Littelfuse, Inc. — Q1 2017 Form 10-Q
Business context and period: Littelfuse designs and sells circuit protection, sensing, and power control products across electronics, automotive, and industrial markets. This unaudited quarterly report covers the three months ended April 1, 2017; comparisons are with the three months ended April 2, 2016. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $285.4 million | $219.4 million |
| Gross profit / margin | $113.7 million / 39.8% | $87.2 million / 39.7% |
| Operating income / margin | $48.9 million / 17.1% | $32.4 million / 14.8% |
| Net income | $38.9 million | $19.3 million |
| Diluted earnings per share | $1.69 | $0.85 |
| Cash from operations | $22.9 million | $9.5 million |
Revenue rose 30% and net income more than doubled. The effective tax rate was 18.0%, down from 28.8%, mainly reflecting a greater proportion of earnings in lower-tax jurisdictions; the 2017 rate also included $0.5 million of excess stock-compensation tax benefits. Foreign exchange was a $1.6 million gain versus a $3.8 million loss in the prior-year quarter. Interest expense increased to $3.1 million from $2.0 million.
Segments and material changes
- Electronics: Sales increased 56% to $153.8 million; operating income was $35.2 million. Prior-year acquisitions contributed $41.5 million of incremental sales, with additional growth in passive and semiconductor products.
- Automotive: Sales increased 17% to $107.8 million; operating income declined to $15.1 million from $17.5 million. Acquisition-related sales were partly offset by unfavorable currency and lower sensor sales.
- Industrial: Sales fell 17% to $23.8 million and operating income was $0.1 million, reflecting divested product lines and lower custom-product sales.
- Prior-year acquisitions—primarily PolySwitch, the ON Portfolio, and Menber’s—added approximately $60.9 million to Q1 2017 sales. Reported growth therefore includes a substantial acquisition contribution.
- Non-segment charges were approximately $1.5 million in Q1 2017, versus $9.2 million in Q1 2016, which included acquisition costs, restructuring, and Denmark facility-closure charges.
Cash, debt, and liquidity
Cash and cash equivalents were $278.0 million at April 1, 2017, versus $275.1 million at year-end 2016. Current assets were $634.2 million and current liabilities $177.2 million. Total debt was $470.5 million, including $6.3 million current; cash less debt was approximately $192.5 million. The company had $574.9 million of available revolving-credit capacity and reported compliance with debt covenants. Management stated that cash, expected operating cash flow, available facilities, and capital-market access should fund operations, investment, and debt obligations.
Operating cash flow improved year over year, but working-capital movements included an $11.3 million increase in receivables, a $3.3 million increase in inventory, and a $20.2 million reduction in accrued payroll and severance, mainly from payment of 2016 incentives. Capital expenditures were $12.4 million. Investing cash outflow was $22.1 million, including $14.2 million for Monolith; financing cash inflow was $2.9 million, including $125.0 million of U.S. senior-note proceeds and $112.5 million of revolving-credit repayments. Dividends paid were $7.5 million.
Acquisitions, outlook, and risks
- On February 28, 2017, Littelfuse acquired approximately 62% of Monolith Semiconductor, a silicon-carbide technology company, for $15 million. The acquisition was consolidated from March 1. The purchase-price allocation included $20.6 million of goodwill; the company recognized a $9.0 million liability for its commitment to purchase the remaining non-controlling interest. Additional consideration of $1 million to $10 million is tied to technical and sales targets and is payable no later than June 30, 2019.
- The filing provides no specific revenue or earnings guidance. Management reported strong Q1 performance and said it expected existing cash, operating cash flows, and financing access to support short- and long-term needs.
- Management cited risks including demand and market acceptance, competitive pricing, product quality or recalls, capacity and supply constraints, foreign exchange and commodity-price changes, acquisition integration, labor disputes, and regulatory or political changes. No material change to previously disclosed risk factors or market-risk exposure was reported; no legal proceedings were listed.
- The company authorized a new share-repurchase program for up to 1 million shares from May 1, 2017 through April 30, 2018. The prior program expired without repurchases.
- Revenue guidance under the forthcoming customer-contract standard was still being assessed. Management did not expect a material effect on total sales, but noted that timing for certain projects could change and had not quantified the impact.
Investor verification points
- Separate acquisition-driven growth from underlying sales trends, especially in Electronics and Automotive, and monitor the Industrial segment’s recovery.
- Track cash conversion and working capital, including receivables, inventories, and incentive-related payroll accruals.
- Review Monolith’s progress against technical and sales targets, the contingent purchase obligation, and acquisition integration.
- Monitor debt levels, interest costs, covenant compliance, and the use of available revolving-credit capacity.
- Assess the durability of the lower effective tax rate and favorable foreign-exchange comparison.