Littelfuse, Inc. — Q1 2012 Form 10-Q
Business context and period: The filing covers the unaudited three months ended March 31, 2012. Littelfuse designs, manufactures, and sells circuit-protection products through its Electronics, Automotive, and Electrical businesses worldwide. Unless otherwise noted, financial amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q1 2012 | Comparable 2011 period | Change |
|---|---|---|---|
| Net sales | $160.6 | $167.2 | Down 4% |
| Gross profit / margin | $60.9 / 38% | $64.7 / 39% reported | Gross profit down $3.8 |
| Operating income / margin | $25.8 / 16.1% | $30.9 / 18.5% | Down $5.1 |
| Net income | $17.9 | $21.6 | Down 17% |
| Diluted EPS | $0.81 | $0.96 | Down $0.15 |
| Operating cash flow | $7.9 | $13.7 | Down $5.9 |
| Capital expenditures | $3.2 | $4.6 | Down $1.4 |
Net sales decreased $6.6 million. Electronics revenue fell 12% to $77.1 million, primarily reflecting an inventory correction across regions. Automotive sales declined 2% to $52.6 million, including lower aftermarket sales and comparison with prior-year pipeline-fill revenue. Electrical sales rose 19% to $30.9 million, supported by protection relays, custom mining products, and $1.7 million of Selco sales. By geography, Americas sales increased 5%; Europe declined 15%; and Asia-Pacific declined 8%.
Gross margin was pressured by lower sales, negative operating leverage, and euro weakness. The prior-year quarter included a $3.7 million non-cash Cole Hersee inventory step-up charge; excluding it, Q1 2011 gross profit was $68.4 million, or 41% of sales. Q1 2012 cost of sales included a further $0.2 million Selco inventory step-up charge. Operating expenses increased to $35.0 million from $33.8 million, largely due to $1.5 million of incremental Selco expenses.
Liquidity, debt, and balance sheet
At March 31, 2012, cash and cash equivalents were $178.7 million, versus $164.0 million at year-end 2011. Current assets were $416.7 million and current liabilities $164.4 million; the current ratio was 2.5 to 1, unchanged from year-end. Accounts receivable was $107.0 million and inventory $77.7 million. Days sales outstanding were approximately 61 days; days inventory outstanding were approximately 71 days.
Revolver borrowings were $96.5 million, all classified as current, compared with $85.0 million at year-end. The $150 million unsecured facility matures June 13, 2016, with a potential increase to $225 million subject to lender agreement. Available capacity was $52.9 million; the stated rate was LIBOR plus 1.25% (1.49% at quarter-end). The company reported compliance with its covenants and $0.8 million of undrawn letters of credit.
Operating cash flow was $7.9 million, including working-capital uses associated mainly with higher receivables, inventory, incentive-plan payouts, and a $5.0 million pension contribution. Investing used $7.8 million, including $3.2 million of capital spending and $4.6 million for short-term investments. Financing provided $12.3 million, including $11.5 million net borrowing proceeds and $3.9 million in dividends. Foreign exchange movements increased cash by $2.3 million.
Outlook, commentary, and risks
Management said sales and order rates, which had slowed in late 2011 and early Q1, had begun to rebound, and described end demand as solid across most markets. Electronics distributor inventories had been reduced and orders were picking up. Management expected new Automotive products to help offset market weakness; Electrical custom products continued to benefit from mining demand, while the solar market remained weak but was expected to return to growth later in 2012. These are forward-looking expectations, not guarantees.
Management expected higher transportation, materials, and labor costs, together with euro weakness, to weigh on margins; cost-reduction programs and operating leverage as sales recovered were expected to help offset pressure. Planned 2012 capital spending was approximately $30–$35 million. Management said operating cash flow and available credit should fund operations and debt obligations for the foreseeable future.
Risks identified include demand and market acceptance, competition and pricing, product quality or recalls, capacity and supply constraints, foreign exchange and commodity-price movements, labor issues, pension returns, acquisition integration, and restructuring costs. A 10% commodity-price change was estimated to affect annual pretax profit by approximately $1.7 million for copper, $0.7 million for zinc, and $0.6 million each for gold and silver. The company had no derivatives outstanding at quarter-end. It reported no material changes to previously disclosed risk factors and no legal proceedings.
Other notable items
- On April 4, 2012, after quarter-end, Littelfuse invested an additional $10 million in Shocking Technologies, bringing its total investment to $16 million.
- The board authorized repurchases of up to 1 million shares for May 1, 2012–April 30, 2013. No shares were repurchased in Q1; 640,971 shares remained under the prior authorization at March 31.
- Long-running facility restructuring was substantially complete except for Yangmei, Taiwan; management did not expect further costs related to those original closures.
- Management concluded disclosure controls were effective at quarter-end; no significant internal-control changes were reported during the quarter.
Investor facts to verify
- Whether the electronics inventory correction and order-rate recovery continued after quarter-end, and how sales developed by segment and region.
- Whether margin pressure from volume, currency, materials, transportation, and labor costs was offset by savings and operating leverage.
- Whether operating cash flow improved as receivables and other working-capital items evolved; monitor receivable and inventory days.
- How revolver balances, available capacity, covenant compliance, and planned $30–$35 million of 2012 capital spending progressed.
- The performance and valuation implications of the additional Shocking Technologies investment and the Selco acquisition.