LITTELFUSE INC annual report, FY2015

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Littelfuse, Inc. — FY2015 Form 10-K

Business context and reporting period

Littelfuse designs and manufactures circuit protection, sensing, switching and control products for electronics, automotive and industrial markets. This annual report covers the fiscal year ended January 2, 2016. FY2015 contained 53 weeks, compared with 52 weeks in FY2014, so year-over-year comparisons include an extra week.

Financial performance and liquidity

  • Revenue was $867.9 million, up 2% from $852.0 million; excluding unfavorable foreign exchange effects of $38.9 million, sales increased 6%.
  • Gross profit was $330.5 million, with a 38.1% gross margin, flat as reported versus FY2014. Excluding specified transfer and prior-year charges, gross margin was 38.7% in both years.
  • Operating income fell 22% to $104.2 million; operating margin declined to 12.0% from 15.7%. FY2015 included $39.9 million of specified charges, principally pension settlement and wind-up costs of $31.9 million, plus restructuring, acquisition and manufacturing-transfer costs.
  • Net income declined 17% to $82.5 million; diluted EPS was $3.63 versus $4.37. The effective tax rate was 22.9%, down from 24.5%.
  • Operating cash flow was $165.8 million, up from $153.1 million. Capital expenditures were $44.0 million; cash and equivalents ended at $328.8 million, up $31.2 million.
  • Total debt was $171.5 million, including a $9.5 million China entrusted loan; term and revolving borrowings totaled $162.0 million. Available borrowing capacity was $197.9 million, and the company reported compliance with credit covenants. The current ratio was 2.8:1.
  • Of cash and equivalents, $318.5 million was held by foreign subsidiaries; the company said it did not expect to repatriate most of these funds. Total equity was $744.2 million.

Changes versus the prior comparable period

  • Automotive sales rose 4% reported, or 11% excluding currency effects, supported by 20% growth in automotive sensors. Industrial sales increased 5% reported, or 9% excluding currency. Electronics sales declined 1% reported but rose 2% excluding currency.
  • Operating income and net income decreased despite higher sales, primarily because of the U.S. pension plan termination and other FY2015 charges. The $29.9 million pension settlement expense was the largest individual operating charge.
  • Cash from operations increased, while cash used in investing activities fell to $44.2 million from $104.0 million, in part because acquisition spending was lower. The company repurchased $31.3 million of stock and paid $24.3 million in dividends.
  • FY2015 sales growth was affected by $38.9 million of unfavorable currency impacts. The 53-week fiscal year also makes the comparison less directly comparable.

Outlook, commentary and risks

  • Management forecast first-quarter 2016 sales of $213 million to $223 million, representing approximately 4% sequential growth at the midpoint, or about 6% excluding currency effects. For FY2016, management expected low- to mid-single-digit revenue growth and approximately 150 basis points of operating-margin expansion, assuming modest sales growth.
  • Management expected FY2016 capital expenditures of $40 million to $45 million, funded from operating cash flow. It attributed expected margin improvement to completing footprint consolidation, sensor profitability initiatives and manufacturing improvements.
  • The company expected to close its $350 million acquisition of TE Connectivity’s circuit protection business by the end of Q1 2016, funded with available cash and credit facilities. The acquisition remained pending at the filing date. Sigmar, acquired in October 2015 for $5.4 million net of cash acquired, expanded automotive sensor offerings.
  • Management’s five-year target, set in 2012, was 15% annual sales growth—5% organic and 10% from acquisitions. After three years, reported progress was 9% annual growth—4% organic and 5% from acquisitions.
  • Key risks include foreign-exchange and commodity-price movements, competitive pricing, demand cyclicality in automotive and electronics, customer and supplier disruption, international operations, acquisition integration, manufacturing transfers and environmental liabilities. The company also disclosed legacy German coal-mine remediation obligations, accrued at $2.0 million.
  • The filing reported no material legal proceedings other than routine litigation. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.

Important facts for investors to verify

  • Whether the TE Connectivity acquisition closed on the expected schedule and its final financing, purchase accounting and integration costs.
  • How much of the $39.9 million of FY2015 specified charges is genuinely nonrecurring, and the resulting comparable operating margin and earnings.
  • Whether management achieved its FY2016 sales and margin outlook, particularly given currency exposure and weakness in some end markets.
  • The accessibility and intended use of foreign-held cash, alongside the company’s debt maturities, covenant headroom and acquisition funding needs.
  • Progress and remaining costs or disruption from the Lake Mills and Suzhou manufacturing transfers, and developments in pension and German mine-remediation obligations.