing in the company’s Annual Report on Form 10-K for the year ended December 27, 2014.January 2, 2016. For a further discussion of the risk factors of the company, please see Item 1A. “Risk Factors” to the company’s Annual Report on Form 10-K for the year ended December 27, 2014.January 2, 2016.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.Risk.
The company is exposed to market risk from changes in interest rates, foreign exchange rates and commodity prices.
InterestInterest Rates
The company had $164.8$369.5 million in debt outstanding at June 27, 2015April 2, 2016 related to the unsecured revolving credit facility and term loan. While 100% of this debt has variable interest rates, the company’s interest expense is not materially sensitive to changes in interest rate levels since debt levels and potential interest expense increases are insignificant relative to earnings.
Foreign Exchange Rates
The majority of the company’s operations consist of manufacturing and sales activities in foreign countries. The company has manufacturing facilities in the U.S., Mexico, Canada, Denmark, China, Italy, Lithuania and the Philippines. During the first sixthree months of 2015,2016, sales to customers outside the U.S. were approximately 60%61% of total net sales. Substantially all sales in Europe are denominated in euros and substantially all sales in the Asia-Pacific region are denominated in U.S. dollars, Japanese yen, Korean won, Chinese renminbiyuan or Taiwanese dollars.
The company’s foreign exchange exposures result primarily from sale of products in foreign currencies, foreign currency denominated purchases, intercompanyinter-company loans, employee-related and other costs of running operations in foreign countries and translation of balance sheet accounts denominated in foreign currencies. The company’s most significant net long exposure is to the euro, with lesser long exposures to the Canadian dollar, Chinese renminbi and Korean won.euro. The company’s most significant net short exposures are to the Chinese renminbi,yuan, Mexican peso and Philippine peso. Changes in foreign exchange rates could affect the company’s sales, costs, balance sheet values and earnings. The company uses netting and offsetting intercompany account management techniques to reduce known foreign currency exposures where possible. From time to time, the company has utilized derivative instruments to hedge certain foreign currency exposures.
CommodityCommodity Prices
The company uses various metals in the manufacturing of its products, including copper, zinc, tin, gold and silver. Prices of these commodities can and do fluctuate significantly, which can impact the company’s earnings. The most significant of these exposures is to copper, zinc, silver and gold where at current prices and volumes, a 10% price change would affect annual pre-tax profit by approximately $1.8$1.9 million for copper, $0.8$0.6 million for zinc, $0.7$0.5 million for silver and $0.3$0.2 million for gold. From time to time, the company has utilized derivative instruments to hedge certain commodity exposures.
Item 4. Controls and Procedures.Procedures.
As of June 27, 2015,April 2, 2016, the Chief Executive Officer and Chief Financial Officer of the company evaluated the effectiveness of the disclosure controls and procedures of the company and concluded that these disclosure controls and procedures are effective to ensure that material information relating to the company and its consolidated subsidiaries has been made known to them by the employees of the company and its consolidated subsidiaries during the period preceding the filing of this Quarterly Report on Form 10-Q and that such information is accurately recorded, processed, summarized and reported within the time periods specified in SEC rules. There were no significant changes in the company’s internal controls during the period covered by this Report that could materially affect these controls or could reasonably be expected to materially affect the company’s internal control reporting, disclosures and procedures subsequent to the last day they were evaluated by the company’s Chief Executive Officer and Chief Financial Officer.Officer.In March, 2016, the company completed the acquisition of PolySwitch. The company is in the process of transferring the accounting for PolySwitch and integrating PolySwitch into the company's existing internal control environment.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A.1A. Risk Factors.
A detailed description of risks that could have a negative impact on our business, revenues and performance results can be found under the caption “Risk Factors” in our most recent Form 10-K, filed with the SEC on February 24, 2015.March 1, 2016. There have been no material changes from risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 27, 2014January 2, 2016 in response to Item 1A to Part 1 of Form 10-K.
Item 2.2. Unregistered Sales of Equity Securities and Use of Proceeds.
The company’s Board of Directors authorized the repurchase of up to 1,000,000 shares of the company’s common stock under a program for the period May 1, 20152016 to April 30, 2016.2017. The company did not repurchase any shares of its common stock during the first six monthsquarter of fiscal 2015 and2016. The company’s existing share repurchase authorization of 1,000,000 shares may yet be purchased underhad 650,000 remaining in the previous authorizationprogram as of June 27, 2015.April 2, 2016 and expired on April 30, 2016.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
Item6. 6. Exhibits.
Exhibit | Description |
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10.2 | Credit Agreement, dated March 4, 2016, among Littelfuse, Inc., certain subsidiaries of the company identified therein, as the Designated Borrowers, certain subsidiaries of the company identified therein, as the Guarantors, Bank of America, N.A., as Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, BMO Harris Bank, N.A., PNC Bank, National Association and Wells Fargo, National Association, as Co-Documentation Agents, Merrill, Lynch, Pierce, Fenner & Smith Incorporated, as Sole Bookrunner and Joint Lead Arranger, and JPMorgan Chase Bank, N.A., as Joint Lead Arranger (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 10, 2016). |
10.3*† | Form of Stock Option Award Agreement (Executive) under the Littelfuse, Inc. Long-Term Incentive Plan. |
10.4*† | Form of Stock Option Award Agreement (Outside Director) under the Littelfuse, Inc. Long-Term Incentive Plan. |
10.5*† | Form of Restricted Stock Unit Award Agreement (Executive) under the Littelfuse, Inc. Long-Term Incentive Plan. |
| Form of Restricted Stock Unit Award Agreement (Tier II Management) under the Littelfuse, Inc. Long-Term Incentive Plan. |
| Form of Restricted Stock Unit Award Agreement (Outside Director) under the Littelfuse, Inc. Long-Term Incentive Plan. |
31.1* | Certification of Gordon Hunter, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of |
| Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| XBRL Instance Document |
| XBRL Taxonomy Extension Schema Document |
| XBRL Taxonomy Extension Calculation Linkbase Document |
| XBRL Taxonomy Definition Linkbase Document |
| XBRL Taxonomy Extension Label Linkbase Document |
| XBRL Taxonomy Extension Presentation Linkbase Document |
† | Indicates management contract or compensatory arrangement. | |
* | Filed herewith. | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q for the quarter ended June 27, 2015,April 2, 2016, to be signed on its behalf by the undersigned thereunto duly authorized.
| Littelfuse, Inc. | ||
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Date: | By |
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Executive Vice President and | |||
Chief Financial Officer | |||
(As duly authorized officer and the principal financial and | officer) |
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