SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JULY 2, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
----------- -----------
Commission file number 0-20388
LITTELFUSE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3795742
--------------------------------------- ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
800 EAST NORTHWEST HIGHWAY
DES PLAINES, ILLINOIS 60016
--------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(847) 824-1188
Registrant's telephone number, including area code:
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
As of July 2, 2005, 22,453,183 shares of common stock, $.01 par value, of
the Registrant were outstanding.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of July 2, 2005 and January 1, 2005
(unaudited)................................................................ 1
Condensed Consolidated Statements of Income for the periods
ended July 2, 2005 and July 3, 2004 (unaudited)............................ 2
Condensed Consolidated Statements of Cash Flows for the periods
ended July 2, 2005 and July 3, 2004 (unaudited)............................ 3
Notes to the Condensed Consolidated Financial Statements (unaudited)....... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk................. 14
Item 4. Controls and Procedures.................................................... 15
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................ 16
Item 4. Submission of Matters to a Vote of Security Holders........................ 16
Item 6. Exhibits................................................................... 17
LITTELFUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
JULY 2, 2005 January 1, 2005
-------------- --------------
ASSETS:
Cash and cash equivalents................................ $ 32,647 $ 28,583
Receivables.............................................. 80,971 77,726
Inventories.............................................. 71,250 79,080
Deferred income taxes.................................... 20,448 17,056
Other current assets..................................... 8,575 6,804
-------------- --------------
Total current assets..................................... 213,891 209,249
Property, plant, and equipment, net...................... 139,314 136,465
Intangible assets, net................................... 17,760 19,052
Goodwill................................................. 54,534 55,249
Investments.............................................. 5,138 4,886
Other assets............................................. 410 408
-------------- --------------
Total assets $ 431,047 $ 425,309
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities excluding current portion
of long-term debt.................................... $ 71,398 $ 82,196
Current portion of long-term debt........................ 42,959 32,958
-------------- --------------
Total current liabilities................................ 114,357 115,154
Long-term debt........................................... 1,544 1,364
Deferred income taxes.................................... 8,649 8,573
Accrued post-retirement benefits......................... 19,481 20,417
Other long-term liabilities.............................. 8,873 7,081
Minority interest........................................ 2,668 2,636
Shareholders' equity..................................... 275,475 270,084
-------------- --------------
Total liabilities and shareholders' equity............... $ 431,047 $ 425,309
============== ==============
Common shares issued and outstanding
of 22,453,183 and 22,549,595,
at July 2, 2005, and January 1, 2005, respectively
1
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data, unaudited)
For the Three Months Ended For the Six Months Ended
---------------------------- ---------------------------
JULY 2, July 3, JULY 2, July 3,
2005 2004 2005 2004
----------- --------- ----------- -----------
Net sales......................................... $ 123,867 $ 128,759 $ 245,555 $ 240,177
Cost of sales..................................... 86,212 84,580 168,209 156,193
----------- --------- ----------- -----------
Gross profit...................................... 37,655 44,179 77,346 83,984
Selling, general and administrative expenses...... 25,435 23,572 52,549 44,115
Research and development expenses................. 4,705 4,156 9,443 7,337
Amortization of intangibles....................... 463 470 1,094 809
----------- --------- ----------- -----------
Operating income.................................. 7,052 15,981 14,260 31,723
Interest expense.................................. 580 492 1,059 918
Other income...................................... (98) (768) (232) (461)
----------- --------- ----------- -----------
Income before minority interest and income taxes.. 6,570 16,257 13,433 31,266
Minority interest................................. (5) 60 2 60
Income taxes...................................... 2,318 5,853 4,735 11,256
----------- --------- ----------- -----------
Net income........................................ $ 4,257 $ 10,344 $ 8,696 $ 19,950
=========== ========= =========== ===========
Net income per share:
Basic.......................................... $ 0.19 $ 0.47 $ 0.39 $ 0.90
=========== ========= =========== ===========
Diluted........................................ $ 0.19 $ 0.46 $ 0.38 $ 0.89
=========== ========= =========== ===========
Weighted average shares and equivalent shares
outstanding:
Basic.......................................... 22,423 22,180 22,453 22,107
=========== ========= =========== ===========
Diluted........................................ 22,613 22,684 22,681 22,515
=========== ========= =========== ===========
2
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
......................................................... JULY 2, July 3, JULY 2, July 3,
......................................................... 2005 2004 2005 2004
--------- -------- --------- ---------
Operating activities:
Net income.............................................. $ 4,257 $ 10,344 $ 8,696 $ 19,950
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................ 7,511 6,177 14,152 11,816
Amortization........................................ 463 470 1,094 809
Changes in operating assets and liabilities:
Accounts receivable................................. (4,908) (5,597) (6,435) (13,818)
Inventories......................................... 4,006 1,137 4,951 (1,233)
Accounts payable and accrued expenses............... (1,971) 2,189 (9,234) 1,779
Prepaid expenses and other.......................... 2,759 1,407 (1,014) (241)
--------- ---------- --------- ---------
Net cash provided by operating activities............... 12,117 16,127 12,210 19,062
Cash used in investing activities:
Purchases of property, plant, and equipment............. (8,266) (6,059) (16,964) (9,051)
Acquisitions, net of cash acquired...................... (991) (32,807) (1,019) (32,807)
--------- -------- --------- ---------
Net cash used in investing activities................... (9,257) (38,866) (17,983) (41,858)
Cash provided by (used in) financing activities:
Proceeds from long-term debt........................ 11,895 32,000 26,951 32,000
Payments of long-term debt.......................... (11,000) (3,008) (16,213) (3,047)
Proceeds from repayment of notes receivable, common
stock.......................................... 12 - 3,533 -
Proceeds from exercise of stock options............. 214 6,425 675 8,309
Purchase of treasury stock.......................... - - (3,199) -
--------- -------- --------- ---------
Net cash provided by financing activities.............. 1,121 35,417 11,747 37,262
Effect of exchange rate changes on cash................ (724) (2,189) (1,910) (2,210)
--------- -------- --------- ---------
Increase in cash and cash equivalents.................. 3,257 10,489 4,064 12,256
Cash and cash equivalents at beginning of period....... 29,390 23,895 28,583 22,128
--------- -------- --------- ---------
Cash and cash equivalents at end of period............. $ 32,647 $ 34,384 $ 32,647 $ 34,384
========= ======== ========= =========
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 2, 2005
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the period ended July 2, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005. For further information, refer to the Company's consolidated
financial statements and the notes thereto incorporated by reference in the
Company's Annual Report on Form 10-K for the year ended January 1, 2005.
2. BUSINESS SEGMENT INFORMATION
The Company designs, manufactures and sells circuit protection devices
throughout the world. The Company has three reportable geographic segments:
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
sales and net income or loss. The Company accounts for intersegment sales as if
the sales were to third parties. The Company's reportable segments are the
geographical regions where the revenue is earned and expenses are incurred. The
Company has subsidiaries in Americas, Europe and Asia-Pacific.
Revenues from no single customer amounted to 10% or more of the Company's total
revenues for the quarter ended July 2, 2005.
Information concerning the operations in these geographic segments for the
periods ended July 2, 2005, and July 3, 2004, is as follows (in thousands):
Three Months Three Months Six Months Six months
Ended Ended Ended Ended
July 2, 2005 July 3, 2004 July 2, 2005 July 3, 2004
--------------- --------------- --------------- ---------------
NET SALES
Americas $ 49,330 $ 55,631 $ 99,585 $ 108,808
Europe 31,906 42,181 66,395 79,519
Asia-Pacific 42,631 30,947 79,575 51,850
--------------- --------------- --------------- ---------------
Combined total 123,867 128,759 245,555 240,177
Corporate - - - -
--------------- --------------- --------------- ---------------
Consolidated total $ 123,867 $ 128,759 $ 245,555 $ 240,177
INTERSEGMENT SALES
Americas $ 42,079 $ 22,688 $ 80,772 $ 38,256
Europe 12,506 14,784 25,526 30,422
Asia-Pacific 16,342 7,421 26,145 13,622
--------------- --------------- --------------- ---------------
Combined total 70,927 44,893 132,443 82,300
Corporate - - - -
Eliminations (70,927) (44,893) (132,443) (82,300)
---------------- ---------------- ---------------- ----------------
Consolidated total $ - $ - $ - $ -
4
Three Months Three Months Six Months Six months
Ended Ended Ended Ended
July 2, 2005 July 3, 2004 July 2, 2005 July 3, 2004
--------------- --------------- --------------- ---------------
INTEREST EXPENSE
Americas $ 531 $ 445 $ 992 $ 875
Europe 24 19 42 43
Asia-Pacific 25 28 25 -
--------------- --------------- --------------- ---------------
Combined total 580 492 1,059 918
Corporate - - - -
--------------- --------------- --------------- ---------------
Consolidated total $ 580 $ 492 $ 1,059 $ 918
DEPRECIATION AND AMORTIZATION
Americas $ 3,916 $ 3,910 $ 7,751 $ 9,053
Europe 3,067 1,916 5,358 2,068
Asia-Pacific 528 351 1,043 695
--------------- --------------- --------------- ---------------
Combined total 7,511 6,177 14,152 11,816
Corporate 463 470 1,094 809
--------------- --------------- --------------- ---------------
Consolidated total $ 7,974 $ 6,647 $ 15,246 $ 12,625
OTHER (INCOME) EXPENSE
Americas $ 270 $ (819) $ 182 $ (530)
Europe (3) (167) (16) (435)
Asia-Pacific (365) 218 (398) 504
---------------- --------------- ---------------- ---------------
Combined total (98) (768) (232) (461)
Corporate - - - -
--------------- --------------- --------------- ---------------
Consolidated total $ (98) $ (768) $ (232) $ (461)
INCOME TAXES
Americas $ 823 $ 3,565 $ 954 $ 7,176
Europe 847 967 2,003 1,724
Asia-Pacific 648 1,321 1,778 2,356
--------------- --------------- --------------- ---------------
Combined total 2,318 5,853 4,735 11,256
Corporate - - - -
--------------- --------------- --------------- ---------------
Consolidated total $ 2,318 $ 5,853 $ 4,735 $ 11,256
NET INCOME (LOSS) *
Americas $ 2,060 $ 5,755 $ 2,305 $ 12,277
Europe (1,557) (26) (430) 87
Asia-Pacific 3,754 4,615 6,821 7,586
--------------- --------------- --------------- ---------------
Combined total 4,257 10,344 8,696 19,950
Corporate - - - -
--------------- --------------- --------------- ---------------
Consolidated total $ 4,257 $ 10,344 $ 8,696 $ 19,950
NET SALES *
Electronic $ 74,879 $ 83,439 $ 147,545 $ 157,966
Automotive 30,183 30,038 61,248 58,226
Electrical 18,805 15,282 36,762 23,985
--------------- --------------- --------------- ---------------
Consolidated total $ 123,867 $ 128,759 $ 245,555 $ 240,177
* Certain prior year amounts have been reclassified to conform to the current
year presentation.
5
IDENTIFIABLE ASSETS
July 3, January 1,
2005 2005
--------------- ---------------
Americas $ 327,917 $ 344,277
Europe 230,616 264,523
Asia-Pacific 77,960 64,828
--------------- ---------------
Combined total 636,493 673,628
Eliminations (205,446) (248,319)
---------------- ----------------
Consolidated total $ 431,047 $ 425,309
=============== ===============
3. INVENTORIES
The components of inventories are as follows (in thousands):
July 2, January 1,
2005 2005
------------ --------------
Raw material $ 15,229 $ 16,723
Work in process 21,979 23,780
Finished goods 34,042 38,577
------------ --------------
Total $ 71,250 $ 79,080
============ ==============
4. LONG-TERM OBLIGATIONS
Total debt, including the current portion, at the end of the second quarter 2005
totaled $44.5 million and consisted of the following: (1) 6.16% private
placement notes totaling $10.0 million, (2) foreign revolver borrowings totaling
$6.5 million and (3) credit revolver borrowings totaling $28.0 million. Of this
indebtedness, $43.0 million is considered to be current liabilities. The Company
has a $50.0 million, three-year revolving bank credit agreement that expires on
August 26, 2006. The bank credit agreement is subject to a maximum indebtedness
calculation and other financial covenants. At July 2, 2005, the Company had
available $22.0 million of borrowing capability under the revolving bank credit
agreement. The revolving bank credit agreement has a floating interest rate of
LIBOR plus 0.875% or prime. The Company also had $2.5 million in letters of
credit outstanding at July 2, 2005.
6
5. PER SHARE DATA
Net income per share amounts for the three months ended July 2, 2005, and July
3, 2004, are based on the weighted average number of common and common
equivalent shares outstanding during the periods as follows (in thousands,
except per share data):
Three months ended Six months ended
------------------ ----------------
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
--------- --------- --------- ---------
Net income $ 4,257 $ 10,344 $ 8,696 $ 19,950
========= ========= ========= =========
Average shares outstanding - Basic 22,423 22,180 22,453 22,107
Net effect of dilutive stock options
and restricted shares
- Diluted 190 504 228 408
--------- --------- --------- ---------
Average shares outstanding
- Diluted 22,613 22,684 22,681 22,515
========= ========= ========= =========
Net income per share
- Basic $ 0.19 $ 0.47 $ 0.39 $ 0.90
========== ========== ========== ==========
- Diluted $ 0.19 $ 0.46 $ 0.38 $ 0.89
========== ========== ========== ==========
Options to purchase 538,600 and 286,286 shares of common stock were outstanding
at July 2, 2005, and July 3, 2004 respectively, but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares and, therefore,
the effect would be anti-dilutive. During the first six months of 2005 the
Company issued 34,980 shares of common stock resulting from the exercising of
stock options.
6. HEINRICH ACQUISITION
On May 6, 2004, the Company acquired 82% of the common stock of Heinrich
Industrie AG ("Heinrich") for Euro 39.5 million (approximately $47.1 million) in
cash and acquisition costs of approximately $1.8 million. The Company purchased
the controlling interest in Heinrich from its two largest shareholders and
initiated a tender offer for the remaining shares of the publicly held company.
The Company funded the acquisition with $17.5 million in cash and $32.0 million
of borrowings on an existing revolving line of credit.
Subsequent to May 6, 2004, the Company purchased additional shares of Heinrich
stock for approximately $8.7 million, bringing the total ownership to 97.2% as
of July 2, 2005.
Heinrich is the holding company for the Wickmann Group of circuit protection
products, which has three business units: electronic, automotive and electrical.
Littelfuse has continued to operate Heinrich in such business units subsequent
to the acquisition. The Heinrich acquisition expands the Company's product
offering and strengthens the Company's position in the circuit protection
industry.
7
The acquisition was accounted for using the purchase method of accounting and
the operations of Heinrich are included in the Company's operations from the
date of acquisition. The following table sets forth the purchase price
allocation for the acquisition of Heinrich in accordance with the purchase
method of accounting with adjustments to record the acquired assets and
liabilities of Heinrich at their estimated fair market or net realizable values.
Purchase price allocation (in thousands)
- -----------------------------------------
Current assets $ 39,824
Property, plant and equipment 35,826
Patents, licenses and software 3,396
Distribution network 5,135
Trademarks and tradenames 788
Goodwill 7,651
Other assets 5,282
Current liabilities (30,778)
Purchase accounting liabilities (7,281)
Other long-term liabilities (16,580)
Minority interest (1,602)
-------------
$ 41,661
All goodwill and intangible assets are recorded in the European segment.
Trademarks and tradenames have an average estimated useful life of five years.
The distribution network has an average estimated useful life of nine years.
Patents and licenses have an average estimated useful life of four years.
Software has a useful life of three years. The weighted average estimated useful
life for intangible assets is approximately seven years.
Purchase accounting liabilities are estimated to be $7.3 million and are
primarily for redundancy costs to be paid through 2006 related to manufacturing
operations and selling, general and administrative functions. These liabilities
are subject to revision as the Company implements its plan. The Company began
formulating its plan to incur these costs as of the acquisition date. As of July
2, 2005, $3.0 million has been paid related to these liabilities. Upon the
future acquisition of the remaining minority interest in Heinrich, the Company
may record additional liabilities in connection with this acquisition.
The following unaudited pro forma consolidated financial information for the
Company has been prepared assuming the acquisition had occurred at the beginning
of fiscal 2004.
Three Months Ended Six Months Ended
------------------ ----------------
July 3, 2004 July 3, 2004
(unaudited) (unaudited)
Net sales $140,406 $272,873
Operating income 16,223 31,614
Net income 10,788 20,130
Diluted income per share $0.48 $0.89
These unaudited pro forma results are presented for comparative purposes only.
The pro forma results are not necessarily indicative of what actual results
would have been had the Heinrich acquisition been completed as of the beginning
of the respective period, or of future results.
7. DERIVATIVES AND HEDGING
On June 11, 2002, the Company entered into cross-currency rate swaps, with a
notional amount of $11.6 million, as a cash flow hedge of the variability of Yen
cash flows attributable to the USD/JPY exchange rate risk on forecasted
8
intercompany sales of inventory to a Japanese subsidiary. The cross-currency
rate swaps convert $11.6 million of the Company's fixed rate 6.16% U.S. Dollar
debt to fixed rate 3.13% Japanese Yen debt. At the inception of the hedge, both
the foreign currency swap and the intercompany sales subject to the hedge were
denominated in Japanese Yen. The swap agreements were accounted for as a cash
flow hedge and reported at fair value. The notional amount outstanding at July
2, 2005 was $0.8 million and the fair value of the outstanding cross currency
rate swap agreements was recognized as a $0.1 million liability in the accrued
liabilities on the consolidated balance sheet. The change in the liability has
been reflected as a charge to shareholders' equity in the consolidated balance
sheet at July 2, 2005. The Company's hedges are considered effective and the net
gain or loss from hedge ineffectiveness was not material.
For the period from June 1, 2004, to September 30, 2005, Heinrich Industrie AG
purchased Euro forward contracts that hedge the variability of U.S. Dollar cash
attributable to the exchange rate risk on forecasted intercompany sales to U.S.
and Asian subsidiaries. These forward contracts guarantee the rate at which the
U.S. Dollar cash flows will be converted to Euro in the future. The forward
agreements are reported at the fair value and recorded as an asset under Other
Assets on the consolidated balance sheet at July 2, 2005. The gains since the
date of the Heinrich acquisition were recognized in the income statement and
were immaterial.
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 amount of the derivative financial instruments
provide one measure of the volume of these transactions, they do not represent
the amount of the Company's exposure to credit risk. The amount 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.
8. PENSIONS
The components of net periodic benefit cost for the three months ended July 2,
2005, compared with the three months ended July 3, 2004, were (in thousands):
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
--------------------------------------------------------------------------------
U.S. Pension Benefits Foreign Plans
----------------------------------------- --------------------------------------
2005 2004 2005 2004 2005 2004 2005 2004
--------- --------- ---------- ---------- --------- --------- --------- --------
Service cost $ 775 $ 737 $ 1,550 $ 1,474 $ 329 $ 281 $ 658 $ 562
Interest cost 883 882 1,766 1,764 537 372 1,074 744
Expected return on plan
assets (912) (907) (1,824) (1,814) (457) (384) (914) (768)
Amortization of prior
service cost 3 3 6 6 (3) (3) (6) (6)
Amortization of transition
asset - - - - (31) (23) (62) (46)
Amortization of net (gain)
loss 68 48 136 96 47 52 94 104
-------- -------- ---------- ---------- -------- -------- -------- --------
Total cost of the plan 817 763 1,634 1,526 422 295 844 590
Expected plan participants'
contribution - - - - (107) (52) (214) (104)
------- ------- ---------- ---------- ------- ------- ------- -------
Net periodic benefit cost $ 817 $ 763 $ 1,634 $ 1,526 $ 315 $ 243 $ 630 $ 486
------- ------- ---------- ---------- ------- ------- ------- -------
The expected rate of return on pension assets is 8.50% and 8.75% in 2005 and
2004, respectively.
9. COMPREHENSIVE INCOME
9
Total comprehensive income for the three months ended July 2, 2005, and July 3,
2004, was approximately $3.2 million and $9.7 million, respectively, and the six
months ended July 2, 2005, and July 3, 2004, was approximately $4.0 million and
$18.9 million, respectively . The adjustment for comprehensive income consists
of deferred gains and losses from foreign currency translation adjustments and
qualified cash flow hedges for the periods ended July 2, 2005, and July 3, 2004,
and unrealized gains and losses on available-for-sale securities for the period
ended July 2, 2005.
10. STOCK-BASED COMPENSATION
The following table discloses the Company's pro forma net income and diluted net
income per share had the valuation methods under SFAS 123 been used for the
Company's 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)
Three months ended Six months ended
July 2, 2005 July 3, 2004 July 2, 2005 July 3, 2004
------------- ------------- ------------- -------------
Net income as reported $ 4,257 $ 10,344 $ 8,696 $ 19,950
Stock option compensation expense, net of tax (731) (674) (1,471) (1,312)
------------- ------------- ------------- -------------
Pro forma net income $ 3,526 $ 9,670 $ 7,225 $ 18,638
Basic net income per share
As reported $ 0.19 $ 0.47 $ 0.39 $ 0.90
Pro forma $ 0.16 $ 0.44 $ 0.32 $ 0.84
Diluted net income per share
As reported $ 0.19 $ 0.46 $ 0.38 $ 0.89
Pro forma $ 0.16 $ 0.43 $ 0.32 $ 0.83
Risk-free interest rate 3.97% 4.14% 3.97% 4.14%
Expected dividend yield 0% 0% 0% 0%
Expected stock price volatility 39.7% 44.0% 39.7% 44.0%
Expected life of options 7 years 7 years 7 years 7 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.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123R, "Share-Based
Payment," replacing SFAS No. 123 and superseding Accounting Principles Board
(APB) Opinion No. 25. SFAS 123R requires public companies to recognize
compensation expense for the cost of awards of equity compensation. This
compensation cost will be measured as the fair value of the award estimated
using an option-pricing model on the grant date. Statement 123R is effective for
registrants no later than the beginning of the first fiscal year after December
15, 2005.
As permitted by Statement 123, the Company currently accounts for share-based
payments to employees in accordance with APB No. 25, "Accounting for Stock
Issued to Employees," using the intrinsic value method. The Company expects to
adopt Statement 123R at the beginning of fiscal year 2006. The Company is
currently evaluating the various transition provisions under provisions under
SFAS 123R. The adoption of Statement 123R is expected to result in increased
compensation expense in future periods.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Net Sales by Geography and Market*
(in millions)
SECOND QUARTER YEAR-TO-DATE
2005 2004 % CHANGE 2005 2004 % CHANGE
---------- ---------- ---------- ---------- ---------- ----------
GEOGRAPHY
Americas $ 49.4 $ 55.7 -11% $ 99.6 $ 108.9 -9%
Europe 31.9 30.9 3% 66.4 51.8 28%
Asia-Pacific 42.6 42.2 1% 79.6 79.5 --
---------- ---------- ---------- ---------- ---------- ----------
TOTAL $ 123.9 $ 128.8 -4% $ 245.6 $ 240.2 2%
========== ========== ========== ========== ========== ==========
SECOND QUARTER YEAR-TO-DATE
2005 2004 % CHANGE 2005 2004 % CHANGE
---------- ---------- ---------- ---------- ---------- ----------
MARKET
Electronics $ 66.9 $ 77.5 -14% $ 130.2 $ 152.4 -15%
Automotive 25.3 26.7 -5% 51.1 54.5 -6%
Electrical 10.8 10.0 8% 20.8 18.7 11%
---------- ---------- ---------- ---------- ---------- ----------
Subtotal 103.0 114.2 -10% 202.1 225.6 -10%
Heinrich 20.9 14.6 43% 43.5 14.6 198%
---------- ---------- ---------- ---------- ---------- ----------
TOTAL $ 123.9 $ 128.8 -4% $ 245.6 $ 240.2 2%
========== ========== ========== ========== ========== ==========
* Certain prior year amounts have been reclassified to conform to the current
year presentation.
Results of Operations
Second Quarter, 2005
Sales decreased $4.9 million or 4% to $123.9 million in the second quarter of
2005, compared to $128.8 million in the second quarter of 2004 due to lower
sales in the Americas and Europe partially offset by the acquisition of
Heinrich. Excluding Heinrich, sales for the second quarter of 2005 decreased
approximately 10% compared to the prior year quarter primarily due to a slowdown
in the electronics business.
On a geographic basis, sales in the Americas decreased $6.3 million or 11% in
the second quarter of 2005, compared to the second quarter of last year. The
electronics business was the main contributor to this decline as sales to North
American distributors and telecom OEM accounts slowed during the current
quarter. Heinrich contributed $1.1 million in the Americas for the quarter.
Europe sales increased $1.0 million or 3% in the second quarter of 2005 compared
to the second quarter of 2004. Heinrich contributed $16.0 million in Europe for
the quarter. Excluding Heinrich, Europe sales decreased $4.2 million or 21%
compared to the second quarter of 2004 primarily due to weakened electronic
distributor sales. Asia-Pacific sales increased $0.4 million or 1% compared to
the prior year second quarter. Excluding Heinrich, which contributed $3.8
million in the second quarter of 2005, Asia-Pacific sales decreased $0.3 million
or 1% compared to the second quarter of 2004. This decrease was mainly due to
lower electronic distributor sales and weaker demand in the China telecom
market, partially offset by improving sales trends in Taiwan and Southeast Asia.
Electronic sales, excluding Heinrich, decreased $10.6 million or 14% for the
second quarter of 2005 compared to the prior year quarter due to lower
distributor sales in North America and Europe and softening telecom end markets.
Automotive sales, excluding Heinrich, decreased $1.4 million or 5% for the
second quarter of 2005 compared to the prior year quarter. Automotive sales for
the second quarter of 2005 were below the prior year quarter due to slightly
lower car build in North America and the prior year quarter benefiting from
incremental sales related to an OEM
11
recall program. Electrical sales, excluding Heinrich, increased $0.8 million or
8% in the second quarter of 2005 compared to the same quarter last year as the
electrical markets benefited from increased industrial manufacturing activity
and improved product pricing.
Gross profit was $37.7 million or 30.4% of sales for the second quarter of 2005,
compared to $44.2 million or 34.3% of sales in the same quarter last year. The
decrease in gross margin was mainly attributable to reduced operating leverage
from lower sales, $1.6 million of inventory write-downs and a $0.5 million
charge related to an automotive quality charge.
Total operating expense was $30.6 million or 24.7% of sales for the second
quarter of 2005 compared to $28.2 million or 21.9% of sales for the same quarter
in the prior year. The increase in operating expense reflects the acquisition of
Heinrich, additions to sales and engineering staffs to support the Company's
solution selling strategy and $0.7 million of severance charges in the current
quarter related to staffing reductions, partially offset by lower bonus expense
in the current year quarter.
Operating income was $7.1 million or 5.7% of sales for the second quarter of
2005 compared to $16.0 million or 12.4% of sales for the same quarter of last
year reflecting the lower sales and increased costs discussed above.
Interest expense was $0.6 million in the second quarter of this year compared to
$0.5 million in the second quarter of last year. Other income was $0.1 million
for the second quarter of 2005 compared to other income of $0.8 million in the
second quarter of last year, due to unfavorable currency effects.
Income before income taxes and minority interest was $6.6 million for the second
quarter 2005 compared to $16.3 million for the second quarter of 2004. Income
taxes were $2.3 million with an effective tax rate of 35% for the second quarter
of 2005 compared to $5.9 million with an effective tax rate of 36% in the second
quarter of last year.
Net income for the second quarter 2005 was $4.3 million or $0.19 per diluted
share compared to $10.3 million or $0.46 per diluted share for the same quarter
of last year.
Six Months, 2005
Sales for the first six months of 2005 increased 2% to $245.6 million from
$240.2 million for the first six months of last year. The acquisition of
Heinrich accounted for approximately $28.9 million of the increase. On a
geographic basis, sales in the Americas decreased $9.3 million or 9% in the
first six months of 2005 compared to the prior year due primarily to lower
electronic distributor sales, weaker telecommunications sales and lower
automotive sales, partially offset by increased electrical sales. Heinrich
contributed $2.6 million in the Americas for the first six months of 2005.
Europe sales increased 28% in the first six months of 2005 compared to the prior
year due to the Heinrich acquisition. Heinrich contributed $22.0 million in
Europe for the first six months of 2005. Excluding Heinrich, Europe sales
decreased $7.4 million or 18% compared to the same period in the prior year due
to weakened distributor sales partially offset by favorable currency effects of
$3.1 million. Asia-Pacific sales were unchanged for the first six months of 2005
compared to the same period in the prior year. Excluding Heinrich, Asia-Pacific
sales decreased $4.9 million or 6% in the first six months of 2005 compared to
the prior year primarily due to lower electronic distributor sales and weaker
demand in the China telecom market.
Electronic sales, excluding Heinrich, decreased $22.2 million or 15% for the
first six months of 2005 compared to the first six months of the prior year due
to lower distributor sales in North America and Europe and softening telecom
end markets. Automotive sales, excluding Heinrich, decreased $3.4 million or 6%
for the first six months of 2005 compared to the first six months of the prior
year due to slightly lower car build in North America and the prior year
benefiting from incremental sales related to an OEM recall program. Electrical
sales, excluding Heinrich, increased $2.1 million or 11% for the first six
months of 2005 compared to the first six months of the prior year due to
increased industrial manufacturing activity and improved product pricing.
Gross profit was $77.3 million or 31.5% of sales for the first six months of
2005 compared to $84.0 million or 35.0% of sales for the first six months of
last year. The decrease in gross margin for the first six months as compared to
the prior year was primarily due to reduced operating leverage from lower base
business sales, inventory write-downs, restructuring charges related to
manufacturing transfers and plant downsizing activities and the addition of
lower margin Heinrich sales.
Total operating expense was $63.1 million or 25.7% of sales for the first six
months of 2005 compared to $52.3 million or 21.8% of sales last year. The
increase in operating expenses was largely due to the additional expenses
related to Heinrich, additions to sales and engineering staffs to support the
Company's solution selling strategy and charges related to staff reductions.
12
Operating income for the first six months of 2005 was $14.3 million or 5.8% of
sales compared to $31.7 million or 13.2% of sales for the prior year reflecting
sales and margin declines discussed above.
Interest expense was $1.1 million for the first six months of 2005 compared to
$0.9 million last year. Other income was $0.2 million for the first six months
of 2005 compared to $0.5 million for the same period last year.
Income before taxes and minority interest was $13.4 million for the first six
months of 2005 compared to $31.3 million the first six months of last year.
Income taxes were $4.7 million the first six months of 2005 compared to $11.3
million for the first six months of last year. The effective tax rate was 35%
for the first six months of 2005 compared to an effective tax rate of 36% for
the first six months of 2004.
Net income for the first six months of 2005 decreased to $8.7 million from $20.0
million for the same period last year. Earnings per share for the first six
months of 2005 decreased to $0.38 per diluted share compared to $0.89 per
diluted share last year.
Liquidity and Capital Resources
Assuming no material adverse changes in market conditions or interest rates,
management expects that the Company will have sufficient cash from operations to
support both its operations and its current debt obligations for the foreseeable
future.
Littelfuse started the 2005 year with $28.6 million of cash and cash
equivalents. Net cash provided by operations was $12.2 million for the first six
months. Net cash provided by operations includes net income of $8.7 million,
depreciation of $14.1 million and amortization of $1.1 million in addition to
various working capital and other items. Accounts receivable increased $6.4
million due primarily to changes in payment terms for certain customers.
Inventory decreased $5.0 million due primarily to improved inventory management.
Accounts payable, accrued expenses, prepaid expenses and other items unfavorably
impacted net cash provided by operations by $10.3 million due primarily to
payment of management bonuses and restructuring charges that were previously
accrued. Net cash used in investing activities included $17.0 million in net
purchases of property, plant and equipment and $1.0 million of acquisition
related expenditures. In addition, net cash provided by financing activities
included stock option exercises of $0.7 million along with net proceeds of
long-term debt of $10.7 million, notes receivable payback of $3.5 million and
the offsetting purchase of treasury stock for $3.2 million. The effects of
exchange rate changes decreased cash by $1.9 million. The net cash provided by
operations, less investing and financing activities plus the effects of exchange
rate changes, resulted in a $4.0 million net increase. This left the Company
with a cash balance of $32.6 million at July 2, 2005.
The ratio of current assets to current liabilities was 1.9 to 1 at the end of
the second quarter of 2005 compared to 2.3 to 1 at the end of the second quarter
of 2004. The days sales in receivables was approximately 60 days at the end of
the second quarter of 2005, compared to 57 days at the end of fiscal 2004 and 54
days at the end of the second quarter 2004. The increase in days sales in
receivables from the second quarter of the prior year was due primarily to the
elimination of early payment discounts for certain distributors. The days
inventory outstanding was approximately 77 days at the end of the second quarter
of 2005 compared to 92 days at the end of 2004 and 73 days at end of the second
quarter of 2004. The decrease in days inventory outstanding from the end of 2004
resulted primarily from improved inventory management. The increase in days
inventory outstanding from the second quarter of the prior year was due to lower
sales in the second quarter of 2005.
The Company's capital expenditures, net of cash from asset sales, were $8.3
million for the second quarter of 2005 compared to $6.1 million for the second
quarter of 2004 due to spending in the most recent quarter related to
manufacturing process improvements, new product introductions and future
capacity expansions.
Total debt, including the current portion, at the end of the second quarter 2005
totaled $44.5 million and consisted of the following: (1) 6.16% private
placement notes totaling $10.0 million, (2) foreign revolver borrowings totaling
$6.5 million and (3) credit revolver borrowings totaling $28.0 million. Of this
indebtedness, $43.0 million is considered to be current liabilities. The Company
has a $50.0 million, three-year revolving bank credit agreement that expires on
August 26, 2006. The bank credit agreement is subject to a maximum indebtedness
calculation and other financial covenants. At July 2, 2005, the Company had
available $22.0 million of borrowing capability under
13
the revolving bank credit agreement. The revolving bank credit agreement has a
floating interest rate of LIBOR plus 0.875% or prime. The Company also had $2.5
million in letters of credit outstanding at July 2, 2005.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
The statements in this section 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, the effect of economic conditions, the impact of
competitive products and pricing, the integration of acquisitions, 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, costs related to former coal mining activities, pension plan asset
returns less than expected, and other risks which may be detailed in the
Company's Securities and Exchange Commission filings. Should one or more of
these risks or uncertainties materialize or should the underlying assumptions
prove incorrect, actual results and outcomes may differ materially from those
indicated or implied in the forward-looking statements. This report should be
read in conjunction with information provided in the financial statements
appearing in the Company's Annual Report on Form 10-K for the year ended January
1, 2005.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in foreign exchange rates,
commodities and, to a lesser extent, interest rates. Management believes that
the Company's exposure to these risks is immaterial and not significant enough
to warrant disclosure of quantitative information regarding market risk.
The Company had $44.5 million of long-term debt outstanding at July 2, 2005,
primarily in the form of senior notes and lines of credit. Approximately 22% of
the Company's long-term debt is at fixed rates.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign countries. The Company has foreign manufacturing
facilities in Mexico, England, Ireland, China, Germany and the Philippines.
Substantially all sales in Europe are denominated in Euro, U.S. Dollar and
British Pound Sterling , and substantially all sales in the Asia-Pacific region
are denominated in U.S. Dollar, 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. 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 deemed to be material. The
Company utilizes derivative instruments as hedges of specific foreign currency
cash flows when appropriate.
The Company has entered into cross-currency rate swaps with a notional amount of
$11.6 million. The cross-currency swaps convert $11.6 million of the Company's
fixed rate 6.16% U.S. dollar debt to fixed rate 3.13% Japanese Yen debt. At the
inception of the hedge, both the foreign currency swap and the intercompany
sales subject to the hedge were denominated in Japanese Yen. The fair value of
the rate swap agreements outstanding at July 2, 2005, which had a notional
amount of $0.8 million, was recognized as a $0.1 million liability, and is
reported in consolidated shareholders' equity as a component of other
comprehensive income.
For the period from June 1, 2004, to September 30, 2005, Heinrich Industrie AG
purchased Euro forward contracts that hedge the variability of U.S. Dollar cash
attributable to the exchange rate risk on forecasted intercompany sales to U.S.
and Asian subsidiaries. These forward contracts guarantee the rate at which the
U.S. Dollar cash flows will be converted to Euros in the future. The forward
agreements are reported at the fair value and recorded as an asset under Other
Assets on the consolidated balance sheet at July 2, 2005. The gains since the
date of the Heinrich acquisition were recognized in the income statement and
were immaterial.
A risk management policy has been implemented by the Company that establishes
the procedures and controls over derivative financial instruments. Under the
policy, the Company does not use derivative financial instruments for
14
trading purposes and the use of such instruments is subject to the approval of
senior officers. Typically, the use of such derivative instruments is limited to
hedging activities related to specific foreign currency cash flows. The
Company's exposure related to such transactions is, in the aggregate, not
material to the Company's financial position, results of operations and cash
flows.
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
Delphi Corporation, a significant customer of the Company, is having financial
difficulties. The Company is actively monitoring this situation and assessing
any financial impact this may have.
Item 4. Controls and Procedures
As of July 2, 2005, the Chief Executive Officer and Chief Financial Officer of
the Company evaluated the effectiveness of the disclosure controls and
procedures of the Company and concluded that these disclosure controls and
procedures are effective to ensure that material information relating to the
Company and its consolidated subsidiaries has been made known to them by the
employees of the Company and its consolidated subsidiaries during the period
preceding the filing of this Report. There were no significant changes in the
Company's internal controls during the period covered by this Report that could
materially affect these controls or could reasonably be expected to materially
affect the Company's internal control reporting, disclosures and procedures
subsequent to the last day they were evaluated by the Company's Chief Executive
Officer and Chief Financial Officer. The Company's management believes that the
material weaknesses discussed in the Company's Annual Report on Form 10-K for
the fiscal year ended January 1, 2005 relating to the approval process over
journal entries and lack of adequate controls over the accounting for foreign
currency translations have been eliminated.
15
PART II - OTHER INFORMATION
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
(c) The table below provides information with respect to
purchases by the Company of shares of its common stock
during each fiscal month of the second quarter of fiscal
2005:
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Shares
Purchased as Part of Maximum Number of Shares
Total Number of Average Price Publicly Announced that May Yet Be Purchased
Period Shares Purchased Paid per Share Plans or Programs Under the Plans or Programs
April 2005 - - - 730,100
May 2005 - - - 1,000,000
June 2005 - - - 1,000,000
Total - - - 1,000,000
The Company's Board of Directors authorized the repurchase of up to 1,000,000
shares under a program for the period May 1, 2005 to April 30, 2006.
Item 4: Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of Littelfuse, Inc. was held on
May 6, 2005.
(b) Howard B. Witt, John P. Driscoll, Anthony Grillo, Gordon Hunter,
Bruce A. Karsh, John E. Major and Ronald L. Schubel were re-elected
as directors at the meeting.
(c) The following votes were taken in connection with the election of
directors at the meeting:
<Table>
<Caption>
Director Votes For Votes Withheld Abstentions Broker Non-Votes
-------- --------- -------------- ----------- ----------------
Howard B. Witt 20,884,528 546,025 - -
John P. Driscoll 20,254,447 1,176,106 - -
Anthony Grillo 20,886,941 543,612 - -
Gordon Hunter 20,885,791 544,762 - -
Bruce A. Karsh 19,950,723 1,499,830 - -
John E. Major 20,827,995 602,558 - -
Ronald L. Schubel 20,884,528 546,025 - -
</Table>
The proposal to ratify the Board of Director's appointment of Ernst
&Young LLP as the Company's independent auditors for the fiscal year of the
Company ending December 31, 2005 was approved. The following votes were taken in
connection with this proposal:
<Table>
<Caption>
Proposal Votes For Votes Against Votes Withheld Abstentions Broker Non-Votes
-------- --------- ------------- -------------- ----------- ----------------
Ratification of the 21,015,039 384,020 - 31,494 -
Board of Director's
appointment of Ernst &
Young LLP as independent
auditors for fiscal 2005
</Table>
16
The proposal to approve an amendment to the 1993 Stock Plan for
Employees and Directors of Littelfuse Inc. (the "1993 Stock Plan") to increase
the maximum aggregate number of shares of Common Stock as to which awards of
options, restricted shares, units or rights may be made from time to time
thereunder from 3,400,000 to 4,400,000 shares was not approved. The following
votes were taken in connection with this proposal:
<Table>
<Caption>
Proposal Votes For Votes Against Votes Withheld Abstentions Broker Non-Votes
-------- --------- ------------- -------------- ----------- ----------------
1993 Stock Plan Amendment 7,151,549 12,913,060 - 18,224 -
</Table>
The proposal to approve amendments to the Littelfuse Deferred
Compensation Plan for Non-employee Directors (the "Non-employee Directors Plan")
to (i) increase the maximum aggregate number of shares of Common Stock which may
be issued under the Non-employee Directors Plan from 60,000 to 160,000 shares,
(ii) provide that such shares shall be issued quarterly, and (iii) revise the
Non-employee Directors Plan to satisfy the requirements of new Section 409A of
the Internal Revenue Code of 1986, as amended, was approved. The following votes
were taken in connection with this proposal:
<Table>
<Caption>
Proposal Votes For Votes Against Votes Withheld Abstentions Broker Non-Votes
-------- --------- ------------- -------------- ----------- ----------------
Non-employee Directors 19,536,732 504,611 - 41,490 -
Plan Amendments
</Table>
(d) Not applicable
Item 6: Exhibits
Exhibit Description
10.1 1993 Stock Plan for Employees and Directors
of Littelfuse, Inc., as amended
10.2 Stock Plan for New Directors of
Littelfuse, Inc., as amended
10.3 Stock Plan for Employees and Directors
of Littelfuse, Inc., as amended
10.4 Littelfuse Deferred Compensation Plan
for Non-employee Directors, as amended
31.1 Certification of Gordon Hunter, Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Philip G. Franklin,
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter
ended July 2, 2005, to be signed on its behalf by the undersigned thereunto duly
authorized.
LITTELFUSE, INC.
Date: August 11, 2005 By /s/ Philip G. Franklin
------------------------------------------
Philip G. Franklin
Vice President, Operations Support and
Chief Financial Officer
(As duly authorized officer and as
the principal financial and accounting
officer)