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LFUS > SEC Filings for LFUS > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for LITTELFUSE INC /DE

Form 10-K for LITTELFUSE INC /DE


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Littelfuse Overview

Introduction

Littelfuse, Inc. and its subsidiaries (the "company" or "Littelfuse" or "we" or "our") 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 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 Overview

In our Electronics segment (which accounts for about half of total Littelfuse sales), we experienced fourth quarter electronics sales of $95.2 million, an increase of 27% over the prior year quarter. Full year sales were $367.1 million, an 11% increase. Excluding acquisitions, fourth quarter electronic sales were down 7% sequentially, but were up 13% year-over-year. Full year electronic sales, excluding acquisitions, increased 4%.

Our fourth quarter sales are typically below third quarter levels as the Christmas build-up slows down. This year, however, the slowdown was a bit less than normal. In addition to the relative stability in the markets, another factor relates to the early Chinese New Year. Chinese factories shut down towards the end of January for the holiday and in anticipation, some factories placed orders earlier and some took shipments in December and January so they could be in full production when the holiday season ends.

Channel inventories at the end of the fourth quarter were stable and in line with expected market conditions. When channel partners are concerned about end markets, we generally expect them to reduce inventory levels, particularly toward the end of the year. We believe that the fact that these channel partners' inventory levels have remained steady is an indication of their belief in a stable to growth mode in 2014.

Automotive Segment Overview

In our Automotive segment, which was the strongest performing business segment in both the fourth quarter and for the full year (generating approximately a third of total Littelfuse sales), fourth quarter automotive sales of $72.9 million were up 45% from the same quarter last year. Excluding acquisitions, year-over-year fourth quarter sales increased 21%.

For the full year, Automotive sales of $267.2 million increased 30% over the prior year. Excluding acquisitions, 2013 sales were up 9%. Fourth quarter automotive sales increased in all three geographies: Europe, Asia and the U.S.

Sales of passenger car fuses and Accel sensors have remained strong and we believe we are well positioned with high content on some of the best-selling models in today's market. Our fourth quarter results also benefited from an increase in commercial vehicle product sales compared to last year's weak fourth quarter.

Electrical Segment Overview

In our Electrical segment, electrical fuse sales were up 9% in the fourth quarter year over year due to continued growth in our focus areas of solar and HVAC, as well as incremental sales from distributor conversions during the year. For the full year, sales into the solar and HVAC markets increased more than $3.0 million over the prior year.

The non-residential construction market appears to be showing signs of improvement and industrial production activity remains solid, such that we expect the market outlook for the electrical fuse business to remain positive.

In contrast, the custom electrical products business continues to struggle. Although fourth quarter sales increased from what was a weak third quarter, they were still down substantially year over year.


The primary market for these products is Canadian potash mining, which has been severely impacted by declining margins and slower than expected demand growth. Significant mine expansion projects that were expected to begin in 2013 and 2014 have been delayed. We do believe we are well positioned with Canadian potash producers for when mine investments rebound.

Hamlin Acquisition

On May 31, 2013, the company acquired 100% of Hamlin, Inc. (Hamlin) from Key Safety Systems, for $144.4 million (net of cash acquired). Hamlin is a manufacturer of sensor technology providing standard products and custom solutions for leading global manufacturers in the automotive and electronic industries. The acquisition allows the company to expand its automotive and electronics product offerings in the global sensor market in both the Automotive and Electronics business segments.

Business Segment Information

U.S. Generally Accepted Accounting Principles ("GAAP") dictates annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Within U.S. GAAP, 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.

The following table is a summary of the company's business unit segments' net sales by business unit and geography (in millions):

                              Fiscal Year
                     2013        2012        2011
Business Unit
Electronics(b)      $ 367.1     $ 329.5     $ 354.5
Automotive(c) (d)     267.2       206.2       197.6
Electrical(e)         123.6       132.2       112.9
Total               $ 757.9     $ 667.9     $ 665.0

Geography(a)
Americas(f)         $ 342.4     $ 303.6     $ 288.6
Europe(d) (e) (g)     136.8       107.5       114.9
Asia-Pacific(h)       278.7       256.8       261.5
Total               $ 757.9     $ 667.9     $ 665.0

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

(b) 2013 includes Hamlin net sales of $24.1 million.

(c) 2013 includes Hamlin net sales of $26.9 million.

(d) 2012 includes Accel and Terra Power net sales of $11.2 million and $1.7 million, respectively.

(e) 2012 and 2011 include Selco net sales of $6.0 million and $3.2 million for fiscal years 2012 and 2011, respectively.

(f) 2013 includes Hamlin net sales of $23.0 million. 2012 and 2011 include Selco net sales of $6.0 million and $3.2 million for fiscal years 2012 and 2011, respectively.

(g) 2013 includes Hamlin net sales of $11.6 million.

(h) 2013 includes Hamlin net sales of $16.4 million.

Business unit segment information is described more fully in Note 15 of the Notes to Consolidated Financial Statements. The following discussion provides an analysis of the information contained in the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements at December 28, 2013 and December 29, 2012, and for the three fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011.


Results of Operations - 2013 compared with 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 $1.5 million inventory adjustment in 2013 as described in Note 2, and $1.7 million in acquisition related operating expenses in 2013 both related to the Hamlin acquisition. Fiscal year 2013 included $3.3 million in foreign currency gains while fiscal year 2012 included $3.2 million in foreign currency loses, both primarily related to U.S. dollar gains or losses against the Philippine peso.

                                    Fiscal Year
(In thousands)                  2013          2012         % Change
Sales                         $ 757,853     $ 667,913          13 %
Gross profit                    296,232       258,467          15 %
Operating expense               166,351       151,597          10 %
Operating income                129,881       106,870          22 %
Other expense (income), net      (4,646 )      (5,396 )       (14 %)
Income before income taxes      124,235       100,052          24 %
Net income                    $  88,784     $  75,332          18 %

Net sales increased $89.9 million or 13% to $757.9 million for fiscal year 2013 compared to $667.9 million in fiscal year 2012 due primarily to an incremental $66.0 million from business acquisitions and growth in electronic and automotive products, offset by lower electrical sales. The company also experienced $1.4 million in favorable foreign currency effects in 2013 as compared to 2012 primarily resulting from sales denominated in euros partially offset by sales denominated in Japanese yen and Canadian dollars. Excluding acquisitions and currency effects, net sales increased $22.6 million or 3% year over year. The Automotive business segment sales increased $61.0 million or 30% to $267.2 million. The Electronics business segment sales increased $37.6 million or 11% to $367.1 million, and the Electrical business segment sales decreased $8.6 million or 7% to $123.6 million. Sales levels in 2013, excluding acquisitions and currency effects, were positively impacted by increased demand for the company's automotive and electronic products partially offset by slowing demand for the company's custom mining products.

The increase in Automotive sales was primarily due to an incremental $41.9 million in sales related to business acquisitions in 2013, strong worldwide growth in passenger vehicle fuses, growth in commercial vehicle products and favorable currency effects. Currency effects increased sales by $2.6 million in 2013 compared to 2012 primarily due to the euro. Excluding incremental sales from acquisitions and currency effects, Automotive sales increased $16.5 million or 8% year over year.

The increase in Electronics sales reflected incremental sales from Hamlin of $24.1 million, improving demand across all geographies and a slightly more favorable macroeconomic outlook. In addition, sales were negatively impacted by net unfavorable currency effects of $0.2 million, primarily from sales denominated in Japanese yen. Excluding incremental sales from acquisitions and currency effects, Electronics sales increased $13.7 million or 4% year over year.


The decrease in Electrical sales was primarily due to slowing demand for protection relays and custom products as a result of reduced potash mine expansion activity as well as the global downturn in the broader mining market. The decline was partially offset by stronger power fuse sales which increased 13% year-over-year primarily reflecting strength in the solar and HVAC markets as well as distributor conversions. The Electrical segment experienced net unfavorable currency effects of $1.0 million primarily from sales denominated in Canadian dollars. Excluding incremental sales from currency effects, Electrical sales decreased $7.6 million or 6% year over year.

On a geographic basis, sales in the Americas increased $38.8 million or 13% in 2013 as compared to 2012 primarily due to incremental sales from business acquisitions of $32.4 million offset by $1.2 million in unfavorable currency effects resulting from sales denominated in Canadian dollars. Excluding incremental sales and currency effects, Americas' sales increased $7.6 million or 3%. This increase resulted from an increase in the company's Automotive and Electronics business segments offset by a decline in the Electrical business segment. Automotive sales increased $31.3 million or 33% primarily reflecting incremental sales from acquisitions of $25.9 million, strong growth in the passenger vehicle market and growth in the commercial vehicle market. Electronics sales increased $14.4 million or 16% primarily reflecting incremental sales from Hamlin of $6.5 million and higher demand. Electrical sales decreased $7.0 million or 6% resulting from decreases in demand for protection relays and custom products due to continued weakness in the mining segment.

European sales increased $29.3 million or 27% in 2013 compared to 2012 primarily due to incremental sales from business acquisitions of $15.7 million and favorable currency effects of $3.8 million primarily from sales denominated in euros. Excluding incremental sales and currency effects, European sales increased $9.8 million or 9%. This resulted from increases in the company's Electronics and Automotive business segments offset by a decrease in the Electrical business segment. Automotive sales increased $20.2 million or 30% in 2013 primarily reflecting incremental sales from business acquisitions of $11.7 million and higher sales in the passenger vehicle markets driven by increased content. Excluding the impact of incremental sales from acquisitions and unfavorable currency effects, primarily from a weaker euro, Automotive sales increased $6.2 million or 9%. Electronics sales increased $10.6 million or 33% reflecting incremental sales from Hamlin of $4.0 million and higher demand in 2013. Electrical sales decreased $1.6 million or 18% in 2013 primarily from decreased demand for nautical relays.

Asia-Pacific sales increased $21.9 million or 9% in 2013 compared to 2012 primarily due to incremental sales from business acquisitions of $17.9 million offset by unfavorable currency effects of $1.2 million primarily from sales denominated in Japanese yen. Excluding the impact of incremental sales and currency effects, Asia-Pacific sales increased $5.2 million or 2%. Electronics sales increased $12.5 million or 6% reflecting incremental sales from Hamlin of $13.4 million and increased sales in China offset by weakness in the Taiwan, Japan and Korea markets. Automotive sales increased $9.5 million or 22% reflecting incremental sales from acquisitions of $4.5 million and continued increased demand for passenger vehicles in China as well as gains in market share.

Gross profit was $296.2 million or 39.1% of sales in 2013, compared to $258.5 million or 38.7% of sales in 2012. Gross profit in both 2013 and 2012 were negatively impacted by purchase accounting adjustments in cost of sales of $1.5 million and $0.6 million, respectively. These charges were the additional cost of goods sold for Hamlin, Accel and Selco inventories which had been stepped up to fair value at the acquisition dates as required by purchase accounting rules. Excluding the impact of these charges, gross profit was $297.7 million or 39.3% of sales as compared to $259.1 million or 38.8% of sales in 2012. The increase in gross margin was primarily attributable to operating leverage on higher sales.


Total operating expense was $166.4 million or 22.0% of net sales for 2013 compared to $151.6 million or 22.7% of net sales for 2012. The increase in operating expenses primarily reflects incremental operating expenses of $12.5 million from business acquisitions and the increased cost of company incentive programs driven by improved financial performance in 2013. 2012 operating expense included $5.1 million of charges related to the settlement of pension liabilities for certain former employees. Further information regarding the company's pension settlement charge is provided in Note 12 of the Notes to Consolidated Financial Statements included in this report.

Operating income was $129.9 million or 17.1% of net sales in 2013 compared to $106.9 million or 16.0% of net sales in the prior year. The increase in operating income in the current year was due primarily to the increased sales and resulting operating leverage.

Interest expense was $2.9 million in 2013 as compared to $1.7 million in 2012 and is primarily related to the company's increased borrowing to fund acquisitions.

Impairment and equity in net loss of unconsolidated affiliate was $10.7 million in 2013. During the first quarter, the company fully impaired its investment in and loan receivable from Shocking Technologies, Inc. ("Shocking") as described in Note 6 of the Notes to Consolidated Financial Statements included in this report.

Foreign exchange (gain) loss was $3.3 million of gain in 2013 compared to $3.2 million of loss in 2012. The fluctuation in foreign exchange was primarily attributable to changes in the value of the Philippine peso against the U.S. dollar in both fiscal 2013 and 2012.

Other expense (income), net, consisting of interest income, royalties and non-operating income was $4.6 million of income in 2013 compared to $5.4 million of income in 2012. The year-over-year decrease in income primarily reflects the impact of a $1.6 million gain on sale of fixed assets recorded in 2012 as compared to less than $0.1 million of gains recorded in 2013.

Income before income taxes was $124.2 million in 2013 compared to $100.1 million in 2012. Income tax expense was $35.5 million in 2013 compared to $24.7 million in 2012. The 2013 effective income tax rate was 28.5% compared to 24.7% in 2012. The higher effective tax rate in 2013 is primarily related to the $6.1 million Shocking Technology Tax adjustment booked in 2013. The 2012 and 2013 effective tax rates are lower than the statutory tax rate primarily due to the result of income earned in low-tax jurisdictions.

Results of Operations - 2012 compared with 2011

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 2012. These include a $0.6 million inventory adjustment as described in Note 2, and $5.3 million pension valuation adjustment as described in Note 12. Fiscal year 2012 and 2011 included $3.2 million and $1.2 million of unfavorable foreign currency revaluation, respectively, primarily related to U.S. dollar losses against the Philippine peso.


                                    Fiscal Year
(In thousands)                  2012          2011         % Change
Sales                         $ 667,913     $ 664,955           0 %
Gross profit                    258,467       256,694           1 %
Operating expense               151,597       142,790           6 %
Operating income                106,870       113,904          (6 %)
Other expense (income), net      (5,396 )      (4,126 )        31 %
Income before income taxes      100,052       115,101         (13 %)
Net income                    $  75,332     $  87,024         (13 %)

Net sales increased $2.9 million or less than 1% to $667.9 million for fiscal year 2012 compared to $665.0 million in fiscal year 2011 due primarily to an incremental $16.6 million from business acquisitions and growth in protection relays, custom mining products and automotive products, offset by lower electronics sales. The company also experienced $9.4 million in unfavorable foreign currency effects in 2012 as compared to 2011 primarily resulting from sales denominated in euros and, to a lesser extent, Canadian dollars and Korean won. Excluding acquisitions and currency effects, net sales decreased $4.3 million or less than 1% year over year. The Automotive business segment sales increased $8.6 million or 4% to $206.2 million. The Electronics business segment sales decreased $25.0 million or 7% to $329.5 million, and the Electrical business segment sales increased $19.3 million or 17% to $132.2 million. Sales levels in 2012, excluding acquisitions and currency effects, were negatively impacted by slowing demand for the company's electronics products coupled with channel inventory de-stocking. Sales levels in 2011, excluding acquisitions and currency effects, were negatively impacted by slowing demand for the company's electronics products coupled with inventory de-stocking in the supply chain.

The increase in Automotive sales was primarily due to an incremental $12.9 million in sales related to the Accel and Terra Power acquisitions in 2012 and organic growth in the passenger vehicle market. This was offset by a decline in commercial vehicle sales and unfavorable currency effects. Lower commercial vehicle sales reflected weakness in the construction and heavy truck markets. Currency effects reduced sales by $5.0 million in 2012 compared to 2011 primarily due to the weaker euro. Excluding incremental sales from acquisitions and currency effects, Automotive sales increased $0.7 million or less than 1% year over year.

The decrease in Electronics sales reflected slowing demand across all geographies. There was weakness in the telecom, PC and TV end markets in addition to distributor channel inventory de-stocking. In addition, sales were negatively impacted by net unfavorable currency effects of $3.2 million, primarily from sales denominated in euros and Korean won.

The increase in Electrical sales was due to continued strong growth for protection relays and custom mining products, an upturn in solar sales reflecting the success of new products, and improvement in the industrial fuse market. The Electrical business segment also had $3.7 million in incremental sales from the Selco acquisition in 2011. The Electrical segment experienced net unfavorable currency effects of $1.2 million primarily from sales denominated in Canadian dollars. Excluding incremental sales from acquisitions and currency effects, Electrical sales increased $16.8 million or 15% year over year.

On a geographic basis, sales in the Americas increased $15.0 million or 5% in 2012 as compared to 2011. This increase resulted from an increase in the company's Automotive and Electrical business segments offset by a decline in the Electronics business segment. Automotive sales increased $1.7 million or 2% primarily reflecting incremental sales from Terra Power. Excluding the acquisition, Automotive sales were essentially flat year-over-year as growth in the passenger vehicle market was offset by declines in the commercial vehicle market. Electrical sales increased $15.5 million or 15% resulting from increases in demand for protection relays, custom products and industrial power fuses. Electronics sales decreased $2.2 million or 2% primarily reflecting inventory de-stocking. The Americas region also experienced $0.9 million in unfavorable currency effects resulting from sales denominated in Canadian dollars.


European sales decreased $7.4 million or 6% in 2012 compared to 2011. This resulted from decreases in the company's Electronics and Automotive business segments offset by an increase in the Electrical business segment. Automotive sales decreased $0.4 million or less than 1% in 2012 primarily reflecting lower demand in the passenger vehicle markets. Excluding the impact of incremental sales from acquisitions and unfavorable currency effects, primarily from a weaker euro, Automotive sales declined $6.5 million or 10%. Electronics sales decreased $10.3 million or 24% reflecting lower demand resulting from a weaker economy during 2012. Electrical sales increased $3.3 million or 63% primarily from the incremental sales of Selco. Excluding incremental sales and currency effects, Electrical sales increased $0.1 million or 2% year-over-year. Overall European sales in 2012 included unfavorable currency effects of $8.6 million, resulting primarily from sales denominated in euros.

Asia-Pacific sales decreased $4.7 million or 2% in 2012 compared to 2011. This decrease resulted from a decrease in the Electronics business segment offset by increases at the company's Automotive and Electrical business segments. Electronics sales decreased $12.5 million or 6% reflecting slowing end-market demand and inventory de-stocking. Automotive sales increased $7.4 million or 20% reflecting continued increased demand for passenger vehicles in the developing Asian markets as well as gains in market share. Electrical sales increased $0.5 million or 9%. Current year results included favorable currency effects of $0.1 million resulting from sales denominated in Chinese yuan partially offset by sales denominated in Korean won and Japanese yen.

Gross profit was $258.5 million or 38.7% of sales in 2012, compared to $256.7 million or 38.6% of sales in 2011. Gross profit in both 2012 and 2011 were negatively impacted by purchase accounting adjustments in cost of sales of $0.6 million and $4.1 million, respectively. These charges were the additional cost of goods sold for Accel and Selco inventory which had been stepped-up to fair value at the acquisition dates as required by purchase accounting rules. Excluding the impact of these charges, gross profit was $259.1 million or 38.8% of sales for 2012 as compared to $260.8 million or 39.2% of sales in 2011. The decline in gross margin was primarily attributable to the unfavorable impact of currency effects on sales as described above.

Total operating expense was $151.6 million or 22.7% of net sales for 2012 compared to $142.8 million or 21.5% of net sales for 2011. The increase in operating expenses primarily reflects incremental operating expenses of $6.5 million from business acquisitions and $5.1 million in charges related to the settlement of pension liabilities for certain former employees. Further information regarding the company's pension settlement charge is provided in Note 12 of the Notes to Consolidated Financial Statements included in this report.

Operating income was $106.9 million or 16.0% of net sales in 2012 compared to $113.9 million or 17.1% of net sales in the prior year. The decrease in operating income in the current year was due primarily to the limited sales growth and an increase in costs as described above.

Interest expense was unchanged at $1.7 million in both 2012 and 2011 and is primarily related to the company's revolving credit facility.

Impairment and equity in net loss of unconsolidated affiliate was $7.3 million in 2012. During the fourth quarter, the company determined that it had the ability to exert significant influence over Shocking and as a result began accounting for the investment using the equity method. In accordance with Accounting Standards Codification (ASC) 323, the company retroactively recorded its proportional share of Shocking's operating losses, which amounted . . .

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