Littelfuse, Inc. — FY2017 Form 10-K Summary
Business context and reporting period. Littelfuse designs and manufactures circuit protection, power control and sensor products for electronics, automotive and industrial markets. Fiscal 2017 ended December 30, 2017 and comprised 52 weeks; the comparable fiscal 2016 year also comprised 52 weeks. Amounts below are U.S. dollars.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $1,221.5 million | $1,056.2 million | +15.7% |
| Gross profit / margin | $506.5 million / 41.5% | $413.1 million / 39.1% | Margin +2.4 percentage points |
| Operating income / margin | $218.5 million / 17.9% | $130.6 million / 12.4% | Income +67.3% |
| Income before taxes | $204.0 million | $123.3 million | +65.5% |
| Income tax expense / effective rate | $84.5 million / 41.4% | $18.8 million / 15.2% | Increase largely reflects Tax Act charge |
| Net income / diluted EPS | $119.5 million / $5.21 | $104.5 million / $4.60 | Net income +14.4% |
| Cash from operations | $269.2 million | $180.1 million | +$89.0 million |
| Capital expenditures | $65.9 million | $46.2 million | +$19.7 million |
Operating cash flow less capital expenditures was approximately $203.2 million, compared with $133.9 million in FY2016. Cash and cash equivalents were $429.7 million at year-end, up from $275.1 million. Current assets were $792.3 million and current liabilities $224.8 million.
Total debt was $495.6 million, including $6.3 million current and $489.4 million long-term; cash exceeded debt by approximately $65.9 million. The company reported $699.9 million of available revolving-credit capacity and compliance with its debt covenants at year-end. Its contractual obligations totaled $685.0 million, including debt, interest, leases, income tax obligations and purchase commitments.
Segment and geographic sales
| Segment | FY2017 sales | Year-over-year change |
|---|---|---|
| Electronics | $661.9 million | +23.7% |
| Automotive | $453.2 million | +9.2% |
| Industrial | $106.4 million | +0.6% |
Growth was strongest in Electronics, reflecting acquisitions and higher volumes across product lines. Automotive grew on acquisitions and passenger-car and commercial-vehicle demand, partly offset by lower automotive sensor volume. Industrial was broadly flat, including the effect of two non-core product-line divestitures. Asia-Pacific sales rose 21.7%, Europe 21.8%, and the Americas 6.2%. Approximately 69% of sales were outside the U.S., including approximately 26% to China.
Fourth-quarter detail and material changes
FY2017 fourth-quarter sales were $304.8 million, up 7.1% from $284.5 million in Q4 2016. Gross profit was $126.6 million and operating income was $50.8 million. The company reported a net loss of $10.8 million, or $0.48 per diluted share, versus net income of $27.2 million, or $1.19 per diluted share, in Q4 2016. The Q4 loss primarily reflects the provisional $49 million Tax Act charge for deemed repatriation of foreign earnings, along with acquisition/integration and restructuring costs.
FY2017 sales growth also reflected the prior-year acquisitions of PolySwitch, ON Portfolio and Menber’s, the 2017 U.S. Sensor acquisition, and higher organic volumes. Gross and operating margin improved with sales leverage, favorable Electronics mix, operational efficiencies, lower acquisition-related costs and the absence of the prior-year $14.8 million goodwill and intangible impairment charge. Reported net income growth was tempered by higher tax expense and increased interest expense.
FY2017 included approximately $10.3 million of non-segment charges, including acquisition and integration costs and Asia restructuring/production-transfer costs. FY2016 included approximately $50.0 million of non-segment charges, including impairment, acquisition/integration, inventory step-up and restructuring items.
Liquidity, acquisitions and outlook
Management said cash, expected operating cash flows, available funding and capital-market access should be sufficient for operations, capital expenditures, investments and debt obligations. Cash flow improved year over year, although inventory and capital spending increased. The company paid $31.8 million of dividends in FY2017; the annual dividend was $1.40 per share. No shares were repurchased during the year.
On January 17, 2018, after fiscal year-end, Littelfuse completed its acquisition of IXYS for approximately $856.5 million in cash, Littelfuse shares and converted or settled equity awards. IXYS reported approximately $340 million in sales for the 12 months ended December 30, 2017; its operations are to be included in Electronics. The purchase-price allocation was still being determined. The company also funded $175 million of senior notes and a $75 million second term-loan advance in January 2018.
Management’s long-term targets are 5–7% annual organic sales growth plus 5–7% annual growth from strategic acquisitions, operating margins of 17–19%, and double-digit EPS growth. These are strategic targets, not specific FY2018 earnings guidance. Priorities include expanding circuit protection, accelerating power control, doubling the sensor platform over four years, operational efficiency and disciplined capital allocation.
Risks, contingencies and unusual items
- Tax Act estimate: FY2017 includes a provisional $47 million net charge, comprising a $49 million toll charge offset by $2 million of other net tax benefits. The final estimate could change materially as the company completes its analysis; the effects of certain tax provisions, including GILTI, remained under evaluation.
- Acquisition integration and leverage: IXYS materially expands the business and adds integration and execution risk. Debt and interest costs increased following acquisitions and financing activity.
- Market and operating exposures: Risks include competition, product demand and pricing, technology shifts, supply or manufacturing disruption, labor issues, commodity prices, foreign exchange, and reliance on global operations. Arrow Electronics represented 10.6% of FY2017 sales.
- Foreign exchange and commodities: Management estimated that a hypothetical 10% adverse currency move could reduce earnings by $30 million on exposed assets and $20 million on exposed liabilities, before offsets. A 10% commodity-price change would affect annual pretax profit by approximately $3.9 million for copper, $1.5 million for zinc, $0.8 million for silver, $0.6 million for tin and $0.2 million for gold.
- Environmental and pension obligations: The company maintains closed coal mines in Germany and recorded a $1.1 million coal-mine liability. Non-U.S. pension plans were underfunded by $19.1 million; expected 2018 contributions were approximately $1.4 million. No material legal proceedings were reported beyond routine litigation.
- Reporting and controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- How the final Tax Act charge and subsequent tax-accounting decisions compare with the provisional FY2017 estimate.
- IXYS’s final purchase-price allocation, integration costs, financing impact and realized revenue, margin and synergy contribution.
- Whether organic growth and segment profitability support management’s long-term sales and margin targets, particularly given Industrial’s modest FY2017 growth.
- How debt, interest expense, cash availability and covenant headroom evolve following the IXYS acquisition and 2018 financing.
- Whether the sharp increase in backlog, to $243.7 million from $110.3 million, converts to deliveries and sales as expected; substantially all year-end orders were scheduled for 2018.
- Exposure to China, customer concentration, foreign exchange, commodity costs and ongoing environmental and pension obligations.