Littelfuse, Inc. — Form 10-Q Summary
Reporting period: Third quarter ended September 28, 2013; comparisons are with the quarter ended September 29, 2012. Year-to-date figures cover nine months. Amounts below are in U.S. dollars.
Business context and performance
Littelfuse designs, manufactures and sells circuit-protection products through Electronics, Automotive and Electrical segments. The May 31, 2013 acquisition of Hamlin expanded its sensor products and contributed materially to reported growth.
- Third-quarter sales: $201.0 million, up 16%. Excluding acquisition contributions and currency effects, sales increased 3%.
- Segment sales: Electronics $101.0 million, up 15%; Automotive $70.4 million, up 36%; Electrical $29.6 million, down 10%. Automotive and Electronics growth included acquisition contributions; Electrical was pressured by weaker potash-related custom-products demand.
- Geography: Third-quarter sales increased 18% in the Americas, 30% in Europe and 9% in Asia-Pacific.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $201.0m | $172.7m | $559.7m | $509.1m |
| Gross profit / margin | $81.0m / 40% | $68.6m / 40% | $219.1m / 39% | $199.1m / 39% |
| Operating income | $37.6m | $30.9m | $97.1m | $88.9m |
| Net income | $27.0m | $22.8m | $68.4m | $63.3m |
| Diluted EPS | $1.19 | $1.03 | $3.04 | $2.87 |
- Third-quarter operating income increased 21%; nine-month operating income increased 9%. Reported net income rose 18% for the quarter and 8% year to date.
- Operating cash flow for the first nine months was $85.8 million, versus $76.1 million in 2012. Capital expenditures were $25.3 million; investing cash flow was negative $178.6 million, including $145.0 million for Hamlin.
- Cash and cash equivalents were $292.9 million at quarter-end, up from $235.4 million at year-end 2012; current assets were $557.3 million and current liabilities $221.3 million. The reported current ratio was 2.5, versus 2.9 at year-end.
- Debt was $228.5 million, including a $100.0 million term loan and $128.5 million drawn on the revolving facility. The filing classifies $133.5 million as current and reports $95.9 million of remaining revolving capacity. The five-year, $325 million credit agreement is subject to financial and other covenants; the company reported compliance.
- Cash dividends paid were $0.22 per share in Q3 and $0.62 per share year to date. The board’s authorization allowed repurchases of up to 1 million shares; none were repurchased in the first nine months.
Material changes, outlook and risks
- Hamlin was acquired for $145.0 million net of cash acquired. It contributed approximately $21.1 million in Q3 revenue and $0.3 million in Q3 net income; for the nine-month period it contributed $28.1 million in revenue and a $0.6 million net loss. Purchase accounting remained preliminary pending final valuation of acquired intangibles.
- Hamlin inventory fair-value step-up charges reduced cost-of-sales results by $0.4 million in Q3 and $2.1 million year to date. Acquisition-related operating expenses were $0.3 million in Q3 and $1.5 million year to date.
- A $10.7 million impairment of the Shocking Technologies investment and loan was recorded in Q1 after Shocking filed for Chapter 7 bankruptcy. This contributed to nine-month non-operating expense; no comparable impairment was recorded in Q3 2013.
- Management cited solid order rates overall, slow but steady automotive improvement, relatively flat conditions in other major markets, and weakness in mining-related relays and custom products. It expected normal fourth-quarter seasonality, with sales of $185–$195 million and diluted EPS of $0.97–$1.12, including Hamlin.
- Risks include global economic and end-market demand, competition and pricing, acquisition integration, foreign-exchange movements, commodity prices, product quality and supply constraints, and pension assumptions. A 10% commodity-price change was estimated to affect annual pretax profit by approximately $2.1 million for copper, $0.7 million for zinc, $0.3 million for gold and $0.6 million for silver.
- Of $292.9 million in cash, $282.6 million was held by foreign subsidiaries; approximately $16.7 million could be repatriated with minimal tax consequences. Management did not expect to repatriate the remainder and anticipated adequate operating cash flow and credit availability.
- The filing reports no legal proceedings and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Assess how much sales and earnings growth is organic versus acquisition-driven, and track Hamlin’s integration and final purchase-price allocation.
- Review the Shocking impairment and Hamlin inventory step-up for comparability of reported earnings with ongoing performance.
- Monitor Electrical segment exposure to potash mining and the outlook for relays and custom products.
- Evaluate debt classification, the $95.9 million of available revolver capacity, covenant headroom and the extent to which overseas cash is practically available to fund U.S. needs.
- Reconcile the filing’s Q3 2012 effective tax-rate disclosures: the tax note states 22.6%, while MD&A states 21.5%.
- Compare fourth-quarter sales and diluted-EPS guidance with actual results; the company cautions that interim results are not necessarily indicative of full-year performance.