lfus20130930_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2013

 

OR

 

 

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO            

 

Commission file number 0-20388

 

LITTELFUSE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

   

36-3795742

 

(State or other jurisdiction

 

(I.R.S. Employer Identification No.)

of incorporation or organization)

   
   

8755 W. Higgins Road, Suite 500

   

Chicago, Illinois

   

60631

 

(Address of principal executive offices)

 

(Zip Code)

 

(773) 628-1000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [X]     Accelerated filer [  ]     Non-accelerated filer [  ]     Smaller reporting company [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of October 25, 2013, 22,402,414 shares of common stock, $.01 par value, of the registrant were outstanding. 

 

 
 

 

 

TABLE OF CONTENTS

 

 

PART I - FINANCIAL INFORMATION

 
   

Item 1.

Financial Statements.

Page

   
 

Condensed Consolidated Balance Sheets as of September 28, 2013

(unaudited) and December 29, 2012 

1

   
 

Consolidated Statements of Net Income for the periods ended

September 28, 2013 and September 29, 2012 (unaudited)

2

   
 

Consolidated Statements of Comprehensive Income for the periods ended

September 28, 2013 and September 29, 2012 (unaudited)

3

   
 

Consolidated Statements of Cash Flows for the periods ended

September 28, 2013 and September 29, 2012 (unaudited)

4

   
 

Notes to Condensed Consolidated Financial Statements (unaudited)

5

   

Item 2.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations.

16

   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

22

   

Item 4.

Controls and Procedures.

23

   

PART II - OTHER INFORMATION

 
   

Item 1. 

Legal Proceedings

24

   

Item 1A.

Risk Factors

24

   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

   

Item 3.

Defaults Upon Senior Securities 24
   

Item 4.

Mine Safety Disclosures

24

   

Item 5.

Other Information

24

   

Item 6.

Exhibits

25

   

Signatures 

26

  

 
 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

LITTELFUSE, INC.

Condensed Consolidated Balance Sheets

(In thousands of USD, except share amounts)

 

   

September 28,

2013

   

December 29,

2012

 
   

(unaudited)

         

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 292,936     $ 235,404  

Short-term investments

    8,808        

Accounts receivable, less allowances

    129,122       100,559  

Inventories

    91,978       75,580  

Deferred income taxes

    11,157       11,890  

Prepaid expenses and other current assets

    17,771       16,532  

Assets held for sale

    5,500       5,500  

Total current assets

    557,272       445,465  

Property, plant and equipment:

               

Land

    4,080       6,243  

Buildings

    59,602       54,559  

Equipment

    358,324       304,954  
      422,006       365,756  

Accumulated depreciation

    (275,906 )     (244,845 )

Net property, plant and equipment

    146,100       120,911  

Intangible assets, net of amortization:

               

Patents, licenses and software

    42,461       11,144  

Distribution network

    32,174       18,964  

Customer lists, trademarks and tradenames

    22,452       18,704  

Goodwill

    186,667       133,592  

Investment in unconsolidated affiliate

          8,666  

Other investments

    11,136       10,327  

Deferred income taxes

    3,776       8,090  

Other assets

    4,893       1,865  
                 

Total assets

  $ 1,006,931     $ 777,728  
                 

Liabilities and Equity

               

Current liabilities:

               

Accounts payable

  $ 38,937     $ 27,226  

Accrued payroll

    26,686       20,540  

Accrued expenses

    11,643       11,062  

Accrued severance

    345       1,033  

Accrued income taxes

    10,154       11,559  

Current portion of long-term debt

    133,500       84,000  

Total current liabilities

    221,265       155,420  

Long-term debt, less current portion

    95,000        

Accrued post-retirement benefits

    14,928       22,338  

Other long-term liabilities

    15,331       12,412  

Total equity

    660,407       587,558  
                 

Total liabilities and equity

  $ 1,006,931     $ 777,728  
                 

Common shares issued and outstanding of 22,419,676 and 22,029,446, at September 28, 2013, and December 29, 2012, respectively.

               

 See accompanying notes.

 

 
1

 

 

LITTELFUSE, INC.

Consolidated Statements of Net Income

(In thousands of USD, except per share amounts, unaudited)

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 28,

2013

   

September 29,

2012

   

September 28,

2013

   

September 29,

2012

 
                                 

Net sales

  $ 201,040     $ 172,688     $ 559,724     $ 509,119  
                                 

Cost of sales

    120,080       104,052       340,601       310,059  
                                 

Gross profit

    80,960       68,636       219,123       199,060  
                                 

Selling, general and administrative expenses

    34,437       30,601       98,091       90,199  

Research and development expenses

    6,217       5,505       17,725       15,553  

Amortization of intangibles

    2,747       1,599       6,249       4,457  
      43,401       37,705       122,065       110,209  
                                 

Operating income

    37,559       30,931       97,058       88,851  
                                 

Interest expense

    939       454       1,959       1,298  

Impairment and equity in net loss of unconsolidated affiliate

          1,965       10,678       3,523  
Foreign exchange (gain) loss     1,476       834       (1,929 )     1,903  

Other (income) expense, net

    (1,380     (1,350 )     (3,543 )     (3,075 )
                                 

Income before income taxes

    36,524       29,028       89,893       85,202  
                                 

Income taxes

    9,534       6,250       21,461       21,898  
                                 

Net income

  $ 26,990     $ 22,778     $ 68,432     $ 63,304  
                                 

Net income per share (see Note 9):

                               

Basic

  $ 1.20     $ 1.04     $ 3.07     $ 2.90  

Diluted

  $ 1.19     $ 1.03     $ 3.04     $ 2.87  
                                 

Weighted average shares and equivalent shares outstanding:

                               

Basic

    22,428       21,923       22,274       21,770  

Diluted

    22,625       22,162       22,497       22,055  
                                 

Cash dividends paid per common share

  $ 0.22     $ 0.20     $ 0.62     $ 0.56  

See accompanying notes.

 

 
2

 

 

 LITTELFUSE, INC.

Consolidated Statements of Comprehensive Income

(In thousands of USD, unaudited)

 

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 28,

2013

   

September 29,

2012

   

September 28,

2013

   

September 29,

2012

 
                                 

Net income

  $ 26,990     $ 22,778     $ 68,432     $ 63,304  

Other comprehensive income (loss):

                               

Pension liability adjustments (net of tax of $49 and ($7) for the three months ended 2013 and 2012, and $233 and $27 for the nine months ended 2013 and 2012, respectively)

    (24 )     (73 )     (349 )     (80 )

Unrealized (loss) gain on investments

    (532 )     (1,127 )     546       1,993  

Foreign currency translation adjustments

    10,273       11,522       (2,998 )     9,270  

Comprehensive income

  $ 36,707     $ 33,100     $ 65,631     $ 74,487  

 

See accompanying notes. 

 

 
3

 

  

LITTELFUSE, INC.

Consolidated Statements of Cash Flows

(In thousands of USD, unaudited)

 

   

For the Nine Months Ended

 
   

September 28, 2013

   

September 29, 2012

 

Operating activities:

               

Net income

  $ 68,432     $ 63,304  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation

    19,603       19,029  

Amortization of intangibles

    6,249       4,457  

Stock-based compensation

    7,030       5,574  

Impairment of assets held for sale

          549  

Non-cash inventory charge

    2,069       567  

Excess tax benefit on share-based compensation

    (3,763 )     (2,471 )

Loss on sale of assets

    169       62  

Impairment and equity in net loss of unconsolidated affiliate

    10,678       3,523  

Changes in operating assets and liabilities:

               

Accounts receivable

    (16,348 )     (12,756 )

Inventories

    (4,537 )     58  

Accounts payable

    6,659       5,640  

Accrued expenses (including post-retirement)

    (11,743 )     (5,234 )

Accrued payroll and severance

    5,492       (4,646 )

Accrued taxes

    (5,473 )     (857 )

Prepaid expenses and other

    1,294       (748 )

Net cash provided by operating activities

    85,811       76,051  
                 

Investing activities:

               

Purchases of property, plant, and equipment

    (25,328 )     (12,797 )

Acquisition of businesses, net of cash acquired

    (145,000 )     (34,016 )

Purchase of investment

          (10,000 )

Purchase of short-term investments

    (8,478 )     (4,616 )

Proceeds from sale of short-term investments

          17,805  

Proceeds from sale of assets

    158       495  

Net cash used in investing activities

    (178,648 )     (43,129 )
                 

FINANCING activities:

               

Proceeds from term loan

    100,000       20,251  

Proceeds from revolving credit facility

    160,500        

Payments of revolving credit facility

    (116,000 )     (17,500 )

Debt issuance costs paid

    (809 )      

Cash dividends paid

    (13,789 )     (12,181 )

Proceeds from exercise of stock options

    19,335       13,411  

Excess tax benefit on share-based compensation

    3,763       2,471  

Net cash provided by financing activities

    153,000       6,452  
                 

Effect of exchange rate changes on cash and cash equivalents

    (2,631 )     4,008  
                 

Increase in cash and cash equivalents

    57,532       43,382  

Cash and cash equivalents at beginning of period

    235,404       164,016  

Cash and cash equivalents at end of period

  $ 292,936     $ 207,398  

 

See accompanying notes.

 

 
4

 

 

Notes to CONDENSED Consolidated Financial Statements (Unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements of Littelfuse, Inc. and its subsidiaries (the “company”) have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulations S-X. Accordingly, certain information and disclosures normally included in the consolidated balance sheet, statements of net income and comprehensive income and cash flows prepared in conformity with U.S. GAAP have been condensed or omitted as permitted by such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the period ended September 28, 2013 are not necessarily indicative of the results that may be expected for the year ending December 28, 2013. For further information, refer to the company’s consolidated financial statements and the notes thereto incorporated by reference in the company’s Annual Report on Form 10-K for the year ended December 29, 2012. The company evaluated subsequent events through the date of its financial statements when filed with the Securities and Exchange Commission (“SEC”).

 

2. Reclassifications and Adjustments

 

As disclosed in the Annual Report on Form 10-K for the year ended December 29, 2012, the company determined that in late-November 2012 it began to exercise significant influence over Shocking Technologies (“Shocking”). Accordingly, the company began accounting for the investment in Shocking using the equity method and in accordance with ASC 323, retroactively recorded its proportional share of Shocking's operating losses, which amounted to approximately $4.0 million in 2012. See Note 6 for additional information related to Shocking.

 

As a result of this retroactive application of the equity method, certain items in the company’s interim results reported on their 2012 Forms 10-Q have been retrospectively restated, as shown in the following tables (in thousands except for per share amounts):

 

   

For the Three Months ended

September 29, 2012

   

For the Nine Months ended

September 29, 2012

 

Consolidated Statements of Net Income and

      Comprehensive Income

 

As

Previously

Reported

   

Adjustment

   

As

Adjusted

   

As

Previously

Reported

   

Adjustment

   

As Adjusted

 
                                                 

Impairment and equity in net loss of

      unconsolidated affiliate

  $     $ 1,965     $ 1,965     $     $ 3,523     $ 3,523  

Income before income taxes

    30,993       (1,965 )     29,028       88,725       (3,523 )     85,202  

Income taxes

    6,995       (745 )     6,250       23,234       (1,336 )     21,898  

Net income

    23,998       (1,220 )     22,778       65,491       (2,187 )     63,304  

Basic Earnings per share

  $ 1.09     $ (0.05 )   $ 1.04     $ 3.00     $ (0.10 )   $ 2.90  

Diluted Earnings per share

  $ 1.08     $ (0.05 )   $ 1.03     $ 2.96     $ (0.09 )   $ 2.87  

Comprehensive income

  $ 34,320     $ (1,220 )   $ 33,100     $ 76,674     $ (2,187 )   $ 74,487  

 

   

For the Nine Months ended

September 29, 2012

 

Consolidated Statements of Cash Flows

 

As Previously

Reported

   

Adjustment

   

As

Adjusted

 
                         

Net income

  $ 65,491     $ (2,187 )   $ 63,304  

Impairment and equity in net loss of unconsolidated affiliate

          3,523       3,523  

Accrued taxes

    479       (1,336 )     (857 )

  

 
5

 

 

 

Notes to CONDENSED Consolidated Financial Statements (Unaudited)

 

3. Acquisition of Businesses

 

The company accounts for acquisitions using the purchase method in accordance with ASC 805, “Business Combinations.” The results of operations of each acquisition have been included in the accompanying consolidated financial statements as of the dates of the acquisition.

 

Hamlin, Inc.

 

On May 31, 2013, the company acquired 100% of Hamlin, Inc. (“Hamlin”) from Key Safety Systems, for $145.0 million (net of cash acquired). Hamlin is a manufacturer of sensor technology providing standard products and custom solutions for leading global manufacturers in the automotive and electronic industries. The acquisition allows the company to expand its automotive and electronics product offerings in the global sensor market in both the Automotive and Electronics business segments. Hamlin is headquartered in Lake Mills, Wisconsin and has manufacturing, engineering and sales offices in the U.S., Mexico, Europe and Asia. The company funded the acquisition with available cash raised from borrowings on the company’s new credit arrangement (See Note 7).

 

The following table sets forth the preliminary purchase price allocation, as of September 28, 2013, for Hamlin acquisition-date net assets, in accordance with the purchase method of accounting with adjustments to record the acquired net assets at their estimated fair values The purchase allocation is preliminary awaiting finalization of the valuation of the acquired intangible assets which is expected to be completed in late-2013 or early 2014.

 

Hamlin preliminary purchase price allocation (in thousands):

 

Cash

  $ 15,473  

Current assets, net

    31,210  

Property, plant and equipment

    22,767  

Goodwill

    53,129  

Distribution network

    33,098  

Patents and licenses

    15,365  

Trademarks

    6,483  

Non-current assets

    1,390  

Current liabilities

    (8,816 )

Non-current liabilities

    (9,626 )
    $ 160,473  

 

All Hamlin goodwill and other assets and liabilities were recorded in the Automotive and Electronics business unit segments and reflected in the Americas, Europe and Asia-Pacific geographical areas. The distribution network, trademarks and patents and licenses are all being amortized over 10 years. The goodwill resulting from this acquisition consists largely of the company’s expected future product sales and synergies from combining Hamlin’s products with the company’s existing product offerings. A portion of the goodwill for the acquisition is not expected to be deductible for tax purposes.

 

As required by purchase accounting rules, the company recorded a $2.1 million step-up of inventory to its fair value as of the acquisition date. During the third quarter of 2013, as the remainder of this inventory was sold, cost of goods sold included $0.4 million of non-cash charges for this step-up.

  

 
6

 

  

Notes to CONDENSED Consolidated Financial Statements (Unaudited)

 

3. Acquisition of Businesses, continued

 

The following unaudited pro forma results are provided below for the company’s acquisition of Hamlin and assume that the acquisition of Hamlin had been completed as of the beginning of fiscal year 2012.

 

   

(In thousands except for per share amounts)

 
   

For the three months ended

   

For the nine months ended

 
   

Sept. 28, 2013

   

Sept. 29, 2012

   

Sept. 28, 2013

   

Sept. 29, 2012

 
   

(Unaudited)

   

(As restated)

   

(Unaudited)

   

(As restated)

 
           

(Unaudited)

           

(Unaudited)

 

Revenues

  $ 201,040     $ 191,516     $ 591,095     $ 559,759  

Net income

  $ 26,990     $ 23,841     $ 68,938     $ 65,606  

Net income per share:

                               

Basic

  $ 1.20     $ 1.09     $ 3.09     $ 3.01  

Diluted

  $ 1.19     $ 1.08     $ 3.06     $ 2.97  

Weighted-average shares and equivalent shares outstanding:

                               

Basic

    22,428       21,923       22,274       21,770  

Diluted

    22,625       22,162       22,497       22,055  

 

For the three months ended September 28, 2013, Hamlin added approximately $21.1 million in revenue and $0.3 million in net income to the company’s consolidated results. For the nine months ended September 28, 2013, Hamlin added approximately $28.1 million in revenue and a $0.6 million net loss to the company’s consolidated results.

 

Accel AB

 

On May 31, 2012, the company acquired 100% of ACCEL AB (“Accel”), a manufacturer of advanced electromechanical products, including sensors and switches primarily for the automotive industry, for approximately $23.9 million. The acquisition allows the company to expand its automotive product offering and establish a presence in the growing automotive sensor market within its Automotive business unit segment. Accel is based in Trollhättan, Sweden with a manufacturing facility located in Kaunas, Lithuania. The company funded the acquisition with available cash.

 

The following table sets forth the final purchase price allocation for Accel acquisition-date net assets, in accordance with the purchase method of accounting with adjustments to record the acquired net assets at their estimated fair values.

 

Accel AB purchase price allocation (in thousands):

 

Cash

  $ 344  

Current assets, net

    8,643  

Property, plant and equipment

    3,731  

Other assets

    7  

Goodwill

    11,536  

Distribution network

    1,321  

Trademarks

    1,259  

Patents and licenses

    2,435  

Current liabilities

    (5,411 )
    $ 23,865  

 

 

All Accel goodwill and other assets and liabilities were recorded in the Automotive business unit segment and reflected in the Europe geographical area. The distribution network is being amortized over three to 10 years. Trademarks are being amortized over five years. Patents and licenses are being amortized over 10 years.

 

 
7

 

 

Notes to CONDENSED Consolidated Financial Statements (Unaudited)

 

3. Acquisition of Businesses, continued

 

The goodwill resulting from this acquisition consists largely of the company’s expected future product sales and synergies from combining Accel’s products with the company’s existing product offerings.

 

Goodwill for the above acquisition is not expected to be deductible for tax purposes. As required by purchase accounting rules, the company recorded a $0.4 million step-up of inventory to its fair value as of the acquisition date. During the third quarter of 2012, as the inventory was sold, cost of goods sold included $0.4 million of non-cash charges for this step-up.

 

Terra Power Systems, LLC

 

On September 26, 2012, the company acquired 100% of Terra Power Systems, LLC (“Terra Power”), a U.S. manufacturer of electromechanical components including power distribution modules and fuse holders for commercial vehicle products for $10.6 million. The acquisition allows the company to strengthen its position in the commercial vehicle products market by adding new products and new customers within its Automotive business unit segment. Terra Power is based in Bellingham, Washington. The company funded the acquisition with available cash.

 

All Terra Power goodwill and other assets and liabilities were recorded in the Automotive business unit segment and reflected in the Americas geographical area. The goodwill resulting from this acquisition consists largely of the company’s expected future product sales and synergies from combining Terra Power’s products with the company’s existing commercial vehicle product offerings. Goodwill for the above acquisition is expected to be deductible for tax purposes.

 

The following table sets forth the final purchase price allocation as of September 28, 2013 for Terra Power acquisition-date net assets, in accordance with the purchase method of accounting with adjustments to record the acquired net assets at their estimated fair values.

 

Terra Power final purchase price allocation (in thousands):

 

Cash

  $ 105  

Current assets, net

    1,625  

Property, plant and equipment

    457  

Goodwill

    4,562  

Other intangibles

    4,064  

Current liabilities

    (213 )
    $ 10,600  

   

Pro forma financial information is not presented for the company’s 2012 business acquisitions described above due to amounts not being materially different than actual results.

 

4. Inventories

 

The components of inventories at September 28, 2013 and December 29, 2012 are as follows (in thousands):

 

   

September 28,

2013

   

December 29,

2012

 

Raw material

  $ 39,000     $ 21,689  

Work in process

    17,650       11,868  

Finished goods

    35,328       42,023  

Total inventories

  $ 91,978     $ 75,580  

 

 
8

 

  

Notes to CONDENSED Consolidated Financial Statements (Unaudited)

 

5. Other Investments

 

The company’s other investments represent shares of Polytronics Technology Corporation Ltd. (“Polytronics”), a Taiwanese company. The Polytronics investment was acquired as part of the Heinrich Companies acquisition in 2004. The fair value of the Polytronics investment was €8.3 million (approximately $11.1 million) at September 28, 2013 and €7.8 million (approximately $10.3 million) at December 29, 2012. Included in other comprehensive income for the nine months ended September 28, 2013, is an unrealized gain of $0.5 million, due to the increase in fair market value of the Polytronics investment. The remaining movement was due to the impact of changes in exchange rates.

 

6. Impairment of Investment in Unconsolidated Affiliate

 

During the first quarter of 2013, the company fully impaired its investment in and loan receivable from Shocking owing to their filing for Chapter 7 bankruptcy protection on March 12, 2013. The impairment charge of approximately $10.7 million consisted of the remaining equity method investment of $8.7 million and a $2.0 million loan receivable, and reduces the carrying value of both the investment and loan receivable to zero at both March 30 and September 28, 2013.

 

The loss was recorded as a component of impairment and equity loss of unconsolidated affiliate in the Consolidated Statements of Net Income for the nine months ended September 28, 2013.

 

7. Debt

 

The carrying amounts of long-term debt at September 28, 2013 and December 29, 2012 are as follows (in thousands):

 

   

September 28, 2013

   

December 29, 2012

 
                 

Term loan

  $ 100,000     $  

Revolving credit facility

    128,500       84,000  
      228,500       84,000  

Less: Current maturities

    133,500       84,000  

Total long-term debt

  $ 95,000     $  

 

On May 31, 2013, the company entered into a new credit agreement with J.P. Morgan Securities LLC for up to $325.0 million which consists of an unsecured revolving credit facility of $225.0 million and an unsecured term loan of $100.0 million. The new credit agreement is for a five year period. At September 28, 2013, the company had available $95.9 million of borrowing capacity under the revolving credit agreement at an interest rate of LIBOR plus 1.25% (1.43% as of September 28, 2013). The company incurred debt issuance costs of $0.8 million which will be amortized over the life of the new credit agreement.

 

The credit agreement replaces the company’s previous credit agreement dated June 13, 2011 which was terminated on May 31, 2013.

 

The company assumed three credit lines with the acquisition of Hamlin totaling RMB 41.0 million (approximately $6.6 million) as of June 29, 2013 with expiration dates from August 23, 2013 through April 22, 2014. Two of these credit lines expired during the third quarter with the remaining credit line totaling RMB 20 million (approximately $3.3 million) as of September 28, 2013. No amounts were drawn under this line of credit at September 28, 2013.

 

The company assumed an agreement for the sale of debts to HSBC Invoice Finance (UK) Ltd. with the acquisition of Hamlin totaling $1.8 million GBP (approximately $2.7 million) as of June 29, 2013. The company terminated this agreement during the third quarter of 2013.

  

 
9

 

  

Notes to CONDENSED Consolidated Financial Statements (Unaudited)

 

8. Fair Value of Assets and Liabilities

 

In determining fair value, the company uses various valuation approaches within the fair value measurement framework. Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability.

 

Applicable accounting literature establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Applicable accounting literature defines levels within the hierarchy based on the reliability of inputs as follows:

 

Level 1—Valuations based on unadjusted quoted prices for identical assets or liabilities in active markets;

Level 2—Valuations based on quoted prices for similar assets or liabilities or identical assets or liabilities in less active markets, such as dealer or broker markets; and

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable, such as pricing models, discounted cash flow models and similar techniques not based on market, exchange, dealer or broker-traded transactions.

 

Following is a description of the valuation methodologies used for instruments measured at fair value and their classification in the valuation hierarchy.

 

Investment in Polytronics

 

The company holds an investment in the equity securities of Polytronics as described in Note 5. Equity securities listed on a national market or exchange are valued at the last sales price. Such securities are classified within Level 1 of the valuation hierarchy.

 

Investment in Shocking Technologies, Inc.

 

The company held an investment in an unconsolidated affiliate, Shocking, as described in Note 6, for which the valuation model that was used to determine the fair value at December 29, 2012, was a discounted cash flow model to value equity and then an option pricing method to allocate the equity value to the various classes of stock in the capital structure, including Series C and common shares held by the company. Significant unobservable inputs used included an expected two years until liquidity event, a volatility of 35% and a risk free rate of 0.44%. The investment was categorized as Level 3.

 

There were no changes during the quarter ended September 28, 2013 to the company’s valuation techniques used to measure asset and liability fair values on a recurring basis.

 

The following table presents assets and liabilities measured at fair value by classification within the fair value hierarchy as of September 28, 2013 (in thousands):

 

   

Fair Value Measurements Using

       
   

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

   

Significant

Other

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

     

Total

 
                                 

Investment in Polytronics

  $ 11,136     $     $     $ 11,136  

Total

  $ 11,136     $     $     $ 11,136  

 

 
10

 

  

Notes to CONDENSED Consolidated Financial Statements (Unaudited)

 

8. Fair Value of Assets and Liabilities, continued

 

The following table presents assets measured at fair value by classification within the fair value hierarchy as of December 29, 2012 (in thousands):

 

   

Fair Value Measurements Using

         
   

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

   

Significant

Other

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

     

Total 

 
                                 

Investment in Polytronics

  $ 10,327     $     $     $ 10,327  

Investment in unconsolidated affiliate

                8,666       8,666  

Total

  $ 10,327     $     $ 8,666     $ 18,993  

 

 The company’s other financial instruments include cash and cash equivalents, short-term investments, accounts receivable, accounts payable and debt. The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and debt approximate their fair values. The company’s debt fair value approximates book value at September 28, 2013 and December 29, 2012, respectively, as the variable interest rates fluctuate along with market interest rates.

 

9. Earnings Per Share

 

The company computes earnings per share using the two-class method. The two-class method includes an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period. The company’s reported net earnings is reduced by the amount allocated to participating securities to arrive at the earnings allocated to common stock shareholders for purposes of calculating earnings per share.

 

The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock or the two-class method. The company has determined the two-class method to be the more dilutive. As such, the earnings allocated to common stock shareholders in the basic earnings per share calculation is adjusted for the reallocation of undistributed earnings to participating securities to arrive at the earnings allocated to common stock shareholders for calculating the diluted earnings per share.

 

 
11

 

 

 

Notes to CONDENSED Consolidated Financial Statements (Unaudited)

 

9. Earnings Per Share, continued

 

The following table sets forth the computation of basic and diluted earnings per share under the two-class method.

 

   

For the Three Months Ended

   

For the Nine Months Ended

 

(in thousands except per share amounts)

 

September 28,

2013

   

September 29,

2012

   

September 28,

2013

   

September 29,

2012

 
                                 

Net income as reported

  $ 26,990     $ 22,778     $ 68,432     $ 63,304  

Less: Distributed earnings available to participating securities

    (3 )     (9 )     (21 )     (21 )

Less: Undistributed earnings available to participating securities

          (19 )     (17 )     (102 )

Numerator for basic earnings per share —

                               

Undistributed and distributed earnings available to common shareholders

  $ 26,987     $ 22,750     $ 68,394     $ 63,181  

Add: Undistributed earnings allocated to participating securities

          19       17       102  

Less: Undistributed earnings reallocated to participating securities

          (19 )     (17 )     (100 )

Numerator for diluted earnings per share —

                               

Undistributed and distributed earnings available to common shareholders

  $ 26,987     $ 22,750     $ 68,394     $ 63,183  

Denominator for basic earnings per share —

                               

Weighted-average shares

    22,428       21,923       22,274       21,770  

Effect of dilutive securities:

                               

Common stock equivalents

    197       239       223       285  

Denominator for diluted earnings per share —

    22,625       22,162       22,497       22,055  

Adjusted for weighted-average shares & assumed conversions

                               

Basic earnings per share

  $ 1.20     $ 1.04     $ 3.07     $ 2.90  

Diluted earnings per share

  $ 1.19     $ 1.03     $ 3.04     $ 2.87  

 

10. Income Taxes

 

The effective tax rate for the third quarter of 2013 was 26.1% compared to an effective tax rate of 22.6% in the third quarter of 2012. The effective tax rate for the nine months ended September 28, 2013 was 23.9% as compared to an effective tax rate of 25.7% for the nine months ended September 29, 2012. The effective tax rates for both the third quarter and nine month periods of 2013 and 2012 are lower than the U.S. statutory tax rate primarily due to the result of more income earned in lower tax jurisdictions. 

 

 
12

 

  

Notes to CONDENSED Consolidated Financial Statements (Unaudited)

 

11. Pensions

 

The components of net periodic benefit cost for the three and nine and months ended September 28, 2013, compared with the three and nine months ended September 29, 2012, were (in thousands):

 

   

U.S. Pension Benefits

   

Foreign Plans

 
   

Three Months Ended

   

Nine Months Ended

   

Three Months Ended

   

Nine Months Ended

 
   

Sept. 28, 2013

   

Sept. 29, 2012

   

Sept. 28, 2013

   

Sept. 29, 2012

   

Sept. 28, 2013

   

Sept. 29, 2012

   

Sept. 28, 2013

   

Sept. 29, 2012

 
                                                                 

Service cost

  $ 150     $ 150     $ 450     $ 450     $ 290     $ 192     $ 813     $ 575  

Interest cost

    891       1,240       2,674       3,721       532       195       1,014       586  

Expected return on plan assets

    (1,340 )     (1,655 )     (4,020 )     (4,965 )     (446 )     (120 )     (717 )     (362 )

Amortization of net loss

    235       85       706       254       39       17       116       51  

Total cost (credit) of the plan

    (64 )     (180 )     (190 )     (540 )     415       284       1,226       850  

Expected plan participants’ contribution

    -       -       -       -       -       -       -       -  

Net periodic benefit cost (credit)

  $ (64 )   $ (180 )   $ (190 )   $ (540 )   $ 415     $ 284     $ 1,226     $ 850  

 

The expected rate of return assumption on domestic pension assets is approximately 6.8% and 7.8% in 2013 and 2012, respectively. The expected return on foreign pension assets is approximately 4.9% and 4.5% in 2013 and 2012, respectively.

 

12. Business Unit Segment Information

 

The company and its subsidiaries design, manufacture and sell circuit protection devices throughout the world. The company reports its operations by the following business unit segments: Electronics, Automotive, and Electrical. Each operating segment is directly responsible for sales, marketing and research and development. Manufacturing, purchasing, logistics, customer service, finance, information technology and human resources are shared functions that are allocated back to the three operating segments. The CEO allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss) before interest and taxes, but does not evaluate the operating segments using discrete balance sheet information.

 

Sales, marketing and research and development expenses are charged directly into each operating segment. All other functions are shared by the operating segments and expenses for these shared functions are allocated to the operating segments and included in the operating results reported below. The company does not report inter-segment revenue because the operating segments do not record it. The company does not allocate interest and other income, interest expense, or taxes to operating segments. Although the CEO uses operating income (loss) to evaluate the segments, operating costs included in one segment may benefit other segments. Except as discussed above, the accounting policies for segment reporting are the same as for the company as a whole.

 

An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. The CODM is the company’s President and Chief Executive Officer (“CEO”). 

 

 
13

 

 

 

Notes to CONDENSED Consolidated Financial Statements (Unaudited)

 

12. Business Unit Segment Information, continued

 

Business unit segment information for the three and nine months ended September 28, 2013 and September 29, 2012 are summarized as follows (in thousands):

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 28,

2013

   

September 29,

2012

   

September 28,

2013

   

September 29,

2012

 

Net sales

                               

Electronics

  $ 101,013     $ 87,779     $ 271,878     $ 254,342  

Automotive

    70,386       51,878       194,319       155,954  

Electrical

    29,641       33,031       93,527       98,823  

Total net sales

  $ 201,040     $ 172,688     $ 559,724     $ 509,119  
                                 

Depreciation and amortization

                               

Electronics

  $ 5,784     $ 5,115     $ 15,776     $ 15,713  

Automotive

    2,880       1,911       7,183       4,862  

Electrical

    937       943       2,893       2,911  

Total depreciation and amortization

  $ 9,601     $ 7,969     $ 25,852     $ 23,486  
                                 

Operating income (loss)

                               

Electronics

  $ 20,362     $ 17,186     $ 52,284     $ 43,075  

Automotive

    11,135       7,018       29,531       23,489  

Electrical

    6,687       8,235       18,801       23,795  

Other(1)

    (625 )     (1,508 )     (3,558 )     (1,508 )

Total operating income

    37,559       30,931       97,058       88,851  

Interest expense

    939       454       1,959       1,298  

Impairment, loan loss and equity in net loss or unconsolidated affiliate (2)

          1,965       10,678       3,523  
Foreign exchange (gain) loss     1,476       834       (1,929 )     1,903  

Other (income) expense, net

    (1,380     (1,350 )     (3,543 )     (3,025 )

Income before income taxes(3)

  $ 36,524     $ 29,028     $ 89,893     $ 85,202  

(1) “Other” consists of acquisition related costs. (2) During the first quarter of 2013, the company recorded approximately $10.7 million related to the impairment of its investment in Shocking Technologies (See Note 6). (3) 2012 Income before income taxes has been restated to reflect the company’s retroactive equity losses from Shocking Technologies. (See Note 2).

 

The company’s significant net sales by country for the three and nine months ended September 28, 2013 and September 29, 2012 are summarized as follows (in thousands):

 

   

For the Three Months Ended(a)

   

For the Nine Months Ended(a)

 
   

September 28,

2013

   

September 29,

2012

   

September 28,

2013

   

September 29,

2012

 
                                 

United States

  $ 76,183     $ 56,043     $ 202,731     $ 170,653  

China

    43,644       39,282       114,952       107,409  

Other countries

    81,213       77,363       242,041       231,057  

Total

  $ 201,040     $ 172,688     $ 559,724     $ 509,119  

(a) Sales by country represent sales to customer or distributor locations. 

 

 
14

 

  

Notes to CONDENSED Consolidated Financial Statements (Unaudited)

 

12. Business Unit Segment Information, continued

 

The company’s significant long-lived assets by country as of September 28, 2013 and December 29, 2012 are summarized as follows (in thousands):

   

Long-lived assets(b)

 
   

September 28, 2013

   

December 29, 2012

 
                 

United States

  $ 28,445     $ 14,433  

China

    42,787       41,504  

Canada

    14,962       13,839  

Other countries

    59,906       51,135  

Total

  $ 146,100     $ 120,911  

(b) Long-lived assets consist of net property, plant and equipment.

 

13. Accumulated Other Comprehensive Income (Loss) (AOCI)

 

The following table sets forth the changes in the components of AOCI by component (in thousands):

 

AOCI component

 

Balance at

December 29, 2012

   

Other

comprehensive

income (loss)

activity

   

Balance at

September 28, 2013

 
                         

Pension liability adjustment(a)

  $ (20,879 )   $ (349 )   $ (21,228 )

Unrealized gain on investments(b)

    7,867       546       8,413  

Foreign currency translation adjustment

    29,560       (2,998 )     26,562  

Total

  $ 16,548             $ 13,747  

 

(a) Balances are net of tax of $12,017 and $11,819 for 2013 and 2012, respectively.

(b) Balances are net of tax of $0 and $0 for 2013 and 2012, respectively.

 

 
15

 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Littelfuse Overview

Littelfuse, Inc. and its subsidiaries (the “company” or “Littelfuse”) is the worldwide leader in circuit protection offering the industry's broadest and deepest portfolio of circuit protection products and solutions. The company’s devices protect products in virtually every market that uses electrical energy, from consumer electronics to automobiles to industrial equipment. The company’s worldwide revenue in 2012 was $667.9 million and net earnings were $75.3 million. The company conducts its business through three reportable segments, which are defined by markets and consist of Electronics, Automotive, and Electrical. The company’s customer base includes original equipment manufacturers, tier one automotive suppliers and distributors.

 

In addition to protecting and growing its core circuit protection business, Littelfuse has been investing in power control and sensing technologies. These newer platforms combined with the company’s strong balance sheet and operating cash flow, provide opportunities for increased organic and acquisition growth. The company has set a target to grow 15% per year, 5% organically and 10% through acquisitions.

 

To maximize shareholder value, the company’s primary strategic goals are to:

 

Grow organically faster than its markets;

 

 

Double the pace of acquisitions;

 

 

Sustain high-teens operating margins;

 

 

Improve return on investment; and

 

 

Return excess cash to shareholders.

 

The company serves markets that are directly impacted by global economic trends with significant exposures to the consumer electronics, automotive, industrial and mining end markets. The company’s results will be impacted positively or negatively by changes in these end markets.

 

Electronics Segment

The Electronics segment sells passive and semiconductor components and modules primarily into the global consumer electronics, general industrial and telecommunications markets. The core electronics markets are characterized by significant Asia competition and price erosion. As a result the company is focusing additional efforts on higher growth, less price sensitive niche markets such as LED lighting and higher-power industrial applications. The Hamlin acquisition expands the company’s product offering into reed switches which are used in a wide variety of electronic products and go through the same channels as the company’s core electronics products.

 

Automotive Segment

The Automotive segment is comprised of passenger vehicle circuit protection, commercial vehicle products and sensors. The primary growth drivers for these businesses are increasing global demand for passenger and commercial vehicles and increasing content per vehicle for both circuit protection and sensing products. The move away from internal combustion engines to hybrid and electric drive systems that require more circuit protection is expected to be an additional growth driver. The Hamlin acquisition significantly expands the company’s position in automotive sensors.

 

Electrical Segment

The Electrical segment derives its revenues from power fuses, protection relays and custom products selling primarily into the industrial, mining, solar and oil and gas markets. The power fuse business continues to perform well with sales growing in the high single digits or better for six consecutive quarters. Custom products sales, after several years of strong growth, have declined due to several large Canadian potash mining projects nearing completion. The company intends to expand this business by moving into new markets such as non-potash mining and oil and gas. Protection relay sales have also slowed due to the general slowdown in the global mining market.

 

 
16

 

 

 

The following table is a summary of the company’s net sales by business unit and geography:

 

Net Sales by Business Unit and Geography (in thousands, unaudited)

 

   

Third Quarter

   

Year-to-Date

 
   

2013

   

2012

   

%

Change

   

2013

   

2012

   

%

 Change

 

Business Unit

                                               

Electronics

  $ 101,013     $ 87,779       15%     $ 271,878     $ 254,342       7%  

Automotive

    70,386       51,878       36%       194,319       155,954       25%  

Electrical

    29,641       33,031       (10)%       93,527       98,823       (5)%  
                                                 

Total

  $ 201,040     $ 172,688       16%     $ 559,724     $ 509,119       10%  

 

   

Third Quarter

   

Year-to-Date

 
   

2013

   

2012

   

%

Change

   

2013

   

2012

   

%

Change

 

Geography(a)

                                               

Americas

  $ 89,682     $ 75,821       18%     $ 254,037     $ 230,754       10%  

Europe

    35,490       27,316       30%       100,360       82,126       22%  

Asia-Pacific

    75,868       69,551       9%       205,327       196,239       5%  
                                                 

Total

  $ 201,040     $ 172,688       16%     $ 559,724     $ 509,119       10%  

(a) Sales by geography represent sales to customer or distributor locations.

 

Results of Operations – Third Quarter, 2013 compared to 2012

 

The following table summarizes the company’s consolidated results of operations for the periods presented. The results include incremental activity from the company’s business acquisitions as described, where applicable, in the below analysis. There were also additional expenses and accounting adjustments during 2013. These include a $2.1 million inventory adjustment for the year-to-date of which $0.4 million was in the current quarter, as described in Note 3, and $1.5 million in acquisition related operating expenses for the year-to date of which $0.3 million was in the current quarter, both related to the Hamlin acquisition. There was also $1.9 million of favorable foreign currency revaluation for the year-to-date primarily related to U.S. dollar gains against the Philippine peso. The impact of foreign currency revaluation for the current quarter was a loss of $1.5 million primarily related to the U.S. dollar weakening against the Philippine peso.

 

(In thousands, unaudited)

 

Third Quarter

   

Year-to-Date

 
   

2013

   

2012

   

%

Change

   

2013

   

2012

   

%

Change

 

Sales

  $ 201,040     $ 172,688       16%     $ 559,724     $ 509,119       10%  

Gross Profit

    80,960       68,636       18%       219,123       199,060       10%  

Operating expense

    43,401       37,705       15%       122,065       110,209       11%  

Operating income

    37,559       30,931       21%       97,058       88,851       9%  

Other (income) expense, net

    1,035       1,903       (46%)       7,165       3,649       96%