Littelfuse, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; financial statements are unaudited. Littelfuse designs and sells circuit protection, power control, and sensor products across electronics, automotive, and industrial markets.
Financial performance
Amounts in $ millions, except per-share data and percentages.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $459.2 | $313.4 | $877.0 | $598.8 |
| Gross profit / margin | $169.0 / 36.8% | $132.6 / 42.3% | $318.6 / 36.3% | $246.3 / 41.1% |
| Operating income / margin | $59.6 / 13.0% | $60.3 / 19.2% | $97.2 / 11.1% | $109.1 / 18.2% |
| Net income | $42.3 | $48.6 | $78.4 | $87.5 |
| Diluted EPS | $1.67 | $2.11 | $3.12 | $3.80 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $140.9 | $93.6 |
- Q2 sales rose 46.5%, primarily due to IXYS, acquired January 17, 2018, which contributed $100.2 million of quarterly sales; higher volumes across all three segments and favorable currency movements also contributed. First-half sales likewise rose 46.5%, including $186.5 million from IXYS and $6.5 million from U.S. Sensor.
- Q2 net income declined 13.0%; first-half net income declined 10.5%. Reported diluted EPS also fell, while weighted-average diluted shares increased by 2.1 million in Q2, primarily reflecting shares issued for IXYS.
- Q2 segment sales: Electronics $299.4 million, up 76.7%; Automotive $127.2 million, up 9.2%; Industrial $32.7 million, up 18.7%. Electronics growth included IXYS and a strong electronics cycle.
- Gross margin fell chiefly because IXYS purchase-accounting inventory charges were $19.0 million in Q2 and $36.9 million year to date, reducing reported gross margin by 4.1 and 4.2 percentage points, respectively. Unfavorable acquired-product mix also affected Q2 margin.
- Operating income was pressured by acquisition and integration costs, higher acquired-intangible amortization, restructuring and impairment charges, and the inventory step-up. Q2 operating income was slightly below prior year despite higher sales.
- First-half operating cash flow improved to $140.9 million from $93.6 million; cash used in investing was $350.7 million, mainly for IXYS, and financing provided $196.2 million. Capital expenditures were $40.3 million. Cash declined $21.5 million to $408.1 million.
Financial position and liquidity
- At June 30, 2018, total debt was $697.6 million, compared with $495.6 million at December 30, 2017; cash and cash equivalents were $408.1 million. Long-term debt, including current maturities, was $697.6 million.
- The company had $699.9 million available under its $700 million revolving credit facility, with $0.1 million of letters of credit outstanding. It reported compliance with credit-facility and senior-note covenants.
- Current assets were $958.2 million and current liabilities $267.2 million. Management stated that cash, operating cash flows, available financing, and capital-market access were expected to support operations, investment, and debt obligations in the short and long term.
- During July, the board approved a 16% increase in the quarterly dividend, from $0.37 to $0.43 per share, or $1.72 annualized. No shares were repurchased in Q2 under the authorized repurchase program.
Material developments, outlook, and risks
- IXYS acquisition: The acquisition materially expanded Electronics and increased debt, amortization, and reported share count. IXYS contributed $100.2 million of Q2 sales but recorded a $13.9 million pretax loss from acquisition through June 30 for the quarter. Purchase-price allocation remained preliminary, including certain tax-related valuations.
- Restructuring and impairments: The company announced the exit of the Custom business and IXYS’s Radio Pulse business. It recorded $1.1 million of impairment charges associated with the Custom exit and $2.1 million of Radio Pulse restructuring charges. Management did not expect the exits to materially affect future sales or earnings and expected cost savings.
- Tariffs: U.S. Section 301 tariffs imposed July 6, 2018 on certain China-origin imports primarily affect Electronics, and to a lesser extent Automotive and Industrial. The company was evaluating the effect on future results; no quantified impact or specific earnings guidance was provided.
- Tax matters: Effective tax rates were 19.1% for Q2 and 19.2% for the first half, versus 15.2% and 16.5% in the comparable 2017 periods. The company cited U.S. tax reform and IXYS as factors. Tax Act and IXYS toll-charge estimates remained subject to review; the company had not selected an accounting policy for GILTI.
- Other risks and controls: Management highlighted demand, economic and competitive conditions, product quality, supply constraints, foreign exchange and commodity movements, restructuring, and IXYS integration and retention risks. It reported effective disclosure controls; integration of IXYS into the company’s internal-control structure was ongoing. No material changes to previously disclosed risk factors were reported, and no material market-risk changes were noted.
- The company expects to adopt lease accounting guidance in Q1 2019 and anticipates recognizing operating-lease right-of-use assets and liabilities; the impact had not yet been finalized. No legal proceedings were reported in this filing.
Important facts for investors to verify
- How much of reported sales growth is sustainable organic growth versus IXYS, U.S. Sensor, currency, and acquisition-related mix.
- Whether margins recover after the $36.9 million inventory step-up is fully expensed, and how IXYS integration costs, amortization, and restructuring evolve.
- The final IXYS purchase-price allocation and tax estimates, including Tax Act and GILTI accounting conclusions.
- The financial effect of Section 301 tariffs and any resulting pricing, sourcing, or supply-chain responses.
- Debt repayment, cash conversion, and progress toward expected restructuring savings, alongside the company’s increased dividend.