Littelfuse, Inc. — Q2 2017 Form 10-Q
Business context and period. Littelfuse designs and sells circuit protection, sensing, and power-control products across Electronics, Automotive, and Industrial markets. This unaudited report covers the quarter and six months ended July 1, 2017; comparisons are to the periods ended July 2, 2016. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $313.4M | $271.9M | $598.8M | $491.3M |
| Gross profit / margin | $132.6M / 42.3% | $97.9M / 36.0% | $246.3M / 41.1% | $185.0M / 37.7% |
| Operating income / margin | $60.3M / 19.2% | $29.7M / 10.9% | $109.1M / 18.2% | $62.1M / 12.6% |
| Net income | $48.6M | $27.2M | $87.5M | $46.4M |
| Diluted EPS | $2.11 | $1.20 | $3.80 | $2.05 |
- Q2 sales rose 15.2%, operating income 102.9%, and net income 79.1% year over year. Six-month sales increased 21.9% and net income 88.5%.
- Segment sales in Q2: Electronics $169.4M, up 28.2%; Automotive $116.5M, up 4.6%; Industrial $27.5M, down 3.0%. Six-month changes were +39.9%, +10.3%, and -10.0%, respectively.
- Q2 operating performance benefited from higher sales, acquisition contributions, improved expense leverage, and lower acquisition-related charges than in the prior-year quarter. The six-month comparison also includes prior-year acquisitions.
- Effective tax rate was 15.2% for Q2 and 16.5% for the first six months, versus 20.2% and 24.0% in the comparable 2016 periods. Management cited income earned in lower-tax jurisdictions and, in 2017, discrete excess tax benefits from share-based compensation.
Cash flow, debt, and liquidity
- For the first six months, operating cash flow was $93.6M, compared with $35.3M in 2016. Investing cash outflow was $36.1M, including $28.3M of capital expenditures and $14.2M for Monolith, net of cash acquired. Financing cash outflow was $10.1M, including $15.0M of dividends paid.
- Cash and cash equivalents were $321.9M at July 1, 2017, up from $275.1M at December 31, 2016. Receivables and inventory increased to $199.0M and $125.2M, respectively; management attributed the receivables increase primarily to higher sales.
- Total debt was $481.7M, versus $454.1M at year-end; cash less total debt was approximately negative $159.8M. The revolving facility had no borrowings and $574.9M of available capacity; the company reported compliance with debt covenants. Management expects cash, operating cash flows, funding availability, and capital-market access to cover operating, investment, and debt needs.
- Interest expense rose to $3.3M in Q2 and $6.4M for the half year, primarily reflecting increased borrowings. The company issued $125M of U.S. senior notes in February 2017; existing euro senior notes mature in 2023 and 2028, and U.S. notes in 2022 and 2027.
Material changes, outlook, and risks
- Electronics growth reflected broad product demand and the ON Portfolio acquisition; Automotive benefited from passenger-car and commercial-vehicle activity and acquisitions. Industrial sales declined partly because of non-core product-line divestitures and weaker custom-products sales.
- Monolith became a consolidated subsidiary on March 1, 2017 after Littelfuse acquired approximately 62% for $15M. The agreement provides for additional purchases of the remaining interest based on technical and sales targets, with consideration of $1M–$10M payable no later than June 30, 2019.
- On July 6, 2017, after quarter-end, Littelfuse completed its $24M acquisition of U.S. Sensor Corp., funded primarily with cash. The business will expand the Electronics segment’s temperature-sensor portfolio.
- No specific financial guidance or numerical forecast is provided in the filing. Management described Q2 performance as strong. It said adoption of the forthcoming revenue-recognition standard was not expected to materially affect overall sales recognized, though timing for certain projects could change and had not been quantified.
- Disclosed risks include product demand and acceptance, competition and pricing, quality issues or recalls, capacity and supply constraints, foreign-exchange and commodity movements, acquisition integration, labor and restructuring matters, and political or regulatory changes. Management noted potential goodwill impairment exposure for the Relays reporting unit if profitability or projected results decline; no impairment indicators were identified at July 1, 2017. No material change in market-risk exposure or risk factors was reported, and no legal proceedings were listed.
Important facts for investors to verify
- How much reported growth and margin improvement is sustainable organically, apart from acquired businesses and prior-year comparison charges?
- Whether Industrial weakness persists, and whether the recent strength in Electronics and Automotive demand continues.
- The eventual purchase consideration, milestone achievement, and integration progress for Monolith and U.S. Sensor.
- Debt repayment, interest costs, and cash conversion, particularly as receivables and inventory rose alongside sales.
- The future effective tax rate and the impact of foreign exchange, including the reduced year-over-year foreign-exchange gain in Q2.
- The cash-flow discussion contains small differences from the cash-flow statement for financing outflow and exchange-rate impact; confirm amounts against the filed financial statements.