EXHIBIT 13.1
LITTELFUSE, INC.
2007 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Littelfuse, Inc. and its subsidiaries ("Littelfuse" or "the Company") design,
manufacture, and sell circuit protection devices for use in the electronics,
automotive and electrical markets throughout the world. The following
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide the reader with information that will
assist in understanding the Company's consolidated financial statements, the
changes in certain key items in those financial statements from year to year,
and the primary factors that accounted for those changes, as well as how certain
accounting principles affect the consolidated financial statements. The
discussion also provides information about the financial results of the various
business segments to provide a better understanding of how those segments and
their results affect the financial condition and results of operations of
Littelfuse as a whole.
FORWARD LOOKING INFORMATION
This MD&A should be read in conjunction with the accompanying consolidated
financial statements and related notes. See "Cautionary Statement Regarding
Forward-Looking Statements Under the Private Securities Litigation Reform Act of
1995 ("PSLRA")" on page 9 of this report for a description of important factors
that could cause actual results to differ from expected results. See also Item
1A, "Risk Factors," in the Company's Annual Report on Form 10-K for the fiscal
year ended December 29, 2007.
BUSINESS SEGMENT INFORMATION
Littelfuse historically has evaluated the Company's operations and reported the
enterprise's operating segments by geography for the purpose of Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). Over the last several
quarters, the Company has made a number of organizational changes that have
altered how the Company's President and Chief Executive Officer evaluates the
Company's operations. These organizational changes have increased the importance
of the Company's reliance on business unit performance compared to geographic
performance. As such, the Company determined in the third quarter of 2007 that
business units now represent operating segments, as defined by SFAS No. 131, and
therefore, reports these business units as separate segments.
The following table is a summary of the Company's operating segments net sales
by business unit and geography (in thousands):
FISCAL YEAR*
------------------------------------------
2007 2006 2005
---------- ---------- ----------
BUSINESS UNIT
Electronics .................... $ 348.9 $ 365.5 $ 305.9
Automotive ..................... 135.1 123.6 118.6
Electrical ..................... 52.1 45.8 42.6
--------- --------- ---------
TOTAL ........................ $ 536.1 $ 534.9 $ 467.1
========= ========= =========
2007 2006 2005
---------- ---------- ----------
GEOGRAPHY**
Americas ....................... $ 204.3 $ 216.0 $ 199.9
Europe ......................... 118.2 111.6 98.3
Asia-Pacific ................... 213.6 207.3 168.9
--------- --------- ---------
TOTAL ........................ $ 536.1 $ 534.9 $ 467.1
========= ========= =========
* Amounts exclude Efen Gmbh ("Efen") since the date of the Heinrich Industrie AG
("Heinrich") acquisition.
** Sales are defined based upon shipped to destination.
Business unit segment information is more fully described in Note 14 of the
Notes to Consolidated Financial Statements. The following discussion provides an
analysis of the information contained in the consolidated financial statements
and accompanying notes beginning on page 12 at December 29, 2007 and December
30, 2006, and for the three fiscal years ended December 29, 2007, December 30,
2006, and December 31, 2005.
1
RESULTS OF OPERATIONS -- 2007 COMPARED WITH 2006
Net sales increased slightly in the current year to $536.1 million compared to
$534.9 million in 2006. These results were led by the automotive segment with an
increase in sales of $11.5 million or 9% to $135.1 million, along with an
increase in the electrical segment of $6.3 million or 14% to $52.1 million,
largely offset by a decrease in the electronics segment of $16.6 million or 5%
to $348.9 million. The increase in automotive sales was due to growth in the
off-road truck and bus product lines, new passenger vehicle products and
favorable currency effects of $5.6 million, mainly due to the strengthening of
the Euro. Electrical sales increased primarily due to price increases over the
prior year and improvements in the industrial market. The decrease in electronic
sales reflected weaker distributor demand in the Americas and Asia-Pacific,
partially offset by favorable currency effects of $5.2 million, largely due to
the strengthening of the Euro.
On a geographic basis, sales in the Americas decreased $11.7 million or 5% in
2007 compared to 2006. Within the Americas, the electronics business declined
$19.9 million, reflecting inventory rationalization at distributors and weaker
telecom demand. Automotive sales increased $0.9 million due to growth in the
off-road truck and bus product lines and new passenger vehicle products. The
electrical business increased $6.2 million due to price increases over the prior
year and improvements in the industrial market.
Europe sales increased $6.6 million or 6% in 2007 compared to 2006. The increase
in European sales was primarily due to increased automotive sales of $8.6
million, partially offset by a $2.0 million decrease in electronic distributor
sales. The automotive sales increase reflected favorable currency effects of
$5.6 million due to the strengthening Euro and growth in both the passenger
vehicle and off-road truck and bus product lines. Lower electronics sales were
due to decreased demand from electronics distributors, partially offset by
favorable currency effects of $4.4 million due to the strengthening Euro.
Asia-Pacific sales increased $6.3 million or 3% compared to the prior year. The
increase in Asia-Pacific sales was mainly the result of higher electronic sales
due to improved demand for digital consumer products. Automotive sales increased
by $0.7 million reflecting continued share gain in the growing Asian markets
outside of Japan.
Gross profit was $171.5 million or 32.0% of sales in 2007 compared to $161.3
million or 30.2% of sales in 2006. The gross profit margin percentage
improvement resulted primarily from lower restructuring charges in 2007 compared
to 2006.
Selling, general and administrative expenses decreased $7.3 million to $103.3
million in 2007 from $110.6 million in 2006, primarily due to lower employee
bonus expense in 2007 and the recognition of $5.3 million in higher
restructuring and asset impairment charges in 2006. As a percentage of net
sales, selling, general and administrative expenses decreased to 19.3% in 2007
from 20.7% in 2006. Research and development costs increased $3.0 million to
$21.7 million due to increased spending on new product development for the
electronics and automotive markets. In 2007, a gain of $8.0 million was
recognized on the sale of real estate in Ireland. Total operating expenses,
including the gain on Ireland property and intangible amortization, were 22.4%
of net sales in 2007, compared to 24.8% of net sales in 2006.
Operating income in 2007 increased 77.8% to $51.3 million or 9.6% of sales
compared to $28.9 million or 5.4% of sales in the prior year. The changes in
operating income and operating margin were due mainly to lower restructuring
charges and decreased bonus expense in 2007 as described above.
Other income, net, consisting of interest income, royalties, non-operating
income and foreign currency items, was $1.5 million in 2007 compared to $2.2
million in the prior year. The decrease was primarily due to foreign currency
effects.
Income from continuing operations before minority interest and income taxes
was $51.3 million in 2007 compared to $29.4 million in 2006. Income tax expense
was $14.5 million in 2007 compared to $6.2 million in the prior year. The 2007
effective income tax rate was 28.2% compared to 21.0% in 2006. The 2006
effective tax rate reflects certain adjustments including a $1.4 million benefit
resulting from a German tax law change and recognition of a $1.8 million benefit
related to net operating losses from an acquired group of companies. Income
from continuing operations was $36.8 million in 2007 compared to $23.2 million
in 2006.
In 2006, the Company sold the Efen business and accounted for this business as a
discontinued operation that reported income, net of taxes, of $0.6 million.
Net income in 2007 was $36.8 million compared to $23.8 million in the prior
year.
RESULTS OF OPERATIONS -- 2006 COMPARED WITH 2005
Sales increased 15% to $534.9 million in 2006 from $467.1 million in 2005. The
increase in sales was due primarily to growth in the electronics markets.
Electronic sales increased $59.6 million or 19% to $365.5 million in 2006
compared to $305.9 million in 2005, driven by increased demand for telecom and
consumer electronics products in Asia-Pacific. Automotive sales increased $5.0
million or 4% to $123.6 million in 2006 compared to $118.6 million in 2005,
primarily due to strong growth in Asia-Pacific and increased European sales in
the off road, truck and bus market, partially offset by lower North America
sales. Electrical sales increased $3.2 million or 8% to $45.8 million in 2006
compared to $42.6 million in 2005 due to price increases and improvements in the
non-residential construction market. Acquisitions in 2006 contributed $11.8
million to 2006 sales.
On a geographic basis, Asia-Pacific sales increased 23% to $207.3 million due to
increased demand for electronics products. Europe sales increased 14% to $111.6
million and the Americas sales increased 8% to $216.0 million as both segments
also experienced increased demand for electronics products. International sales
were $326.8 million or 61.1% of net sales in 2006 compared to $279.3 million or
59.8% of net sales in 2005, with favorable currency effects contributing $1.1
million to sales in 2006.
2
Gross profit was $161.3 million or 30.2% of sales in 2006 compared to $144.6
million or 30.9% of sales in 2005. The gross profit margin percentage decline
resulted from $21.3 million of current year net restructuring charges related to
the closure of facilities in Ireland ($17.1 million after a $2.9 million
statutory rebate), Germany ($2.3 million) and Irving, Texas ($1.9 million), an
asset write-down in Germany of $0.8 million and higher commodity prices,
partially offset by the progression of ongoing cost reduction programs and
improved operating leverage. The Company expects to incur additional
restructuring charges in the future as it further consolidates its worldwide
manufacturing operations. Excluding the 2006 net restructuring charges, gross
profit improved from the prior year primarily due to reduced costs as a result
of the progression of ongoing cost reduction programs and improved operating
leverage due to higher plant volumes, partially offset by higher commodity
prices.
Selling, general and administrative expenses increased $12.0 million to $110.6
million in 2006 from $98.5 million in 2005, primarily due to the recognition of
$5.2 million stock-based compensation expense in 2006, increased bonus expense,
$2.7 million of restructuring expense related to German operations and a $3.6
million charge for the write-down of Heinrich real estate and fixed assets. As a
percentage of net sales, selling, general and administrative expenses decreased
to 20.7% in 2006 from 21.1% in 2005. Research and development costs increased
$2.0 million to $18.7 million due to increased spending on new product
development for the electronics and automotive markets. Total operating
expenses, including intangible amortization, were 24.8% of net sales in 2006,
compared to 25.2% of sales in 2005.
Operating income in 2006 increased 7.0% to $28.9 million or 5.4% of sales
compared to $27.0 million or 5.8% of sales in the prior year. The changes in
operating income and operating margin were due to the factors affecting gross
profit margin and operating expenses described above.
Interest expense was $1.6 million in 2006 compared to $2.1 million in 2005 due
to a lower average outstanding debt balance during 2006. Other income, net,
consisting of interest income, royalties, non-operating income and foreign
currency items, was $2.2 million in 2007 compared to $3.1 million in the prior
year. The decrease was primarily due to the recognition of a $1.4 million gain
on the sale of the Company's interest in a wafer fabrication facility in the
U.K. in 2005, partially offset by higher interest income in 2006.
Income from continuing operations before minority interest and income taxes
was $29.4 million in 2006 compared to $27.9 million in 2005. Minority interest
income was zero in 2006 and $0.1 million in 2005, as 2005 reflected the minority
share ownership in Heinrich prior to the 2005 acquisition of the remaining
Heinrich shares. Income tax expense was $6.2 million in 2006 compared to $11.4
million in the prior year. The 2006 effective income tax rate was 21.0% compared
to 41.1% in 2005. The 2006 effective tax rate was favorably affected by certain
adjustments including a $1.4 million benefit resulting from a German tax law
change and recognition of a $1.8 million benefit relating to net operating
losses from an acquired group of companies. The 2005 effective tax rate was
unfavorably affected by the limited tax shield on restructuring charges and
repatriation of earnings from lower tax jurisdictions. Income from continuing
operations was $23.2 million in 2006 compared to $16.6 million in 2005.
In the fourth quarter of 2005, the Company entered into a contract to sell the
Efen business acquired as part of the Heinrich acquisition in May 2004.
Therefore, the Efen business is accounted for as a discontinued operation that
reported income, net of taxes, of $0.6 million in 2006 compared to $1.1 million
in 2005.
Net income in 2006 was $23.8 million, compared to $17.7 million in 2005.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed capital expenditures through cash flows
from operations. Management expects that cash flows from operations and
available lines of credit will be sufficient to support both its operations and
its debt obligations for the foreseeable future.
The Company has an unsecured domestic financing arrangement consisting of a
credit agreement with banks that provides a $75.0 million revolving credit
facility, with the potential to increase this up to $125.0 million upon request
of the Company and agreement with the lenders, which expires on July 21, 2011.
At December 29, 2007, the Company had available $63.5 million of borrowing
capability under the revolving credit facility at an interest rate of LIBOR plus
0.50% (5.44% as of December 29, 2007). The Company also had $2.5 million and
$6.1 million available in letters of credit at December 29, 2007 and December
30, 2006, respectively. No amounts were outstanding under these letters of
credit at December 29, 2007 and December 30, 2006.
The domestic bank credit agreement contains covenants that, among other matters,
impose limitations on the incurrence of additional indebtedness, future mergers,
sales of assets, payment of dividends, and changes in control, as defined in the
agreement. In addition, the Company is required to satisfy certain financial
covenants and tests relating to, among other matters, interest coverage, working
capital, leverage and net worth. At December 29, 2007, and for the year then
ended, the Company was in compliance with these covenants.
The Company has an unsecured bank line of credit in Japan that provides a Yen
900 million (an equivalent of $7.9 million) revolving credit facility at an
interest rate of TIBOR plus 0.625% (1.523% as of December 29, 2007). The
revolving line of credit becomes due on July 21, 2011. The Company had no
outstanding borrowings on the Yen facility at December 29, 2007 and $1.3 million
outstanding on the Yen facility at December 30, 2006.
The Company has an unsecured bank line of credit in Taiwan that provides a
Taiwanese Dollar 35.0 million (equivalent to $1.1 million) revolving credit
facility at an interest rate of two-years Time Deposit plus 0.145% (2.83% as of
December 29, 2007). The revolving line of credit becomes due on August 18, 2009.
The Company had the equivalent of $0.6 million and $0.9 million outstanding on
the Taiwanese Dollar facility at December 29, 2007 and December 30, 2006,
respectively.
3
The Company also has a foreign fixed rate mortgage loan outstanding at December
29, 2007, totaling Taiwanese Dollar 38.9 million (equivalent to $1.2 million)
with maturity dates through August 2013.
The Company started 2007 with $56.7 million of cash. Net cash provided by
operations was $59.9 million in the year. Net cash used in investing activities
was $34.8 million and included $40.5 million in purchases of property, plant and
equipment and $4.5 million for the acquisition of a business, partially offset
by $8.6 million from the sale of real estate in Ireland. Net cash used in
financing activities of $22.3 million included net payments of debt ($12.8
million) and repurchases of the Company's common stock ($16.4 million),
partially offset by cash proceeds from the exercise of stock options ($6.3
million) and the excess tax benefit on share-based compensation ($0.6 million).
The effect of exchange rate changes increased cash by $5.4 million. The net cash
provided by operating activities, less net cash used in financing and investing
activities plus the effect of exchange rate changes resulted in a $8.2 million
net increase in cash. This left the Company with a cash balance of $64.9 million
at the end of 2007.
Net operating assets (including short-term and long-term items) decreased a net
$5.5 million in 2007. The major factors contributing to the change in net
operating assets were decreases in inventories, partially offset by decreases in
accrued payroll and increases in prepaid expenses and other current assets. Days
sales outstanding in accounts receivable decreased to 58 days at year-end 2007,
compared to 60 days at year-end 2006 and 63 days at year-end 2005. The
improvement in days sales outstanding was due primarily to a reduction in
past-due electronics accounts. Days inventory outstanding was 59 days at
year-end 2007 compared to 67 days at year-end 2006 and 75 days at year-end 2005.
The improvement in days inventory outstanding was the result of lean
manufacturing and logistics initiatives and improved inventory planning.
The ratio of current assets to current liabilities was 2.4 to 1 at year-end 2007
compared to 2.3 to 1 at year-end 2006 and 2.0 to 1 at year-end 2005. The ratio
of long-term debt to equity was 0.0 to 1 at year-end 2007 compared to 0.1 to 1
at year-end 2006 and 0.0 to 1 at year-end 2005.
The Company started 2006 with $21.9 million of cash. Net cash provided by
operations was $80.9 million in the year. Net cash used in investing activities
was $42.6 million and included $19.6 million in purchases of property, plant and
equipment and $37.8 million for the acquisition of businesses partially offset
by $14.4 million from the sale of assets including the Efen business ($11.6
million) and a building in Witten, Germany ($2.8 million) and $0.5 million from
the sale of an investment in LC Fab. Net cash used in financing activities of
$6.4 million included repurchases of the Company's common stock of $10.3
million, partially offset by cash proceeds from the exercise of stock options of
$5.7 million and the excess tax benefit on share-based compensation of $0.5
million. The effect of exchange rate changes increased cash by $2.8 million. The
net cash provided by operations and financing activities, less net cash used in
investing activities plus the effect of exchange rate changes resulted in a
$34.8 million net increase in cash. This left the Company with a cash balance of
$56.7 million at the end of 2006.
Decreases in net operating assets (including short-term and long-term items)
provided $27.3 million of cash flow in 2006. The major factors contributing to
lower net operating assets were decreases in accounts receivables and
inventories ($4.1 million), increases in accrued payroll and severance and
income taxes ($32.5 million), and decreases in prepaid expenses and other ($1.4
million), partially offset by decreases in accounts payable and accrued expenses
($10.7 million). Days sales outstanding in accounts receivable decreased to 60
days at year-end 2006 compared to 63 days at year-end 2005 and 60 days at
year-end 2004. The 2006 improvement in days sales outstanding was due primarily
to a reduction in past-due automotive accounts. Days inventory outstanding was
67 days at year-end 2006 compared to 75 days at year-end 2005 and 88 days at
year-end 2004. The improvement in days inventory outstanding in 2005 and 2006
was the result of lean manufacturing and logistics initiatives and improved
inventory planning.
The ratio of current assets to current liabilities was 2.3 to 1 at year-end 2006
compared to 2.0 to 1 at year-end 2005 and 1.8 to 1 at year-end 2004. The ratio
of long-term debt to equity was 0.1 to 1 at year-end 2006 compared to 0.0 to 1
at year-end 2005 and 0.1 to 1 at year-end 2004.
The Efen business, which is presented as a discontinued operation, did not
contribute significantly to cash from operations in 2006 or 2005.
The Company's capital expenditures were $40.5 million in 2007, $19.6 million in
2006 and $27.2 million in 2005. The Company expects that capital expenditures in
2008 will be approximately $50.0 million. The majority of capital expenditures
in 2008 will be for facilities and equipment to support manufacturing transfers
and new product introductions. The Company expects that in 2009 capital
expenditures will decline to the historical average of approximately 5% of
sales.
The Company decreased total debt by $12.8 million in 2007, $2.3 million in 2006,
and $6.8 million in 2005. The Company's Board of Directors has authorized the
Company to repurchase up to 1 million shares of its common stock, from time to
time, depending on market conditions. The Company repurchased 500,000 common
shares for $16.4 million in 2007, 329,000 common shares for $10.3 million in
2006, and 458,000 common shares for $12.8 million in 2005.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 29, 2007, the Company did not have any off-balance sheet
arrangements, as defined under the U.S. Securities and Exchange Commission
("SEC") rules. Specifically, the Company was not liable for guarantees of
indebtedness owed by third parties; the Company was not directly liable for the
debt of any unconsolidated entity, and the Company did not have any retained or
contingent interest in assets; the Company did not hold any derivative financial
instruments, as defined by SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended ("SFAS 133"); and the Company does not
participate in transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities.
4
CONTRACTUAL OBLIGATIONS
The following table summarizes contractual obligations and commitments, as of
December 29, 2007 (in thousands):
Payment Due By Period
----------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
- -------------------------------------------- --------- ---------- ---------- ---------- ----------
Long-term debt obligations $13,309 $12,086 $ 661 $ 422 $ 140
Interest payments 396 365 16 12 3
Supplemental Executive Retirement Plan 2,820 -- -- -- 2,820
Operating lease payments 15,190 5,748 5,737 1,936 1,769
-------- ---------- -------- --------- ----------
Total $31,715 $18,199 $ 6,414 $ 2,370 $ 4,732
======== ========== ======== ========= ==========
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment" ("SFAS
123(R)"). SFAS 123(R) requires public companies to recognize compensation
expense for the cost of awards of equity compensation using a fair value method.
The Company adopted SFAS 123(R) on January 1, 2006 (i.e., the first quarter of
2006) using the modified prospective method. The Company has made the one-time
election to adopt the transition method described in FASB Staff Position ("FSP")
No. FAS 123(R)-3, "Transition Election Related to Accounting for the Tax Effect
of Share-Based Payment Awards." Under SFAS 123(R), benefits of tax deductions in
excess of recognized compensation expense are now reported as a financing cash
flow, rather than an operating cash flow as prescribed under the prior
accounting rules. The Company recognized $5.0 million and $5.2 million of
expense related to share-based compensation during 2007 and 2006, respectively.
The impact of the adoption of SFAS 123(R) is more fully described in Note 1 of
the Notes to Consolidated Financial Statements.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" ("FIN 48"), an interpretation of SFAS No. 109, "Accounting for
Income Taxes" ("SFAS 109"). FIN 48 requires that a position taken or expected to
be taken in a tax return be recognized in the financial statements when it is
more likely than not (i.e. a likelihood of more than fifty percent) that the
position would be sustained upon examination by tax authorities. A recognized
tax position is then measured at the largest amount of benefit that is greater
than fifty percent likely of being realized upon ultimate settlement. The
Company adopted FIN 48 as of December 31, 2006. The impact of the adoption of
FIN 48 is more fully described in Note 13 of the Notes to Consolidated Financial
Statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 establishes a framework for measuring fair value by
providing a standard definition of fair value as it applies to assets and
liabilities. SFAS 157, which does not require any new fair value measurements,
clarifies the application of other accounting pronouncements that require or
permit fair value measurements. SFAS 157 must be applied prospectively beginning
January 1, 2008. The Company is evaluating the impact of adopting SFAS 157 on
its Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - - an Amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). SFAS 158 requires the
recognition of the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or a liability in the balance sheet, with
changes in the funded status recorded through comprehensive income in the year
in which those changes occur. The Company adopted SFAS 158 at December 30, 2006.
The impact of the adoption of SFAS 158 is more fully described in Note 11 of the
Notes to Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - - Including an Amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value at specified
election dates. SFAS 159 is expected to expand the use of fair value
measurement, but does not eliminate disclosure requirements included in other
accounting standards, including those in SFAS 157. SFAS 159 is effective for
fiscal years beginning after November 15, 2007. The Company is evaluating the
impact of adopting SFAS 159 on its Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS 141(R)"), which replaces SFAS No. 141, "Business Combinations" ("SFAS
141"). SFAS No. 141(R) retains the underlying concepts of SFAS No. 141 in that
all business combinations are still required to be accounted for at fair value
under the acquisition method of accounting, but SFAS No. 141(R) changed the
method of applying the acquisition method in a number of significant aspects.
Acquisition costs generally will be expensed as incurred; noncontrolling
interests will be valued at fair value at the acquisition date; in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date; restructuring costs associated with a
business combination generally will be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. SFAS No. 141(R) is effective on a prospective basis for all business
combinations for which the acquisition date is on or after the beginning of the
first annual period subsequent to December 15, 2008, with the exception of the
accounting for valuation allowances on deferred taxes and acquired tax
contingencies. SFAS No. 141(R) amends SFAS 109 such that adjustments made to
valuation allowances on deferred taxes and acquired tax contingencies associated
with acquisitions that closed prior to the effective date of SFAS No. 141(R)
would also apply the provisions of SFAS No. 141(R). Early adoption is not
permitted. The Company is evaluating the impact of adopting SFAS 141(R) on its
Consolidated Financial Statements.
5
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements -- an amendment of ARB No. 51" ("SFAS 160").
SFAS No. 160 is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008, with earlier adoption
prohibited. SFAS 160 requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial statements and
separate from the parent's equity. The amount of net earnings attributable to
the noncontrolling interest will be included in consolidated net income on the
face of the income statement. SFAS 160 also amends certain of ARB No. 51's
consolidation procedures for consistency with the requirements of SFAS No.
141(R) and includes expanded disclosure requirements regarding the interests of
the parent and its noncontrolling interest. The Company is evaluating the impact
of adopting SFAS 160 on its Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
Certain of the accounting policies as discussed below require the application of
significant judgment by management in selecting the appropriate estimates and
assumptions for calculating amounts to record in the financial statements.
Actual results could differ from those estimates and assumptions, impacting the
reported results of operations and financial position. Significant accounting
policies are more fully described in the Notes to Consolidated Financial
Statements included elsewhere in this Annual Report. Certain accounting
policies, however, are considered to be critical in that they are most important
to the depiction of the Company's financial condition and results of operations
and their application requires management's subjective judgment in making
estimates about the effect of matters that are inherently uncertain. The Company
believes the following accounting policies are the most critical to aid in fully
understanding and evaluating its reported financial results, as they require
management's most difficult, subjective or complex judgments, resulting from the
need to make estimates about the effect of matters that are inherently
uncertain. The Company has reviewed these critical accounting policies and
related disclosures with the Audit Committee of its Board of Directors.
Revenue Recognition: The Company recognizes revenue on product sales in the
period the sales process is complete. This generally occurs when products are
shipped (FOB origin) to the customer in accordance with the terms of the sale,
the risk of loss has been transferred, collectibility is reasonably assured and
the pricing is fixed and determinable. The Company's distribution channels are
primarily through direct sales, and through independent third party
distributors. There is no retail channel.
Revenue & Billing: The Company accepts orders from customers based on long term
purchasing contracts and written sales agreements. Contract pricing and selling
agreement terms are based on market factors, costs, and competition. Pricing is
normally negotiated as an adjustment (premium or discount) from the Company's
published price lists. The customer is invoiced when the Company's products are
shipped to them in accordance with the terms of the sales agreement.
Returns & Credits: Some of the terms of the Company's sales agreements and
normal business conditions provide customers (distributors) the ability to
receive credit for products previously shipped and invoiced. This practice is
common in the industry and is referred to as a "ship and debit" program. This
program allows the distributor to debit the Company for the difference between
the distributors' contracted price and a lower price for specific transactions.
Under certain circumstances (usually in a competitive situation or large volume
opportunity), a distributor will request authorization to reduce their price to
their buyer. If the Company approves such a reduction, the distributor is
authorized to "debit" their account for the amount of their reduced margin. The
Company establishes reserves for this program based on historic activity and
actual authorizations for the debit and recognizes these debits as a reduction
of revenue in accordance with the guidance of FASB's Emerging Issues Task Force
("EITF") Issue No. 01-09, paragraph 9 "Accounting for Consideration Given by a
Vendor to a Customer".
The Company has a return to stock policy whereby a customer with previous
authorization from Littelfuse management can return previously purchased goods
for full or partial credit. The Company establishes an estimated allowance for
these returns based on historic activity. Sales revenue and cost of sales are
reduced to anticipate estimated returns in accordance with SFAS No. 48, "Revenue
Recognition When Right of Return Exists" ("SFAS 48").
The Company properly meets all of the criteria of SFAS 48 for recognizing
revenue when the right of return exists under Staff Accounting Bulletin 104
(Revenue Recognition). Specifically, the Company meets those requirements
because:
1. The Company's selling price is fixed or determinable at the date of
the sale.
2. The Company has policies and procedures to accept only credit worthy
customers with the ability to pay the Company.
3. The Company's customers are obligated to pay the Company under the
contract and the obligation is not contingent on the resale of the
product. (All "ship and debit" and "returns to stock" require
specific circumstances and authorization.)
4. The risk ownership transfers to the Company's customers upon
shipment and is not changed in the event of theft, physical
destruction or damage of the product.
5. The Company bills at the ship date and establishes a reserve to
reduce revenue from the in transit time until the product is
delivered for FOB destination sales.
6. The Company's customers acquiring the product for resale have
economic substance apart from that provided by Littelfuse. All
distributors are independent of the Company.
7. The Company does not have any obligations for future performance to
bring about resale of the product by its customers.
8. The Company can reasonably estimate the amount of future returns.
6
Allowance for Doubtful Accounts: The Company evaluates the collectibility of its
trade receivables based on a combination of factors. The Company regularly
analyzes its significant customer accounts and, when the Company becomes aware
of a specific customer's inability to meet its financial obligations, the
Company records a specific reserve for bad debt to reduce the related receivable
to the amount the Company reasonably believes is collectible. The Company also
records allowances for all other customers based on a variety of factors
including the length of time the receivables are past due, the financial health
of the customer, macroeconomic considerations and historical experience.
Historically, the allowance for doubtful accounts has been adequate to cover bad
debts. If circumstances related to specific customers change, the estimates of
the recoverability of receivables could be further adjusted. However, due to the
Company's diverse customer base and lack of credit concentration, the Company
does not believe its estimates would be materially impacted by changes in its
assumptions.
Credit Memos: The Company evaluates sales activity for credits to be issued on
sales recorded prior to the end of the fiscal period. These credits relate to
the return of inventory, pricing adjustments and credits issued to a customer
based upon achieving prearranged sales volumes. Volume based incentives offered
to customers are based upon the estimated cost of the program and are recognized
as a reduction to revenue as products are sold. Due to the Company's diverse
customer base and lack of customer concentration, the Company does not believe
its estimates would be materially impacted by changes in its assumptions.
Inventory: The Company performs a detailed assessment of inventory, which
includes a review of, among other factors, demand requirements, product life
cycle and development plans, component cost trends, product pricing and quality
issues. Based on the analysis, the Company records adjustments to inventory for
excess quantities, obsolescence or impairment when appropriate to reflect
inventory at net realizable value. Historically, inventory reserves have been
adequate to reflect inventory at net realizable values. Revisions to inventory
reserves may be required if actual demand, component costs or product life
cycles differ from estimates. However, due to the Company's diverse product
lines and end user markets, the Company does not believe its estimates would be
materially impacted by changes in its assumptions.
Goodwill and Other Intangibles: The Company annually tests goodwill for
impairment as required by SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), or if there is an event or change in circumstances that indicate
the asset may be impaired. The Company determined the fair value of each of its
reporting units by using a discounted cash flow method to estimate market value.
As of the most recent annual test, the Company determined that the fair value of
each of the reporting units exceeded their carrying amounts and, therefore, no
goodwill impairment existed. The Company will continue to perform a goodwill
impairment test as required on an annual basis and on an interim basis, if
certain conditions exist. Factors the Company considers important, which could
result in changes to its estimates, include underperformance relative to
historical or projected future operating results and declines in acquisition and
trading multiples. Due to the diverse end user base and non-discretionary
product demand, the Company does not believe its future operating results will
vary significantly relative to its historical and projected future operating
results.
Long-Lived Assets: The Company evaluates long-lived assets on an ongoing basis.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the related asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to future undiscounted cash flows
expected to be generated by the asset. If the asset is determined to be
impaired, the impairment recognized is measured by the amount by which the
carrying value of the asset exceeds its fair value. The Company's estimates of
future cash flows from such assets could be impacted if it underperforms
relative to historical or projected future operating results. However, due to
the Company's diverse product lines and end user markets, the Company does not
believe its estimates would be materially impacted by changes in its
assumptions.
Pension and Supplemental Executive Retirement Plan: The Company has a number of
defined benefit plans primarily in North America and Europe. Historically these
plans have been accounted for using SFAS No. 87, "Employers' Accounting for
Pensions" ("SFAS 87"), and the Company recognized the net unfunded status of the
plan on the balance sheet. The Company adopted SFAS 158 effective December 30,
2006, which requires the full unfunded status of the plan to be recognized.
Actuarial gains and losses and prior service costs and credits are now
recognized as a component of accumulated other comprehensive income. Accounting
for pensions requires estimating the future benefit cost and recognizing the
cost over the employee's expected period of employment with the Company. Certain
assumptions are required in the calculation of pension costs and obligations.
These assumptions include the discount rate, salary scales and the expected
long-term rate of return on plan assets. The discount rate is intended to
represent the rate at which pension benefit obligations could be settled by
purchase of an annuity contract. These assumptions are subject to change based
on stock and bond market returns and other economic factors. Actual results that
differ from the Company's assumptions are accumulated and amortized over future
periods and therefore, generally affect its recognized expense and accrued
liability in such future periods. While the Company believes that its
assumptions are appropriate given current economic conditions and its actual
experience, significant differences in results or significant changes in the
Company's assumptions may materially affect its pension obligations and related
future expense. See Note 11 of the Notes to Consolidated Financial Statements.
Environmental Liabilities: Environmental liabilities are accrued based on
estimates of the probability of potential future environmental exposure.
Expenses related to on-going maintenance of environmental sites are expensed as
incurred. If actual or estimated probable future losses exceed the Company's
recorded liability for such claims, it would record additional charges as other
expense during the period in which the actual loss or change in estimate
occurred.
7
Other Contingencies: In the ordinary course of business, the Company is involved
in legal proceedings involving contractual and employment relations, product
liability claims, trademark rights and a variety of other matters. The Company
records contingent liabilities resulting from claims against it when it is
probable that a liability has been incurred and the amount of the loss is
reasonably estimable. The Company discloses contingent liabilities when there is
a reasonable possibility that the ultimate loss will exceed the recorded
liability. Estimating probable losses requires analysis of multiple factors, in
some cases including judgments about the potential actions of third party
claimants and courts. Therefore, actual losses in any future period are
inherently uncertain. Currently, the Company does not believe that any of its
pending legal proceedings or claims will have a material impact on its financial
position or results of operations. However, if actual or estimated probable
future losses exceed the Company's recorded liability for such claims, it would
record additional charges during the period in which the actual loss or change
in estimate occurred.
Stock-based compensation: Stock-based compensation expense is recorded for
stock-option grants and performance-based restricted stock awards based upon the
fair values of the awards. The fair value of stock option awards is estimated at
the grant date using the Black-Scholes option pricing model, which includes
assumptions for volatility, expected term, risk-free interest rate and dividend
yield. Expected volatility is based on implied volatilities from traded options
on Littelfuse stock, historical volatility of Littelfuse stock and other
factors. Historical data is used to estimate employee termination experience and
the expected term of the options. The risk-free interest rate is based on the
U.S. Treasury yield curve in effect at the time of grant. The Company has not
paid any cash dividends in its history. The performance-based restricted stock
awards vest in thirds over a three-year period (following the three-year
performance period), and are paid annually as they vest, one half in the
Company's common stock and one half in cash. The fair value of performance-based
restricted stock awards that are paid in common stock is measured at the market
price on the grant date, and the fair value of the portion paid in cash is
measured at the current market price of a share. The number of shares issued is
based on the Company attaining certain financial performance goals relating to
return on net tangible assets ("RONTA") and earnings before interest, taxes,
depreciation and amortization ("EBITDA") during the three-year period after the
grant date. Stock-based compensation for performance-based awards is based on
the fair values and the Company's current estimate of the probable number of
shares to be issued (based on the probable outcome at the end of the performance
period). As the Company's estimate of the probable outcome changes in future
periods, stock-based compensation expense is adjusted accordingly. Total
stock-based compensation expense was $5.0 million and $5.2 million in 2007 and
2006, respectively. See Note 12 of the Notes to Consolidated Financial
Statements.
MARKET RISK
The Company is exposed to market risk from changes in interest rates, foreign
exchange rates and commodities.
The Company had debt outstanding at December 29, 2007, in the form of a domestic
revolving credit facility and foreign lines of credit at variable rates. While
100% of this debt has variable interest rates, the Company's interest expense is
not materially sensitive to changes in interest rate levels since debt levels
and potential interest expense increases are small relative to earnings.
The majority of the Company's operations consist of manufacturing and sales
activities in foreign countries. The Company has manufacturing facilities in
Mexico, Ireland, Germany, China, Taiwan and the Philippines. During 2007, sales
to customers outside the U.S. were 61.9% of total net sales. 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. As international sales were more than half of total sales, a
significant portion of the resulting accounts receivable are denominated in
foreign currencies. Changes in foreign currency exchange rates or weak economic
conditions in the foreign countries in which it manufactures and distributes
products could affect the Company's sales, accounts receivable values and
financial results. The Company uses netting and offsetting intercompany account
management techniques to reduce known foreign currency exposures where possible
and also, from time to time, utilizes derivative instruments to hedge certain
foreign currency exposures deemed to be material.
The Company uses various metals in the production of its products, including
copper and zinc. 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. A 10% increase in
the price of copper or zinc would reduce pre-tax profit by approximately $1.4
million and $0.7 million, respectively.
The Company purchases a particular type of silicon as a raw material for many of
its semiconductor products. This same type of silicon is used in solar panels,
and therefore is experiencing high levels of market demand. As a result, there
is a risk of market shortages for this material at some point. The Company is
taking actions to secure adequate sources of supply to meet its expected future
demand for this material.
While the Company is exposed to significant changes in certain commodity prices
and foreign currency exchange rates, the Company actively monitors these
exposures and takes various actions to mitigate any negative impacts of these
exposures.
OUTLOOK
The Company believes its long-term growth strategy, which emphasizes development
of new circuit protection products, providing customers with solutions and
technical support in all major regions of the world and leveraging low cost
production facilities in Asia-Pacific and Mexico will drive sales growth and
reduce costs in each of its segments. In addition, the fundamentals for the
Company's major markets appear to be neutral for 2008.
8
The Company initiated a series of projects beginning in 2005 to reduce costs in
its global operations by consolidating manufacturing and distribution into fewer
sites in low-cost locations in China, the Philippines and Mexico. These programs
are expected to generate significant cost savings beginning in late 2008 and
increasing in 2009. The Company has incurred significant costs related to these
programs, including severance, retention incentives, training, redundant
overhead and equipment moves. These costs are expected to be ongoing through
2008 and until the manufacturing and distribution transfers are completed in
early 2010.
The Company is working to expand its share of the circuit protection market by
leveraging new products that it has recently acquired or developed as well as
improving solution selling capabilities. In the future, the Company will look
for opportunities to add to its product portfolio and technical expertise so
that it can provide customers with the most complete circuit protection
solutions available in the marketplace.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 ("PSLRA").
The statements in this section, the letter to shareholders and the other
sections of this report and in the Company's Annual Report on Form 10-K that are
not historical facts are intended to constitute "forward-looking statements"
entitled to the safe-harbor provisions of the PSRLA. These statements may
involve risks and uncertainties, including, but not limited to, risks relating
to product demand and market acceptance, economic conditions, the impact of
competitive products and pricing, product quality problems or product recalls,
capacity and supply difficulties or constraints, coal mining exposures, failure
of an indemnification for environmental liability, exchange rate fluctuations,
commodity price fluctuations, the effect of the Company's accounting policies,
labor disputes, restructuring costs in excess of expectations, pension plan
asset returns being less than assumed, integration of acquisitions and other
risks which may be detailed in Item 1A, "Risk Factors," in the Form 10-K and in
the Company's other Securities and Exchange Commission filings.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Littelfuse is responsible for establishing and maintaining
adequate internal control over financial reporting as such term is defined in
Exchange Act Rule 13a-15(f). Littelfuse's internal control system was designed
to provide reasonable assurance to its management and the Board of Directors
regarding the preparation and fair presentation of published financial
statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation.
Littelfuse's management assessed the effectiveness of the Company's internal
control over financial reporting as of December 29, 2007, based upon the
framework in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this
assessment, the Company's management concluded that, as of December 29, 2007,
the Company's internal control over financial reporting is effective.
Littelfuse's independent registered public accounting firm, Ernst & Young LLP,
has audited the effectiveness of the Company's internal control over financial
reporting as of December 29, 2007. Their report appears on page 11.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in the Company's internal control over financial reporting
that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF LITTELFUSE, INC.
We have audited the accompanying consolidated balance sheets of Littelfuse, Inc.
and subsidiaries (Company) as of December 29, 2007, and December 30, 2006, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 29, 2007. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Littelfuse, Inc.
and subsidiaries at December 29, 2007 and December 30, 2006, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 29, 2007, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment" and, effective December 30, 2006,
the Company adopted certain provisions of Statement of Financial Accounting
Standards No. 158, "Employer's Accounting for Defined Benefit Pension and Other
Postretirement Plans", and effective December 31, 2006, the Company adopted
Financial Accounting Standards Board Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109."
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Littelfuse Inc. and subsidiaries'
internal control over financial reporting as of December 29, 2007, based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 26, 2008 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 26, 2008
10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF LITTELFUSE, INC.
We have audited Littelfuse, Inc.'s internal control over financial reporting as
of December 29, 2007, based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Littelfuse, Inc.'s management is
responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying management's report on internal control
over financial reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Littelfuse, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 29, 2007, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Littelfuse, Inc. and subsidiaries as of December 29, 2007, and December 30,
2006, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 29,
2007, and our report dated February 26, 2008 expressed an unqualified opinion
thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 26, 2008
11
CONSOLIDATED BALANCE SHEETS
(In thousands) December 29, 2007 December 30, 2006
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 64,943 $ 56,704
Accounts receivable, less allowances (2007 - $12,997; 2006 - $17,503) 85,607 83,901
Inventories 58,845 65,961
Deferred income taxes 10,986 12,382
Prepaid expenses and other current assets 14,789 9,821
--------- ---------
Total current assets 235,170 228,769
Property, plant, and equipment:
Land 12,573 10,916
Buildings 49,321 45,518
Equipment 282,416 285,758
--------- ---------
344,310 342,192
Accumulated depreciation (199,748) (216,676)
--------- ---------
Net property, plant and equipment 144,562 125,516
Intangible assets, net of amortization:
Patents, licenses and software 9,231 10,118
Distribution network 13,823 15,209
Trademarks and tradenames 1,192 1,321
Goodwill 73,462 67,500
--------- ---------
97,708 94,148
Investments 6,544 5,231
Deferred income taxes 6,141 9,746
Other assets 1,240 1,556
--------- ---------
Total assets $ 491,365 $ 464,966
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,889 $ 23,334
Accrued payroll 19,441 22,468
Accrued expenses 11,595 12,579
Accrued severance 21,092 10,670
Accrued income taxes 4,484 4,656
Current portion of long-term debt 12,086 24,328
--------- ---------
Total current liabilities 96,587 98,035
Long-term debt, less current portion 1,223 1,785
Accrued severance 8,912 18,879
Accrued post-retirement benefits 18,371 27,971
Other long-term liabilities 12,715 14,488
Minority interest 143 143
Shareholders' equity:
Preferred stock, par value $0.01 per share: 1,000,000
shares authorized; no shares issued and outstanding -- --
Common stock, par value $0.01 per share: 34,000,000
shares authorized; shares issued and outstanding,
2007 - 21,869,824; 2006 - 22,110,674 219 221
Additional paid-in capital 118,765 108,543
Notes receivable from officers - common stock (5) (10)
Accumulated other comprehensive income (loss) 17,361 (11)
Retained earnings 217,074 194,922
--------- ---------
Total shareholders' equity 353,414 303,665
--------- ---------
Total liabilities and shareholders' equity $ 491,365 $ 464,966
========= =========
See accompanying notes.
12
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts) Year Ended
----------------------------------------------------------
December 29, 2007 December 30, 2006 December 31, 2005
----------------- ----------------- -----------------
Net sales $ 536,144 $ 534,859 $ 467,089
Cost of sales 364,607 373,596 322,537
---------- ---------- ----------
Gross profit 171,537 161,263 144,552
Selling, general and administrative expenses 103,258 110,581 98,536
Research and development expenses 21,700 18,708 16,672
Gain on sale of Ireland property (8,037) -- --
Amortization of intangibles 3,307 3,116 2,378
---------- ---------- ----------
Operating income 51,309 28,858 26,966
Interest expense 1,557 1,626 2,098
Other expense (income), net (1,536) (2,174) (3,068)
---------- ---------- ----------
Income from continuing operations before
minority interest and income taxes 51,288 29,406 27,936
Minority interest -- -- (86)
Income taxes 14,453 6,170 11,440
---------- ---------- ----------
Income from continuing operations 36,835 23,236 16,582
Discontinued operations (net of tax expense
of $409 and $645 in 2006 and 2005, respectively) -- 588 1,128
---------- ---------- ----------
Net income $ 36,835 $ 23,824 $ 17,710
========== ========== ==========
Income per share:
Basic:
Continuing operations $ 1.66 $ 1.04 $ 0.74
Discontinued operations -- 0.03 0.05
---------- ---------- ----------
Net Income $ 1.66 $ 1.07 $ 0.79
========== ========== ==========
Diluted:
Continuing operations $ 1.64 $ 1.03 $ 0.73
Discontinued operations -- 0.03 0.05
---------- ---------- ----------
Net Income $ 1.64 $ 1.06 $ 0.78
========== ========== ==========
Weighted-average shares and equivalent
shares outstanding:
Basic 22,231 22,305 22,413
Diluted 22,394 22,434 22,582
See accompanying notes.
13
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year Ended
---------------------------------------------------------
December 29, 2007 December 30, 2006 December 31, 2005
----------------- ----------------- -----------------
Operating activities
Net income $ 36,835 $ 23,824 $ 17,710
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 25,429 25,375 28,738
Impairment of assets 767 4,374 --
Amortization of intangibles 3,307 3,116 2,495
Provision for bad debts 31 127 1,884
Gain on sale of LC Fab -- -- (1,400)
Gain on sale of Ireland property (8,037) -- --
Stock-based compensation 4,957 5,187 --
Deferred income taxes 2,151 (8,341) (1,564)
Changes in operating assets and liabilities:
Accounts receivable (280) 2,843 (11,185)
Inventories 9,112 1,240 6,594
Accounts payable and accrued expenses (3,801) (10,651) (2,639)
Accrued payroll and severance (3,046) 30,620 1,505
Accrued income taxes (3,071) 1,850 (5,590)
Prepaid expenses and other (4,414) 1,351 1,594
--------- --------- ---------
Net cash provided by operating activities 59,940 80,915 38,142
Investing activities
Purchases of property, plant and equipment (40,501) (19,613) (27,239)
Purchase of businesses, net of cash acquired (4,507) (37,841) (3,658)
Sale of business and property, plant and equipment -- 14,401 --
Sale of LC Fab -- 500 600
Sale of Ireland property 8,593 -- --
Deposit on sale of building 1,607 -- --
--------- --------- ---------
Net cash used in investing activities (34,808) (42,553) (30,297)
Financing activities
Proceeds from debt 89,200 43,273 48,819
Payments of debt (101,991) (45,626) (55,616)
Proceeds from exercise of stock options 6,316 5,734 3,844
Notes receivable, common stock 5 7 3,533
Purchases of common stock (16,433) (10,262) (12,832)
Excess tax benefit on share-based compensation 610 468 --
--------- --------- ---------
Net cash used in financing activities (22,293) (6,406) (12,252)
Effect of exchange rate changes on cash 5,400 2,801 (2,229)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 8,239 34,757 (6,636)
Cash and cash equivalents at beginning of year 56,704 21,947 28,583
--------- --------- ---------
Cash and cash equivalents at end of year $ 64,943 $ 56,704 $ 21,947
========= ========= =========
See accompanying notes.
14
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands) Notes Accumulated
Additional Receivable Other
Common Paid-In Common Comprehensive Retained
Stock Capital Stock Income (Loss) Earnings Total
---------- ----------- ---------- ------------- ----------- -----------
Balance at January 1, 2005 $ 225 $ 96,008 $ (3,550) $ 3,673 $ 173,728 $ 270,084
Comprehensive income:
Net income for the year -- -- -- -- 17,710 17,710
Change in net unrealized loss on derivatives -- -- -- 177 -- 177
Minimum pension liability adjustment* -- -- -- (1,111) -- (1,111)
Unrealized gain on investments* -- -- -- 999 -- 999
Foreign currency translation adjustment -- -- -- (6,164) -- (6,164)
---------- ----------- ---------- ------------- ----------- -----------
Comprehensive income 11,611
Payments on notes receivable -- -- 3,533 -- -- 3,533
Purchase of 458,000 shares of common stock (5) (1,598) -- -- (11,229) (12,832)
Stock options exercised, including tax
benefit of $443 2 4,668 -- -- -- 4,670
---------- ----------- ---------- ------------- ----------- -----------
Balance at December 31, 2005 $ 222 $ 99,078 $ (17) $ (2,426) $ 180,209 $ 277,066
Comprehensive income:
Net income for the year -- -- -- -- 23,824 23,824
Minimum pension liability adjustment * -- -- -- 1,546 -- 1,546
Unrealized loss on investments* -- -- -- (467) -- (467)
Foreign currency translation adjustment -- -- -- 9,025 -- 9,025
---------- ----------- ---------- ------------- ----------- -----------
Comprehensive income 33,928
Payments on notes receivable -- -- 7 -- -- 7
Adoption of SFAS 158* -- -- -- (7,689) -- (7,689)
Stock-based compensation - SFAS 123(R) -- 5,187 -- -- -- 5,187
Purchase of 329,000 shares of common stock (3) (1,148) -- -- (9,111) (10,262)
Stock options exercised, including tax
benefit of $779 2 5,426 -- -- -- 5,428
---------- ----------- ---------- ------------- ----------- -----------
Balance at December 30, 2006 $ 221 $ 108,543 $ (10) $ (11) $ 194,922 $ 303,665
Comprehensive income:
Net income for the year -- -- -- -- 36,835 36,835
Minimum pension liability adjustment * -- -- -- 4,123 -- 4,123
Unrealized gain on investments* -- -- -- 668 -- 668
Foreign currency translation adjustment -- -- -- 12,581 -- 12,581
---------- ----------- ---------- ------------- ----------- -----------
Comprehensive income 54,207
Payments on notes receivable -- -- 5 -- -- 5
Stock-based compensation - SFAS 123(R) -- 4,957 -- -- -- 4,957
Purchase of 500,000 shares of common stock (5) (1,745) -- -- (14,683) (16,433)
Stock options exercised, including tax
benefit of $728 3 7,010 -- -- -- 7,013
---------- ----------- ---------- ------------- ----------- -----------
Balance at December 29, 2007 $ 219 $ 118,765 $ (5) $ 17,361 $ 217,074 $ 353,414
========== =========== ========== ============= =========== ===========
* Including related tax impact.
See accompanying notes.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2007 and December 30, 2006
1. Summary of Significant Accounting Policies and Other Information
Nature of Operations: Littelfuse, Inc. and its subsidiaries (the "Company")
design, manufacture, and sell circuit protection devices for use in the
automotive, electronic and electrical markets throughout the world.
Fiscal Year: The Company's fiscal years ended December 29, 2007, December 30,
2006, and December 31, 2005 and contained 52 weeks each.
Basis of Presentation: The consolidated financial statements include the
accounts of Littelfuse, Inc. and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated. The Company's consolidated
financial statements were prepared in accordance with generally accepted
accounting principles in the United States of America and include the assets,
liabilities, revenues, and expenses of all wholly-owned subsidiaries and
majority-owned subsidiaries over which the Company exercises control.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to make
estimates and assumptions that affect the amounts of assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of
revenues and expenses and the accompanying notes. The Company evaluates and
updates its assumptions and estimates on an ongoing basis and may employ outside
experts to assist in its evaluation, as considered necessary. Actual results
could differ from those estimates.
Cash Equivalents: All highly liquid investments, with a maturity of three months
or less when purchased, are considered to be cash equivalents.
Investments: The Company has determined that all of its investment securities
are to be classified as available-for-sale. Available-for-sale securities are
carried at fair value with the unrealized gains and losses reported in
"Shareholders' Equity" as a component of "Accumulated Other Comprehensive Income
(Loss)." The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in other
income or expense. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
Fair Value of Financial Instruments: The Company's financial instruments include
cash and cash equivalents, accounts receivable, investments and long-term debt.
The carrying values of such financial instruments approximate their estimated
fair values.
Accounts Receivable: The Company performs credit evaluations of customers'
financial condition and generally does not require collateral. Credit losses are
provided for in the financial statements based upon specific knowledge of a
customer's inability to meet its financial obligations to the Company.
Historically, credit losses have consistently been within management's
expectations and have not been a material amount. The Company also maintains
allowances against accounts receivable for the settlement of rebates and sales
discounts to customers. These allowances are based upon specific customer sales
and sales discounts as well as actual historical experience.
Inventories: Inventories are stated at the lower of cost or market (first in,
first out method), which approximates current replacement cost. The Company
maintains excess and obsolete allowances against inventory to reduce the
carrying value to the expected net realizable value. These allowances are based
upon a combination of factors including historical sales volume, market
conditions, lower of cost or market analysis and expected realizable value of
the inventory.
Property, Plant and Equipment: Land, buildings, and equipment are carried at
cost. Depreciation is calculated using the straight-line method with useful
lives of 21 years for buildings, seven to nine years for equipment, seven years
for furniture and fixtures, five years for tooling and three years for computer
equipment.
Intangible Assets: Trademarks and tradenames are amortized using the
straight-line method over estimated useful lives that have a range of five to 20
years. Patents and licenses are amortized using the straight-line method or an
accelerated method over estimated useful lives that have a range of four to 50
years. The distribution networks are amortized on either a straight-line or
accelerated basis over estimated useful lives that have a range of four to 20
years. Intangible assets are also tested for impairment when there is a
significant event that may cause the asset to be impaired.
Goodwill is subject to an annual impairment test. The Company determined the
fair value of each of its business unit segments by using a discounted cash flow
model (which includes forecasted five-year income statement and balance sheet
projections, a market based weighted average cost of capital and terminal values
after five years) to estimate market value. As of the most recent annual test,
the Company determined that the fair value of each of the business unit segments
exceeded their carrying amounts and, therefore, no goodwill impairment existed.
The Company will continue to perform a goodwill impairment test on an annual
basis and on an interim basis, if certain conditions exist. Factors the Company
considers important, which could result in changes to its estimates, include
underperformance relative to historical or projected future operating results
and declines in acquisition and trading multiples. Due to the diverse end user
base and non-discretionary product demand, the Company does not believe its
future operating results will vary significantly relative to its historical and
projected future operating results.
16
Pension and Other Post-retirement Benefits: Accounting for pensions requires
estimating the future benefit cost and recognizing the cost over the employee's
expected period of employment with the Company. Certain assumptions are required
in the calculation of pension costs and obligations. These assumptions include
the discount rate, salary scales and the expected long-term rate of return on
plan assets. The discount rate is intended to represent the rate at which
pension benefit obligations could be settled by purchase of an annuity contract.
These assumptions are subject to change based on stock and bond market returns
and other economic factors. Actual results that differ from the Company's
assumptions are accumulated and amortized over future periods and therefore
generally affect its recognized expense and accrued liability in such future
periods. While the Company believes that its assumptions are appropriate given
current economic conditions and its actual experience, significant differences
in results or significant changes in the Company's assumptions may materially
affect its pension obligations and related future expense.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
Amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). SFAS 158
requires the recognition of the overfunded or underfunded status of a defined
benefit postretirement plan as an asset or a liability in the balance sheet,
with changes in the funded status recorded through comprehensive income in the
year in which those changes occur. The Company adopted SFAS 158 on December 30,
2006. The impact of the adoption of SFAS 158 is more fully described in Note 11
of the Notes to Consolidated Financial Statements.
Environmental Liabilities: Environmental liabilities are accrued based on
engineering studies estimating the cost of remediating sites. Expenses related
to on-going maintenance of environmental sites are expensed as incurred. If
actual or estimated probable future losses exceed the Company's recorded
liability for such claims, the Company would record additional charges during
the period in which the actual loss or change in estimate occurred.
Revenue Recognition: The Company recognizes revenue on product sales in the
period the sales process is complete. This occurs when products are shipped (FOB
origin) to the customer in accordance with the terms of the sale, the risk of
loss has been transferred, collectibility is reasonably assured and the pricing
is fixed and determinable. The Company's distribution channels are primarily
through direct sales and through independent third party distributors. There is
no retail channel.
Revenue & Billing: The Company accepts orders from customers based on long term
purchasing contracts and written sales agreements. Contract pricing and selling
agreement terms are based on market factors, costs, and competition. Pricing is
normally negotiated as an adjustment (premium or discount) from the Company's
published price lists. The customer is invoiced when the Company's products are
shipped to them in accordance with the terms of the sales agreement.
Returns & Credits: Some of the terms of the Company's sales agreements and
normal business conditions provide customers (distributors) the ability to
receive credit for products previously shipped and invoiced. This practice is
common in the industry and is referred to as a "ship and debit" program. This
program allows the distributor to debit the Company for the difference between
the distributors' contracted price and a lower price for specific transactions.
Under certain circumstances (usually in a competitive situation or large volume
opportunity), a distributor will request authorization to reduce their price to
their buyer. If the Company approves, the distributor is authorized to "debit"
their Littelfuse account for the amount of their reduced margin. The Company
establishes reserves for this program based on historic activity and actual
authorizations for the debit. In accordance with the guidance in Emerging Issues
Task Force ("EITF") Issue No. 01-09 "Accounting for Consideration Given by a
Vendor to a Customer," paragraph 9, the Company recognizes these debits as a
reduction of revenue.
The Company has a return to stock policy whereby a customer with prior
authorization from Littelfuse management can return previously purchased goods
for full or partial credit. The Company establishes an estimated allowance for
these returns based on historic activity. Sales revenue and cost of sales are
reduced to anticipate estimated returns in accordance with SFAS No. 48, "Revenue
Recognition When Right of Return Exists" ("SFAS 48").
The Company properly meets all of the criteria of SFAS No. 48 for recognizing
revenue when the right of return exists under Staff Accounting Bulletin ("SAB")
No. 104 (Revenue Recognition). Specifically, the Company meets those
requirements because:
1. The Company's selling price is fixed or determinable at the date of
the sale.
2. The Company has policies and procedures to accept only credit worthy
customers with the ability to pay the Company.
3. The Company's customers are obligated to pay the Company under the
contract and the obligation is not contingent on the resale of the
product. (All "ship and debit" and "returns to stock" require
specific circumstances and authorization.)
4. The risk of ownership transfers to the Company's customers upon
shipment and is not changed in the event of theft, physical
destruction or damage of the product.
5. The Company bills at the ship date and establishes a reserve to
reduce revenue from the in transit time until the product is
delivered for FOB destination sales.
6. The Company's customers acquiring the product for resale have
economic substance apart from that provided by Littelfuse, and all
distributors are independent of the Company.
7. The Company does not have any obligations for future performance to
bring about resale of the product by its customers.
8. The Company can reasonably estimate the amount of future returns.
Advertising Costs: The Company expenses advertising costs as incurred, which
amounted to $1.8 million in 2007, $1.5 million in 2006, and $1.8 million in
2005.
Shipping and Handling Fees and Costs: Amounts billed to customers related to
shipping and handling are classified as revenue. Costs incurred for shipping and
handling of $5.7 million, $5.7 million, and $5.1 million in 2007, 2006, and
2005, respectively, are classified in selling, general and administrative
expenses.
17
Restructuring Costs: The Company incurred severance charges and plant closure
expenses as part of the Company's on-going cost reduction efforts. These charges
are included in cost of sales or selling, general and administrative expenses
depending on the personnel being included in the charge. See Note 9 for
additional information on restructuring costs.
Foreign Currency Translation: The Company's foreign subsidiaries use the local
currency or the U.S. dollar as their functional currency, as appropriate. Assets
and liabilities are translated using exchange rates at the balance sheet date
and revenues and expenses are translated at weighted average rates. The amount
of foreign currency conversion gain recognized in the income statement related
to currency translation was $2.9 million, $2.1 million, and $1.0 million in
2007, 2006, and 2005, respectively. Adjustments from the translation process are
recognized in "Shareholders' Equity" as a component of "Accumulated Other
Comprehensive Income (Loss)."
Stock-based Compensation: In December 2004, the FASB issued SFAS No. 123(R),
"Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires public companies to
recognize compensation expense for the cost of awards of equity compensation
using a fair value method. The Company adopted SFAS 123(R) on January 1, 2006
(i.e., the first quarter of 2006) using the modified prospective method. The
Company made the one-time election to adopt the transition method described in
FASB Staff Position ("FSP") No. FAS 123(R)-3, "Transition Election Related to
Accounting for the Tax Effect of Share-Based Payment Awards." Under SFAS 123(R),
benefits of tax deductions in excess of recognized compensation expense are now
reported as a financing cash flow, rather than an operating cash flow as
prescribed under the prior accounting rules. Prior to January 1, 2006, the
Company applied Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") to account for its stock-based
compensation plans. Under APB 25, no compensation expense was recognized for
non-qualified stock option awards as long as the exercise price of the awards on
the date of grant was equal to the current market price of the Company's stock.
However, the Company did recognize compensation expense in connection with the
issuance of restricted stock. The table below discloses the Company's pro forma
amounts related to basic and diluted net income per share for 2005, had the fair
value recognition method under SFAS 123(R) been used for the Company's stock
option grants. Further information regarding stock-based compensation is
provided in Note 12 to the Consolidated Financial Statements.
(in thousands, except per share amounts)
2005
--------
Net income as reported $ 17,710
Stock option compensation expense under fair value method, net of tax (3,172)
--------
Pro forma net income $ 14,538
========
Basic net income per share:
As reported $ 0.79
Pro forma $ 0.65
Diluted net income per share:
As reported $ 0.78
Pro forma $ 0.64
On certain occasions, the Company has granted stock options for a fixed number
of shares with an exercise price below that of the underlying stock on the date
of the grant and recognizes compensation expense accordingly. This compensation
expense has not been material. See Note 12 for additional information on
stock-based compensation.
Accounting Pronouncements: In June 2006, the FASB issued Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48"), an interpretation of
SFAS No. 109, "Accounting for Income Taxes." FIN 48 requires that a position
taken or expected to be taken in a tax return be recognized in the financial
statements when it is more likely than not (i.e., a likelihood of more than
fifty percent) that the position would be sustained upon examination by tax
authorities. A recognized tax position is then measured at the largest amount of
benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. The Company adopted FIN 48 as of December 31, 2006. As a
result of the adoption of FIN 48, the December 30, 2006 balance of $8.0 million
for uncertain income tax positions has been reclassified from accrued income
taxes to other long-term liabilities on the Consolidated Balance Sheets. The
impact of the adoption of FIN 48 is more fully described in Note 13 of the Notes
to Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 establishes a framework for measuring fair value by
providing a standard definition of fair value as it applies to assets and
liabilities. SFAS 157, which does not require any new fair value measurements,
clarifies the application of other accounting pronouncements that require or
permit fair value measurements. SFAS 157 must be applied prospectively beginning
January 1, 2008. The Company is evaluating the impact of adopting SFAS 157 on
its Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value at specified
election dates. SFAS 159 is expected to expand the use of fair value
measurement, but does not eliminate disclosure requirements included in other
accounting standards, including those in SFAS 157. SFAS 159 is effective for
fiscal years beginning after November 15, 2007. The Company is evaluating the
impact of adopting SFAS 159 on its Consolidated Financial Statements.
18
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS 141(R)"), which replaces SFAS No. 141, "Business Combinations" ("SFAS
141"). SFAS No. 141(R) retains the underlying concepts of SFAS No. 141 in that
all business combinations are still required to be accounted for at fair value
under the acquisition method of accounting, but SFAS No. 141(R) changed the
method of applying the acquisition method in a number of significant aspects.
Acquisition costs generally will be expensed as incurred; noncontrolling
interests will be valued at fair value at the acquisition date; in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date; restructuring costs associated with a
business combination generally will be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. SFAS No. 141(R) is effective on a prospective basis for all business
combinations for which the acquisition date is on or after the beginning of the
first annual period subsequent to December 15, 2008, with the exception of the
accounting for valuation allowances on deferred taxes and acquired tax
contingencies. SFAS No. 141(R) amends SFAS 109 such that adjustments made to
valuation allowances on deferred taxes and acquired tax contingencies associated
with acquisitions that closed prior to the effective date of SFAS No. 141(R)
would also apply the provisions of SFAS No. 141(R). Early adoption is not
permitted. The Company is evaluating the impact of adopting SFAS 141(R) on its
Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements -- an amendment of ARB No. 51" ("SFAS 160").
SFAS No. 160 is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008, with earlier adoption
prohibited. SFAS 160 requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial statements and
separate from the parent's equity. The amount of net earnings attributable to
the noncontrolling interest will be included in consolidated net income on the
face of the income statement. SFAS 160 also amends certain of ARB No. 51's
consolidation procedures for consistency with the requirements of SFAS No.
141(R) and includes expanded disclosure requirements regarding the interests of
the parent and its noncontrolling interest. The Company is evaluating the impact
of adopting SFAS 160 on its Consolidated Financial Statements.
Reclassifications: Certain items in the 2006 and 2005 financial statements have
been reclassified to conform to the 2007 presentation.
2. Acquisition of Business
On February 3, 2006, the Company acquired SurgX Corporation ("SurgX") for $2.5
million. All of the assets of SurgX were classified as patents with an average
useful life of seven years. The SurgX acquisition expands the Company's product
offering and strengthens the Company's position in the circuit protection
industry. SurgX is included in the Company's financial statements since the date
of acquisition. Pro forma financial information is not presented due to amounts
not being materially different than actual results.
On May 30, 2006, the Company acquired all of the common stock of Concord
Semiconductor ("Concord") for $23.8 million in cash, net of cash acquired of
$1.2 million, and acquisition costs of approximately $0.2 million. The Company
funded the acquisition with $14.0 million in cash and $10.0 million of
borrowings on an existing revolving line of credit.
Littelfuse has continued to operate Concord's electronics business subsequent to
the acquisition. The Concord 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 Concord 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 Concord in accordance with the purchase method of accounting
with adjustments to record the acquired assets and liabilities of Concord at
their estimated fair market or net realizable values.
Purchase price allocation (in thousands)
- ----------------------------------------
Current assets $ 7,548
Property, plant and equipment 7,903
Patents and licenses 4,477
Distribution network 6,906
Goodwill 6,356
Current liabilities (2,975)
Deferred taxes (3,593)
Long-term debt (2,657)
--------
$ 23,965
========
Patents and licenses have an average estimated useful life of approximately four
years. Pro forma financial information is not presented due to amounts not being
materially different than actual results.
On June 26, 2006, the Company acquired Catalina Performance Accessories, Inc.
("Catalina") for $4.5 million. The Company acquired $0.4 million of accounts
receivable, $0.5 million of inventory and a $3.6 million distribution network.
The distribution network has a useful life of ten years. The Catalina
acquisition expands the Company's product offering and strengthens the Company's
position in the circuit protection industry. Catalina is included in the
Company's financial statements since the date of acquisition. Pro forma
financial information is not presented due to amounts not being materially
different than actual results.
19
On August 1, 2006 the Company acquired the gas discharge tube ("GDT") assets of
SRC Devices, Inc. ("SRC") for $6.0 million in cash. The Company acquired $0.3
million of inventory, $0.9 million of fixed assets, and $2.2 million of
distribution network, with the excess purchase price of $2.6 million recorded as
goodwill. The distribution network has a useful life of nine years. The SRC
acquisition expands the Company's product offering and strengthens the Company's
position in the circuit protection industry. SRC is included in the Company's
financial statements since the date of acquisition. Pro forma financial
information is not presented due to amounts not being materially different than
actual results. The Company moved production of the GDT product line from the
SRC manufacturing facility in Mexico to its existing operation in Suzhou, China
in 2007, in order to be closer to customers in the Asia-Pacific region while
lowering production costs.
In June 2006, the Company announced that it had signed a definitive agreement to
acquire the assets of Song Long Electronics Co., Ltd. ("Song Long"). On July 31,
2007, the Company acquired the assets of Song Long for approximately $5.5
million and acquisition costs of approximately $0.8 million, of which
approximately $4.5 million was paid in 2007 and $0.8 million was paid in 2006.
The Company funded the acquisition with cash and has continued to operate Song
Long's electronics business subsequent to the acquisition. The Song Long
acquisition strengthens the Company's position in the circuit protection
industry, moving operations closer to customers in the Asia-Pacific region while
lowering production costs.
The acquisition was accounted for using the purchase method of accounting and
the operations of Song Long are included in the Company's consolidated net
income from the date of the acquisition. The purchase price allocations were
based on preliminary estimates. These estimates were subject to revision after
the Company completed final negotiation of working capital adjustments to the
purchase price and fair value analysis. During the fourth quarter, the Company
completed the final negotiation, which resulted in an addition to the purchase
price of approximately $0.3 million of acquisition costs, the assumption of $1.5
million of accounts payable and the holdback of $1.0 million subject to the
fulfillment of certain contractual obligations by the seller. The following
table sets forth the purchase price allocations for Song Long's assets in
accordance with the purchase method of accounting with adjustments to record the
acquired assets at their estimated fair market or net realizable values.
Purchase price allocation (in thousands)
- ----------------------------------------
Inventory $ 1,186
Property, plant and equipment 1,290
Goodwill 5,293
Current liabilities (1,500)
-------
$ 6,269
=======
All Song Long goodwill and assets are recorded in the Electronics business unit
segment at estimated fair values as adjusted during the fourth quarter of 2007.
The fair values are estimates and subject to revision as the Company completes
its fair value analysis, which may result in an allocation to identifiable
intangible assets. Pro forma financial information is not presented due to
amounts not being materially different than actual results.
Goodwill for all of the above acquisitions is expected to be deductible for tax
purposes.
3. Inventories
The components of inventories at December 29, 2007 and December 30, 2006 are as
follows (in thousands):
2007 2006
------- -------
Raw materials $19,758 $15,043
Work in process 11,292 15,838
Finished goods 27,795 35,080
------- -------
Total inventories $58,845 $65,961
======= =======
4. Intangible Assets
The Company recorded amortization expense of $3.3 million, $3.1 million, and
$2.4 million in 2007, 2006, and 2005, respectively. The details of intangible
assets and future amortization expense of existing intangible assets at December
29, 2007 and December 30, 2006 are as follows (in thousands):
As of December 29, 2007 As of December 30, 2006
------------------------------------- --------------------------------------
Weighted Gross Weighted Gross
Average Carrying Accumulated Average Carrying Accumulated
Useful Life Value* Amortization Useful Life Value Amortization
----------- -------- ------------ ----------- --------- ------------
Patents, licenses and software 11.7 $ 34,156 $ 24,925 11.6 $ 33,898 $ 23,780
Distribution network 15.3 28,975 15,152 15.5 28,107 12,898
Trademarks and tradenames 18.2 5,832 4,640 18.4 5,663 4,342
-------- ------------ --------- -------------
Total $ 68,963 $ 44,717 $ 67,668 $ 41,020
======== ============ ========= =============
* Increases to gross carrying values include the impact of changes in exchange
rates.
20
Estimated amortization expense related to intangible assets with definite lives
at December 29, 2007 is as follows (in thousands):
2008 $ 3,567
2009 3,372
2010 3,213
2011 3,156
2012 2,536
2013 and thereafter 8,402
--------
$ 24,246
========
The amounts for goodwill and changes in the carrying value by operating segment
are as follows at December 29, 2007 and December 30, 2006 (in thousands):
2007 Additions Adjustments** 2006 Additions Adjustments* 2005
-------- --------- ------------- -------- --------- ------------ --------
Electronics $ 36,312 $ 5,293 $ (223) $ 31,242 $ 9,730 $ 474 $ 21,038
Automotive 25,164 -- 1,012 24,152 2,579 406 21,167
Electrical 11,986 -- (120) 12,106 -- (129) 12,235
-------- --------- ------------ --------- --------- ------------ --------
Total goodwill $ 73,462 $ 5,293 $ 669 $ 67,500 $ 12,309 $ 751 $ 54,440
======== ========= ============ ========= ========= ============ ========
* Adjustments reflect the impact of changes in exchange rates.
** Adjustments reflect the impact of changes in exchange rates as well as the
partial reversal of an unrecognized tax benefit.
5. Investments
Included in investments are shares of Polytronics Technology Corporation Ltd.
("Polytronics"), a Taiwanese company that was acquired as part of the Heinrich
Industrie AG acquisition ("Heinrich"). The Company's shares held represent
approximately 8.2% and 8.9% of total Polytronics shares outstanding during 2007
and 2006, respectively. The fair value of this investment is $6.5 million at
December 29, 2007 and $4.8 million at December 30, 2006. Included in 2007 other
comprehensive income (loss) is an unrealized gain of $1.1 million, net of tax of
$0.4 million, due to the increase in fair market value. The remaining movement
year over year is due to the impact of changes in exchange rates.
6. Discontinued Operations
In December 2005, the Company announced its plan to sell the Efen business,
which consisted of production and sales facilities in Uebigau and Eltville,
Germany and Kaposvar, Hungary. The Company obtained Efen as part of its
acquisition of Heinrich in May 2004. Results of operations for Efen have been
reclassified and presented as discontinued operations for 2006 and 2005.
In February 2006, the Company sold the Efen product line for Euro 9.5 million
(approximately $11.6 million). In connection with the sale, an after tax gain of
$0.1 million was recognized. The results of Efen were no longer recorded in the
Consolidated Statements of Income after the first quarter of 2006.
Efen's operating results are summarized as follows for the periods ending
December 30, 2006 and December 31, 2005 (in thousands):
2006 2005
------- --------
Net sales $ 3,789 $ 32,988
Income before taxes 773 1,773
Income taxes 324 645
------- --------
Net income $ 449* $ 1,128
======= ========
* Additionally, for the period ended December 30, 2006, discontinued operations
in the Consolidated Statements of Income includes a gain on the sale of assets
of $139 (net of tax of $85).
7. Debt
The carrying amounts of long-term debt at December 29, 2007 and December 30,
2006 are as follows (in thousands):
2007 2006
-------- --------
Revolving credit facility $ 11,517 $ 22,500
Other obligations 1,792 3,613
-------- --------
13,309 26,113
Less: Current maturities 12,086 24,328
-------- --------
$ 1,223 $ 1,785
======== ========
21
The Company has an unsecured domestic financing arrangement consisting of a
credit agreement with banks that provides a $75.0 million revolving credit
facility, with a potential increase of up to $125.0 million upon request of the
Company and agreement with the lenders, which expires on July 21, 2011. At
December 29, 2007, the Company had available $63.5 million of borrowing
capability under the revolving credit facility at an interest rate of LIBOR plus
0.50% (5.44% as of December 29, 2007). The Company also had $2.5 million and
$6.1 million available in letters of credit at December 29, 2007 and December
30, 2006, respectively. No amounts were outstanding under these letters of
credit at December 29, 2007 and December 30, 2006.
The domestic bank credit agreement contains covenants that, among other matters,
impose limitations on the incurrence of additional indebtedness, future mergers,
sales of assets, payment of dividends, and changes in control, as defined in the
agreement. In addition, the Company is required to satisfy certain financial
covenants and tests relating to, among other matters, interest coverage, working
capital, leverage and net worth. At December 29, 2007, and for the year then
ended, the Company was in compliance with these covenants.
The Company has an unsecured bank line of credit in Japan that provides a Yen
900 million (an equivalent of $7.9 million) revolving credit facility at an
interest rate of TIBOR plus 0.625% (1.523% as of December 29, 2007). The
revolving line of credit becomes due on July 21, 2011. The Company had no
outstanding borrowings on the Yen facility at December 29, 2007 and $1.3
million outstanding on the Yen facility at December 30, 2006.
The Company has an unsecured bank line of credit in Taiwan that provides a
Taiwanese Dollar 35.0 million (equivalent to $1.1 million) revolving credit
facility at an interest rate of two-years Time Deposit plus 0.145% (2.83% as of
December 29, 2007). The revolving line of credit becomes due on August 18, 2009.
The Company had the equivalent of $0.6 million and $0.9 million outstanding on
the Taiwanese Dollar facility at December 29, 2007 and December 30, 2006,
respectively. The Company also has a foreign fixed rate mortgage loan
outstanding at December 29, 2007, totaling Taiwanese Dollar 38.9 million
(equivalent to $1.2 million) with maturity dates through August 2013.
Interest paid on debt approximated $1.4 million in 2007, $1.6 million in 2006,
and $2.0 million in 2005. Aggregate maturities of obligations at December 29,
2007, are as follows (in thousands):
2008 $ 12,086
2009 450
2010 211
2011 211
2012 211
2013 and thereafter 140
--------
$ 13,309
========
8. Coal Mining Liability
Included in other long-term liabilities is an accrual related to a former coal
mining operation at Heinrich for the amounts of Euro 4.0 million and Euro 4.2
million in 2007 and 2006, respectively. The accrual, which is not discounted, is
based on an engineering study estimating the cost of remediating the dangers
(such as a shaft collapse) of abandoned coal mine shafts in Germany.
9. Restructuring
During 2005, the Company announced a downsizing of the Ireland operation and
outsourcing of more of its varistor manufacturing to lower cost Asian
subcontractors. A liability of $4.9 million was recorded related to redundancy
costs for the manufacturing operation associated with this downsizing. This
restructuring impacted approximately 35 associates in various production and
support related roles. These costs were paid in 2005 and 2006. In the second
quarter of 2006, an additional $17.1 million, consisting of $20.0 million of
accrued severance less a statutory rebate of $2.9 million recorded as a current
asset, was recorded as part of cost of sales related to the closure of the
entire facility. This restructuring is part of the Company's strategy to expand
operations in Asia-Pacific in order to be closer to current and potential
customers and take advantage of lower manufacturing costs. This additional
restructuring impacted approximately 131 employees. Restructuring charges are
based upon each associate's current salary and length of service with the
Company. These costs will be paid through 2008. In both instances, all charges
related to the downsizing/closure of the Ireland facility are recorded in "Other
Operating Income (Loss)" for business unit segment reporting purposes.
Ireland restructuring (in thousands)
- ----------------------------------------------
Balance at December 31, 2005 $ 4,003
Additions 20,019
Payments (2,473)
Exchange rate impact 1,059
---------
Balance at December 30, 2006 22,608
Additions 977
Payments (3,801)
Exchange rate impact 1,977
---------
Balance at December 29, 2007 $ 21,761
=========
22
During 2006, the Company recorded a $5.0 million charge related to the
downsizing of the Heinrich operations. Manufacturing related charges of $2.3
million were recorded as part of cost of sales and non-manufacturing related
charges of $2.7 million were recorded as part of selling, general and
administrative expenses. These charges were primarily for redundancy costs to be
paid through 2008. The additions in 2007 primarily relate to retention costs
that will be incurred over the remaining transition period. All charges related
to this downsizing are recorded in "Other Operating Income (Loss)" for business
unit segment reporting purposes. This restructuring impacted approximately 52
associates in various technical, production, administrative and support
employees. A summary of activity of this liability is as follows:
Heinrich restructuring (in thousands)
Balance at December 31, 2005 $ --
Additions 4,995
Payments (632)
---------
Balance at December 30, 2006 4,363
Additions 850
Payments (4,733)
---------
Balance at December 29, 2007 $ 480
=========
During December 2006, the Company announced the closure of its Irving, Texas
facility and the transfer of its semiconductor wafer manufacturing from Irving,
Texas to Wuxi, China in a phased transition from 2007 to 2010. A liability of
$1.9 million was recorded related to redundancy costs for the manufacturing
operation associated with this downsizing. This charge was recorded as part of
cost of sales and is included in "Other Operating Income (Loss)" for business
unit segment reporting purposes. The total cost expected to be incurred through
2010 is $6.5 million. The amounts not yet recognized primarily relate to
retention costs that will be incurred over the remaining closure period. This
restructuring impacted approximately 180 associates in various production and
support related roles and will be paid over the period 2007 to 2010. A summary
of activity of this liability is as follows:
Irving, Texas restructuring (in thousands)
Balance at December 31, 2005 $ --
Additions 1,890
Payments --
--------
Balance at December 30, 2006 1,890
Additions 1,446
Payments (362)
--------
Balance at December 29, 2007 $ 2,974
========
During March 2007, the Company announced the closure of its Des Plaines and Elk
Grove, Illinois facilities and the transfer of its manufacturing from Des
Plaines, Illinois to the Philippines and Mexico in a phased transition from 2007
to 2009. A liability of $3.5 million was recorded related to redundancy costs
for the manufacturing and distribution operations associated with this
downsizing. Manufacturing related charges of $3.0 million are recorded as part
of cost of sales and non-manufacturing related charges of $0.5 million are
recorded as part of selling, general and administrative expenses. All charges
related to this downsizing are recorded in "Other Operating Income (Loss)" for
business unit segment reporting purposes. The total cost expected to be incurred
through 2009 is $7.1 million. The amounts not yet recognized primarily relate to
retention costs that will be incurred over the remaining closure period. This
restructuring impacts approximately 307 associates in various production and
support related roles and the costs relating to the restructuring will be paid
over the period 2007 to 2009. A summary of activity of this liability is as
follows:
Des Plaines and Elk Grove, Illinois restructuring (in thousands)
Balance at December 31, 2005 $ --
Additions 102
Payments --
--------
Balance at December 30, 2006 102
Additions 4,963
Payments (355)
--------
Balance at December 29, 2007 $ 4,710
========
10. Asset impairments
During 2007, the Company recorded a charge of approximately $0.8 million within
cost of sales related to asset impairments incurred primarily in China and
Germany. During 2006, the Company recorded a charge of approximately $4.4
million for the write-down of Heinrich real estate and fixed assets. $2.7
million of this write-down was recorded to reduce the carrying value of property
located in Witten, Germany, consisting primarily of land and buildings used for
manufacturing and administrative offices, as a result of entering into
agreements to sell the property. The sale was completed in the fourth quarter of
2006. The remaining $1.7 million charge related to a reduction in the carrying
value of certain long-term assets located at the same facility to record them at
fair value in anticipation of their future sale. $0.8 million of the total
charge was recorded within cost of sales and $3.6 million within selling,
general and administrative expenses.
23
11. Benefit Plans
The Company has a defined-benefit pension plan covering substantially all of its
North American employees. The amount of the retirement benefit is based on years
of service and final average pay. The plan also provides post-retirement medical
benefits to retirees and their spouses if the retiree has reached age 62 and has
provided at least ten years of service prior to retirement. Such benefits
generally cease once the retiree attains age 65. The Company also has defined
benefit pension plans covering employees in the U.K., Ireland, Germany, Japan,
Taiwan and the Netherlands. The amount of these retirement benefits is based on
years of service and final average pay. Liabilities resulting from the plan that
covers employees in the Netherlands are settled annually through the purchase of
insurance contracts. Separate from the foreign pension data presented below, net
periodic expense for the plan covering Netherlands employees was $0.1 million,
$0.1 million and $0.6 million in 2007, 2006 and 2005, respectively.
The Company's contributions are made in amounts sufficient to satisfy legal
requirements and ensure funding to at least 90% of the Employee Retirement
Income Securities Act of 1974 ("ERISA") Current Liability amount. In 2008, the
Company expects to make contributions to defined benefit pension plans in the
range of $3.5 million to $5.0 million.
Total pension expense was $6.7 million, $3.7 million, and $4.8 million in 2007,
2006, and 2005, respectively. The increase in pension expense in 2007 was
largely due to the wind down of the U.K. plan and the resulting settlement loss.
The decrease in pension expense in 2006 was primarily due to currency gains and
the impact of demographic changes, partially offset by a decrease in the
discount rate. Benefit plan related information, including Efen prior to the
sale, is as follows (in thousands):
2007 2006
----------------------------------- ----------------------------------
U.S. Foreign Total U.S. Foreign Total
-------- ---------- --------- --------- --------- ---------
Change in benefit obligation
Benefit obligation at beginning of year $ 68,530 $ 51,249 $ 119,779 $ 66,425 $ 47,290 $ 113,715
Service cost 3,329 1,170 4,499 3,192 1,124 4,316
Interest cost 4,069 2,371 6,440 3,799 2,043 5,842
Plan participants' contributions -- 288 288 -- 304 304
Settlement gain -- (657) (657) -- (980) (980)
Net actuarial gain (4,599) (4,235) (8,834) (1,821) (156) (1,977)
Benefits paid (3,462) (6,201) (9,663) (3,065) (2,538) (5,603)
Business acquisitions -- -- -- -- 625 625
Business divestitures -- -- -- -- (1,530) (1,530)
Effect of exchange rate movements -- 4,970 4,970 -- 5,067 5,067
-------- ---------- --------- --------- -------- ---------
Benefit obligation at end of year $ 67,867 $ 48,955 $ 116,822 $ 68,530 $ 51,249 $ 119,779
-------- ---------- --------- --------- -------- ---------
Change in plan assets at fair value
Fair value of plan assets at beginning of year $ 56,563 $ 35,498 $ 92,061 $ 50,436 $ 28,787 $ 79,223
Actual return on plan assets 3,223 78 3,301 6,192 2,361 8,553
Employer contributions 5,000 5,795 10,795 3,000 2,127 5,127
Plan participant contributions -- 288 288 -- 304 304
Benefits paid (3,462) (5,337) (8,799) (3,065) (1,760) (4,825)
Business acquisitions -- -- -- -- 326 326
Effect of exchange rate movements -- 3,755 3,755 -- 3,353 3,353
-------- ---------- --------- --------- -------- ---------
Fair value of plan assets at end of year $ 61,324 $ 40,077 $ 101,401 $ 56,563 $ 35,498 $ 92,061
-------- ---------- --------- --------- -------- ---------
Net amount recognized / Unfunded status $ (6,543) $ (8,878) $ (15,421) $ (11,967) $(15,751) $ 27,718)
======== ========== ========= ========= ======== =========
Amounts recognized in the Consolidated
Balance Sheet consist of:
Prepaid benefit cost $ -- $ 2,950 $ 2,950 $ -- $ 253 $ 253
Accrued benefit liability (6,543) (11,828) (18,371) (11,967) (16,004) (27,971)
-------- ---------- --------- --------- -------- ---------
Net liability recognized $ (6,543) $ (8,878) $ (15,421) $ (11,967) $(15,751) $ (27,718)
-------- ---------- --------- --------- -------- ---------
Accumulated other comprehensive loss $ 1,795 $ 4,363 $ 6,158 $ 4,943 $ 7,892 $ 12,835
-------- ---------- --------- --------- -------- ---------
Amounts recognized in accumulated other comprehensive loss, pre-tax consist of
(in thousands):
2007
-------------------------------
U.S. Foreign Total
-------- -------- --------
Net actuarial loss $ 1,709 $ 5,438 $ 7,147
Prior service (cost) credit 86 (102) (16)
Net transition obligation -- (973) (973)
-------- -------- --------
Net amount recognized/occurring, pre-tax $ 1,795 $ 4,363 $ 6,158
======== ======== ========
24
The estimated net actuarial loss which will be amortized from accumulated other
comprehensive loss into benefit cost in 2008 is $0.1 million.
U.S. Foreign
------------------------------ ------------------------------
2007 2006 2005 2007 2006 2005
-------- -------- -------- -------- -------- --------
Components of net periodic benefit cost
Service cost $ 3,329 $ 3,192 $ 3,259 $ 1,170 $ 1,124 $ 1,210
Interest cost 4,069 3,799 3,664 2,371 2,043 1,971
Expected return on plan assets (4,697) (4,228) (3,728) (1,513) (2,117) (1,681)
Amortization of prior service cost 10 10 10 (14) (13) (13)
Amortization of transition asset -- -- -- (92) (113) (112)
Amortization of losses 14 57 409 522 308 173
-------- -------- -------- -------- -------- --------
Total cost of the plan for the year 2,725 2,830 3,614 2,444 1,232 1,548
Expected plan participants' contribution -- -- -- -- -- (392)
-------- -------- -------- -------- -------- --------
Net periodic benefit cost 2,725 2,830 3,614 2,444 1,232 1,156
-------- -------- -------- -------- -------- --------
Settlement loss (curtailment gain) -- -- -- 1,506 (322) --
-------- -------- -------- -------- -------- --------
Total expense for the year $ 2,725 $ 2,830 $ 3,614 $ 3,950 $ 910 $ 1,156
======== ======== ======== ======== ======== ========
Weighted average assumptions used to determine net periodic benefit cost for the
years 2007, 2006 and 2005 are as follows:
U.S. Foreign
--------------------------- ---------------------------
2007 2006 2005 2007 2006 2005
------- ------- ------- ------- ------- -------
Discount rate 6.0% 6.0% 6.0% 4.5% 4.2% 4.8%
Expected return on plan assets 8.5% 8.5% 8.5% 4.0% 6.7% 6.7%
Compensation increase rate 4.5% 4.5% 4.5% 3.5% 3.2% 3.2%
Measurement dates 1/01/07 1/01/06 1/01/05 1/01/07 1/01/06 1/01/05
The accumulated benefit obligation for the U.S. defined benefits plans was $57.8
million and $57.5 million at December 29, 2007 and December 30, 2006,
respectively. The accumulated benefit obligation for the foreign plans was $44.5
million and $45.6 million at December 29, 2007 and December 30, 2006,
respectively.
Weighted average assumptions used to determine benefit obligations at year-end
2007, 2006 and 2005 are as follows:
U.S. Foreign
------------------------------ ------------------------------
2007 2006 2005 2007 2006 2005
-------- -------- -------- -------- -------- --------
Discount rate 6.5% 6.0% 6.0% 5.2% 4.5% 4.3%
Compensation increase rate 4.5% 4.5% 4.5% 3.5% 3.5% 3.2%
Measurement dates 12/31/07 12/31/06 12/31/05 12/31/07 12/31/06 12/31/05
Expected benefit payments to be paid to participants for the fiscal year ending
are as follows (in thousands):
U.S. Foreign
-------- --------
2008 $ 3,144 $ 2,014
2009 3,247 2,134
2010 3,384 3,935
2011 3,488 2,349
2012 3,729 3,279
Defined Benefit Plan Assets
Based upon analysis of the target asset allocation and historical returns by
type of investment, the Company has assumed that the expected long-term rate of
return will be 8.5% on domestic plan assets and 4.0% on foreign plan assets.
Assets are invested to maximize long-term return taking into consideration
timing of settlement of the retirement liabilities and liquidity needs for
benefits payments. U.S. defined benefit pension assets were invested as follows
and were not materially different from the target asset allocation:
U.S. Asset Allocation
---------------------
2007 2006
-------- --------
Equity securities 73% 73%
Debt securities 27% 27%
-------- ---------
100% 100%
======== =========
Foreign Asset Allocation
------------------------
2007 2006
---------- -----------
Equity securities 2% 39%
Debt securities 83% 54%
Property 0% 7%
Cash 15% 0%
---------- -----------
100% 100%
========== ===========
25
Defined Contribution Plans
The Company also maintains a 401(k) savings plan covering substantially all U.S.
employees. The Company matches 50% of the employee's annual contributions for
the first 4% of the employee's gross wages. Employees vest in the Company
contributions after two years of service. Company matching contributions
amounted to $0.6 million, $0.6 million, and $0.6 million in 2007, 2006 and 2005,
respectively. The Company provides additional retirement benefits for certain
key executives through its unfunded defined contribution Supplemental Executive
Retirement Plan. The charge to expense for this plan amounted to $0.3 million in
each of the years 2007, 2006 and 2005.
12. Shareholders' Equity
Equity Plans: The Company has stock option plans authorizing the granting of
both incentive and nonqualified options and other stock rights of up to
5,925,000 shares of common stock to employees and directors. The stock options
granted prior to 2002 vest over a five-year period and are exercisable over a
ten-year period commencing from the date of vesting. The stock options granted
in 2002 through February 2005 vest over a five-year period and are exercisable
over a ten-year period commencing from the date of the grant. Stock options
granted after February 2005 vest over either a four or five-year period and are
exercisable over either a seven or ten-year period commencing from the date of
the grant.
The Company also has performance share agreements under its equity-based
compensation plans pursuant to which a target amount of performance share awards
are granted based on the Company attaining certain financial performance goals
relating to return on net tangible assets and earnings before interest, taxes,
depreciation and amortization over a three-year performance period. The
performance-based restricted stock awards vest in thirds over a three-year
period (following the three-year performance period), and are paid annually as
they vest, one half in the Company's common stock and one half in cash. The fair
value of the performance-based restricted stock awards that are paid in common
stock is measured at the market price on the grant date, and the fair value of
the portion paid in cash is measured at the current market price of a share.
The following table provides a reconciliation of outstanding stock options for
the twelve month period ending December 29, 2007.
Weighted
Average
Weighted Remaining Aggregate
Average Contractual Intrinsic
Shares Under Exercise Life Value
Option Price (Years) ($000s)
------------ -------- ----------- ---------
Outstanding December 30, 2006 1,983,170 $ 29.54
Granted 393,955 37.27
Exercised (236,633) 27.15
Forfeited (130,388) 31.87
------------
Outstanding December 29, 2007 2,010,104 31.19 6.0 $ 7,533
============
Exercisable December 29, 2007 1,000,922 28.30 5.7 5,993
The total intrinsic value of options exercised during 2007, 2006, and 2005 was
$2.9 million, $2.1 million, and $1.4 million, respectively.
The following table provides a reconciliation of nonvested performance share
awards (including only awards to be paid in the Company's common stock) for the
twelve month period ending December 29, 2007.
Weighted
Average
Grant-Date
Shares Fair Value
---------- ----------
Nonvested December 30, 2006 58,500 $ 29.37
Granted 20,500 41.22
Vested (6,333) 25.07
Forfeited (23,500) 34.16
----------
Nonvested December 29, 2007 49,167 35.51
==========
26
The Company recognizes compensation cost of all share-based awards as an expense
on a straight-line basis over the vesting period of the awards. At December 29,
2007, the unrecognized compensation cost for options and performance shares was
$12.6 million before tax, and will be recognized over a weighted-average period
of 2.7 years. The following table shows total stock-based compensation expense
included in selling, general and administrative expenses in the Consolidated
Statements of Income during 2007 and 2006. No such compensation expense was
recognized during 2005.
(in thousands, except per share amounts)
2007 2006
-------- --------
Pre-tax stock based compensation $ 4,957 $ 5,187
Income tax (1,880) (1,889)
-------- --------
Stock-based compensation expense, net $ 3,077 $ 3,298
======== ========
The Company uses the Black-Scholes option valuation model to determine the fair
value of awards granted. The weighted average fair value of and related
assumptions for options granted were as follows:
2007 2006 2005
--------- --------- --------
Weighted average fair value of options granted $ 14.05 $ 13.90 $ 13.63
Assumptions:
Risk-free interest rate 4.46% 4.89% 4.27%
Expected dividend yield 0% 0% 0%
Expected stock price volatility 35.7% 39.0% 39.4%
Expected life of options 4.7 years 4.8 years 7 years
Expected volatilities are based on both historical volatility of the Company's
stock price and implied volatility of exchange-traded options on the Company's
stock. The expected life of options is based on historical data for options
granted by the Company and the SEC simplified method. The risk-free rates are
based on yields available at the time of grant on U.S. Treasury bonds with
maturities consistent with the expected life assumption.
Notes Receivable From Officers - Common Stock: In 1995, the Company established
the Executive Loan Program under which certain management employees could then
obtain interest-free loans from the Company to facilitate their exercise of
stock options and payment of the related income tax liabilities. Such loans,
limited to 90% of the exercise price plus related tax liabilities, have a
five-year maturity, subject to acceleration for termination of employment or
death of the employee. Such loans are classified as a reduction of shareholders'
equity. The Company changed its policy in 2002 such that management employees
may no longer obtain such loans.
Accumulated Other Comprehensive Income (Loss): The components of accumulated
other comprehensive income (loss) at the end of the year were as follows (in
thousands):
December 29, December 30,
2007 2006
------------ ------------
Minimum pension liability adjustment* $ (3,835) $ (269)
Adoption of SFAS 158** -- (7,689)
Gain (Loss) on investments*** 105 (563)
Foreign currency translation adjustment 21,091 8,510
------------ ------------
Total $ 17,361 $ (11)
============ ============
* net of tax of $2,323 and $165 for 2007 and 2006, respectively.
** net of tax of $4,712 for 2006.
*** net of tax of $(65) and $345 for 2007 and 2006, respectively.
Preferred Stock: The Board of Directors may authorize the issuance from time to
time of preferred stock in one or more series with such designations,
preferences, qualifications, limitations, restrictions, and optional or other
special rights as the Board may fix by resolution.
27
13. Income Taxes
In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes -- an interpretation of FASB Statement No. 109, Accounting for Income
Taxes." FIN 48 addresses the determination of whether tax benefits claimed or
expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48, the Company may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit
that has a greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognition, classification,
interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures.
The Company adopted the provisions of FIN 48 on December 31, 2006 and had no
adjustments to the retained earnings balance as a result of the implementation.
A reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
Balance at December 31, 2006 $ 8,311
Additions for tax positions of prior years 121
Settlements (706)
Reductions based on lapse of statute (3,947)
-----------
Balance at December 29, 2007 $ 3,779
===========
The amount of unrecognized tax benefits at December 29, 2007 was approximately
$3.8 million. Of this total, approximately $1.8 million represents the amount of
unrecognized tax benefits that, if recognized, would favorably affect the
effective income tax rate in future periods. The Company reasonably expects an
approximate $1.3 million decrease in unrecognized tax benefits in the next 12
months due to settlements or lapse of tax statutes of limitations. None of the
positions included in unrecognized tax benefits are related to tax positions for
which the ultimate deductibility is highly certain, but for which there is
uncertainty about the timing of such deductibility. The U.S. federal statute of
limitations remains open for 2004 onward. Foreign and U.S. state statute of
limitations generally range from three to six years. The Company is currently
under examination in several foreign jurisdictions.
The Company recognizes accrued interest and penalties associated with uncertain
tax positions as part of income tax expense. As of December 29, 2007, the
Company had approximately $0.3 million of accrued interest and penalties. Of
this total, approximately $0.1 million represents the amount of interest and
penalties that, if recognized, would favorably affect the effective tax rate in
future periods.
Domestic and foreign income from continuing operations before minority interest
and income taxes is as follows (in thousands):
2007 2006 2005
----------- ----------- -----------
Domestic $ 2,149 $ 2,655 $ 1,484
Foreign 49,139 26,751 26,452
----------- ----------- -----------
Income from continuing operations before minority interest and income taxes $ 51,288 $ 29,406 $ 27,936
=========== =========== ===========
Federal, state, and foreign income tax (benefit) expense consists of the
following (in thousands):
2007 2006 2005
----------- ----------- -----------
Current:
Federal $ (1,871) $ 8,678 $ 2,735
State 1,146 144 41
Foreign 13,027 5,689 10,228
----------- ----------- -----------
Subtotal 12,302 14,511 13,004
Deferred:
Federal and state 2,033 (6,731) 1,956
Foreign 118 (1,610) (3,520)
----------- ----------- ----------
Subtotal 2,151 (8,341) (1,564)
----------- ----------- -----------
Provision for income taxes $ 14,453 $ 6,170 $ 11,440
=========== =========== ===========
A reconciliation between income taxes computed on income before income taxes at
the federal statutory rate and the provision for income taxes is provided below
(in thousands):
2007 2006 2005
----------- ----------- ----------
Tax expense at statutory rate of 35% $ 17,951 $ 10,292 $ 9,785
State and local taxes, net of federal tax benefit 483 45 27
Foreign income tax rate differential (962) (1,374) (47)
Foreign losses for which no tax benefit is available 32 203 1,446
Valuation allowance -- -- (753)
Tax on unremitted earnings (140) (276) 790
Domestic net operating loss carryover -- (1,780) --
Contingent tax reserves (2,783) (230) 1,119
Other, net (128) (710) (927)
----------- ----------- -----------
Provision for income taxes $ 14,453 $ 6,170 $ 11,440
=========== =========== ===========
28
Deferred income taxes are provided for the tax effects of temporary differences
between the financial reporting bases and the tax bases of the Company's assets
and liabilities. Significant components of the Company's deferred tax assets and
liabilities at December 29, 2007, and December 30, 2006, are as follows (in
thousands):
2007 2006
----------- -----------
DEFERRED TAX ASSETS
Accrued expenses $ 14,698 $ 18,605
Foreign tax credit carryforwards -- 769
AMT credit carryforwards 1,502 1,321
Accrued restructuring 9,348 8,322
Domestic & foreign net operating loss carryforwards 6,627 8,211
----------- -----------
Gross deferred tax assets 32,175 37,228
Less: Valuation allowance (708) (708)
----------- -----------
Total deferred tax assets 31,467 36,520
----------- -----------
DEFERRED TAX LIABILITIES
Tax depreciation and amortization in excess of book 13,920 13,833
Other 420 559
----------- -----------
Total deferred tax liabilities 14,340 14,392
----------- -----------
Net deferred tax assets $ 17,127 $ 22,128
=========== ===========
The deferred tax asset valuation allowance is related to deferred tax assets
from foreign net operating losses. The remaining domestic and foreign net
operating losses either have no expiration date or are expected to be utilized
prior to expiration. The Company paid income taxes of approximately $16.7
million, $10.0 million and $9.5 million in 2007, 2006 and 2005, respectively.
U.S. income taxes were not provided for on a cumulative total of approximately
$36 million of undistributed earnings for certain non-U.S. subsidiaries as of
December 29, 2007, and accordingly, no deferred tax liability has been
established relative to these earnings. The determination of the deferred tax
liability associated with the distribution of these earnings is not practicable.
The Company has two subsidiaries in China that currently are taxed at an income
tax rate less than the statutory income tax rate of 25%. The "tax holidays" are
set to expire within the next five years.
14. Business Unit Segment Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), establishes annual and interim reporting standards
for an enterprise's operating segments and related disclosures about its
products, services, geographic areas and major customers. An operating segment
is defined as a component of an enterprise that engages in business activities
from which it may earn revenues and incur expenses, and about which separate
financial information is regularly evaluated by the Chief Operating Decision
Maker ("CODM") in deciding how to allocate resources. The CODM, as defined by
SFAS 131, is the Company's President and Chief Executive Officer ("CEO").
The CEO historically has evaluated the Company's operations and reported the
enterprise's operating segments by geography for the purpose of SFAS No. 131.
Over the last several quarters, the Company has made a number of organizational
changes that have changed the information the CODM receives and how the CEO
evaluates the Company's operations. These organizational changes have increased
the importance of the Company's reliance on business unit performance compared
to geographic. As such, the Company determined in the third quarter of 2007 that
business units now represent operating segments, as defined by SFAS No. 131, and
therefore reports these business units as separate segments.
The Company's operating segments include the electronics business, the
automotive business, and the electrical business.
- - Electronics Business. Provides circuit protection components and expertise
to leading global manufacturers of a wide range of electronic products
including mobile phones, computers, LCD TV's, telecommunications
equipment, medical devices, lighting products and white goods. The
Electronics Business has the broadest product offering in the industry
including fuses and protectors, positive temperature coefficient ("PTC")
resettable fuses, varistors, polymer electrostatic discharge ("ESD")
suppressors, discreet transient voltage suppression ("TVS") diodes, TVS
diode arrays and protection thyristors, gas discharge tubes, power
switching components and fuseholders, blocks and related accessories.
- - Automotive Business. Provides circuit protection products to the worldwide
automotive original equipment manufacturers ("OEM") and parts distributors
of passenger automobiles, trucks, buses and off-road equipment. The
Company also sells its fuses in the automotive replacement parts market.
Products include blade fuses, high current fuses, battery cable protectors
and varistors.
- - Electrical Business. Provides circuit protection products and hazard
assessments for industrial and commercial customers. Products include
power fuses and other circuit protection devices that are used in
commercial and industrial buildings and large equipment such as HVAC
systems, elevators and machine tools.
29
Each of the operating segments is directly responsible for sales, marketing and
research and development. Manufacturing, purchasing, logistics, customer
service, finance, information technology and human resources are shared
functions that are allocated back to the three operating segments. The CODM
allocates resources to and assesses the performance of each operating segment
using information about its revenue and operating income (loss) before interest
and taxes, but does not evaluate the operating segments using discrete asset
information.
Sales, marketing and research and development expenses are charged directly into
each operating segment. All other functions are shared by the operating segments
and expenses for these shared functions are allocated to the operating segments
and included in the operating results reported below. The Company does not
report inter-segment revenue because the operating segments do not record it.
The Company does not allocate interest and other income, interest expense, or
taxes to operating segments. Although the CEO uses operating income to evaluate
the segments, operating costs included in one segment may benefit other
segments. Except as discussed above, the accounting policies for segment
reporting are the same as for the Company as a whole.
In accordance with SFAS 131, the Company has provided this business unit segment
information for all comparable prior periods. Segment information is summarized
as follows (in thousands):
2007 2006 2005
--------------- --------------- ---------------
Net sales
Electronic $ 348,957 $ 365,418 $ 305,870
Automotive 135,109 123,620 118,595
Electrical 52,078 45,821 42,624
--------------- --------------- ---------------
Total net sales $ 536,144 $ 534,859 $ 467,089
=============== =============== ===============
Operating income (loss)
Electronic $ 19,814 $ 37,819 $ (188)
Automotive 18,900 13,700 19,313
Electrical 11,989 9,936 8,102
Other* 606 (32,597) (261)
--------------- ---------------- ----------------
Total operating income 51,309 28,858 26,966
Interest expense 1,557 1,626 2,098
Other income, net (1,536) (2,174) (3,068)
--------------- --------------- ---------------
Income from continuing operations
before minority interest and
income taxes $ 51,288 $ 29,406 $ 27,936
=============== =============== ===============
* Included in "Other" Operating income (loss) are nonrecurring items such as
restructuring charges (see Note 9), asset impairments (see Note 10) and
gains/losses on asset sales and disposals.
The Company's revenues and identifiable assets (total assets less intangible
assets and investments) by geographical area for the fiscal years ended 2007,
2006 and 2005 are as follows (in thousands):
2007 2006 2005
--------------- --------------- ---------------
Net sales
Americas $ 204,305 $ 215,892 $ 199,855
Europe 118,265 111,652 98,337
Asia-Pacific 213,574 207,315 168,897
--------------- --------------- ---------------
Total net sales $ 536,144 $ 534,859 $ 467,089
=============== =============== ===============
Identifiable assets
Americas $ 165,074 $ 227,322 $ 248,651
Europe 136,881 159,639 146,907
Asia-Pacific 164,730 148,526 90,233
--------------- --------------- ---------------
Combined total 466,685 535,487 485,791
Eliminations (79,572) (169,900) (156,632)
--------------- --------------- ---------------
Consolidated total $ 387,113 $ 365,587 $ 329,159
=============== =============== ===============
For the year ended December 29, 2007, approximately 61.9% of the Company's net
sales were to customers outside the United States (exports and foreign
operations) including 18.6% to Hong Kong. Sales to Arrow Pemco Group were less
than 10% for 2007 and 2005, respectively, but 10.6% for 2006. No other single
customer accounted for more than 10% of net sales during the last three years.
15. Lease Commitments
The Company leases certain office and warehouse space as well as certain
machinery and equipment under non-cancelable operating leases. Rental expense
under these leases was approximately $4.4 million in 2007, $5.3 million in 2006,
and $5.5 million in 2005. Rent expense is recognized on a straight-line basis
over the term of the leases. The difference between straight-line basis rent and
the amount paid has been recorded as accrued lease obligations. The Company also
has leases that have lease renewal provisions. As of December 29, 2007, all
operating leases outstanding were with third parties. The Company did not have
any capital leases as of December 29, 2007.
30
Future minimum payments for all non-cancelable operating leases with initial
terms of one year or more at December 29, 2007, are as follows (in thousands):
2008 $ 5,748
2009 3,674
2010 2,063
2011 1,182
2012 754
2013 and thereafter 1,769
--------
Total lease commitments $ 15,190
========
16. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands, except per share amounts) 2007 2006 2005
-------- -------- --------
Numerator:
Net income $ 36,835 $ 23,824 $ 17,710
======== ======== ========
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 22,231 22,305 22,413
Effect of dilutive securities:
Common stock equivalents 163 129 169
-------- -------- --------
Denominator for diluted earnings per share -
Adjusted weighted-average shares and assumed conversions 22,394 22,434 22,582
======== ======== ========
Basic earnings per share $ 1.66 $ 1.07 $ 0.79
Diluted earnings per share $ 1.64 $ 1.06 $ 0.78
The following potential shares of common stock attributable to stock options
were excluded from the EPS calculation because their effect would be
anti-dilutive: 906,215 in 2007; 1,121,293 in 2006; and 712,153 in 2005.
17. Subsequent Event
On February 15, 2008, the Company entered into an agreement to lease certain
office space for its U.S. headquarters that will be located in the Chicago area.
Annual base rental expense under this lease will be approximately $1.6 million,
which will be recognized on a straight-line basis over the term of the lease.
The lease, which commences January 1, 2009 and expires December 31, 2024, also
contains renewal provisions and other lease term options.
SELECTED FINANCIAL DATA
(in thousands, except per share data)
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2007 2006*
--------------------------------------- ----------------------------------------
4Q 3Q**** 2Q 1Q*** 4Q 3Q 2Q** 1Q
-------- -------- -------- -------- -------- -------- -------- --------
Net sales $134,966 $140,215 $129,149 $131,814 $127,836 $143,471 $137,941 $125,611
Gross profit 42,656 46,289 41,271 41,321 38,089 47,085 31,289 44,800
Operating income (loss) 9,979 20,227 11,612 9,491 5,398 12,368 (2,691) 13,783
Net income 7,938 14,294 8,382 6,221 4,644 9,360 449 9,371
Net income per share:
Basic 0.36 0.64 0.38 0.28 0.21 0.42 0.02 0.42
Diluted 0.36 0.64 0.37 0.28 0.21 0.42 0.02 0.42
* Results reflect Efen as a discontinued operation.
** In the second quarter of 2006, the Company recorded a $17.1 million net
restructuring charge (after a $2.9 million statutory rebate) related to
the closure of its Ireland facility.
*** In the first quarter of 2007, the Company recorded a $3.5 million
restructuring charge related to the closure of its Des Plaines and Elk
Grove, Illinois facilities and the transfer of its manufacturing from Des
Plaines, Illinois to the Philippines and Mexico.
**** In the third quarter of 2007, the Company recorded a $8.0 million gain on
the sale of land in Ireland.
31