Littelfuse, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended April 2, 2016; comparative quarter ended March 28, 2015. Amounts are in U.S. dollars unless noted.
Business context and results
Littelfuse designs, manufactures and sells circuit-protection products through its Electronics, Automotive and Industrial segments. The quarter’s growth was led by Automotive and Industrial, while Electronics was approximately flat. Results include significant acquisition, restructuring and other special charges.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $219.4 million | $210.3 million | +4% |
| Gross profit / margin | $87.2 million / 39.7% | $76.3 million / 36.3% | Margin +3.4 percentage points |
| Operating income / margin | $32.4 million / 14.8% | $29.5 million / 14.0% | +10% |
| Income before taxes | $27.1 million | $26.4 million | +3% |
| Net income | $19.3 million | $20.0 million | -4% |
| Diluted EPS | $0.85 | $0.88 | -3% |
| Operating cash flow | $9.5 million | $23.2 million | Down $13.7 million |
Sales increased 6% excluding $3.5 million of unfavorable currency effects. Segment sales were Electronics $98.8 million (-1%), Automotive $91.9 million (+9%) and Industrial $28.7 million (+7%). Management attributed the gross-margin improvement primarily to a richer mix of higher-margin products. Excluding identified special charges, management reported operating income of $41.6 million versus $32.6 million and gross margin of 40% versus 37%.
Liquidity, cash flow and debt
- Cash and cash equivalents were $272.9 million at April 2, down $55.9 million from January 2. Current assets were $605.8 million and current liabilities $232.7 million; the current ratio was 2.6x, versus 2.8x at year-end.
- Operating cash flow of $9.5 million reflected working-capital outflows, including receivables, inventory, payroll/severance and taxes. Capital expenditures were $9.1 million.
- Investing cash outflow was $273.2 million, principally the PolySwitch acquisition. Financing cash inflow was $203.7 million, largely reflecting net borrowings.
- Total debt was $377.4 million, compared with $170.8 million at year-end. It included $244.5 million on the revolver, $125.0 million of term debt and $9.5 million of entrusted loan debt. The new five-year unsecured facility provides up to $575 million revolving and $125 million term borrowing; $330.4 million of revolver capacity remained available. The company reported covenant compliance.
- Cash held by foreign subsidiaries was $260.5 million; approximately $28.0 million could be repatriated with minimal tax consequences. Management said it did not expect to repatriate the remaining foreign cash.
Material changes, acquisitions and unusual items
- On March 25, Littelfuse acquired TE Connectivity’s PolySwitch business for $350 million, including $70 million payable subject to Chinese regulatory approvals. The preliminary allocation included $120.2 million of goodwill and $109.3 million of technology and customer-relationship intangibles. PolySwitch’s results were not included in Q1 income because the nine-day contribution was considered immaterial; its results were to be included in the quarter ending July 2.
- Q1 included approximately $9.2 million of special charges, including acquisition-related costs, Denmark facility closure impairment/severance, reed-sensor production transfer and internal legal restructuring. The filing also reports a $1.4 million charge associated with sale of a marine product line.
- On April 4, after quarter-end, the company acquired Menber’s S.p.A. for approximately $19 million, subject to working-capital adjustment. Menber’s had 2015 sales of approximately $23 million; purchase accounting was incomplete.
- Interest expense rose to $2.0 million from $1.2 million, primarily reflecting borrowings and financing costs. The effective tax rate increased to 28.8% from 24.3%, contributing to lower net income despite higher operating income.
Guidance, commentary and risks
For Q2 2016, management expected core-business sales, including the recent Menber’s acquisition, of $230–$240 million and PolySwitch sales of $35–$37 million, for total expected sales of $265–$277 million. Management expected low-to-mid-single-digit 2016 sales growth in the core business, excluding PolySwitch, and approximately $40 million of PolySwitch revenue per quarter in the second half of 2016.
Risks highlighted include demand and economic conditions, competitive pricing, product quality or supply constraints, acquisition integration, foreign-exchange movements and commodity prices. Foreign sales were approximately 61% of Q1 revenue; management identified the euro as its largest net-long currency exposure. A 10% change in commodity prices was estimated to affect annual pretax profit by approximately $1.9 million for copper, $0.6 million for zinc, $0.5 million for silver and $0.2 million for gold. All reported facility and term debt carried variable rates. Management stated operating cash flows and available credit were expected to support operations and debt obligations. No material changes to previously disclosed risk factors or legal proceedings were reported. The company was still integrating PolySwitch into its internal control environment.
Important facts for investors to verify
- Whether PolySwitch achieves the stated Q2 and second-half revenue expectations, and how its contribution affects margins after purchase-accounting inventory charges and amortization.
- Final PolySwitch purchase-price allocation, payment of the $70 million contingent amount, and final accounting for the Menber’s acquisition.
- Cash conversion and working-capital trends, particularly the increase in days sales outstanding to 65 from 59 a year earlier and inventory days to 71 from 65 at year-end.
- Debt levels, variable-rate exposure, covenant headroom and the availability of foreign cash for U.S. needs.
- The magnitude and recurrence of acquisition, restructuring and other special charges; reported earnings and management’s adjusted comparisons differ materially.