Littelfuse, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; compared with the three months ended April 1, 2017. Financial amounts below are in U.S. dollars; millions unless noted. Littelfuse makes circuit protection, power control and sensor products for electronics, automotive and industrial markets.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $417.8 | $285.4 | +46.4% |
| Gross profit / margin | $149.6 / 35.8% | $113.7 / 39.8% | Margin down 4.0 pts |
| Operating income / margin | $37.6 / 9.0% | $48.9 / 17.1% | Income down 23.1% |
| Income before taxes | $44.6 | $47.4 | Down 5.9% |
| Net income | $36.0 | $38.9 | Down 7.4% |
| Diluted EPS | $1.45 | $1.69 | Down $0.24 |
| Operating cash flow | $69.3 | $22.9 | Up $46.3 |
| Capital expenditures | $17.9 | $12.4 | Up $5.5 |
Sales rose with the IXYS acquisition and higher volumes across all three segments. Electronics sales increased 72.0% to $264.4 million, Automotive increased 17.0% to $126.1 million, and Industrial increased 14.4% to $27.3 million. Segment operating income was $54.0 million for Electronics, $18.4 million for Automotive and $4.7 million for Industrial; $39.5 million of costs were reported in “Other.”
Cash and cash equivalents were $412.5 million at quarter-end, down from $429.7 million at year-end 2017. Total debt was $753.5 million, versus $495.6 million; cash less debt was approximately negative $341.1 million. Current assets of $973.1 million exceeded current liabilities of $264.4 million. The company had $696.9 million of available revolving-credit capacity and was in compliance with its debt covenants. Management said available cash, expected operating cash flow, borrowing capacity and capital-market access were expected to support near- and long-term needs.
Operating cash flow improved to $69.3 million. Investing cash outflow was $324.4 million, including $306.5 million for acquisitions and $17.9 million of capital expenditures. Financing cash inflow was $240.3 million, including proceeds from debt issuance and credit facilities, partly offset by debt repayments and $9.2 million of dividends paid.
Material changes and unusual items
- On January 17, 2018, Littelfuse completed its acquisition of IXYS, a power semiconductor and integrated-circuit business. Purchase consideration in the preliminary allocation was $778.8 million net of cash acquired; Littelfuse issued approximately 2.09 million shares and used cash consideration. The allocation, including $381.6 million of goodwill and $211.6 million of intangible assets, remained preliminary.
- IXYS contributed approximately $86.3 million of sales and a $17.8 million pretax loss from acquisition through March 31. The company reported $39.5 million of non-segment charges, including a $17.9 million noncash inventory fair-value step-up charge, acquisition and integration costs, stock compensation and backlog amortization, plus $0.8 million of restructuring costs.
- The inventory step-up and acquisition/integration costs materially reduced reported gross and operating margins. Management stated acquisition and integration charges reduced operating margin by 9.0 percentage points.
- Interest expense increased $2.3 million to $5.4 million, primarily due to acquisition-related borrowings. A $10.6 million foreign-exchange gain and a $1.9 million unrealized investment gain supported pretax income.
- Total assets increased to $2.63 billion from $1.74 billion, chiefly reflecting IXYS acquisition-related goodwill and intangibles. Debt also increased following additional term-loan and senior-note funding.
Outlook, risks and other disclosures
The filing provides no quantified revenue or earnings guidance. Management cited broad-based volume growth and expected the company’s liquidity sources to fund operations, capital spending, investments and debt obligations. Forward-looking risks include demand and economic conditions, competition and pricing, product quality, capacity and supply constraints, currency and commodity fluctuations, and the ability to integrate IXYS, realize expected synergies and retain key personnel.
The company’s Tax Act impact remained subject to refinement: it had recorded a $47 million provisional charge in 2017 and a preliminary $10 million IXYS-related toll-charge estimate in acquisition accounting. The company had not yet selected an accounting policy for GILTI taxes. The IXYS purchase-price allocation was also incomplete. Management reported disclosure controls were effective; evaluation and integration of IXYS’s internal controls were ongoing. No legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether IXYS integration progresses as planned and whether its results improve from the reported post-acquisition pretax loss.
- How much of the margin decline reflects temporary acquisition charges versus ongoing IXYS profitability and operating costs.
- Final IXYS purchase-price allocation, including acquired tax balances, goodwill and intangible-asset valuations.
- Debt repayment capacity, covenant headroom and the effect of borrowing costs on earnings and cash flow.
- Final Tax Act and GILTI accounting conclusions and any resulting changes to tax expense or balance-sheet estimates.