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LFUS > SEC Filings for LFUS > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for LITTELFUSE INC /DE

Form 10-Q for LITTELFUSE INC /DE


2-Aug-2013

Quarterly Report


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 begun to decline 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.


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)



                            Second Quarter                               Year-to-Date
                  2013          2012         % Change         2013          2012         % Change
Business Unit
Electronics     $  91,450     $  89,508              2 %    $ 170,865     $ 166,562              3 %
Automotive         64,548        51,450             25 %      123,933       104,076             19 %
Electrical         31,768        34,895             (9 %)      63,886        65,793             (3 %)

    Total       $ 187,766     $ 175,853              7 %    $ 358,684     $ 336,431              7 %



                           Second Quarter                              Year-to-Date
                 2013          2012         % Change        2013          2012         % Change
Geography(a)
Americas       $  86,531     $  80,888              7 %   $ 164,355     $ 154,933              6 %
Europe            33,484        27,051             24 %      64,870        54,810             18 %
Asia-Pacific      67,751        67,914              0 %     129,459       126,688              2 %

   Total       $ 187,766     $ 175,853              7 %   $ 358,684     $ 336,431              7 %

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

Results of Operations - Second 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 $1.7 million inventory adjustment, as described in Note 3, and $1.2 million in acquisition related operating expenses, both related to the Hamlin acquisition. There was also $3.7 million of favorable foreign currency revaluation primarily related to U.S. dollar gains against the Philippine peso.

(In thousands,                      Second Quarter                               Year-to-Date
unaudited)
                          2013          2012         % Change         2013          2012         % Change
Sales                   $ 187,766     $ 175,853              7 %    $ 358,684     $ 336,431              7 %
Gross Profit               73,557        69,562              6 %      138,163       130,424              6 %
Operating expense          42,175        37,466             13 %       78,664        72,504              8 %
Operating income           31,382        32,096             (2 %)      59,499        57,920              3 %
Other (income)
expense, net               (4,015 )         697           (676 %)       6,130         1,746            251 %
Income before income
taxes                      35,397        31,399             13 %       53,369        56,174             (5 %)
Net income              $  26,648     $  22,963             16 %    $  41,442     $  40,526              2 %

Net sales increased $11.9 million or 7% to $187.8 million in the second quarter of 2013 compared to $175.9 million in the second quarter of 2012 due primarily to an incremental $12.7 million from business acquisitions and growth in automotive sales offset by a decline in both electrical and electronics sales. Sales were not significantly impacted by currency effects in the second quarter of 2013 as compared to the second quarter of 2012. Excluding incremental sales from acquisitions, net sales decreased $0.8 million or less than 1% year-over-year.

Electronics sales increased $2.0 million or 2% to $91.5 million in the second quarter of 2013 compared to $89.5 million in the second quarter of 2012 due to incremental sales of $3.4 million from the company's acquisition of Hamlin. The electronics segment experienced $0.3 million in unfavorable currency effects in the second quarter of 2013 primarily from sales denominated in Japanese yen. Excluding the impact from incremental sales and currency effects, sales decreased $1.1 million 1%. The lower sales resulted primarily from weaker sales in Taiwan, Japan and Korea due to softness in consumer electronics.

Automotive sales increased $13.0 million or 25% to $64.5 million in the second quarter of 2013 compared to $51.5 million in the second quarter of 2012 due primarily to an incremental $9.3 million of sales from acquisitions and growth in the passenger vehicle business. This was partially offset by a decline in the commercial vehicle business which, while showing signs of recovery, still declined 1% as compared to the second quarter of 2012. The automotive segment experienced $0.4 million in favorable currency effects in the second quarter of 2013 primarily due to sales denominated in euros. Excluding incremental sales from acquisitions and currency effects, net sales increased $3.4 million or 7% year-over-year.


Electrical sales decreased $3.1 million or 9% to $31.8 million in the second quarter of 2013 compared to $34.9 million in the second quarter of 2012 due to a decline in custom product and relay sales partially offset by growth in power fuses. The decline in custom product and relay sales primarily reflects lower sales to Canadian potash customers as well as a general slow-down in the global mining industry. The increase in power fuse sales is primarily due to success in the solar and HVAC markets. The electrical segment experienced $0.1 million in unfavorable currency effects in the second quarter of 2013 primarily from sales denominated in Canadian dollars.

On a geographic basis, sales in the Americas increased $5.6 million or 7% to $86.5 million in the second quarter of 2013 compared to $80.9 million in the second quarter of 2012 mainly due to incremental sales of $5.3 million from the Accel and Hamlin acquisitions offset slightly by $0.1 million in unfavorable currency effects from sales denominated in Canadian dollars. Excluding acquisition sales and currency effects, America's sales increased 1% year-over-year primarily due to an increase in demand for automotive and electronics products partially offset by a decrease in sales of electrical products.

Europe sales increased $6.4 million or 24% to $33.5 million in the second quarter of 2013 compared to $27.1 million in the second quarter of 2012 mainly due to incremental sales of $5.6 million from Accel and Hamlin and $0.5 million in favorable currency effects offset by lower demand for electrical products. Excluding incremental sales and currency effects, Europe sales increased 1% year-over-year primarily due to a an increase in demand for automotive and electronics products.

Asia-Pacific sales decreased $0.2 million or less than 1% to $67.8 million in the second quarter of 2013 compared to $67.9 million in the second quarter of 2012 primarily due to lower demand for electronics and electrical products offset by increased sales of automotive products, incremental sales from Hamlin of $1.7 million and $0.4 million in unfavorable currency effects primarily from sales denominated in Japanese yen. Excluding incremental sales from Hamlin and currency effects, net sales decreased $1.5 million or 2% year-over-year.

Gross profit was $73.6 million or 39% of net sales for the second quarter of 2013 compared to $69.6 million or 40% of net sales in the same quarter last year. Gross profit for the second quarter of 2013 included a $1.7 million non-cash charge to cost of goods sold for inventory that was stepped-up to fair value as a result of the Hamlin acquisition.

Total operating expense was $42.2 million or 22% of net sales for the second quarter of 2013 compared to $37.5 million or 21% of net sales for the same quarter in 2012. The increase in operating expenses primarily reflects incremental operating expenses of $2.7 million from business acquisitions.

Operating income for the second quarter of 2013 was approximately $31.4 million compared to operating income of $32.1 million for the same quarter in 2012 primarily due to higher sales partially offset by slightly higher operating expenses as described above.

Interest expense was $0.6 million in the second quarter of 2013 compared to $0.4 million in the second quarter of 2012.

Impairment, loan loss and equity losses from the investment in and loan to Shocking Technologies was $0.0 million in the second quarter of 2013 compared to $1.0 million in the second quarter of 2012. The company fully impaired its investment and loan receivable in Shocking during the first quarter of 2013 as described in Note 6.

Other (income) expense, net, consisting of interest income, royalties, non-operating income and foreign currency items was approximately $4.7 million of income for the second quarter of 2013 compared to $0.8 million of income in the second quarter of 2012. The increase in other (income) expense, net for 2013 is primarily due to the impact from foreign exchange revaluation.


Income before income taxes was $35.4 million for the second quarter of 2013 compared to income before income taxes of $31.4 million for the second quarter of 2012. Income tax expense was $8.7 million with an effective tax rate of 24.7% for the second quarter of 2013 compared to income tax expense of $8.4 million with an effective tax rate of 26.9% in the second quarter of 2012. The effective tax rates for both the second quarter of 2013 and 2012 are lower than the U.S. statutory tax rate primarily due to income earned in countries with lower tax rates than the U.S.

Net income for the second quarter of 2013 was $26.6 million or $1.18 per diluted share compared to net income of $23.0 million or $1.04 per diluted share for the same quarter of 2012.

Results of Operations - Six Months, 2013 compared to 2012

Net sales increased $22.3 million or 7% to $358.7 million for the first six months of 2013 compared to $336.4 million in the first six months of 2012 due primarily to an incremental $20.2 million from business acquisitions. The company also experienced $0.1 million in unfavorable foreign currency effects in the first six months of 2013 as compared to 2012. The unfavorable foreign currency impact primarily resulted from sales denominated in the Japanese yen and Canadian dollar, offset by the favorable impact of the euro. Excluding incremental sales from acquisitions and currency effects, net sales increased $2.2 million or 1% year-over-year.

Electronics sales increased $4.3 million or 3% to $170.9 million in the first six months of 2013 compared to $166.6 million in the first six months of 2012 due primarily to incremental sales of $3.4 million from the Hamlin business acquisition. The electronics segment experienced $0.4 million in unfavorable currency effects in the first six months of 2013 primarily from sales denominated in Japanese yen. Excluding incremental sales from Hamlin and currency effects, net sales increased $1.3 million or 1% year-over-year.

Automotive sales increased $19.9 million or 19% to $123.9 million in the first six months of 2013 compared to $104.1 million in the first six months of 2012 due primarily to an incremental $16.8 million from business acquisitions and growth in the passenger vehicle business. The automotive segment experienced $0.6 million in favorable currency effects in the first six months of 2013 primarily due to sales denominated in euros. Excluding incremental sales from acquisitions and currency effects, net sales increased $2.4 million or 2% year-over-year.

Electrical sales decreased $1.9 million or 3% to $63.9 million in the first six months of 2013 compared to $65.8 million in the first six months of 2012 due primarily to slowing demand for custom products as a result of a slow-down in the potash mining industry. This was offset by growth in power fuses primarily reflecting increased sales into the solar and HVAC markets. The electrical segment experienced $0.3 million in unfavorable currency effects in the first six months of 2013 primarily from sales denominated in Canadian dollars.

On a geographic basis, sales in the Americas increased $9.4 million or 6% to $164.4 million in the first six months of 2013 compared to $154.9 million in the first six months of 2012 due to incremental sales from business acquisitions of $7.2 million and increased sales of power fuses, offset by weaker custom product sales and $0.3 million in unfavorable currency effects from sales denominated in Canadian dollars. Excluding incremental sales from Hamlin and currency effects, net sales increased $2.5 million or 2% year-over-year.

Europe sales increased $10.1 million or 18% to $64.9 million in the first six months of 2013 compared to $54.8 million in the first six months of 2012 mainly due to incremental sales of $11.3 million from business acquisitions and $0.7 million in favorable currency effects. Excluding incremental sales and currency effects, Europe sales declined 4% year-over-year primarily due to a decrease in demand for electrical products partially offset by an increase in sales of electronics and automotive products.

Asia-Pacific sales increased $2.8 million or 2% to $129.5 million in the first six months of 2013 compared to $126.7 million in the first six months of 2012 primarily due to incremental sales from Hamlin of $1.7 million and higher demand for automotive products offset by lower electronics and electrical sales and $0.5 million in unfavorable currency effects primarily from sales denominated in Japanese yen. Excluding incremental sales from Hamlin and currency effects, net sales increased $1.6 million or 1% year-over-year.


Gross profit was $138.2 million or 39% of net sales for the first six months of 2013 compared to $130.4 million or 39% of net sales in the first six months of last year. Gross profit for the first six months of 2013 was negatively impacted by $1.7 million which was the additional cost of goods sold for Hamlin inventory which had been stepped-up to fair value at the acquisition date as required by purchase accounting rules. Excluding the impact of this adjustment, gross profit was $139.9 million or 39% of net sales for the first six months of 2013.

Total operating expense was $78.7 million or 22% of net sales for the first six months of 2013 compared to $72.5 million or 22% of net sales for the same quarter in 2012. The increase in operating expenses primarily reflects incremental operating expenses of $4.2 million from business acquisitions.

Operating income for the first six months of 2013 was $59.5 million compared to operating income of $57.9 million for the first six months in 2012 primarily due to higher sales partially offset by slightly higher operating expenses as described above.

Interest expense was $1.0 million for the first six months of 2013 and $0.8 million the first six months of 2012.

Impairment, loan loss and equity losses from the investment in and loan to Shocking Technologies was $10.7 million in the first six months of 2013 compared to $1.6 million in the first six months of 2012. The company fully impaired its investment and loan receivable in Shocking during the first quarter of 2013 as described in Note 6.

Other (income) expense, net, consisting of interest income, royalties, non-operating income and foreign currency items was approximately $5.6 million of income for the first six months of 2013 compared to $0.7 million of income in the first six months of 2012. The increase in other (income) expense, net for 2013 is primarily due to the impact from foreign exchange revaluation.

Income before income taxes was $53.4 million for the first six months of 2013 compared to income before income taxes of $56.2 million for the first six months of 2012. Income tax expense was $11.9 million with an effective tax rate of 22.4% for the first six months of 2013 compared to income tax expense of $15.6 million with an effective tax rate of 27.9% in the first six months of 2012. The effective tax rates for both the first six months of 2013 and 2012 are lower than the U.S. statutory tax rate primarily due to income earned in countries with lower tax rates than the U.S.

Net income for the first six months of 2013 was $41.4 million or $1.85 per diluted share compared to net income of $40.5 million or $1.84 per diluted share for the same six months of 2012.

Liquidity and Capital Resources

As of June 29, 2013, $250.2 million of the $257.7 million of the company's cash and cash equivalents was held by foreign subsidiaries. Of the $250.2 million held by foreign subsidiaries, approximately $13.0 million could be repatriated with minimal tax consequences. The company expects to maintain its foreign cash balances (other than the aforementioned $13.0 million) for local operating requirements, to provide funds for future capital expenditures and for potential acquisitions. The company does not expect to repatriate these funds to the U.S.

The company historically has financed capital expenditures through cash flows from operations. Management expects that cash flows from operations and available lines of credit will be sufficient to support both the company's operations and its debt obligations for the foreseeable future.

Revolving Credit Facilities

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 a 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 June 29, 2013, the company had available $91.4 million of borrowing capacity under the revolving credit agreement at an interest rate of LIBOR plus 1.25% (1.44% as of June 29, 2013). The credit agreement replaced the company's previous credit agreement dated June 13, 2011. This arrangement contains covenants that, among other matters, impose limitations on the incurrence of additional indebtedness, future mergers, sales of assets, payment of dividends, and changes in control, as defined in the agreement. In addition, the company is required to satisfy certain financial covenants and tests relating to, among other matters, interest coverage and leverage. At June 29, 2013, the company was in compliance with all covenants under the revolving credit facility.


The company also had $0.8 million outstanding in letters of credit at June 29, 2013. No amounts were drawn under these letters of credit at June 29, 2013.

Cash Flow

The company started 2013 with $235.4 million of cash and cash equivalents. Net cash provided by operating activities was approximately $39.0 million for the first six months of 2013 reflecting $41.4 million in net income and $29.8 million in non-cash adjustments (primarily $10.7 million in impairment charges and $16.3 million in depreciation and amortization) offset by $32.2 million in net changes to various operating assets and liabilities.

Changes in operating assets and liabilities for the first six months of 2013 (including short-term and long-term items) that impacted cash flows negatively consisted of increases in accounts receivables ($20.2 million) and decreases in accrued payroll and severance ($1.7 million), accrued expenses (including post-retirement) ($11.5 million) and accrued taxes ($7.6 million), and). The increase in accounts receivables was due to increased sales in the first quarter. The decrease in accrued payroll and severance was due primarily to payouts for the 2012 management incentive plan which occurred in the first quarter. The decrease in accrued expenses was due primarily to a $5.0 million pension contribution made during the first quarter. Changes that had a positive impact on cash flows were decreases in inventories ($3.4 million), prepaid expenses and other ($0.7 million) and increases in accounts payable ($4.7 million).

Net cash used in investing activities was approximately $167.9 million and included $145.0 million for a business acquisition, $14.4 million in capital spending, and $8.5 million in expenditures for short-term investments.

Net cash provided by financing activities was approximately $158.2 million and included $149.0 million in net proceeds from borrowing and $15.4 million from the exercise of stock options, including tax benefits, partially offset by cash dividends paid of $8.9 million. The effects of exchange rate changes decreased cash and cash equivalents by approximately $7.1 million. The net cash provided by operating activities combined with the effects of exchange rate changes less net cash used in investing and financing activities resulted in a $22.3 million increase in cash, which left the company with a cash and cash equivalents balance of $257.7 million at June 29, 2013.

The ratio of current assets to current liabilities was 2.4 at the end of the second quarter of 2013 compared to 2.9 at year-end 2012 and 2.6 at the end of the second quarter of 2012. Days sales outstanding in accounts receivable was approximately 58 days at the end of the second quarter of 2013 (excluding Hamlin) compared to 60 days at the end of the second quarter of 2012 and 58 days at year-end 2012. Days inventory outstanding was approximately 60 days at the end of the second quarter of 2013 (excluding Hamlin) compared to 69 days at the year-end 2012 and 69 days at end of the second quarter of 2012.

Outlook

Despite ongoing uncertainty in the global economy, the company's order rates continue to be solid except for relays and custom products which are being affected by weakness in the mining market. None of the business segments are getting noticeably stronger overall, but the company is seeing strength in certain niche markets such as LED lighting and solar. The third quarter of 2013 is expected to look quite similar to the second quarter of 2013, except that the second quarter had only one month of the Hamlin acquisition. Including the Hamlin acquisition, the company expects third quarter sales to increase to $195 to $205 million and third quarter earnings to be in the range of $1.12 to $1.27 per diluted share before any special items.


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

The statements in this section and the other sections of this report that are not historical facts are intended to constitute "forward-looking statements" entitled to the safe-harbor provisions of the PSLRA. These statements may involve risks and uncertainties, including, but 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. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual results and outcomes may differ materially from those indicated or implied in the forward-looking statements. This report should be read in conjunction with information provided in the financial statements appearing in the company's Annual Report on Form 10-K for the year ended December 29, 2012. For a further discussion of the risk factors of the company, please see Item 1A. "Risk Factors" to the company's Annual Report on Form 10-K for the year ended December 29, 2012.

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