Exhibit 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following discussion provides an analysis of the information contained in
the consolidated financial state-ments and accompanying notes beginning on page
18 for the three fiscal years ended December 28, 2002, December 29, 2001, and
December 30, 2000, respectively.
Results of Operations -- 2002 Compared with 2001
Sales increased 4% to $283.3 million in 2002 from $272.1 million in 2001.
Electronic sales increased $4.6 million or 3% to $150.9 million in 2002 compared
to $146.3 million in 2001. The increase in electronic sales was driven by
increased demand in the Asia region and sales from the Semitron Industries
acquisition, partially offset by weakness in Europe and North America. Excluding
sales of Semitron Industries products, electronic sales in 2002 were flat as
compared to the prior year. Automotive sales increased $7.1 million or 8% to
$98.2 million in 2002 compared to $91.1 million in 2001, due to strength in
vehicle production in North America and strengthening of the Euro against the
Dollar. Electrical product sales decreased $0.5 million or 2% to $34.2 million
in 2002 compared to $34.7 million in 2001 due to continued weakness in
commercial construction and lower levels of industrial activity in the North
American market. International sales increased 8% to $152.2 million or 53.7% of
net sales in 2002 from $141.3 million or 51.9% of net sales in 2001. The
increase in international sales was primarily due to strong demand for
electronic products in Asia.
Gross profit was $90.4 million or 31.9% of sales in 2002 compared to $91.9
million or 33.8% of sales in 2001. The gross profit margin was negatively
affected by increased price pressure for electronic products and the addition of
Semitron, which has been operating at approximately breakeven levels.
Selling, general and administrative expenses decreased $0.6 million, from $62.2
million in 2001 to $61.6 million in 2002 reflecting reductions in head count. As
a percentage of sales, SG&A decreased to 21.8% in 2002 from 22.9% in 2001.
Research and development costs decreased $0.5 million to $8.3 million,
representing 2.9% of sales in 2002 as compared to 3.3% of sales in 2001.
Amortization of reorganization value and other intangibles was $0.8 million or
0.3% of sales for 2002 compared to $6.0 million or 2.2% of sales for the prior
year. The decrease in amortization expense results from the combination of the
adoption of SFAS No. 142 and a natural drop off of patent amortization. The
adoption of SFAS No. 142 reduced amortization expense by $3.4 million in the
year, and the net natural drop off of intangible amortization provided an
additional reduction of $1.8 million in the year.
Total operating expenses, including intangible amortization and restructuring
expense, were 26.3% of sales in 2002, compared to 30.6% of sales in 2001.
Excluding restructuring and amortization expense for both years, total operating
expenses were 24.7% of sales in 2002 and 26.1% in 2001.
Operating income in 2002 increased 87% to $15.9 million or 5.6% of sales
compared to $8.5 million or 3.1% of sales in the prior year. The improvement in
operating income was driven by lower restructuring charges and the reduction of
amortization expense discussed above.
Interest expense was $2.7 million in 2002 compared to $3.3 million in 2001 due
to lower average debt levels in 2002. Other income, net, consisting of gain on
the sale of certain non-core product lines, interest income, royalties, minority
interest and foreign currency items was $1.8 million compared to other income,
net, of $1.1 million in the prior year.
Income before taxes was $15.0 million in 2002 compared to $6.4 million in 2001.
Income tax expense was $5.4 million in 2002 compared to $2.3 million the prior
year. Net income in the current year was $9.6 million, compared to $4.1 million
in the prior year. The Company's effective tax rate was 36.0% in both 2002 and
2001. Diluted earnings per share increased to $0.44 in 2002 compared to $0.19 in
2001.
Results of Operations --2001 Compared with 2000
Sales decreased 27% to $272.1 million in 2001 from $371.9 million in 2000.
Electronic sales decreased $86.4 million or 37% to $146.3 million in 2001
compared to $232.7 million in 2000. The decrease in electronic sales in 2001
reflected weak global demand for electronic products compared to record sales
performance in 2000. Inventory corrections at customers and in the distribution
channel further reduced sales of electronic products in 2001. Automotive sales
decreased $8.9 million or 9% to $91.1 million in 2001 compared to $100.0 million
in 2000, primarily due to a reduction in North American vehicle production and
the continued weakness in automotive aftermarket sales. Decreases in North
America and Asia sales of automotive products more than offset an increase in
European automotive product sales. Electrical product sales decreased $4.5
million or 11% to $34.7 million in 2001 compared to $39.2 million in 2000 due to
continued weakness in the electrical market driven by reduced industrial
activity and commercial construction. International sales decreased 22% to
$141.3 million or 51.9% of net sales in 2001 from $180.1 million or 48.4% of net
sales in 2000. The primary cause of lower international sales in 2001 was
reduced demand for electronic products in Asia and Europe.
Gross profit was $91.9 million or 33.8% of sales in 2001 compared to $150.6
million or 40.5% of sales in 2000. The gross profit was negatively affected in
2001 by lower sales demand, lower factory utilization, declining average sell
prices and employee separation costs. The Company took steps in 2001 to reduce
the cost structure and decrease
inventories to bring them in-line with current market demand. These included
actions to reduce worldwide headcount by approximately 25% and increase the
focus on material, labor and process cost reductions.
Selling, general and administrative expenses decreased $8.9 million,
representing 22.9% of sales in 2001 compared to 19.1% of sales in 2000. Overall,
expenses decreased due to lower sales and effective cost reduction actions taken
during the year. Expenses as a percentage of sales increased, however, due to
the decline in sales. Research and development costs decreased $2.3 million to
$8.9 million, representing 3.3% of sales in 2001 as compared to 3.0% of sales in
2000. Amortization of reorganization value and other intangibles was $6.0
million or 2.2% of sales in 2001 compared to $6.7 million or 1.8% of sales in
the prior year. Total operating expenses, including intangible amortization and
restructuring expense, were 30.6% of sales in 2001, compared to 23.9% of sales
in 2000. Excluding restructuring expense, total operating expenses were 28.3% of
sales in 2001.
Operating income in 2001 decreased 86% to $8.5 million or 3.1% of sales compared
to $61.7 million or 16.6% of sales in the prior year due to the reduced sales
demand and profitability discussed above. Also contributing to the decrease in
operating income in 2001 were $6.3 million of restructuring charges related to a
program to rationalize the Company's worldwide manufacturing operations. This
program includes plans to close three manufacturing facilities located in the
U.S., England and Korea and to consolidate production into existing lower cost
sites in the Philippines, China and Mexico. The restructuring expense consisted
primarily of separation cost for approximately 512 employees as well as a
write-down of impaired manufacturing machinery and equipment.
Interest expense was $3.3 million in 2001 compared to $4.7 million in 2000 due
to lower average debt levels in 2001. Other income, net, consisting of interest
income, royalties, minority interest and foreign currency items was $1.1 million
in 2001 compared to $1.9 million in 2000.
Income before taxes was $6.4 million in 2001 compared to $59.0 million in 2000.
Income tax expense was $2.3 million in 2001 compared to $21.7 million in 2000.
Net income in 2001 was $4.1 million, compared to $37.3 million in 2000. The
Company's effective tax rate was 36.0% in 2001 compared to 36.8% in 2000.
Diluted earnings per share decreased 89% to $0.19 in 2001 compared to $1.69 in
2000.
Liquidity and Capital Resources
The Company has historically financed capital expenditures through cash flows
from operations. Management expects that cash flows from operations and
available lines of credit will be sufficient to support both its operations and
its debt obligations for the foreseeable future.
The Company has a domestic unsecured revolving credit line of $55.0 million,
which matures on August 31, 2003. At December 28, 2002, there were no borrowings
against this credit line. The Company's subsidiaries in the Netherlands, Japan
and Korea also have unsecured credit lines of Euro 4.0 million, Yen 1.1 billion
and Won 2.5 billion, respectively. At December 28, 2002, the Euro credit line
was unused, Won 1.5 billion was drawn on the credit line in Korea and Yen 0.9
billion was drawn on the credit line in Japan.
The Company's bank credit agreement requires maintenance of certain financial
ratios and a minimum net worth level. At December 28, 2002, the Company was in
compliance with these covenants. If the Company were to default on any of the
bank agreement debt covenants, and were unable to obtain a waiver from the
lenders, the debt would be callable by the lenders. The Company believes that
default of any of the debt covenants is unlikely for the foreseeable future
since it expects the results of operations to be within the minimum levels to
continue to be in compliance with the debt covenants.
The Company started 2002 with $34.5 million of cash. Net cash provided by
operations was $40.8 million in the year. Cash used in investing activities
included $8.4 million in purchases of property, plant and equipment, $15.0
million for the acquisition of Semitron Industries and $8.8 million in purchases
of marketable securities. Cash provided by financing activities included cash
proceeds from the exercise of stock options of $1.6 million, offset by
repurchase of the Company's common stock for $3.6 million and net payments of
long-term debt of $13.0 million. The effect of exchange rate changes decreased
cash by $0.4 million. The net cash provided by operations and financing
activities, less investing activities plus the effect of exchange rates,
resulted in a $6.8 million net decrease in cash. This left the Company with a
cash balance of $27.8 million at the end of 2002.
Decreases in net working capital provided $11.8 million of cash flow in 2002.
The major factors contributing to lower working capital were a decrease in
inventory of $4.8 million, a $2.8 million reduction in accounts receivable, a
$3.3 million increase in accounts payable and accrued expenses and a $0.9
million reduction in prepaid and other items. Net working capital (working
capital less cash, marketable securities and the current portion of long-term
debt) as a percent of sales was 20.9% at year-end 2002 compared to 21.8% at
year-end 2001 and 20.0% at year-end 2000. The days sales outstanding in accounts
receivable decreased to 54 days at year-end 2002 compared to 61 days at year-end
2001 and 58 days at year-end 2000. Days inventory outstanding was 88 days at
year-end 2002 compared to 99 days at year-end 2001 and 109 days at year-end
2000.
The ratio of current assets to current liabilities was 2.3 to 1 at year-end 2002
compared to 2.2 to 1 at year-end 2001 and 2.0 to 1 at year-end 2000. The ratio
of long-term debt to equity was 0.1 to 1 at year-end 2002, compared to 0.2 to 1
at year-end 2001 and 0.2 to 1 at year-end 2000.
The Company started 2001 with $5.5 million of cash. Net cash provided by
operations was $40.3 million in the year. Cash used in investing activities
included $14.1 million in purchases of property, plant and equipment. Cash
provided by financing activities included cash proceeds from the exercise of
stock options and conversion of warrants of $10.5 million, offset by repurchase
of the Company's common stock for $1.3 million and net payments of long-term
debt of $6.0 million. The effect of exchange rate changes decreased cash by $0.2
million. The net cash provided by operations and financing activities, less
investing activities plus the effect of exchange rates, resulted in a $29.0
million net increase in cash. This left the Company with a cash balance of $34.5
million at the end of 2001.
Decreases in net working capital provided $18.2 million of cash flow in 2001.
The major factors contributing to lower working capital were a decrease in
inventory of $11.9 million and a $10.6 million reduction in accounts receivable,
partially offset by a $3.7 million reduction in accounts payable and accrued
expenses. Net working capital (working capital less cash and the current portion
of long-term debt) as a percent of sales was 21.8% at year-end 2001 compared to
20.0% at year-end 2000 and to 20.2% at year-end 1999. Net working capital as a
percent of sales increased as the decreases in accounts receivable and inventory
were more than offset by lower sales. The days sales outstanding in accounts
receivable increased to approximately 61 days at year-end 2001 compared to 58
days at year-end 2000 and 68 days at year-end 1999. Days inventory outstanding
was 99 days at year-end 2001 compared to 109 days at year-end 2000 and 94 days
at year-end 1999.
The Company's capital expenditures were $8.4 million in 2002, $14.1 million in
2001 and $22.0 million in 2000. The Company expects that capital expenditures in
2003 will be higher than 2002, and at levels similar to 2001. The primary
purposes for capital expenditures in 2003 will be for new product tooling,
production equipment and facility expansion. As in 2002, the Company expects to
finance capital expenditures in 2003 through cash flow from operations.
The Company decreased total debt by $13.0 million in 2002, after decreasing debt
by $6.0 million in 2001 and $16.8 million in 2000. The Company is required to
repay $10.0 million of its Senior Notes in 2003. Separately, the Company has
$8.8 million in renewable foreign credit facilities outstand-ing at December 28,
2002, coming due in 2003. The Company's Board of Directors has authorized the
Company to repurchase shares of its common stock, from time to time, depending
on market conditions. The Company repurchased 225,800 common shares for $3.6
million in 2002, 50,000 common shares for $1.3 million in 2001 and 369,000
common shares for $11.2 million in 2000. As of December 28, 2002, the Company
had 774,200 shares remaining for repurchase under the Board of Directors
authorization expiring in May 2003.
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 out-standing at December 28, 2002, in the form of
Senior Notes at fixed interest rates and foreign lines of credit at variable
rates. Since 76% of this debt has fixed interest rates, the Company's interest
expense is not materially 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, U.K., Ireland, Switzerland, China and the Philippines. During 2002,
sales exported from the United States or manufactured abroad accounted for 53.7%
percent of total sales. Substantially all sales in Europe are denominated in
Euros, U.S. Dollars and British Pound Sterling, and substantially all sales in
the Asia-Pacific region are denominated in U.S. Dollars, Japanese Yen 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. As international sales were slightly more than half of total sales, a
significant portion of the resulting accounts receivable is denominated in
foreign currencies. 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, accounts receivable values and
financial results. The Company uses netting and offsetting intercompany account
management techniques to reduce known foreign currency exposures where possible
and also considers the use of derivative instruments to hedge certain foreign
currency exposures deemed to be material. During 2002, the Company entered into
cross currency interest rate swaps, as discussed in Note 6 of the Notes to
Consolidated Financial Statements, designated as a cash flow hedge of the
foreign currency exchange rate risk associated with forecasted intercompany
sales transactions denominated in Japanese Yen.
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.
Outlook
Sales in 2003 are expected to start slowly, with continued weakness in the
electronics and electrical markets. As these markets improve, the Company
believes its long-term growth strategy, which emphasizes development of new
circuit protection products and providing customers with solutions and technical
support in all major regions of the world, will drive sales growth in all of its
markets.
With the expectation of continued price pressure, the Company initiated a
manufacturing rationalization program in 2001 emphasizing consolidation of
plants and transfer of manufacturing to lower cost locations. The program
involved manufacturing plant closures in the U.S., U.K. and Korea and workforce
reductions in Ireland, and is expected to be completed in the first half of
2003. The benefits of incremental volume improvements and cost savings are
expected to have a favorable impact in 2003.
The Company is working to expand its market share in the overvoltage circuit
protection market with the addition of products and technology through the
Semitron Industries and Harris Suppression Products acquisitions and the ability
to offer customers total circuit protection solutions. The Company remains
committed to investing in new product development and technical resources to
provide customers with overcurrent and overvoltage circuit protection solutions
and expertise.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
The statements in this section, the letter to shareholders and in the other
sections of this report 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, capacity and supply constraints or difficulties, exchange rate
fluctuations, actual purchases under agreements, the effect of the Company's
accounting policies, labor disputes, restructuring costs in excess of
expectations, pension plan asset returns less than assumed, 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 of Littelfuse, Inc.
We have audited the accompanying consolidated statements of financial condition
of Littelfuse, Inc. and subsidiaries as of December 28, 2002 and December 29,
2001, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 28,
2002. 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 December 28, 2002 and December 29, 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 28, 2002, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 1 to the financial statements in the year ended December
28, 2002, the Company changed its method of accounting for goodwill.
Ernst & Young LLP
Chicago, Illinois
January 23, 2003
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands) December 28, 2002 December 29, 2001
- -------------- ----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 27,750 $ 34,527
Short-term investments 8,806 --
Accounts receivable, less allowances (2002 - $7,330; 2001 - $7,519) 40,810 40,969
Inventories 44,533 46,208
Deferred income taxes 12,451 10,870
Prepaid expenses and other current assets 2,695 3,608
--------- ---------
Total current assets 137,045 136,182
Property, plant, and equipment:
Land 9,738 9,669
Buildings 32,733 33,481
Equipment 172,266 176,185
--------- ---------
214,737 219,335
Accumulated depreciation (133,615) (132,734)
--------- ---------
81,122 86,601
Intangible assets, net of amortization:
Reorganization value in excess of amounts allocable to identifiable assets 27,665 28,066
Patents and licenses 36 56
Distribution network 4,607 5,102
Trademarks 2,270 2,522
Goodwill 21,378 12,775
--------- ---------
55,956 48,521
Other assets 3,355 968
--------- ---------
Total assets $ 277,478 $ 272,272
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,094 $ 7,881
Accrued payroll 17,373 16,654
Accrued expenses 8,425 6,932
Accrued income taxes 4,416 7,702
Current portion of long-term debt 18,994 21,026
--------- ---------
Total current liabilities 60,302 60,195
Long-term debt, less current portion 20,252 30,402
Deferred income taxes 1,713 835
Accrued post-retirement benefits 9,027 3,047
Other long-term liabilities 473 124
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, 2002 - 21,759,065; 2001 - 21,873,416 218 219
Additional paid-in capital 71,918 70,641
Notes receivable - Common stock (3,900) (3,448)
Accumulated other comprehensive loss (9,901) (10,265)
Retained earnings 127,376 120,522
Total shareholders' equity 185,711 177,669
--------- ---------
Total liabilities and shareholders' equity $ 277,478 $ 272,272
========= =========
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except per Share Amounts)
Year Ended December 28, 2002 December 29, 2001 December 30, 2000
- ---------- ----------------- ----------------- -----------------
Net sales $ 283,267 $ 272,149 $ 371,920
Cost of sales 192,870 180,242 221,272
--------- --------- ---------
Gross profit 90,397 91,907 150,648
Selling, general and administrative expenses 61,621 62,197 71,083
Research and development expenses 8,334 8,883 11,152
Amortization of intangibles 767 5,972 6,665
Restructuring expense 3,744 6,315 --
--------- --------- ---------
Operating income 15,931 8,540 61,748
Interest expense 2,653 3,291 4,652
Other income, net (1,753) (1,112) (1,940)
--------- --------- ---------
Income before income taxes 15,031 6,361 59,036
Income taxes 5,411 2,291 21,738
--------- --------- ---------
Net income $ 9,620 $ 4,070 $ 37,298
========= ========= =========
Net income per share:
Basic $ 0.44 $ 0.20 $ 1.88
Diluted $ 0.44 $ 0.19 $ 1.69
========= ========= =========
Weighted-average shares and equivalent shares outstanding:
Basic 21,858 19,951 19,834
Diluted 21,971 21,731 22,118
========= ========= =========
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended December 28, 2002 December 29, 2001 December 30, 2000
- ---------- ----------------- ----------------- -----------------
Operating activities
Net income $ 9,620 $ 4,070 $ 37,298
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 18,137 19,710 20,074
Amortization of intangibles 767 5,972 6,665
Provision for bad debts 356 308 275
Deferred income taxes (575) (7,531) (1,810)
Other 651 (435) 337
Changes in operating assets and liabilities:
Accounts receivable 2,794 10,573 4,978
Inventories 4,762 11,873 (10,802)
Accounts payable and accrued expenses 3,296 (3,710) (8,514)
Prepaid expenses and other 950 (520) 186
-------- -------- --------
Net cash provided by operating activities 40,758 40,310 48,687
Investing activities
Purchases of property, plant, and equipment, net (8,360) (14,121) (21,958)
Purchase of business, net of cash acquired (15,031) (168) --
Purchase of marketable securities (13,747) -- --
Sale of marketable securities 4,941 -- --
Other -- -- (60)
-------- -------- --------
Net cash used in investing activities (32,197) (14,289) (22,018)
Financing activities
Proceeds from long-term debt 112 15,855 53,811
Payments of long-term debt (13,130) (21,887) (70,630)
Proceeds from exercise of stock options and warrants 1,614 10,519 5,831
Purchases of common stock and redemption of warrants (3,556) (1,256) (11,203)
-------- -------- --------
Net cash provided by (used in) financing activities (14,960) 3,231 (22,191)
Effect of exchange rate changes on cash (378) (216) (875)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (6,777) 29,036 3,603
Cash and cash equivalents at beginning of year 34,527 5,491 1,888
-------- -------- --------
Cash and cash equivalents at end of year $ 27,750 $ 34,527 $ 5,491
======== ======== ========
See accompanying notes.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands) Notes Accumulated
Additional Receivable- Other
Common Paid-In Common Comprehensive Retained
Period from January 1, 2000 to December 28, 2002 Stock Capital Stock Loss Earnings Total
- ------------------------------------------------ -------- -------- ----------- -------------- --------- ---------
Balance at January 1, 2000 $ 195 $ 55,241 $(2,909) $ (5,642) $ 90,147 $ 137,032
Comprehensive income:
Net income for the year -- -- -- -- 37,298 37,298
Foreign currency translation adjustment -- -- -- (2,232) -- (2,232)
-------- -------- ------- -------- --------- ---------
Comprehensive income 35,066
Stock options and warrants exercised 7 6,269 (444) -- -- 5,832
Purchase of 369,000 shares of common stock (4) (1,287) -- -- (9,912) (11,203)
-------- -------- ------- -------- --------- ---------
Balance at December 30, 2000 $ 198 $ 60,223 $(3,353) $ (7,874) $ 117,533 $ 166,727
Comprehensive income:
Net income for the year -- -- -- -- 4,070 4,070
Foreign currency translation adjustment -- -- -- (2,391) -- (2,391)
-------- -------- ------- -------- --------- ---------
Comprehensive income 1,679
Stock options and warrants exercised 21 10,593 (95) -- -- 10,519
Purchase of 50,000 shares of common stock -- (175) -- -- (1,081) (1,256)
-------- -------- ------- -------- --------- ---------
Balance at December 29, 2001 $ 219 $ 70,641 $(3,448) $(10,265) $ 120,522 $ 177,669
Comprehensive income:
Net income for the year -- -- -- -- 9,620 9,620
Change in net unrealized loss on derivatives -- -- -- (231) -- (231)
Minimum pension liability adjustment, net of tax -- -- -- (3,462) -- (3,462)
Foreign currency translation adjustment -- -- -- 4,057 -- 4,057
-------- -------- ------- -------- --------- ---------
Comprehensive income 9,984
Stock options and warrants exercised 1 2,065 (452) -- -- 1,614
Purchase of 225,800 shares of common stock (2) (788) -- -- (2,766) (3,556)
-------- -------- ------- -------- --------- ---------
Balance at December 31, 2002 $ 218 $ 71,918 $(3,900) $ (9,901) $ 127,376 $ 185,711
======== ======== ======= ======== ========= =========
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 2002 and December 29, 2001
1. Summary of Significant Accounting Policies and Other Information
Nature of Operations Littelfuse, Inc. and its subsidiaries (the Company) design,
manufacture, and sell circuit protection devices for use in the automotive,
electronic, and electrical markets throughout the world.
Fiscal Year The Company's fiscal years ended December 28, 2002, December 29,
2001 and December 30, 2000, contained 52 weeks.
Basis of Presentation The consolidated financial statements include the accounts
of Littelfuse, Inc. and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated. Certain amounts reported in previous
years have been reclassified to conform to the 2002 presentation.
Cash Equivalents All highly liquid investments, with a maturity of three months
or less when purchased, are considered to be cash equivalents.
Short-term Investments Short-term investments consist primarily of liquid debt
instruments purchased with maturity dates greater than three months. The Company
has evaluated its investment policies consistent with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," and determined that all of its investment
securities are to be classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses
reported in "Shareholders' Equity" as a component of "Accumulated Other
Comprehensive Income (Loss)." The amortized cost of debt securities is adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amorti-zation is included in interest income. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in other income or expense. The cost of securities sold
is based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income.
Fair Value of Financial Instruments The Company's financial instruments include
cash and cash equivalents, short-term investments, accounts receivable, and
long-term debt. The carrying values of such financial instruments approximate
their estimated fair values.
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 based upon specific knowledge of a customer's inability to meet its
financial obligations to the Company. Historically, credit losses have
consistently been within the management's expectations and have not been a
material amount. The Company also maintains allowances against accounts
receivable for the settlement of rebates and sales discounts to customers. These
allowances are based upon specific customer sales and sales discounts as well as
actual historical experience.
INVENTORIES Inventories are stated at the lower of cost (first in, first out
method) or market, which approximates current replacement cost. The Company
maintains excess and obsolete allowances against inventory to reduce the
carrying value to the expected net realizable value. These allowances are based
upon a combination of factors including historical sales volume, market
conditions, lower of cost or market analysis and expected realizable value of
the inventory.
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 Prior to the adoption of the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" on December 30, 2001, reorganization value in excess of
amounts allocable to identifiable assets and trademarks have been 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 has been amortized using an
accelerated method over 20 years. Licenses have been amortized using an
accelerated method over their estimated useful lives, which average
approximately 9 years. Other intangible assets consisting principally of
goodwill have been amortized over 10 to 20 years. The Company recorded
amortization expense of $0.8 million, $6.0 million and $6.7 million in 2002,
2001 and 2000, respectively. All of this goodwill amortization is deductible for
tax purposes. Accumulated amortization of intangible assets was $66.7 million at
December 28, 2002 and was $65.9 million at December 29, 2001.
REVENUE RECOGNITION In accordance with the Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements," issued in December 1999,
sales and associated costs are recognized in accordance with customer shipping
terms which is when the transfer of title to the customer occurs. The adoption
of SAB 101 did not have a material impact on the Company's earnings or financial
position.
ADVERTISING COSTS The Company expenses advertising costs as incurred which
amounted to $2.1 million in 2002, $1.1 million in 2001 and $2.1 million in 2000.
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.
DERIVATIVE INSTRUMENTS The Company recognizes derivatives as either assets or
liabilities on the Consolidated Statements of Financial Condition and measures
those instruments at fair value. The accounting for changes in the fair value of
a derivative depends on the intended use and designation of the derivative
instrument. For derivatives designated as cash flow hedges, the effective
portion of the derivative's gain or loss is initially reported as a component of
accumulated other comprehensive income (loss) and subsequently reclassified into
earnings when the hedged exposure affects earnings. Derivative financial
instruments involve, to a varying degree, elements of market and credit risk not
recognized in the consolidated financial statements. The market risk associated
with these instruments resulting from interest rate movements is expected to
offset the market risk of the underlying transactions being hedged. The
counterparties to the agreements relating to the Company's cross currency rate
instruments consist of major international financial institutions with high
credit ratings. The Company does not believe that there is significant risk of
non-performance by these counterparties because the Company monitors the credit
ratings of such counterparties, and limits the financial exposure and amount of
agreements entered into with any one financial institution. While the notional
amounts of the derivative financial instruments provides one measure of the
volume of these transactions, they do not represent the amount of the Company's
exposure to credit risk. The amounts potentially subject to credit risk (arising
from the possible inability of counterparties to meet the terms of their
contracts) are generally limited to the amounts, if any, by which the
counterparties' obligations under the contracts exceed the obligations of the
Company to the counterparty.
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" using the intrinsic
value method. 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. See Note 8 for additional information on
stock-based compensation.
USE OF ESTIMATES The preparation of financial statements in conformity with
accounting principles generally accepted
in the U.S. 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.
SHIPPING AND HANDLING FEES AND COSTS Amounts billed to customers in a sales
transaction represent fees earned for the goods provided and, accordingly,
amounts billed related to shipping and handling should be classified as revenue.
Costs incurred for shipping and handling of $3.6 million, $3.1 million and $3.9
million in 2002, 2001 and 2000, respectively, are classified in Selling,
General, and Administrative Expenses.
ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board
issued SFAS No. 141, "Business Combinations." All business combinations in the
scope of this Statement are to be accounted for using one method, the purchase
method. The provisions of this Statement apply to all business combinations
initiated after June 30, 2001. Use of the pooling-of-interests method for those
business combinations is prohibited. The Company has adopted Statement No. 141
for its acquisition of Semitron Industries Limited (see Note 2).
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
which prohibits the amortization of goodwill and intangible assets with
indefinite useful lives. Statement 142 requires that these assets be reviewed
for impairment at least annually. Intangible assets with finite lives will
continue to be amortized over their estimated useful lives. Additionally,
Statement 142 requires that goodwill included in the carrying value of equity
method investments no longer be amortized. The Company has adopted the
provisions of Statement 142 as of December 30, 2001. The Company has tested
goodwill for impairment both as of the date of adoption of Statement No. 142 and
as of September 29, 2002 as prescribed in Statement 142 and determined that
there was no impairment. The effect of non-amortization of goodwill had
Statement 142 been effective at the beginning of each year is as follows:
(In Thousands, except per share amounts) 2002 2001 2000
- ---------------------------------------- ------ ------ -------
Net income as reported $9,620 $4,070 $37,298
Add back: Goodwill amortization,
net of tax -- 2,145 2,328
Adjusted net income $9,620 $6,215 $39,626
Basic net income per share
As reported $ 0.44 $ 0.20 $ 1.88
Goodwill amortization -- 0.11 0.12
Adjusted basic net income per share $ 0.44 $ 0.31 $ 2.00
Diluted net income per share
As reported $ 0.44 $ 0.19 $ 1.69
Goodwill amortization -- 0.10 0.11
Adjusted diluted net income share $ 0.44 $ 0.29 $ 1.80
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," which is effective for fiscal years beginning after June 15, 2002.
The Statement requires legal obligations associated with the retirement of
long-lived assets to be recognized at their fair value at the time that the
obligations are incurred. Upon initial recognition of a liability, that cost
should be capitalized as part of the related long-lived asset and allocated to
expense over the useful life of the asset. The Company has adopted Statement 143
as of December 30, 2001, and determined that the impact of adoption of Statement
143 had no material impact on the Company's financial position or results of
operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (Statement 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
for a Disposal of a Segment of a Business." Statement 144 is effective for
fiscal years beginning after December 15, 2001. Using the methodology prescribed
in Statement 144, the Company reviews long-lived assets and the related
intangible assets for impairment whenever events or changes in circumstances
indicate the carrying amounts of such assets may not be recoverable. Once an
indication of a potential impairment exists, recoverability of the respective
assets is determined by comparing the forecasted undiscounted net cash flows of
the operation to which the assets relate, to the carrying amount, including
associated intangible assets, of such operation. If the operation is determined
to be unable to recover the carrying amount of its assets, then long-lived
assets of the operation are written down to fair value. Fair value is determined
based on discounted cash flows or appraised values, depending upon the nature of
the assets. Long-lived assets that are held for disposal are reported at the
lower of the asset carrying amount or fair value less costs related to the asset
disposal. The Company has adopted Statement 144 as of December 30, 2001 and
determined that the adoption of the Statement had no significant impact on the
Company's financial position or results of operations.
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." The statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or a disposal plan. Examples of
costs covered by the Statement include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operations, plant
closing, or other exit or disposal activities. Statement No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN No. 45 clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The Company will
adopt the provisions of FIN No. 45 on January 1, 2003 for all new or amended
guarantees subsequent to that date.
On December 31, 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, to provide alternative methods of
transition to the fair value method of accounting for stock-based compensation.
In addition, Statement 148 amends the disclosure provisions of Statement 123 to
require disclosure in the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based
compensation on reported net income and earnings per share in annual and interim
financial statements. Statement 148 does not amend Statement 123 to require
companies to account for their employee stock-based awards using the fair value
method. However, the disclosure provisions are required for all companies with
stock-based employee compensation, regardless of whether they utilize the fair
value method of accounting described in Statement 123 or the intrinsic method
described in APB Opinion No. 25. The Company has adopted the disclosure
provisions of Statement No. 148 as of December 28, 2002 and determined that the
adoption of the Statement had no significant impact on the Company's financial
position and results of operations.
RESTRUCTURING COSTS Included in the Company's operating results for the year
ended December 29, 2001 are restructuring charges of $6.3 million. These charges
result from the Company's plans to close down plants in the U.S. and the U.K.,
workforce reductions in Korea and the write-down of manufacturing equipment.
Restructuring charges for the closure of the U.S. and the U.K. plants included
$4.1 million of employee termination costs covering 462 technical, production,
administrative and support employees. Restructuring of the Korea manufacturing
operations included $1.1 million of employee termination costs covering 50
technical, production, administrative and support employees. The remaining $1.1
million of the restructuring expense relates to the non-cash write-down of
manufacturing equipment. Included in the Company's operating results for the
year ended December 28, 2002 are restructuring charges of $3.7 million. These
charges result from the Company's plans to close down a plant in Korea,
workforce reductions in Ireland and the write-down of manufacturing equipment.
Restructuring charges for the closure of the Korea plant included $1.5 million
of employee termination costs covering 62 technical, production, administrative
and support employees. Restructuring of the Ireland manufacturing operations
included $1.4 million of employee termination costs covering 19 technical,
production, administrative and support employees. The remaining $0.8 million of
the restructuring expense relates to the non-cash write-down of manufacturing
equipment. The remaining $2.1 million of severance costs, currently included in
accrued expenses, are expected to be paid by
September 30, 2003.
2. Acquisition of Business
On July 16, 2002, the Company acquired Semitron Industries for $12.6 million and
40% of LC Fab Co. for $2.4 million in cash. Semitron Industries manufactures and
markets a broad line of transient voltage suppression devices that provide
circuit protection for products in numerous markets including computer,
telecommunications, automotive and consumer electronics. LC Fab Co. provides
semiconductor dies for assembly at Semitron Industries. Subsequent to the
acquisition, Semitron Industries has been renamed Littelfuse UK Limited. 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 $1.7 million, inventory of $1.9 million,
property, plant and equipment of $3.0 million, goodwill of $7.4 million and
liabilities assumed of $1.5 million. Purchase accounting liabilities recorded in
2002 consist of $0.2 million for transaction costs and $0.8 million for costs
associated with involuntary termination of employees in connection with the
integration of the business. Assuming that this acquisition had occurred at the
beginning of 2002 and 2001, unaudited pro forma sales of Littelfuse, Inc. would
have been $286.0 million in 2001 and $288.1 million in 2002 and pro forma
results of operations would not have differed materially from reported results
of operations. The pro forma results are not necessarily indicative of what
would have occurred if the acquisition had been consummated at the beginning of
each year, nor are they necessarily indicative of future consolidated operating
results.
3. Inventories
The components of inventories are as follows at December 28, 2002, and December
29, 2001 (in thousands):
2002 2001
------- -------
Raw materials $10,084 $ 9,244
Work in process 11,615 11,066
Finished goods 22,834 25,898
------- -------
Total net inventory $44,533 $46,208
======= =======
4. Long-Term Obligations
The carrying amounts of long-term debt, which approximate fair value, are as
follows at December 28, 2002, and December 29, 2001 (in thousands):
2002 2001
------- -------
6.16% Senior Notes, maturing 2005 $30,000 $40,000
Revolving credit facility -- --
Other obligations 9,096 10,616
Capital lease obligations 150 812
------- -------
39,246 51,428
Less: Current maturities 18,994 21,026
------- -------
$20,252 $30,402
======= =======
The Company has unsecured domestic 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, 2003. At
December 28, 2002, the Company had available $55.0 million of borrowing
capability under the revolving credit facility at an interest rate of LIBOR plus
0.38%. The bank credit agreement allows for letters of credit of up to $8.0
million in addition to the available $55.0 million credit line. At December 28,
2002, the Company had $1.7 million of outstanding letters of credit.
The Company also has unsecured bank lines of credit in the Netherlands, Japan
and Korea that provide a Euro 4.0 million revolving credit facility at an
interest rate of Euro Libor plus 0.85% in the Netherlands, a Yen 1.1 billion
revolving credit facility at an interest rate of TIBOR plus 0.85% (0.88% as of
December 28, 2002) and a Won 2.5 billion revolving credit facility at an
interest rate of the 3-month Korea Negotiable Certificate of Deposit rate plus
1.0% (5.80% as of December 28, 2002). No principal payments are required for
borrowings until the lines mature on December 31, 2002, in the Netherlands and
Japan and on August 29, 2003 in Korea. At December 28, 2002, the Company had no
borrowings outstanding on the Euro revolving credit line, an equivalent of $7.5
million outstanding on the Yen facility and the equivalent of $1.3 million
outstanding on the Won credit line. The Company did not renew the Netherlands
credit facility but did renew the Japanese credit facility.
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. At
December 28, 2002 and for the year then ended, the Company was in compliance
with these covenants.
Aggregate maturities of long-term obligations at December 28, 2002, are as
follows (in thousands):
2003 $18,994
2004 10,072
2005 10,072
2006 72
2007 and thereafter 36
-------
$39,246
=======
Interest paid on long-term debt approximated $2.5 million in 2002, $3.1 million
in 2001 and $4.3 million in 2000.
5. Short-term Investments
Short-term investments consist primarily of liquid debt instruments purchased
with remaining maturity dates greater than three months.
The following is a summary of short-term investments classified as
"available-for-sale" securities as required by Statement 115 (in thousands):
December 28, December 29,
2002 2001
------------ ------------
Debt/equity securities:
Amortized cost $8,808 --
Gross unrealized gains 2 --
Gross unrealized losses 4 --
------ ------
Estimated fair value $8,806 --
====== ======
Proceeds from the sales of short-term investments in 2002 were $4.9 million.
Realized gains and losses on the sales of securities are based on the specific
identification method and included in earnings. During 2002, there were no
realized gains, and realized losses on sales of securities were not material to
the results of operations.
6. Derivatives and Hedging
On June 11, 2002, the Company entered into cross currency rate swaps, with a
notional amount of $11.6 million and a maturity date of September 5, 2005. The
cross currency rate swaps convert a portion of the Company's U.S. Dollar fixed
rate debt to fixed rate Japanese Yen debt and have been designated as a cash
flow hedge of the variability of Yen cash flows attributable to the exchange
rate risk on forecasted intercompany sales of inventory to a Japanese
subsidiary. The notional amount outstanding at December 28, 2002, was $10.0
million and the fair value of the outstanding cross-currency rate swap
agreements was recognized as a $0.2 million liability and as a charge to
comprehensive loss in the Consolidated Statement of Financial Condition at
December 28, 2002. There were no cross-currency rate swaps outstanding as of
December 29, 2001.
7. 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 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 also has defined
benefit pension plans covering employees in the U.K., Ireland and the
Netherlands. The amount of these retirement benefits is based on years of
service and final average pay. Liabilities resulting from the plan that covers
employees in the Netherlands are settled annually through the purchase of
insurance contracts. Separate from the foreign pension data presented below, net
periodic expense for the plan covering Netherlands employees was $0.3 million,
$0.2 million and $0.1 million in 2002, 2001 and 2000, respectively.
The Company accounts for its defined benefit pension plans in accordance with
SFAS No. 87, "Employers' Accounting for Pensions" which requires that amounts
recognized in the financial statements be determined on an actuarial basis. The
Company's contributions are made in amounts sufficient to satisfy legal
requirements.
The most significant element in determining the Company's pension expense in
accordance with SFAS No. 87 is the expected return on assets. The Company has
assumed that the expected long-term rate of return on domestic plan assets will
be 9.0% and foreign plan assets will be 6.8%. Based upon long-term performance
and investment allocations, the Company believes that its assumption of future
returns is reasonable. Changes in actual return on pension plan assets are
deferred and recognized over a period of three years. The deferral of actual
gains and losses affects the calculated value of plan assets and therefore
future pension expense. The plan assets have earned a rate of return less than
the assumed return in the last three years and, should this trend continue,
future pension expense would likely increase. Charges to record additional
minimum pension liability were reflected in accumulated other comprehensive loss
in the Statement of Financial Condition in 2002 in the amount of $3.5 million,
net of tax.
Differences between total pension expense of $2.2 million, $1.8 million and $1.3
million in 2002, 2001 and 2000, respectively, were not material to the overall
financial performance of the Company.
U.S. Total Foreign
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Change in benefit obligation
Benefit obligation at beginning of year $ 47,764 $ 45,942 $ 15,819 $ 16,210
Service cost 2,198 2,327 621 574
Interest cost 3,528 3,264 992 959
Plan participants' contributions -- -- 167 159
Net actuarial loss (gain) 3,885 (1,331) 1,638 --
Benefits paid (2,890) (2,438) (764) (1,140)
Effect of exchange rate movements -- -- 3,043 (943)
-------- -------- -------- --------
Benefit obligation at end of year $ 54,485 $ 47,764 $ 21,516 $ 15,819
======== ======== ======== ========
Change in plan assets at fair value
Fair value of plan assets at beginning of year $ 43,139 $ 46,022 $ 16,919 $ 18,213
Actual return (loss) on plan assets (4,564) (445) (2,113) 16
Employer contributions -- -- 431 720
Plan participant contributions -- -- 167 159
Benefits paid (2,890) (2,438) (764) (1,140)
Effect of exchange rate movements -- -- 2,707 (1,049)
-------- -------- -------- --------
Fair value of plan assets at end of year $ 35,685 $ 43,139 $ 17,347 $ 16,919
======== ======== ======== ========
Funded (unfunded) status $(18,800) $ (4,625) $ (4,169) $ 1,100
Unrecognized prior service cost (benefit) -- 46 (138) --
Unrecognized transition asset -- -- (1,401) (1,266)
Unrecognized net actuarial loss (gain) 14,170 1,609 6,182 1,007
-------- -------- -------- --------
Prepaid pension asset (obligation) $ (4,630) $ (2,970) $ 474 $ 841
======== ======== ======== ========
Amounts recognized in the statement of financial condition consist of:
Prepaid benefit cost $ -- $ -- $ 29 $ --
Accrued benefit asset (obligation) (8,154) (2,970) (856) 841
Accumulated other comprehensive income 2,291 -- 1,171 --
-------- -------- -------- --------
Net amount recognized $ (5,863) $ (2,970) $ 344 $ 841
======== ======== ======== ========
U.S. Foreign
--------------------------------- ---------------------------------
2002 2001 2000 2002 2001 2000
------- ------- ------- ------- ------- -------
Weighted-average assumptions at end of year
Discount rate 6.8% 7.3% 7.5% 5.5% 6.0% 6.0%
Expected return on plan assets 9.0% 9.0% 9.0% 6.8% 7.0% 7.0%
Compensation increase rate 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Components of net periodic benefit cost
Service cost $ 2,198 $ 2,327 $ 1,952 $ 796 $ 659 $ 618
Interest cost 3,528 3,264 3,154 992 882 936
Expected return on plan assets (4,112) (4,182) (4,002) (1,277) (1,129) (1,223)
Amortization of prior service cost 46 66 66 (11) -- --
Amortization of transition asset -- -- -- (85) (81) (96)
Total cost of the plan for the year 1,660 1,475 1,170 415 331 235
Expected plan participants' contribution -- -- -- (175) (159) (193)
------- ------- ------- ------- ------- -------
Net periodic benefit cost $ 1,660 $ 1,475 $ 1,170 $ 240 $ 172 $ 42
======= ======= ======= ======= ======= =======
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 $0.4 million, $1.9 million
and $0.6 million in 2002, 2001 and 2000, 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 $0.6 million, $0.6 million and $0.7 million in 2002, 2001 and 2000,
respectively.
8. Shareholders' Equity
Stock Options The Company has stock option plans authorizing the granting of
both incentive and nonqualified options and other stock rights of up to
3,400,000 shares of common stock to employees and directors. The stock options
issued prior to 2002 vest over a five-year period and are exercisable over a
ten-year period commencing from the date of vesting. The Company has changed its
policy in 2002 where the stock options vest over a five-year period and are
exercisable over a ten-year period commencing from the date of the grant. This
change was not made to stock options already granted.
A summary of stock option information follows:
2002 2001 2000
---------------------- ----------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of year 1,902,905 $23.63 1,692,075 $22.53 1,588,840 $18.02
Options granted
Option price equals market price 329,250 23.18 391,200 27.18 358,250 35.07
Option price less than market price 4,000 5.00 1,000 5.00 -- --
--------- ------ --------- ------ --------- ------
Total options granted 333,250 22.96 392,200 27.12 358,250 35.07
Exercised (99,580) 15.43 (116,170) 16.42 (217,465) 10.15
Forfeited (159,970) 26.02 (65,200) 29.06 (37,550) 22.25
--------- ------ --------- ------ --------- ------
Outstanding at end of year 1,976,605 $23.73 1,902,905 $23.63 1,692,075 $22.53
========= ====== ========= ====== ========= ======
Exercisable at end of year 1,060,140 938,623 794,450
Available for future grant 1,004,500 164,400 471,190
Weighted-average value of options granted
during the year $12.52 $18.31 $21.05
Option price equals market price 12.69 18.29 21.05
Option price less than market price 20.97 20.72 --
As of December 28, 2002, the Company had the following
outstanding options:
Weighted- Weighted-
Average Average
Options Exercise Remaining Options
Exercise Price Outstanding Price Life Exercisable
- -------------- ----------- --------- --------- -----------
$3.69 to $ 5.00 35,400 $4.50 2.60 26,600
$7.50 to $11.16 98,500 10.61 1.03 98,500
$11.63 to $16.50 150,600 15.34 2.45 144,100
$17.81 to $25.50 996,825 22.09 6.47 543,390
$26.63 to $35.50 695,280 30.73 7.56 247,550
The following table discloses our pro forma net income and diluted net income
per share had the valuation methods under SFAS 123 been used for our stock
option grants. The table also discloses the weighted average assumptions used in
estimating the fair value using the Black-Scholes option pricing model.
(In Thousands, except per share amounts) 2002 2001 2000
- ---------------------------------------- -------- -------- --------
Net income as reported $ 9,620 $ 4,070 $ 37,298
Stock option compensation
expense, net of tax (1,022) (1,436) (1,506)
Pro forma net income $ 8,598 $ 2,634 $ 35,792
Basic net income per share
As reported $ 0.44 $ 0.20 $ 1.88
Pro forma $ 0.39 $ 0.13 $ 1.81
Diluted net income per share
As reported $ 0.44 $ 0.19 $ 1.69
Pro forma $ 0.39 $ 0.12 $ 1.62
Risk-free interest rate 3.24% 5.11% 5.16%
Expected dividend yield 0% 0% 0%
Expected stock price volatility 41.4% 58.6% 47.6%
Expected life of options 8 years 8 years 8 years
These pro forma amounts may not be representative of future disclosures because
the estimated fair value of the options is amortized to expense over the vesting
period and additional options may be granted in the future.
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 shareholders' equity. The Company has
changed its policy in 2002 such that management employees may no longer obtain
such loans.
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. 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.
9. Income Taxes
Federal, state, and foreign income tax expense (benefit) consists of the
following (in thousands):
2002 2001 2000
------- ------- --------
Current:
Federal $ (527) $ 5,187 $ 13,375
State 249 (637) 1,908
Foreign 5,110 4,980 8,265
------- ------- --------
Subtotal 4,832 9,530 23,548
Deferred:
Federal 2,987 (7,379) (1,827)
Foreign (2,408) 140 17
Subtotal 579 (7,239) (1,810)
------- ------- --------
Provision for income taxes $ 5,411 $ 2,291 $ 21,738
======= ======= ========
Domestic and foreign income (loss) before income taxes is as follows (in
thousands):
2002 2001 2000
------- -------- -------
Domestic $ 6,542 $(10,030) $28,906
Foreign 8,489 16,391 30,130
------- -------- -------
Income before income taxes $15,031 $ 6,361 $59,036
======= ======== =======
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):
2002 2001 2000
------- ------- --------
Tax expense at statutory rate of 35% $ 5,259 $ 2,226 $ 20,663
State and local taxes (benefit),
net of federal tax benefit 162 (476) 1,179
Foreign income tax rate differential 179 (615) (1,437)
Foreign losses for which no tax
benefit is available 34 47 63
Other, net (223) 1,109 1,270
------- ------- --------
Provision for income taxes $ 5,411 $ 2,291 $ 21,738
======= ======= ========
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 December 28, 2002 and December 29, 2001, are as follows (in
thousands):
2002 2001
-------- --------
Deferred tax liabilities
Tax depreciation and amortization
in excess of book $ 5,397 $ 2,238
Prepaid expenses -- 231
Other 89 1,390
-------- --------
Total deferred tax liabilities 5,486 3,859
Deferred tax assets
Accrued expenses 13,229 10,907
Foreign tax credit carryforwards 2,995 2,987
Foreign net operating loss carryforwards 428 392
-------- --------
Gross deferred tax assets 16,652 14,286
Less: Valuation allowance (428) (392)
Total deferred tax assets 16,224 13,894
-------- --------
Net deferred tax assets $ 10,738 $ 10,035
======== ========
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. The Company paid income taxes of $5.8 million, $8.4 million and
$25.4 million in 2002, 2001 and 2000, respectively. U.S. income taxes were not
provided for on a cumulative total of approximately $68.9 million of
undistributed earnings for certain non-U.S. subsidiaries as of December 28,
2002, and accordingly, no deferred tax liability has been established relative
to these earnings. The determination of the deferred tax liability associated
with the distribution of these earnings is not practicable.
10. 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 electrical. 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 December 28, 2002, is as follows (in thousands):
The Asia- Combined Consolidated
Americas Europe Pacific Total Corporate Reconciliation Total
-------- ------ ------- ----- --------- -------------- -----
Revenues 2002 $148,047 $51,233 $83,987 $283,267 $ -- $ -- $283,267
2001 $144,899 $51,430 $75,820 $272,149 $ -- $ -- $272,149
2000 $214,907 $61,634 $95,379 $371,920 $ -- $ -- $371,920
Intersegment revenues 2002 62,022 47,213 17,696 126,931 -- (126,931) --
2001 54,440 46,660 9,926 111,026 -- (111,026) --
2000 44,599 38,185 6,523 89,307 -- (89,307) --
Interest expense 2002 2,450 19 184 2,653 -- -- 2,653
2001 3,075 23 193 3,291 -- -- 3,291
2000 4,337 69 246 4,652 -- -- 4,652
Depreciation and 2002 13,256 2,853 2,028 18,137 767 -- 18,904
amortization 2001 12,176 4,035 1,723 17,934 7,748 -- 25,682
2000 11,563 2,810 4,213 18,586 8,153 -- 26,739
Other income (loss) 2002 1,385 888 (520) 1,753 -- -- 1,753
2001 635 688 (211) 1,112 -- -- 1,112
2000 2,754 (893) 79 1,940 -- -- 1,940
Income tax 2002 3,583 1,764 64 5,411 -- -- 5,411
expense (benefit) 2001 (2,831) 2,871 2,251 2,291 -- -- 2,291
2000 12,290 4,546 4,902 21,738 -- -- 21,738
Net income (loss) 2002 2,626 3,235 8,270 14,131 (4,511) -- 9,620
2001 5,426 7,363 5,347 18,136 (14,066) -- 4,070
2000 24,493 9,124 11,856 45,473 (8,175) -- 37,298
Identifiable assets 2002 202,642 32,908 45,079 280,629 83,706 (86,857) 277,478
2001 191,626 35,568 41,643 268,837 83,048 (79,613) 272,272
2000 181,727 39,559 48,096 269,382 60,404 (55,408) 274,378
Capital expenditures, net 2002 9,256 (2,516) 1,620 8,360 -- -- 8,360
2001 5,126 5,318 3,677 14,121 -- -- 14,121
2000 13,929 1,875 6,154 21,958 -- -- 21,958
Intersegment revenues and receivables are eliminated to reconcile to
consolidated totals. Restructuring charges are reflected in the corporate column
for the net income segmentation. Corporate identifiable assets consist primarily
of cash and intangible assets.
The Company's revenues by product areas for the years ended December 28, 2002,
December 29, 2001 and December 30, 2000, are as follows (in thousands):
Revenues 2002 2001 2000
-------- -------- --------
Electronic $150,838 $146,342 $232,677
Automotive 98,235 91,061 100,036
Electrical 34,194 34,746 39,207
-------- -------- --------
Consolidated total $283,267 $272,149 $371,920
======== ======== ========
Revenue from no single customer of the Company amounts to 10% or more.
11. Lease Commitments
The Company leases certain office and warehouse space under non-cancelable
operating leases, as well as certain machinery and equipment. Rental expense
under these leases was approximately $2.6 million in 2002, $1.8 million in 2001,
and $1.5 million in 2000. Future minimum payments for all non-cancelable
operating leases with initial terms of one year or more at December 28, 2002,
are as follows (in thousands):
2003 2,817
2004 2,160
2005 1,425
2006 1,035
2007 and thereafter 914
-----
Total lease commitments 8,351
=====
12. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
(In Thousands, except per share amounts) 2002 2001 2000
- ---------------------------------------- ------- ------- -------
Numerator:
Net income $ 9,620 $ 4,070 $37,298
Denominator:
Denominator for basic
earnings per share -
Weighted-average shares 21,858 19,951 19,834
Effect of dilutive securities:
Warrants -- 1,565 1,871
Employee stock options 113 215 413
Denominator for diluted
earnings per share -
Adjusted weighted-average
shares and assumed conversions 21,971 21,731 22,118
Basic earnings per share $ 0.44 $ 0.20 $ 1.88
Diluted earnings per share $ 0.44 $ 0.19 $ 1.69
Options to purchase 1,434,718, 814,735 and 354,550 shares of common stock were
outstanding at December 28, 2002, December 29, 2001 and December 30, 2000,
respectively, but were not included in the computation of diluted earnings per
share because the effect of including such options would have been
anti-dilutive.
SELECTED FINANCIAL DATA
(in thousands, except per share data)
FIVE YEAR SUMMARY+
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Net sales $283,267 $272,149 $371,920 $296,367 $269,540
Gross profit 90,397 91,907 150,648 117,255 100,199
Operating income 15,931 8,540 61,748 44,624 34,096
Net income 9,620 4,070 37,298 25,220 19,885
Net income per share - Diluted 0.44 0.19 1.69 1.16 0.86
Net working capital 59,181 62,486 74,503 60,008 46,685
Total assets 277,478 272,272 274,378 275,698 250,544
Long-term debt 20,252 30,402 41,397 55,460 70,061
QUARTERLY RESULTS OF OPERATIONS (unaudited)+
2002 2001
4Q 3Q 2Q 1Q* 4Q* 3Q 2Q 1Q
------- ------- ------- -------- -------- ------- ------- -------
Net sales $69,274 $74,964 $73,900 $ 65,129 $ 60,851 $66,711 $68,996 $75,590
Gross profit 22,705 23,390 24,277 20,025 18,265 21,509 25,199 26,935
Operating income (loss) 4,071 5,835 6,867 (842) (4,102) 1,491 5,456 5,695
Net income (loss) 2,540 3,667 4,025 (612) (2,804) 474 3,284 3,116
Net income (loss) per share:
Basic 0.12 0.17 0.18 (0.03) (0.14) 0.02 0.17 0.16
Diluted 0.12 0.17 0.18 (0.03) (0.14) 0.02 0.15 0.14
* Net losses in the fourth quarter of 2001 and the first quarter of 2002 were
due to restructuring charges related primarily to reductions in force. Refer to
the Notes to Consolidated Financial Statements for additional information about
these restructuring costs.
+As of December 30, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142 which prohibits the authorization of goodwill and intangible
assets with indefinite useful lives. Refer to the Notes to Consolidated
Financial Statements for more information.
QUARTERLY STOCK PRICES
2002 2001
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
----- ----- ----- ----- ----- ----- ----- -----
High 19.70 24.60 28.25 28.47 27.81 29.67 31.58 30.56
Low 13.84 17.35 22.16 22.85 19.78 19.37 19.81 22.50
Close 17.23 17.36 23.13 24.77 26.17 22.13 26.79 25.13