Littelfuse, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended October 1, 2016. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless noted. Results include acquired businesses from their respective acquisition dates.
Business context and performance
Littelfuse designs and sells circuit protection, power control and sensing products through its Electronics, Automotive and Industrial segments. The period included the acquisitions of PolySwitch, Menber’s and ON Semiconductor’s TVS Diode/Thyristor/IGBT business. These acquisitions materially increased reported revenue and debt.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $280.3M | $215.5M | $771.6M | $647.8M |
| Gross profit | $113.8M | $86.2M | $298.8M | $247.8M |
| Gross margin | 40.6% | 40.0% | 38.7% | 38.3% |
| Operating income | $27.5M | $8.6M | $89.7M | $74.3M |
| Operating margin | 9.8% | 4.0% | 11.6% | 11.5% |
| Net income | $30.8M | $11.3M | $77.2M | $60.0M |
| Diluted EPS | $1.35 | $0.50 | $3.41 | $2.64 |
Revenue, segment trends and material comparisons
- Q3 sales increased 30%; management attributed $59.6M of the $64.8M increase to acquisitions, with strong organic growth in Automotive also contributing. Nine-month sales increased 19%, including $106.5M from acquired businesses.
- Q3 Electronics revenue rose 44% to $147.7M and Automotive rose 31% to $106.3M. Industrial revenue fell 16% to $26.3M amid weak solar, mining, oil and gas markets. For the first nine months, Electronics and Automotive each grew 23%; Industrial declined 6%.
- Q3 net income benefited from a $0.4M income tax benefit (effective tax rate negative 1.2%). A one-time deduction related to an affiliate’s stock contributed to the low tax rate; the goodwill impairment received no tax benefit.
- Q3 2015 included a $30.2M U.S. pension settlement expense, while Q3 2016 included a $14.8M goodwill and intangible asset impairment. These unusual items affect year-over-year operating income comparisons.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $100.0M, versus $113.6M a year earlier. Capital expenditures were $34.5M; operating cash flow less capital expenditures was approximately $65.5M.
- Investing activities used $498.5M, primarily for acquisitions: $342.3M for PolySwitch, $104.0M for the ON Semiconductor business and $18.9M for Menber’s, in addition to capital spending. Financing activities provided $262.4M, largely reflecting net borrowings.
- Cash and cash equivalents were $194.5M at October 1, down from $328.8M at January 2. Current assets were $555.2M and current liabilities $187.9M; the current ratio was 3.0. Accounts receivable days rose to 67 from 62 a year earlier.
- Total debt carrying value was $440.5M, including $437.4M under the revolving facility and term loan and $5.2M of entrusted loan, less debt issuance costs. The company reported $259.4M of remaining revolving borrowing capacity and compliance with credit covenants. The revolving facility rate was LIBOR plus 1.5% (2.03% at quarter-end).
- Of $194.5M cash, $182.1M was held by foreign subsidiaries; management said it expects to retain most foreign cash overseas. Only approximately $19.7M could be repatriated with minimal tax consequences.
Outlook, management commentary and risks
- Management expected Q4 2016 sales of $270M–$280M, about 24% growth at the midpoint versus the prior-year quarter. Excluding acquisitions, the e-house business sale and the 2015 extra week, management estimated approximately 3% growth at the midpoint.
- Management cited continuing weakness in heavy industrial, mining, oil and gas markets, including declining potash prices. The custom products reporting unit failed its impairment test, resulting in a $14.8M charge: $8.8M goodwill and $6.0M intangible assets.
- All credit facility and term-loan debt was variable-rate. The filing estimates that a 100-basis-point rate increase would add approximately $4.4M to annual interest expense. Foreign exchange and metal-price movements are additional exposures; a 10% commodity-price change was estimated to affect annual pretax profit by $3.2M for copper, $0.9M for zinc, $0.7M for silver and $0.2M for gold.
- Other items included $18.2M of year-to-date acquisition and integration costs, $7.5M of noncash acquisition-related inventory charges, facility and production-transfer restructuring costs, and a $1.4M loss on sale of a marine product line. The e-house business sale closed October 14, 2016; the filing says it was not material.
- Management identified risks including demand and market acceptance, competition and pricing, quality or recall issues, supply constraints, currency and commodity fluctuations, and acquisition integration. It reported no material change to previously disclosed risk factors and no legal proceedings.
Important facts for investors to verify
- How much of reported growth and future earnings reflects acquired revenue versus organic growth, particularly after the acquisitions are fully included in comparable periods.
- Whether Industrial market weakness, especially potash, mining, oil and gas, and solar, continues to affect sales, margins or asset valuations.
- The sustainability of reported earnings given acquisition costs, inventory step-up charges, impairment, restructuring items and the unusually low Q3 tax rate.
- Debt reduction, variable-rate exposure, covenant headroom and the availability of cash held outside the United States.
- Progress against the Q4 sales outlook and management’s estimate of underlying growth excluding acquisitions and other stated comparability factors.
- The company disclosed an immaterial prior-period tax correction: approximately $4.9M cumulative through January 2, 2016, including interest, with prior statements revised.