UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A10-Q
Amendment No. 1
(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 | 36-3795742 |
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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 | 60631 |
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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):
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 April 26, 2013, 22,106,477October 24, 2014, 22,489,432 shares of common stock, $.01 par value, of the registrant were outstanding.
EXPLANATORY NOTETABLE OF CONTENTS
Littelfuse, Inc. (“we” or the “company”) is filing this report on Form 10-Q/A because the Audit Committee of the Board of Directors (the “Committee”) approved, on February 4, 2014, management’s recommendation that the company’s previously issued financial statements included in the company’s quarterly report on form 10-Q for the fiscal quarter ended March 30, 2013, and filed on May 3, 2013 (“Original Form 10-Q”), should no longer be relied upon because of an error resulting from the treatment of tax deductions related to the company’s write-off of its investment in Shocking Technologies, Inc. The tax deductions were determined to be a capital loss for tax purposes, instead of an ordinary loss as the company had previously determined in consultation with a third party expert. The impact of correcting this error is to record a charge to income tax expense of $3.3 million relating to the company’s first fiscal quarter ended March 30, 2013. As a result, the income tax expense recorded by the company in the first quarter of fiscal 2013 was understated by $3.3 million, producing an overstatement of net income of $3.3 million. The error was discovered in connection with the annual audit of the company for its fiscal year ended December 28, 2013.
On February 4, 2014, the Committee approved management’s recommendation that the company restate its financial statements for the three months ended March 30, 2013, by filing on this Form 10-Q/A an amendment to the Original Form 10-Q. Prior to the February 4, 2014, determination, management and the Audit Committee discussed these matters with Ernst & Young LLP, the company’s independent registered public accounting firm. The company filed an Item 4.02 current report on Form 8-K on February 5, 2014, relating to this matter.
The company believes the restatement constitutes a material weakness and that its disclosure controls and procedures were not effective as of the end of the period covered by the Original Form 10-Q. Management has commenced steps to remediate the material weakness associated with the income tax valuation allowance misstatement. For more information on the material weakness and our remediation efforts, please see “Item 4 – Controls and Procedures” of this Form 10-Q/A.
This report on Form 10-Q/A restates in its entirety the Original Form 10-Q. The following sections of the Original Form 10-Q have been restated:
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Specifically the following sections have been restated or added:
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The company has also restated the signature page, the certifications of our Chief Executive Officer and Chief Financial Officer in Exhibits 31.1, 31.2, and 32.1, and the financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibits 101. No other sections were affected.
For more information about the restatement and the related disclosure controls and procedures matters, please see Littelfuse’s Current Report on Form 8-K (Item 4.02) filed on February 5, 2014.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION | ||
Item 1. | Financial Statements. | Page |
Condensed Consolidated Balance Sheets as of | 1 | |
Consolidated Statements of Net Income for the | 2 | |
Consolidated Statements of Comprehensive Income for the | 3 | |
Consolidated Statements of Cash Flows for the | 4 | |
Notes to Condensed Consolidated Financial Statements (unaudited) | 5 | |
Item 2. | Management’s Discussion and Analysis of Financial Conditionand Results of Operations. |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
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Item 4. | Controls and Procedures. |
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PART II - OTHER INFORMATION | ||
Item 1. | Legal Proceedings | |
Item 1A. | Risk Factors | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. | Defaults Upon Senior Securities | 22 |
Item 4. | Mine Safety Disclosures | 22 |
Item 5. | Other Information | |
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Item 6. Exhibits | 23 | |
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)
March 30, 2013 | December 29, 2012 | September 27, 2014 | December 28, 2013 | |||||||||||||
(Unaudited, restated) | (unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 246,895 | $ | 235,404 | $ | 378,276 | $ | 305,192 | ||||||||
Short-term investments | 8,344 | — | 38 | 6,886 | ||||||||||||
Accounts receivable, less allowances | 107,044 | 100,559 | 134,706 | 127,887 | ||||||||||||
Inventories | 71,372 | 75,580 | 99,822 | 92,591 | ||||||||||||
Deferred income taxes | 10,874 | 11,890 | 10,722 | 10,463 | ||||||||||||
Prepaid expenses and other current assets | 15,857 | 16,532 | 16,570 | 17,080 | ||||||||||||
Assets held for sale | 5,500 | 5,500 | 5,500 | 5,500 | ||||||||||||
Total current assets | 465,886 | 445,465 | 645,634 | 565,599 | ||||||||||||
Property, plant and equipment: | ||||||||||||||||
Land | 6,328 | 6,243 | 5,969 | 4,382 | ||||||||||||
Buildings | 55,159 | 54,559 | 66,780 | 59,699 | ||||||||||||
Equipment | 309,975 | 304,954 | 363,438 | 354,475 | ||||||||||||
371,462 | 365,756 | 436,187 | 418,556 | |||||||||||||
Accumulated depreciation | (251,162 | ) | (244,845 | ) | (278,927 | ) | (268,383 | ) | ||||||||
Net property, plant and equipment | 120,300 | 120,911 | 157,260 | 150,173 | ||||||||||||
Intangible assets, net of amortization: | ||||||||||||||||
Patents, licenses and software | 10,521 | 11,144 | 24,514 | 25,166 | ||||||||||||
Distribution network | 18,243 | 18,964 | 39,604 | 42,685 | ||||||||||||
Customer lists, trademarks and tradenames | 17,738 | 18,704 | 42,911 | 30,506 | ||||||||||||
Goodwill | 131,850 | 133,592 | 198,702 | 186,464 | ||||||||||||
Investment in unconsolidated affiliate | — | 8,666 | ||||||||||||||
Other investments | 11,572 | 10,327 | 13,115 | 12,286 | ||||||||||||
Deferred income taxes | 9,826 | 8,090 | 5,325 | 5,092 | ||||||||||||
Other assets | 1,878 | 1,865 | 6,750 | 6,402 | ||||||||||||
Total assets | $ | 787,814 | $ | 777,728 | $ | 1,133,815 | $ | 1,024,373 | ||||||||
Liabilities and Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 29,582 | $ | 27,226 | $ | 37,062 | $ | 33,872 | ||||||||
Accrued payroll | 13,374 | 20,540 | 28,022 | 29,437 | ||||||||||||
Accrued expenses | 9,703 | 11,062 | 13,342 | 13,087 | ||||||||||||
Accrued severance | 776 | 1,033 | 320 | 182 | ||||||||||||
Accrued income taxes | 11,502 | 11,559 | 15,059 | 5,931 | ||||||||||||
Deferred income taxes | 7 | 229 | ||||||||||||||
Current portion of long-term debt | 94,000 | 84,000 | 186,500 | 126,000 | ||||||||||||
Total current liabilities | 158,937 | 155,420 | 280,312 | 208,738 | ||||||||||||
Long-term debt, less current portion | 90,000 | 93,750 | ||||||||||||||
Deferred income taxes | 10,821 | 11,585 | ||||||||||||||
Accrued post-retirement benefits | 17,692 | 22,338 | 225 | 8,528 | ||||||||||||
Other long-term liabilities | 13,820 | 12,412 | 14,558 | 14,856 | ||||||||||||
Total equity | 597,365 | 587,558 | 737,899 | 686,916 | ||||||||||||
Total liabilities and equity | $ | 787,814 | $ | 777,728 | $ | 1,133,815 | $ | 1,024,373 | ||||||||
Common shares issued and outstanding of22,145,423 and 22,029,446, at March 30, 2013, and December 29, 2012, respectively. | ||||||||||||||||
Common shares issued and outstanding of22,541,918 and 22,467,491, at September 27, 2014, and December 28, 2013, 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 | ||||||||||||||||||||||||
March 30, 2013 | March 31, 2012 | For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||
(Restated) | September 27, 2014 | September 28, 2013 | September 27, 2014 | September 28, 2013 | ||||||||||||||||||||
Net sales | $ | 170,918 | $ | 160,578 | $ | 217,608 | $ | 201,040 | $ | 645,375 | $ | 559,724 | ||||||||||||
Cost of sales | 106,312 | 99,716 | 130,228 | 120,080 | 396,506 | 340,601 | ||||||||||||||||||
Gross profit | 64,606 | 60,862 | 87,380 | 80,960 | 248,869 | 219,123 | ||||||||||||||||||
Selling, general and administrative expenses | 29,202 | 28,409 | 36,647 | 34,437 | 109,146 | 98,091 | ||||||||||||||||||
Research and development expenses | 5,715 | 5,161 | 7,449 | 6,217 | 22,833 | 17,725 | ||||||||||||||||||
Amortization of intangibles | 1,572 | 1,468 | 3,154 | 2,747 | 9,451 | 6,249 | ||||||||||||||||||
36,489 | 35,038 | 47,250 | 43,401 | 141,430 | 122,065 | |||||||||||||||||||
Operating income | 28,117 | 25,824 | 40,130 | 37,559 | 107,439 | 97,058 | ||||||||||||||||||
Interest expense | 376 | 423 | 1,292 | 939 | 3,736 | 1,959 | ||||||||||||||||||
Impairment and equity in net loss of unconsolidated affiliate | 10,678 | 525 | — | — | — | 10,678 | ||||||||||||||||||
Foreign exchange (gain) loss | (101 | ) | 1,476 | 2,022 | (1,929 | ) | ||||||||||||||||||
Other (income) expense, net | (909 | ) | 101 | (2,261 | ) | (1,380 | ) | (4,893 | ) | (3,543 | ) | |||||||||||||
Income before income taxes | 17,972 | 24,775 | 41,200 | 36,524 | 106,574 | 89,893 | ||||||||||||||||||
Income taxes | 6,484 | 7,212 | 11,260 | 9,534 | 26,667 | 24,767 | ||||||||||||||||||
Net income | $ | 11,488 | $ | 17,563 | $ | 29,940 | $ | 26,990 | $ | 79,907 | $ | 65,126 | ||||||||||||
Net income per share (see note 9): | ||||||||||||||||||||||||
Net income per share (see Note 8): | ||||||||||||||||||||||||
Basic | $ | 0.52 | $ | 0.81 | $ | 1.33 | $ | 1.20 | $ | 3.55 | $ | 2.92 | ||||||||||||
Diluted | $ | 0.51 | $ | 0.80 | $ | 1.32 | $ | 1.19 | $ | 3.52 | $ | 2.89 | ||||||||||||
Weighted average shares and equivalent shares outstanding: | ||||||||||||||||||||||||
Basic | 22,095 | 21,608 | 22,536 | 22,428 | 22,536 | 22,274 | ||||||||||||||||||
Diluted | 22,366 | 21,929 | 22,689 | 22,625 | 22,722 | 22,497 | ||||||||||||||||||
Cash dividends paid per common share | $ | 0.20 | $ | 0.18 | $ | 0.25 | $ | 0.22 | $ | 0.69 | $ | 0.62 |
See accompanying notes.
LITTELFUSE, INC.
Consolidated Statements Consolidated Statementsof Comprehensive Income Comprehensive Income
(In thousands of USD, unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 27, 2014 | September 28, 2013 | September 27, 2014 | September 28, 2013 | |||||||||||||
Net income | $ | 29,940 | $ | 26,990 | $ | 79,907 | $ | 65,126 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Pension liability adjustments (net of tax of $39 and $49, for the three months ended 2014 and 2013, and $178 and $233 for the nine months ended 2014 and 2013, respectively) | 4 | (24 | ) | (1 | ) | (349 | ) | |||||||||
Unrealized (loss) gain on investments | (1,773 | ) | (532 | ) | 1,811 | 546 | ||||||||||
Foreign currency translation adjustments | (14,962 | ) | 10,273 | (15,273 | ) | (2,998 | ) | |||||||||
Comprehensive income | $ | 13,209 | $ | 36,707 | $ | 66,444 | $ | 62,325 |
For the Three Months Ended | ||||||||
March 30, 2013 | March 31, 2012 | |||||||
(Restated) | ||||||||
Net income | $ | 11,488 | $ | 17,563 | ||||
Other comprehensive income (loss): | ||||||||
Pension liability adjustments (net of tax of $103 and $45, respectively) | (194 | ) | (66 | ) | ||||
Unrealized gain on investments | 1,618 | 1,812 | ||||||
Foreign currency translation adjustments | (5,250 | ) | 7,396 | |||||
Comprehensive income | $ | 7,662 | $ | 26,705 |
See accompanying notes.
LITTELFUSE, INC.
Consolidated Statements of Cash Flows
(In thousands of USD, unaudited)
For the Three Months Ended | ||||||||||||||||
March 30, 2013 | March 31, 2012 | For the Nine Months Ended | ||||||||||||||
(Restated) | September 27, 2014 | September 28, 2013 | ||||||||||||||
Operating activities: | ||||||||||||||||
Net income | $ | 11,488 | $ | 17,563 | $ | 79,907 | $ | 65,126 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation | 6,232 | 6,481 | 21,736 | 19,603 | ||||||||||||
Amortization of intangibles | 1,572 | 1,468 | 9,451 | 6,249 | ||||||||||||
Stock-based compensation | 1,779 | 1,365 | 7,168 | 7,030 | ||||||||||||
Non-cash inventory charge | — | 205 | 2,769 | 2,069 | ||||||||||||
Excess tax benefit on share-based compensation | (467 | ) | (475 | ) | (2,477 | ) | (3,763 | ) | ||||||||
(Gain) loss on sale of assets | (24 | ) | 7 | |||||||||||||
Loss on sale of assets | 673 | 169 | ||||||||||||||
Impairment and equity in net loss of unconsolidated affiliate | 10,678 | 525 | — | 10,678 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (9,745 | ) | (14,017 | ) | (9,728 | ) | (16,348 | ) | ||||||||
Inventories | 3,632 | (1,713 | ) | (4,118 | ) | (4,537 | ) | |||||||||
Accounts payable | 2,452 | 8,552 | �� | 3,024 | 6,659 | |||||||||||
Accrued expenses (including post-retirement) | (4,619 | ) | (5,543 | ) | (7,080 | ) | (11,743 | ) | ||||||||
Accrued payroll and severance | (7,319 | ) | (7,728 | ) | (1,198 | ) | 5,492 | |||||||||
Accrued taxes | (640 | ) | 1,275 | 5,756 | (2,167 | ) | ||||||||||
Prepaid expenses and other | 1,026 | (101 | ) | (2,052 | ) | 1,294 | ||||||||||
Net cash provided by operating activities | 16,045 | 7,864 | 103,831 | 85,811 | ||||||||||||
Investing activities: | ||||||||||||||||
Purchases of property, plant, and equipment | (5,453 | ) | (3,244 | ) | (19,422 | ) | (25,328 | ) | ||||||||
Acquisition of businesses, net of cash acquired | (52,768 | ) | (145,000 | ) | ||||||||||||
Purchase of short-term investments | (8,478 | ) | (4,616 | ) | — | (8,478 | ) | |||||||||
Proceeds from maturities of short-term investments | 6,770 | — | ||||||||||||||
Proceeds from sale of assets | 9 | 21 | 72 | 158 | ||||||||||||
Net cash used in investing activities | (13,922 | ) | (7,839 | ) | (65,348 | ) | (178,648 | ) | ||||||||
FINANCING activities: | ||||||||||||||||
FINANCING activities: | ||||||||||||||||
Proceeds from term loan | — | 100,000 | ||||||||||||||
Proceeds from revolving credit facility | 15,000 | 17,000 | 97,500 | 160,500 | ||||||||||||
Payments of term loan | (3,750 | ) | — | |||||||||||||
Payments of revolving credit facility | (5,000 | ) | (5,500 | ) | (37,000 | ) | (116,000 | ) | ||||||||
Debt issuance costs paid | (108 | ) | (809 | ) | ||||||||||||
Cash dividends paid | (4,410 | ) | (3,888 | ) | (15,543 | ) | (13,789 | ) | ||||||||
Purchases of common stock | (14,283 | ) | — | |||||||||||||
Proceeds from exercise of stock options | 5,283 | 4,217 | 12,170 | 19,335 | ||||||||||||
Excess tax benefit on share-based compensation | 467 | 475 | 2,477 | 3,763 | ||||||||||||
Net cash provided by financing activities | 11,340 | 12,304 | 41,463 | 153,000 | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (1,972 | ) | 2,347 | (6,862 | ) | (2,631 | ) | |||||||||
Increase in cash and cash equivalents | 11,491 | 14,676 | 73,084 | 57,532 | ||||||||||||
Cash and cash equivalents at beginning of period | 235,404 | 164,016 | 305,192 | 235,404 | ||||||||||||
Cash and cash equivalents at end of period | $ | 246,895 | $ | 178,692 | $ | 378,276 | $ | 292,936 |
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 Regulations 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. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the period ended March 30, 2013September 27, 2014 are not necessarily indicative of the results that may be expected for the year ending December 28, 2013.27, 2014. 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 December 29, 2012.28, 2013. The company evaluated subsequent events through the date of its financial statements when filed with the Securities and Exchange Commission (“SEC”).
Restatement2. Acquisition of Financial StatementsBusinesses
The company accounts for acquisitions using the purchase method in accordance with ASC 805, “Business Combinations.” The results of operations of each acquisition have been included in the accompanying consolidated financial statements as of the dates of the acquisition.
We account for the correction of an error in our previously issued financial statements in accordance with the provisions of ASC Topic 250,Accounting Changes and Error Corrections. In accordance with the disclosure provisions of ASC Topic 250, when financial statements are restated to correct an error, an entity is required to disclose that its previously issued financial statements have been restated along with a description of the nature of the error, the effect of the correction on each financial statement line item and any per share amount affected for each prior period presented, and the cumulative effect on retained earnings or other appropriate component of equity or net assets in the statement of financial position, as of the beginning of the earliest period presented. See Note 16.
2. Reclassifications and Adjustments
As disclosed in the Annual Report on Form 10-K for the year ended December 29, 2012, the company determined that in late-November 2012 it began to exercise significant influence over Shocking Technologies (“Shocking”). Accordingly, the company began accounting for the investment in Shocking using the equity method and in accordance with ASC 323, retroactively recorded its proportional share of Shocking's operating losses, which amounted to approximately $4.0 million in 2012. See Note 6 for additional information related to Shocking.
As a result of this retroactive application of the equity method, certain items in the company’s interim results reported on their 2012 Forms 10-Q have been retrospectively restated, as shown in the following tables:
March 31, 2012 | ||||||||||||
Consolidated Statements of Net Income andComprehensive Income | As Previously Reported | Adjustment | As Adjusted | |||||||||
Impairment and equity in net loss of unconsolidated affiliate | $ | — | $ | 525 | $ | 525 | ||||||
Income before income taxes | 25,300 | (525 | ) | 24,775 | ||||||||
Income taxes | 7,411 | (199 | ) | 7,212 | ||||||||
Net income | 17,889 | (326 | ) | 17,563 | ||||||||
Basic Earnings per share | $ | 0.83 | $ | (0.02 | ) | $ | 0.81 | |||||
Diluted Earnings per share | $ | 0.81 | $ | (0.01 | ) | $ | 0.80 | |||||
Comprehensive income | $ | 27,031 | $ | (326 | ) | $ | 26,705 |
March 31, 2012 | ||||||||||||
Consolidated Statements of Cash Flows | As Previously Reported | Adjustment | As Adjusted | |||||||||
Net income | $ | 17,889 | $ | (326 | ) | $ | 17,563 | |||||
Impairment and equity in net loss of unconsolidated affiliate | — | 525 | 525 | |||||||||
Accrued taxes | 1,474 | (199 | ) | 1,275 |
Notes to CONDENSED Consolidated Financial Statements (Unaudited)
3. Acquisition of Businesses
Accel ABSymCom, Inc.
On May 31, 2012,January 3, 2014, the company acquired 100% of ACCEL ABSymCom, Inc. (“Accel”SymCom”), a manufacturer for $52.8 million net of advanced electromechanical products, including sensorscash acquired. Headquartered in Rapid City, South Dakota, SymCom provides overload relays and switchespump controllers primarily forto the automotive industry, for approximately $23.9 million.industrial market. The acquisition allows the company to expandstrengthen its automotive product offering and establish a presenceposition in the growing automotive sensorrelay products market by adding new products and new customers within its AutomotiveElectrical business unit segment. AccelSymCom is based in Vänersborg, Sweden with a manufacturing facility located in Kaunas, Lithuania.Rapid City, South Dakota. The company funded the acquisition with available cash.cash and proceeds from credit facilities.
The following table sets forth the preliminary purchase price allocation as of March 30, 2013, for AccelSymCom 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.
Accel AB purchase price allocation (in thousands): | ||||||||
SymCom preliminary purchase price allocation (in thousands): | SymCom preliminary purchase price allocation (in thousands): | |||||||
Cash | $ | 344 | $ | 325 | ||||
Current assets, net | 8,643 | 9,154 | ||||||
Property, plant and equipment | 3,731 | 11,193 | ||||||
Other assets | 7 | |||||||
Goodwill | 11,536 | 15,063 | ||||||
Distribution network | 1,321 | |||||||
Trademarks | 1,259 | 17,020 | ||||||
Patents and licenses | 2,435 | |||||||
Patents | 1,500 | |||||||
Other non-current assets | 20 | |||||||
Current liabilities | (5,411 | ) | (1,182 | ) | ||||
$ | 23,865 | $ | 53,093 |
All AccelSymCom goodwill and other assets and liabilities were recorded in the Electrical business unit segment and reflected in the Americas geographical area. The trademarks are being amortized over 15 to 20 years. The patents are being amortized over 16 to 17 years. The goodwill resulting from this acquisition consists largely of the company’s expected future product sales and synergies from combining SymCom’s products with the company’s existing electrical product offerings. Goodwill for the above acquisition is expected to be deductible for tax purposes.
As required by purchase accounting rules, the company initially recorded a $2.6 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. During the first quarter of 2014, as a portion of this inventory was sold, cost of goods sold included a $1.4 million non-cash charge for this step-up.
Notes toCONDENSEDConsolidated Financial Statements (Unaudited)
2. Acquisition of Businesses, continued
During the second quarter of 2014, the inventory step-up valuation was finalized at $2.8 million which resulted in an additional $1.4 million non-cash charge to cost of goods sold for the second quarter of 2014.
Pro forma financial information is not presented for the SymCom acquisition due to amounts not being materially different than actual results.
Hamlin, Inc.
On May 31, 2013, the company acquired 100% of Hamlin, Inc. (“Hamlin”) from Key Safety Systems, for $144.4 million (net of cash acquired). Hamlin is a manufacturer of sensor technology providing standard products and custom solutions for leading global manufacturers in the automotive and electronic industries. The acquisition allows the company to expand its automotive and electronics product offerings in the global sensor market in both the Automotive and Electronics business segments. Hamlin has manufacturing, engineering and sales offices in the U.S., Mexico, Europe and Asia. Hamlin operations are being integrated into the Electronics and Automotive segments of Littelfuse. The company funded the acquisition with available cash raised from borrowings on the company’s new credit arrangement. (See Note 6).
The following table sets forth the final purchase price allocation, as of May 31, 2014, for Hamlin 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.
Hamlin final purchase price allocation (in thousands): | ||||
Cash | $ | 15,984 | ||
Current assets, net | 27,811 | |||
Property, plant and equipment | 24,728 | |||
Goodwill | 51,218 | |||
Distribution network | 35,327 | |||
Patents and licenses | 16,276 | |||
Trademarks | 6,522 | |||
Non-current assets | 2,452 | |||
Current liabilities | (7,734 | ) | ||
Non-current liabilities | (12,217 | ) | ||
$ | 160,367 |
All Hamlin goodwill and other assets and liabilities were recorded in the Automotive and Electronics business unit segmentsegments and reflected in the Americas, Europe and Asia-Pacific geographical area.areas. The distribution network, is being amortized over three to 10 years. Trademarks are being amortized over five years. Patentstrademarks and patents and licenses are all being amortized over 10 years. The goodwill resulting from this acquisition consists largely of the company’s expected future product sales and synergies from combining Accel’sHamlin’s products with the company’s existing product offerings. GoodwillA portion of the goodwill for the above acquisition is not expected to be deductible for tax purposes.
As required by purchase accounting rules, the company recorded a $0.4$2.1 million step-up of inventory to its fair value as of the acquisition date. During the thirdsecond quarter of 2012,2013, as thea portion of this inventory was sold, cost of goods sold included $0.4$1.7 million of non-cash charges for this step-up.
Terra Power Systems, LLC
On September 26, 2012, the company acquired 100% of Terra Power Systems, LLC (“Terra Power”), a U.S. manufacturer of electromechanical components including power distribution modules and fuse holders for commercial vehicle products for $10.6 million. The acquisition allows the company to strengthen its position in the commercial vehicle products market by adding new products and new customers within its Automotive business unit segment. Terra Power is based in Bellingham, Washington. The company funded the acquisition with available cash.
All Terra Power goodwill and other assets and liabilities were recorded in the Automotive business unit segment and reflected in the Americas geographical area. The goodwill resulting from this acquisition consists largely of the company’s expected future product sales and synergies from combining Terra Power’s products with the company’s existing commercial vehicle product offerings. Goodwill for the above acquisition is expected to be deductible for tax purposes.
Notes toCONDENSEDConsolidated Financial Statements (Unaudited)
3.2. Acquisition of Businesses,Businesses, continued
The following table sets forth the preliminary purchase price allocation for Terra Power 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. The preliminary purchase price allocation reflectedunaudited pro forma results are provided below is based on internal estimates and is expected to be finalized in the second quarter of 2013 although further adjustments are not anticipated to be significant.
Terra Power preliminary purchase price allocation (in thousands): | ||||
Cash | $ | 105 | ||
Current assets, net | 1,625 | |||
Property, plant and equipment | 457 | |||
Goodwill | 4,562 | |||
Other intangibles | 4,064 | |||
Current liabilities | (213 | ) | ||
$ | 10,600 |
Pro forma financial information is not presented for the company’s business acquisitions described above due to amounts not being materially different than actual results.acquisition of Hamlin and assume that the acquisition of Hamlin had been completed as of the beginning of fiscal year 2012.
(In thousands except for per share amounts) | ||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
Sept. 27, 2014 | Sept. 28, 2013 | Sept. 27, 2014 | Sept. 28, 2013 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (As restated) | |||||||||||||
(Unaudited) | ||||||||||||||||
Revenues | $ | 217,608 | $ | 201,040 | $ | 645,375 | $ | 591,095 | ||||||||
Net income | $ | 29,940 | $ | 26,990 | $ | 79,907 | $ | 65,425 | ||||||||
Net income per share: | ||||||||||||||||
Basic | $ | 1.33 | $ | 1.20 | $ | 3.55 | $ | 2.94 | ||||||||
Diluted | $ | 1.32 | $ | 1.19 | $ | 3.52 | $ | 2.91 | ||||||||
Weighted-average shares and equivalent shares outstanding: | ||||||||||||||||
Basic | 22,536 | 22,428 | 22,536 | 22,274 | ||||||||||||
Diluted | 22,689 | 22,625 | 22,722 | 22,497 |
4.
3. Inventories
The components of inventories at March 30, 2013September 27, 2014 and December 29, 201228, 2013 are as follows (in thousands):
March 30, 2013 | December 29, 2012 | September 27, 2014 | December 28, 2013 | |||||||||||||
Raw material | $ | 21,819 | $ | 21,689 | $ | 31,549 | $ | 28,228 | ||||||||
Work in process | 12,062 | 11,868 | 16,810 | 17,576 | ||||||||||||
Finished goods | 37,491 | 42,023 | 51,463 | 46,787 | ||||||||||||
Total inventories | $ | 71,372 | $ | 75,580 | $ | 99,822 | $ | 92,591 |
5. 4.OtherInvestments
The company’s other investments represent shares of Polytronics Technology Corporation Ltd. (“Polytronics”), a Taiwanese company. The Polytronics investment was acquired as part of the Heinrich Companies acquisition in 2004. The fair value of the Polytronics investment was €9.1million€10.2 million (approximately $11.6$13.1 million) at March 30, 2013September 27, 2014 and €7.8€9.0 million (approximately $10.3$12.3 million) at December 29, 2012.28, 2013. Included in 20132014 other comprehensive income is an unrealized gain of $1.6$1.8 million, due to the increase in fair market value of the Polytronics investment. The remaining movement was due to the impact of changes in exchange rates.
6. 5.Impairment of Investment in Unconsolidated Affiliate
During the first quarter of 2013, the company fully impaired its investment in and loan receivable from Shocking Technologies, Inc. owing to their filing for Chapter 7 bankruptcy on March 12, 2013. The impairment charge of approximately $10.7 million consisted of the remaining equity method investment of $8.7 million and a $2.0 million loan receivable, and reducesreduced the carrying value of both the investment and loan receivable to zero at March 30, 2013.
The loss was recorded as a component of impairment and equity loss of unconsolidated affiliate in the Consolidated Statements of Net Income for the threenine months ended March 30,September 28, 2013.
Notes toCONDENSEDConsolidated Financial Statements (Unaudited)
7.6. Debt
The carrying amounts of long-term debt at March 30, 2013September 27, 2014 and December 29, 201228, 2013 are as follows (in thousands):
March 30, 2013 | December 29, 2012 | |||||||
Revolving credit facility | $ | 94,000 | $ | 84,000 |
September 27, 2014 | December 28, 2013 | |||||||
Term loan | $ | 95,000 | $ | 98,750 | ||||
Revolving credit facility | 181,500 | 121,000 | ||||||
Total debt | 276,500 | 219,750 | ||||||
Less: Current maturities | 186,500 | 126,000 | ||||||
Total long-term debt | $ | 90,000 | $ | 93,750 |
On June 13, 2011,May 31, 2013, the company entered into a new credit agreement with certain commercial banks that providesJ.P Morgan Securities LLC for up to $325.0 million which consisted of an unsecured revolving credit facility inof $225.0 million and an amountunsecured term loan of up$100.0 million. The new credit agreement is for a five year period. On January 30, 2014, the company increased the unsecured revolving credit facility entered into on May 31, 2013, by $50.0 million thereby increasing the total revolver borrowing capacity from $225.0 million to $150.0$275.0 million. The company incurred debt issuance costs of $0.1 million with a potential to increase up to $225.0 million. At March 30, 2013,which will be amortized over the life of the existing credit agreement. As of September 27, 2014, the company had available $55.4$92.9 million of borrowing capacity under the revolving credit agreement at an interest rate of LIBOR plus 1.250% (1.45%1.50% (1.65% as of March 30, 2013)September 27, 2014).
The At September 27, 2014, the company was in compliance with all covenants under the revolving credit agreement replaces the company’s previous credit agreement dated July 21, 2006 and loan agreement dated September 29, 2008, and, unless terminated earlier, will terminate on June 13, 2016.facility.
8.7. 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
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 Polytronics
The company holds an investment in the equity securities of Polytronics as described in Note 5.4. 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.
Investment in Shocking Technologies, Inc.
The company holds an investment in an unconsolidated affiliate, Shocking Technologies, Inc. (“Shocking”), as described in Note 6, for which thevaluation model that was used to determine the fair value of Shocking at December 29, 2012, was a discounted cash flow model to value Shocking’s equity and then an option pricing method to allocate the equity value to the various classes of stock in Shocking’s capital structure, including Series C and common shares held by the company. Significant unobservable inputs used included an expected two years until liquidity event, a volatility of 35% and a risk free rate of 0.44%. The investment was categorized as Level 3.
Notes to CONDENSED Consolidated Financial Statements (Unaudited)
8. Fair Value of Financial Assets and Liabilities, continued
There were no changes during the quarternine months ended March 30, 2013September 27, 2014 to the company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of March 30, 2013September 27, 2014 and December 29, 201228, 2013 the company held no non-financial assets or liabilities that are required to be measured at fair value on a recurring basis.
Notes to CONDENSED Consolidated Financial Statements (Unaudited)
7. Fair Value of Assets and Liabilities, continued
The following table presents assets and liabilities measured at fair value by classification within the fair value hierarchy as of March 30, 2013September 27, 2014 (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 | $ | 11,572 | $ | - | $ | - | $ | 11,572 | $ | 13,115 | $ | — | $ | — | $ | 13,115 | ||||||||||||||||
Total | $ | 11,572 | $ | - | $ | - | $ | 11,572 | $ | 13,115 | $ | — | $ | — | $ | 13,115 |
The following table presents assets measured at fair value by classification within the fair value hierarchy as of December 29, 201228, 2013 (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 | $ | 10,327 | $ | — | $ | — | $ | 10,327 | $ | 12,286 | $ | — | $ | — | $ | 12,286 | ||||||||||||||||
Investment in unconsolidated affiliate | — | — | 8,666 | 8,666 | ||||||||||||||||||||||||||||
Total | $ | 10,327 | $ | — | $ | 8,666 | $ | 18,993 | $ | 12,286 | $ | — | $ | — | $ | 12,286 |
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 March 30, 2013September 27, 2014 and December 29, 2012,28, 2013, respectively, as the variable interest rates fluctuate along with market interest rates.
9. 8.Earnings Per Share
TheIn 2013, the company computescalculated its earnings per share using the two-class method. The two-class method includeswhich included an earnings allocation formula that determinesdetermined earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period. ThePreviously, the company’s reported net earnings iswere reduced by the amount allocated to participating securities to arrive at the earnings allocated to common stock shareholders for purposes of calculating earnings per share.share under the two-class method. As of January, 2014, the company no longer has “participating securities” as defined under ASC 260. As such, the company now calculates its earnings per share using the treasury method. All of the previous participating securities that resulted in the company using the two-class method have become fully vested or have otherwise expired.
TheUnder the previous two-class method calculation, the dilutive effect of participating securities iswas calculated using the more dilutive of the treasury stock or the two-class method. The company haspreviously determined the two-class method to be the more dilutive. As such, the earnings allocated to common stock shareholders in the basic earnings per share calculation iswas adjusted for the reallocation of
Notes to CONDENSED Consolidated Financial Statements (Unaudited)
9. Earnings Per Share, continued
undistributed earnings to participating securities to arrive at the earnings allocated to common stock shareholders for calculating the diluted earnings per share.
Notes toCONDENSEDConsolidated Financial Statements (Unaudited)
8. Earnings Per Share, continued
The following table sets forth the computation of basic and diluted earnings per share under the treasury share method as of September 27, 2014 and the two-class method.method as of September 28, 2013.
For the Three Months Ended | For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
(in thousands except per share amounts) | March 30, 2013 | March 31, 2012 | Sept. 27, 2014 | Sept. 28, 2013 | Sept. 27, 2014 | Sept. 28, 2013 | ||||||||||||||||||
(Restated) | ||||||||||||||||||||||||
Net income as reported | $ | 11,488 | $ | 17,563 | $ | 29,940 | $ | 26,990 | $ | 79,907 | $ | 65,126 | ||||||||||||
Less: Distributed earnings available to participating securities | (9 | ) | (6 | ) | — | (3 | ) | — | (21 | ) | ||||||||||||||
Less: Undistributed earnings available to participating securities | (7 | ) | (43 | ) | — | — | — | (16 | ) | |||||||||||||||
Numerator for basic earnings per share — | ||||||||||||||||||||||||
Undistributed and distributed earnings available to common shareholders | $ | 11,472 | $ | 17,514 | $ | 29,940 | $ | 26,987 | $ | 79,907 | $ | 65,089 | ||||||||||||
Add: Undistributed earnings allocated to participating securities | 7 | 44 | — | — | — | 16 | ||||||||||||||||||
Less: Undistributed earnings reallocated to participating securities | (6 | ) | (44 | ) | — | — | — | (16 | ) | |||||||||||||||
Numerator for diluted earnings per share — | ||||||||||||||||||||||||
Undistributed and distributed earnings available to common shareholders | $ | 11,473 | $ | 17,514 | $ | 29,940 | $ | 26,987 | $ | 79,907 | $ | 65,089 | ||||||||||||
Denominator for basic earnings per share — | ||||||||||||||||||||||||
Weighted-average shares | 22,095 | 21,608 | 22,536 | 22,428 | 22,536 | 22,274 | ||||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||||||
Common stock equivalents | 271 | 321 | 153 | 197 | 186 | 223 | ||||||||||||||||||
Denominator for diluted earnings per share — | ||||||||||||||||||||||||
Adjusted for weighted-average shares & assumed conversions | 22,366 | 21,929 | 22,689 | 22,625 | 22,722 | 22,497 | ||||||||||||||||||
Basic earnings per share | $ | 0.52 | $ | 0.81 | $ | 1.33 | $ | 1.20 | $ | 3.55 | $ | 2.92 | ||||||||||||
Diluted earnings per share | $ | 0.51 | $ | 0.80 | $ | 1.32 | $ | 1.19 | $ | 3.52 | $ | 2.89 |
9
10. Restructuring. Income Taxes
DuringThe effective tax rate for the period 2006 through 2009,third quarter of 2014 was 27.3% compared to an effective tax rate of 26.1% in the company announced closuresthird quarter of its facilities2013 reflecting more income earned in Dundalk, Ireland, Irving, Texas, Des Plaines, Illinois, Elk Grove, Illinois, Matamoros, Mexico, Swindon, U.K., Dünsen, Germany, Utrecht, Netherlands, and Yangmei, Taiwan. These manufacturing and distribution center closures were parthigher tax jurisdictions in the third quarter of a multi-year plan2014. The effective tax rate for the nine months ended September 27, 2014 was 25.0% as compared to improvean effective tax rate of 27.6% for the company’s cost structure and margins by rationalizing the company’s footprint, reducing labor costs and moving closer to customers. As of March 30, 2013, all of these facility closures have been completed. Together, these initiatives have impacted approximately 946 employees and resulted in aggregate restructuring charges of $53.9 million through March 30,nine months ended September 28, 2013. The company does not expect to incur any additional costs associated with these facility closures and related restructuring activities.
A summary of activity of this liability at December 29, 2012, andhigher tax rate for the threenine months ended March 30,September 28, 2013 is as follows:
Littelfuse restructuring (in thousands) | ||||
Balance at December 29, 2012 | $ | 645 | ||
Additions | 13 | |||
Payments | (129 | ) | ||
Exchange rate impact | (6 | ) | ||
Balance at March 30, 2013 | $ | 523 |
Additional costs recorded that are not related towas primarily the initial restructuring plans discussed above were $0.1 million and $0.5 million for the quarter ended March 30, 2013 and year ended December 29, 2012, respectivelyresult of certain non-recurring tax items.
Notes toCONDENSEDConsolidated Financial Statements (Unaudited)
11. Income Taxes (Restated)
The effective tax rate for the first quarter of 2013 was 36.1% compared to an effective tax rate of 29.3% in the first quarter of 2012. The effective tax rates for both the first quarter of 2013 (which includes incremental income tax expense of $3.3 million relating to the Shocking Technologies impairment loss as discussed further in Note 16 - Restatement) and 2012 are lower than the U.S. statutory tax rate primarily due to the result of more income earned in low tax jurisdictions.
12.10. Pensions
The components of net periodic benefit cost for the three and nine months ended March 30, 2013,September 27, 2014, compared with the three and nine months ended March 31, 2012,September 28, 2013, were (in thousands):
U.S. Pension Benefits | Foreign Plans | |||||||||||||||||||||||||||||||||||||||||||||||
U.S. Plans | Foreign Plans | Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | Three Months Ended | Sept. 27, 2014 | Sept. 28, 2013 | Sept. 27, 2014 | Sept. 28, 2013 | Sept. 27, 2014 | Sept. 28, 2013 | Sept. 27, 2014 | Sept. 28, 2013 | |||||||||||||||||||||||||||||||||||||||
March 30, 2013 | March 31, 2012 | March 30, 2013 | March 31, 2012 | |||||||||||||||||||||||||||||||||||||||||||||
Service cost | $ | 150 | $ | 150 | $ | 255 | $ | 192 | $ | 150 | $ | 150 | $ | 450 | $ | 450 | $ | 311 | $ | 290 | $ | 933 | $ | 813 | ||||||||||||||||||||||||
Interest cost | 891 | 1,240 | 183 | 195 | 971 | 891 | 2,913 | 2,674 | 591 | 532 | 1,774 | 1,014 | ||||||||||||||||||||||||||||||||||||
Expected return on plan assets | (1,340 | ) | (1,655 | ) | (74 | ) | (121 | ) | ||||||||||||||||||||||||||||||||||||||||
Expected return on plan assetsassets | (1,412 | ) | (1,340 | ) | (4,234 | ) | (4,020 | ) | (572 | ) | (446 | ) | (1,718 | ) | (717 | ) | ||||||||||||||||||||||||||||||||
Amortization of net loss | 236 | 85 | 39 | 17 | 137 | 235 | 411 | 706 | 47 | 39 | 142 | 116 | ||||||||||||||||||||||||||||||||||||
Total cost of the plan | (63 | ) | (180 | ) | 403 | 283 | ||||||||||||||||||||||||||||||||||||||||||
Total (credit) cost of the plan | (154 | ) | (64 | ) | (460 | ) | (190 | ) | 377 | 415 | 1,131 | 1,226 | ||||||||||||||||||||||||||||||||||||
Expected plan participants’contribution | — | — | — | — | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Net periodic benefit cost | $ | (63 | ) | $ | (180 | ) | $ | 403 | $ | 283 | ||||||||||||||||||||||||||||||||||||||
Net periodic benefit(credit)cost | $ | (154 | ) | $ | (64 | ) | $ | (460 | ) | $ | (190 | ) | $ | 377 | $ | 415 | $ | 1,131 | $ | 1,226 |
The expected rate of return assumption on domestic pension assets is approximately 6.75% in 2014 and 7.75% in 2013 and 2012, respectively.2013. The expected return on foreign pension assets is approximately 5.14% and 3.00% in 2014 and 4.53% in 2013, and 2012, respectively.
On July 31, 2014, the company terminated the Littelfuse, Inc. Retirement Plan (the “Pension Plan”), a plan that was previously offered to all full-time Company employees but frozen as to new participants and benefit accruals as of April 1, 2009. Distribution of plan assets resulting from the Pension Plan termination will not be made until the Internal Revenue Service and the Pension Benefit Guaranty Corporation determine that the termination satisfies applicable regulatory requirements. As a result of the termination of the Pension Plan, each participant will become fully vested in his or her benefits under the Pension Plan without regard to age and years of service. All participants will have a choice of receiving a lump sum payment or an annuity in full payment of their benefits accrued under the Pension Plan.
13. 11.Business Unit Segment 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. 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.
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”).
Notes toCONDENSEDConsolidated Financial Statements (Unaudited)
13. 11.Business Unit Segment Information, continued
Business unit segment information for the three and nine months ended March 30,September 27, 2014 and September 28, 2013 and March 31, 2012 are summarized as follows (in thousands):
March 30, 2013 | March 31, 2012 | |||||||
Net sales | ||||||||
Electronics | $ | 79,415 | $ | 77,055 | ||||
Automotive | 59,385 | 52,626 | ||||||
Electrical | 32,118 | 30,897 | ||||||
Total net sales | $ | 170,918 | $ | 160,578 | ||||
Depreciation and amortization | ||||||||
Electronics | $ | 4,861 | $ | 5,486 | ||||
Automotive | 1,984 | 1,449 | ||||||
Electrical | 959 | 1,014 | ||||||
Total depreciation and amortization | $ | 7,804 | $ | 7,949 | ||||
Operating income | ||||||||
Electronics | $ | 12,143 | $ | 10,112 | ||||
Automotive | 9,483 | 9,505 | ||||||
Electrical | 6,491 | 6,207 | ||||||
Total operating income | 28,117 | 25,824 | ||||||
Interest expense | 376 | 423 | ||||||
Impairment, loan loss and equity in net loss of unconsolidated affiliate(1) | 10,678 | 525 | ||||||
Other (income) expense, net | (909 | ) | 101 | |||||
Income before income taxes | $ | 17,972 | $ | 24,775 |
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
Sept. 27, 2014 | Sept. 28, 2013 | Sept. 27, 2014 | Sept. 28, 2013 | |||||||||||||
Net sales | ||||||||||||||||
Electronics | $ | 107,754 | $ | 101,013 | $ | 313,726 | $ | 271,878 | ||||||||
Automotive | 80,639 | 70,386 | 245,083 | 194,319 | ||||||||||||
Electrical | 29,215 | 29,641 | 86,566 | 93,527 | ||||||||||||
Total net sales | $ | 217,608 | $ | 201,040 | $ | 645,375 | $ | 559,724 | ||||||||
Depreciation and amortization | ||||||||||||||||
Electronics | $ | 5,582 | $ | 5,784 | $ | 16,482 | $ | 15,776 | ||||||||
Automotive | 3,435 | 2,880 | 10,609 | 7,183 | ||||||||||||
Electrical | 1,414 | 937 | 4,096 | 2,893 | ||||||||||||
Total depreciation and amortization | $ | 10,431 | $ | 9,601 | $ | 31,187 | $ | 25,852 | ||||||||
Operating income (loss) | ||||||||||||||||
Electronics | $ | 25,800 | $ | 20,362 | $ | 70,805 | $ | 52,284 | ||||||||
Automotive | 12,227 | 11,135 | 35,158 | 29,531 | ||||||||||||
Electrical | 3,224 | 6,687 | 7,541 | 18,801 | ||||||||||||
Other(1) | (1,121 | ) | (625 | ) | (6,065 | ) | (3,558 | ) | ||||||||
Total operating income | 40,130 | 37,559 | 107,439 | 97,058 | ||||||||||||
Interest expense | 1,292 | 939 | 3,736 | 1,959 | ||||||||||||
Impairment, loan loss and equity in net loss of unconsolidated affiliate(2) | — | — | — | 10,678 | ||||||||||||
Foreign exchange (gain) loss | (101 | ) | 1,476 | 2,022 | (1,929 | ) | ||||||||||
Other (income) expense, net | (2,261 | ) | (1,380 | ) | (4,893 | ) | (3,543 | ) | ||||||||
Income before income taxes | $ | 41,200 | $ | 36,524 | $ | 106,574 | $ | 89,893 |
(1) “Other” consists of acquisition related costs, severance charges and restructuring costs. (2) During the first quarter of 2013, the company recorded approximately $10.7 million related to thean impairment of its investment in Shocking Technologies. (See note 6). 2012 Income before income taxes has been restated to reflect the company’s retroactive equity losses from Shocking Technologies. (See note 2)Note 5).
The company’s significant net sales by country for the three and nine months ended March 30,September 27, 2014 and September 28, 2013 and March 31, 2012 are summarized as follows (in thousands):
Net sales(a) | For the Three Months Ended(a) | For the Nine Months Ended(a) | ||||||||||||||||||||||
March 30, 2013 | March 31, 2012 | Sept. 27, 2014 | Sept. 28, 2013 | Sept. 27, 2014 | Sept. 28, 2013 | |||||||||||||||||||
United States | $ | 57,914 | $ | 55,253 | $ | 85,326 | $ | 76,183 | $ | 243,979 | $ | 202,731 | ||||||||||||
China | 33,614 | 30,444 | 45,905 | 43,644 | 134,166 | 114,952 | ||||||||||||||||||
Other countries | 79,390 | 74,881 | 86,377 | 81,213 | 267,230 | 242,041 | ||||||||||||||||||
Total | $ | 170,918 | $ | 160,578 | $ | 217,608 | $ | 201,040 | $ | 645,375 | $ | 559,724 |
(a) Sales by country represent sales to customer or distributor locations.
The company’s significant long-lived assets by country as of March 30, 2013September 27, 2014 and December 29, 201228, 2013 are summarized as follows (in thousands):
Long-lived assets(b) | Long-lived assets(b) | |||||||||||||||
March30, 2013 | December 29, 2012 | September 27, 2014 | December 28, 2013 | |||||||||||||
United States | $ | 13,963 | $ | 14,433 | $ | 38,964 | $ | 27,294 | ||||||||
China | 40,157 | 41,504 | 40,015 | 45,843 | ||||||||||||
Canada | 13,907 | 13,839 | 13,621 | 14,429 | ||||||||||||
Other countries | 52,273 | 51,135 | 64,660 | 62,607 | ||||||||||||
Total | $ | 120,300 | $ | 120,911 | $ | 157,260 | $ | 150,173 |
(b) Long-lived assets consistsconsist of net property, plant and equipment.
Notes toCONDENSEDConsolidated Financial Statements (Unaudited)
14.12. Accumulated Other Comprehensive Income (Loss) (AOCI)
In February, 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2013-02 which requires companies to report, in one place, information about reclassifications out of accumulated other comprehensive income (AOCI). The new guidance allows companies to present this information on the face of the financial statements, if certain requirements are met. Otherwise, the information must be presented in the notes. If a company is unable to identify the line item of net income affected by any significant amount reclassified out of AOCI during a reporting period (including when all reclassifications for the period are not to net income in their entirety), the information must be reported in the notes. In addition, ASU 2013-02 requires detailed reporting about changes in AOCI balances. It requires companies to present details of current-period changes in AOCI for each component of other comprehensive income on the face of the financial statements or in the notes. The company adopted the new guidance on December 30, 2012 and will be applied prospectively. There was no impact on its consolidated financial statements upon adoption.
The following table sets forth the changes in the components of AOCI by component (in thousands):
AOCI component | Balance at December 29, 2012 | Other comprehensive income (loss) activity | Balance at March 30, 2013 | |||||||||
Pension liability adjustment(a) | $ | (20,879 | ) | $ | (194 | ) | $ | (21,073 | ) | |||
Unrealized gain on investments(b) | 7,867 | 1,618 | 9,485 | |||||||||
Foreign currency translation adjustment | 29,560 | (5,250 | ) | 24,310 | ||||||||
Total | $ | 16,548 | $ | 12,722 |
AOCI component | Balance at December 28, 2013 | Other comprehensive income (loss) activity | Reclassification adjustment for expense included in net income | Balance at September 27, 2014 | ||||||||||||
Pension liability adjustment(a) | $ | (17,140 | ) | $ | (243 | ) | $ | 242 | $ | (17,141 | ) | |||||
Unrealized gain on investments(b) | 9,393 | 1,811 | — | 11,204 | ||||||||||||
Foreign currency translation adjustment | 28,164 | (15,273 | ) | — | 12,891 | |||||||||||
AOCI income (loss) | $ | 20,417 | $ | (13,705 | ) | $ | 242 | $ | 6,954 |
(a) Balances are net of tax of $11,929$6,549 and $11,819$6,549 for 20132014 and 2012,2013, respectively.
(b) Balances are net of tax of $0 and $0 for 2014 and 2013, and 2012, respectively.
15. Subsequent Event
On April 15, 2013, the company announced it had signed a definitive agreement to acquire Hamlin, Inc. from Key Safety Systems for $145.0 million in a cash transaction. Hamlin is dedicated to providing sensor technology to the automotive industry as well as the electronics and industrial markets. The company completed the transaction on May 31, 2013.
16. Restatement
The restatement is to correct an error in the previously-filed interim financial statements and has the effect of both increasing the company’s reported income tax expense and reducing the company’s reported net income, for the three months ended March 30, 2013, by $3.3 million. The restatement relates to a tax deduction previously recorded in error related to the company’s investment in Shocking Technologies, Inc.
Notes to CONDENSED Consolidated Financial Statements (Unaudited)
16. Restatement, continued
The following table presents previously reported and restated balances of affected line items in the Condensed Consolidated Balance Sheets as of March 30, 2013, Consolidated Statements of Income for the three months ended March 30, 2013, Consolidated Statements of Comprehensive Income for the three months ended March 30, 2013 and Consolidated Statements of Cash Flows for the three months ended March 30, 2013.
(In thousands) | For the Three months Ended March 30, 2013 | |||||||||||
As Reported | Adjustment | As Restated | ||||||||||
Consolidated Balance Sheets: | ||||||||||||
Accrued income taxes | $ | 8,196 | $ | 3,306 | $ | 11,502 | ||||||
Total current liabilities | 155,631 | 3,306 | 158,937 | |||||||||
Total equity | 600,671 | (3,306 | ) | 597,365 | ||||||||
Consolidated Statements of Income: | ||||||||||||
Income taxes | $ | 3,178 | $ | 3,306 | $ | 6,484 | ||||||
Net income | 14,794 | (3,306 | ) | 11,488 | ||||||||
Net income per share: | ||||||||||||
Basic | $ | 0.67 | $ | (0.15 | ) | $ | 0.52 | |||||
Diluted | $ | 0.66 | $ | (0.15 | ) | $ | 0.51 | |||||
Consolidated Statements of Comprehensive Income: | ||||||||||||
Net income | $ | 14,794 | $ | (3,306 | ) | $ | 11,488 | |||||
Comprehensive income | 10,968 | (3,306 | ) | 7,662 | ||||||||
Consolidated Statements of Cash Flows: | ||||||||||||
Net income | $ | 14,794 | $ | (3,306 | ) | $ | 11,488 | |||||
Accrued taxes | (3,946 | ) | 3,306 | (640 | ) |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Littelfuse Overview
Littelfuse, Inc. and its subsidiaries (the “company” or “Littelfuse”) design, manufacture, and sellis 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 2013 was $757.9 million and net earnings were $88.8 million. The company conducts its business through three reportable segments, which are defined by markets and consist of Electronics, Automotive, and Electrical. 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 investing in power control and sensing technologies. These newer platforms combined with the company’s strong balance sheet and operating cash flow, provide opportunities for useincreased organic and acquisition growth. The company has set a target to grow 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
The Electronics segment sells passive and semiconductor components and modules primarily into the global consumer electronics, general industrial and telecommunications markets. The core electronics markets are characterized by significant Asia competition and price erosion. As a result the company is focusing additional efforts on higher growth, less price sensitive niche markets and higher-power industrial applications. The Hamlin acquisition in 2013 expands the company’s product offering into reed switches which are used in a wide variety of electronic products and go through the same channels as the company’s core electronics products.
Automotive Segment
The Automotive segment is comprised of passenger vehicle circuit protection, commercial vehicle products and 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 expected to be an additional growth driver. The Hamlin acquisition in 2013 significantly expands the company’s position in automotive sensors.
Electrical Segment
The Electrical 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 several large Canadian potash mining projects nearing completion. The company intends to expand this business by moving into new markets such as non-potash mining and oil and gas. Protection relay sales have also slowed due to the general slowdown in the electronics, automotive and electrical markets throughout the world. global mining market.
The following table is a summary of the company’s net sales by business unit and geography:
Net Sales by Business Unitand Geography (in millions, unaudited)(inthousands, unaudited)
First Quarter | ||||||||||||
2013 | 2012 | % Change | ||||||||||
Business Unit | ||||||||||||
Electronics | $ | 79.4 | $ | 77.1 | 3 | % | ||||||
Automotive | 59.4 | 52.6 | 13 | % | ||||||||
Electrical | 32.1 | 30.9 | 4 | % | ||||||||
Total | $ | 170.9 | $ | 160.6 | 6 | % |
First Quarter | ||||||||||||
2013 | 2012 | % Change | ||||||||||
Geography(a) | ||||||||||||
Americas | $ | 77.8 | $ | 74.0 | 5 | % | ||||||
Europe | 30.5 | 27.8 | 10 | % | ||||||||
Asia-Pacific | 62.6 | 58.8 | 6 | % | ||||||||
Total | $ | 170.9 | $ | 160.6 | 6 | % |
Third Quarter | Year-to-Date | |||||||||||||||||||||||
2014 | 2013 | % Change | 2014 | 2013 | % Change | |||||||||||||||||||
Business Unit | ||||||||||||||||||||||||
Electronics | $ | 107,754 | $ | 101,013 | 7 | % | $ | 313,726 | $ | 271,878 | 15 | % | ||||||||||||
Automotive | 80,639 | 70,386 | 15 | % | 245,083 | 194,319 | 26 | % | ||||||||||||||||
Electrical | 29,215 | 29,641 | (1 | %) | 86,566 | 93,527 | (7 | %) | ||||||||||||||||
Total | $ | 217,608 | $ | 201,040 | 8 | % | $ | 645,375 | $ | 559,724 | 15 | % | ||||||||||||
Third Quarter | Year-to-Date | |||||||||||||||||||||||
2014 | 2013 | % Change | 2014 | 2013 | % Change | |||||||||||||||||||
Geography(a) | ||||||||||||||||||||||||
Americas | $ | 97,903 | $ | 89,682 | 9 | % | $ | 282,928 | $ | 254,037 | 11 | % | ||||||||||||
Europe | 39,568 | 35,490 | 11 | % | 127,791 | 100,360 | 27 | % | ||||||||||||||||
Asia-Pacific | 80,137 | 75,868 | 6 | % | 234,656 | 205,327 | 14 | % | ||||||||||||||||
Total | $ | 217,608 | $ | 201,040 | 8 | % | $ | 645,375 | $ | 559,724 | 15 | % |
(a) Sales by geography represent sales to customer or distributor locations.
Results of Operations – FirstThird Quarter, 20132014 compared to 20122013
The following table summarizes the company’s consolidated results of operations for the periods presented. The results include incremental activity from the company’s business acquisitions as described, where applicable, in the below analysis. There was an additional $2.8 million in 2014 year-to-date for the write-off of stepped-up inventory valuation related to the SymCom acquisition as described in Note 2. The company incurred $2.0 million of severance charges in 2014 year-to date resulting from restructuring at the Hamlin-Mexico plant. The company also incurred $1.1million of charges during the third quarter of 2014 related to its internal organization restructuring to optimize its ability to use cash. There was $0.1 million of foreign exchange gains during the third quarter of 2014 ($2.0 million of losses in 2014 year-to-date) due primarily to balance sheet remeasurement in the Philippines.
(In thousands, unaudited) | Third Quarter | Year-to-Date | ||||||||||||||||||||||
2014 | 2013 | % Change | 2014 | 2013 | % Change | |||||||||||||||||||
Sales | $ | 217,608 | $ | 201,040 | 8 | % | $ | 645,375 | $ | 559,724 | 15 | % | ||||||||||||
Gross Profit | 87,380 | 80,960 | 8 | % | 248,869 | 219,123 | 14 | % | ||||||||||||||||
Operating expense | 47,250 | 43,401 | 9 | % | 141,430 | 122,065 | 16 | % | ||||||||||||||||
Operating income | 40,130 | 37,559 | 7 | % | 107,439 | 97,058 | 11 | % | ||||||||||||||||
Other (income) expense, net | (1,070 | ) | 1,035 | (203 | %) | 865 | 7,165 | (88 | %) | |||||||||||||||
Income before income taxes | 41,200 | 36,524 | 13 | % | 106,574 | 89,893 | 19 | % | ||||||||||||||||
Net income | $ | 29,940 | $ | 26,990 | 11 | % | $ | 79,907 | $ | 65,126 | 23 | % |
Net sales increased $10.3$16.6 million or 6%8% to $170.9$217.6 million in the firstthird quarter of 2014 compared to $201.0 million in the third quarter of 2013 compared to $160.6 million in the first quarter of 2012 due primarily to strong organic growth in automotive and electronics and an incremental $7.5$5.5 million from business acquisitions and broad-based growth in all businesses and geographies.the SymCom acquisition, partially offset by lower electrical sales. The company also experienced $0.2$0.3 million in unfavorablefavorable foreign currency effects in the firstthird quarter of 20132014 as compared to the firstthird quarter of 2012. The unfavorable foreign currency impact primarily resulted from sales denominated in the Japanese yen and Canadian dollar, offset by the favorable impact of the euro.2013. Excluding incremental sales from acquisitionsSymCom and currency effects, net sales increased $3.0$10.8 million or 2%5% year-over-year.
Electronics sales increased $2.3$6.7 million or 3%7% to $79.4$107.8 million in the firstthird quarter of 2014 compared to $101.0 million in the third quarter of 2013 compareddue primarily to $77.1 million in the first quarter of 2012 due to low channel inventoriesstrong growth for both semiconductor and improving market sentiment.passive components. The electronics segment experienced $0.2 million in unfavorablefavorable currency effects in the firstthird quarter of 20132014 primarily from sales denominated in Japanese yen.Korean won. Excluding the impact of currency effects, sales increased $6.6 million or 6% year-over-year.
Automotive sales increased $6.8$10.3 million or 13%15% to $59.4$80.6 million in the firstthird quarter of 2014 compared to $70.4 million in the third quarter of 2013 compared to $52.6 million in the first quarter of 2012 due to an incremental $7.5 million from business acquisitions andstrong organic growth in thefor passenger vehicle business. This was partially offset by a decline in thecar fuses, commercial vehicle business which, while showing signs of recovery, still declined 10% as compared to the first quarter of 2012.products and sensors. The automotive segment experienced $0.2 million in favorable currency effects in the firstthird quarter of 2014 primarily due to sales denominated in Korean won. Excluding currency effects, net sales increased $10.1 million or 14% year-over-year.
Electrical sales decreased $0.4 million or 1% to $29.2 million in the third quarter of 2014 compared to $29.6 million in the third quarter of 2013 primarily from declines in custom and relay sales into the mining market and power fuses into the industrial market. These declines more than offset incremental sales of $5.5 million from the SymCom acquisition. The electrical segment experienced $0.1 million in unfavorable currency effects in the third quarter of 2014 primarily from sales denominated in Canadian dollars. Excluding incremental sales from SymCom and currency effects, net sales decreased $5.8 million or 20% year-over-year.
On a geographic basis, sales in the Americas increased $8.2 million or 9% to $97.9 million in the third quarter of 2014 compared to $89.7 million in the third quarter of 2013 due primarily to incremental sales of $5.5 million from SymCom offset by $0.1 million in unfavorable currency effects from sales denominated in Canadian dollars. Excluding incremental sales from acquisitions and currency effects, the Americas sales increased $2.9 million or 3% due to the increase in automotive and electronics sales partially offset by decreased electrical sales.
Europe sales increased $4.1 million or 11% to $39.6 million in the third quarter of 2014 compared to $35.5 million in the third quarter of 2013 mainly due to strong demand for electronics and automotive products and $0.2 million in favorable currency effects.
Asia-Pacific sales increased $4.3 million or 6% to $80.1 million in the third quarter of 2014 compared to $75.9 million in the third quarter of 2013 primarily due to strong demand for automotive and electronics products and $0.2 million in favorable currency effects primarily from sales denominated in Korean won. Excluding currency effects, net sales increased $4.1 million or 5% year-over-year.
Gross profit was $87.4 million or 40% of net sales for the third quarter of 2014 compared to $81.0 million or 40% of net sales in the same quarter last year. Gross profit for the third quarter of 2013 included a $0.4 million non-cash charge to cost of goods sold for inventory that was stepped-up to fair value as a result of the Hamlin acquisition.
Total operating expense was $47.3 million or 22% of net sales for the third quarter of 2014 compared to $43.4 million or 22% of net sales for the same quarter in 2013. The increase in operating expenses primarily reflects incremental operating expenses of $2.3 million from the SymCom acquisition and $1.1 million of expenses to effect changes in the company’s legal structure that will enable the up-streaming of cash to the U.S.
Operating income for the third quarter of 2014 was approximately $40.1 million compared to operating income of $37.6 million for the same quarter in 2013 primarily due to higher sales partially offset by higher operating expenses as described above.
Interest expense was $1.3 million in the third quarter of 2014 compared to $0.9 million in the third quarter of 2013 and is primarily related to the company’s revolving credit facility.
Foreign exchange loss (gain), reflecting net gains and losses from balance sheet revaluation, was approximately $0.1 million of income for the third quarter of 2014 and $1.5 million of expense for the third quarter of 2013 and primarily reflects fluctuations in the Philippine peso against the U.S. dollar.
Other (income) expense, net, consisting of interest income, royalties and non-operating income and expense was approximately $2.3 million of income for the third quarter of 2014 compared to $1.4 million of income in the third quarter of 2013.
Income before income taxes was $41.2 million for the third quarter of 2014 compared to income before income taxes of $36.5 million for the third quarter of 2013. Income tax expense was $11.3 million with an effective tax rate of 27.3% for the third quarter of 2014 compared to income tax expense of $9.5 million with an effective tax rate of 26.1% in the third quarter of 2013. The higher effective tax rate in the third quarter of 2014 was primarily due to more income earned in high tax jurisdictions.
Net income for the third quarter of 2014 was $29.9 million or $1.32 per diluted share compared to net income of $27.0 million or $1.19 per diluted share for the same quarter of 2013.
Results of Operations –Nine Months, 2014 compared to 2013
Net sales increased $85.7 million or 15% to $645.4 million in the first nine months of 2014 compared to $559.7 million in the first nine months of 2013 due primarily to an incremental $51.8 million from business acquisitions. The company also experienced $4.0 million in favorable foreign currency effects in the first nine months of 2014 as compared to 2013. The favorable foreign currency impact primarily resulted from sales denominated in euros. Excluding incremental sales from acquisitions and currency effects, net sales increased $29.9 million or 5% year-over-year.
Electronics sales increased $41.8 million or 15% to $313.7 million in the first nine months of 2014 compared to $271.9 million in the first nine months of 2013 due primarily to strong organic growth in fuse products and incremental sales of $16.3 million from the Hamlin acquisition. The electronics segment experienced $1.5 million in favorable currency effects in the first nine months of 2014 primarily from sales denominated in euros. Excluding incremental sales from Hamlin and currency effects, net sales increased $24.1 million or 9% year-over-year.
Automotive sales increased $50.8 million or 26% to $245.1 million in the first nine months of 2014 compared to $194.3 million in the first nine months of 2013 due primarily to incremental sales of $20.2 million from Hamlin and strong growth in all product categories. The automotive segment experienced $3.1 million in favorable currency effects in the first nine months of 2014 primarily due to sales denominated in euros. Excluding incremental sales from acquisitions and currency effects, net sales decreased $0.9increased $27.5 million or 2%14% year-over-year.
Electrical sales increased $1.2decreased $7.0 million or 4%7% to $32.1$86.6 million in the first quarternine months of 20132014 compared to $30.9$93.5 million in the first quarternine months of 20122013 due primarily to growthslowing demand for custom and relay products as a result of a slow-down in power fuses primarily reflecting increasedthe mining industry. This more than offset incremental sales intoof $15.3 million from the solar market.SymCom acquisition. The electrical segment experienced $0.2$0.6 million in unfavorable currency effects in the first quarternine months of 20132014 primarily from sales denominated in Canadian dollars. Excluding incremental sales from SymCom and currency effects, net sales decreased $21.6 million or 23% year-over-year.
On a geographic basis, sales in the Americas increased $3.8$28.9 million or 5%11% to $77.8$282.9 million in the first quarternine months of 20132014 compared to $74.0$254.0 million in the first quarternine months of 20122013 due to increasedincremental sales from business acquisitions of power fuses$32.0 million, offset by weaker commercial vehicle productcustom and relay sales and $0.2$0.8 million in unfavorable currency effects from sales denominated in Canadian dollars. Excluding incremental sales from acquisitions and currency effects, net sales decreased $2.3 million or 1% year-over-year.
Europe sales increased $2.7$27.4 million or 10%27% to $30.5$127.8 million in the first quarternine months of 20132014 compared to $27.8$100.4 million in the first quarternine months of 20122013 mainly due to strong demand for both automotive and electronics products, incremental sales of $5.7$9.4 million from AccelHamlin and $0.2$4.3 million in favorable currency effects offset by lower demand for electronics and automotive products.effects. Excluding incremental sales from acquisitions and currency effects, Europe sales declined 11% year-over-year primarily due to a decrease in demand for automotive and electrical products partially offset by an increase in sales of electronics products.increased $13.7 million or 14% year-over-year.
Asia-Pacific sales increased $3.8$29.3 million or 6%14% to $62.6$234.7 million in the first quarternine months of 20132014 compared to $58.8$205.3 million in the first quarternine months of 20122013 primarily due to higher demand for electricalautomotive and automotiveelectronics products, offset by $0.2incremental sales from Hamlin of $10.4 million and $0.5 million in unfavorablefavorable currency effects primarily from sales denominated in Japanese yen.Korean won. Excluding incremental sales from Hamlin and currency effects, net sales increased $18.4 million or 9% year-over-year.
Gross profit was $64.6$248.9 million or 38% of net sales for the first quarter of 2013 compared to $60.9 million or 38%39% of net sales in the same quarter last year.first nine months of 2014 compared to $219.1 million or 39% of net sales in the first nine months of 2013. Gross profit for the nine 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 of severance charges resulting from restructuring at the Hamlin-Mexico plant. Gross profit for the first nine months of 2013 included a $2.1 million non-cash charge to cost of goods sold for inventory that was stepped-up to fair value as a result of the Hamlin acquisition. Excluding the impact of these charges, gross profit was 39% for the first nine months of 2014 and 40% for the first nine months of 2013. The decline in gross margin is primarily attributable to lower sales in the Electrical market.
Total operating expense was $36.5 million or 21% of net sales for the first quarter of 2013 compared to $35.0$141.4 million or 22% of net sales for the same quarterfirst nine months of 2014 compared to $122.1 million or 22% of net sales for the first nine months in 2012.2013. The increase in operating expenses primarily reflects incremental operating expenses of $1.5$12.0 million from the business acquisitions.
Operating income for the first quarternine months of 20132014 was approximately $28.1$107.4 million compared to operating income of $25.8$97.1 million for the same quarterfirst nine months in 20122013 primarily due to higher sales and gross margin partially offset by slightly higher operating expenses as described above.
Interest expense was $0.4$3.7 million in bothfor the first quarternine months of 2014 and $2.0 million for the first nine months of 2013 and is primarily related to the first quarter of 2012.company’s revolving credit facility.
Impairment, loanForeign exchange loss (gain), reflecting net gains and equity losses resulting from the investment ineffect of exchange rate changes on various foreign currency transactions worldwide, was approximately $2.0 million of expense for the first nine months of 2014 and loan to Shocking Technologies was $10.7$1.9 million of income for the first nine months of 2013 and primarily reflects fluctuations in the first quarter of 2013 compared to $0.5 million inPhilippine peso against the first quarter of 2012. The company fully impaired its investment and loan receivable in Shocking during the first quarter of 2013 as described in Note 6.U.S. dollar.
Other (income) expense, net, consisting of interest income, royalties and non-operating income and foreign currency itemsexpense was approximately $0.9$4.9 million of income for the first quarternine months of 20132014 compared to $0.1$3.5 million of expense inincome for the first quarternine months of 2012. The results for 2013 and 2012 were primarily due to the impact from foreign exchange revaluation.2013.
Income before income taxes was $18.0$106.6 million for the first quarternine months of 20132014 compared to income before income taxes of $24.8$89.9 million for the first quarternine months of 2012.2013. Income tax expense was $6.5$26.7 million with an effective tax rate of 36.1%25.0% for the first quarternine months of 20132014 compared to income tax expense of $7.2$24.8 million with an effective tax rate of 29.1% in27.6% for the first quarternine months of 2012.2013. The effective tax rates for both the first quarternine months of 2013 (which includes incremental income tax expense of $3.3 million relating to the Shocking Technologies impairment loss as discussed further in Item 1, Note 16 - Restatement)2014 and 20122013 are lower than the U.S. statutory tax rate primarily due to the result of more income earned in lowcountries with lower tax jurisdictions.rates than the U.S.
Net income for the first quarternine months of 20132014 was $11.5$79.9 million or $0.51$3.52 per diluted share compared to net income of $17.6$65.1 million or $0.80$2.89 per diluted share for the same quarternine months of 2012.2013.
Liquidity and Capital Resources
As of March 30, 2013, $231.8September 27, 2014, $365.3 million of the $246.9$378.3 million of the company’s cash and cash equivalents was held by foreign subsidiaries. Of the $231.8$365.3 million held by foreign subsidiaries, approximately $20.5$17.7 million could be repatriated with minimal tax consequences. consequences as of September 27, 2014.
In the fourth quarter of 2014, in conjunction with the post-merger integration of Hamlin, the company expects to repatriate over $90.0 million of cash to the U.S. from various overseas subsidiaries.The company expects to maintain its foreign cash balances (other than the aforementioned $20.5$90.0 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. in the foreseeable future. The company is also in the process of reviewing and revising its internal legal structure to optimize its ability to use cash.
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 Facilities
On June 13, 2011May 31, 2013, the company entered into a domestic unsecured financing agreement, which expires on June 13, 2016, consisting of anew credit agreement with certain commercial banks that providesJ.P. Morgan Securities LLC for up to $325.0 million which consisted of a $150.0 million revolving credit facility with a potential to increase up toof $225.0 million upon requestand an unsecured term loan of $100.0 million. The new credit agreement is for a five year period. On January 30, 2014, the company and agreement withincreased the lenders.unsecured revolving credit facility entered into on May 31, 2013, by $50.0 million thereby increasing the total revolver borrowing capacity from $225.0 million to $275.0 million. At March 30, 2013,September 27, 2014, the company had available $55.4$92.9 million of borrowing capacity under the revolving credit facilityagreement at an interest rate of LIBOR plus 1.250% (1.45%1.50% (1.65% as of March 30, 2013)September 27, 2014). The credit agreement replacedreplaces the company’s previous credit agreement dated July 21, 2006 and term loan agreement dated September 29, 2008, and, unless terminated earlier, will terminate on June 13, 2016. 2011 which was terminated on May 31, 2013.
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 March 30, 2013,September 27, 2014, the company was in compliance with all covenants under the revolving credit facility.
The company also had $0.8 million outstanding in letters of credit at March 30, 2013.September 27, 2014. No amounts were drawn under these letters of credit at March 30, 2013.September 27, 2014.
Cash Flow
The company started 20132014 with $235.4$305.2 million of cash and cash equivalents. Net cash provided by operating activities was approximately $16.0$103.8 million for the first threenine months of 20132014 reflecting $11.5$79.9 million in net income and $19.8$39.3 million in non-cash adjustments (primarily $10.7 million in impairment charges and $7.8$31.2 million in depreciation and amortization) offset by $15.2$15.4 million in net changes to various operating assets and liabilities.
Changes in operating assets and liabilities for the first threenine months of 20132014 (including short-term and long-term items) that impacted cash flows negatively consisted of increases in accounts receivables ($9.7 million), inventory ($4.1 million) and prepaid and other assets ($2.1 million), decreases in accrued expenses (including post-retirement) ($7.1 million) and accrued payroll and severance ($7.3 million), accrued expenses (including post-retirement) ($4.6 million) and accrued taxes ($0.61.2 million). The increase in accounts receivables was due to increased sales in the first quarter.nine months. The decreaseincrease in accrued payroll and severance was due primarilyinventory resulted from higher stock levels to payouts for the 2012 management incentive plan which occurred in the first quarter.meet increased demand. The decrease in accrued expenses was due primarily to a $5.0$9.9 million in pension contributioncontributions made during the first quarter. Changes that hadhaving a positive impact on cash flows were decreases in inventories ($3.6 million) and prepaid expenses and other ($1.0 million) and increases in accounts payable ($2.43.0 million) and accrued and deferred taxes ($5.8 million).
Net cash used in investing activities was approximately $13.9$65.3 million and included $5.4$19.4 million in capital spending and $8.5$52.8 million for the acquisition of SymCom offset by $6.8 million in expenditures forproceeds from sales of short-term investments.
Net cash provided by financing activities was approximately $11.3$41.5 million and included $10.0$56.8 million in net proceeds from borrowing and $5.8$14.6 million from the exercise of stock options, including tax benefits, partially offset by debt issuance costs of $0.1 million, cash dividends paid of $4.4$15.5 million and the repurchase of common stock for $14.3 million. The effects of exchange rate changes decreased cash and cash equivalents by approximately $2.0$6.9 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 an $11.5a $73.1 million increase in cash, which left the company with a cash and cash equivalents balance of $246.9$378.3 million at March 30, 2013.September 27, 2014.
The ratio of current assets to current liabilities was 3.02.3 at the end of the firstthird quarter of 20132014 compared to 2.9 at year-end 2012 and 2.5 at the end of the firstthird quarter of 2012.2013 and 2.7 at year-end 2013. Days sales outstanding in accounts receivable was approximately 5756 days at the end of the firstthird quarter of 20132014 compared to 6158 days at the end of the firstthird quarter of 20122013 and 5859 days at year-end 2012.2013. Days inventory outstanding was approximately 6170 days at the end of the firstthird quarter of 2014 as well as at the end of the third quarter of 2013 compared to 69 daysand at the year-end 2012 and 71 days at end of the first quarter of 2012.2013.
OutlookOutlook
The company’s sales and order rates have rebounded duringSales for the first quarter. The electronics business is showing signs of improvement while the electrical and automotive passenger vehicle markets continue to grow modestly. The commercial vehicle business appears to be recovering but still faces headwinds in key end markets. Protection relays and custom products have been negatively impacted by the slowdown in mining andfourth quarter are expected to show further weaknessfollow normal seasonal patterns which will call for slightly softer Automotive sales and a moderate decline in the second half of 2013 as several large projects near completion. Sales for the second quarter of 2013 are expected to increase between 4% and 9%Electronics sales compared to the firstthird quarter of 2013.2014. The Electrical segment is expected to remain weak due primarily to continued softness in the mining market. The company issued the following guidance for the fourth quarter of 2014:
● | Sales for the fourth quarter are expected to be in the range of $201.0 million to $211.0 million which represents 4% year-over-year growth at the midpoint. |
● | Earnings for the fourth quarter are expected to be in the range of $1.05 to $1.19 per diluted share, excluding any special items. |
● | Capital expenditures are expected to increase to approximately $11.0 million for the fourth quarter of 2014 due to spending on a new building at the company’s Philippines site and several large equipment purchases. |
The company also made the following comments regarding 2015:
● | After a relatively strong first half of 2014, electronics market growth has slowed. We see a continuation of modest growth in 2015. |
● | Global car build rates have moderated after several years of above-trend growth. We see this slower growth environment continuing through 2015. However, our program wins for fuses and sensors give us confidence that we can continue to grow our automotive sales faster that the market. |
● | The overall electrical business is expected to have moderate growth in 2015 driven primarily by the beginnings of a recovery for custom products and the ramp up of new products at SymCom. |
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 29, 2012.28, 2013. 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 29, 2012.28, 2013.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The company is exposed to market risk from changes in interest rates, foreign exchange rates and commodity prices.
InterestInterest Rates
The company had $94.0$276.5 million in debt outstanding under revolving credit facilities at March 30, 2013,September 27, 2014 at variable interest rates. 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 small 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, Lithuania and the Philippines. During the first threenine months of 2013,2014, sales to customers outside the U.S. were 66.1%62.2% 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 yuan or Taiwanese dollars.
The company’s foreign exchange exposures result primarily from sale of products in foreign currencies, foreign currency denominated purchases, 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 long exposure is to the euro, with lesser long exposures to the Canadian dollar, Japanese yen and Korean won. The company’s most significant short exposures are to the Chinese 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 deemed to be material.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, gold,silver, and silvergold where at current prices and volumes, a 10% price change would affect annual pre-tax profit by approximately $2.2$1.2 million for copper, $0.7$0.9 million for zinc, $0.4 million for gold, and $0.8 million for silver.silver and $0.3 million for gold. From time to time, the company has utilized derivative instruments to hedge certain commodity exposures deemed to be material.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
With the participation of our management, including the company’s principal executive officer and principal financial officer, the company has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q/A.10-Q. Based upon (1) that evaluation (2) the fact that the company’s previously issued financial statements included in the company’s quarterly report on Form 10-Q for the first fiscal quarter of 2013 should no longer be relied upon because of errors in those financial statements and (3) the fact that the company would restate those financial statementsis in the process of remediating the material weakness, which is expected to makebe completed by the necessary accounting adjustments,fourth quarter of 2014, the company’s principal executive officer and principal financial officer concluded that the company’s disclosure controls and procedures were not effective as of the end of the period ended March 30, 2013.September 27, 2014.
The errors resulted from the 2013 year-end treatment of tax deductions related to the company'scompany’s write-off of its investment in Shocking Technologies, Inc. The tax deductions were determined to be a capital loss for tax purposes, instead of an ordinary loss as the company had previously determined in consultation with a third party expert.
Material Weakness and Related Remediation Initiatives
On February 4, 2014, the company concluded there was a material weakness in internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act as it relates to deferred tax valuation allowance accounting at March 30, 2013. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statement will not be prevented or detected on a timely basis.
The material weakness in internal control over financial reporting relates to the company’s evaluation of the income tax considerations, including deferred tax valuation allowances relating to the write-off of its investment in Shocking Technologies, Inc. during the first quarter of 2013. Management has commenced steps to remediate the material weakness associated with this misstatement and has begun the process of implementing an enhanced process to review and approve the income tax accounting treatment for any material items that are of an unusual or complex nature.In accordance with the company’s internal control over financial reporting compliance program, however, the material weakness designation cannot be remediated fully until the remediation processes have been operational for a period of time and successfully tested. Such remediation is not anticipated to be complete until latercompleted in the fourth quarter of 2014.
Changes in Internal Control Over Financial Reporting
Except as has been described above, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three monthsperiod ended March 30, 2013,September 27, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Reference is made to Exhibits 31.1 and 31.2 for the Certification statements issued by the company’s Chief Executive Officer and Chief Financial Officer, regarding the company’s disclosure controls and procedures, and internal control over financial reporting, as of March 30, 2013.September 27, 2014.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 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 27, 2013.25, 2014. There have been no material changes from risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 29, 201228, 2013 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, 20132014 to April 30, 2014.2015. The company did not repurchase anyrepurchased 161,751 shares of its common stock during the first quarternine months of fiscal 20132014, and 1,000,000838,249 shares may yet be purchased under the previous authorizationprogram as of March 30, 2013.September 27, 2014. No shares were repurchased during the third quarter of 2014. The company withheld 16,518 shares of stock in lieu of withholding taxes on behalf of employees who became vested in restricted stock units during the first nine months of 2014.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
Item 6.6. Exhibits.
Exhibit | Description |
3.1 | Bylaws, as amended to date | |
10.1 | Termination of Amendment to the Littelfuse, Inc. Retirement Plan. |
31.1 | Certification of Gordon Hunter, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Philip G. Franklin, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q/A10-Q for the quarter ended March 30, 2013,September 27, 2014, to be signed on its behalf by the undersigned thereunto duly authorized.
| Littelfuse, Inc. |
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Date: | By | /s/ Philip G. Franklin |
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| Philip G. Franklin | |
Senior Vice President and | |||
Chief Financial Officer | |||
(As duly authorized officer and as | |||
the principal financial and accounting
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officer) |
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