Littelfuse, Inc. — Second-Quarter 2013 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter ended June 29, 2013, and the six months then ended; comparisons are with the corresponding 2012 periods. Littelfuse designs and sells circuit-protection products through Electronics, Automotive and Electrical segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $187.8 million | $175.9 million | $358.7 million | $336.4 million |
| Gross profit | $73.6 million | $69.6 million | $138.2 million | $130.4 million |
| Gross margin | 39% | 40% | 39% | 39% |
| Operating income | $31.4 million | $32.1 million | $59.5 million | $57.9 million |
| Operating margin | 17% | 18% | 17% | 17% |
| Net income | $26.6 million | $23.0 million | $41.4 million | $40.5 million |
| Diluted EPS | $1.18 | $1.04 | $1.85 | $1.84 |
Second-quarter sales rose 7%, with $12.7 million attributed to acquisitions; excluding acquisition sales, revenue declined less than 1%. First-half sales also rose 7%, but excluding acquisitions and currency effects, growth was 1%. Automotive was the strongest segment: Q2 sales increased 25% and first-half sales 19%, primarily reflecting acquisitions and passenger-vehicle growth. Electronics increased 2% in Q2, while Electrical declined 9%, hurt by weaker custom-product and relay demand tied to mining markets.
Operating income declined 2% in Q2 despite higher sales, as operating expenses rose 13%. First-half operating income increased 3%. Q2 net income benefited from higher other income, including favorable foreign-currency revaluation; first-half results included a $10.7 million impairment charge related to Shocking Technologies. The effective tax rate was 24.7% in Q2 and 22.3% for the first half, versus 27.2% and 28.1%, respectively, in 2012; the filing attributes lower rates mainly to income earned in lower-tax jurisdictions.
Cash flow, liquidity and debt
- First-half operating cash flow was $39.0 million, compared with $32.6 million in 2012. Investing cash flow was negative $167.9 million, including $145.0 million for Hamlin and $14.4 million of capital expenditures. Financing cash flow was positive $158.2 million, including net borrowing proceeds.
- Cash and cash equivalents were $257.7 million at June 29, 2013, up from $235.4 million at year-end; short-term investments were $8.5 million. The company stated that $250.2 million of cash was held by foreign subsidiaries and generally was intended for foreign operations, capital expenditures and acquisitions.
- Current assets were $516.1 million and current liabilities $211.8 million; the reported current ratio was 2.4, down from 2.9 at year-end 2012.
- Debt totaled $233.0 million: $100.0 million term loan and $133.0 million drawn on the revolving facility. The filing classified $138.0 million as current and $95.0 million as long-term. The new five-year credit agreement provides up to $325.0 million, with $91.4 million of revolver capacity available at quarter-end. Littelfuse reported compliance with all credit covenants.
- Cash dividends paid were $0.20 per share in Q2 and $0.40 per share for the first half, compared with $0.18 and $0.36, respectively, in 2012.
Material changes, outlook and risks
- On May 31, 2013, Littelfuse acquired Hamlin for $145.0 million net of cash acquired, funded with cash and borrowings. Hamlin contributed approximately $7.0 million of revenue and a $0.8 million net loss in the quarter and first half. Purchase accounting included a $1.7 million non-cash inventory step-up charge in cost of sales; the purchase-price allocation was preliminary.
- In Q1, the company fully impaired its Shocking Technologies investment and loan receivable after Shocking filed for Chapter 7 bankruptcy. The charge was approximately $10.7 million.
- Management expected Q3 2013 sales of $195 million to $205 million and diluted EPS of $1.12 to $1.27 before special items, including a full quarter of Hamlin. Management said Q3 should otherwise resemble Q2; order rates were generally solid, with weakness in mining-related relays and custom products and strength in select niches such as LED lighting and solar.
- Key exposures include global economic and end-market demand, competition and pricing, acquisition integration, foreign-exchange movements, commodity costs, supply or capacity constraints, product quality and recalls, and pension-asset returns. The company quantified annual pretax-profit sensitivity to a 10% commodity-price change at approximately $2.3 million for copper, $0.7 million for zinc, $0.3 million for gold and $0.5 million for silver.
- No material changes to previously disclosed risk factors were reported; no legal proceedings were listed. The filing states disclosure controls were effective and reports no significant internal-control changes during the period.
Important facts for investors to verify
- Whether Hamlin delivers the expected growth and synergies, and how the preliminary acquisition accounting may change.
- Whether reported sales growth persists after separating acquisition contributions, particularly given weakness in mining-related Electrical products.
- Whether the $10.7 million Shocking impairment is fully reflected and whether any further exposure remains.
- How foreign-held cash availability, debt maturities, variable interest rates and covenant headroom evolve.
- Whether Q3 sales and EPS guidance is achieved; the filing cautions that interim results are not necessarily indicative of full-year results.