Littelfuse, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Littelfuse designs, manufactures and sells circuit protection products through Electronics, Automotive and Electrical segments.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $220.9 | $187.8 | $427.8 | $358.7 |
| Gross profit | $83.0 | $73.6 | $161.5 | $138.2 |
| Gross margin | 38% | 39% | 38% | 39% |
| Operating income | $33.7 | $31.4 | $67.3 | $59.5 |
| Net income | $24.6 | $26.6 | $50.0 | $38.1 |
| Diluted EPS | $1.08 | $1.18 | $2.20 | $1.70 |
- Q2 sales grew 18%; six-month sales grew 19%. Excluding acquisition contributions and currency effects, growth was 6% for Q2 and 5% year to date.
- Electronics and Automotive sales increased in Q2 by 20% and 27%, respectively; Electrical sales declined 9%. For the six months, segment changes were +21%, +33% and −10%, respectively.
- Q2 net income declined 8% despite higher sales and operating income. Foreign-exchange effects shifted from a $3.7 million gain in Q2 2013 to a $2.4 million loss in Q2 2014, and interest expense increased to $1.2 million from $0.6 million. Six-month net income rose 31%.
- Reported gross margin was 38% in both 2014 periods versus 39% in the comparable 2013 periods. Management said margins were 39% in 2014 after excluding SymCom inventory step-up charges and Hamlin-Mexico severance, versus 40% for Q2 2013 after its Hamlin inventory charge; six-month adjusted margins were 39% in both years.
Cash flow, liquidity and debt
- Six-month operating cash flow was $42.5 million, versus $39.0 million a year earlier. Investing used $65.9 million, including $52.8 million for SymCom and $13.1 million of capital spending. Financing provided $64.5 million, including net borrowing, and included $9.9 million of dividends and $14.3 million of share repurchases.
- Cash and cash equivalents were $346.4 million at June 28, up from $305.2 million at year-end 2013. Of the balance, $332.0 million was held by foreign subsidiaries; management said it did not expect to repatriate most of those funds. Approximately $16.1 million could be repatriated with minimal tax consequences.
- Total debt was $295.3 million, including $204.0 million classified as current and $91.3 million long term. The revolving facility had $75.4 million of remaining capacity; its rate was LIBOR plus 1.25% (1.4% at quarter-end). The company reported compliance with debt covenants. The current ratio was 2.2, down from 2.7 at year-end.
Material changes, outlook and risks
- The January 2014 SymCom acquisition cost $52.8 million net of cash acquired and added overload relays and pump controllers to Electrical. Its purchase-price allocation was preliminary; the company expected to finalize it in Q3, with no significant adjustments anticipated. A $2.8 million inventory step-up charge was recorded in the first half.
- Q2 included $2.0 million of severance charges from restructuring at the Hamlin-Mexico plant. Management also cited Q2 foreign-exchange losses, primarily from Philippine peso revaluation. In 2013, the company recorded a $10.7 million impairment related to Shocking Technologies; there was no comparable 2014 charge.
- Third-quarter sales guidance was $215–$225 million, with diluted EPS of $1.29–$1.43 excluding special items. Full-year capital expenditures were expected to be approximately $35 million. Management expected Electrical to remain weak through at least year-end due mainly to softness in mining; Q3 sales were expected to be similar to Q2.
- Key exposures include demand and pricing in consumer electronics, automotive and industrial markets; weakness in mining; foreign-exchange movements; commodity prices; acquisition integration; and pension investment performance. A 10% change in commodity prices was estimated to affect annual pretax profit by approximately $2.3 million for copper, $0.9 million for zinc, $0.2 million for gold and $1.1 million for silver.
- Disclosure controls were deemed ineffective at quarter-end because of a material weakness in deferred-tax valuation allowance accounting tied to the 2013 Shocking Technologies write-off. Management was remediating the issue and anticipated completion in Q4 2014. The pension plan was terminated on July 31, 2014, subject to regulatory approval of the termination; participants would become fully vested and could choose a lump sum or annuity.
- The filing reported no legal proceedings and no material changes to the risk factors previously disclosed in the 2013 Form 10-K.
Important facts for investors to verify
- Whether the deferred-tax control weakness was remediated and tested as planned, and whether any related financial reporting changes followed.
- Final SymCom purchase accounting and the effects of acquisition-related amortization, inventory charges and integration on margins and earnings.
- The current classification and repayment schedule of the $204.0 million current debt balance, plus available revolver capacity and covenant headroom.
- How much foreign-held cash is practically available to fund U.S. needs, dividends, repurchases or acquisitions.
- Performance against Q3 sales and EPS guidance, particularly continued Electrical weakness and foreign-exchange impacts.
- Regulatory completion and financial consequences of the pension plan termination.