Management's Discussion and Analysis of Financial Condition and
Results of Operations
THE FOLLOWING DISCUSSION PROVIDES AN ANALYSIS OF THE INFORMATION CONTAINED IN
THE CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES BEGINNING ON PAGE
24 FOR THE THREE FISCAL YEARS ENDED JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY
3, 1998, RESPECTIVELY.
CURRENT YEAR HIGHLIGHTS
Sales increased 10% in 1999 to $296.4 million and diluted earnings per share
increased 35% to $1.16. Strengthening electronic demand contributed
significantly to the sales growth and successful cost reduction programs as well
as higher unit volume increased gross margin and earnings. During the year, the
Company completed its acquisition of the Suppression Products Group. This
acquisition of overvoltage products complements the current line of overcurrent
products to broaden the Company's offering of circuit protection.
RESULTS OF OPERATIONS--1999 COMPARED WITH 1998
Sales increased 10% to $296.4 million in 1999 from $269.5 million in 1998. Of
the $26.9 million sales increase during 1999, $8.0 million was attributable to
sales of suppression products since the date of the acquisition. Electronic
sales increased $21.1 million or 16% to $154.1 million in 1999 compared to
$133.1 million in 1998, due primarily to strength in the Asia-Pacific region.
Automotive sales increased $4.6 million or 5% to $101.3 million in 1999 compared
to $96.7 million in 1998 reflecting growth in the OEM markets in all regions of
the world. Power fuse sales increased $1.2 million or 3% to $41.0 million in
1999 compared to $39.8 million in 1998. Led by Asia-Pacific and European sales
growth, international sales increased by 18% in 1999 to 46.1% of net sales in
1999 from 43.0% of net sales in 1998.
Gross profit was $117.3 million or 39.6% of sales for 1999 compared to $100.2
million or 37.2% of sales for 1998. The gross margin increase resulted from
successful worldwide cost reductions, increasing unit volumes during the year
and firming of selling prices in the last half of 1999. Selling, general and
administrative expenses increased $5.2 million to 18.9% of sales in 1999 in line
with 18.9% of sales in 1998. Research and development costs increased $1.1
million to 3.2% of sales in 1999 as compared to 3.1% of sales in 1998 due to
continued focus on development of new products. Amortization of reorganization
value and other intangibles was $7.1 million or 2.4% of sales for 1999 compared
to $6.8 million or 2.5% of sales for the prior year. Total operating expenses,
including intangibles amortization, were 24.5% of sales for both years.
Operating income for 1999 increased to $44.6 million or 15.1% of sales compared
to $34.1 million or 12.6% of sales for the prior year as a result of the factors
discussed above. Interest expense was $5.3 million for 1999 compared to $4.0
million for 1998 due to higher average debt levels.
Other income, net, consisting of interest income, royalties, minority
interest and foreign currency items was $1.3 million compared to other expense
of $0.1 million for the prior year. The increase in other income was primarily
the result of higher interest income in the year.
Income before taxes was $40.7 million in 1999 compared to $30.0 million in 1998.
Income tax expense was $15.5 million in 1999 compared to $10.1 million the prior
year. Net income for the year was $25.2 million, compared to $19.9 million for
the prior year. The Company's effective tax rate was 38.0% in 1999 compared to
33.7% in 1998. The lower effective tax rate in 1998 was due to a one-time
benefit related to the liquidation of one of the Company's subsidiaries in
Korea. Diluted earnings per share increased 35% to $1.16 in 1999 compared to
$0.86 in 1998. A 6% decline in average shares outstanding in 1999 as compared to
the prior year, due to the Company's repurchase of common stock, contributed
favorably to the increase in earnings per share.
1998 COMPARED WITH 1997
Sales decreased 2% to $269.5 million in 1998 from $275.2 million in 1997. The
gross margin was 37.2% compared to 40.4% the prior year and operating income was
12.7% of net sales compared to 15.9% the prior year. Net income decreased 22% to
$19.9 million in 1998 from $25.3 million in 1997 and diluted earnings per share
decreased 20% to $0.86 in 1998 from $1.07 in 1997.
Sales decreased $5.6 million during 1998. Sales declined both in the automotive
and electronic markets, with a modest increase in power fuse sales. Automotive
sales decreased $5.5 million or 5% to $96.7 million in 1998 compared to $102.1
million in 1997. Automotive sales were down domestically as a result of the
continued phase-out of electromechanical products and the absence of any product
fixes by the automotive OEM's in 1998. Electronic sales decreased $1.9 million
or 1% to $133.1 million in 1998 compared to $135.0 million in 1997. The
electronics business was down due in part to continued inventory reductions at
North American distributors, weakness in Japan and greater than historical
selling price declines. Power fuse sales increased $1.8 million or 5% to $39.8
million in 1998 compared to $38.0 million in 1997. Led by European sales
increases, international sales increased by 4% in 1998 to 43.0% of net sales in
1998 from 40.6% of net sales in 1997.
On a constant currency basis, electronic and power fuse sales increased 3% and
5%, respectively, automotive sales decreased 4% and consolidated sales were
flat. Gross profit was $100.2 million or 37.2% of sales for 1998 compared to
$111.1 million or 40.4% of sales for 1997. The gross margin decline resulted
from greater than historical selling price reductions, lower volumes than
anticipated and costs associated with the introduction of new products in 1998.
Selling, general and administrative expenses decreased $1.3 million to 18.9% of
sales in 1998 as compared to 19.0% of sales in 1997 as a result of the decline
in sales and favorable expense control during 1998. Research and development
costs increased $0.5 million to 3.1% of sales in 1998 as compared to 2.9% of
sales in 1997 due to the continued development of new products. Amortization of
reorganization value and other intangibles was $6.8 million or 2.5% of sales for
1998 compared to $7.2 million or 2.6% of sales in the prior year. Total
operating expenses, including intangibles amortization, were 24.5% of sales for
both years.
Operating income for 1998 was $34.1 million or 12.7% of sales compared to $43.8
million or 15.9% of sales the prior year. The decline in operating margin
resulted from decreases in gross margin.
Interest expense was $4.0 million for 1998 compared to $4.1 million for 1997.
Other expense, net, consisting of royalties, minority interest adjustments and
foreign currency items was $0.1 million compared to other income of $1.0 million
the prior year. Also included in other expense in 1998 were charges related to
the liquidation of Sam Hwa Littelfuse
amounting to approximately $0.4 million.
Income before taxes was $30.0 million in 1998 compared to $40.7 million in 1997.
Income tax expense was $10.1 million in 1998 compared to $15.3 million the prior
year. The Company's effective tax rate was 33.7% in 1998 compared to 37.7% in
1997. The decrease in income tax expense resulted from lower income before taxes
as well as a one-time benefit of $1.1 million related to the liquidation of Sam
Hwa Littelfuse. Net income for the year was $19.9 million in 1998 compared to
$25.3 million the prior year. Diluted earnings per share decreased to $0.86 in
1998 compared to $1.07 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Assuming no material adverse changes in market conditions, management expects
that the Company will have sufficient cash from operations to support both its
operations and its debt obligations for the foreseeable future.
The Company started 1999 with $28.0 million of cash. Net cash provided by
operations was $38.9 million for the year. Cash used in investing activities
included $20.0 million in property, plant and equipment and $24.8 million for
the Harris Corporation's Suppression Products Group acquisition. Cash used in
financing activities included net payments of long-term debt of $9.1 million.
The Company utilized borrowings under its revolving loan facility to finance the
purchase of Harris Corporation's Suppression Products Group and had $6.0 million
of this short-term debt remaining as of January 1, 2000. This left the Company
with $49.0 million of borrowing capability under the revolving loan facility as
of January 1, 2000. The repurchase of the Company's common stock for $12.8
million was partially offset by cash proceeds from the exercise of stock options
and conversion of warrants of $1.6 million. The effect of exchange rate changes
increased cash by $0.2 million. The net of cash provided by operations, less
investing activities, less financing activities, plus the effect of exchange
rates resulted in a $26.1 million net decrease in cash. This left the Company
with a cash balance of $1.9 million at the end of 1999.
Net working capital used $8.4 million of cash flow from operations in 1999.
Increases in accounts receivable of $14.3 million, inventory of $8.9 million and
other asset and liability changes of $0.1 million were offset by an increase in
accounts payable and accrued expenses of $14.9 million. Contributing to the
increase in working capital in 1999 was an increase in sales as well as some
information systems migration difficulties, which the Company is addressing.
Increased focus has been placed on working capital management and improvements
are expected in 2000.
The Company started 1998 with $0.8 million of cash. Net cash provided by
operations was $39.3 million for the year. Cash used to invest in property,
plant and equipment was $21.3 million, to invest in product acquisitions for
electrostatic discharge devices and medium voltage power fuses was $2.8 million
and to make a non-compete payment was $0.2 million. Cash provided by financing
activities included net proceeds of long-term debt of $33.9 million due to a
$60.0 million private placement of new senior notes and renegotiation of the
existing bank credit agreement. The available $55.0 million revolving loan
facility was unused as of January 2, 1999. The purchase of the Company's common
stock for $26.8 million was partially offset by cash proceeds from the exercise
of stock options and conversion of warrants of $6.3 million.
The effect of exchange rate changes decreased cash
by $1.1 million. The net of cash provided by operations, less investing
activities, less financing activities, plus the effect of exchange rates
resulted in a $27.2 million net increase in cash. This left the Company with a
cash balance of $28.0 million at the end of 1998.
Net working capital used $2.8 million of cash flow from operations for 1998.
Lower inventory and prepaid and other items were the primary cash providers,
offset by an increase in accounts receivable and a decrease in accounts payable.
The Company's capital expenditures were $20.0 million in 1999, $21.3 million in
1998 and $18.9 million in 1997. The Company expects that capital expenditures
will be approximately $22.0 to $23.0 million in 2000. The primary purposes for
capital expenditures in 2000 will be for new product tooling and production
equipment. As in 1999, capital expenditures in 2000 are expected to be financed
by cash flow from operations.
The Company decreased total debt by $9.1 million in 1999, after increasing debt
by $33.9 million in 1998 and decreasing debt by $5.2 million in 1997. The
Company is required to repay $15.0 million of long-term debt in 2000. In May of
1999, the Company's Board of Directors authorized the Company to repurchase up
to 1,000,000 shares of its common stock or 1,000,000 of its warrants, or any
combination not to exceed 1,000,000 shares of common stock or warrants, from
time to time, depending on market conditions. The Company repurchased 707,500
common shares for $12.8 million in 1999, 1,345,000 common shares for $26.8
million in 1998 and 210,000 warrants and 205,000 common shares for $8.6 million
in 1997. As of January 1, 2000, the Company had over 800,000 shares remaining
for repurchase under the Board of Directors authorization expiring in May of
2000.
Earnings before interest, taxes, depreciation, amortization and other income and
expense (EBITDA) increased 25% to $70.2 million in 1999 from $56.3 million in
1998. EBITDA decreased 12% to $56.3 million in 1998 from $64.1 million in 1997.
Net working capital (working capital less cash and the current portion of
long-term debt) as a percent of sales was 20.2% at year-end 1999 compared to
17.3% at year-end 1998 and to 15.1% at year-end 1997. The increase in net
working capital was due in part to the increase in days sales outstanding in
accounts receivable to approximately 68 days at year-end 1999 compared to 61
days at year-end 1998 and 55 days at year-end 1997. The increase in days sales
outstanding in 1999 was due primarily to difficulties experienced with the
migration to new information systems as indicated above. Additionally, the trend
towards a higher percentage of international sales with longer standard terms
than domestic sales has contributed to the increase in days sales outstanding
over the last several years.
The ratio of current assets to current liabilities was 1.5 to 1 at year-end 1999
compared to 2.1 to 1 at year-end 1998 and 1.6 to 1 at year-end 1997. The ratio
of long-term debt to equity was 0.5 to 1 at year-end 1999 compared to 0.6 to 1
at year-end 1998 and 0.3 to 1 at year-end 1997.
MARKET RISK
The Company is exposed to market risk from changes in interest rates, foreign
exchange rates and commodities.
The Company had long-term debt outstanding at January 1, 2000 in the form of
Senior Notes and lines of credit at both variable and fixed interest rates.
Since substantially all of the debt has fixed interest rates, the Company's
interest expense is not sensitive to changes in interest rate levels.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign countries. The Company has manufacturing facilities in
Mexico, England, Ireland, Switzerland, South Korea, China and the Philippines.
During 1999, sales exported from the United States or manufactured abroad
accounted for 46.1% of total sales. Substantially all sales in Europe are
denominated in Dutch Guilders, British Pounds Sterling, United States Dollars
and Euros and substantially all sales in the Asia-Pacific region are denominated
in United States Dollars and South Korean Won.
The Company's identifiable foreign exchange exposures result from the purchase
and sale of products from affiliates, repayment of intercompany trade and loan
amounts and translation of local currency amounts in consolidation of financial
results. Changes in foreign currency exchange rates or weak economic conditions
in the foreign countries in which it manufactures and distributes products could
affect the Company's sales and financial results. Other than utilizing netting
and offsetting intercompany account management techniques to reduce known
exposures, the Company does not use derivative financial instruments to mitigate
its foreign currency risk at the present time.
The Company uses various metals in the production of its products, including
zinc, copper and silver. The Company's earnings are exposed to fluctuations in
the prices of these commodities. The Company does not currently use derivative
financial instruments to mitigate this commodity price risk.
YEAR 2000
As of July 3, 1999, the Company had completed 100% of the remediation phase for
its mission critical information technology, operating equipment systems and
external interface exposures.
The Company has not experienced any difficulties with its information
technology, operating equipment systems, or external interfaces related to the
year 2000 transition. In addition, the Company has not experienced any
difficulties with its significant suppliers.
The Company believes that the foregoing statements are in conformity with the
Year 2000 Information and Readiness Disclosure Act (Public Law 105-271, 112
Stat. 2386), and all of the foregoing statements are designated as Year 2000
Readiness Disclosures thereunder. The protection of this act
does not apply to federal securities fraud.
OUTLOOK
Continued sales growth is expected in 2000, fueled in part by sales of products
introduced in 1999 and 2000 and continued increases in electronic product sales.
A full year of sales in 2000 of suppression products resulting from the
acquisition of the Suppression Products Group in October of 1999 is expected to
contribute to increases over 1999.
The Company will continue to identify and implement cost reduction opportunities
in 2000. These efforts are expected to help offset selling price pressure from
customers. The development of new products, global expansion, and reinvestment
continue to be the Company's long-term growth strategy. The Company intends to
continue its commitment to funding research and development, international
market development, and investments in capital equipment and operations
improvements.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
The statements under "Outlook," "Year 2000" and the other statements which
are not historical facts contained in this report are forward-looking statements
that involve risks and uncertainties, including, but not limited to, product
demand and market acceptance risks, the effect of economic conditions, the
impact of competitive products and pricing, product development and patent
protection, commercialization and technological difficulties, year 2000 issues
discussed above, capacity and supply constraints or difficulties, exchange rate
fluctuations, actual purchases under agreements, the effect of the Company's
accounting policies, and other risks which may be detailed in the Company's
Securities and Exchange Commission filings.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders Littelfuse, Inc.
We have audited the consolidated statements of financial condition of
Littelfuse, Inc. and subsidiaries as of January 1, 2000, and January 2, 1999,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended January 1, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Littelfuse, Inc.
and subsidiaries as of January 1, 2000 and January 2, 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 1, 2000, in conformity with accounting principles
generally accepted in the Unites States.
/s/ Ernst & Young LLP
Chicago, Illinois
February 11, 2000
Littelfuse, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
January 1, 2000 January 2, 1999
------------------------------------
(In Thousands)
Assets
Current assets:
Cash and cash equivalents $ 1,888 $ 27,961
Accounts receivable, less allowances
(1999 - $ 7,121; 1998 - $5,885) 59,583 41,382
Inventories 48,916 36,209
Deferred income taxes 5,265 2,456
Prepaid expenses and other current assets 3,485 3,090
------------------------------------
------------------------------------
Total current assets 119,137 111,098
Property, plant, and equipment:
Land 8,370 6,753
Buildings 28,636 25,682
Equipment 157,296 131,136
------------------------------------
194,302 163,571
Less: Allowances for depreciation and amortization 102,511 85,783
------------------------------------
------------------------------------
91,791 77,788
Intangible assets, net of amortization:
Reorganization value in excess of amounts allocable to
identifiable assets 33,943 37,814
Patents and licenses 4,356 6,522
Distribution network 5,918 6,412
Trademarks 3,022 3,275
Other 16,274 5,940
------------------------------------
63,513 59,963
Other assets 1,257 1,695
------------------------------------
$275,698 $250,544
====================================
Littelfuse, Inc. and Subsidiaries
Consolidated Statements of Financial Condition (continued)
January 1, 2000 January 2, 1999
------------------------------------
(In Thousands)
Liabilities and shareholders' equity Current liabilities:
Accounts payable $ 19,075 $ 9,926
Accrued payroll 14,167 12,555
Accrued expenses 14,596 7,929
Accrued income taxes 9,403 6,042
Current portion of long-term debt 20,974 15,515
------------------------------------
------------------------------------
Total current liabilities 78,215 51,967
Long-term debt, less current portion 55,460 70,061
Deferred income taxes 4,490 3,951
Other long-term liabilities 501 41
Shareholders' equity:
Preferred stock, par value $.01 per share: 1,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, par value $.01 per share: 34,000,000 shares
authorized; shares issued and outstanding, 1999 - 19,489,143;
1998 - 20,023,520 195 200
Additional paid-in capital 55,241 55,537
Notes receivable - Common stock (2,909) (2,772)
Accumulated other comprehensive loss (5,642) (3,726)
Retained earnings 90,147 75,285
------------------------------------
137,032 124,524
------------------------------------
$275,698 $250,544
====================================
See accompanying notes.
Littelfuse, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended Year ended Year ended
January 1, January 2, January 3,
2000 1999 1998
--------------------------------------------------------
(In Thousands, Except per Share Amounts)
Net sales $296,367 $269,540 $275,165
Cost of sales 179,112 169,341 164,034
--------------------------------------------------------
--------------------------------------------------------
Gross profit 117,255 100,199 111,131
Selling, general and administrative expenses 56,098 50,936 52,226
Research and development expenses 9,455 8,387 7,927
Amortization of intangibles 7,078 6,780 7,210
--------------------------------------------------------
Operating income 44,624 34,096 43,768
Interest expense 5,253 3,989 4,103
Other expense/(income), net (1,306) 98 (987)
--------------------------------------------------------
--------------------------------------------------------
Income before income taxes 40,677 30,009 40,652
Income taxes 15,457 10,124 15,310
========================================================
Net income $ 25,220 $ 19,885 $ 25,342
========================================================
========================================================
Net income per share:
Basic $ 1.29 $ 0.97 $ 1.28
Diluted $ 1.16 $ 0.86 $ 1.07
========================================================
Weighted-average shares and equivalent shares outstanding:
Basic 19,572 20,474 19,824
Diluted 21,751 23,154 23,623
========================================================
See accompanying notes.
Littelfuse, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Period from December 28, 1996 to January 1, 2000
Notes Accumulated
Additional Receivable - Other
Common Paid-In Common Stock Comprehensive Retained
Stock Capital Income/(Loss) Earnings Total
-----------------------------------------------------------------------------------
(In Thousands)
-----------------------------------------------------------------------------------
Balance at December 28, 1996 198 54,569 (1,470) (870) 56,195 108,622
Comprehensive income:
Net income for the year - - - - 25,342 25,342
Foreign currency translation adjustment - - - (3,897) - (3,897)
-----------------
Comprehensive income 21,445
Stock options and warrants exercised 3 2,567 (490) - - 2,080
Purchase of 205,000 shares of common stock (2) (720) - - (4,044) (4,766)
Redemption of 210,250 warrants - (3,876) - - - (3,876)
-----------------------------------------------------------------------------------
Balance at January 3, 1998 199 52,540 (1,960) (4,767) 77,493 123,505
Comprehensive income:
Net income for the year - - - - 19,885 19,885
Foreign currency translation adjustment - - - 1,041 - 1,041
-----------------
Comprehensive income 20,926
Stock options and warrants exercised 15 7,693 (812) - - 6,896
Purchase of 1,345,300 shares of common stock (14) (4,696) - - (22,093) (26,803)
-----------------------------------------------------------------------------------
Balance at January 2, 1999 200 $55,537 $(2,772) $(3,726) $75,285 $124,524
Comprehensive income:
Net income for the year - - - - 25,220 25,220
Foreign currency translation adjustment - - - (1,916) - (1,916)
-----------------
Comprehensive income 23,304
Stock options and warrants exercised 2 2,172 (137) - - 2,037
Purchase of 707,500 shares of common stock (7) (2,468) - - (10,358) (12,833)
===================================================================================
Balance at January 1, 2000 195 $55,241 $(2,909) $(5,642) $90,147 $137,032
===================================================================================
See accompanying notes
Littelfuse, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended Year ended Year ended
January 1, January 2, January 3,
2000 1999 1998
-------------------------------------------
(In Thousands)
Operating activities
Net income $25,220 $19,885 $25,342
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 18,461 15,426 13,184
Amortization of intangibles 7,078 6,780 7,210
Provision for bad debts 614 626 410
Deferred income taxes (3,922) (896) 215
Other (225) 326 (159)
Changes in operating assets and liabilities:
Accounts receivable (14,323) (3,218) (3,331)
Inventories (8,850) 3,610 (8,281)
Accounts payable and accrued expenses 14,915 (4,992) 1,950
Prepaid expenses and other (117) 1,757 217
-------------------------------------------
Net cash provided by operating activities 38,851 39,304 36,757
Investing activities
Purchases of property, plant, and equipment, net (19,975) (21,320) (18,936)
Purchase of business, net of cash acquired (24,754) (2,751) (5,268)
Other (56) (249) (357)
-------------------------------------------
Net cash used in investing activities (44,785) (24,320) (24,561)
Financing activities
Proceeds (payments) of long-term debt, net (9,132) 33,851 (5,192)
Proceeds from exercise of stock options and warrants 1,645 6,308 1,055
Purchases of common stock and redemption of warrants (12,833) (26,803) (8,642)
-------------------------------------------
Net cash provided by (used in) financing activities (20,320) 13,356 (12,779)
Effect of exchange rate changes on cash 181 (1,134) (89)
-------------------------------------------
-------------------------------------------
Increase (decrease) in cash and cash equivalents (26,073) 27,206 (672)
Cash and cash equivalents at beginning of year 27,961 755 1,427
---------------
===========================================
Cash and cash equivalents at end of year $1,888 $27,961 $ 755
===========================================
See accompanying notes.
Littelfuse, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
January 1, 2000 and January 2, 1999
1. Summary of Significant Accounting Policies and Other Information
Nature of Operations
Littelfuse, Inc. and its subsidiaries (the Company) design, manufacture, and
sell fuses and other circuit protection devices for use in the automotive,
electronic, and general industrial markets throughout the world. The Company
also manufactures and supplies relays, switches and circuit breakers.
Fiscal Year
The Company's fiscal years ended January 1, 2000 and January 2, 1999, contained
52 weeks. The Company's fiscal year ended January 3, 1998, contained 53 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of Littelfuse, Inc.
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Cash Equivalents
All highly liquid investments, with a maturity of three months or less when
purchased, are considered to be cash equivalents.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents, accounts
receivable, and long-term debt. The carrying values of such financial
instruments approximate their estimated fair values.
1. Summary of Significant Accounting Policies and Other Information (continued)
Accounts Receivable
The Company performs credit evaluations of customers' financial condition and
generally does not require collateral. Credit losses are provided for in the
financial statements and consistently have been within management's
expectations.
Inventories
Inventories are stated at the lower of cost (first in, first out method) or
market, which approximates current replacement cost.
Property, Plant, and Equipment
Land, buildings, and equipment are carried at cost. Depreciation is provided
under accelerated methods using useful lives of 21 years for buildings, 7 to 9
years for equipment, and 7 years for furniture and fixtures. Tooling and
computer software are depreciated using the straight-line method over 5 years
and 3 years, respectively.
Intangible Assets
Reorganization value in excess of amounts allocable to identifiable assets and
trademarks are amortized using the straight-line method over 20 years. Patents
are amortized using the straight-line method over their estimated useful lives,
which average approximately 10 years. The distribution network is amortized
using an accelerated method over 20 years. Licenses are amortized using an
accelerated method over their estimated useful lives, which average
approximately 9 years. Other intangible assets consist principally of goodwill
that is being amortized over 10 to 20 years. Accumulated amortization of these
intangible assets was $53.2 million at January 1, 2000 and $46.1 million at
January 2, 1999. If there are indicators that an asset may be impaired, the
Company assesses recoverability from future operations using undiscounted cash
flows of the related business as a measure. Under this approach, the carrying
value of the intangible asset would be reduced to a fair value if the Company's
best estimate for expected undiscounted future cash flows of the related
business would be less than the carrying amount of the intangible asset over its
remaining amortization period.
Revenue Recognition
Sales and associated costs are recognized when products are shipped to
customers.
Advertising Costs
The Company expenses advertising costs as incurred which amounted to $2.6
million in 1999, $2.6 million in 1998 and $2.8 million in 1997.
1. Summary of Significant Accounting Policies and Other Information (continued)
Foreign Currency Translation
The financial statements of foreign entities have been translated in accordance
with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign
Currency Translation," and, accordingly, unrealized foreign currency translation
adjustments are reflected as a component of shareholders' equity.
Stock-Based Compensation
Under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123), the Company accounts for stock option grants to employees and
directors in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Generally, the Company grants stock
options for a fixed number of shares with an exercise price equal to the market
price of the underlying stock at the date of grant and, accordingly, does not
recognize compensation expense. On certain occasions, the Company has granted
stock options for a fixed number of shares with an exercise price below that of
the underlying stock on the date of the grant and recognizes compensation
expense accordingly. This compensation expense has not been material.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in the
financial statements. The Company adopted SFAS 130 for fiscal 1998. The Company
has chosen to disclose comprehensive income, which encompasses net income and
foreign currency translation adjustments, in the consolidated statements of
shareholders' equity. Prior years have been restated to conform to SFAS 130
requirements.
1. Summary of Significant Accounting Policies and Other Information (continued)
Business Segment Disclosure
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards
for the way in which public business enterprises report information about
operating segments in annual financial statements and interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
adopted SFAS 131 for fiscal 1998. (See Note 8.)
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1999 and 1998 financial statement presentation.
2. Acquisition of Business and Liquidation
On May 30, 1997, the Company invested $5.3 million in exchange for a 97%
interest in Samjoo Elec. Ind. Co. Ltd., a Korean fuse manufacturer, now doing
business as Littelfuse Triad. This acquisition has been accounted for through
the use of the purchase method of accounting; accordingly, the accompanying
financial statements include the results of its operations since the acquisition
date. Goodwill arising from this acquisition of approximately $2.9 million is
being amortized over 20 years. Pro forma results of operations, assuming this
acquisition had occurred as of December 29, 1996, would not differ materially
from reported results of operations.
During the year ended January 2, 1999, the Company made two acquisitions for
approximately $2.8 million. The acquisitions have been accounted for through the
use of the purchase method of accounting; accordingly, the accompanying
financial statements include the results of operations since the acquisition
dates. Goodwill arising from these acquisitions of approximately $2.6 million is
being amortized over 10 years. Pro forma results of operations, assuming these
acquisitions had occurred as of December 29, 1996, would not differ materially
from reported results of operations.
In March 1998, the Company consolidated its Korean operations into Littelfuse
Triad. Pursuant to the consolidation, the Company incurred costs of
approximately $400,000 to liquidate Sam Hwa Littelfuse, Inc.
On October 19, 1999, the Company acquired Harris Corporation's Suppression
Products Group for $ 24.8 million in cash. The Suppression Products Group
manufactures and markets a broad line of transient voltage suppression devices
that provide circuit protection for products in numerous markets including
consumer, computer, telecommunications, automotive, office equipment, industrial
and power transmission. This acquisition has been accounted for through the use
of the purchase method of accounting; accordingly, the accompanying financial
statements include the results of its operations since the acquisition date. The
purchase price has been allocated to the following net assets acquired based on
fair value of such assets: accounts receivable of $7.4 million, inventory of
$4.6 million, property, plant and equipment of $12.7 million, other assets of
$0.4 million, goodwill of $4.8 million and liabilities assumed of $5.1 million.
Purchase accounting liabilities recorded during 1999 consist of $0.5 million for
transaction costs and $5.7 million for costs associated with exiting a product
line and involuntary termination of employees in connection with the integration
of the business. Goodwill arising from this acquisition of approximately $ 11.0
million is being amortized over 20 years. Pro forma results of operations,
assuming that this acquisition had occurred as of January 4, 1998, pro forma
sales of Littelfuse, Inc. would have been $328.3 million in 1999 and $311.9
million in 1998 and pro forma results of operations would not differ materially
from reported results of operations.
3. Inventories
The components of inventories are as follows at January 1, 2000, and January 2,
1999 (in thousands):
1999 1998
---------------------------------------
---------------------------------------
Raw materials $ 12,684 $ 9,800
Work in process 14,854 5,338
Finished goods 21,378 21,071
---------------------------------------
=======================================
$48,916 $36,209
=======================================
4. Long-Term Obligations
The carrying amounts of long-term debt, which approximate fair value, are as
follows at January 1, 2000, and January 2, 1999 (in thousands):
1999 1998
------------------------------------
------------------------------------
6.16% Senior Notes, maturing 2005 $55,000 $60,000
6.31% Senior Notes, maturing 2000 9,000 18,000
Revolving credit facility 6,000 -
Other obligations 4,964 5,539
Capital lease obligations 1,470 2,037
------------------------------------
76,434 85,576
Less: Current maturities 20,974 15,515
====================================
$55,460 $70,061
====================================
The Company has unsecured financing arrangements consisting of Senior Notes with
insurance companies and a credit agreement with banks that provides a $55.0
million revolving credit facility. The Senior Notes require minimum annual
principal payments. No principal payments are required for borrowings against
the revolving line of credit until the line matures on August 31, 2002. At
January 1, 2000, the Company had available $49.0 million of borrowing capability
under the revolving credit facility at an interest rate of LIBOR plus 0.375%.
The bank credit agreement provides for letters of credit of up to $8.0 million
as part of the available credit line. At January 1, 2000 the Company had $1.8
million of outstanding letters of credit.
The Senior Notes and bank credit agreement contain 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 addition, the Company is required to satisfy certain financial
covenants and tests relating to, among other matters, interest coverage, working
capital, leverage and net worth.
Aggregate maturities of long-term obligations at January 1, 2000, are as follows
(in thousands):
2000 $20,974
2001 14,475
2002 10,063
2003 10,063
2004 and thereafter 20,859
==================
$76,434
==================
Interest paid on long-term debt approximated $4.9 million in 1999, $3.8 million
in 1998 and $4.0 million in 1997.
5. Benefit Plans
The Company has a defined-benefit pension plan covering substantially all of its
North American employees. The amount of the retirement benefit is based on years
of service and final average monthly pay. The plan also provides post-retirement
medical benefits to retirees and their spouses if the retiree has reached age 62
and has provided at least ten years of service prior to retirement. Such
benefits generally cease once the retiree attains age 65. The Company's
contributions are made in amounts sufficient to satisfy ERISA funding
requirements.
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosure about Pensions
and Other Postretirement Benefits." The statement standardizes the disclosure
requirements for pensions and other postretirement benefits.
1999 1998
------------------------------------
(In Thousands)
Change in benefit obligation
Benefit obligation at beginning of year $45,487 $41,649
Service cost 2,264 1,942
Interest cost 3,015 2,822
Actuarial loss/(gain) (4,760) 1,155
Benefits paid (1,902) (2,081)
====================================
Benefit obligation at end of year $44,104 $45,487
====================================
Change in plan assets at fair value
Plan assets at beginning of year $44,363 $39,703
Actual return on plan assets 5,050 6,041
Employer contributions - 700
Benefits paid (1,902) (2,081)
====================================
Fair value of plan assets at end of year $47,511 $44,363
====================================
Funded status $ 3,407 $ (1,124)
Unrecognized prior service cost 178 245
Unrecognized net actuarial loss/(gain) (3,910) 2,301
====================================
Prepaid pension obligation $ (325) $ 1,422
====================================
Weighted-average assumptions
Discount 7.50% 6.75%
Expected return on plan assets 9.00% 9.00%
Salary growth rate 4.50% 4.50%
Components of net periodic benefit cost
Service cost $ 2,264 $ 1,942
Interest cost 3,015 2,822
Expected return on plan assets (3,648) (3,243)
Amortization of prior service cost 66 65
Recognized net actuarial loss 50 151
====================================
Net periodic benefit cost $ 1,747 $ 1,737
====================================
The Company also has a defined-benefit pension plan covering most of its Ireland
employees as a result of its acquisition of the Suppression Products Group in
October, 1999. The amount of the retirement benefit is based on years of service
and final average monthly pay. The plan also provides death benefits to the plan
participants. As of January 3, 1998 the Ireland pension plan had assets in the
amount of $11.1 million and liabilities in the amount of $10.4 million. The
Company is in the process of obtaining a more current actuarial valuation of the
Ireland plan.
The Company provides additional retirement benefits for certain key executives
through its unfunded defined contribution Supplemental Executive Retirement
Plan. The charge to expense for this plan amounted to $1,058,000, $852,000 and
$853,000 in 1999, 1998 and 1997, respectively.
The Company also maintains a 401(k) savings plan covering substantially all U.S.
employees. The Company matches 50% of the employee's annual contributions for
the first 4% of the employee's gross wages. Employees vest in the Company
contributions after two years of service. Company matching contributions
amounted to $632,000 in 1999, $547,000 in 1998 and $523,000 in 1997.
6. Shareholders' Equity
Stock Split
On April 29, 1997, the Company's Board of Directors approved a two-for-one stock
split to stockholders of record on May 20, 1997, payable June 10, 1997, in the
form of a stock dividend. All prior years' number of shares and per share
amounts have been restated to reflect the stock split.
Stock Purchase Warrants
Warrants to purchase 2,461,309 shares of common stock at $4.18 per share were
outstanding at January 1, 2000. The warrants are exercisable at the option of
the holder at any time prior to December 27, 2001, and are not callable by the
Company.
Stock Options
The Company has stock option plans authorizing the granting of both incentive
and nonqualified options and other stock rights of up to 2,800,000 shares of
common stock to employees and directors. The stock options vest over a five-year
period and are exercisable over a ten- year period commencing from the date of
vesting.
A summary of stock option information follows:
1999 1998 1997
-------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Price Exercise Price Exercise Price
Options Options Options
-------------------------------------------------------------------------------------
Outstanding at
beginning of year 1,428,910 $16.91 1,361,310 $14.28 1,257,380 $10.95
Granted 367,200 19.63 311,500 24.64 274,300 25.29
Option price equals
market price 352,200 20.25 311,500 24.64 274,300 25.29
Option price less
than market price 15,000 5.00 - - - -
Exercised (144,870) 9.34 (153,480) 6.49 (156,170) 6.70
Forfeited (62,400) 21.98 (90,420) 15.31 (14,200) 15.69
=====================================================================================
Outstanding at end
of year 1,588,840 $18.02 1,428,910 $16.91 1,361,310 $14.28
=====================================================================================
=====================================================================================
Exercisable at end of
year 765,960 708,818 671,126
Available for future
grant 216,440 517,340 138,420
Weighted-average
value of options
granted during the
year $12.04 $11.81 $11.16
Option price equals
market price 11.79 11.81 11.16
Option price less
than market price 17.75 - -
As of January 1, 2000, the Company had the following outstanding options:
Weighted- Weighted-
Exercise Options Average Average Options
Price Outstanding Exercise Price Remaining Life Exercisable
- -----------------------------------------------------------------------------------------------------------
$3.688 to $5.00 147,700 $ 4.00 3.00 129,500
$7.50 to $11.155 185,100 10.20 3.92 182,700
$11.625 to $16.50 235,600 14.84 5.03 201,920
$17.813 to $25.50 930,240 21.52 8.27 215,520
$28.875 to $34.125 90,200 28.93 7.56 36,320
Disclosure of pro forma information regarding net income and net income per
share is required by SFAS 123 and has been determined as if the Company had
accounted for its stock options granted in 1999, 1998, and 1997 under the fair
value method using the Black-Scholes option pricing model. The following
assumptions were utilized in the valuation:
1999 1998 1997
------------------------------------------------------
Risk-free interest rate 6.52% 5.59% 6.63%
Expected dividend yield 0% 0% 0%
Expected stock price volatility 41.0% 30.0% 19.5%
Expected life of options 8 years 8 years 8 years
Had compensation cost for the Company's stock options granted in 1999, 1998, and
1997 been determined based on the fair value at the dates of grant, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated:
1999 1998 1997
------------------------------------------------
Pro forma net income (in thousands of dollars) $24,341 $18,710 $24,621
Pro forma basic net income per share $ 1.24 $ 0.91 $ 1.24
Pro forma diluted net income per share $ 1.12 $ 0.81 $ 1.04
The pro forma effect on net income for 1999, 1998, and 1997 is not
representative of the pro forma effect on net income in future years as the pro
forma disclosures reflect only the fair value of stock options granted in those
years and do not reflect the fair value of outstanding options granted prior to
1996.
Notes Receivable - Common Stock
In 1995, the Company established the Executive Loan Program under which certain
management employees may obtain interest-free loans from the Company to
facilitate their exercise of stock options and payment of the related income tax
liabilities. Such loans, limited to 90% of the exercise price plus related tax
liabilities, have a five-year maturity, subject to acceleration for termination
of employment or death of the employee. Such loans are classified as a reduction
of shareholder's equity.
Preferred Stock
The Board of Directors may authorize the issuance from time to time of preferred
stock in one or more series with such designations, preferences, qualifications,
limitations, restrictions, and optional or other special rights as the Board may
fix by resolution. In connection with the Rights Plan, the Board of Directors
has reserved, but not issued, 200,000 shares of preferred stock.
Rights Plan
In December 1995, the Company adopted a shareholder rights plan providing for a
dividend distribution of one preferred share purchase right for each share of
common stock outstanding on and after December 15, 1995. The rights can be
exercised only if an individual or group acquires or announces a tender offer
for 15% or more of the Company's common stock and warrants. If the rights first
become exercisable as a result of an announced tender offer, each right would
entitle the holder to buy 1/200th of a share of a new series of preferred stock
at an exercise price of $67.50. Once an individual or group acquires 15% or more
of the Company's common stock, each right held by such individual or group
becomes void and the remaining rights will then entitle the holder to purchase a
number of common shares having a market value of twice the exercise price of the
right. If the attempted takeover succeeds, each right will then entitle the
holder to purchase a number of the acquiring Company's common shares having a
market value of twice the exercise price of the right. After an individual or
group acquires 15% of the Company's common stock and before they acquire 50%,
the Company's Board of Directors may exchange the rights in whole or in part, at
an exchange ratio of one share of common stock or 1/100th of a share of a new
series of preferred stock per right. Before an individual or group acquires 15%
of the Company's common stock, or a majority of the Company's Board of Directors
are removed by written consent, whichever occurs first, the rights are
redeemable for $.01 per right at the option of the Company's Board of Directors.
The Company's Board of Directors is authorized to reduce the 15% threshold to no
less than 10%. Each right will expire on December 15, 2005, unless earlier
redeemed by the Company.
7. Income Taxes
Federal, state, and foreign income tax expense (credit) consists of the
following (in thousands):
1999 1998 1997
------------------------------------------------------
Current:
Federal $ 10,078 $ 4,861 $ 7,845
State 1,467 920 1,859
Foreign 6,180 5,239 5,391
------------------------------------------------------
------------------------------------------------------
17,725 11,020 15,095
Deferred:
Federal (1,875) (809) 5
Foreign (393) (87) 210
------------------------------------------------------
------------------------------------------------------
(2,268) (896) 215
======================================================
$15,457 $10,124 $15,310
======================================================
Domestic and foreign income before income taxes is as follows (in thousands):
1999 1998 1997
------------------------------------------------------
Domestic $22,846 $15,337 $26,494
Foreign 17,831 14,672 14,158
------------------------------------------------------
======================================================
$40,677 $30,009 $40,652
======================================================
A reconciliation between income taxes computed on income before income taxes at
the federal statutory rate and the provision for income taxes is provided below
(in thousands):
1999 1998 1997
------------------------------------------------------
Tax expense at statutory rate of 35% $14,237 $10,503 $14,228
State and local taxes, net of federal tax
benefit 904 598 1,208
Foreign income taxes (735) 68 (705)
Sam Hwa Littelfuse, Inc. liquidation - (1,055) -
Foreign losses for which no tax
benefit is available 82 83 974
Other, net 969 (73) (395)
------------------------------------------------------
======================================================
$15,457 $10,124 $15,310
======================================================
Deferred income taxes are provided for the tax effects of temporary differences
between the financial reporting bases and the tax bases of the Company's assets
and liabilities. Significant components of the Company's deferred tax assets and
liabilities at January 1, 2000 and January 2, 1999, are as follows (in
thousands):
1999 1998
------------------------------------
Deferred tax liabilities
Tax over book depreciation and amortization $2,736 $4,289
Prepaid expenses 1,250 1,265
Other 887 416
------------------------------------
------------------------------------
Total deferred tax liabilities 4,873 5,970
Deferred tax assets
Accrued expenses 5,648 3,899
Foreign net operating loss carryforwards 258 174
Other - 578
------------------------------------
Gross deferred tax assets 5,906 4,651
Less: Valuation allowance (258) (174)
------------------------------------
Total deferred tax assets 5,648 4,477
====================================
====================================
Net deferred tax assets / (liabilities) $775 ($1,493)
====================================
The deferred tax asset valuation allowance is related to deferred tax assets
from foreign net operating losses. The net operating loss carryforwards have no
expiration date. Certain foreign net operating loss carryforwards and the
related valuation allowance are no longer available due to the liquidation of
Sam Hwa Littelfuse, Inc. The Company received a one-time tax benefit associated
with the liquidation of approximately $1.1 million for the year ended January 2,
1999. The Company paid income taxes of $12.1 million in 1999, $11.5 million in
1998 and $14.0 million in 1997.
8. Business Segment Information
The Company designs, manufactures, and sells circuit protection devices
throughout the world. The Company has three reportable geographic segments: The
Americas, Europe, and Asia-Pacific. The circuit protection market in these
geographical segments is categorized into three major product areas: electronic,
automotive, and power fuses.
The Company evaluates the performance of each geographic segment based on its
net income or loss. The Company also accounts for intersegment sales as if the
sales were to third parties.
The Company's reportable segments are the business units where the revenue is
earned and expenses are incurred. The Company has subsidiaries in The Americas,
Europe, and Asia-Pacific where each region is measured based on its sales and
operating income or loss.
Information concerning the operations in these geographic segments for the year
ended January 1, 2000, is as follows (in thousands):
Combined Consolidated
The Americas Europe Asia-Pacific Total Corporate Reconciliation Total
-----------------------------------------------------------------------------------------------------
Revenues 1999 $172,122 $50,434 $73,811 $296,367 $ - $ - $296,367
1998 164,211 44,835 60,494 269,540 - - 269,540
Intersegment revenues 1999 32,250 18,884 3,883 55,017 - (55,017) -
1998 30,297 10,024 263 40,584 - (40,584) -
Interest expense 1999 5,007 11 235 5,253 - - 5,253
1998 3,724 17 248 3,989 - - 3,989
Depreciation and
amortization 1999 10,831 1,969 3,700 16,500 9,039 - 25,539
1998 8,495 1,459 3,417 13,371 8,835 - 22,206
Other income (loss) 1999 883 500 (77) 1,306 - - 1,306
1998 506 68 (672) (98) - - (98)
Income tax expense 1999 8,967 3,706 2,784 15,457 - - 15,457
1998 4,412 3,896 1,816 10,124 - - 10,124
Net income (loss) 1999 21,007 8,156 5,101 34,264 (9,044) 25,220
1998 18,970 7,692 2,058 28,720 (8,835) - 19,885
Identifiable assets 1999 191,997 36,228 39,112 267,337 66,076 (57,715) 275,698
1998 130,981 24,282 42,658 197,921 89,619 (36,996) 250,544
Capital expenditures 1999 13,303 2,978 3,694 19,975 - - 19,975
1998 15,269 2,344 3,707 21,320 - - 21,320
Intersegment revenues and receivables are eliminated to reconcile to
consolidated totals. Corporate identifiable assets consist primarily of cash and
intangible assets.
8. Business Segment Information (continued)
The Company's revenues by product areas for the year ended January 1, 2000 and
January 2, 1999, are as follows (in thousands):
Revenues 1999 1998
-------------------------------------
Electronic $154,141 $133,086
Automotive 101,270 96,685
Power 40,956 39,769
=====================================
Consolidated Total $296,367 $269,540
=====================================
Revenues from no single customer of the Company amount to 10% or more.
9. Lease Commitments
The Company leases certain office and warehouse space under noncancelable
operating leases, as well as certain machinery and equipment. Rental expense
under these leases was approximately $0.9 million in 1999 and 1998, respectively
and $1.3 million in 1997. Future minimum payments for all noncancelable
operating leases with initial terms of one year or more at January 1, 2000 are
as follows (in thousands):
2000 $481
2001 297
2002 145
2003 44
2004 and thereafter -
------------------
$967
==================
10. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
1999 1998 1997
------------------------------------------------------
(In Thousands)
Numerator:
Net income $25,220 $19,885 $25,342
======================================================
Denominator:
Denominator for basic earnings per share
- Weighted-average shares 19,572 20,474 19,824
Effect of dilutive securities:
Warrants 1,970 2,311 3,335
Employee stock options 209 369 464
======================================================
Denominator for diluted earnings per share
- Adjusted weighted-average shares and
assumed conversions 21,751 23,154 23,623
======================================================
Basic earnings per share $ 1.29 $ 0.97 $ 1.28
======================================================
Diluted earnings per share $ 1.16 $ 0.86 $ 1.07
======================================================