Littelfuse, Inc. — Q1 2020 Form 10-Q Summary
Reporting period: Three months ended March 28, 2020; unaudited. Littelfuse manufactures circuit protection, power control and sensing products, reported through Electronics, Automotive and Industrial segments. Comparisons are with the three months ended March 30, 2019.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $346.1 million | $405.5 million | Down 14.6% |
| Gross profit / margin | $123.7 million / 35.7% | $155.2 million / 38.3% | Margin down 2.6 percentage points |
| Operating income / margin | $44.8 million / 12.9% | $60.7 million / 15.0% | Down 26.2%; margin down 2.1 points |
| Net income | $24.6 million | $37.0 million | Down 33.4% |
| Diluted EPS | $1.00 | $1.48 | Down 32.4% |
| Operating cash flow | $45.3 million | $30.9 million | Up $14.4 million |
| Capital expenditures | $16.6 million | $14.1 million | Up $2.5 million |
Operating cash flow less capital expenditures was approximately $28.7 million, compared with $16.8 million a year earlier. Cash and cash equivalents were $620.6 million at quarter-end, versus $531.1 million at December 28, 2019. Total debt was $774.2 million, including $100.0 million drawn on the revolving facility; cash exceeded debt by approximately $153.6 million. Current assets were $1,092.5 million and current liabilities were $208.2 million.
Material changes and segment results
- Electronics sales fell 19.3% to $214.2 million, principally as distributors and customers reduced inventories and production; temporary facility closures and unfavorable foreign exchange also contributed.
- Automotive sales fell 7.7% to $104.8 million amid weaker vehicle production and late-quarter demand, including COVID-19 effects.
- Industrial sales rose 1.9% to $27.1 million, with higher volume partly offset by foreign exchange.
- Management attributed the overall sales decline to lower Electronics and Automotive volume, COVID-19 disruption and $3.3 million of unfavorable foreign exchange. Lower Electronics gross margin was the main driver of the operating-income decline.
- Operating expenses decreased 16.5% to $79.0 million, reflecting cost savings and lower incentive compensation, commissions and travel, partly offset by $2.2 million of impairment charges.
- The effective tax rate rose to 30.6% from 20.3%, mainly because COVID-19 uncertainty reduced forecast income in lower-tax jurisdictions.
Liquidity, debt and capital allocation
Operating cash flow increased primarily due to lower annual incentive payments and inventory levels, partly offset by lower earnings. Financing cash flow included a $100.0 million revolver draw on March 25 to preserve flexibility amid COVID-19 uncertainty. At March 28, the company reported $219.8 million of remaining revolver capacity and compliance with debt covenants.
On April 3, 2020, the credit agreement was amended, extending maturity to April 3, 2025, easing certain covenants and repaying the remaining term loan through the revolver; borrowings under the facility totaled $240.0 million on that date. Q1 share repurchases were $22.9 million and dividends paid were $11.7 million. The company said it did not expect near-term repurchases given COVID-19 uncertainty. A quarterly dividend of $0.48 per share was declared for payment in June.
Outlook, risks and unusual items
- Management said COVID-19 was negatively affecting business activity but that the magnitude and duration of disruption, and its full-year financial impact, could not be estimated clearly. China facilities that had closed temporarily returned to normal capacity; some operations in Europe, the Philippines and Mexico remained closed or at reduced capacity.
- COVID-19-related impacts included lower demand, temporary manufacturing disruption, supply-chain constraints and approximately $2.5 million of incremental costs, primarily freight, protective supplies and plant-closure costs. The company suspended wage increases and its 2020 annual cash incentive program and reduced executive and director compensation.
- Management expected restructuring actions to produce cost savings. Q1 included $1.7 million of restructuring charges and $2.2 million of impairment charges related principally to a planned Industrial facility consolidation, plus $1.2 million of acquisition-related and integration charges.
- The company reported no interim goodwill impairment indicator as of March 28, but warned that prolonged disruption could change valuation assumptions and lead to future impairment. Automotive sensors and semiconductors reporting-unit fair values exceeded carrying values by approximately 40% and 42%, respectively, at the September 2019 annual test.
- Customer liquidity and receivable collections, future debt-covenant compliance, supply availability and demand remain risks. The filing provides no numerical earnings or sales guidance for the rest of 2020.
- After quarter-end, the company agreed to purchase a UK pension group annuity contract expected to reduce pension obligations by about $36 million. It estimated a non-cash settlement charge of $18–$22 million in the second half of 2021; the final amount may differ.
Most important facts for investors to verify
- Whether COVID-19-related demand declines, facility constraints and incremental costs persisted or intensified after March 28.
- Subsequent cash, debt and revolver availability following the April 3 credit amendment and term-loan refinancing.
- Whether cost reductions offset lower volume and whether gross and operating margins recover.
- Potential future goodwill or other asset impairments, particularly in automotive sensors and semiconductors.
- Actual funding and accounting effects of the UK pension annuity transaction and any resulting settlement charge.