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 OCTOBER 1, 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 [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of October 1, 2005, 22,323,791 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 October 1, 2005 and January 1,
2005 (unaudited)........................................................... 1
Condensed Consolidated Statements of Income for the periods ended October 1,
2005 and October 2, 2004 (unaudited)....................................... 2
Condensed Consolidated Statements of Cash Flows for the periods ended
October 1, 2005 and October 2, 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................................................................. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk................. 13
Item 4. Controls and Procedures.................................................... 14
PART II - OTHER INFORMATION
Item 5. Unregistered Sales of Equity Securities and Use of Proceeds................. 15
Item 6. Exhibits................................................................... 15
LITTELFUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
OCTOBER 1, 2005 January 1, 2005
--------------- ---------------
ASSETS:
Cash and cash equivalents................................ $ 34,333 $ 28,583
Receivables.............................................. 83,375 77,726
Inventories.............................................. 69,246 79,080
Deferred income taxes.................................... 23,320 17,056
Other current assets..................................... 7,830 6,804
---------- -----------
Total current assets..................................... 218,104 209,249
Property, plant, and equipment, net...................... 136,785 136,465
Intangible assets, net................................... 17,085 19,052
Goodwill................................................. 55,135 55,249
Investments.............................................. 5,479 4,886
Other assets............................................. 410 408
---------- -----------
Total assets $ 432,998 $ 425,309
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities excluding current portion
of long-term debt.................................... $ 74,527 $ 82,196
Current portion of long-term debt........................ 38,486 32,958
---------- -----------
Total current liabilities................................ 113,013 115,154
Long-term debt........................................... 1,757 1,364
Deferred income taxes.................................... 12,281 8,573
Accrued post-retirement benefits......................... 17,111 20,417
Other long-term liabilities.............................. 6,051 7,081
Minority interest........................................ 928 2,636
Shareholders' equity..................................... 281,857 270,084
---------- -----------
Total liabilities and shareholders' equity............... $ 432,998 $ 425,309
========== ===========
Common shares issued and outstanding
of 22,323,791 and 22,549,595, at
October 1, 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 Nine Months Ended
-------------------------- --------------------------
OCTOBER 1, October 2, OCTOBER 1, October 2,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net sales ................................................ $ 131,050 $ 135,926 $ 376,605 $ 376,103
Cost of sales ............................................ 90,634 86,565 258,843 242,758
--------- --------- --------- ---------
Gross profit ............................................. 40,416 49,361 117,762 133,345
Selling, general and administrative expenses ............. 26,982 26,181 79,531 70,296
Research and development expenses ........................ 4,620 4,324 14,063 11,661
Amortization of intangibles .............................. 496 480 1,590 1,289
--------- --------- --------- ---------
Operating income ......................................... 8,318 18,376 22,578 50,099
Interest expense ......................................... 598 387 1,657 1,305
Other income ............................................. (2,989) 303 (3,221) (158)
--------- --------- --------- ---------
Income before minority interest and income taxes ......... 10,709 17,686 24,142 48,952
Minority interest ........................................ 25 75 27 135
Income taxes ............................................. 4,358 6,361 9,093 17,617
--------- --------- --------- ---------
Net income ............................................... $ 6,326 $ 11,250 $ 15,022 $ 31,200
========= ========= ========= =========
Net income per share:
Basic ................................................. $ 0.28 $ 0.50 $ 0.67 $ 1.41
========= ========= ========= =========
Diluted ............................................... $ 0.28 $ 0.49 $ 0.66 $ 1.38
========= ========= ========= =========
Weighted average shares and equivalent shares outstanding:
Basic ................................................. 22,441 22,350 22,449 22,189
========= ========= ========= =========
Diluted ............................................... 22,626 22,844 22,671 22,594
========= ========= ========= =========
2
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
For the Three Months Ended For the Nine Months Ended
-------------------------- --------------------------
OCTOBER 1, October 2, OCTOBER 1, October 2,
2005 2004 2005 2004
---------- ---------- --------- ------------
Operating activities:
Net income ............................................ $ 6,326 $ 11,250 $ 15,022 $ 31,200
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ...................................... 7,547 5,828 21,699 17,644
Amortization ...................................... 496 480 1,590 1,289
Provision for bad debts ........................... 1,139 (92) 2,428 945
Changes in operating assets and liabilities:
Accounts receivable ............................... (3,757) (506) (11,481) (15,361)
Inventories ....................................... 1,894 (6,834) 6,845 (8,067)
Accounts payable and accrued expenses ............. 681 1,817 (8,553) 3,596
Prepaid expenses and other ........................ 796 11,683 (218) 11,442
-------- -------- -------- --------
Net cash provided by operating activities ............. 15,122 23,626 27,332 42,688
Cash used in investing activities:
Purchases of property, plant, and equipment ........... (4,979) (7,343) (21,943) (16,394)
Acquisitions, net of cash acquired .................... (398) (2,512) (1,417) (35,319)
Sale of property, plant and equipment ................. -- 2,684 -- 2,684
-------- -------- -------- --------
Net cash used in investing activities ................. (5,377) (7,171) (23,360) (49,029)
Cash provided by (used in) financing activities:
Proceeds from long-term debt ...................... 19,729 700 46,680 32,700
Payments of long-term debt ........................ (23,901) (19,603) (40,114) (22,650)
Proceeds from repayment of notes receivable,
common stock ................................. -- -- 3,533 --
Proceeds from exercise of stock options ........... 3,075 2,026 3,750 10,335
Purchase of treasury stock ........................ (6,761) (5,604) (9,960) (5,604)
-------- -------- -------- --------
Net cash provided by (used in) financing activities ... (7,858) (22,481) 3,889 14,781
Effect of exchange rate changes on cash ............... (201) (1,033) (2,111) (3,243)
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents ...... 1,686 (7,059) 5,750 5,197
34,384
Cash and cash equivalents at beginning of period ...... 32,647 23,895 28,583 22,128
-------- -------- -------- --------
Cash and cash equivalents at end of period ............ $ 34,333 $ 27,325 $ 34,333 $ 27,325
======== ======== ======== ========
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 1, 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 October 1, 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 October 1, 2005.
Information concerning the operations in these geographic segments for the
periods ended October 1, 2005, and October 2, 2004, is as follows (in
thousands):
Three Months Three Months Nine Months Nine months
Ended Ended Ended Ended
October 1, 2005 October 2, 2004 October 1, 2005 October 2, 2004
--------------- --------------- --------------- ---------------
NET SALES *
Americas $ 50,640 $ 55,537 $ 147,300 $ 185,379
Europe 37,562 41,549 114,637 90,091
Asia-Pacific 42,848 38,840 114,668 100,633
--------- --------- --------- ---------
Consolidated total $ 131,050 $ 135,926 $ 376,605 $ 376,103
INTERSEGMENT SALES *
Americas $ 39,600 $ 47,781 $ 120,372 $ 86,037
Europe 18,334 13,973 43,860 44,395
Asia-Pacific 22,550 8,269 48,695 21,891
--------- --------- --------- ---------
Combined total 80,484 70,023 212,927 152,323
Eliminations (80,484) (70,023) (212,927) (152,323)
--------- --------- --------- ---------
Consolidated total $ -- $ -- $ -- $ --
INTEREST EXPENSE *
Americas $ 564 $ 385 $ 1,556 $ 1,299
Europe 22 2 64 6
Asia-Pacific 12 -- 37 --
--------- --------- --------- ---------
Consolidated total $ 598 $ 387 $ 1,657 $ 1,305
4
DEPRECIATION AND AMORTIZATION *
Americas $ 4,687 $ 3,663 $ 13,357 $ 13,525
Europe 2,703 2,139 8,236 4,207
Asia-Pacific 653 506 1,696 1,201
--------- --------- --------- ---------
Consolidated total $ 8,043 $ 6,308 $ 23,289 $ 18,933
OTHER (INCOME) EXPENSE *
Americas $ (3,142) $ 219 $ (2,924) $ (311)
Europe 356 290 341 (145)
Asia-Pacific (203) (206) (638) 298
--------- --------- --------- ---------
Consolidated total $ (2,989) $ 303 $ (3,221) $ (158)
INCOME TAXES *
Americas $ 2,508 $ 4,130 $ 3,463 $ 11,306
Europe 409 832 2,186 2,556
Asia-Pacific 1,441 1,399 3,444 3,755
--------- --------- --------- ---------
Consolidated total $ 4,358 $ 6,361 $ 9,093 $ 17,617
NET INCOME (LOSS) *
Americas $ 2,655 $ 6,759 $ 4,960 $ 19,036
Europe (2,855) 254 (3,285) 341
Asia-Pacific 6,526 4,237 13,347 11,823
--------- --------- --------- ---------
Consolidated total $ 6,326 $ 11,250 $ 15,022 $ 31,200
NET SALES
Electronic $ 80,875 $ 90,312 $ 228,518 $ 248,278
Automotive 29,868 27,488 90,967 85,714
Electrical 20,307 18,126 57,120 42,111
--------- --------- --------- ---------
Consolidated total $ 131,050 $ 135,926 $ 376,605 $ 376,103
* Certain prior year amounts have been reclassified to conform to the current
year presentation.
IDENTIFIABLE ASSETS
October 1, January 1,
2005 2005
----------- -----------
Americas $ 328,637 $ 344,277
Europe 230,364 264,523
Asia-Pacific 86,445 64,828
----------- -----------
Combined total 645,446 673,628
Eliminations (212,448) (248,319)
------------ ------------
Consolidated total $ 432,998 $ 425,309
=========== ===========
5
3. INVENTORIES
The components of inventories are as follows (in thousands):
October 1, January 1,
2005 2005
------------ -----------
Raw material $ 12,866 $ 16,723
Work in process 23,213 23,780
Finished goods 33,167 38,577
------------ -----------
Total $ 69,246 $ 79,080
============ ===========
4. LONG-TERM OBLIGATIONS
Total debt, including the current portion, at the end of the third quarter 2005
totaled $40.2 million and consisted of the following: (1) credit revolver
borrowings totaling $34.5 million and (2) foreign revolver borrowings totaling
$5.7 million. Of this indebtedness, $38.5 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 October
1, 2005, the Company had available $15.5 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 $5.8
million in letters of credit outstanding at October 1, 2005.
5. PER SHARE DATA
Net income per share amounts for the three months ended October 1, 2005, and
October 2, 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 Nine months ended
------------------------ ------------------------
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
Net income $ 6,326 $ 11,250 $ 15,022 $ 31,200
========= ========= ========= =========
Average shares outstanding - Basic 22,441 22,350 22,449 22,189
Net effect of dilutive stock options
and restricted shares
- Diluted 185 494 222 405
--------- --------- --------- ---------
Average shares outstanding
- Diluted 22,626 22,844 22,671 22,594
========= ========= ========= =========
Net income per share
- Basic $ 0.28 $ 0.50 $ 0.67 $ 1.41
========== ========== ========== ==========
- Diluted $ 0.28 $ 0.49 $ 0.66 $ 1.38
========== ========== ========== ==========
Options to purchase 538,600 and 347,500 shares of common stock were outstanding
at October 1, 2005, and October 2, 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. The Company issued 133,650 and
168,630 shares of common stock resulting from the exercising of stock options
for the three and nine months ended October 1, 2005, respectively.
6
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 October 1, 2005. The Heinrich squeeze out was registered with the German
courts during the third quarter of 2005. It is expected that Littelfuse will
acquire the remaining 2.8% of Heinrich shares outstanding before the end of
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.
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 12,590
Other assets 5,282
Current liabilities (30,778)
Purchase accounting liabilities (12,220)
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 $12.2 million and are
primarily for redundancy costs to be paid through 2006 related to manufacturing
operations and selling, general and administrative functions. The Company began
formulating its plan to incur these costs as of the acquisition date. As of
October 1, 2005, $6.3 million has been paid related to these liabilities.
A summary of the purchase accounting liability activity is as follows:
Purchase accounting liability (in thousands)
--------------------------------------------
Balance, May 6, 2004 $ 7,281
Payments (92)
-------------
Balance, January 1, 2005 $ 7,189
Increases 4,939
Payments (6,214)
Other additions 283
-------------
Balance, October 1, 2005 $ 6,197
=============
7
Increases in the purchase accounting reserve pertain to additional liabilities
anticipated at the acquisition date and recognized in conjunction with the
registration of the domination agreement and related requirement to purchase
remaining shares from minority shareholders. These additional liabilities are
primarily for redundancy costs to be paid through 2006 related to manufacturing
operations and selling, general and administrative functions.
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.
Nine Months Ended
-----------------
October 2, 2004
(unaudited)
Net sales $408,799
Operating income 49,990
Net income 31,380
Diluted income per share $ 1.39
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. RESTRUCTURING CHARGES
During the third quarter of 2005 the Company recorded $1.6 million related to
the downsizing of the European segment's Ireland operation. These charges are
primarily for redundancy costs to be paid through 2006 related to the
manufacturing operations and are recorded as part of cost of sales. Employees
affected by this downsizing include technical, production, administrative and
support employees. During the first half of 2005 and during the third quarter
of 2005 payments of $0.1 million and $0.9 million, respectively, have been
made for Ireland restructuring charges. The total expected cost related to
European restructuring is approximately $5.5 million.
8. 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
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 cross-currency rate swaps expired on
September 6, 2005 and a $0.3 million gain was recorded on the consolidated
income statement in the third quarter of 2005.
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. These forward
contracts expired on September 30, 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
8
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 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.
9. PENSIONS
The components of net periodic benefit cost for the three months ended
October 1, 2005, compared with the three months ended October 2, 2004, were (in
thousands):
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
------------------- ----------------- ------------------ -------------------
U.S. Pension Benefits Foreign Plans
---------------------------------------- ----------------------------------------
2005 2004 2005 2004 2005 2004 2005 2004
--------- --------- ------- ------- ------- ------- ------ -------
Service cost $ 775 $ 690 $ 2,325 $ 2,070 $ 329 $ 281 $ 987 $ 843
Interest cost 883 875 2,649 2,625 537 372 1,611 1,116
Expected return on plan
assets (912) (912) (2,736) (2,736) (457) (384) (1,371) (1,152)
Amortization of prior
service cost 3 3 9 9 (3) (3) (9) (9)
Amortization of transition
asset -- -- -- -- (31) (23) (93) (69)
Amortization of net loss 68 40 204 120 47 52 141 156
-------- -------- ------- ------- ------- -------- ------- -------
Total cost of the plan 817 696 2,451 2,088 422 295 1,266 885
Expected plan participants'
contribution -- -- -- -- (107) (52) (321) (156)
------- ------- ------- ------- ------- ------- ------- -------
Net periodic benefit cost $ 817 $ 696 $ 2,451 $ 2,088 $ 315 $ 243 $ 945 $ 729
------- ------- ------- ------- ------- ------- ------- -------
The expected rate of return on pension assets is 8.50% and 8.75% in 2005 and
2004, respectively.
10. COMPREHENSIVE INCOME
Total comprehensive income for the three months ended October 1, 2005, and
October 2, 2004, was approximately $9.8 million and $13.9 million, respectively,
and the nine months ended October 1, 2005, and October 2, 2004, was
approximately $13.8 million and $32.9 million, respectively. The adjustment for
comprehensive income consists of deferred gains and losses from foreign currency
translation adjustments and qualified cash flow hedges and unrealized gains and
losses on available-for-sale securities for the three and nine months ended
October 1, 2005, and October 2, 2004.
11. INCOME TAXES
The effective tax rate for the third quarter of 2005 was 41% compared to an
effective tax rate of 36% in the third quarter of last year. The current
quarter effective tax rate was unfavorably impacted by charges related to the
expected repatriation of earnings from lower tax jurisdictions and limited tax
shield from Ireland plant restructuring charges.
12. 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 Nine months ended
------------------------ -------------------------
October 1, October 2, October 1, October 2,
---------- ---------- ---------- ----------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income as reported $ 6,326 $ 11,250 $ 15,022 $ 31,200
Stock option compensation expense under fair
value method, net of tax (720) (719) (2,191) (2,031)
-------- --------- --------- --------
Pro forma net income $ 5,606 $ 10,531 $ 12,831 $ 29,169
Basic net income per share:
As reported $ 0.28 $ 0.50 $ 0.67 $ 1.41
Pro forma $ 0.25 $ 0.47 $ 0.56 $ 1.29
Diluted net income per share:
As reported $ 0.28 $ 0.49 $ 0.66 $ 1.38
Pro forma $ 0.25 $ 0.46 $ 0.56 $ 1.29
Risk-free interest rate 4.66% 4.14% 4.66% 4.14%
Expected dividend yield 0% 0% 0% 0%
Expected stock price volatility 38.6% 44.0% 38.6% 44.0%
Expected life of options 7 years 7 years 7 years 7 years
9
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.
13. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SALES BY GEOGRAPHY AND MARKET*
(Dollars in millions)
THIRD QUARTER YEAR-TO-DATE
--------------------------- ------------------------------
2005 2004 % CHANGE 2005 2004 % CHANGE
----- ----- -------- -------- ------- --------
GEOGRAPHY
- ---------
Americas ............ $ 51.3 $ 57.1 -10% $150.9 $166.0 -9%
Europe .............. 31.9 34.6 -8% 98.3 86.4 14%
Asia Pacific ........ 47.8 44.2 8% 127.4 123.7 3%
------ ------ ---- ------ ------ ----
TOTAL $131.0 $135.9 -4% $376.6 $376.1 0%
====== ====== ===== ====== ====== ====
THIRD QUARTER YEAR-TO-DATE
--------------------------- ------------------------------
2005 2004 % CHANGE 2005 2004 % CHANGE
----- ----- -------- -------- ------- --------
MARKET
- ------
Electronics ......... 80.8 90.9 -11% $228.5 $249.6 -9%
Automotive .......... 29.9 27.4 9% 91.0 84.9 7%
Electrical .......... 20.3 17.6 15% 57.1 41.6 37%
------ ------ ----- ------ ------ ----
TOTAL $131.0 $135.9 -4% $376.6 $376.1 0%
====== ====== ===== ====== ====== ====
* Certain prior year amounts have been reclassified to conform to the current
year presentation. Sales by geography represent sales to customer or distributor
locations.
10
Results of Operations
Third Quarter, 2005
Sales decreased $4.9 million or 4% to $131.0 million in the third quarter of
2005, compared to $135.9 million in the third quarter of 2004 due to lower sales
in the Americas and Europe partially offset by increased sales in Asia Pacific.
On a geographic basis, sales in the Americas decreased $5.8 million or 10% in
the third quarter of 2005, compared to the third quarter of last year. The
Americas decline was due primarily to lower electronic distributor sales
compared to the prior year, which was the peak quarter for last year's build up
in distributor inventories, as well as weaker sales to telecom OEM accounts.
This was partially offset by stronger electrical and automotive sales in North
America compared to the prior year quarter. The electrical increase was due to
new business wins, price realization and favorable market trends. The automotive
increase reflected stronger new vehicle launches and improving aftermarket
sales. Europe sales decreased $2.7 million or 8% in the third quarter of 2005
compared to the third quarter of 2004 primarily due to lower sales to telecom
OEM accounts and electronic distributors. Asia-Pacific sales increased $3.6
million or 8% compared to the prior year third quarter due primarily to
increases in Taiwan, Southeast Asia and Korea reflecting strength in digital
consumer end markets.
Gross profit was $40.4 million or 30.8% of sales for the third quarter of 2005,
compared to $49.4 million or 36.3% of sales in the same quarter last year. The
decrease in gross margin was mainly attributable to reduced operating leverage
from lower production rates and a $1.6 million restructuring charge related to
downsizing of the Ireland operation.
Total operating expense was $32.1 million or 24.5% of sales for the third
quarter of 2005 compared to $31.0 million or 22.8% of sales for the same quarter
in the prior year. The increase in operating expense reflects additional
research and development spending to support the Company's solution selling
strategy and a $1.0 million charge related to receivables from Delphi
Corporation partially offset by lower bonus expense in the current year quarter.
Operating income was $8.3 million or 6.3% of sales for the third quarter of 2005
compared to $18.4 million or 13.5% of sales for the same quarter of last year
reflecting the lower sales, reduced operating leverage and increased costs
discussed above.
Interest expense was $0.6 million in the third quarter of this year compared to
$0.4 million in the third quarter of last year. Other income was $3.0 million
for the third quarter of 2005 compared to other expense of $0.3 million in the
third quarter of last year. The increase in other income was mainly due to
favorable currency effects compared to the prior year quarter and a gain of $1.4
million in the current year quarter related to the sale of a 40% interest in a
wafer fabrication facility in Swindon, England.
Income before minority interest and income taxes was $10.7 million for the third
quarter 2005 compared to $17.7 million for the third quarter of 2004. Income
taxes were $4.4 million with an effective tax rate of 41% for the third quarter
of 2005 compared to $6.4 million with an effective tax rate of 36% in the third
quarter of last year. The current quarter effective tax rate was unfavorably
impacted by charges related to the expected repatriation of earnings from lower
tax jurisdictions and limited tax shield from Ireland plant restructuring
charges.
Net income for the third quarter 2005 was $6.3 million or $0.28 per diluted
share compared to $11.3 million or $0.49 per diluted share for the same quarter
of last year.
Nine Months, 2005
Sales for the first nine months of 2005 increased $0.5 million from the first
nine months of last year to $376.6 million. A decrease in current year base
business sales was largely offset by recording a full year of Heinrich during
2005. On a geographic basis, sales in the Americas decreased $15.1 million or 9%
in the first nine months of 2005 compared to the prior year due primarily to
lower electronic distributor and telecom OEM sales partially offset by increased
automotive and electrical sales. Europe sales increased $11.9 million or 14% in
the first nine months of 2005 compared to the prior year mainly due to
recognizing a full year of sales from the Heinrich acquisition in the current
year and favorable currency effects of $3.1 million partially offset by lower
electronic distributor and
11
telecom OEM sales. Asia-Pacific sales increased $3.7 million or 3% for the first
nine months of 2005 compared to the same period in the prior year due to
favorable currency effects of $2.7 million and strength in digital consumer end
markets.
Gross profit was $117.8 million or 31.3% of sales for the first nine months of
2005 compared to $133.3 million or 35.5% of sales for the first nine months of
last year. The decrease in gross margin for the first nine months as compared to
the prior year was primarily due to reduced operating leverage from lower sales,
restructuring charges related to Ireland plant downsizing activities and the
addition of lower margin Heinrich sales.
Total operating expense was $95.2 million or 25.3% of sales for the first nine
months of 2005 compared to $83.2 million or 22.1% of sales last year. The
increase in operating expenses was largely due to the additional expenses
related to a recognizing a full year of Heinrich, additions to sales and
engineering staffs to support the Company's solution selling strategy and
charges related to staff reductions.
Operating income for the first nine months of 2005 was $22.6 million or 6.0% of
sales compared to $50.1 million or 13.3% of sales for the prior year reflecting
sales and margin declines discussed above.
Interest expense was $1.7 million for the first nine months of 2005 compared to
$1.3 million last year. Other income was $3.2 million for the first nine months
of 2005 compared to $0.2 million for the same period last year. The increase in
other income was mainly due to favorable currency effects and a gain of $1.4
million in the current period related to the sale of a 40% interest in a wafer
fabrication facility in Swindon, England.
Income before minority interest and income taxes was $24.1 million for the first
nine months of 2005 compared to $49.0 million for the first nine months of last
year. Income taxes were $9.1 million the first nine months of 2005 compared to
$17.6 million for the first nine months of last year. The effective tax rate was
38% for the first nine months of 2005 compared to an effective tax rate of 36%
for the first nine months of 2004. The current year effective tax rate was
unfavorably impacted by charges related to the expected repatriation of
earnings from lower tax jurisdictions and limited tax shield from Ireland
plant restructuring charges.
Net income for the first nine months of 2005 decreased to $15.0 million from
$31.2 million for the same period last year. Earnings per share for the first
nine months of 2005 decreased to $0.66 per diluted share compared to $1.38 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 $27.3 million for the first
nine months. Net cash provided by operations includes net income of $15.0
million, depreciation of $21.7 million and amortization of $1.6 million in
addition to various working capital and other items. Accounts receivable
increased $9.0 million due primarily to changes in payment terms for certain
customers. Inventory decreased $6.8 million due primarily to improved inventory
management and lower plant production due to lower sales. Accounts payable,
accrued expenses, prepaid expenses and other items unfavorably impacted net cash
provided by operations by $8.8 million due primarily to payment of management
bonuses and restructuring charges that were previously accrued. Net cash used in
investing activities included $21.9 million in net purchases of property, plant
and equipment and $1.4 million of acquisition related expenditures. In addition,
net cash provided by financing activities included stock option exercises of
$3.8 million along with net proceeds of long-term debt of $6.5 million, notes
receivable payback of $3.5 million and the offsetting purchase of treasury stock
for $10.0 million. The effects of exchange rate changes decreased cash by $2.1
million. The net cash provided by operations less investing and financing
activities plus the effects of exchange rate changes resulted in a $5.8 million
net increase in cash. This left the Company with a cash balance of $34.3 million
at October 1, 2005.
The ratio of current assets to current liabilities was 1.9 to 1 at the end of
the third quarter of 2005 compared to 1.5 to 1 at the end of the third quarter
of 2004. The days sales in receivables was approximately 60 days at the end of
the
12
third quarter of 2005, compared to 57 days at the end of fiscal 2004 and 57 days
at the end of the third quarter 2004. The increase in days sales in receivables
from the third quarter of the prior year was due primarily to changes in payment
terms for certain customers. The days inventory outstanding was approximately 73
days at the end of the third quarter of 2005 compared to 92 days at the end of
2004 and 86 days at end of the third quarter of 2004. The decrease in days
inventory outstanding resulted primarily from improved inventory management. The
Company's capital expenditures, net of cash from asset sales, were $5.0 million
for the third quarter of 2005 compared to $7.3 million for the third quarter of
2004 and $21.9 million for the nine months of 2005 compared to $16.4 million for
nine months of 2004. Most of the spending in 2005 relates to manufacturing
process improvements, new product introductions and capacity expansion.
Total debt, including the current portion, at the end of the third quarter 2005
totaled $40.2 million and consisted of the following: (1) credit revolver
borrowings totaling $34.5 million and (2) foreign revolver borrowings totaling
$5.7 million. Of this indebtedness, $38.5 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 October
1, 2005, the Company had available $15.5 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 $5.8
million in letters of credit outstanding at October 1, 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 intended to be
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 $40.2 million of long-term debt outstanding at October 1, 2005,
primarily in the form of lines of credit. None 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.
13
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
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 cross-currency rate swaps expired on
September 6, 2005 and a $0.3 million gain was recorded on the consolidated
income statement in the third quarter of 2005.
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. These forward
contracts expired on September 30, 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 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, filed bankruptcy on
October 8, 2005. Delphi accounts receivable affected by the bankruptcy are
approximately $3.0 million. The Company recorded a $1.0 million reserve against
this balance in the third quarter of 2005 and is actively monitoring this
situation and assessing any further financial impact this may have.
Item 4. Controls and Procedures
As of October 1, 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.
14
PART II - OTHER INFORMATION
Item 5: 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 third quarter of fiscal 2005:
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of
Shares Purchased as
Part of Publicly Maximum Number of Shares
Total Number of Shares Average Price Announced Plans or that May Yet Be Purchased
Period Purchased Paid per Share Programs Under the Plans or Programs
July 2005 - - - 1,000,000
August 2005 - - - 1,000,000
September 2005 244,500 - - 755,500
Total 244,500 - - 755,500
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 6: Exhibits
Exhibit Description
------- -----------
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
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 October 1, 2005, to be signed on its behalf by the undersigned thereunto
duly authorized.
LITTELFUSE, INC.
Date: November 10, 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)
15