lfus20161025_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 OCTOBER 1, 2016

 

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 28, 2016, 22,532,130 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 October 1, 2016 (unaudited) and January 2, 2016 

1

     
 

Consolidated Statements of Net Income for the three and nine months ended October 1, 2016 (unaudited) and September 26, 2015 (unaudited)

2

     
 

Consolidated Statements of Comprehensive Income for the three and nine months ended October 1, 2016 (unaudited) and September 26, 2015 (unaudited)

3

     
 

Consolidated Statements of Cash Flows for the nine months ended October 1, 2016 (unaudited) and September 26, 2015 (unaudited)

4

     
 

Notes to Condensed Consolidated Financial Statements (unaudited)

5

     
Item 2.

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

19

     
Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

27

     
Item 4.

Controls and Procedures.

28

     

PART II - OTHER INFORMATION

 
     
Item 1.

Legal Proceedings

29

     
Item 1A. Risk Factors 29
     
Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

     
Item 3. Defaults Upon Senior Securities 29
     
Item 4.

Mine Safety Disclosures

29
     
Item 5. Other Information 29
     
Item 6.

Exhibits

30

     

Signatures

 31

 

 
 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

LITTELFUSE, INC.

Condensed Consolidated Balance Sheets

(In thousands of USD, except share amounts)

 

   

October 1, 2016

   

January 2, 2016

 
   

(unaudited)

         

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 194,494     $ 328,786  

Short-term investments

    3,961       4,179  

Accounts receivable, less allowances

    205,211       142,882  

Inventories

    121,616       98,629  

Prepaid income taxes and income taxes receivable

    14,344       1,510  

Prepaid expenses and other current assets

    15,543       7,943  

Total current assets

    555,169       583,929  

Property, plant and equipment:

               

Land

    10,044       5,236  

Buildings

    83,441       71,383  

Equipment

    439,430       382,429  
      532,915       459,048  

Accumulated depreciation

    (309,062 )     (296,480 )

Net property, plant and equipment

    223,853       162,568  

Intangible assets, net of amortization:

               

Patented and unpatented technologies, licenses and software

    88,322       20,221  

Distribution network

    19,566       16,490  

Customer lists, trademarks and tradenames

    116,684       54,912  

Goodwill

    409,527       189,767  

Investments

    14,974       15,197  

Deferred income taxes

    17,151       8,333  

Other assets

    12,857       14,058  
                 

Total assets

  $ 1,458,103     $ 1,065,475  
                 

Liabilities and Equity

               

Current liabilities:

               

Accounts payable

  $ 81,382     $ 51,658  

Accrued payroll

    39,517       32,611  

Accrued expenses

    48,713       24,145  

Accrued severance

    3,420       3,798  

Accrued income taxes

    8,622       11,836  

Current portion of long-term debt

    6,250       87,000  

Total current liabilities

    187,904       211,048  

Long-term debt, less current portion

    434,206       83,753  

Deferred income taxes

    7,345       8,014  

Accrued post-retirement benefits

    6,235       5,653  

Other long-term liabilities

    19,037       17,755  

Total equity

    803,376       739,252  
                 

Total liabilities and equity

  $ 1,458,103     $ 1,065,475  
                 

Common shares issued of 22,643,816 and 22,420,785, at October 1, 2016, and January 2, 2016, 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

 
   

October 1,

2016

   

September 26,

2015

   

October 1,

2016

   

September 26,

2015

 
                                 

Net sales

  $ 280,331     $ 215,510     $ 771,641     $ 647,844  
                                 

Cost of sales

    166,572       129,328       472,861       400,051  
                                 

Gross profit

    113,759       86,182       298,780       247,793  
                                 

Selling, general and administrative expenses

    56,589       37,002       150,047       112,119  

Research and development expenses

    10,403       7,479       30,884       22,224  

Pension settlement expense

    -       30,194       -       30,194  

Amortization of intangibles

    4,432       2,923       13,384       8,953  

Impairment of goodwill and intangible assets

    14,809       -       14,809       -  
      86,233       77,598       209,124       173,490  
                                 

Operating income

    27,526       8,584       89,656       74,303  
                                 

Interest expense

    2,571       922       6,286       3,021  

Foreign exchange (gain) loss

    (4,700 )     (3,549 )     (7,114 )     (1,724 )

Other (income) expense, net

    (778 )     (1,430 )     (1,040 )     (3,758 )
                                 

Income before income taxes

    30,433       12,641       91,524       76,764  
                                 

Income taxes

    (369 )     1,317       14,281       16,761  
                                 

Net income

  $ 30,802     $ 11,324     $ 77,243     $ 60,003  
                                 

Net income per share (see Note 10):

                               

Basic

  $ 1.36     $ 0.50     $ 3.43     $ 2.65  

Diluted

  $ 1.35     $ 0.50     $ 3.41     $ 2.64  
                                 

Weighted average shares and equivalent shares outstanding:

                               

Basic

    22,578       22,581       22,515       22,623  

Diluted

    22,734       22,693       22,675       22,771  
                                 

Cash dividends paid per common share

  $ 0.33     $ 0.29     $ 0.91     $ 0.79  

 

 
2

 

 

LITTELFUSE, INC.

Consolidated Statements of Comprehensive Income

(In thousands of USD, unaudited)

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

October 1, 2016

   

September 26,

2015

   

October 1, 2016

   

September 26,

2015

 
                                 

Net income

  $ 30,802     $ 11,324     $ 77,243     $ 60,003  

Other comprehensive income (loss):

                               

Pension liability adjustments (net of tax of $30 and $7 for the three months ended 2016 and 2015, and $395 and $49 for the nine months ended 2016 and 2015, respectively)

    (138 )     (16 )     (183 )     (140 )

Reclassification adjustments to expense, (net of tax of $0 and $1,244, for the three months ended 2016 and 2015, and $0 and $746 for the nine months ended 2016 and 2015, respectively)

    68       (514 )     212       1,457  

Reclassification of pension settlement costs to expense (net of tax of $11,742 for the three and nine months ended 2015)

          21,124             21,124  

Unrealized (loss) gain on investments

    927       (3,354 )     (559 )     (18 )

Foreign currency translation adjustments

    (5,771 )     (26,377 )     (8,951 )     (36,530 )

Comprehensive income

  $ 25,888     $ 2,187     $ 67,762     $ 45,896  

 

See accompanying notes.

 

 
3

 

 

LITTELFUSE, INC.

Consolidated Statements of Cash Flows

(In thousands of USD, unaudited)

 

   

For the Nine Months Ended

 
   

October 1, 2016

   

September 26, 2015

 

Operating activities:

               

Net income

  $ 77,243     $ 60,003  

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

               

Depreciation

    24,841       22,154  

Amortization of intangibles

    13,384       8,952  

Impairment of goodwill and intangible assets

    14,809        

Loss on sale of product line

    1,391        

Stock-based compensation

    9,166       7,997  

Non-cash inventory charge

    7,456        

Net loss on pension settlement, net of tax

          19,472  

Excess tax benefit on share-based compensation

    (2,272 )     (1,500 )

Loss on sale of property, plant and equipment

    440       308  

Changes in operating assets and liabilities:

               

Accounts receivable

    (24,862 )     (18,274 )

Inventories

    4,505       (4,203 )

Accounts payable

    7,845       4,216  

Accrued expenses (including post-retirement)

    6,497       6,577  

Accrued payroll and severance

    1,388       3,598  

Accrued taxes

    (23,613 )     4,006  

Prepaid expenses and other

    (18,203 )     277  

Net cash provided by operating activities

    100,015       113,583  
                 

Investing activities:

               

Purchases of property, plant, and equipment

    (34,501 )     (35,016 )

Acquisition of businesses, net of cash acquired

    (468,636 )      

Proceeds from maturities of short term investments

    345        

Decrease in entrusted loan receivable

    4,056       5,930  

Proceeds from sale of assets

    255       38  

Net cash used in investing activities

    (498,481 )     (29,048 )
                 

FINANCING activities:

               

Proceeds of revolving credit facility

    258,000       49,000  

Proceeds of term loan

    234,000        

Payments of revolving credit facility

    (97,500 )     (25,000 )

Payments of term loan

    (119,125 )     (3,750 )

Payments of entrusted loan

    (4,056 )     (5,930 )

Debt issuance costs

    (1,701 )     (42 )

Cash dividends paid

    (20,405 )     (17,864 )

Proceeds from exercise of stock options

    14,581       6,186  

Excess tax benefit on share-based compensation

    2,272       1,500  

Purchases of common stock

    (3,685 )     (31,252 )

Net cash (used in) provided by financing activities

    262,381       (27,152 )
                 

Effect of exchange rate changes on cash and cash equivalents

    1,793       (18,314 )
                 

Increase (decrease) in cash and cash equivalents

    (134,292 )     39,069  

Cash and cash equivalents at beginning of period

    328,786       297,571  

Cash and cash equivalents at end of period

  $ 194,494     $ 336,640  

 

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 Regulation 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, although the company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the periods ended October 1, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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 January 2, 2016.

 

The company’s unaudited consolidated statement of income for the three and nine months ended October 1, 2016 include the operating results of PolySwitch business purchased from TE Connectivity Ltd and the TVS Diode/Thyristor/IGBT business purchased from ON Semiconductor Corporation since the acquisition dates of these businesses of March 25, 2016 and August 29, 2016, respectively.

 

2. Correction of immaterial errors

 

In the second quarter of 2016, management determined that the company may incur additional income taxes and interest in a foreign jurisdiction with respect to the 2011 through 2015 fiscal years. The cumulative adjustment for this income tax (including interest of $1.5 million) as of January 2, 2016, is approximately $4.9 million. The adjustment applicable to 2015, 2014, 2013, 2012 and 2011 was $1.6 million, $1.3 million, $1.0 million, $0.9 million and $0.1 million, respectively.

 

Pursuant to the guidance of Staff Accounting Bulletin ("SAB") No. 99, Materiality, the company concluded that the errors were not material to any of its applicable prior period annual and quarterly financial statements. Although the errors were immaterial to prior periods, the prior period annual and interim financial statements were revised, in accordance with SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, due to the significance of the out-of-period correction. The adjustment for each year has been treated as applicable to the fourth quarter of each year.

 

A reconciliation of the effects of the adjustments to the previously reported balance sheet at January 2, 2016 follows ($ in thousands):

 

   

January 2, 2016

 
   

Previously

Reported

   

Adjustment

   

As Revised

 

Other long-term liabilities

  $ 12,809     $ 4,946     $ 17,755  

Total equity

    744,198       (4,946

)

    739,252  

 

 
5

 

 

A reconciliation of the effects of the adjustments to the previously reported statements of net income for the years ended January 2, 2016 and December 27, 2014 follows ($ in thousands, except per share amounts):

 

   

Year Ended January 2, 2016

   

Year Ended December 27, 2014

 
   

Previously

Reported

   

Adjustment

   

As Revised

   

Previously

Reported

   

Adjustment

   

As Revised

 

Income taxes

  $ 24,482     $ 1,600     $ 26,082     $ 32,228     $ 1,318     $ 33,546  

Net income

    82,466       (1,600

)

    80,866       99,418       (1,318

)

    98,100  

Net income per share - Basic

  $ 3.65     $ (0.07

)

  $ 3.58     $ 4.41     $ (0.06

)

  $ 4.35  

Net income per share - Diluted

  $ 3.63     $ (0.07

)

  $ 3.56     $ 4.37     $ (0.05

)

  $ 4.32  

 

A reconciliation of the effects of the adjustments to the previously reported statements of cash flows for the years ended January 2, 2016 and December 27, 2014 follows ($ in thousands):

 

   

Year Ended January 2, 2016

   

Year Ended December 27, 2014

 
   

Previously

Reported

   

Adjustment

   

As Revised

   

Previously

Reported

   

Adjustment

   

As Revised

 

Net income

  $ 82,466     $ (1,600

)

  $ 80,866     $ 99,418     $ (1,318

)

  $ 98,100  

Accrued taxes

    (1,043

)

    1,600       557       (549

)

    1,318       769  

Net cash provided by operating activities

    165,826             165,826       153,141             153,141  

 

A reconciliation of the effects of the adjustments to the previously reported statements of equity for the years ended January 2, 2016 and December 27, 2014 follows ($ in thousands):

 

   

Year Ended January 2, 2016

   

Year Ended December 27, 2014

 
   

Previously

Reported

   

Adjustment

   

As Revised

   

Previously

Reported

   

Adjustment

   

As Revised

 

Net income

  $ 82,466     $ (1,600

)

  $ 80,866     $ 99,418     $ (1,318

)

  $ 98,100  

Comprehensive income

    57,921       (1,600

)

    56,321       57,875       (1,318

)

    56,557  

Retained earnings

    562,717       (4,946

)

    557,771       523,302       (3,346

)

    519,956  

Total shareholders’ equity

    744,198       (4,946

)

    739,252       727,665       (3,346

)

    724,319  

 

A reconciliation of the effects of the adjustments to the previously reported statement of equity at December 28, 2013 follows ($ in thousands):

 

   

December 28, 2013

 
   

Previously

Reported

   

Adjustment

   

As Revised

 

Retained earnings

  $ 445,059     $ (2,028

)

  $ 443,031  

Total shareholders’ equity

    686,916       (2,028

)

    684,888  

 

 
6

 

 

3. Reclassifications

 

Certain amounts presented in the 2015 financial statements have been reclassified to conform to the 2016 presentation. In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amended guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amended guidance is to be applied on a retrospective basis. The company adopted the new guidance on January 3, 2016 and has made the corresponding reclassification on its balance sheet for the fiscal year ended January 2, 2016. The adoption of the new guidance had no effect on the company’s net income, cash flows or shareholders’ equity. Additionally, the company has reclassified a portion of its current tax position at January 2, 2016 to more accurately reflect its prepaid/liability position at a jurisdictional level.

 

4. Acquisition of Businesses

 

TVS Diode/Thyristor/IGBT business

 

On August 29, 2016, the company acquired certain assets of select businesses (the “TVS Diode/Thyristor/IGBT business”) of ON Semiconductor Corporation for $104.0 million. The company funded the acquisition with available cash and proceeds from its credit facility. The acquired business, which is included in the Electronics segment, consists of a product portfolio that includes transient voltage suppression (TVS) diodes, switching thyristors and insulated gate bipolar transistors (IGBT) for automotive ignition applications. The acquisition expands the company’s offerings in power semiconductor applications as well as increases its presence in the automotive electronics market. The TVS Diode/Thyristor/IGBT business products have strong synergies with the company’s existing circuit protection business, will strengthen its channel partnerships and customer engagement, and expand its power semiconductor portfolio.

 

The following table represents the preliminary allocation of the total consideration to assets acquired and liabilities assumed in the acquisition of the TVS Diode/Thyristor/IGBT business based on the company’s preliminary estimate of their respective fair values at the acquisition date (in thousands):

 

Total purchase consideration:

       

Cash

  $ 104,000  

Preliminary allocation of consideration to assets acquired and liabilities assumed:

       

Current assets, net

    4,616  

Customer relationships

    31,650  

Patented and unpatented technologies

    10,250  

Non-compete agreement

    2,500  

Goodwill

    54,984  
    $ 104,000  

  

All the TVS Diode/Thyristor/IGBT business goodwill and other assets were recorded in the Electronics segment and are reflected in the Americas and Europe geographic areas. The customer relationships are preliminarily being amortized over 13.5 years. The patented and unpatented technologies are preliminarily being amortized over 6-8.5 years. The non-compete agreement is preliminarily being amortized over 4 years. The goodwill resulting from this acquisition consists largely of the company’s expected future product sales and synergies from combining the TVS Diode/Thyristor/IGBT business products with the company’s existing power semiconductor product portfolio. A portion of goodwill for the above acquisition is expected to be deductible for tax purposes.

 

As required by purchase accounting rules, the company recorded a $0.5 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. $0.3 million of the step-up was amortized as a non-cash charge to cost of goods sold during the third quarter of 2016, as the acquired inventory was sold, and reflected as other non-segment costs.

 

 
7

 

 

Included in the company’s consolidated statements of net income for the three and nine months ended October 1, 2016 are net sales of approximately $5.6 million and $5.6 million, respectively, since the August 29, 2016 acquisition of the TVS Diode/Thyristor/IGBT business.

 

Menber’s

 

On April 4, 2016, the company completed the acquisition of Menber’s S.p.A. (“Menber’s”) headquartered in Legnago, Italy for $19.2 million, net of acquired cash and after settlement of a working capital adjustment. At October 1, 2016, $18.9 million of the $19.2 million purchase price has been paid and financed through a mixture of cash on hand and borrowings under the company’s revolving credit facility, with the remaining consideration expected to be paid out in the remainder of 2016. The acquired business is part of the company's commercial vehicle product business within the Automotive segment and specializes in the design, manufacturing and selling of manual and electrical high current switches and trailer connectors for commercial vehicles.

 

The following table represents the preliminary allocation of the total consideration to assets acquired and liabilities assumed in the acquisition of Menber’s based on the company’s preliminary estimate of their respective fair values at the acquisition date (in thousands):

 

Total purchase consideration:

       

Cash, net of acquired cash

  $ 18,909  

Additional consideration payable

    253  

Total purchase consideration

  $ 19,162  

Preliminary allocation of consideration to assets acquired and liabilities assumed:

       

Current assets, net

  $ 13,560  

Property, plant and equipment

    1,693  

Customer relationships

    3,050  

Patented and unpatented technologies

    224  

Trademarks and tradenames

    1,849  

Goodwill

    7,651  

Current liabilities

    (7,421 )

Other non-current liabilities

    (1,444 )
    $ 19,162  

  

All Menber’s goodwill and other assets and liabilities were recorded in the Automotive segment and reflected in the Europe geographic area. The customer relationships are being amortized over 10 years. The patented and unpatented technologies are being amortized over 5 years. The trademarks and tradenames are 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 Menber’s products with the company’s existing automotive product portfolio. Goodwill for the above acquisition is not expected to be deductible for tax purposes.

 

As required by purchase accounting rules, the company recorded a $0.2 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up was amortized as a non-cash charge to cost of goods sold during the third quarter of 2016 with the charge reflected as other non-segment costs.

 

Included in the company’s consolidated statements of net income for the three and nine months ended October 1, 2016 are net sales of approximately $5.3 million and $12.0 million, respectively, since the April 4, 2016 acquisition of Menber’s.

 

 
8

 

 

PolySwitch

 

On March 25, 2016, the company acquired 100% of the circuit protection business (“PolySwitch”) of TE Connectivity Ltd. for $348.0 million, net of acquired cash and after settlement of certain post-closing adjustments. At October 1, 2016, $342.3 million of the $348.0 million purchase price has been paid and financed through a mixture of cash on hand and borrowings under the company’s revolving credit facility, with the remaining consideration expected to be paid by the 2nd quarter of 2017. The PolySwitch business, which is split between the Automotive and Electronics segments, has a leading position in polymer based resettable circuit protection devices, with a strong global presence in the automotive, battery, industrial, communications and mobile computing markets. PolySwitch has operations in Menlo Park, California and manufacturing facilities in Shanghai and Kunshan, China and Tsukuba, Japan. The acquisition allows the company to strengthen its global circuit protection product portfolio, as well as strengthen its presence in the automotive electronics and battery end markets. The acquisition also significantly increases the company’s presence in Japan. The company funded the acquisition with available cash and proceeds from a new credit facility.

 

The following table represents the preliminary allocation of the total consideration to assets acquired and liabilities assumed in the acquisition of PolySwitch based on the company’s preliminary estimate of their respective fair values at the acquisition date (in thousands):

 

Total purchase consideration:

       

Original consideration

  $ 350,000  

Post closing consideration adjustment received

    (2,029 )

Acquired cash

    (5,719 )

Acquired cash to be returned to seller

    5,719  

Total purchase consideration

  $ 347,971  

Preliminary allocation of consideration to assets acquired and liabilities assumed:

       

Current assets, net

  $ 59,751  

Property, plant and equipment

    52,025  

Land lease

    4,290  

Patented and unpatented technologies

    56,425  

Customer relationships

    39,720  

Goodwill

    163,635  

Other long-term assets

    10,711  

Current liabilities

    (37,068 )

Other non-current liabilities

    (1,518 )
    $ 347,971  

 

All PolySwitch goodwill and other assets and liabilities were recorded in the Automotive and Electronics segments and reflected in all geographic areas. The customer relationships are being amortized over 15 years. The patented and unpatented technologies are 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 PolySwitch products with the company’s existing automotive and electronics product portfolio. A portion of the goodwill for the above acquisition is expected to be deductible for tax purposes.

 

As required by purchase accounting rules, the company recorded a $6.9 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up was amortized as a non-cash charge to cost of goods sold during the second quarter of 2016, as the acquired inventory was sold, and reflected as other non-segment costs.

 

Included in the company’s consolidated statements of net income for the three and nine months ended October 1, 2016 are net sales of approximately $47.9 million and $84.4 million, respectively, since the March 25, 2016 acquisition of PolySwitch.

 

 
9

 

 

Sigmar S.r.l

 

On October 1, 2015, the company acquired 100% of Sigmar S.r.l. (“Sigmar”). The total purchase price for Sigmar is expected to be $6.7 million, net of cash acquired and including: (1) additional consideration of $1.0 million paid in the first nine months of 2016 relating to certain working capital related adjustments and an earn-out clause payment; and (2) estimated additional net payments of up to $0.9 million, a portion of which is subject to the achievement of certain milestones.

 

Located in Ozegna, Italy, Sigmar is a leading global manufacturer of water-in-fuel sensors and also manufactures selective catalytic reduction (SCR) quality sensors and diesel fuel heaters for automotive and commercial vehicle applications. The acquisition further expanded the company’s automotive sensor product line offerings within its Automotive segment. The company funded the acquisition with available cash.

 

The following table sets forth the preliminary purchase price allocation for Sigmar 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 (in thousands):

 

Total purchase consideration:

       

Cash

  $ 5,788  

Estimated additional consideration payable

    901  

Total purchase consideration

  $ 6,689  

Preliminary allocation of consideration to assets acquired and liabilities assumed:

       

Cash

  $ 230  

Current assets, net

    4,011  

Property, plant and equipment

    1,097  

Goodwill

    2,552  

Patents

    2,845  

Current liabilities

    (1,478 )

Other non-current liabilities

    (2,568 )
    $ 6,689  

 

All Sigmar goodwill and other assets and liabilities were recorded in the Automotive segment and reflected in the Europe geographic area. The patents are 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 Sigmar’s products with the company’s existing automotive product offerings. Goodwill for the above acquisition is not expected to be deductible for tax purposes.

 

Pro Forma Results

 

The following table summarizes, on a pro forma basis, the combined results of operations of the company and the acquired PolySwitch and the TVS Diode/Thyristor/IGBT businesses as though the acquisitions had occurred as of December 28, 2014. The company has not provided pro forma results of operations for Menber’s or Sigmar as these results were not material to the company. The pro forma amounts presented are not necessarily indicative of either the actual consolidated results had the PolySwitch or TVS Diode/Thyristor/IGBT acquisitions occurred as of December 28, 2014 or of future consolidated operating results.

 

   

For the Three Months Ended

   

For the Nine Months Ended

 

(in thousands, except per share amounts)

 

October 1, 2016

   

September 26,

2015

   

October 1, 2016

   

September 26,

2015

 

Net sales

  $ 290,377     $ 278,093     $ 846,127     $ 834,372  

Income before income taxes

    32,728       17,823       110,853       88,124  

Net income

    33,086       6,324       96,713       69,110  

Net income per share — basic

    1.47       0.28       4.30       3.05  

Net income per share — diluted

    1.46       0.28       4.26       3.04  

 

 
10

 


Pro forma results presented above primarily reflect: (1) incremental depreciation relating to fair value adjustments to property, plant and equipment; (2) amortization adjustments relating to fair value estimates of intangible assets; (3) incremental interest expense on assumed indebtedness; and (4) additional cost of goods sold relating to the capitalization of gross profit as part of purchase accounting recognized for purposes of the pro forma as if it was recognized during the company’s first quarter of 2015. Pro forma adjustments described above have been tax affected using the company's effective rate during the respective periods.

 

The historical PolySwitch and TVS Diode/Thyristor/IGBT business results for the three and nine months ended October 1, 2016 and September 26, 2015 do not include a provision for income taxes. Income tax expense for the historical PolySwitch business was only provided at the end of the business’s fiscal year ended September 25, 2015. Income tax expense for the historical TVS Diode/Thyristor/IGBT business was not provided on a standalone basis.

 

5. Impairment of Goodwill and Intangible Assets

 

The company annually tests goodwill for impairment during its fiscal fourth quarter or at an interim date if there is an event or change in circumstances that indicates the asset may be impaired. As of the most recent annual test conducted, the company concluded the fair value of its custom products reporting unit exceeded its carrying value of invested capital by 12% and therefore, no potential goodwill impairment existed in 2015.

 

Due to recent negative events in the potash market subsequent to the company’s 2016 second quarter end, the company conducted a step one goodwill impairment analysis for the custom products reporting unit to determine if goodwill was impaired as of July 2, 2016. The fair value of this reporting unit at this date exceeded its carrying value by less than 10%.  Since then, the potash market has continued to see a decline in market pricing in the potash mining industry. Due to this continuing decline in potash pricing, management revisited its long term projections during the company’s third quarter 2016 and conducted another step one goodwill impairment analysis. The custom products reporting unit failed the step one test and management conducted a step two analysis with the revised projections. The fair value of the unit was estimated using the expected present value of future cash flows over a seven year forecast period and appraisal of certain assets. This analysis required a write down of the reporting unit’s carrying value of $14.8 million. A goodwill impairment loss of $8.8 million and intangible assets impairments aggregating $6.0 million were recognized during the third quarter, including a $3.8 million reduction of the custom products trade names to a $0.7 million remaining value and a $2.2 million reduction of the reporting unit’s customer relationships to zero value.  

 

6. Inventories

 

The components of inventories at October 1, 2016 and January 2, 2016 are as follows (in thousands):

 

   

October 1, 2016

   

January 2, 2016

 

Raw material

  $ 35,450     $ 33,599  

Work in process

    24,703       16,479  

Finished goods

    61,463       48,551  

Total inventories

  $ 121,616     $ 98,629  

 

7. Investments

 

The company’s investments represent shares of Polytronics Technology Corporation Ltd. (“Polytronics”), a Taiwanese company, and shares of Monolith Semiconductor, Inc. (“Monolith”), a Texas-based start-up company.

 

Polytronics

 

The Polytronics investment was acquired as part of the Littelfuse GmbH acquisition. The fair value of the Polytronics investment was €10.2 million (approximately $11.5 million) at October 1, 2016 and €10.7 million (approximately $11.7 million) at January 2, 2016. Included in 2016 other comprehensive income is an unrealized loss of $0.6 million, due to the decrease in fair market value of the Polytronics investment. The remaining change in the recorded value was due to the impact of changes in exchange rates.

 

 
11

 

 

Monolith

 

In December 2015, the company invested $3.5 million in the preferred stock of Monolith, a U.S. start-up company developing silicon carbide technology, which represents approximately 12% of the common stock of Monolith on an as-converted basis. The company accounts for its investment in Monolith under the cost method. The carrying value of the Monolith investment was $3.5 million at October 1, 2016 and January 2, 2016.

 

8. Debt

 

The carrying amounts of debt at October 1, 2016 and January 2, 2016 are as follows (in thousands):

 

   

October 1, 2016

   

January 2, 2016

 

Revolving credit facility

  $ 315,500     $ 77,000  

Term loan

    121,875       85,000  

Entrusted loan

    5,173       9,474  

Unamortized debt issuance costs

    (2,092 )     (721 )

Total debt

    440,456       170,753  

Less: Current maturities

    (6,250 )     (87,000 )

Total long-term debt

  $ 434,206     $ 83,753  

 

Revolving Credit Facility / Term Loan

 

On March 4, 2016, the company entered into a new credit agreement with Bank of America, as agent, for up to $700.0 million which consists of an unsecured revolving credit facility of $575.0 million and an unsecured term loan credit facility of up to $125.0 million. The new credit agreement is for a five year period. The new credit agreement replaced the company’s previous credit agreement dated May 31, 2013, which was terminated on March 4, 2016. As of October 1, 2016, the company had $0.1 million outstanding in letters of credit and had available $259.4 million of borrowing capacity under the revolving credit facility at an interest rate of LIBOR plus 1.5% (2.03% as of October 1, 2016). At October 1, 2016, the company was in compliance with all covenants under the credit agreement.

 

Entrusted Loan

 

During 2014, the company entered into an entrusted loan arrangement (“Entrusted Loan”) of RMB 110.0 million (approximately $17.9 million) between two of its China legal entities, Littelfuse Semiconductor (Wuxi) Company (the “lender”) and Suzhou Littelfuse OVS Ltd. (the “borrower”), utilizing Bank of America, N.A., Shanghai Branch as agent. Direct borrowing and lending between two commonly owned commercial entities was strictly forbidden at the time under China’s regulations requiring the use of a third party agent to enable loans between Chinese legal entities. As a result, the Entrusted Loan is reflected as both a long-term asset and long-term debt on the company’s Consolidated Balance Sheets and is reflected in the investing and financing activities in its Consolidated Statements of Cash Flows. Interest expense and interest income will be recorded between the lender and borrower with no net impact on the company’s Consolidated Statements of Income since the amounts will be offsetting. The loan interest rate per annum is 5.25%. The Entrusted Loan is used to finance the operation and working capital needs of the borrower and matures in November 2019. The balance of the Entrusted Loan was RMB 34.5 million (approximately $5.2 million) at October 1, 2016.

 

Debt Issuance Costs

 

The company incurred debt issuance costs of $1.7 million in relation to the new credit agreement which, along with the remaining balance of debt issuance costs of the previous credit facility, are being amortized over the life of the new credit agreement. This new credit agreement was determined to be a modification under ASC 470-50 of the previous credit agreement.

 

 
12

 

 

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The company adopted this guidance in the first quarter of 2016, on a retrospective basis, and has reclassified the unamortized debt issuance costs into long-term debt as shown in the table above.

 

9. 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.

 

Investments

 

The company holds an investment in the equity securities of Polytronics as described in Note 7. Equity securities listed on a national market or exchange, such as Polytronics securities, are valued at the last sales price. Such securities are classified within Level 1 of the valuation hierarchy. The company also holds an investment in Monolith as described in Note 7 for which the value of the $3.5 million represents the cost of the investment.

 

There were no changes during the quarter ended October 1, 2016 to the company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of October 1, 2016 and January 2, 2016, the company held no non-financial assets or liabilities that are required to be measured at fair value on a recurring basis.

 

The following table presents assets measured at fair value by classification within the fair value hierarchy as of October 1, 2016 (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

  $ 11,474     $     $     $ 11,474  

Total

  $ 11,474     $     $     $ 11,474  

 

 
13

 

 

The following table presents assets measured at fair value by classification within the fair value hierarchy as of January 2, 2016 (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

  $ 11,697     $     $     $ 11,697  

Total

  $ 11,697     $     $     $ 11,697  

 

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 October 1, 2016 and January 2, 2016, respectively, as the variable interest rates fluctuate along with market interest rates.

 

10. Earnings per Share

 

The following table sets forth the computation of basic and diluted earnings per share for the periods ending October 1, 2016 and September 26, 2015 (in thousands, except per share amounts):

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

October 1,

2016

   

September 26,

2015

   

October 1,

2016

   

September 26,

2015

 
                                 

Net income

  $ 30.802     $ 11,324     $ 77,243     $ 60,003  
                                 

Average shares outstanding - Basic

    22,578       22,581       22,515       22,623  
                                 

Net effect of dilutive stock options and restricted share units

    156       112       160       148  
                                 

Average shares - Diluted

    22,734       22,693       22,675       22,771  
                                 

Net income per share:

                               

Basic

  $ 1.36     $ 0.50     $ 3.43     $ 2.65  

Diluted

  $ 1.35     $ 0.50     $ 3.41     $ 2.64  

 

Potential shares of common stock relating to stock options excluded from the earnings per share calculation because their effect would be anti-dilutive were 76,845 and 144,031 for the three months ended October 1, 2016 and September 26, 2015, respectively, and 45,591 and 108,193 for the nine months ended October 1, 2016 and September 26, 2015, respectively.

 

11. Income Taxes

 

The effective tax rate for the third quarter of 2016 was negative 1.2% compared to an effective tax rate of 10.4% in the third quarter of 2015. The effective tax rate for the nine months ended October 1, 2016 was 15.6% compared to an effective tax rate of 21.8% for the nine months ended September 26, 2015. The effective tax rates for the periods presented are lower than the U.S. statutory tax rate primarily due to income earned in lower tax jurisdictions and, with respect to the 2016 periods, a one-time deduction with respect to the stock of one of the company’s affiliates partially offset by the impact of the impairment of goodwill for which no tax benefit was recorded, and, with respect to the 2015 periods, the impact of a pension settlement partially offset by the impact from the restructuring of the legal ownership of the company’s Mexican manufacturing operations.

 

 
14

 

 

12. Pensions

 

The components of net periodic benefit cost for the three and nine months ended October 1, 2016, compared with the three and nine months ended September 26, 2015, were (in thousands):

 

   

U.S. Pension Benefits

   

Foreign Plans

 
   

Three Months Ended

   

Nine Months Ended

   

Three Months Ended

   

Nine Months Ended

 
   

October 1,

2016

   

September 26,

2015

   

October 1,

2016

   

September 26,

2015

   

October 1,

2016

   

September 26,

2015

   

October 1,

2016

   

September 26,

2015

 
                                                                 

Service cost

  $ -     $ 250     $ -     $ 750     $ 332     $ 314     $ 997     $ 944  

Interest cost

    -       1,032       -       3,094       496       512       1,489       1,538  

Expected return on plan assets

    -       (917 )     -       (2,749 )     (520 )     (599 )     (1,560 )     (1,800 )

Amortization of net loss

    -       290       -       870       74       62       220       185  

Total cost (credit) of the plan

    -       655       -       1,965       382       289       1,146       867  

Expected plan participants’contribution

    -       -       -       -       -       -       -       -  

Net periodic benefit cost (credit)

    -       655       -       1,965       382       289       1,146       867  

Settlement charge

    -       30,194       -       30,194       -       -       -       -  

Total pension cost (credit)

  $ -     $ 30,849     $ -     $ 32,159     $ 382     $ 289     $ 1,146     $ 867  

  

* The U.S. pension plan was terminated effective July 30, 2014 and, following receipt of a favorable Letter of Determination from the IRS (dated April 14, 2015), all liabilities of the plan were settled during the third quarter of fiscal 2015.

 

The expected rate of return assumption on U.S. pension assets was 3.90% in 2015. The expected return on foreign pension assets is 4.95% and 5.39% in 2016 and 2015, respectively.

 

13. Segment and Geographic Information

 

The company and its subsidiaries design, manufacture and sell components and modules for circuit protection, power control and sensing throughout the world. The company reports its operations by the following segments: Electronics, Automotive, and Industrial. 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”). The CODM 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. Manufacturing, purchasing, logistics, customer service, finance, information technology and human resources are shared functions that are allocated back to the three operating segments. The company does not report inter-segment revenue because the operating segments do not record it. Certain expenses, determined by the CODM to be strategic in nature and not directly related to segments current results, are not allocated but identified as “Other”. Additionally, the company does not allocate interest and other income, interest expense, or taxes to operating segments. These costs are not allocated to the segments, as management excludes such costs when assessing the performance of the segments. Although the CODM 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.

 

 
15

 

 

Segment information for the three and nine months ended October 1, 2016 and September 26, 2015 are summarized as follows (in thousands):

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

October 1, 2016

   

September 26, 2015

   

October 1, 2016

   

September 26, 2015

 

Net sales

                               

Electronics

  $ 147,730     $ 102,616     $ 378,696     $ 307,549  

Automotive

    106,341       81,475       309,644       251,464  

Industrial

    26,260       31,419       83,301       88,831  

Total net sales

  $ 280,331     $ 215,510     $ 771,641     $ 647,844  
                                 

Depreciation and amortization

                               

Electronics

  $ 7,694     $ 5,811     $ 20,783     $ 17,384  

Automotive

    4,627       3,244       12,881       9,883  

Industrial

    1,733       1,260       4,561       3,839  

Other(1)

    (937 )     -       -       -  

Total depreciation and amortization

  $ 13,117     $ 10,315     $ 38,225     $ 31,106  
                                 

Operating income (loss)

                               

Electronics

  $ 34,571     $ 20,923     $ 82,246     $ 61,755  

Automotive

    15,032       15,253       48,997       39,123  

Industrial

    57       5,781       3,758       13,220  

Other(2)

    (22,134 )     (33,373 )     (45,345 )     (39,795 )

Total operating income

    27,526       8,584       89,656       74,303  

Interest expense

    2,571       922       6,286       3,021  

Foreign exchange (gain) loss

    (4,700 )     (3,549 )     (7,114 )     (1,724 )

Other (income) expense, net

    (778 )     (1,430 )     (1,040 )     (3,758 )

Income before income taxes

  $ 30,433     $ 12,641     $ 91,524     $ 76,764  


(1) Consists of intangible impairments related to its loss on sale of product line now reflected in selling, general and administrative expenses for the nine months ended October 1, 2016. (See Note 15).

(2) Included in “Other” Operating income (loss) for the 2016 third quarter is $14.8 million (14.8 million year-to-date) of charges related to the impairment of the custom products reporting unit, $5.9 million ($18.2 million year-to-date) of acquisition and integration costs associated with the company’s 2016 acquisitions, primarily PolySwitch, $0.6 million ($7.5 million year-to-date) of non-cash inventory charges relating to the company’s 2016 acquisitions, primarily PolySwitch, as described in Note 4, $1.9 million year-to-date in charges related to the closure of the company’s manufacturing facility in Denmark, $1.7 million year-to-date related to the company’s transfer of its reed sensor manufacturing operations from the U.S. and China to the Philippines and $0.9 million ($1.3 million year-to-date) related to internal legal restructuring costs.

 

Included in “Other” Operating income (loss) for the 2015 third quarter is $2.1 million ($6.8 million year-to-date) related to internal legal restructuring, $0.3 million ($0.7 million year-to-date) related to acquisition costs and $30.9 million ($32.2 million year-to-date) of expense related to the planned termination of the U.S. pension as described in Note 12.

 

The company’s significant net sales by country for the three and nine months ended October 1, 2016 and September 26, 2015 are summarized as follows (in thousands):

 

   

For the Three Months Ended(a)

   

For the Nine Months Ended(a)

 
   

October 1, 2016

   

September 26, 2015

   

October 1, 2016

   

September 26, 2015

 
                                 

United States

  $ 92,475     $ 85,049     $ 270,659     $ 258,030  

China

    70,215       49,345       181,134       143,694  

Other countries

    117,641       81,116       319,848       246,120  

Total

  $ 280,331     $ 215,510     $ 771,641     $ 647,844  

 

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

 

 
16

 

 

The company’s significant long-lived assets by country as of October 1, 2016 and January 2, 2016 are summarized as follows (in thousands):

 

   

Long-lived assets(b)

 
   

October 1, 2016

   

January 2, 2016

 
                 

United States

  $ 24,578     $ 23,965  

China

    67,003       37,241  

Mexico

    51,988       47,130  

Philippines

    34,511       33,525  

Other countries

    45,773       20,707  

Total

  $ 223,853     $ 162,568  

 

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

 

14. 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

January 2, 2016

   

Other

comprehensive

income (loss)

activity

   

Reclassification

adjustment for

expense included

in net income

   

Balance at

October 1, 2016

 
                                 

Pension and post employment liability and reclassification adjustments(a)

  $ (8,722 )   $ (183 )   $ 212     $ (8,693 )

Unrealized gain on investments(b)

    11,584       (559 )           11,025  

Foreign currency translation adjustment

    (48,533 )     (8,951 )           (57,484 )

AOCI (loss) income

  $ (45,671 )   $ (9,693 )   $ 212     $ (55,152 )

 

(a) Balances are net of tax of $661 and $1,056 for January 2, 2016 and October 1, 2016, respectively.

(b) Balances are net of tax of $0 and $0 for January 2, 2016 and October 1, 2016, respectively.

 

15. Product Line Sale

 

During the first quarter of 2016, the company sold its tangible and intangible assets relating to a marine product line that it acquired as part of its acquisition of Selco A/S in 2011. In connection with this sale, the company recorded a loss on sale of the product line of $1.4 million reflected within selling, general and administrative expenses for the nine months ended October 1, 2016. This loss was recognized as an “other” charge for segment reporting purposes.

 

 
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16. Recently issued accounting pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers, which amends guidance for revenue recognition. Under the new standard, revenue will be recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. The standard creates a five-step model that will generally require companies to use more judgment and make more estimates than under current guidance when considering the terms of contracts along with all relevant facts and circumstances. These include the identification of customer contracts and separating performance obligations, the determination of transaction price that potentially includes an estimate of variable consideration, allocating the transaction price to each separate performance obligation, and recognizing revenue in line with the pattern of transfer. In August 2015, the FASB issued an No. 2015-14, "Deferral of Effective Date" (Topic 606) to defer the effective date for all entities by one year. The new standard will become effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. Companies have the option of using either a full or modified retrospective approach in applying this standard. In March 2016, the FASB issued ASU No. 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" (Topic 606). ASU 2016-08 provides clarification for the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, ASU No. 2016-11, and ASU 2016-12, all of which provide additional clarification of the original revenue standard. The company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

 

In July 2015, the FASB issued Accounting Standards Update No. 2015-11 ("ASU 2015-11"), Simplifying the Measurement of Inventory. ASU 2015-11 clarifies that inventory should be held at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price, less the estimated costs to complete, dispose and transport such inventory. ASU 2015-11 will be effective for fiscal years and interim periods beginning after December 15, 2016. ASU 2015-11 is required to be applied prospectively and early adoption is permitted. The company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (Topic 842). ASU 2016-02 establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for capital leases and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-09 ("ASU 2016-09"), Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 will directly impact the tax administration of equity plans. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted and any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

 

17. Subsequent Event

 

On October 14, 2016, the Company completed the sale of its portable electrical house (e-house) business, located in Winnipeg, Manitoba, Canada. This business was included in the company’s custom products reporting unit within the Industrial segment, and mainly served mining and utility markets. Neither the sale nor the historical results of operation of the sold business are material to the company’s financial results.

 

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

 

Cautionary Statement Regarding Forward-Looking Statements Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”).

 

Certain statements in this section and other parts of this Quarterly Report on Form 10-Q may constitute "forward-looking statements" within the meaning of the federal securities laws and are entitled to the safe-harbor provisions of the PSLRA.  These statements include statements regarding the company’s future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future.  Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy, although not all forward-looking statements contain such terms.  The company cautions that forward-looking statements, which speak only as of the date they are made, are subject to risks, uncertainties and other factors, and actual results and outcomes may differ materially from those indicated or implied by the forward-looking statements.  These risks, uncertainties and other factors include, but  are not limited to, risks relating to product demand and market acceptance, economic conditions, the impact of competitive  products and pricing, product quality problems or product recalls, capacity and supply difficulties or constraints, coal mining  exposures reserves, failure of an indemnification for environmental liability, exchange rate fluctuations, commodity price fluctuations, the effect of the company's accounting policies, labor disputes, restructuring costs in excess of expectations,  pension plan asset returns less than assumed, integration of acquisitions and other risks which may be detailed in the  company's other Securities and Exchange Commission filings, including those set forth under  Item 1A. "Risk Factors" of the company's Annual Report on Form 10-K for the year ended January 2, 2016.  The company does not undertake any obligation to update or revise any forward-looking statements to reflect future events or circumstances, new information or otherwise. 

 

This report, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations,  should be read in conjunction with information provided in the financial statements and the related Notes thereto appearing in the company's Annual Report on Form 10-K for the year ended January 2, 2016. 

 

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 2015 was $867.9 million and net earnings were $82.5 million. The company conducts its business through three reportable segments, which are defined by markets and consist of Electronics, Automotive, and Industrial. 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 expanding its portfolio in power control and sensing technologies. These platforms, combined with the company’s strong balance sheet and operating cash flow, provide opportunities for increased organic and acquisition growth. In 2012, the company set a five-year strategic plan to grow annual sales at 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.

 

 
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Electronics Segment

The Electronics segment sells passive and semiconductor components and modules as well as sensors primarily into the global consumer electronics, general industrial and telecommunications markets. The core electronics markets are characterized by significant Asia-Pacific 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 PolySwitch business acquisition in 2016 has expanded the company’s product offering used in a wide variety of electronic products and utilizes many of the same distribution channels as the company’s legacy electronics products. On August 29, 2016, the company completed the acquisition of the TVS Diode/Thyristor/IGBT business from ON Semiconductor Corporation. This business is complimentary to and will further expand the semiconductor markets that the segment serves.

 

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 continues to be an additional growth driver. The PolySwitch business acquisition in 2016 has added to the company’s strong global presence in the automotive market. The acquisition of Menber’s further strengthens the company’s position in electrical high current switches and connectors for the commercial vehicle market.

 

Industrial Segment

The Industrial segment derives its revenues from power fuses, protection relays and custom products selling primarily into the industrial, mining, solar and oil and gas markets. Protection relay sales have declined due to the general slowdown in the global mining and oil and gas markets. Custom products sales have declined significantly over the past two years due to continued end market softness in the potash mining market. The potash market has recently experienced a steep decline in market pricing and consolidation. Due to negative events in the potash market subsequent to the company’s 2016 second quarter end, the company conducted a step one goodwill impairment analysis for the custom products reporting unit to determine if goodwill was impaired as of July 2, 2016. The fair value of this reporting unit at this date exceeded its carrying value by less than 10%.  Since then, the potash market has continued to see a decline in market pricing in the potash mining industry. Due to this continuing decline in potash pricing, management revisited its long term projections during the company’s third quarter 2016 and conducted another step one goodwill impairment analysis. Based on the revised projections, the custom products reporting unit failed. As required by GAAP, management conducted a step two analysis which indicated a write down of the reporting unit’s carrying value by $14.8 million, with $8.8 million from goodwill and $6.0 million from intangible assets.

 

 
20

 

 

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

   

First Nine Months

 
   

2016

   

2015

   

%

Change

   

2016

   

2015

   

%

Change

 

Business Unit

                                               

Electronics

  $ 147,730     $ 102,616       44 %   $ 378,696     $ 307,549       23 %

Automotive

    106,341       81,475       31 %     309,644       251,464       23 %

Industrial

    26,260       31,419       (16% )     83,301       88,831       (6% )
                                                 

Total

  $ 280,331     $ 215,510       30 %   $ 771,641     $ 647,844       19 %
                                                 

Geography(a)

                                               

Americas

  $ 106,112     $ 98,974       7 %   $ 313,231     $ 299,061       5 %

Europe

    52,200       37,520       39 %     149,417       115,613       29 %

Asia-Pacific

    122,019       79,016       54 %     308,993       233,170       33 %
                                                 

Total

  $ 280,331     $ 215,510       30 %   $ 771,641     $ 647,844       19 %

 

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

 

The following table summarizes the company’s consolidated results of operations for the periods presented. The quarter of 2016 includes approximately $22.1 million ($45.3 million year-to-date) of other non-segment charges. These included $14.8 million (14.8 million year-to-date) of charges related to the impairment of the custom products reporting unit, $5.9 million ($18.2 million year-to-date) of acquisition and integration costs associated with the company’s 2016 acquisitions, primarily PolySwitch, $0.6 million ($7.5 million year-to-date) of non-cash inventory charges relating to the company’s 2016 acquisitions, primarily PolySwitch, as described in Note 4, $1.9 million year-to-date in charges related to the closure of the company’s manufacturing facility in Denmark, $1.7 million year-to-date related to the company’s transfer of its reed sensor manufacturing operations from the U.S. and China to the Philippines and $0.9 million ($1.3 million year-to-date) related to internal legal restructuring costs.

 

The third quarter of 2015 includes approximately $33.4 million ($39.8 million year-to-date) of other non-segment charges. These included $2.1 million ($6.8 million year-to-date) related to internal legal restructuring, $0.3 million ($0.7 million year-to-date) related to acquisition costs and $30.9 million ($32.2 million year-to-date) of expense related to the planned termination of the U.S. pension as described in Note 12.

 

(In thousands, unaudited)

 

Third Quarter

   

First Nine Months

 
   

2016

   

2015

   

%

Change

   

2016

   

2015

   

%

Change

 

Sales

  $ 280,331     $ 215,510       30 %   $ 771,641     $ 647,844       19 %

Gross profit

    113,759       86,182       32 %     298,780       247,793       21 %

Operating expense

    86,233       77,598       11 %     209,124       173,490       21 %

Operating income

    27,526       8,584       221 %