Littelfuse, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 29, 2018. Fiscal Q4 was the 13 weeks ended December 29, 2018. Comparisons below are with fiscal 2017, ended December 30, 2017.
Business context
Littelfuse designs and manufactures circuit protection, power control and sensing products for electronics, automotive and industrial markets. The January 2018 acquisition of IXYS, a power-semiconductor business, was the primary driver of the year’s sharp revenue increase. The company also completed its acquisition of the remaining Monolith Semiconductor shares in 2018.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $1,718.5 million | $1,221.5 million | +40.7% |
| Gross profit / margin | $652.5 million / 38.0% | $506.5 million / 41.5% | Margin down 3.5 points |
| Operating income / margin | $225.0 million / 13.1% | $218.5 million / 17.9% | Income +3.0%; margin down 4.8 points |
| Net income | $164.6 million | $119.5 million | +37.7% |
| Diluted EPS | $6.52 | $5.21 | +25.1% |
| Operating cash flow | $331.8 million | $269.2 million | +$62.7 million |
| Capital expenditures | $74.8 million | $65.9 million | +$8.8 million |
Revenue growth included $378.2 million from IXYS, $6.5 million from U.S. Sensor, $16.7 million of favorable foreign exchange, and higher volume. Electronics sales rose 69.9% to $1,124.3 million; Automotive rose 5.9% to $479.8 million; Industrial rose 7.5% to $114.4 million. Arrow Electronics accounted for 10.7% of consolidated sales.
Reported profitability was affected by approximately $88.7 million of non-segment charges, primarily related to IXYS. These included $36.9 million of inventory step-up expense, $18.7 million of acquisition and integration costs, $12.4 million of backlog amortization, and restructuring and other charges. The inventory step-up reduced gross margin by 2.1 percentage points. Higher amortization and acquisition costs also weighed on operating margin. Net income benefited from a lower tax expense: the 2017 comparison included a $47.0 million provisional Tax Act charge.
FY 2018 Q4: Sales were $402.3 million versus $304.8 million in Q4 2017. Operating income was $51.6 million versus $50.8 million; net income was $32.7 million versus a loss of $10.8 million. Q4 2017 included a $49.0 million Tax Act charge. Q4 2018 included a $3.2 million Tax Act estimate finalization charge, $3.7 million of IXYS backlog amortization, $3.2 million of acquisition and integration costs, and $2.4 million of restructuring and impairment charges.
Cash, debt and liquidity
Cash and cash equivalents were $489.7 million at year-end, including $400 million held by non-U.S. subsidiaries. Total debt was $694.7 million, including $10.0 million current debt; net debt was approximately $205.0 million. Net cash provided by financing activities was $121.9 million. Investing cash outflow was $382.2 million, including $318.5 million of acquisitions and $74.8 million of capital spending. Operating cash flow less capital expenditures was approximately $257.1 million.
The company reported $699.9 million of available revolving-credit capacity and was in compliance with debt covenants. It expects cash, operating cash flow, funding arrangements and capital-market access to meet short- and long-term needs. The filing reports a 3.59% effective rate on credit-facility borrowings; a 100-basis-point rate increase on variable-rate borrowings was estimated to add about $1.6 million in annual interest expense.
Outlook, commentary and risks
Management’s long-term (2017–2021) objectives are double-digit sales growth, comprising 5–7% accelerated organic growth and 5–7% growth from strategic acquisitions; operating margins of 17–19%; and double-digit EPS growth. Cash flow from operations less capital expenditures is targeted to approximate or exceed net income over time. These are strategic targets, not a specific 2019 earnings forecast. Priorities include integration, organic growth, innovation, productivity, disciplined acquisitions, dividends and periodic repurchases.
Management identified U.S. tariffs on certain China-origin products as affecting primarily Electronics and, to a lesser extent, Automotive, with future effects still under evaluation. Other material risks include acquisition integration and realization of expected benefits; demand, pricing and competition; foreign-exchange and commodity volatility; supply-chain disruption; customer concentration; changes in tax rules and examinations; and environmental liabilities, including maintenance of closed German coal mines. The company also cited cybersecurity, labor, geopolitical and impairment risks. No material legal proceeding was reported.
The board authorized a quarterly dividend of $0.43 per share in January 2019. The company repurchased 391,972 shares for $63.6 million during FY 2018. Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- How much of reported growth and earnings reflects IXYS, and whether the acquisition’s expected synergies and margins are being realized.
- Whether operating margins recover toward management’s 17–19% long-term target as inventory step-up, backlog amortization and integration costs subside.
- The effect of tariffs, weaker demand, currency movements and commodity costs on sales, pricing and margins.
- Debt repayment, interest-rate sensitivity, cash availability outside the U.S., and continued covenant compliance.
- Final tax consequences under the Tax Act, including toll-charge installments, GILTI and unresolved tax positions.
- Backlog fell to approximately $405.7 million from $676.1 million; confirm subsequent orders and conversion, noting substantially all year-end backlog was scheduled for 2019 delivery.