Littelfuse, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the quarter and six months ended July 2, 2011. Amounts are in U.S. dollars unless noted. The company designs, manufactures and sells circuit-protection products for electronics, automotive and electrical markets.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $175.9m | $176.6m | $336.4m | $343.8m |
| Gross profit | $69.6m | $70.0m | $130.4m | $134.7m |
| Gross margin | 40% | 40% | 39% | 37% reported |
| Operating income | $32.1m | $35.3m | $57.9m | $66.2m |
| Net income | $23.6m | $25.3m | $41.5m | $46.8m |
| Diluted EPS | $1.07 | $1.11 | $1.88 | $2.08 |
| Operating cash flow | Not separately presented | Not separately presented | $32.6m | $46.1m |
Q2 operating margin was approximately 18% versus 20% a year earlier; six-month operating margin was approximately 17% versus 19%. The six-month 2011 gross profit included a $3.7m non-cash inventory step-up charge related to the Cole Hersee acquisition. Excluding it, 2011 gross profit was $138.4m and gross margin approximately 40%, versus 39% in 2012.
- Q2 segment sales: Electronics $89.5m, down 9%; Automotive $51.5m, up 2%; Electrical $34.9m, up 25%. Six-month changes were down 10%, approximately flat, and up 22%, respectively.
- Cash and liquidity: Cash and equivalents were $168.8m at June 30, up from $164.0m at year-end 2011. Current assets were $403.1m and current liabilities $156.5m; the reported current ratio was 2.6:1.
- Debt: $85.2m outstanding under a variable-rate revolving facility, with $64.9m of domestic borrowing capacity remaining; the rate was 1.50% at quarter-end. The balance sheet reports the debt as current maturities. The facility expires June 2016, and the company reported covenant compliance.
- Cash uses and investment: Six-month investing cash outflow was $32.0m, including $23.5m for the Accel acquisition, $10.0m invested in Shocking Technologies, and $6.7m of capital spending. Dividends paid were $7.8m. Operating cash flow was affected by a $21.7m increase in receivables and other working-capital outflows.
Changes and notable items
- Quarterly sales were nearly flat, while six-month sales declined 2%. Management attributed electronics weakness largely to distributor inventory normalization after a significant channel build in Q2 2011. Six-month sales also faced $5.3m of unfavorable currency effects; Q2 effects were $4.1m unfavorable.
- Electrical growth reflected strength in protection relays and custom mining products, plus acquired sales. Automotive growth in the U.S. and Asia was offset by weaker European demand. Acquisitions contributed $2.8m of Q2 sales and $4.5m for the six-month period.
- Operating expenses rose to $37.5m in Q2 from $34.7m and to $72.5m for six months from $68.5m, primarily reflecting acquisition-related costs. Six-month net income declined 11% and diluted EPS declined from $2.08 to $1.88.
- Accel, an automotive sensors and switches manufacturer, was acquired on May 31 for approximately $23.9m. Its purchase-price allocation was preliminary; the external valuation was not complete. The company also invested an additional $10m in Shocking Technologies, bringing its investment to $16m and ownership to approximately 18%.
- Other comprehensive income was affected by foreign-currency translation: a $9.6m Q2 loss versus a $4.6m gain in the prior-year quarter. For the six months, translation adjustments were a $2.3m loss versus a $15.0m gain.
Outlook, risks and contingencies
- Management described the second-half 2012 outlook as mixed: expects continued Electrical growth, while Electronics and Automotive end markets are expected to be relatively flat. It cited solid end demand across most markets, but European automotive weakness and weakness in non-residential construction and solar.
- Lower commodity-metal and oil prices were expected to benefit costs, but management expected those benefits to be offset by a weak euro. Planned 2012 capital spending was revised from $30–$35m to approximately $25m because of project delays.
- Key stated risks include demand and economic conditions, competition and pricing, product quality or recalls, supply constraints, currency and commodity-price fluctuations, acquisition integration, pension returns, labor disputes, restructuring costs and environmental liabilities. The company had no outstanding derivatives at June 30.
- Commodity sensitivity estimates: a 10% price change would affect annual pretax profit by approximately $1.8m for copper, $0.6m for zinc, $0.7m for gold and $1.1m for silver. Foreign customers represented 65.9% of six-month sales.
- The company reported no legal proceedings and no material changes to previously disclosed annual-report risk factors. It stated that disclosure controls were effective and that there were no significant changes in internal controls during the period.
Important facts for investors to verify
- Whether distributor inventory normalization and the expected recovery in orders support Electronics sales in the second half, and whether the forecast of relatively flat end markets holds.
- Accel’s final purchase-price allocation, integration progress and contribution to Automotive results; the initial allocation includes $8.9m of intangible assets and $8.0m of goodwill.
- Cash conversion and working-capital trends, particularly receivables, as operating cash flow fell to $32.6m from $46.1m year over year.
- The facility’s current-maturity presentation despite its June 2016 stated expiration, remaining borrowing capacity, and ongoing compliance with credit covenants.
- Exposure to euro weakness and commodity prices, and whether those headwinds offset expected savings from lower input costs.