Littelfuse, Inc. — Form 10-Q Summary
Reporting period: Third quarter ended October 1, 2011; comparisons are with the quarter ended October 2, 2010. Year-to-date figures cover the nine months ended on those dates. Unless noted, amounts are in U.S. dollars.
Business context and financial results
Littelfuse designs, manufactures and sells circuit-protection devices for electronics, automotive and electrical markets. It reports three business segments: Electronics, Automotive and Electrical.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $174.0m | $163.5m | $517.8m | $465.4m |
| Gross profit | $68.5m | $67.3m | $203.2m | $179.9m |
| Gross margin | 39% | 41% | 39% | 39% |
| Operating income | $29.6m | $34.1m | $95.8m | $83.3m |
| Net income | $24.9m | $23.3m | $71.8m | $59.1m |
| Diluted earnings per share | $1.12 | $1.04 | $3.19 | $2.64 |
Q3 sales increased 6%; excluding acquisitions and currency effects, sales fell 4%, primarily reflecting softer electronics demand. Automotive sales rose 39% and Electrical sales rose 17%, while Electronics sales declined 7%. Year-to-date sales grew 11%, supported by acquisitions, protection relays, custom mining products and currency effects. Q3 operating income declined despite higher sales, as lower gross margin and higher operating expenses more than offset revenue growth. Net income increased partly because the effective tax rate fell to 19.7% from 31.0%; the nine-month rates were 25.6% and 29.2%, respectively.
Cash flow, balance sheet and capital allocation
- Cash from operations was $84.0m for the first nine months, versus $74.9m in the prior-year period. Capital spending was $12.4m; investing cash outflow was $25.9m, including the $11.1m Selco acquisition and a $3.0m investment in Shocking Technologies.
- Cash and cash equivalents were $163.4m at October 1, 2011, up from $109.7m at January 1, 2011. Current assets were $388.2m and current liabilities $171.5m; the current ratio was 2.3, down from 2.9 at year-end 2010.
- Debt was $93.0m, all classified as current and outstanding under the revolving facility; the filing reports no long-term debt at quarter-end. The new unsecured revolver provides up to $150m, potentially expandable to $225m, and had $56.4m of borrowing capacity available. The company was in compliance with its covenants.
- Financing cash outflow was $3.8m, including $37.1m of share repurchases and $10.6m of dividends, partly offset by stock-option proceeds and net borrowing. The company repurchased 859,029 shares during the first nine months; on October 28, the board increased the repurchase authorization to 1.5m shares.
Material changes, outlook and risks
- Acquisitions and unusual items: Selco A/S was acquired in August for approximately $11.1m. Cole Hersee, acquired in December 2010, contributed $35.9m of year-to-date sales. The first nine months included a $3.7m noncash cost-of-sales charge for Cole Hersee inventory fair-value step-up. Q3 included $2.3m of asset impairment charges related to the Düns̈en facility shutdown and previously closed sites. Restructuring programs were complete, with $1.4m of related liability remaining at quarter-end.
- Management outlook: Management said earlier sales and order momentum had slowed. Electronics distributors had become more cautious, and management anticipated softer Q4 order rates. Automotive demand remained solid; relay and custom-products growth was supported by mining, while the solar market had weakened but showed signs of improvement. 2011 capital spending was expected to be approximately $15m–$18m, with some projects deferred to 2012. No numerical revenue or earnings guidance was provided.
- Operating and market risks: Higher commodity costs pressured margins. Thailand flooding was expected to reduce Electronics sales by approximately $0.5m per quarter over the next few quarters. Management also cited foreign-exchange exposure, commodity-price volatility, potential supply constraints, weaker end-market demand, acquisition integration, and conflict-minerals sourcing and disclosure requirements. A 10% change in copper prices was estimated to affect annual pretax profit by approximately $1.9m; corresponding estimates were $0.6m for zinc and $0.7m each for gold and silver.
- Management stated cash flows and available credit were expected to support operations and debt obligations for the foreseeable future. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether softer Electronics demand, distributor inventory caution and the Thailand supply interruption affected subsequent-quarter sales as anticipated.
- How much of reported sales and earnings growth came from acquisitions and favorable currency effects versus organic growth, and whether acquisition-related costs or purchase-accounting adjustments recur.
- Whether commodity inflation and manufacturing-transfer savings changed gross margins after Q3.
- Debt repayment, revolver availability and compliance with facility covenants, particularly given the $93.0m debt balance classified as current.
- Progress on the Selco purchase-price allocation, the remaining restructuring and held-for-sale assets, and the expanded share-repurchase authorization.