Littelfuse, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 28, 2015; comparable period ended March 29, 2014. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Business context and results
Littelfuse designs, manufactures, and sells circuit protection products through Electronics, Automotive, and Electrical segments. Q1 sales rose 2% year over year, but foreign-exchange impacts—primarily euro weakness—pressured reported growth and profitability.
- Revenue: $210.3 million, up 2% reported and 6% excluding currency effects. Electronics sales were $99.4 million (+4%), Automotive $84.1 million (+2%), and Electrical $26.9 million (-6%).
- Profitability: Gross profit was $76.3 million, down 3%; gross margin was approximately 36%, versus 38% a year earlier. Operating income was $29.5 million, down 12%, with an operating margin of approximately 14%, versus 16%. Net income was $20.0 million, down 21%; diluted EPS was $0.88 versus $1.12.
- Cash flow: Operating cash flow was $23.2 million, versus $11.5 million. Capital expenditures were $12.3 million, versus $6.4 million; operating cash flow less capital expenditures was approximately $10.9 million. Cash declined $3.9 million to $293.6 million, including a $6.5 million adverse foreign-exchange effect.
- Liquidity and debt: Current assets were $566.9 million and current liabilities $190.1 million; the current ratio was 3.0, compared with 2.8 at year-end 2014. Total reported debt was $190.0 million, including a $17.97 million China entrusted loan; term-loan and revolver borrowings totaled $172.0 million. Revolver availability was $194.9 million, and the company reported covenant compliance.
- Other metrics: Cash dividends paid were $0.25 per share, versus $0.22. The effective tax rate was 24.3%, versus 24.9%. Cash and equivalents included $282.5 million held by foreign subsidiaries; management said it did not expect to repatriate most of those funds.
Material changes and notable items
- Reported sales benefited from growth in Electronics and Automotive, while Electrical declined amid weaker fuse and relay sales. Excluding currency effects, Europe sales grew 9%, despite an 11% reported decline; Americas sales grew 10% excluding currency.
- Unfavorable currency effects reduced sales by approximately $9.9 million. Management attributed lower gross margin primarily to foreign exchange, while Q1 2015 gross profit also included $1.0 million of costs for transferring reed-sensor manufacturing from the U.S. to the Philippines.
- Q1 included approximately $3.0 million of special charges: $1.0 million for the manufacturing transfer, $1.2 million for internal legal restructuring, $0.2 million of acquisition costs, and $0.7 million of U.S. pension wind-up costs. Q1 2014 included a $1.4 million non-cash inventory step-up charge related to the SymCom acquisition.
- Foreign-exchange results moved from a $0.3 million gain in Q1 2014 to a $3.1 million loss in Q1 2015. Comprehensive income was $9.0 million, including a $14.0 million foreign-currency translation loss.
- The IRS approved termination of the U.S. defined-benefit pension plan on April 14, 2015. The $11.8 million current liability represented the projected settlement cost; settlement was expected in Q3 2015.
Guidance, outlook, and risks
Management expected Q2 2015 sales of $221 million to $231 million, assuming a euro-dollar rate of 1.09; this represented approximately 2% growth at the midpoint year over year, or about 7% excluding currency effects. Q2 diluted EPS guidance, excluding special items, was $1.20 to $1.34, including an estimated $0.13 negative currency impact versus the prior year. Management expected Q2 stock compensation expense to be about $2 million higher than in other quarters. The full-year effective tax rate was expected to be about 23%, subject to renewal of the R&D tax credit and “look-through” tax provision; without them, management expected a rate 50–100 basis points higher.
Management expected sequential Q2 sales growth from seasonality and improving Automotive and Electronics conditions, while mining was expected to remain weak through the rest of 2015. Foreign currency effects were expected to remain volatile. Key disclosed risks include demand and economic conditions, competition and pricing, product quality, capacity or supply constraints, currency and commodity fluctuations, labor issues, restructuring costs, pension-asset returns, and acquisition integration. A 10% commodity-price change was estimated to affect annual pretax profit by approximately $2.0 million for copper, $0.8 million for zinc, $0.7 million for silver, and $0.3 million for gold. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether subsequent results meet Q2 sales and adjusted EPS guidance, and whether the assumed euro-dollar rate and currency impacts hold.
- Whether reported growth and margins improve as the currency headwind changes, and whether Electrical and mining-related demand stabilizes.
- The final costs and timing of the U.S. pension-plan termination, expected to settle in Q3 2015.
- Foreign cash accessibility, ongoing capital expenditure needs, and debt repayment or refinancing requirements, including the reported current portion of debt.
- Whether the R&D tax credit and “look-through” provision are renewed and the resulting full-year effective tax rate.