Littelfuse, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 28, 2013 (52 weeks); comparisons are with fiscal 2012, ended December 29, 2012. Littelfuse supplies circuit protection, sensing, switching and control products through Electronics, Automotive and Electrical segments. FY2013 results include Hamlin from its May 31, 2013 acquisition.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $757.9 million | $667.9 million |
| Gross profit / margin | $296.2 million / 39.1% | $258.5 million / 38.7% |
| Operating income / margin | $129.9 million / 17.1% | $106.9 million / 16.0% |
| Net income | $88.8 million | $75.3 million |
| Diluted EPS | $3.94 | $3.40 |
| Cash from operations | $117.4 million | $116.2 million |
| Capital expenditures | $35.0 million | $22.5 million |
- Cash and equivalents were $305.2 million at year-end, up from $235.4 million. Investing cash use was $185.6 million, including $144.4 million for Hamlin; financing provided $142.2 million.
- Total debt was $219.8 million: $98.8 million term loan and $121.0 million revolver borrowings. The company reported $103.4 million of available revolver capacity at year-end; its $225 million revolving facility was increased to $275 million in January 2014. Debt bears variable interest; the stated rate at year-end was 1.42%. The company reported covenant compliance.
- The current ratio was 2.7. Of year-end cash, $297.1 million was held by foreign subsidiaries; only $13.6 million could be repatriated with minimal tax consequences. Management expected to retain the remaining foreign funds abroad.
- Quarterly data show Q4 sales of $198.1 million versus $158.8 million in Q4 2012. Q4 2013 net income was $23.7 million; Q4 2012 restated net income was $12.0 million.
Material changes versus prior year
- Sales rose 13%; excluding acquisitions and currency effects, management reported growth of 3%. Acquisitions contributed approximately $66 million of incremental sales.
- Automotive sales increased 30% to $267.2 million, including acquisition contributions and organic growth. Electronics rose 11% to $367.1 million. Electrical declined 7% to $123.6 million, principally from weaker mining-related custom products and protection relays.
- Hamlin contributed approximately $51 million of revenue and $1.2 million of net income in the period after acquisition. Its purchase price allocation remained preliminary at filing.
- Profitability improved: gross margin rose 0.4 percentage point and operating margin 1.1 points. Higher sales and operating leverage helped; acquisition costs and acquired-inventory purchase accounting adjustments were among the offsets.
- Interest expense increased to $2.9 million from $1.7 million, primarily reflecting borrowing to fund acquisitions. Income tax expense rose to $35.5 million from $24.7 million; the effective rate was 28.5% versus 24.7%, including a Shocking Technologies tax adjustment.
Outlook, risks and unusual items
- Management forecast Q1 2014 sales of $195–$205 million and diluted EPS of $0.98–$1.12. For 2014 it expected moderate organic growth in Automotive and Electronics; Electrical remained exposed to weak mining activity and delayed potash projects, partly offset by solar and industrial demand and SymCom.
- Management expected Hamlin and SymCom to operate below their margin potential in 2014 due to integration and growth investments, with expected earnings contributions in 2015 and beyond. Planned 2014 capital expenditures were $35–$40 million, expected to be funded from operating cash flow.
- The company acquired SymCom for $52 million net of cash on January 6, 2014. Its acquisition accounting was not complete when the 10-K was filed.
- Significant reporting-control issue: Littelfuse restated Q1 2013 for a $3.3 million tax adjustment tied to the Shocking Technologies write-off and stated that the previously filed Q1 statements should not be relied upon. A further $2.8 million tax adjustment relating to Q4 2012 was recorded in Q4 2013 as correction of an immaterial error. The total Shocking investment and loan impairment recorded in Q1 2013 was $10.7 million.
- Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end because of a material weakness in evaluating income-tax accounting, including deferred tax valuation allowances, for the Shocking write-off. The auditor issued an adverse opinion on internal control but an unqualified opinion on the financial statements. Remediation was not expected to be complete until later in 2014. Hamlin, representing 18.3% of assets, was excluded from the control assessment and audit scope.
- Key exposures include competition and pricing, cyclical automotive and electronics demand, mining weakness, foreign exchange and metal prices, supply and labor interruptions, acquisition integration, environmental obligations and international operations. The German coal-mine liability accrual was $3.1 million; no material legal proceedings were reported.
- Longer-term management objectives included 15% annual growth (5% organic and 10% acquisitions) and high-teens operating margins; these are strategic targets, not stated 2014 guidance.
Important facts for investors to verify
- Review the Q1 2013 restatement, Shocking-related tax accounting and the status and testing of material-weakness remediation.
- Assess how much reported growth and margin improvement is repeatable without acquisition contributions, purchase-accounting effects and other unusual items.
- Confirm cash availability and restrictions given the large offshore cash balance, debt classification and borrowing capacity.
- Track Hamlin and SymCom integration, margins and purchase accounting, alongside 2014 guidance and continuing mining-sector weakness.