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
22 for the three fiscal years ended January 2, 1999.
Highlights
Sales decreased 2% in 1998 to $269.5 million. Contributing to the decline in
sales was weakness in the electronic markets domestically and in Asia as well as
lower domestic auto-motive sales. In addition, greater than historical selling
price declines and costs related to new product introductions contributed to
lower gross margins in 1998. The company continued its investment in and
dedication to introducing new products. During the year, the company introduced
a surface mount telecom fuse, J-Case automotive fuse, downsized packaging of
aftermarket products and expanded the line of PTC devices to meet customer
requirements. The company also continued to make investments in its
manufacturing capabilities, successfully integrating plastic molding equipment
into the Switzerland facility and installing new thin film capacity
domestically.
Results of Operations -- 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 $.86 in 1998 from $1.07 in 1997. Sales decreased $5.6 million
during 1998. Sales declined both in the automotive and electronics 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 Company's
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 in-creased $1.8 million or 5% to $39.8
million in 1998 compared to $38.0 million in 1997. On a constant currency basis,
electronic and power fuse sales would have increased 3 and 5% respectively,
automotive sales would have decreased 4% and consolidated sales would have been
flat. 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. 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 declined $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 for the prior year. Total operating expenses,
including intangible 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 SamHwa 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.
1997 Compared with 1996
Sales increased 14% to $275.2 million in 1997 from $241.4 million in 1996. The
gross margin was 40.4% compared to 40.7% the prior year and operating income was
15.9% of net sales compared to 15.6% the prior year. Net income increased 17% to
$25.3 million in 1997 from $21.7 million in 1996 and diluted earnings per share
increased 18% to $1.07 in 1997 from $.91 in 1996. Sales increased $33.7 million
during 1997. The sales growth was strongest in the electronics segment, followed
by automotive and power fuses. Electronic sales increased $22.6 million or 20%
to $135.0 million in 1997 compared to $112.4 million in 1996. The electronics
business was very strong in personal computers, tele- and data-communications as
well as consumer electronics throughout the year. Electronics sales enjoyed
significant growth in Asia-Pacific, Europe and North America in 1997. Automotive
sales increased $8.4 million or 9% to $102.1 million in 1997 compared to $93.7
million in 1996. Automotive sales were very strong in the OEM markets, while
they declined slightly in the automotive aftermarkets on a worldwide basis.
Power fuse sales increased $2.6 million or 7% to $38.0 million in 1997 compared
to $35.4 million in 1996. The company believes that its power fuse business grew
twice as fast as the underlying markets for capital equipment and construction
spending during 1997.On a constant currency basis, European sales growth would
have been 16% rather than the 5% reported, Asia-Pacific sales growth would have
been 36% rather than the 32% reported, and consolidated sales growth would have
been 16% rather than the 14% reported. Led by increases in Asia-Pacific and
European sales, international sales increased by 20% in 1997 to 40.6% of net
sales in 1997 from 38.5% of net sales in 1996.Gross profit was $111.1 million or
40.4% of sales for 1997 compared to $98.3 million or 40.7% of sales for 1996.
The gross margin decline of 32 basis points was primarily caused by the lower
margins of our new China and Korean operations having a greater impact than our
margin improvements due to cost reductions and spreading our fixed costs over
higher sales in North America and Europe. Selling, general and administrative
expenses increased $5.9 million to 19.0% of sales in 1997 as compared to 19.2%
of sales in 1996 as a result of the increase in sales during 1997. Research and
development costs increased $0.6 million to 2.9% of sales in 1997 as compared to
3.0% of sales in 1996. Amor-tization of reorganization value and other
intangibles was 2.6% of sales for 1997 compared to 2.9% the prior year. Total
operating expenses, including intangible amortization, were 24.5% of sales for
1997 compared to 25.1% of sales for 1996.Operating income for 1997 was $43.8
million or 15.9% of sales compared to $37.7 million or 15.6% of sales the prior
year.Interest expense was $4.1 million for 1997 compared to $4.2 million for
1996 due to declining debt levels during the year. Other income, net, consisting
of royalties, minority interest adjustments, revaluation of the Korean
non-compete agreement and government grants, was $1.0 million compared to $0.7
million the prior year. Income before taxes was $40.7 million in 1997 compared
to $34.1 million in 1996. Income tax expense was $15.3 million in 1997 compared
to $12.4 million the prior year. The company's effective tax rate was 37.7% in
1997 compared to 36.3% in 1996. Net income for the year was $25.3 million in
1997 compared to $21.7 million the prior year. Diluted earnings per share
increased to $1.07 in 1997 compared to $0.91 in 1996.
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. Littelfuse
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. Terms of the new bank credit agreement provide for a credit
line of $55.0 that 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.Littelfuse started 1997 with $1.4 million of cash.
Net cash provided by operations was $36.8 million for the year. Cash used to
invest in property, plant and equipment was $18.9 million, to invest in a new
Korean acquisition called Samjoo was $5.3 million and to make a non-compete
payment was $0.4 million. Cash used in financing activities included net
payments of long-term debt of $5.2 million. The purchase of the company's
warrants and common stock for $8.6 million was partially offset by cash proceeds
from the exercise of stock options of $1.0 million. The effect of exchange rate
changes decreased cash by $0.1 million. The net of cash provided by operations,
less investing activities, less financing activities, plus the effect of
exchange rates resulted in a $0.7 million net decrease in cash. This left the
company with a cash balance of $0.8 million at the end of 1997. Net working
capital used $9.4 million of cash flow from operations for 1997. All asset
categories used working capital. Accounts receivable increased $3.3 million and
inventory increased $8.3 million. Most accruals provided working capital for the
year. Accounts payable, accrued payroll, and accrued and deferred taxes each
increased by a little less than $1 million and collectively provided funds of
over $2.5 million. Accrued expenses declined $0.6 million using funds of that
amount. The company's capital expenditures were $21.3 million in 1998, $18.9
million in 1997 and $17.1 million in 1996. The company expects that capital
expenditures will be approximately $22 million in 1999. The primary purposes for
capital expenditures in 1999 will be for new product tooling, production
equipment and information systems. As in 1998, capital expenditures in 1999 are
expected to be financed by cash flow from operations. The company increased
total debt by $33.9 million in 1998, after decreasing debt by $5.2 million in
1997 and increasing debt by $4.2 million in 1996. The company is required to
repay $14.0 million of long-term debt in 1999. During 1998, the company's Board
of Directors authorized the company to repurchase up to 2,000,000 shares of its
common stock or 2,000,000 of its warrants, or any combination not to exceed
2,000,000 shares of common stock or warrants, from time to time, depending on
market conditions. The company repurchased 1,345,000 common shares for $26.8
million in 1998, 210,000 warrants and 205,000 common shares for $8.6 million in
1997 and 1,342,000 warrants and 570,000 common shares for $26.8 million in 1996.
As of January 2, 1999, the company had over 700,000 shares remaining under Board
of Directors authorization expiring in May of 1999. Earnings before interest,
taxes, depreciation, amortization and other income and expense (EBITDA)
decreased 12% to $56.3 million in 1998 from $64.1 million in 1997. EBITDA
increased 9% to $64.1 million in 1997 from $58.7 million in 1996. Net working
capital (working capital less cash and the current portion of long-term debt) as
a % of sales was 17.3% at year-end 1998 compared to 15.1% at year-end 1997 and
to 13.0% at year-end 1996. The increase in net working capital was due in part
to the increase in days sales outstanding in accounts receivable to
approximately 61 days at year-end 1998 compared to 55 days at year-end 1997 and
52 days at year-end 1996. The ratio of current assets to current liabilities was
2.1 to 1 at year-end 1998 compared to 1.6 to 1 at year-end 1997 and 1.4 to 1 at
year-end 1996. The ratio of long-term debt to equity was 0.6 to 1 at year end
1998 compared to 0.3 to 1 at year-end 1997 and 0.4 to 1 at year-end 1996.
Year 2000
The company utilizes software, hardware and related computer technologies
essential to its operations that use two digits rather than four to specify the
applicable year, which could result in a date recognition problem with the
transition to the year 2000. The company presently believes that with
modifications or replacements of existing software and certain hardware, date
recognition problems associated with the year 2000 can be mitigated. However, if
such modifications and replacement are not made, or are not completed timely,
the year 2000 transition could have a material adverse effect on the company's
consolidated results of operations. To date, the company has fully completed its
assessment of all mission-critical systems. Assessments of other systems,
including operating equipment systems, which could be significantly affected by
the year 2000 are underway. The completed assessments have indicated that most
of the company's significant information technology systems could be affected,
particularly the order entry, billing and inventory systems. In addition, the
company has gathered information about the year 2000 compliance status of its
significant customers, suppliers and subcontractors and continues to monitor
their compliance.As of January 2, 1999, the company had completed 40% of the
remediation phase for its information technology, operating equipment systems
and external interface exposures. The company expects to complete software
reprogramming and replacement as well as testing of all significant systems no
later than May 1, 1999. All remediated systems are expected to be fully tested
and implemented by June 30, 1999. The company has queried its significant
suppliers and subcontractors, none of which share information systems with the
company ("external agents"). To date, the company is not aware of any external
agent with a year 2000 issue that would materially impact the company's results
of operations, liquidity or capital resources. However, the company has no means
of ensuring that external agents will be year 2000 ready. The inability of
external agents to complete their year 2000 resolution process in a timely
fashion could materially impact the company. The company will utilize both
internal and external resources to reprogram or replace, test, and implement the
software, operating equipment and external interfaces for year 2000
modifications. The total cost of projects that relate to year 2000 compliance is
estimated at $12.0 million and is being funded through operating cash flows.
Through January 2, 1999, the company has incurred costs totaling approximately
$4.9 million, $0.6 of which has been expensed and $4.3 of which has been
capitalized, related to all phases of the year 2000 project. Management of the
company believes it has an effective program in place to become year 2000
compliant in a timely manner. As noted above, the company has not yet completed
all necessary phases of the year 2000 program. In the event that the company
does not complete any additional phases, the company would be unable to use its
electronic systems to take customer orders, manufacture and ship products,
invoice customers or collect payments. In addition, disruptions in the economy
generally resulting from year 2000 issues could also materially adversely affect
the company. The company could be subject to litigation for computer sys- tems
failure, equipment shutdown or failure to properly date business records. The
company currently has no contingency plans in place in the event it does not
complete all phases of the year 2000 pro- gram. The company plans to evaluate
the status of completion in March 1999 and determine whether such a plan is
necessary. 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
Littelfuse has experienced compounded annual sales growth of 11% for the last
five years. Sales growth is expected in 1999, fueled in part by sales of
products introduced in 1998 and continued increases in the European segment.
Although the company expects that growth will resume in 1999, the rate is
expected to be lower than the last five-year average. In an attempt to offset
continued selling price pressures from its customers, the company has increased
cost reduction efforts worldwide. The company expects that these efforts will
favorably affect the gross margin percentage in 1999. In addition, new product
introduction costs that negatively affected the gross margin in 1998 are not
expected to be as significant in 1999. The development of new products, global
expansion, and reinvestment continue to be Littelfuse's long-term growth
strategy. Accordingly, 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,
commercialization and technological difficulties, year 2000 issues discussed
above, capacity and supply constraints or difficulties, the results of financing
efforts, 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 2, 1999, and January 3, 1998,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended January 2, 1999.
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 generally accepted
auditing standards. 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 2, 1999 and January 3, 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended January 2, 1999, in conformity with
generally accepted accounting principles.
Chicago, Illinois
January 26, 1999
Consolidated Statements of Financial Condition
(thousands of dollars)
Assets January 2, 1999 January 3, 1998
Current assets:
Cash and cash equivalents $ 27,961 $ 755
Accounts receivable, less allowances
(1998 - $5,885; 1997 - $5,899) 41,382 37,458
Inventories 36,209 39,075
Deferred income taxes 2,456 3,672
Prepaid expenses and other current assets 3,090 2,896
Total current assets 111,098 83,856
Property, plant, and equipment:
Land 6,753 6,355
Buildings 25,682 23,152
Equipment 131,136 111,723
163,571 141,230
Less: Allowances for depreciation and amortization 85,783 70,467
77,788 70,763
Intangible assets, net of amortization:
Reorganization value in excess of amounts
allocable to identifiable assets 37,814 41,202
Patents and licenses 6,522 8,785
Distribution network 6,412 7,126
Trademarks 3,275 3,527
Other 5,940 3,348
59,963 63,988
Other assets 1,695 3,278
$250,544 $221,885
Consolidated Statements of Financial Condition (continued)
(thousands of dollars)
Liabilities and shareholders' equity January 2, 1999 January 3, 1998
Current liabilities:
Accounts payable $ 9,926 $ 13,858
Accrued payroll 12,555 10,316
Accrued expenses 7,929 7,427
Accrued income taxes 6,042 9,952
Current portion of long-term debt 15,515 10,172
Total current liabilities 51,967 51,725
Long-term debt, less current portion 70,061 40,385
Deferred income taxes 3,951 6,205
Minority interest in subsidiary 41 65
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: 38,000,000 shares
authorized; shares issued and outstanding,
1998 - 20,023,520; 1997 - 19,873,140 200 199
Additional paid-in capital 55,537 52,540
Notes receivable - Common stock (2,772) (1,960)
Accumulated other comprehensive loss (3,726) (4,767)
Retained earnings 75,285 77,493
124,524 123,505
$250,544 $221,885
See accompanying notes.
Consolidated Statements of Income
(in thousands of dollars, except per share amounts)
Year ended January 2, 1999 January 3, 1998 December 28, 1996
Net sales $269,540 $275,165 $241,446
Cost of sales 169,341 164,034 143,158
Gross profit 100,199 111,131 98,288
Selling, general and administrative expenses 50,936 52,226 46,281
Research and development expenses 8,387 7,927 7,330
Amortization of intangibles 6,780 7,210 7,008
Operating income 34,096 43,768 37,669
Interest expense 3,989 4,103 4,235
Other expense/(income), net 98 (987) (660)
Income before income taxes 30,009 40,652 34,094
Income taxes 10,124 15,310 12,359
Net income $ 19,885 $ 25,342 $ 21,735
Net income per share:
Basic $ 0.97 $ 1.28 $ 1.09
Diluted $ 0.86 $ 1.07 $ 0.91
Weighted-average shares and equivalent shares outstanding:
Basic 20,474 19,824 19,888
Diluted 23,154 23,623 23,801
See accompanying notes.
Consolidated Statements of Cash Flows
(thousands of dollars)
Year ended January 2, 1999 January 3, 1998 December 28, 1996
Operating activities
Net income $ 19,885 $ 25,342 $ 21,735
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 15,426 13,184 14,057
Amortization of intangibles 6,780 7,210 7,008
Provision for bad debts 626 410 236
Deferred income taxes (896) 215 (962)
Other 326 (159) (411)
Changes in operating assets and liabilities:
Accounts receivable (3,218) (3,331) (5,630)
Inventories 3,610 (8,281) (1,816)
Accounts payable and accrued expenses (4,992) 1,950 6,550
Prepaid expenses and other 1,757 217 (424)
Net cash provided by operating activities 39,304 36,757 40,343
Investing activities
Purchases of property, plant, and equipment, net (21,320) (18,936) (17,094)
Purchase of business, net of cash acquired (2,751) (5,268) --
Other (249) (357) (341)
Net cash used in investing activities (24,320) (24,561) (17,435)
Financing activities
Proceeds (payments) of long-term debt, net 33,851 (5,192) 4,196
Proceeds from exercise of stock options and warrants 6,308 1,055 276
Purchases of common stock and redemption of warrants (26,803) (8,642) (26,845)
Net cash provided by (used in) financing activities 13,356 (12,779) (22,373)
Effect of exchange rate changes on cash (1,134) (89) (416)
Increase (decrease) in cash and cash equivalents 27,206 (672) 119
Cash and cash equivalents at beginning of year 755 1,427 1,308
Cash and cash equivalents at end of year $ 27,961 $ 755 $ 1,427
See accompanying notes.
Consolidated Statements of Shareholders' Equity
(thousands of dollars)
Notes Accumulated
Additional Receivable- Other
Common Paid-In Common Comprehensive Retained
Period from January 1, 1996 to January 2, 1999 Stock Capital Stock Income/(Loss) Earnings Total
Balance at January 1, 1996 202 $ 71,494 $ (571) $ (120) $ 42,377 $113,382
Comprehensive income:
Net income for the year - - - - 21,735 21,735
Foreign currency translation adjustment - - - (750) - (750)
Comprehensive income 20,985
Stock options and warrants exercised 2 1,997 (899) - - 1,100
Purchase of 570,260 shares of common stock (6) (1,986) - - (7,917) (9,909)
Redemption of 1,342,120 warrants - (16,936) - - - (16,936)
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
See accompanying notes.
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, circuit
breakers, and indicator lights to the automotive industry and to appliance and
general electronics manufacturers.
Fiscal Year Effective January 1, 1996, the Company changed its fiscal year-end
from December 31 to a 52-53-week year ending on the Saturday nearest December
31. The Company's fiscal years ended January 2, 1999, and December 28, 1996,
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 re-ceivables, and long-term debt. The
carrying values of such financial instruments approximate their estimated fair
values.
Accounts Receivable The Company performs credit eval-uations 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 accel-erated method over their estimated useful lives, which
average approximately 9 years. Other intangible assets consist principally of an
agreement-not-to-compete that is being amortized over the 3-year term of the
agreement and goodwill that is being amortized over 10 to 20 years. Accumulated
amortization of these intangible assets was $46.1 million at January 2, 1999,
and $39.9 million at January 3, 1998.
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 1998, $2.8 million in 1997, and $2.7 million in
1996.
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." 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.
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.
Recently Issued Accounting Pronouncements 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.)
In March 1998, the Accounting Standards Executive Committee (ACSEC) issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance
on accounting for costs incurred on software obtained or developed for internal
use. The Company adopted SOP 98-1 in the first quarter of fiscal 1998.
Reclassifications Certain amounts in the 1997 and 1996 financial statements have
been reclassified to conform with the 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 January 1, 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 SamHwa Littelfuse, Inc.
3. Inventories
The components of inventories are as follows at January 2, 1999, and January 3,
1998 (in thousands):
1998 1997
Raw materials $ 9,800 $ 8,788
Work in process 5,338 3,556
Finished goods 21,071 26,731
$36,209 $39,075
4. Long-Term Obligations
The carrying amounts of long-term obligations, which approximate fair value, are
as follows at January 2, 1999, and January 3, 1998 (in thousands):
1998 1997
6.16% Senior Notes, maturing 2005 $60,000 $ -
6.31% Senior Notes, maturing 2000 18,000 27,000
Credit line - 20,000
Other obligations 5,539 3,557
Capital lease obligations 2,037 -
85,576 50,557
Less: Current maturities 15,515 10,172
$70,061 $40,385
During 1998, the Company concluded a $60.0 million private placement of Senior
Notes and renegotiated its existing bank credit agreement to provide for a
credit line of $55.0 million maturing on August 31, 2003. At January 2, 1999,
the Company had available $55.0 million of borrowing capability under the credit
line at an interest rate of LIBOR plus 0.375%. In addition, the Company has
outstanding $18.0 million of Senior Notes issued pursuant to a 1993 Note
Purchase Agreement.
The bank credit agreement provides for letters of credit of up to $8.0 million
as part of the available credit line. At January 2, 1999, the Company had $1.4
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 2, 1999, are as follows
(in thousands):
1999 $15,515
2000 17,916
2001 11,016
2002 10,071
2003 and thereafter 31,058
$85,576
Interest paid on long-term obligations approximated $3.8 million in 1998 and
$4.0 million in 1997 and 1996, respectively.
5. Benefit Plans
The Company has a defined-benefit pension plan (the "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." This statement standardizes the disclosure
requirements for pensions and other postretirement benefits. Prior years'
information has been restated to conform with the requirements of this
statement.
(in thousands) 1998 1997
Change in benefit obligation
Benefit obligation at beginning of year $41,649 $37,385
Service cost 1,942 1,657
Interest cost 2,822 2,654
Actuarial loss 1,155 1,995
Benefits paid (2,081) (2,042)
Benefit obligation at end of year $45,487 $41,649
Change in plan assets at fair value
Plan assets at beginning of year $39,703 $34,513
Actual return on plan assets 6,041 6,232
Employer contributions 700 1,000
Benefits paid (2,081) (2,042)
Fair value of plan assets at end of year $44,363 $39,703
Funded status $ (1,124) $ (1,946)
Unrecognized prior service cost 245 311
Unrecognized net actuarial loss 2,301 4,094
Prepaid pension obligation $ 1,422 $ 2,459
Weighted-average assumptions
Discount rate 6.75% 7.00%
Expected return on plan assets 9.00% 9.00%
Salary growth rate 4.50% 4.50%
Components of net periodic benefit cost
Service cost $ 1,942 $ 1,657
Interest cost 2,822 2,654
Expected return on plan assets (3,243) (2,822)
Amortization of prior service cost 65 65
Recognized net actuarial loss 151 224
Net periodic benefit cost $ 1,737 $ 1,778
The Company provides additional retirement benefits for certain key executives
through its unfunded Supplemental Executive Retirement Plan. The charge to
expense for this plan amounted to $852,000, $853,000, and $747,000 in 1998,
1997, and 1996, respectively. The unfunded benefit obligation amounted to $5.5
million and $4.3 million at January 2, 1999, and January 3, 1998, 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 $547,000 in 1998, $523,000 in 1997, and $457,000 in 1996.
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 2,483,709 shares of common stock at
$4.18 per share were outstanding at January 2, 1999. 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:
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding at beginning of year 1,361,310 $14.28 1,257,380 $10.95 1,236,800 $ 8.76
Granted 311,500 24.64 274,300 25.29 251,400 18.40
Exercised (153,480) 6.49 (156,170) 6.70(174,900)
5.81
Forfeited (90,420) 15.31 (14,200) 15.69(55,920)
10.43
Outstanding at end of year 1,428,910 $16.91 1,361,310 $14.28 1,257,380 $10.95
Exercisable at end of year 708,818 671,126 461,820
Available for future grant 517,340 138,420 398,520
Weighted-average value of options
granted during the year $11.81 $11.16 $ 9.31
As of January 2, 1999, the Company had the following outstanding options:
Weighted- Weighted-
Exercise Options Average Average Options
Price Outstanding Exercise Price Remaining Life Exercisable
$ 3.688 to $5.00 195,300 $ 3.87 3.23 193,500
$ 7.50 to $11.155 206,900 9.95 4.68 181,620
$ 11.625 to $16.50 287,070 14.69 6.00 202,502
$ 17.813 to $25.50 638,340 22.18 8.53 110,936
$ 28.875 to $34.125 101,300 28.95 8.56 20,260
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 1998, 1997, and 1996 under the fair
value method using the Black-Scholes option pricing model. The following
assumptions were utilized in the valuation:
1998 1997 1996
Risk-free interest rate 5.59% 6.63% 6.76%
Expected dividend yield 0% 0% 0%
Expected stock price volatility .300% .195% .265%
Expected life of options 8 years 8 years 8 years
Had compensation cost for the Company's stock options granted in 1998, 1997, and
1996 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:
1998 1997 1996
Pro forma net income
(in thousands of dollars) $18,710 $24,621 $21,340
Pro forma basic net
income per share $ 0.91 $ 1.24 $ 1.08
Pro forma diluted net
income per share $ 0.81 $ 1.04 $ 0.90
The pro forma effect on net income for 1998, 1997, and 1996 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, which ever 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):
1998 1997 1996
Current:
Federal $ 4,861 $ 7,845 $ 7,091
State 920 1,859 1,440
Foreign 5,239 5,391 4,790
11,020 15,095 13,321
Deferred:
Federal (809) 5 (872)
Foreign (87) 210 (90)
(896) 215 (962)
$10,124 $15,310 $12,359
Domestic and foreign income before income taxes is as follows (in thousands):
1998 1997 1996
Domestic $15,337 $26,494 $21,299
Foreign 14,672 14,158 12,795
$30,009 $40,652 $34,094
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):
1998 1997 1996
Tax expense at statutory
rate of 35% $10,503 $14,228 $11,933
State and local taxes,
net of federal tax benefit 598 1,208 936
Foreign income taxes 68 (705) (181)
SamHwa Littelfuse, Inc.
liquidation (1,055) - -
Foreign losses for which
no tax benefit is available 83 974 703
Other, net (73) (395) (1,032)
$10,124 $15,310 $12,359
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 2, 1999, and January 3, 1998, are as follows (in
thousands):
1998 1997
Deferred tax liabilities
Tax over book depreciation
and amortization $4,289 $4,740
Prepaid expenses 1,265 1,346
Other 416 639
Total deferred tax liabilities 5,970 6,725
Deferred tax assets
Accrued expenses 3,899 3,146
Foreign net operating loss carryforwards 174 1,820
Other 578 1,045
Total deferred tax assets 4,651 6,011
Less: Valuation allowance (174) (1,820)
Net deferred tax assets 4,477 4,191
Net deferred tax liabilities $1,493 $2,534
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
SamHwa 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 $11.5 million in 1998, $14.0 million in
1997, and $9.0 million in 1996.
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 2, 1999, is as follows in Table 1 (in thousands):
Combined Consolidated
Table 1: Geographic Segments The Americas Europe Asia-Pacific Total CorporateReconciliation Total
Revenues $164,211 $ 44,835 $ 60,494 $269,540 $ -$ - $269,540
Intersegment revenues 30,297 10,024 263 40,584 - (40,584) -
Interest expense 3,724 17 248 3,989 - - 3,989
Depreciation and amortization 8,495 1,459 3,417 13,371 8,835 - 22,206
Other income (loss) 506 68 (672) (98) - - (98)
Income tax expense 4,412 3,896 1,816 10,124 - - 10,124
Net income (loss) 18,970 7,692 2,058 28,720 (8,835) - 19,885
Identifiable assets 130,981 24,282 42,658 197,921 89,619 (36,996) 250,544
Capital expenditures 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.
The Company's revenues by product areas for the year ended January 2, 1999, are
as follows (in thousands):
Revenues
Electronic $133,086
Automotive 96,685
Power 39,769
Consolidated Total $269,540
Revenues from no single customer of the Company amount to 10% or more of total
revenues, except for its Japanese stocking representative, which accounted for
10.2% for the year ended January 2, 1999.
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 $900,000 in 1998 and $1.3 million in 1997
and 1996, respectively. Future minimum payments for all noncancelable operating
leases with initial terms of one year or more at January 2, 1999, are as follows
(in thousands):
1999 $ 588
2000 200
2001 57
2002 7
2003 and thereafter -
$ 852
10. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
(in thousands) 1998 1997 1996
Numerator:
Net income $ 19,885 $ 25,342 $ 21,735
Denominator:
Denominator for basic earnings per share -
Weighted-average shares $ 20,474 $ 19,824 $ 19,888
Effect of dilutive securities:
Warrants 2,311 3,335 3,520
Employee stock options 369 464 393
Denominator for diluted earnings per share -
Adjusted weighted-average shares and
assumed conversions 23,154 23,623 23,801
Basic earnings per share $ 0.97 $ 1.28 $ 1.09
Diluted earnings per share $ 0.86 $ 1.07 $ 0.91
Selected Financial Data
(In thousands, except per share data)
Five Year Summary
1998 1997 1996 1995 1994
Net sales $269,540 $ 275,165 $ 241,446 $ 219,535 $ 194,454
Gross profit 100,199 111,131 98,288 89,872 77,416
Operating income 34,096 43,768 37,669 33,729 27,846
Net income 19,885 25,342 21,735 19,272 15,227
Net income per share - Diluted 0.86 1.07 0.91 0.78 0.63
Net working capital $ 46,685 $ 41,548 $ 31,343 $ 27,963 $ 25,061
Total assets 250,544 221,885 209,951 205,186 199,328
Long-term debt 70,061 40,385 44,556 40,804 60,344
Quarterly Results of Operations (Unaudited)
1998 1997
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
Net sales $ 62,058 $ 69,035 $ 69,116 $ 69,331 $ 70,761 $ 68,993 $ 69,828 $ 65,583
Gross profit 21,370 25,905 26,331 26,592 27,843 27,860 28,609 26,819
Operating income 5,890 9,226 9,809 9,171 10,196 11,220 11,770 10,582
Net income 3,139 5,366 5,555 5,826 5,767 6,412 6,896 6,267
Net income per share:
Basic 0.16 0.26 0.27 0.29 0.29 0.32 0.35 0.32
Diluted 0.14 0.23 0.24 0.25 0.24 0.27 0.29 0.27
Quarterly Stock Price
1998 1997
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
High 25 1/4 25 5/8 26 5/8 28 1/2 35 1/2 34 1/2 28 1/2 250 /0
Low 16 0/0 16 1/4 20 0/0 25 1/4 21 3/4 27 1/4 22 0/0 22 1/8
Close 19 1/4 19 1/4 25 1/8 25 3/4 25 1/2 33 7/8 270 /0 23 1/8