Littelfuse, Inc. — FY 2016 Form 10-K Summary
Business context and reporting period. Littelfuse designs and manufactures circuit-protection, sensing and power-control products for Electronics, Automotive and Industrial markets. This annual report covers the 52-week fiscal year ended December 31, 2016; the comparable 2015 fiscal year had 53 weeks, so some comparisons are not like-for-like.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $1,056.2 million | $867.9 million |
| Gross profit / margin | $413.1 million / 39.1% | $330.5 million / 38.1% |
| Operating income / margin | $130.6 million / 12.4% | $104.2 million / 12.0% |
| Net income | $104.5 million | $80.9 million |
| Diluted EPS | $4.60 | $3.56 |
| Cash from operations | $180.1 million | $165.8 million |
| Capital expenditures | $46.2 million | $44.0 million |
- Sales rose 22%; management attributed $170.2 million of the increase to acquired businesses, alongside organic growth in Electronics and Automotive. Unfavorable foreign-exchange effects reduced sales by $7.3 million.
- Segment sales: Electronics $535.2 million, up 32%; Automotive $415.2 million, up 22%; Industrial $105.8 million, down 14%. Industrial operating income fell to $3.6 million from $18.1 million.
- Fourth-quarter 2016 sales were $284.5 million, operating income $41.0 million, net income $27.2 million and diluted EPS $1.19. Fourth-quarter 2015 had 14 weeks versus 13 weeks in 2016.
- Cash and cash equivalents were $275.1 million, down from $328.8 million; current assets were $612.1 million and current liabilities $187.5 million. Approximately $266.7 million of cash was held by foreign subsidiaries, and management expected to retain most of it abroad.
- Year-end total debt was approximately $454.1 million, including revolving and term borrowings, euro senior notes and an entrusted loan. Available revolving-credit capacity was $462.4 million; the company reported compliance with debt covenants. Operating cash flow less capital expenditures was approximately $133.9 million.
Material changes, outlook and risks
- 2016 acquisitions included PolySwitch for $348.3 million, Menber’s for $19.2 million and the ON Portfolio for $104.0 million. Acquisitions contributed approximately $250 million in annualized revenue, according to management.
- Reported results included approximately $50 million of non-segment charges, including $14.8 million of custom-products goodwill and intangible-asset impairments, $21.4 million of acquisition and integration costs, and $7.8 million of acquisition-related inventory step-up charges. The impairment reflected continued weakness in potash markets.
- The effective tax rate declined to 15.2% from 24.4%, reflecting, among other items, a one-time deduction related to stock of an affiliate. Management also disclosed an immaterial prior-period tax correction; prior financial statements were revised, reducing 2015 net income by $1.6 million and 2014 net income by $1.3 million.
- Management’s five-year strategic plan targets annual organic growth of 5–7% and annual acquisition growth of 5–7%, with a goal to double sensor-platform revenue over five years. First-quarter 2017 sales guidance was $277–$287 million, representing about 29% growth at the midpoint versus first-quarter 2016.
- Key risks include acquisition integration and execution, foreign-currency and commodity-price movements, competition and demand variability, automotive and industrial cyclicality, supply or labor disruptions, and environmental liabilities. The company warned that further declines in relay-unit profitability could lead to impairment. A 100-basis-point increase in rates on variable-rate credit-facility borrowings was estimated to add about $2.3 million to annual interest expense.
- Auditors issued unqualified opinions on the financial statements and internal control. However, the internal-control assessment excluded the 2016 acquisitions, which represented 36% of year-end assets and 16% of annual revenue in aggregate; integration and control evaluation remained in progress.
Important facts for investors to verify
- How much future growth and margin improvement is organic versus acquisition-driven, and whether the acquired businesses meet expected synergies.
- Whether Industrial-market weakness persists, particularly in potash, oil and gas, and heavy industry, and whether the relay reporting unit faces impairment.
- Debt balances and funding after year-end: the $125 million U.S. senior notes were funded in February 2017, after the balance-sheet date.
- Availability and repatriation costs of foreign-held cash, as well as the sustainability of the unusually low 2016 effective tax rate.
- Progress integrating acquired businesses into Littelfuse’s internal controls and any subsequent updates to acquisition accounting, tax exposures or contingencies.