Littelfuse, Inc. — Q3 2018 Form 10-Q
Reporting period: Third quarter ended September 29, 2018; year-to-date results cover the nine months ended that date. Littelfuse makes circuit protection, power control and sensing products across Electronics, Automotive and Industrial segments. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Net sales | $439.2 million | $317.9 million | $1,316.2 million | $916.7 million |
| Gross profit / margin | $179.6 million / 40.9% | $133.7 million / 42.0% | $498.2 million / 37.9% | $379.9 million / 41.4% |
| Operating income / margin | $76.2 million / 17.4% | $58.6 million / 18.4% | $173.4 million / 13.2% | $167.7 million / 18.3% |
| Net income | $53.5 million | $42.8 million | $131.9 million | $130.3 million |
| Diluted EPS | $2.10 | $1.87 | $5.23 | $5.69 |
For the first nine months, operating cash flow was $252.1 million, versus $181.3 million in 2017. Investing cash outflow was $368.6 million, including $313.5 million for acquisitions and $55.9 million of capital expenditures. Financing cash inflow was $195.3 million. Cash and cash equivalents were $498.2 million at quarter-end.
Total debt was $700.7 million, including $10.1 million current maturities; long-term debt was $690.6 million. The company had $699.9 million of available revolving-credit capacity and was in compliance with debt covenants. It reported total current assets of $1,052.6 million and current liabilities of $303.9 million.
Changes and business drivers
- Q3 sales rose 38.2%; the IXYS acquisition contributed $99.7 million. Higher Electronics demand and Industrial volume also contributed; foreign exchange reduced Q3 sales by $1.5 million.
- Electronics sales increased 68.5% in Q3, largely reflecting IXYS. Automotive sales were nearly flat, up 0.5%; Industrial sales were up 0.4%.
- Q3 gross margin declined 1.1 percentage points, primarily because IXYS products had a lower gross margin. Nine-month gross margin fell 3.5 points, including a 2.8-point impact from the $36.9 million IXYS inventory fair-value step-up charge.
- Q3 operating income grew 30.1%, slower than sales; operating margin fell 1.0 point. Nine-month operating income increased 3.4%, while diluted EPS declined from $5.69 to $5.23.
- Q3 net income increased 25.1%. Nine-month net income increased 1.2%, as acquisition-related charges, amortization and higher interest expense offset sales growth. IXYS contributed $286.2 million of year-to-date sales and a reported $25.5 million pretax loss since acquisition.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management stated that cash, operating cash flows, borrowing availability and capital-market access were expected to support operations, capital spending, investments and debt obligations.
- Management was evaluating the effect of U.S. Section 301 tariffs on certain China-origin products, which primarily affect Electronics and, to a lesser extent, Automotive.
- The company cited a slowdown in the European passenger-car market following implementation of the new WLTP emissions testing procedure.
- Acquisition and integration charges were substantial: $79.4 million of year-to-date “Other” segment operating costs, including the inventory step-up, acquisition/integration costs, backlog amortization, restructuring and converted-option compensation. The inventory step-up was fully expensed by the end of Q2.
- Tax Act estimates remained subject to interpretation and refinement. The company had not selected an accounting policy for GILTI; it also expected to recognize operating-lease right-of-use assets and liabilities upon adopting the lease standard in Q1 2019.
- Other cited risks include demand and economic conditions, competition and pricing, supply or capacity constraints, foreign exchange and commodity movements, product quality, and successful IXYS integration and retention of key personnel. Management reported no material change in previously disclosed risk factors.
- The quarterly dividend was increased from $0.37 to $0.43 per share in July 2018. After quarter-end, the company reported repurchasing 200,000 shares for $35.9 million and acquiring Monolith’s remaining 19% interest for $5.0 million. No legal proceedings were reported.
Important facts for investors to verify
- Whether IXYS integration delivers the expected growth and synergies, and how its margins and pretax contribution develop after the reported acquisition-period loss.
- How much of future reported earnings remains affected by acquisition-related costs, amortization and restructuring, and whether underlying margins recover.
- The impact of tariffs and European automotive weakness on segment sales, costs and demand.
- Debt repayment, interest expense, liquidity and covenant headroom as the company funds acquisitions, capital expenditures, dividends and repurchases.
- Final Tax Act and IXYS purchase-accounting estimates, including the GILTI policy election and the effect of adopting lease accounting.