Littelfuse, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 29, 2014; unaudited. Littelfuse designs, manufactures and sells circuit-protection products through Electronics, Automotive and Electrical segments. Financial amounts below are in U.S. dollars; millions unless noted.
Financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $206.9 million | $170.9 million | +21% |
| Gross profit / margin | $78.5 million / 38% | $64.6 million / 38% | +21% |
| Operating income / margin | $33.6 million / 16.2% | $28.1 million / 16.5% | +19% |
| Net income | $25.4 million | $11.5 million | +121% |
| Diluted EPS | $1.12 | $0.51 | +120% |
| Operating cash flow | $11.5 million | $16.0 million | Down $4.5 million |
| Capital expenditures | $6.4 million | $5.5 million |
Net income growth substantially exceeded operating-income growth, reflecting the absence of the prior-year $10.7 million Shocking Technologies impairment and a lower effective tax rate (24.9%, versus 36.1%). Q1 2014 gross profit included a $1.4 million non-cash charge for acquired SymCom inventory step-up; excluding it, gross margin was 39%.
Revenue and operating trends
- Sales growth included $26.4 million of incremental acquisition revenue and $1.3 million of favorable currency effects. Excluding acquisitions and currency, sales grew 5%.
- Electronics sales rose 21% to $95.7 million; organic growth excluding acquisition and currency effects was 8%. Automotive sales rose 39% to $82.4 million, including strong organic growth; comparable organic growth was 16%.
- Electrical sales fell 11% to $28.7 million. Excluding SymCom and currency, sales declined 24%, principally due to weakness in mining markets.
- Sales by geography increased 15% in the Americas, 40% in Europe and 20% in Asia-Pacific. Acquisition contributions and currency affected these comparisons.
- Operating expenses rose 23% to $44.9 million, including $5.2 million of acquisition-related incremental expenses. Interest expense increased to $1.2 million from $0.4 million due to higher acquisition-related borrowing.
Cash, debt and liquidity
- Cash and cash equivalents were $319.8 million at quarter-end, up $14.6 million from year-end. Operating activities generated $11.5 million; investing used $58.4 million, including the $52.0 million SymCom acquisition; financing provided $65.4 million.
- Total debt was $285.5 million, up from $219.8 million at year-end. The company had $86.4 million of remaining revolver capacity under its $275 million unsecured revolving facility. Debt was variable-rate; the revolver rate was 1.40% at quarter-end. The company reported compliance with credit covenants.
- Current assets were $597.5 million and current liabilities $268.2 million; the current ratio was 2.2, down from 2.7 at year-end. The filing reports days sales outstanding of 60 days and days inventory outstanding of 70 days.
- $310.3 million of cash was held by foreign subsidiaries. Management expected to retain most of those funds abroad for local operations, capital expenditures and potential acquisitions; approximately $17.0 million could be repatriated with minimal tax consequences.
Acquisitions, outlook and risks
- SymCom was acquired January 3, 2014 for $52.0 million net of cash acquired, adding overload relays and pump controllers to the Electrical segment. Purchase accounting remained preliminary; the company did not expect significant adjustments. SymCom-related inventory step-up charges were $1.4 million in Q1.
- Hamlin, acquired in May 2013, contributed approximately $21.9 million of Q1 2014 revenue and $0.3 million of net income.
- For Q2 2014, management forecast sales of $216–$226 million and diluted EPS of $1.23–$1.37, excluding special items. Management expected sequential sales growth from seasonality and improving automotive and electronics conditions; mining was expected to remain weak at least through the rest of 2014.
- Management’s stated strategic target is 15% annual revenue growth: 5% organic and 10% from acquisitions. It also cited goals of sustaining high-teens operating margins and returning excess cash to shareholders.
- Risks discussed include end-market demand and economic conditions, competitive pricing, product quality or recalls, supply constraints, foreign exchange and commodity-price movements, acquisition integration, and pension-asset returns. The company estimated a 10% commodity-price change would affect annual pretax profit by approximately $1.9 million for copper, $0.8 million for zinc, $0.7 million for silver and $0.3 million for gold.
Unusual items and controls
The company reported that its disclosure controls were not effective at March 29, 2014 because of a material weakness in deferred-tax valuation-allowance accounting related to the 2013 Shocking Technologies write-off. The tax deduction had been treated as an ordinary loss rather than a capital loss. Management began remediation, including enhanced review of unusual or complex tax matters, and expected remediation to be completed in 2014. No legal proceedings were reported; the filing stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Q2 sales and EPS guidance was achieved, and whether mining-market weakness persisted.
- Organic performance and margins by segment, especially the continuing Electrical decline and the effect of SymCom’s inventory charge.
- Post-acquisition results and integration of SymCom and Hamlin, including final purchase-price allocations.
- Cash generation, debt repayment, revolver availability and the practical availability of foreign-held cash.
- Progress and testing of remediation for the material weakness in tax controls.