Littelfuse, Inc. — Q3 2017 Form 10-Q
Business context and period. Littelfuse designs and manufactures circuit-protection products, sensors and power-control components. It reports Electronics, Automotive and Industrial segments. This unaudited quarterly report covers the three and nine months ended September 30, 2017; comparisons are to the periods ended October 1, 2016. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | First 9 months 2017 | First 9 months 2016 |
|---|---|---|---|---|
| Net sales | $317.9m | $280.3m | $916.7m | $771.6m |
| Gross profit / margin | $133.7m / 42.0% | $113.8m / 40.6% | $379.9m / 41.4% | $298.8m / 38.7% |
| Operating income / margin | $58.6m / 18.4% | $27.5m / 9.8% | $167.7m / 18.3% | $89.7m / 11.6% |
| Net income | $42.8m | $30.8m | $130.3m | $77.2m |
| Diluted EPS | $1.87 | $1.35 | $5.69 | $3.41 |
Q3 sales increased 13.4% and nine-month sales increased 18.8%. Q3 diluted EPS rose 38.5%; nine-month diluted EPS rose 66.9%. The filing attributes growth principally to higher Electronics and Automotive volumes and acquisitions. Electronics led segment growth: Q3 sales rose 19.1% and nine-month sales 31.8%. Automotive sales increased 7.0% and 9.2%, respectively. Industrial sales rose 7.4% in Q3 but declined 4.5% year to date.
Cash flow and liquidity. Nine-month operating cash flow was $181.3m, compared with $100.0m; capital expenditures were $48.5m. Operating cash flow less capital expenditures was approximately $132.9m. Cash at September 30 was $372.8m, up from $275.1m at year-end 2016. Current assets were $759.4m and current liabilities $226.2m. Management said cash, operating cash flows, available funding and capital-market access should provide sufficient funding for operations, investment and debt obligations.
Debt. Total debt was $501.6m, including $9.4m current, versus $454.1m at December 31, 2016. Cash less total debt was approximately $128.8m. The company reported $559.9m of available revolving capacity at quarter-end and compliance with debt covenants. On October 13, after quarter-end, it amended its credit agreement, increasing the revolving facility to $700m and term-loan facility to $200m and extending maturity to October 2022. The agreement permits up to a further $300m of aggregate facility increases subject to conditions.
Material changes and unusual items
- Q3 operating income improved substantially in part because Q3 2016 included a $14.8m impairment charge for the Custom Products reporting unit. The 2016 quarter also had higher acquisition and integration costs. Q3 2017 included $6.3m of non-segment charges, including acquisition/integration costs, a $1.6m U.S. Sensor inventory step-up charge and $1.5m of Asia restructuring and production-transfer costs.
- Nine-month 2017 results benefited from acquisitions, improved gross margin and lower acquisition/integration costs compared with 2016; higher research and development and amortization costs partly offset these benefits.
- Q3 2017 income tax expense was $12.7m (22.9% effective rate), compared with a $0.4m tax benefit in Q3 2016 (negative 1.2% rate). The company cites lower-tax jurisdictions in both periods; 2017 also included an accrual for taxes on undistributed earnings of certain non-U.S. affiliates, while 2016 included a one-time deduction.
- Foreign exchange was a headwind to pretax income: Q3 2017 recorded a $0.6m loss versus a $4.7m gain in Q3 2016. Nine-month 2017 recorded a $1.5m gain versus a $7.1m gain in 2016. Interest expense also rose with borrowing levels.
Acquisitions, outlook and risks
During 2017, Littelfuse acquired U.S. Sensor for $24.4m and obtained control of Monolith Semiconductor, a silicon-carbide technology company. Monolith’s preliminary acquisition accounting included a $9m liability for the commitment to acquire non-controlling interests, subject to technical and sales targets; additional consideration is described as ranging from $1m to $10m and payable no later than June 30, 2019. Purchase-price allocations for U.S. Sensor and Monolith remained preliminary.
The proposed IXYS acquisition, announced August 28, 2017, had an initially announced equity value of approximately $750m. Consideration is to be a mix of cash and Littelfuse shares, subject to proration. Closing was expected in Q1 2018, subject to customary conditions, regulatory approvals and IXYS stockholder approval. The cash portion was expected to be funded with existing cash and additional debt. The filing warns that final transaction value may differ materially from the announced amount and identifies closing, financing, integration, personnel-retention, disruption and synergy risks. No numerical operating guidance is provided.
Other disclosed risks include changes in demand and economic conditions, competition and pricing, product quality or recalls, capacity and supply constraints, currency and commodity fluctuations, labor and restructuring costs, and potential impairment if the Relays business underperforms. Management reported no material change in previously disclosed risk factors, no legal proceedings, no off-balance-sheet arrangements and effective disclosure controls. The company did not repurchase shares in Q3 under its authorized repurchase program.
Important facts for investors to verify
- Whether IXYS received required approvals and closed on the expected timetable, and the final cash, share and financing mix and transaction value.
- How much reported growth and margin improvement reflects acquired businesses versus organic volume, pricing, product mix and foreign exchange.
- Whether working-capital movements, particularly higher receivables and inventory, affect the sustainability of operating cash flow.
- Debt levels, covenant compliance and financing needs after the credit-facility amendment and any acquisition funding.
- Final purchase accounting for U.S. Sensor and Monolith, and the timing and amount of Monolith contingent or non-controlling-interest payments.
- Tax-rate drivers, foreign-exchange exposure, and the effect of acquisition, integration and restructuring costs on future reported results.