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LITTELFUSE INC /DE - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Edgar Glimpses Via Acquire Media NewsEdge)
Littelfuse, Inc. and its subsidiaries (the "company" or "Littelfuse") design,
manufacture and sell circuit protection devices for use in the electronics,
automotive and electrical markets throughout the world. The following
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide the reader with information that will
assist in understanding the company's Consolidated Financial Statements, the
changes in certain key items in those financial statements from year to year,
and the primary factors that accounted for those changes, as well as how certain
accounting principles affect the Consolidated Financial Statements. The
discussion also provides information about the financial results of the various
business unit segments to provide a better understanding of how those segments
and their results affect the financial condition and results of operations of
Littelfuse as a whole.
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.
21
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The company reports its operations by three business unit segments: Electronics,
Automotive and Electrical. The following table is a summary of the company's
operating segments' net sales by business unit and geography (in millions):
Fiscal Year
2012 2011(b) 2010
Business Unit
Electronics $ 329.5 $ 354.5 $ 373.4
Automotive(b) (d) 206.2 197.6 139.1
Electrical(c) 132.2 112.9 95.5
Total $ 667.9 $ 665.0 $ 608.0
Geography(a)
Americas(c) $ 303.6 $ 288.6 $ 227.7
Europe(d) 107.5 114.9 115.1
Asia-Pacific 256.8 261.5 265.2
Total $ 667.9 $ 665.0 $ 608.0
(a) Sales by geography represent sales to customer or distributor locations.
(b) 2012 and 2011 include Cole Hersee net sales of $47.2 million and $46.9
million for fiscal years 2012 and 2011, respectively.
(c) 2012 and 2011 include Selco net sales of $6.0 million and $3.2 million for
fiscal years 2012 and 2011, respectively.
(d) 2012 includes Accel and Terra Power net sales of $11.2 million and $1.7
million, respectively.
Business unit segment information is described more fully in Note 16 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 29, 2012
and December 31, 2011, and for the three fiscal years ended December 29, 2012,
December 31, 2011 and January 1, 2011.
Results of Operations - 2012 compared with 2011
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.
22--------------------------------------------------------------------------------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.
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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 13 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 Technologies, Inc.
("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 to approximately $4.0 million in 2012. The
proportional amount of operating losses in 2011 was not material. In addition,
the company concluded that there was an other-than-temporary impairment which
existed for its remaining investment in Shocking. The company engaged a
third-party valuation firm to assist in developing the fair value of the
investment in Shocking. Based on the then fair value, the company determined
that there was an impairment of approximately $3.3 million which was recorded as
a non-operating impairment and equity loss of unconsolidated affiliate in the
Consolidated Statements of Net Income. See Note 6 of the Notes to Consolidated
Financial Statements included in this report.
Other expense (income), net, consisting of interest income, royalties,
non-operating income and foreign currency items was $2.2 million of income in
2012 compared to $2.9 million of income in 2011.The year-over-year decrease in
income primarily reflects the impact of unfavorable currency translation effects
(primarily due to the weakening of the euro against the U.S. dollar) in 2012.
Income before income taxes was $100.1 million in 2012 compared to $115.1 million
in 2011. Income tax expense was $24.7 million in 2012 compared to $28.1 million
in 2011. The 2012 effective income tax rate was 24.7% compared to 24.4% in 2011.
The 2012 effective tax rate is lower than the statutory tax rate primarily due
to the result of more income earned in low tax jurisdictions.
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--------------------------------------------------------------------------------Results of Operations - 2011 compared with 2010
Net sales increased $57.0 million or 9% to $665.0 million for fiscal year 2011
compared to $608.0 million in fiscal year 2010 due primarily to an incremental
$50.1 million from business acquisitions and growth in protection relays, custom
mining products and automotive products, offset by lower electronics sales. The
company also experienced $10.4 million in favorable foreign currency effects in
2011 as compared to 2010. The favorable foreign currency impact primarily
resulted from sales denominated in euros and, to a lesser extent, Canadian
dollars and Japanese yen. Excluding acquisitions and currency effects, net sales
decreased $3.5 million or 1% year over year. The Automotive business segment
sales increased $58.5 million or 42% to $197.6 million. The Electronics business
segment sales decreased $18.9 million or 5% to $354.5 million, and the
Electrical business segment sales increased $17.4 million or 18% to $112.9
million. 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. Sales levels in 2010
were positively impacted by the global economic recovery, distributor inventory
replenishment and effective execution of the company's strategic growth plans.
The increase in Automotive sales was primarily due to an incremental $46.9
million in sales related to Cole Hersee, organic growth in all regions and
favorable currency effects. Excluding Cole Hersee, automotive sales increased
$11.6 million or 8.4% year over year. Currency effects added $4.3 million to
sales in 2011 compared to 2010 primarily due to the stronger euro.
The decrease in Electronics sales reflected slowing demand across all
geographies coupled with inventory de-stocking in the supply chain. In addition,
the effects of the Japan disaster in March 2011 negatively impacted sales by
approximately $3 to $4 million in 2011. The negative impact from a decrease in
volume was partially offset by net favorable currency effects of $4.0 million
primarily from sales denominated in euros and Japanese yen.
The increase in Electrical sales was due to continued strong growth for
protection relays and custom mining products and steady improvement in the
industrial fuse market. This was partially offset by a slowdown in the solar
market. The Electrical segment experienced net favorable currency effects of
$2.0 million primarily from sales denominated in Canadian dollars.
On a geographic basis, sales in the Americas increased $60.8 million or 27% in
2011 compared to 2010. This increase resulted from increases in the company's
Automotive and Electrical business segments offset by a decline in the
Electronics business segment. Automotive sales increased $46.8 million or 100%
primarily reflecting incremental sales from Cole Hersee. Excluding Cole Hersee,
Automotive sales increased $2.7 million or 6% reflecting increased demand in the
passenger and commercial vehicle markets. Electrical sales increased $17.5
million or 21% resulting from increases in demand for protection relays, custom
products and industrial power fuses partially offset by a decline in solar fuse
sales. Electronics sales decreased $3.5 million or 4% reflecting slowing
end-market demand and inventory de-stocking. The Americas region also
experienced $1.9 million in favorable currency effects resulting from sales
denominated in Canadian dollars.
European sales decreased $0.2 million for fiscal year 2011 compared to 2010.
This resulted from decreases in the company's Electronics and Electrical
business segments offset by an increase in the Automotive business segment.
Automotive sales increased $7.2 million or 12% in 2011 primarily reflecting
increased end-market demand and favorable currency effects. Electronics sales
decreased $6.9 million or 14% reflecting lower demand resulting from a weaker
economy during 2011. Electrical sales decreased $0.5 million or 9%. Overall
European sales in 2011 included favorable currency effects of $5.3 million,
resulting from sales denominated in euros.
25
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Asia-Pacific sales decreased $3.7 million or 1% in 2011 compared to 2010. 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 $8.5 million or 4% reflecting slowing end-market
demand and inventory de-stocking. Automotive sales increased $4.4 million or 14%
reflecting continued increased demand for passenger vehicles in the developing
Asian markets as well as gains in market share. Also contributing to the
increase in Automotive sales was incremental sales from Cole Hersee. Excluding
Cole Hersee, Automotive sales increased $2.3 million or 7%. Electrical sales
increased $0.4 million or 7%. Current year results included favorable currency
effects of $3.2 million resulting from sales denominated in Japanese yen, Korean
won and Chinese yuan.
Gross profit was $256.7 million or 38.6% of sales in 2011, compared to $233.9
million or 38.5% of sales in 2010. Gross profit in 2011 was negatively impacted
by $4.1 million of purchase accounting adjustments recorded in cost of sales.
These charges were the additional cost of goods sold for Cole Hersee 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 $260.8 million or 39.2% of sales for 2011. The improvement in
gross margin was attributable to improved operating leverage resulting from
higher production volumes in 2011 as well as cost reductions related to
manufacturing transfers.
Total operating expense was $142.8 million or 21.5% of net sales for 2011
compared to $126.3 million or 20.8% of net sales for 2010. The increase in
operating expenses primarily reflects incremental operating expenses of $12.8
million from business acquisitions.
Operating income was $113.9 million or 17.1% of net sales in 2011 compared to
$107.6 million or 17.7% of net sales in the prior year. The increase in
operating income in the current year was due primarily to the increase in sales
and reduction in costs as described above.
Interest expense, net, increased to $1.7 million in 2011 compared to $1.4
million for 2010 primarily due to amortization of debt issuance costs incurred
related to the new credit agreement in 2011.
Other expense (income), net, consisting of interest income, royalties,
non-operating income and foreign currency items, was $2.9 million of income in
2011 compared to $1.5 million of income in 2010. The year over year increase
resulted primarily from dividend and royalty income.
Income before income taxes was $115.1 million in 2011 compared to $107.7 million
in 2010. Income tax expense was $28.1 million in 2011 compared to $29.0 million
in 2010. The 2011 effective income tax rate was 24.4% compared to 27.0% in 2010.
The 2011 effective tax rate is lower than the statuatory tax rate primarily due
to the result of more income earned in low tax jurisdictions and a large tax
benefit from revaluation of a deferred tax asset.
Liquidity and Capital Resources
As of December 29, 2012, $227.3 million of the $235.4 million of the company's
cash and cash equivalents was held by foreign subsidiaries. Of the $227.3
million held by foreign subsidiaries, approximately $28.1 million could be
repatriated with minimal tax consequences. The company expects to maintain its
foreign cash balances (other than the aforementioned $28.1 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.
26--------------------------------------------------------------------------------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.
Term Loan
On September 29, 2008, the company entered into a Loan Agreement with various
lenders that provided the company with a five-year term loan facility of up to
$80.0 million for the purposes of (i) refinancing certain existing indebtedness;
(ii) funding working capital needs; and (iii) funding capital expenditures and
other lawful corporate purposes, including permitted acquisitions. The company
terminated this loan agreement on June 13, 2011 at which time any outstanding
amounts were refinanced under the company's new revolving credit facility
effective June 13, 2011.
Revolving Credit Facilities
The company had an unsecured domestic financing arrangement, which expired on
July 21, 2011, consisting of a credit agreement with banks that provided a $75.0
million revolving credit facility, with a potential to increase up to $125.0
million upon request of the company and agreement with the lenders. The company
refinanced this loan agreement with proceeds from a new revolving credit
facility on June 13, 2011. The company's revolving credit facility is an
uncommitted and discretionary facility, subject to withdrawal at any time by the
lender upon due notice to the company.
On June 13, 2011, the company entered into a new credit agreement with certain
commercial banks that provides an unsecured revolving credit facility in an
amount of up to $150.0 million, with a potential to increase up to $225.0
million. At December 29, 2012, the company had available approximately $65.0
million of borrowing capacity under the revolving credit agreement at an
interest rate of LIBOR plus 1.25% (1.46% as of December 29, 2012). The credit
agreement replaces the company's previous credit agreement dated July 21, 2006
and term loan agreement dated September 29, 2008, and, unless terminated
earlier, will terminate on June 13, 2016. During the second quarter of 2011,
$0.2 million of previously capitalized debt issuance costs were written off as a
non-cash charge and $0.7 million of new debt issuance costs incurred was
capitalized and will be amortized over the life of the new credit agreement.
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 December 29, 2012, the company was in compliance with all covenants
under the revolving credit facility.
During the second quarter of 2011, as part of the new refinancing arrangement
discussed above, $47.0 million of indebtedness that was due on the previous term
loan was settled and rolled-over into the revolving credit facility by the
lender.
Other Obligations
For the fiscal year ended December 29, 2012, the company had $0.8 million
outstanding in letters of credit. No amounts were drawn under these letters of
credit at December 29, 2012. For the fiscal year ended December 31, 2011, the
company had $2.3 million available in letters of credit. No amounts were drawn
under these letters of credit at December 31, 2011.
27
--------------------------------------------------------------------------------Cash Flows and Working Capital
The company started 2012 with $164.0 million of cash. Net cash provided by
operating activities in 2012 was approximately $116.2 million and included $75.3
million in net income and $46.0 million in non-cash adjustments (primarily $31.4
million in depreciation and amortization), partially offset by $5.2 million of
changes in operating assets and liabilities.
Changes in operating assets and liabilities in 2012 (including short-term and
long-term items) that negatively impacted cash flows in 2012 consisted of
changes in accounts receivable ($1.6 million), accrued expenses including
post-retirement ($9.6 million), accrued payroll and severance ($4.4 million),
accrued taxes ($0.4 million), and prepaid expenses and other (less than $0.1
million). Accrued expenses including post-retirement included $10.0 million in
pension contributions in 2012. Positively impacting cash flows were changes in
inventory ($5.4 million) and accounts payable ($5.4 million).
Net cash used in investing activities in 2012 was approximately $51.7 million
and included $22.5 million in purchases of property, plant and equipment
(primarily production equipment for capacity expansion and new products at the
company's facilities in Mexico, China and the Philippines), $4.6 million for
purchases of short-term investments, $34.0 million for the acquisitions of Accel
and Terra Power, a $2.0 million secured loan to and $10.0 million of additional
investment in Shocking Technologies. Offsetting the cash used in investing
activities was $3.7 million in proceeds from sales of property, plant and
equipment and $17.8 million in proceeds from maturities of short-term
investments.
Net cash provided by financing activities in 2012 was approximately $0.8
million, which included $1.8 million in net payments from borrowing, $2.7
million in excess tax benefits on share-based compensation and $16.4 million in
cash proceeds from the exercise of stock options. Additionally the company paid
cash dividends of $16.6 million during the year. Information regarding the
company's debt is provided in Note 7 of the Notes to Consolidated Financial
Statements included in this report.
The effect of exchange rate changes increased cash by $6.2 million in 2012. The
net cash provided by operating activities less net cash used in financing and
provided by investing activities plus the effect of exchange rate changes,
resulted in a $71.4 million increase in cash and cash equivalents in 2012. This
left the company with a cash balance of $235.4 million at December 29, 2012.
Days sales outstanding (DSO) in accounts receivable was 58 days at year-end 2012
compared to 57 days at year-end 2011 and 58 days at year-end 2010 (excluding the
year-end Cole Hersee balance). Days inventory outstanding was 69 days at
year-end 2012, compared to 73 days at year-end 2011 and 70 days at year-end 2010
(excluding the year-end Cole Hersee balance).
The ratio of current assets to current liabilities was 2.9 to 1 at year-end
2012, compared to 2.5 to 1 at year-end 2011 and 2.9 to 1 at year-end 2010. The
change in the current ratio at the end of 2012 compared to the prior year
reflected increased current assets in 2012, primarily related to higher cash and
cash equivalents balances. The carrying amounts of total debt decreased $1.0
million in 2012, compared to an increase of $11.0 million in 2011 and an
increase of $10.8 million in 2010. The decrease in 2012 is due to lower net
amounts borrowed under the revolving credit facility in 2012. The ratio of
long-term debt to equity was 0.00 to 1 at year-end 2012 and 2011 and 0.09 to 1
at year-end 2010. Further information regarding the company's debt is provided
in Note 7 of the Notes to Consolidated Financial Statements included in this
report.
28--------------------------------------------------------------------------------
The company started 2011 with $109.7 million of cash. Net cash provided by
operating activities in 2011 was approximately $120.8 million and included $87.0
million in net income and $39.6 million in non-cash adjustments (primarily $32.3
million in depreciation and amortization), partially offset by $5.8 million of
changes in operating assets and liabilities.
Changes in operating assets and liabilities in 2011 (including short-term and
long-term items) that negatively impacted cash flows in 2011 consisted of
decreases in accounts payable ($5.3 million), accrued expenses including
post-retirement ($0.4 million), accrued payroll and severance ($3.2 million) and
accrued taxes ($6.1 million). The decrease in accounts payable resulted from
decreased purchases related to low production levels at the end of 2011. The
decrease in accrued payroll and severance resulted from lower severance accruals
in 2011. Positively impacting cash flows were decreases in accounts receivable
($4.8 million), a decrease in inventory ($2.6 million) and a decrease in prepaid
expenses and other current assets ($1.8 million).
The company's capital expenditures were $22.5 million in 2012, $17.6 million in
2011 and $22.4 million in 2010. The company expects capital expenditures in 2013
to increase to between $25 and $30 million primarily related to building
expansion in Mexico to support the company's growth initiatives. The company
expects to fund 2013 capital expenditures from operating cash flows.
The company's Board of Directors authorized the repurchase of up to 1,000,000
shares of the company's common stock under a program for the period May 1, 2012
to April 30, 2013. The company did not repurchase any shares of its common stock
during 2012 under this program.
The company withheld 27,417 shares of stock in lieu of withholding taxes on
behalf of employees who became vested in restricted stock option grants during
2012.
Contractual Obligations and Commitments
The following table summarizes contractual obligations and commitments as of
December 29, 2012:
(In thousands ) Total < 1 Year > 1 - < 3 Years > 3 - < 5 Years > 5 Years
Revolving credit facility $ 84,000 $ 84,000 $ - $ - $ -
Supplemental Executive
Retirement Plan 2,422 31 62 62 2,267
Operating lease payments 37,913 8,101 8,677 4,991 16,144
Purchase obligations 27,226 27,226 - - -
Total $ 151,561 $ 119,358 $ 8,739 $ 5,053 $ 18,411
Off-Balance Sheet Arrangements
As of December 29, 2012, the company did not have any off-balance sheet
arrangements, as defined under SEC rules. Specifically, the company was not
liable for guarantees of indebtedness owed by third parties; the company was not
directly liable for the debt of any unconsolidated entity, and the company did
not have any retained or contingent interest in assets; and the company does not
participate in transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities.
29
--------------------------------------------------------------------------------Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board ("FASB") issued
authoritative guidance that provides a consistent definition of fair value and
ensures that the fair value measurement and disclosure requirements are similar
between U.S. GAAP and International Financial Reporting Standards. The new
guidance changes certain fair value measurement principles and enhances the
disclosure requirements particularly for Level 3 fair value measurements. The
company adopted the new guidance on January 1, 2012. There was no significant
impact on its consolidated financial statements upon adoption.
In June 2011, the FASB issued authoritative guidance that will require companies
to present the components of net income and other comprehensive income either as
one continuous statement or as two consecutive statements. It eliminates the
option to present components of other comprehensive income as part of the
statement of changes in equity. The guidance does not change the items which
must be reported in other comprehensive income, how such items are measured or
when they must be reclassified to net income. This guidance is effective for
interim and annual periods beginning after December 15, 2011. The company
adopted the new guidance on January 1, 2012, which resulted in a different
presentation in its consolidated financial statements.
In September 2011, the FASB issued authoritative guidance on testing goodwill
for impairment. Under the revised guidance, entities testing goodwill for
impairment have the option of performing a qualitative assessment before
calculating the fair value of the reporting unit (i.e., step 1 of the goodwill
impairment test). If entities determine, on the basis of qualitative factors,
that the fair value of the reporting unit is more likely than not less than the
carrying amount, the two-step impairment test would be required. The guidance
does not change how goodwill is calculated or assigned to reporting units, nor
does it revise the requirement to test goodwill annually for impairment. In
addition, the guidance does not amend the requirement to test goodwill for
impairment between annual tests if events or circumstances warrant; however, it
does revise the examples of events and circumstances that an entity should
consider. The amendments are effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after December 15, 2011.
The company adopted the new guidance on January 1, 2012. There was no
significant impact on its consolidated financial statements upon adoption.
Goodwill testing was completed in September 2012 using the previous methodology,
as permitted.
In July 2012, the FASB issued authoritative guidance on testing indefinite-lived
intangible assets for impairment. Under the revised guidance, entities testing
indefinite-lived intangible assets for impairment will have the option first to
assess qualitative factors to determine whether the existence of events and
circumstances indicate that it is more likely than not that the indefinite-lived
intangible asset is impaired. If, after assessing the totality of events and
circumstances, an entity concludes that it is not more likely than not that the
indefinite-lived intangible asset is not impaired, then the entity is not
required to take further action. The amendment is effective for annual and
interim indefinite-lived asset impairment tests performed for fiscal years
beginning after September 15, 2012. The company believes that adoption of the
new guidance will have no effect on its consolidated financial statements.
Critical Accounting Policies and Estimates
Certain of the accounting policies as discussed below require the application of
significant judgment by management in selecting the appropriate estimates and
assumptions for calculating amounts to record in the financial statements.
Actual results could differ from those estimates and assumptions, impacting the
reported results of operations and financial position. Significant accounting
policies are more fully described in the Notes to Consolidated Financial
Statements included elsewhere in this Annual Report. Certain accounting
policies, however, are considered to be critical in that they are most important
to the depiction of the company's financial condition and results of operations
and their application requires management's subjective judgment in making
estimates about the effect of matters that are inherently uncertain. The company
believes the following accounting policies are the most critical to aid in fully
understanding and evaluating its reported financial results, as they require
management's most difficult, subjective or complex judgments, resulting from the
need to make estimates about the effect of matters that are inherently
uncertain. The company has reviewed these critical accounting policies and
related disclosures with the Audit Committee of its Board of Directors.
30
--------------------------------------------------------------------------------Net Sales
Revenue Recognition: The company recognizes revenue on product sales in the
period in which the sales process is complete. This generally occurs when
products are shipped (FOB origin) to the customer in accordance with the terms
of the sale, the risk of loss has been transferred, collectability is reasonably
assured and the pricing is fixed and determinable. At the end of each period,
for those shipments where title to the products and the risk of loss and rewards
of ownership do not transfer until the product has been received by the
customer, the company adjusts revenues and cost of sales for the delay between
the time that the products are shipped and when they are received by the
customer. The company's distribution channels are primarily through direct sales
and independent third party distributors.
Revenue and Billing: The company accepts orders from customers based on long
term purchasing contracts and written sales agreements. Contract pricing and
selling agreement terms are based on market factors, costs and competition.
Pricing normally is negotiated as an adjustment (premium or discount) from the
company's published price lists. The customer is invoiced when the company's
products are shipped to them in accordance with the terms of the sales
agreement.
Returns and Credits: Some of the terms of the company's sales agreements and
normal business conditions provide customers (distributors) the ability to
receive price adjustments on products previously shipped and invoiced. This
practice is common in the industry and is referred to as a "ship and debit"
program. This program allows the distributor to debit the company for the
difference between the distributors' contracted price and a lower price for
specific transactions. Under certain circumstances (usually in a competitive
situation or large volume opportunity), a distributor will request authorization
to reduce its price to its buyer. If the company approves such a reduction, the
distributor is authorized to "debit" its account for the difference between the
contracted price and the lower approved price. The company establishes reserves
for this program based on historic activity and actual authorizations for the
debit and recognizes these debits as a reduction of revenue.
The company has a return to stock policy whereby a customer with previous
authorization from Littelfuse management can return previously purchased goods
for full or partial credit. The company establishes an estimated allowance for
these returns based on historic activity. Sales revenue and cost of sales are
reduced to anticipate estimated returns.
The company properly meets all of the criteria for recognizing revenue when the
right of return exists. Specifically, the company meets those requirements
because:
1. The company's selling price is fixed or determinable at the date of the sale.
2. The company has policies and procedures to accept only credit worthy
customers with the ability to pay the company.
3. The company's customers are obligated to pay the company under the contract
and the obligation is not contingent on the resale of the product. (All "ship
and debit" and "returns to stock" require specific circumstances and
authorization.)
31-------------------------------------------------------------------------------- 4. The risk ownership transfers to the company's customers upon shipment and is
not changed in the event of theft, physical destruction or damage of the
product.
5. The company bills at the ship date and establishes a reserve to reduce revenue from the in-transit time until the product is delivered for FOB
destination sales.
6. The company's customers acquiring the product for resale have economic
substance apart from that provided by Littelfuse. All distributors are
independent of the company.
7. The company does not have any obligations for future performance to bring
about resale of the product by its customers.
8. The company can reasonably estimate the amount of future returns.
Volume Rebates: The company offers incentives to certain customers to achieve
specific quarterly or annual sales targets. If customers achieve their sales
targets, they are entitled to rebates. The company estimates the future cost of
these rebates and recognizes this estimated cost as a reduction to revenue as
products are sold.
Allowance for Doubtful Accounts: The company evaluates the collectability of its
trade receivables based on a combination of factors. The company regularly
analyzes its significant customer accounts and, when the company becomes aware
of a specific customer's inability to meet its financial obligations, the
company records a specific reserve for bad debt to reduce the related receivable
to the amount the company reasonably believes is collectible. The company also
records allowances for all other customers based on a variety of factors
including the length of time the receivables are past due, the financial health
of the customer, macroeconomic considerations and past experience. Historically,
the allowance for doubtful accounts has been adequate to cover bad debts. If
circumstances related to specific customers change, the estimates of the
recoverability of receivables could be further adjusted.
Inventory
The company performs regular detailed assessments of inventory, which include a
review of, among other factors, demand requirements, product life cycle and
development plans, component cost trends, product pricing, shelf life and
quality issues. Based on the analysis, the company records adjustments to
inventory for excess quantities, obsolescence or impairment when appropriate to
reflect inventory at net realizable value. Historically, inventory reserves have
been adequate to reflect inventory at net realizable values. During 2012, 2011
and 2010, the company was required to step up the value of inventory acquired in
business combinations to its selling prices less the cost to sell under business
combination accounting. This was approximately $0.6 million in 2012 for Accel
and Selco, $0.4 million in 2011 for Selco and $3.7 million in 2010 for Cole
Hersee.
Goodwill and Other Intangible Assets
The company annually tests goodwill for impairment on the first day of its
fiscal fourth quarter or at an interim date if there is an event or change in
circumstances that indicates the asset may be impaired. The company has seven
reporting units for goodwill testing purposes. Management determines the fair
value of each of its reporting units by using a discounted cash flow model
(which includes forecasted five-year income statement and working capital
projections, a market-based weighted average cost of capital and terminal values
after five years) to estimate market value. In addition, the company compares
its derived enterprise value on a consolidated basis to the company's market
capitalization as of its test date to ensure its derived value approximates the
market value of the company when taken as a whole.
32
--------------------------------------------------------------------------------
As of the most recent annual test conducted on September 30, 2012, the company
concluded the fair value of each of the reporting units exceeded its carrying
value of invested capital and therefore, no potential goodwill impairment
existed. Specifically, the company noted that its headroom, defined as the
excess of fair value over the carrying value of invested capital, was 66%, 113%,
59%, 99%, 96%, 247% and 119% for its electronics (non-silicon), electronics
(silicon), automotive (excluding Cole Hersee), Cole Hersee, relay, custom
products and fuse reporting units, respectively, at September 30, 2012. Certain
key assumptions used in the annual test included a discount rate of 12.7% for
all reporting units. A long-term growth rate of 3.0% was used for all seven
reporting units.
In addition, the company performed a sensitivity test at September 30, 2012 that
showed either a 100 basis point increase in its discount rate or a 100 basis
point decrease in the long-term growth rate for each reporting unit would not
have changed the company's conclusion that no potential goodwill impairment
existed at September 30, 2012.
The company will continue to perform a goodwill impairment test as required on
an annual basis and on an interim basis, if certain conditions exist. Factors
the company considers important, which could result in changes to its estimates,
include underperformance relative to historical or projected future operating
results and declines in acquisitions and trading multiples. Due to the diverse
end user base and non-discretionary product demand, the company does not believe
its future operating results will vary significantly relative to its historical
and projected future operating results.
Long-Lived Assets
The company evaluates long-lived asset groups on an ongoing basis. Long-lived
asset groups are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the related asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to future undiscounted cash flows
expected to be generated by the asset group. If it is determined to be impaired,
the impairment recognized is measured by the amount by which the carrying value
of the asset exceeds its fair value. The company's estimates of future cash
flows from such assets could be impacted if it underperforms relative to
historical or projected future operating results. The company recorded asset
impairment charges of $0.5 million, $2.3 million and $3.0 million for the fiscal
years ended 2012, 2011 and 2010, respectively. Further information regarding
asset impairments is provided in Note 12 of the Notes to Consolidated Financial
Statements included in this report.
The company evaluates its investments quarterly or when there is an indicator of
a potential impairment. During the fourth quarter of 2012, company management
determined that an indicator of impairment existed for the company's investment
in Shocking Technologies, Inc. Subsequently, the company engaged a third party
asset valuation firm to perform an analysis for purposes of assisting management
in determining the amount of impairment. Further information regarding the
impairment of the company's investment in Shocking Technologies, Inc. is
provided in Note 6 of the Notes to Consolidated Financial Statements included in
this report.
33--------------------------------------------------------------------------------Environmental Liabilities
Environmental liabilities are accrued based on estimates of the probability of
potential future environmental exposure. Expenses related to on-going
maintenance of environmental sites are expensed as incurred. If actual or
estimated probable future losses exceed the company's recorded liability for
such claims, it would record additional charges as other expense during the
period in which the actual loss or change in estimate occurred. The company
evaluates its reserve for coal mine remediation annually utilizing a third party
expert.
Pension and Supplemental Executive Retirement Plan
Littelfuse has a number of company-sponsored defined benefit plans primarily in
North America, Europe and the Asia-Pacific region. The company recognizes the
full unfunded status of these plans on the balance sheet. Actuarial gains and
losses and prior service costs and credits are recognized as a component of
accumulated other comprehensive income. Accounting for pensions requires
estimating the future benefit cost and recognizing the cost over the employee's
expected period of employment with the company. Certain assumptions are required
in the calculation of pension costs and obligations. These assumptions include
the discount rate, salary scales and the expected long-term rate of return on
plan assets. The discount rate is intended to represent the rate at which
pension benefit obligations could be settled by purchase of an annuity contract.
These assumptions are subject to change based on stock and bond market returns
and other economic factors. Actual results that differ from the company's
assumptions are accumulated and amortized over future periods and, therefore,
generally affect its recognized expense and accrued liability in such future
periods. While the company believes that its assumptions are appropriate given
current economic conditions and its actual experience, significant differences
in results or significant changes in the company's assumptions may materially
affect its pension obligations and related future expense. Further information
regarding these plans is provided in Note 13 of the Notes to Consolidated
Financial Statements included in this report.
Stock-based Compensation
Stock-based compensation expense is recorded for stock-option grants and
restricted share units based upon the fair values of the awards. The fair value
of stock option awards is estimated at the grant date using the Black-Scholes
option pricing model, which includes assumptions for volatility, expected term,
risk-free interest rate and dividend yield. Expected volatility is based on
implied volatilities from traded options on Littelfuse stock, historical
volatility of Littelfuse stock and other factors. Historical data is used to
estimate employee termination experience and the expected term of the options.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect
at the time of grant. The company initiated a quarterly cash dividend in 2010
and expects to continue making cash dividend payments in the foreseeable future.
Total stock-based compensation expense was $7.3 million, $5.8 million and $5.2
million in 2012, 2011 and 2010, respectively. Further information regarding this
expense is provided in Note 14 of the Notes to Consolidated Financial Statements
included in this report.
Income Taxes
The company accounts for income taxes using the liability method. Deferred taxes
are recognized for the future effects of temporary differences between financial
and income tax reporting using tax rates in effect for the years in which the
differences are expected to reverse. The company recognizes deferred taxes for
temporary differences, operating loss carryforwards and tax credit
carryforwards. Deferred tax assets are reduced by a valuation allowance if it is
more likely than not that some portion, or all, of the deferred tax assets will
not be realized. Federal and state income taxes are provided on the portion of
foreign income that is expected to be remitted to the U.S. and be taxable.
34
--------------------------------------------------------------------------------
The company recognizes the tax benefit from an uncertain tax position only if it
is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The
tax benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement.
Further information regarding income taxes, including a detailed reconciliation
of current year activity, is provided in Note 15 of the Notes to Consolidated
Financial Statements included in this report.
Outlook
The company's 2012 revenue, excluding acquisitions ($16.6 million) and
unfavorable currency effects ($9.4 million), was essentially flat compared to
2011 ($660.7 million in 2012 versus $665.0 million in 2011). The outlook for
2013 is guarded due to global economic uncertainty. The electronics book-to-bill
ratio is beginning to improve. Automotive passenger vehicle sales continue to be
strong in Asia, solid in the U.S. and weak in Europe. The commercial vehicle
market remains weak but has shown some early signs of improvement. Electrical
continues to show solid performance in the powerfuse business. There is a
world-wide slowdown in Potash mining which may impact the company's relay/custom
business. Revenues for 2013 are expected to be in the range of $680.0 to $720.0
million. Capital expenditures are expected to be in the range of $25.0 to $30.0
million.
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