Littelfuse, Inc. — Q3 2020 Form 10-Q
Business context and period. Littelfuse manufactures circuit protection, power control and sensing products through its Electronics, Automotive and Industrial segments. This unaudited report covers the quarter and nine months ended September 26, 2020; comparisons are to the periods ended September 28, 2019.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $391.6 million | $362.0 million | $1,045.0 million | $1,165.4 million |
| Gross profit / margin | $138.2 million / 35.3% | $130.9 million / 36.2% | $361.0 million / 34.5% | $428.0 million / 36.7% |
| Operating income / margin | $64.6 million / 16.5% | $47.2 million / 13.0% | $97.4 million / 9.3% | $160.5 million / 13.8% |
| Net income | $55.4 million | $35.6 million | $71.0 million | $116.4 million |
| Diluted EPS | $2.25 | $1.44 | $2.89 | $4.68 |
Q3 sales grew 8.2%, chiefly from higher Electronics volume and $4.4 million of favorable foreign exchange. Net income rose 55.3%; results benefited from stronger Electronics and Automotive operating income, foreign exchange gains, and lower acquisition-related and integration costs. Gross margin nevertheless declined, reflecting price and mix, currency and higher COVID-related freight and supply costs.
For the first nine months, sales fell 10.3% and operating income fell 39.3%. COVID-related shutdowns and weaker demand affected Electronics and Automotive; distributors and end customers also reduced excess electronics inventories. The $33.8 million Automotive goodwill impairment was a major contributor to lower year-to-date earnings.
Segment sales: Q3 Electronics $255.3 million, up 12.4%; Automotive $104.7 million, approximately flat; Industrial $31.5 million, up 4.8% (partly reflecting a product-line transfer). Nine-month sales declined 7.9%, 16.9% and 6.5%, respectively.
Cash flow and liquidity: Nine-month operating cash flow was $164.3 million, versus $160.9 million; capital expenditures were $41.5 million. Cash and equivalents were $641.9 million at quarter-end, up from $531.1 million at fiscal year-end 2019. Current assets were $1,148.9 million and current liabilities $234.6 million. Cash flow from investing was negative $41.4 million and financing was negative $18.4 million. The company paid $35.1 million in dividends and repurchased $22.9 million of shares year to date.
Debt: Total debt was $725.5 million, versus $679.2 million at December 28, 2019; no current debt maturities were reported. The revolving facility balance was $180 million, with $245.1 million of borrowing capacity available. The facility matures April 3, 2025; its reported effective borrowing rate was 1.90%. The company reported compliance with debt covenants. Cash exceeded reported debt by approximately $83.6 million.
Material changes, outlook and risks
- Management said Q3 was less affected by COVID-19 than the first half; facilities generally operated at normal capacity. Higher freight, PPE, staffing and employee transportation costs continued. The company said the pandemic could still materially affect demand, operations, cash flows and covenant compliance, and that its future effects were difficult to estimate.
- Q3 operating expenses fell 12.1%, including lower R&D, integration, incentive compensation and travel costs. Year-to-date operating expenses included $33.8 million of goodwill impairment and $2.2 million of impairment related to a planned Industrial facility consolidation. Total year-to-date restructuring, impairment and other charges were $40.9 million.
- The goodwill impairment followed reduced automotive sensor revenue, profit and cash flow expectations, customer program delays and a cancellation. Remaining goodwill in that reporting unit was $9.4 million. Management reported no additional impairment indicator at September 26, but noted further COVID-related deterioration could lead to future impairment; the semiconductor reporting unit was also under evaluation.
- The company expects cost savings from restructuring and plans to complete the Industrial facility consolidation in the first half of 2021. No specific sales or earnings guidance was provided in the supplied filing text.
- A UK pension group annuity agreement is expected to reduce pension obligations by about $36 million. The company anticipates a one-time, non-cash settlement charge of $18–$22 million in the second half of 2021; the actual amount may differ.
- Share repurchases were suspended for the near term because of COVID-19 uncertainty and capital allocation priorities. The board declared a $0.48-per-share dividend payable December 3, 2020, subject to customary record-date terms.
- The company identified COVID-19 as a material risk, including possible renewed disruptions, supply-chain constraints, customer credit or collection issues, and adverse effects on liquidity and debt covenant compliance. No material changes to other previously disclosed risk factors were reported. The filing reported no legal proceedings or off-balance-sheet arrangements.
Important facts for investors to verify
- Whether sales and margins continue recovering after the first-half COVID-related declines, particularly in Automotive and semiconductor products.
- Whether the $9.4 million remaining automotive sensor goodwill and the semiconductor reporting unit’s $473.3 million goodwill remain supportable under revised demand and valuation assumptions.
- Cash generation, working-capital movements, debt levels, facility availability and covenant headroom if business conditions weaken.
- The eventual pension settlement charge and timing, restructuring costs and savings, and completion of the Industrial facility consolidation.
- COVID-19’s continuing effects on customer demand, supply chains, costs and receivable collections; the filing provides no quantified forward outlook.