Littelfuse, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter ended June 27, 2015; comparisons are with the quarter ended June 28, 2014. Financial amounts are in U.S. dollars; statement amounts below are rounded to millions unless noted.
Business context
Littelfuse designs, manufactures and sells circuit-protection products worldwide through Electronics, Automotive and Electrical segments. It serves consumer electronics, automotive and industrial markets, among others. Management’s stated strategy includes organic growth, acquisitions, high-teens operating margins, improved returns on investment and returning excess cash to shareholders.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | First six months 2015 | First six months 2014 |
|---|---|---|---|---|
| Net sales | $222.0 million | $220.9 million | $432.3 million | $427.8 million |
| Gross profit / margin | $85.3 million / 38% | $83.0 million / 38% | $161.6 million / 37% | $161.5 million / 38% |
| Operating income | $36.2 million | $33.7 million | $65.7 million | $67.3 million |
| Net income | $28.7 million | $24.6 million | $48.7 million | $50.0 million |
| Diluted EPS | $1.26 | $1.08 | $2.13 | $2.20 |
| Effective tax rate | 23.9% | 22.1% | 24.1% | 23.6% |
Q2 operating income rose 7% and net income rose 17%; first-half operating income fell 2% and net income fell 3%. First-half operating cash flow was $62.0 million, versus $42.5 million a year earlier. Investing used $22.8 million, including $26.4 million of capital spending; financing used $19.6 million. Cash increased $14.3 million to $311.9 million, with $5.2 million of unfavorable exchange-rate effects.
At June 27, 2015, current assets were $603.1 million and current liabilities $203.7 million; the current ratio was 3.0. Total debt was $179.2 million, down from $195.2 million at year-end 2014. This includes $164.8 million under the credit agreement and a $14.5 million China entrusted loan. The company had $200.9 million of revolver availability and reported compliance with credit covenants. Cash and cash equivalents substantially exceeded debt, but $302.1 million of cash was held by foreign subsidiaries; management did not expect to repatriate most of it. The filing states that cash flows and available credit should support operations and debt obligations for the foreseeable future.
Cash dividends paid were $0.25 per share in Q2 and $0.50 per share in the first half, compared with $0.22 and $0.44, respectively, in 2014.
Material changes and management commentary
- Reported sales increased 1% year over year in both Q2 and the first half. Excluding unfavorable currency effects, sales increased 6% in both periods. Currency reduced Q2 sales by $11.3 million and first-half sales by $21.2 million.
- Q2 segment sales: Electronics declined 4% to $105.6 million; Automotive rose 5% to $85.9 million; Electrical rose 6% to $30.6 million. On a constant-currency basis, respective changes were down 1%, up 13% and up 9%.
- Q2 sales by geography: Americas rose 7% to $103.0 million; Europe fell 12% to $39.1 million; Asia-Pacific fell 1% to $79.9 million. The filing attributes much of Europe’s reported decline to the weaker euro; constant-currency European sales rose 12%.
- Q2 gross margin was 38%, unchanged as reported. Excluding identified charges, management said gross margin was 39% in both Q2 periods. For the first half, reported gross margin declined to 37% from 38%; management cited foreign exchange, particularly the euro, as a key factor.
- Q2 and first-half 2015 included $3.4 million and $6.4 million, respectively, of special charges: reed-sensor production transfer costs, internal legal restructuring, acquisition costs and U.S. pension wind-up costs. The 2014 comparison included SymCom inventory step-up and Hamlin-Mexico severance charges.
- The company received IRS approval to terminate its U.S. defined-benefit pension plan. The $11.8 million current liability represents the projected settlement cost, with settlement expected in Q3 2015.
Outlook, risks and contingencies
For Q3 2015, management expected sales of $211 million to $221 million, described as flat sequentially; the midpoint implied flat reported sales year over year or about 4% constant-currency growth. Diluted EPS guidance was $1.24 to $1.36, including an estimated $0.10 adverse currency effect versus the prior year. Management expected the full-year effective tax rate to be about 23.5%, subject to Congressional renewal of the R&D credit and look-through provision; absent approval, it expected a rate about 50 basis points higher. Full-year capital expenditures were expected at approximately $40 million to $45 million.
Management expected less-than-normal seasonal strength in electronics, continued improvement in Electrical and solid automotive trends despite slowing global car-production growth. Mining was expected to remain weak through at least year-end, and currency effects were expected to remain volatile. Disclosed risks include demand and economic conditions, competition and pricing, product quality, capacity or supply constraints, foreign exchange, commodity prices, labor disputes, restructuring costs, pension-asset returns and acquisition integration. A 10% commodity-price change at current prices and volumes was estimated to affect annual pretax profit by about $1.8 million for copper, $0.8 million for zinc, $0.7 million for silver and $0.3 million for gold. No legal proceedings or material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether constant-currency growth and segment trends continued, particularly Automotive strength and Electronics performance.
- Whether currency movements, gross-margin pressure and the mining slowdown developed as management anticipated.
- Progress and final costs of the reed-sensor transfer, legal restructuring and U.S. pension-plan settlement.
- Cash availability and potential uses, considering that most cash was held abroad, alongside capital spending, dividends and debt repayments.
- Whether Q3 sales, EPS, tax-rate and full-year capital-expenditure guidance were achieved; guidance is forward-looking and subject to the risks described in the filing.