Littelfuse, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter ended June 27, 2020; comparisons are with the quarter ended June 29, 2019. The six-month period is also compared year over year. Littelfuse manufactures circuit-protection, power-control and sensing products across Electronics, Automotive and Industrial segments. Dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $307.3 | $397.9 | $653.4 | $803.4 |
| Gross profit / margin | $99.1 / 32.2% | $141.8 / 35.6% | $222.8 / 34.1% | $297.0 / 37.0% |
| Operating income (loss) / margin | $(12.0) / (3.9)% | $52.6 / 13.2% | $32.8 / 5.0% | $113.3 / 14.1% |
| Net income (loss) | $(9.0) | $43.8 | $15.7 | $80.8 |
| Diluted EPS | $(0.37) | $1.75 | $0.64 | $3.23 |
| Operating cash flow | Not stated separately | Not stated separately | $101.3 | $80.1 |
- Q2 revenue fell 22.8%; six-month revenue fell 18.7%. Management attributed the declines primarily to COVID-related shutdowns and disruption, reduced demand and lower global auto production, plus unfavorable currency effects.
- At June 27, cash and cash equivalents were $651.9, total assets $2,611.1, and equity $1,462.4. Current assets were $1,119.2 and current liabilities $209.2.
- Total debt was $776.2, all classified as long-term; cash exceeded debt by approximately $124.3. The company had $148.6 of available revolver capacity under financial covenants and reported compliance with debt covenants.
- Six-month investing cash use was $29.4, including $29.5 of capital expenditures. Financing provided $50.5, including revolver borrowings; dividends paid were $23.4.
Material changes and unusual items
- All segments had lower sales year over year in Q2: Electronics down 14.0% to $223.3; Automotive down 42.9% to $62.0; Industrial down 25.6% to $22.1. Automotive was the steepest decline.
- Q2 included a $33.8 non-cash goodwill impairment in the Automotive segment’s automotive-sensors reporting unit. The charge reflected lower projected revenue, profitability and cash flows amid COVID-related demand weakness, delayed customer programs and a canceled program. Remaining goodwill in the unit was $9.1.
- Six-month impairment charges totaled $36.1, including the goodwill charge and $2.2 related to the planned Industrial facility consolidation. Restructuring charges were $3.5 for the half year. Total restructuring, impairment and other charges were $39.6 year to date.
- Operating cash flow increased year over year despite lower earnings, primarily from lower incentive payments and favorable working-capital timing, including receivable collections and accounts payable.
- The effective tax rate was 37.2% for the first half versus 19.2% a year earlier. The goodwill impairment largely generated no tax benefit; lower forecast income in lower-tax jurisdictions also contributed.
Outlook, management commentary and risks
- The filing gives no quantified revenue, earnings or margin guidance. Management said COVID-19 was expected to negatively affect business activity for the foreseeable future and that the impact on the remainder of fiscal 2020 was difficult to estimate. Facilities that had been closed or operating at limited levels were at normal or near-normal capacity by June, and all manufacturing facilities were operating at filing time.
- COVID-19 caused temporary facility closures, lower demand and additional costs of approximately $5.1 in Q2 and $7.6 for the first half, primarily for shutdown-related costs, freight and protective supplies, partly offset by government support. Management implemented cost-containment measures and expects savings from restructuring, but gave no quantified savings outlook.
- Management identified potential future goodwill impairment risk if economic weakness or COVID-related disruption further reduces expected results. The semiconductor reporting unit had $467.1 of goodwill; its estimated fair value exceeded book value by approximately 42% at the September 2019 annual test.
- The company amended its credit agreement in April: it repaid the remaining $140.0 term-loan balance through the revolver, loosened certain covenants and extended facility maturity to April 3, 2025. It had borrowed $100.0 from the revolver in March to preserve liquidity.
- A U.K. pension group annuity transaction is expected to reduce pension obligations by about $36, funded with plan assets and additional cash. The company estimated a one-time non-cash settlement charge of $18–$22 in the second half of 2021; the estimate may change. The plan remeasurement increased the net pension liability by $13.4 in Q2.
- Share repurchases were suspended for the near term. The board declared a $0.48-per-share dividend payable in September 2020. Management said available cash, operating cash flow, funding capacity and capital-market access were expected to support liquidity needs, while noting COVID-19 could affect cash flows and future covenant compliance.
- The filing reported no material legal proceedings, no off-balance-sheet arrangements, effective disclosure controls, and no material changes in market-risk exposure. COVID-19 was identified as a material risk to operations, demand, supply chain, liquidity and investment.
Important facts for investors to verify
- Whether end-market demand, especially automotive, recovers and whether COVID-related disruptions or customer program changes persist.
- Whether the automotive-sensors impairment signals further deterioration, and whether semiconductor-unit assumptions remain supportable.
- Actual cash generation, working-capital trends, revolver availability and covenant headroom as operating conditions evolve.
- The final amount and timing of the expected 2021 pension settlement charge and the annuity transaction’s cash and liability effects.