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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 2, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 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
of incorporation or organization) Identification No.)
800 EAST NORTHWEST HIGHWAY
DES PLAINES, ILLINOIS 60016
--------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(847) 824-1188
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 is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of October 2, 2004, 22,252,982 shares of common stock, $.01 par value,
of the Registrant were outstanding.
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of October 2, 2004, and January 3, 2004 (unaudited)....... 1
Condensed Consolidated Statements of Income for the periods ended
October 2, 2004, and September 27, 2003 (unaudited)................................................ 2
Condensed Consolidated Statements of Cash Flows for the periods ended
October 2, 2004, and September 27, 2003 (unaudited)................................................ 3
Notes to the Condensed Consolidated Financial Statements (unaudited)............................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 11
Item 3. Qualitative and Quantitative Disclosures about Market Risk......................................... 14
Item 4. Controls and Procedures............................................................................ 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................... 16
LITTELFUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
OCTOBER 2, January 3,
2004 2004
---- ----
ASSETS:
Cash and cash equivalents .............................. $ 27,325 $ 22,128
Receivables ............................................ 82,959 52,149
Inventories ............................................ 78,769 52,598
Other current assets ................................... 28,372 22,265
-------- --------
Total current assets ................................... 217,425 149,140
Property, plant, and equipment ......................... 296,236 252,800
Accumulated depreciation ............................... (165,990) (154,321)
-------- --------
Property, plant, and equipment, net .................... 130,246 98,479
Intangible assets, net ................................. 18,797 11,943
Goodwill ............................................... 61,704 48,643
Investments ............................................ 8,819 2,543
Other assets ........................................... 786 822
-------- --------
Total assets ....................................... $437,777 $311,570
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities excluding current portion
of long-term debt .................................. $102,527 $ 64,892
Current portion of long-term debt ...................... 38,403 18,496
-------- --------
Total current liabilities .............................. 140,930 83,388
Long-term debt ......................................... 1,574 10,201
Accrued post-retirement benefits ....................... 18,717 4,564
Other long-term liabilities ............................ 14,476 1,072
Minority interest ...................................... 12,309 143
Shareholders' equity ................................... 249,771 212,202
-------- --------
Total liabilities and shareholders' equity ............. $437,777 $311,570
======== ========
Common shares issued and outstanding
of 22,252,982 and 22,063,943,
at October 2, 2004 and January 3, 2004, respectively
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data, unaudited)
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
OCT 2, Sept 27, OCT 2, Sept 27,
2004 2003 2004 2003
---- ---- ---- ----
Net sales ................................................ $ 135,926 $ 94,696 $ 376,103 $ 237,447
Cost of sales ............................................ 86,565 66,910 242,758 162,709
--------- --------- --------- ---------
Gross profit ............................................. 49,361 27,786 133,345 74,738
Selling, general and administrative expenses ............. 26,181 18,228 70,296 49,449
Research and development expenses ........................ 4,324 2,297 11,661 6,092
Amortization of intangibles .............................. 480 192 1,289 575
--------- --------- --------- ---------
Operating income ......................................... 18,376 7,069 50,099 18,622
Interest expense ......................................... 387 544 1,305 1,594
Other (income) expense ................................... 303 160 (158) (391)
--------- --------- --------- ---------
Income before minority interest and income taxes ......... 17,686 6,365 48,952 17,419
Minority interest ........................................ 75 - 135 -
Income taxes ............................................. 6,361 2,292 17,617 6,271
--------- --------- --------- ---------
Net income ............................................... $ 11,250 $ 4,073 $ 31,200 $ 11,148
========= ========= ========= =========
Net income per share:
Basic .............................................. $ 0.50 $ 0.19 $ 1.41 $ 0.51
========= ========= ========= =========
Diluted ............................................ $ 0.49 $ 0.19 $ 1.38 $ 0.51
========= ========= ========= =========
Weighted average shares and equivalent shares outstanding:
Basic .............................................. 22,350 21,823 22,189 21,794
========= ========= ========= =========
Diluted ............................................ 22,844 21,955 22,594 21,862
========= ========= ========= =========
2
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
OCT 2, Sept 27, OCT 2, Sept 27,
2004 2003 2004 2003
---- ---- ---- ----
Operating activities:
Net income .................................................... $ 11,250 $ 4,073 $ 31,200 $ 11,148
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation ......................................... 5,828 5,223 17,644 13,857
Amortization ......................................... 480 192 1,289 575
Changes in operating assets and liabilities:
Accounts receivable .................................. (598) (2,806) (14,416) (4,608)
Inventories .......................................... (6,834) 4,309 (8,067) 1,588
Accounts payable and accrued expenses ................ 1,817 6,428 3,596 5,814
Prepaid expenses and other ........................... 11,683 1,125 11,442 (1,431)
-------- -------- -------- --------
Net cash provided by operating activities ..................... 23,626 18,544 42,688 26,943
Cash used in investing activities:
Purchases of property, plant, and equipment .......... (7,343) (9,136) (16,394) (11,712)
Acquisitions, net of cash acquired ................... (2,512) (44,496) (35,319) (44,496)
Sale of property, plant and equipment ................ 2,684 - 2,684 -
Sale of marketable securities, net ................... - - - 8,806
-------- -------- -------- --------
Net cash used in investing activities ......................... (7,171) (53,632) (49,029) (47,402)
Cash provided by (used in) financing activities:
Proceeds from long-term debt ......................... 700 30,500 32,700 30,500
Payments of long-term debt ........................... (19,603) (28,550) (22,650) (29,991)
Proceeds from exercise of stock options .............. 2,026 282 10,335 982
Purchase of treasury stock ........................... (5,604) - (5,604) -
-------- -------- -------- --------
Net cash provided by (used in) in financing activities ........ (22,481) 2,232 14,781 1,491
Effect of exchange rate changes on cash ....................... (1,033) 1,315 (3,243) 1,956
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents .............. (7,059) (31,541) 5,197 (17,012)
Cash and cash equivalents at beginning of period .............. 34,384 42,279 22,128 27,750
-------- -------- -------- --------
Cash and cash equivalents at end of period .................... $ 27,325 $ 10,738 $ 27,325 $ 10,738
======== ======== ======== ========
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 2, 2004
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the periods ended October 2, 2004, and
September 27, 2003, are not necessarily indicative of the results that may be
expected for the year ending January 1, 2005. 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 3, 2004.
2. BUSINESS SEGMENT INFORMATION
The Company designs, manufactures and sells circuit protection devices
throughout the world. The Company has three reportable geographic segments:
Americas, Europe and Asia-Pacific. The circuit protection market in these
geographical segments is categorized into three major product areas: electronic,
automotive and electrical.
The Company evaluates the performance of each geographic segment based on its
net income or loss. The Company also accounts for inter segment sales as if the
sales were to third parties.
The Company's reportable segments are the geographical regions where the revenue
is earned and expenses are incurred. The Company has subsidiaries in Americas,
Europe and Asia-Pacific where each region is measured based on its sales and
operating income or loss.
Revenues from no single customer amounted to 10% or more of the Company's total
revenues for the quarter ended October 2, 2004.
Information concerning the operations in these geographic segments for the
periods ended October 2, 2004, and September 27, 2003, is as follows (in
thousands):
Three Months Three months Nine Months Nine Months
Ended Ended Ended Ended
October 2, 2004 September 27, 2003 October 2, 2004 September 27, 2003
--------------- ------------------ --------------- ------------------
NET SALES
Americas $ 57,339 $ 46,406 $ 166,147 $ 117,291
Europe 34,412 15,281 86,262 43,680
Asia-Pacific 44,175 33,009 123,694 76,476
-------------- -------------- --------------- -------------
Combined total 135,926 94,696 376,103 237,447
Corporate - - - -
-------------- -------------- --------------- -------------
Consolidated total $ 135,926 $ 94,696 $ 376,103 $ 237,447
INTER SEGMENT SALES
Americas $ 47,781 $ 17,845 $ 86,037 $ 53,116
Europe 13,973 12,713 44,395 38,019
Asia-Pacific 8,269 4,799 21,891 15,307
-------------- -------------- --------------- -------------
Combined total 70,023 35,357 152,323 106,442
Corporate - - - -
Elimination (70,023) (35,357) (152,323) (106,442)
--------------- --------------- ---------------- --------------
Consolidated total $ - $ - $ - $ -
4
INTEREST EXPENSE
Americas $ 385 $ 525 $ 1,299 $ 1,533
Europe 2 - 6 4
Asia-Pacific - 19 - 57
-------------- -------------- --------------- -------------
Combined total 387 544 1,305 1,594
Corporate - - - -
-------------- -------------- --------------- -------------
Consolidated total $ 387 $ 544 $ 1,305 $ 1,594
DEPRECIATION AND AMORTIZATION
Americas $ 3,183 $ 4,232 $ 12,236 $ 10,726
Europe 2,139 436 4,207 1,473
Asia-Pacific 506 555 1,201 1,657
-------------- -------------- --------------- -------------
Combined total 5,828 5,223 17,644 13,856
Corporate 480 192 1,289 576
-------------- -------------- --------------- -------------
Consolidated total $ 6,308 $ 5,415 $ 18,933 $ 14,432
OTHER (INCOME) EXPENSE
Americas $ 219 $ (73) $ (311) $ (467)
Europe 290 (138) (145) (114)
Asia-Pacific (206) 371 298 190
-------------- -------------- --------------- -------------
Combined total 303 160 (158) (391)
Corporate - - - -
-------------- -------------- --------------- -------------
Consolidated total $ 303 $ 160 $ (158) $ (391)
INCOME TAX EXPENSE
Americas $ 4,130 $ 1,069 $ 11,306 $ 3,182
Europe 832 314 2,556 441
Asia-Pacific 1,399 909 3,755 2,648
-------------- -------------- --------------- -------------
Combined total 6,361 2,292 17,617 6,271
Corporate - - - -
-------------- -------------- --------------- -------------
Consolidated total $ 6,361 $ 2,292 $ 17,617 $ 6,271
NET INCOME(LOSS)
Americas $ 7,239 $ 1,440 $ 20,120 $ 5,006
Europe 254 248 341 (274)
Asia-Pacific 4,237 2,576 11,823 6,992
-------------- -------------- --------------- -------------
Combined total 11,730 4,265 32,284 11,724
Corporate (480) (192) (1,084) (576)
-------------- -------------- --------------- -------------
Consolidated total $ 11,250 $ 4,073 $ 31,200 $ 11,148
NET SALES
Electronic $ 90,312 $ 62,461 $ 248,278 $ 139,354
Automotive 27,488 23,100 85,714 72,360
Electrical 18,126 9,135 42,111 25,733
-------------- -------------- --------------- -------------
Consolidated total $ 135,926 $ 94,696 $ 376,103 $ 237,447
5
Total assets
October 2, January 3,
2004 2004
---- ----
Americas $ 300,074 $ 356,871
Europe 193,836 33,637
Asia-Pacific 63,381 47,798
----------- ----------
Combined total 557,291 438,306
Eliminations (119,514) (126,736)
----------- ----------
Consolidated total $ 437,777 $ 311,570
=========== ==========
3. INVENTORIES
The components of inventories are as follows (in thousands):
October 2, January 3,
2004 2004
---- ----
Raw material $ 15,899 $ 11,783
Work in process 25,981 16,224
Finished goods 36,889 24,591
----------- ----------
Total $ 78,769 $ 52,598
=========== ==========
4. LONG-TERM OBLIGATIONS
Total debt including the current portion at the end of the third quarter 2004
totaled $40.0 million and consisted of the following: (1) 6.16% private
placement notes totaling $10.0 million, (2) foreign revolver borrowings totaling
$7.8 million and (3) notes payable relating to mortgages totaling $0.2 million
and (4) credit revolver borrowings totaling $22.0 million. Of this indebtedness,
$38.4 million is considered to be current liabilities. The Company has a $50.0
million, three-year revolving bank credit agreement that expires on August 26,
2006. The bank credit agreement is subject to a maximum indebtedness calculation
and other financial covenants. No revolver principal payments are required until
the agreement matures. At October 2, 2004, the Company had available $28.0
million of borrowing capability under the revolving bank credit agreement. The
revolving bank credit agreement has an interest rate of prime or LIBOR plus
..875%. The Company also had $1.8 million in letters of credit outstanding at
October 2, 2004.
6
5. PER SHARE DATA
Net income per share amounts for the three months and nine months ended October
2, 2004, and September 27, 2003, are based on the weighted average number of
common and common equivalent shares outstanding during the periods as follows
(in thousands, except per share data):
Three months ended Nine months ended
------------------ -----------------
Oct 2, Sept 27, Oct 2, Sept 27,
2004 2003 2004 2003
---- ---- ---- ----
Net income $11,250 $ 4,073 $31,200 $11,148
======= ======= ======= =======
Average shares outstanding - Basic 22,350 21,823 22,189 21,794
Net effect of dilutive stock options
and restricted shares
- Diluted 494 132 405 68
------- ------- ------- -------
Average shares outstanding - Diluted 22,844 21,955 22,594 21,862
======= ======= ======= =======
Net income per share
- Basic $ 0.50 $ 0.19 $ 1.41 $ 0.51
======= ======= ======= =======
- Diluted $ 0.49 $ 0.19 $ 1.38 $ 0.51
======= ======= ======= =======
Options to purchase 347,500 and 1,214,920 shares of common stock were
outstanding at October 2, 2004, and September 27, 2003, respectively, but were
not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be anti-dilutive.
6. HEINRICH ACQUISITION
On May 6, 2004, the Company acquired 82% of the common stock of Heinrich
Industrie AG ("Heinrich") for euro 39.5 million (approximately $47.7 million) in
cash and also incurred acquisition costs of euro 2.0 million (approximately $2.4
million). The Company purchased the controlling interest in Heinrich from its
two largest shareholders and initiated a tender offer for the remaining shares
of the publicly held company. The Company funded the acquisition with $18.1
million in cash and $32.0 million of borrowings on an existing credit revolver.
Subsequent to May 6, 2004, the Company purchased additional shares of Heinrich
stock for approximately $2.5 million, bringing the total ownership to 87% as of
October 2, 2004.
Heinrich, the holding company for the Wickmann Group of circuit protection
products, has three business units: electronic, automotive and electrical.
Littelfuse intends to operate Heinrich in such business units subsequent to the
acquisition. The Heinrich acquisition expands the Company's product offerings
and strengthens the Company's position in the circuit protection industry.
7
The acquisition was accounted for using the purchase method and the operations
of Heinrich are included in the Company's operations from the date of
acquisition. The following table sets forth the purchase price allocation for
the acquisition of Heinrich in accordance with the purchase method of accounting
with adjustments to record the acquired assets and liabilities of Heinrich at
their estimated fair market or net realizable values.
Purchase price allocation (in thousands)
Current assets $ 50,750
Property, plant and equipment 36,754
Intangible assets 8,374
Goodwill 12,744
Other assets 8,955
Current liabilities (20,443)
Purchase accounting liabilities (10,505)
Other long-term liabilities (24,262)
Minority interest (9,692)
---------
$ 52,675
=========
The final purchase price allocation is subject to revision based upon receipt of
the independent appraisal of the property, equipment and intangible assets
acquired.
Purchase accounting liabilities are estimated to be $10.5 million and are
primarily for redundancy costs to be paid through 2005 related to manufacturing
operations and selling, general and administrative functions. These liabilities
are subject to revision as the Company implements its plan. The Company began
formulating its plan to incur these costs as of the acquisition date. As of
October 2, 2004, no amounts have been paid related to these liabilities.
The following unaudited pro forma consolidated financial information for the
Company has been prepared assuming the acquisition had occurred on the first day
of the respective periods.
Three Months Ended Nine Months Ended
------------------ -----------------
October 2,2004 September 27, 2003 October 2, 2004 September 27, 2003
(unaudited) (unaudited) (unaudited) (unaudited)
in thousands
Net revenues $135,926 $111,842 $426,447 $304,938
Income from operations 18,376 6,067 49,123 16,644
Net income 11,250 3,735 30,889 10,319
Diluted income per share $ 0.49 $ 0.17 $ 1.37 $ 0.47
7. DERIVATIVES AND HEDGING
On June 11, 2002, the Company, entered into cross currency rate swaps, with a
notional amount of $11.6 million, as a cash flow hedge of the variability of Yen
cash flows attributable to the USD/JPY exchange rate risk on forecasted
intercompany sales of inventory to a Japanese subsidiary. The cross currency
swaps convert $11.6 million of the Company's fixed rate 6.16% U.S. dollar debt
to fixed rate 3.13% Japanese Yen debt. At the inception of the hedge, both the
foreign currency swap and the intercompany sales subject to the hedge were
denominated in JPY. The swap agreements were accounted for as a cash flow hedge
and reported at fair value. The notional amount outstanding at October 2, 2004,
was $3.8 million and the fair value of the outstanding cross currency rate swap
agreements was recognized as a $0.5 million liability and as a charge to
accumulated other comprehensive loss in the Consolidated Balance Sheet at
October 2, 2004.
8
For the period from June 1, 2004 to September 30, 2005, Heinrich Industrie AG
purchased euro forward contracts with a notional amount of $6.7 million as a
cash flow hedge of the variability of US dollar cash attributable to the
exchange rate risk on forecasted intercompany sales to U.S. and Asian
subsidiaries. These forward contracts guarantee the rate at which the US dollar
cash flows will be converted to euros in the future. The forward agreements were
accounted for as a cash flow hedge and reported at fair value. The notional
amount outstanding at October 2, 2004, was $4.5 million and the fair value of
the outstanding forward contracts was recognized as a $0.3 million asset and as
a credit to comprehensive income in the Consolidated Balance Sheet at October 2,
2004.
Derivative financial instruments involve, to a varying degree, elements of
market and credit risk not recognized in the consolidated financial statements.
The market risk associated with these instruments resulting from interest rate
movements is expected to offset the market risk of the underlying transactions
being hedged. The counterparties to the agreements relating to the Company's
cross currency rate instruments consist of major international financial
institutions with high credit ratings. The Company does not believe that there
is significant risk of non-performance by these counterparties because the
Company monitors the credit ratings of such counterparties, and limits the
financial exposure and amount of agreements entered into with any one financial
institution. While the notional amount of the derivative financial instruments
provide one measure of the volume of these transactions, they do not represent
the amount of the Company's exposure to credit risk. The amounts potentially
subject to credit risk (arising from the possible inability of counterparties to
meet the terms of their contracts) are generally limited to the amounts, if any,
by which the counterparties' obligations under the contracts exceed the
obligations of the Company to the counterparty.
8. PENSIONS
The components of net periodic benefit cost for the three and nine months ended
2004 compared with the three and nine months ended 2003 were (in thousands):
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
------------------ ----------------- ------------------ -----------------
U.S. Pension Benefits Foreign Plans
--------------------- -------------
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
Service cost $ 690 $ 667 $ 2,070 $ 2,001 $ 281 $ 249 $ 843 $ 747
Interest cost 875 888 2,625 2,664 372 315 1,116 945
Expected return on plan
Assets (912) (916) (2,736) (2,748) (384) (311) (1,152) (933)
Amortization of prior
service cost 3 3 9 9 (3) (3) (9) (9)
Amortization of transition
Asset - - - - (23) (26) (69) (78)
Amortization of net (gain)
Loss 40 28 120 84 52 - 156 -
Recognized actuarial loss - - - - - 63 - 189
-------- ------- -------- -------- ------- ------ -------- ------
Total cost of the plan 696 670 2,088 2,010 295 287 885 861
Expected plan participants'
contribution - - - - (52) (52) (156) (156)
-------- ------- -------- -------- -------- ------- --------- -------
Net periodic benefit cost $ 696 $ 670 $ 2,088 $ 2,010 $ 243 $ 235 $ 729 $ 705
-------- ------- -------- -------- ------- ------ -------- ------
The expected rate of return on pension assets is 8.75% and 9.00% in 2004 and
2003, respectively.
9. COMPREHENSIVE INCOME
Total comprehensive income for the three months ended October 2, 2004 and
September 27, 2003 was approximately $13.9 million and $5.2 million,
respectively, and for the nine months ended October 2, 2004 and September 27,
2003 was $32.9 million and $14.5 million, respectively. The adjustment for
comprehensive income consists of deferred gains and losses from foreign currency
translation adjustments and qualified cash flow hedges for the periods ended
October 2, 2004 and September 27, 2003, and additionally unrealized gains and
losses on available-for-sales securities for the period ended October 2, 2004.
10. STOCK-BASED COMPENSATION
9
The following table discloses the Company's pro forma net income and diluted net
income per share had the valuation methods under SFAS 123 been used for the
Company's stock option grants. The table also discloses the weighted average
assumptions used in estimating the fair value using the Black-Scholes option
pricing model.
(In thousands, except per share amounts)
Three months ended Nine months ended
------------------ -----------------
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $ 11,250 $ 4,073 $ 31,200 $ 11,148
Stock option compensation
expense, net of tax (273) (302) (795) (816)
------------- ------------ ------------- -------------
Pro forma net income $ 10,977 $ 3,771 $ 30,405 $ 10,332
Basic net income per share
As reported $ 0.50 $ 0.19 $ 1.41 $ 0.51
Pro forma $ 0.49 $ 0.17 $ 1.37 $ 0.47
Diluted net income per share
As reported $ 0.49 $ 0.19 $ 1.38 $ 0.51
Pro forma $ 0.48 $ 0.17 $ 1.34 $ 0.47
Risk-free interest rate 3.39% 3.10% 3.39% 3.10%
Expected dividend yield 0% 0% 0% 0%
Expected stock price volatility 43.0% 50.2% 43.0% 50.2%
Expected life of options 8 years 8 years 8 years 8 years
These pro forma amounts may not be representative of future disclosures because
the estimated fair value of the options is amortized to expense over the vesting
period and additional options may be granted in the future.
11. Subsequent Event
Subsequent to October 2, 2004 the Company signed an agreement for the purchase
of an additional 10.1% of shares in Heinrich Industrie AG of Witten, Germany, to
increase ownership to approximately 97%. Pursuant to this agreement, the Company
will purchase an additional 202,000 shares of Heinrich for approximately 4.8
million euros in a private transaction.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Sales by Market and Geography
(Dollars in Millions)
THIRD QUARTER YEAR-TO-DATE
-------------------------- ----------------------------
2004 2003 % CHANGE 2004 2003 % CHANGE
---- ---- -------- ---- ---- --------
MARKET
Electronics $ 79.2 $ 62.5 27% $ 230.9 $ 139.4 66%
Automotive 23.4 23.1 1% 78.6 72.4 9%
Electrical 9.9 9.1 9% 28.6 25.7 11%
-------- ------- -- -------- -------- --
Subtotal 112.5 94.7 19% 338.1 237.5 42%
Heinrich 23.4 - - 38.0 - -
-------- ------- -- -------- -------- --
TOTAL $ 135.9 $ 94.7 44% $ 376.1 $ 237.5 58%
======== ======= == ======== ======== ==
THIRD QUARTER YEAR-TO-DATE
------------- ------------
2004 2003 % CHANGE 2004 2003 % CHANGE
---- ---- -------- ---- ---- --------
GEOGRAPHY
Americas $ 57.2 $ 46.4 23% $ 166.1 $ 117.3 42%
Europe 34.4 15.3 125% 86.2 43.7 97%
Asia Pacific 44.3 33.0 34% 123.8 76.5 62%
-------- ------- ---- -------- -------- --
TOTAL $ 135.9 $ 94.7 44% $ 376.1 $ 237.5 58%
======== ======= ==== ======== ======== ==
Results of Operations
Third Quarter, 2004
Sales increased $41.2 million or 44% to $135.9 million in the third quarter of
2004, compared to $94.7 million in the third quarter of 2003. The acquisition of
Heinrich accounted for approximately $23.4 million of the increase from the
prior year quarter. Excluding Heinrich, sales for the third quarter of 2004
increased approximately 19% compared to the prior year quarter.
On a geographic basis, sales in the Americas increased $10.8 million or 23% in
the third quarter of 2004, compared to the third quarter of last year. The
electronics business was the major contributor to this growth reflecting
strength in the telecom and industrial markets, while Heinrich contributed $2.0
million for the quarter. Europe sales increased $19.1 million or 125% in the
third quarter of 2004 compared to the third quarter of last year. Heinrich
contributed $16.2 million of this increase. Excluding Heinrich, Europe sales
increased 19% compared to the third quarter of 2003 due to improved demand for
electronics products and favorable currency effects. Asia sales increased $11.3
million or 34% compared to the prior year third quarter. Excluding Heinrich,
which contributed $5.3 million, Asia sales increased 18% compared to the prior
year third quarter. This increase was largely due to increased demand in the
digital consumer electronics market.
Electronic sales, excluding Heinrich, increased $16.7 million or 27% for the
third quarter of 2004 compared to the prior year quarter due to continued
strength across all electronic end markets. Automotive sales, excluding Heinrich
increased $0.3 million or 1% for the third quarter of 2004 compared to the prior
year quarter, but decreased by 2% excluding currency effects. The modest decline
in automotive sales, assuming a constant currency, was due primarily to softness
in the European market. Electrical sales, excluding Heinrich, increased $0.8
million or 9% in the third quarter of 2004 compared to the same quarter last
year as the electrical markets benefited from increased industrial activity and
the beginnings of a recovery in non-residential construction.
11
Gross profit was $49.4 million or 36.3% of sales for the third quarter of 2004,
compared to $27.8 million or 29.3% in the same quarter last year. The increase
in gross margin was mainly attributable to operating leverage from higher sales
and cost reductions in excess of price erosion, partially offset by $1.3 million
of restructuring charges related to manufacturing transfers and plant downsizing
activities and the addition of lower margin Heinrich sales.
Total operating expense was $31.0 million or 22.8% of sales for the third
quarter of 2004 compared to $20.7 million or 21.9% of sales for the same quarter
in the prior year. The increase in operating expense as a percentage of sales
reflects additions to sales and engineering staffs to support the Company's
solution selling strategy and professional fees associated with Sarbanes-Oxley
compliance.
Operating income was $18.4 million or 13.5% of sales for the third quarter of
2004 compared to $7.1 million or 7.5% of sales for the same quarter of last year
reflecting the sales and margin improvements discussed above.
Interest expense was $0.4 million in the third quarter of this year compared to
$0.5 million in the third quarter of last year. Other expense was $0.3 million
for the third quarter of 2004 compared to $0.2 million in the third quarter of
last year.
Income before income taxes and minority interest was $17.7 million for the third
quarter 2004 compared to $6.4 million for the third quarter of 2003. Income
taxes were $6.4 million with an effective tax rate of 36% for the third quarter
of 2004 compared to $2.3 million with an effective tax rate of 36% in the third
quarter of last year.
Net income for the third quarter 2004 was $11.3 million or $0.49 per diluted
share compared to $4.1 million or $0.19 per diluted share for the same quarter
of last year.
Nine Months, 2004
Sales for the first nine months of 2004 increased 58% to $376.1 million from
$237.5 million for the first nine months of last year. The acquisition of
Heinrich accounted for approximately $38.0 million of the increase. On a
geographic basis, sales in the Americas increased 42% in the first nine months
of 2004 compared to the prior year due primarily to Teccor, which was acquired
on July 7, 2003, and strong organic growth in the electronics business.
Increased sales of automotive and electrical products as well as the Heinrich
acquisition also contributed to sales growth in the Americas for the first nine
months of 2004. Europe sales increased 97% in the first nine months of 2004
compared to the prior year due primarily to the Heinrich acquisition. The Teccor
acquisition and favorable currency effects also contributed to sales growth in
Europe for the first nine months of 2004. Asia sales increased 62% in the first
nine months of 2004 compared to the prior year due to the Teccor and Heinrich
acquisitions and continued strength in the digital consumer end markets.
Gross profit was $133.3 million or 35.5% of sales for the first nine months of
2004 compared to $74.7 million or 31.5% of sales for the first nine months of
last year. Improvement in gross margin for the first nine months as compared to
the prior year was primarily due to operating leverage from higher sales and
cost reductions in excess of price erosion, partially offset by $2.5 million of
restructuring charges related to manufacturing transfers and plant downsizing
activities and the addition of lower margin Heinrich sales.
Total operating expense was $83.2 million or 22.1% of sales for the first nine
months of 2004 compared to $56.1 million or 23.6% last year. The increase in
operating expenses was largely due to the additional expenses related to Teccor
and Heinrich, but additions to sales and engineering staffs to support the
Company's solution selling strategy and professional fees associated with
Sarbanes Oxley compliance also contributed to the increase.
Operating income for the first nine months of 2004 was $50.1 million or 13.3% of
sales compared to $18.6 million or 7.8% of sales for the prior year reflecting
sales and margin improvements discussed above.
Interest expense was $1.3 million for the first nine months of 2004 compared to
$1.6 million last year. Other income was $0.2 million for the first nine months
of 2004 compared to $0.4 million for the same period last year.
12
Income before taxes and minority interest was $49.0 million for the first nine
months of 2004 compared to $17.4 million the first nine months of last year.
Income taxes were $17.6 million the first nine months of 2004 compared to $6.3
million for the first nine months of last year.
Net income for the first nine months of 2004 increased to $31.2 million from
$11.1 million for the same period last year. Earnings per share for the first
nine months of 2004 increased to $1.38 per diluted share compared to $0.51 per
diluted share last year.
Liquidity and Capital Resources
Assuming no material adverse changes in market conditions or interest rates,
management expects that the Company will have sufficient cash from operations to
support both its operations and its current debt obligations for the foreseeable
future.
Littelfuse started the 2004 year with $22.1 million of cash. Net cash provided
by operations was $42.7 million for the first nine months. Net cash provided by
operations includes net income of $31.2 million, depreciation of $17.6 million
and amortization of $1.3 million in addition to various working capital and
other items. Excluding the effects of the Heinrich acquisition, accounts
receivable increased $14.4 million and inventory increased $8.1 million
primarily to support the significant sales increase. Excluding the effects of
the Heinrich acquisition, accounts payable, accrued expenses, prepaid expenses
and other items favorably impacted net cash provided by operations by $15.0
million, mostly due to the timing of liability payments including taxes and to a
lesser extent reductions in assets which were paid in prior periods. Net cash
used in investing activities included $13.7 million in net purchases of
property, plant and equipment and $35.3 million, net of cash acquired of $15.7
million, for the purchase of Heinrich. An allocation of the Heinrich purchase
price is provided in Note 6 to the Notes to Condensed Consolidated Financial
Statements (Unaudited) for the period ending October 2, 2004. In addition, net
cash provided by financing activities included stock option exercises of $10.3
million along with net proceeds of long-term debt of $10.1 million and the
purchase of treasury stock for $5.6 million. The effects of exchange rate
changes decreased cash by $3.2 million. The net cash provided by operations,
less investing and financing activities plus the effects of exchange rate
changes, resulted in a $5.2 million net increase in cash. This left the Company
with a cash balance of $27.3 million at October 2, 2004.
The ratio of current assets to current liabilities was 1.5 to 1 at the end of
the third quarter of 2004 compared to 2.0 to 1 at the third quarter 2003. The
days sales in receivables was approximately 57 days at the end of the third
quarter of 2004, compared to 50 days at the end 2003, and 56 days at the end of
the third quarter 2003. The increase in days sales in receivables from 2003
resulted primarily from the addition of Heinrich whose days sales in receivables
were higher than the rest of the Company. The days inventory outstanding was
approximately 86 days at the end of the third quarter of 2004 compared to 71
days at the end of 2003 and 76 days at end of the third quarter of 2003. The
increase in days inventory outstanding from 2003 resulted primarily from the
addition of Heinrich whose days inventory outstanding is higher than the rest of
the Company and planned increases in inventory to support upcoming manufacturing
line transfers.
The Company's capital expenditures, net of cash from asset sales, was $4.7
million for the third quarter of 2004 and $13.7 million for the first nine
months of 2004 compared to the prior year periods of $9.1 million and $11.7
million, respectively. The increase in capital expenditures reflects the
acquisitions of Teccor and Heinrich and capacity additions for electronic and
automotive products.
Total debt at the end of the third quarter 2004 totaled $40.0 million and
consisted of the following: (1) 6.16% private placement notes totaling $10.0
million, (2) foreign revolver borrowings totaling $7.8 million and (3) notes
payable relating to mortgages totaling $0.2 million and (4) credit revolver
borrowings totaling $22.0 million. Of this indebtedness, $38.4 million is
considered to be current liabilities. The Company has a $50.0 million,
three-year revolving bank credit agreement that expires on August 26, 2006. The
bank credit agreement is subject to a maximum indebtedness calculation and other
financial covenants. No revolver principal payments are required until the
agreement matures. At October 2, 2004, the Company had available $28.0 million
of borrowing capability under the revolving bank credit agreement. The revolving
bank credit agreement has an interest rate of prime or LIBOR plus .875%. The
Company also had $1.8 million in letters of credit outstanding at October 2,
2004.
13
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
The statements in this section, the letter to shareholders and in the other
sections of this report which are not historical facts contained in this report
are forward-looking statements that involve risks and uncertainties, including,
but not limited to, product demand and market acceptance, the effect of economic
conditions, the impact of competitive products and pricing, the integration of
acquisitions, product development and patent protection, commercialization and
technological difficulties, capacity and supply constraints or difficulties,
exchange rate fluctuations, actual purchases under agreements, the effect of the
Company's accounting policies, labor disputes, restructuring costs in excess of
expectations, pension plan asset returns less than assumed, and other risks
which may be detailed in the Company's 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 January 3, 2004.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
The Company is exposed to market risk from changes in foreign exchange rates,
commodities and, to a lesser extent, interest rates. Management believes that
the Company's exposure to these risks is immaterial and not significant enough
to warrant disclosure of quantitative information regarding market risk.
The Company had $40.0 million of long-term debt outstanding at October 2, 2004,
primarily in the form of senior notes and lines of credit. Approximately 25% of
the Company's long-term debt is at fixed rates.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign countries. The Company has foreign manufacturing
facilities in Mexico, England, Ireland, Switzerland, China, Germany, Hungary and
the Philippines. Substantially all sales in Europe are denominated in British
pounds sterling, United States dollars and euros and substantially all sales in
the Asia-Pacific region are denominated in United States dollars, Japanese yen
and South Korean won.
The Company's identifiable foreign exchange exposures result from the purchase
and sale of products from affiliates, repayment of intercompany trade and loan
amounts and translation of local currency amounts in consolidation of financial
results. Changes in foreign currency exchange rates or weak economic conditions
in the foreign countries in which it manufactures and distributes products could
affect the Company's sales and financial results. The Company primarily utilizes
netting and offsets to reduce known foreign currency exposures and, when
appropriate, derivative instruments as hedges of specific foreign currency cash
flows.
The Company has entered into cross currency rate swaps with a notional amount of
$11.6 million. The cross currency swaps convert $11.6 million of the Company's
fixed rate 6.16% U.S. dollar debt to fixed rate 3.13% Japanese Yen debt. At the
inception of the hedge, both the foreign currency swap and the intercompany
sales subject to the hedge were denominated in JPY. The fair value of the rate
swap agreements outstanding at October 2, 2004, which had a notional amount of
$3.8 million, was recognized as a $0.5 million liability, and is reported in
consolidated shareholders' equity as a component of other comprehensive income.
For the period from June 1, 2004 to September 30, 2005, Heinrich Industrie AG
purchased euro forward contracts with a notional amount of $6.7 million as a
cash flow hedge of the variability of US dollar cash attributable to the
exchange rate risk on forecasted intercompany sales to U.S. and Asian
subsidiaries. These forward contracts guarantee the rate at which the US dollar
cash flows will be converted to euros in the future. The forward agreements were
accounted for as a cash flow hedge and reported at fair value. The notional
amount outstanding at October 2, 2004 was $4.5 million and the fair value of the
outstanding forward contracts was recognized as a $0.3 million asset and as a
credit to comprehensive income in the Consolidated Balance Sheet at October 2,
2004.
A risk management policy has been implemented by the Company that establishes
the procedures and controls over derivative financial instruments. Under the
policy, the Company does not use derivative financial instruments for trading
purposes and the use of such instruments is subject to the approval of senior
officers. Typically, the use of such derivative instruments is limited to
hedging activities related to specific foreign currency cash flows. The
14
Company's exposure related to such transactions is, in the aggregate, not
material to the Company's financial position, results of operations and cash
flows.
The Company uses various metals in the production of its products, including
zinc, copper and silver. The Company's earnings are exposed to fluctuations in
the prices of these commodities. The Company does not currently use derivative
financial instruments to mitigate this commodity price risk.
Item 4. Controls and Procedures
As of October 2, 2004, the Chief Executive Officer and Chief Financial Officer
of the Company evaluated the effectiveness of the disclosure controls and
procedures of the Company and concluded that these disclosure controls and
procedures are effective to ensure that material information relating to the
Company and its consolidated subsidiaries has been made known to them by the
employees of the Company and its consolidated subsidiaries during the period
preceding the filing of this Report. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the last day they were evaluated by the Company's
Chief Executive Officer and Chief Financial Officer.
15
PART II - OTHER INFORMATION
Item 2: Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
(e) The table below provides information with respect to purchases by
the Company of shares of its common stock during each fiscal month
of the third quarter of fiscal 2004:
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Maximum Number
Shares Purchased of Shares that May
Total Number as Part of Publicly Yet Be Purchased
of Shares Average Price Announced Plans Under the Plans or
Period Purchased Paid per Share or Programs Programs
7/4/04 - 7/31/04 - $ - - 1,000,000
8/1/04-8/2804 - - - 1,000,000
8/29/04-10/2/04 168,400 33.28 168,400 831,600
------- -------------- ------- ---------
Total 168,400 $ 33.28 168,400 831,600
======= ============== ======= ---======
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit Description
31.1 Certification of Howard B. Witt, Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Philip G. Franklin, Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C Section 1350
(b) Reports on Form 8-K filed during the quarter ended October 2, 2004
A Current Report on Form 8-K/A (Items 2 and 7) filed on July 20,
2004.
A Current Report on Form 8-K (Items 5 and 7) filed on July 29,
2004.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter
ended October 2, 2004, to be signed on its behalf by the undersigned thereunto
duly authorized.
LITTELFUSE, INC.
Date: November 11, 2004 By /s/ Philip G. Franklin
---------------------------------------
Philip G. Franklin
Vice President, Operations Support and
Chief Financial Officer
(As duly authorized officer and as
the principal financial and accounting
officer)
17