Littelfuse, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 27, 2014; unaudited. Comparisons are with the quarter and nine months ended September 28, 2013, except balance-sheet comparisons, which are with December 28, 2013. Amounts below are in USD millions unless stated otherwise.
Business context
Littelfuse designs, manufactures and sells circuit-protection products through Electronics, Automotive and Electrical segments. The company also invests in power-control and sensing technologies. It acquired SymCom on January 3, 2014 for $52.8 million net of cash acquired; its products serve industrial customers and are reported in Electrical. Hamlin, acquired in 2013, contributed to 2014 results, particularly in Automotive and Electronics.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $217.6 | $201.0 | $645.4 | $559.7 |
| Gross profit | $87.4 | $81.0 | $248.9 | $219.1 |
| Operating income | $40.1 | $37.6 | $107.4 | $97.1 |
| Net income | $29.9 | $27.0 | $79.9 | $65.1 |
| Diluted EPS | $1.32 | $1.19 | $3.52 | $2.89 |
| Gross margin, as reported | 40% | 40% | 39% | 39% |
- Q3 sales rose 8%; management attributed the increase to organic growth in Automotive and Electronics, plus $5.5 million from SymCom. Excluding acquisition contributions and currency effects, sales grew 5%.
- For the first nine months, sales increased 15%, including $51.8 million from acquisitions and $4.0 million in favorable currency effects. Excluding those effects, sales grew 5%.
- Q3 operating income increased 7% and net income 11%. Nine-month operating income rose 11% and net income 23%.
- Segment sales in Q3: Electronics $107.8 million, up 7%; Automotive $80.6 million, up 15%; Electrical $29.2 million, down 1%. Nine-month Electrical sales fell 7%, as mining-related weakness more than offset SymCom contributions.
- Q3 effective tax rate was 27.3%, versus 26.1%; the filing attributes the increase to a larger share of income earned in higher-tax jurisdictions. The nine-month rate declined to 25.0% from 27.6%, partly reflecting non-recurring tax items in 2013.
Cash flow, liquidity and debt
- Nine-month cash from operations was $103.8 million, compared with $85.8 million. Capital expenditures were $19.4 million; investing cash use was $65.3 million, including $52.8 million for SymCom.
- Financing activities provided $41.5 million, including net borrowing proceeds; the company paid $15.5 million in dividends and repurchased $14.3 million of stock. Cash increased $73.1 million to $378.3 million.
- At September 27, cash was $378.3 million, total debt was $276.5 million, and cash less debt was approximately $101.8 million. Debt included a $186.5 million current portion and $90.0 million long-term portion. The company had $92.9 million of available revolver capacity and was in compliance with credit covenants.
- Current assets were $645.6 million and current liabilities $280.3 million; the reported current ratio was 2.3, versus 2.7 at year-end 2013. Management said operating cash flows and available credit were expected to support operations and debt obligations for the foreseeable future.
- $365.3 million of cash was held by foreign subsidiaries; only about $17.7 million of that amount could be repatriated with minimal tax consequences. The company expected to repatriate more than $90 million to the U.S. in Q4 2014 following Hamlin integration.
Material changes, outlook and risks
- Growth was concentrated in Automotive and Electronics. Electrical remained pressured by mining-market softness, declining custom and relay sales, and weaker industrial fuse sales. Management cited price erosion and competition in core Electronics markets.
- 2014 nine-month gross profit included a $2.8 million non-cash SymCom inventory step-up charge and $2.0 million in severance charges from Hamlin-Mexico restructuring. Q3 operating expenses included $1.1 million of costs related to legal-structure changes intended to facilitate cash movement to the U.S. Management also described Q3 restructuring costs of $1.1 million. The 2013 nine-month comparison included a $10.7 million impairment of the Shocking Technologies investment and loan.
- The company terminated its U.S. retirement plan on July 31, 2014. Benefit distributions remain subject to regulatory review; participants may choose a lump sum or annuity.
- Q4 2014 guidance: sales of $201 million to $211 million, representing 4% year-over-year growth at the midpoint; diluted EPS of $1.05 to $1.19, excluding special items; and capital expenditures of approximately $11 million.
- 2015 commentary: management expected modest Electronics growth, slower global vehicle-build growth but Automotive sales growth faster than the market, and moderate Electrical growth supported by an expected custom-products recovery and SymCom new-product ramps.
- Key stated exposures include economic and end-market demand, competition and pricing, product quality and recalls, supply or capacity constraints, acquisition integration, foreign exchange, commodity prices, restructuring and pension assumptions. A 10% commodity-price change at current prices and volumes was estimated to affect annual pretax profit by approximately $1.2 million for copper, $0.9 million for zinc, $0.8 million for silver and $0.3 million for gold.
- Disclosure controls were deemed ineffective at quarter-end because of a material weakness in deferred-tax valuation-allowance accounting related to the 2013 Shocking Technologies write-off and tax treatment. Management was implementing enhanced review procedures and anticipated remediation in Q4 2014; remediation had not yet been completed and tested.
Important facts for investors to verify
- Whether the material weakness was remediated and controls were tested as planned, and whether any related financial-statement adjustments or tax exposures remain.
- Whether the expected Q4 repatriation of more than $90 million occurred and what tax or other costs resulted.
- Whether Electrical-market weakness, especially mining-related demand, persisted and whether expected 2015 recovery and SymCom growth materialized.
- Whether Q4 sales and EPS guidance was achieved, including the impact of special items, foreign exchange and acquisition integration.
- How acquisition-related charges, Hamlin integration and the pension-plan termination affected margins, cash flows and future obligations.