lfus20171230_10k.htm
 

TABLE OF CONTENTS

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-K

 

 

[X]

Annual Report Pursuant to Section 13 or 15(d)

 
   

of the Securities Exchange Act of 1934

 

(Mark one)

 

for the fiscal year ended December 30, 2017 

 
   

Or

 
 

[   ]

Transition Report Pursuant to Section 13 or 15(d)

 
   

of the Securities Exchange Act of 1934

 
   

for the transition period from to

 

 

Commission file number 0-20388

 

LITTELFUSE, INC.

 

(Exact name of registrant as specified in its charter)

 

Delaware

36-3795742

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

 
   

8755 West Higgins Road, Suite 500

 

Chicago, Illinois

60631

(Address of principal executive offices)

(ZIP Code)

 

773-628-1000

 

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

    Name of Each Exchange
          Title of Each Class   On Which Registered
Common Stock, $0.01 par value    NASDAQ Global Select MarketSM

     

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “small reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ] Emerging growth company [ ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

 

The aggregate market value of 22,647,077 shares of voting stock held by non-affiliates of the registrant was approximately $3,736,767,705 based on the last reported sale price of the registrant’s Common Stock as reported on the NASDAQ Global Select MarketSM on July 1, 2017.

 

As of February 16, 2018, the registrant had outstanding 24,830,204 shares of Common Stock, net of Treasury Shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Littelfuse, Inc. Proxy Statement for the 2017 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

 

 

 

TABLE OF CONTENTS

 

 

Page

   

FORWARD-LOOKING STATEMENTS

3

     

PART I

   

Item 1.

Business

3

Item 1A.

Risk Factors

9

Item 1B.

Unresolved Staff Comments

14

Item 2.

Properties

14

Item 3.

Legal Proceedings

14

Item 4.

Mine Safety Disclosures

14

     

PART II

   

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15

Item 6.

Selected Financial Data

17

Item 7.

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

17

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 8.

Financial Statements and Supplementary Data

33

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

69

Item 9A.

Controls and Procedures

69

Item 9B.

Other Information

69

     

PART III

   

Item 10.

Directors, Executive Officers and Corporate Governance 

70

Item 11.

Executive Compensation

71

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

72

Item 13.

Certain Relationships and Related Transactions, and Director Independence

72

Item 14.

Principal Accounting Fees and Services

72

     

PART IV

   

Item 15.

Exhibits, Financial Statement Schedules.

73

Item 16.

Form 10-K Summary

73

 

Schedule II – Valuation and Qualifying Accounts and Reserves

74

 

Signatures

75

 

Exhibit Index

76

 

 

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Annual Report on Form 10-K that are not historical facts are intended to constitute “forward-looking statements” entitled to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995 (“PSRLA”). These statements may involve risks and uncertainties, including, but not limited to, risks relating to product demand and market acceptance; economic conditions; the impact of competitive products and pricing; product quality problems or product recalls; capacity and supply difficulties or constraints; coal mining exposures reserves; failure of an indemnification for environmental liability; exchange rate fluctuations; commodity price fluctuations; the effect of the company’s accounting policies; labor disputes; restructuring costs in excess of expectations; pension plan asset returns less than assumed; uncertainties related to political and regulatory changes; integration of acquisitions including the integration of the recently acquired business of IXYS Corporation (“IXYS”) and the risk that expected benefits, synergies and growth prospects of the acquisition of IXYS may not be achieved in a timely manner, or at all; and other risks that may be detailed in “Item 1A. Risk Factors” below and in the company’s other Securities and Exchange Commission filings.

 

AVAILABLE INFORMATION

 

The Company is subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended and as a result, are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the United States Securities and Exchange Commission (“SEC”). The Company makes these filings available free of charge on its website (http://www.littelfuse.com) as soon as reasonably practicable after it electronically files them with, or furnish them to, the SEC. Information on the Company’s website does not constitute part of this Annual Report on Form 10-K. In addition, the SEC maintains a website (http://www.sec.gov) that contains the Company’s annual, quarterly, and current reports, proxy and information statements, and other information the Company electronically files with, or furnishes to, the SEC. Any materials the Company files with, or furnish to, the SEC may also be read and/or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. the Company’s website address is included in this report for informational purposes only. The Company’s website and the information contained therein or connected thereto are not incorporated into this Annual Report on Form 10-K.

 

PART I

 

ITEM 1. BUSINESS.

 

GENERAL

 

Littelfuse, Inc., was incorporated under the laws of the State of Delaware in 1991. References herein to the “Company,” “we,” “our” or “Littelfuse” refer to Littelfuse, Inc. and its subsidiaries. References herein to “2017”, “fiscal 2017” or “fiscal year 2017” refer to the fiscal year ended December 30, 2017. References herein to “2016”, “fiscal 2016” or “fiscal year 2016” refer to the fiscal year ended December 31, 2016. References herein to “2015”, “fiscal 2015” or “fiscal year 2015” refer to the fiscal year ended January 2, 2016. The Company operates on a 52-53 week fiscal year (4-4-5 basis) ending on the Saturday closest to December 31. Therefore, the financial results of certain fiscal years and the associated 14 week quarters will not be exactly comparable to the prior and subsequent 52 week fiscal years and the associated quarters having only 13 weeks. As a result of using this convention, each of fiscal 2017 and fiscal 2016 contained 52 weeks, whereas fiscal 2015 contained 53 weeks.

 

OVERVIEW

 

Founded in 1927, Littelfuse is a global leader in circuit protection products with advancing platforms in power control and sensor technologies, serving customers in the electronics, automotive, and industrial markets. With a diverse and extensive product portfolio of fuses, semiconductors, polymers, ceramics, relays and sensors, the Company works with its customers to build safer, more reliable and more efficient products for the connected world in virtually every market that uses electrical energy, ranging across consumer electronics, IT and telecommunication applications, industrial electronics, automobiles and other transportation, and heavy industrial applications

 

The company maintains a network of global laboratories and engineering centers that develop new products and product enhancements, provide customer application support and test products for safety, reliability, and regulatory compliance.

 

 

Segments

 

The Company conducts its business through three reportable segments: Electronics, Automotive, and Industrial. For each of these segments, the Company designs, manufactures and sells circuit protection products that protect against electrostatic discharge, power surges, short circuits, voltage spikes and other harmful occurrences; power control products that safely and efficiently control power to mitigate equipment damage, minimize electrical hazards and improve productivity; and sensor products used to identify and detect temperature, proximity, flow speed and fluid level in various applications. For segment and geographical information and consolidated net sales and operating income see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 12, Segment Information, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

 

Electronics Segment: Consists of one of the broadest product offerings in the industry, including fuses and fuse accessories, positive temperature coefficient (“PTC”) resettable fuses, polymer electrostatic discharge (“ESD”) suppressors, varistors, gas discharge tubes; semiconductor and power semiconductor products such as discrete transient voltage suppressor (“TVS”) diodes, TVS diode arrays, protection and switching thyristors, silicon carbide, metal-oxide-semiconductor field-effect transistors (“MOSFETs”) and silicon carbide diodes; and insulated gate bipolar transistors (“IGBT”) technologies. The segment covers a broad range of end markets, including consumer electronics, automotive electronics, IT and telecommunications equipment, medical devices, lighting products, and white goods.

 

 

Automotive Segment: Consists of a wide range of circuit protection, power control and sensing technologies for global original equipment manufacturers (“OEMs”), Tier-I suppliers and parts distributors in the automotive, commercial vehicle, and agricultural and construction equipment industries. Passenger car fuse products include fuses and fuse accessories, including blade fuses, battery cable protectors, varistors, high-current fuses, and high-voltage fuses for hybrid and electric vehicles. Commercial vehicle products include fuses, switches, relays, and power distribution modules for the commercial vehicle industry. Automotive sensor products include a wide range of automotive and commercial vehicle products designed to monitor the passenger compartment occupants and environment as well as the vehicle’s powertrain, emissions, speed and suspension.

 

 

Industrial Segment: Consists of power fuses, protection relays and controls and other circuit protection products for use in heavy industrial applications such as mining, oil and gas, energy storage, construction, HVAC systems, elevator and other industrial equipment.

 

Strategy

 

In December 2016, the Company announced its updated strategic plan. Building upon its achievements from its previous five-year plan and leveraging the global mega trends of safety, energy efficiency and the connected world, the Company is targeting accelerated annual organic growth of 5-7 percent and annual growth from strategic acquisitions of 5-7 percent. The Company’s strategic goals include the continuing growth of its circuit protection platform, accelerating growth in its power control platform and doubling its sensor platform over the next four years. The Company expects to do this through content and share gains, targeting underpenetrated geographies and markets, leveraging innovation and capitalizing on growth opportunities where technologies and applications are converging across its segments, while continuing to acquire and integrate businesses that fit its strategic focus areas.

 

Recent Acquisitions 

 

 

IXYS Corporation: On January 17, 2018, the Company acquired IXYS Corporation “IXYS”, a global pioneer in the power semiconductor and integrated circuit markets with a focus on medium to high voltage power control semiconductors across the industrial, communications, consumer and medical markets. IXYS has a broad customer base, serving more than 3,500 customers through its direct sales force and global distribution partners. The purchase price for IXYS was approximately $856.5 million, which included consideration of cash, Littelfuse common stock, and the value of converted, or cash settled IXYS equity awards. For the twelve months ended December 30, 2017, IXYS generated net sales of approximately $340 million. IXYS’ operations will be included in the Electronics segment.

 

 

U.S. Sensor: On July 7, 2017, the Company acquired the assets of U.S. Sensor Corporation (“U.S. Sensor”) for $24.3 million. U.S. Sensor manufactures a variety of high quality negative temperature coefficient thermistors probes and assemblies. The acquisition expands the Company’s existing sensor portfolio in several key electronics and industrial end markets. The operations of U.S. Sensor are included in the Electronics segment.

 

 

Monolith Semiconductor Inc.: On February 28, 2017, pursuant to a Securities Purchase Agreement between the Company and the stockholders of Monolith Semiconductor Inc. (“Monolith”), a U.S. start-up Company developing silicon carbide technology, the Company increased its investment in Monolith by acquiring approximately 62% of the outstanding common stock of Monolith for $15.0 million. The agreement includes provisions whereby the Company will acquire the remaining outstanding stock of Monolith at a time or times based on Monolith meeting certain technical and sales targets. The operations of Monolith are included in the Electronics segment.

 

 

ON Portfolio: On August 29, 2016, the Company acquired certain assets of select businesses (the “ON Portfolio”) of ON Semiconductor Corporation for $104.0 million. The acquired business, which is included in the Electronics segment, consists of a product portfolio that includes transient voltage suppression (“TVS”) diodes, switching thyristors, and IGBTs for automotive ignition applications. The acquisition expands the Company’s offerings in power semiconductor applications as well as increases its presence in the automotive electronics market. The ON Portfolio products have strong synergies with the Company’s existing circuit protection business, will strengthen its channel partnerships and customer engagement, and expand its power semiconductor portfolio.

 

 

 

Menber’s: On April 4, 2016, the Company completed the acquisition of Menber’s S.p.A. (“Menber’s”) headquartered in Legnago, Italy for $19.2 million (net of cash acquired and after settlement of a working capital adjustment). The acquired business is part of the Company's commercial vehicle product business within the Automotive segment and specializes in the design, manufacturing, and selling of manual and electrical high current switches and trailer connectors for commercial vehicles. The transaction expands the Company’s commercial vehicle products business globally.

 

 

PolySwitch: On March 25, 2016, the Company acquired 100% of the circuit protection business (“PolySwitch”) of TE Connectivity Ltd. for $348.3 million (net of cash acquired and after settlement of certain post-closing adjustments). The PolySwitch business, which is split between the Automotive and Electronics segments, has a leading position in polymer based resettable circuit protection devices, with a strong global presence in the automotive, battery, industrial, communications and mobile computing markets. PolySwitch has manufacturing facilities in Shanghai and Kunshan, China, and Tsukuba, Japan. The acquisition allows the Company to strengthen its global circuit protection product portfolio, as well as expands its presence in the automotive electronics and battery end markets. The acquisition also significantly increases the Company’s presence in Japan.

 

 

Sigmar: On October 1, 2015, the Company acquired 100% of Sigmar S.r.l. (“Sigmar”) for $6.5 million (net of cash acquired and including estimated additional net payments of up to $0.9 million, a portion of which was subject to the achievement of certain milestones). Located in Ozegna, Italy, Sigmar is a leading global manufacturer of water-in-fuel sensors and also manufactures selective catalytic reduction (“SCR”) quality sensors and diesel fuel heaters for automotive and commercial vehicle applications. The acquisition further expanded the Company’s automotive sensor product line offerings within its Automotive segment.

 

Sales and Operations

 

The Company operates in three geographic regions: the Americas, Europe, and Asia-Pacific. The Company manufactures products and sells to customers in all three regions.

 

Net sales by segment for the periods indicated are as follows:

 

   

Fiscal Year

 

(in thousands)

 

2017

   

2016

   

2015

 

Electronics

  $ 661,928     $ 535,191     $ 405,497  

Automotive

    453,227       415,200       339,957  

Industrial

    106,379       105,768       122,410  

Total

  $ 1,221,534     $ 1,056,159     $ 867,864  

 

Net sales in the Company’s three geographic regions, based upon the shipped-to destination, are as follows:

 

   

Fiscal Year

 

(in thousands)

 

2017

   

2016

   

2015

 

Americas

  $ 436,559     $ 411,105     $ 401,173  

Europe

    243,858       200,277       152,661  

Asia-Pacific

    541,117       444,777       314,030  

Total

  $ 1,221,534     $ 1,056,159     $ 867,864  

 

The Company’s products are sold worldwide through distributors, a direct sales force and manufacturers’ representatives in certain regions. For the fiscal year 2017, approximately 69% of the Company’s net sales were to customers outside the United States (“U.S.”), including approximately 26% to China.

 

The Company manufactures many of its products on fully integrated manufacturing and assembly equipment. The Company maintains product quality through a Global Quality Management System with most manufacturing sites certified under ISO 9001:2000. In addition, several of the Littelfuse manufacturing sites are also certified under TS 16949 and ISO 14001.

 

Additional information regarding the Company’s sales by geographic area and long-lived assets in different geographic areas is in Note 12, Segment Information, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

 

BUSINESS ENVIRONMENT

 

Electronics Segment

 

The Company designs, develops and manufactures a wide range of components and modules that provide circuit protection, power control and sensing for a multitude of electronic and industrial electronics applications. Circuit protection technologies in the Electronics Segment are designed to protect against harmful occurrences like voltage spikes, short circuits, power surges and electrostatic discharge. Products include a vast array of fuses and other circuit protection technologies used in a variety of electronic products including consumer electronics, automotive electronics, IT and telecommunications equipment, medical devices, lighting products, and white goods.

 

The Company also offers a wide range of power control products used to convert and regulate energy and safely and efficiently control power across a broad spectrum of applications including industrial and automotive power systems, motor drives and power conversion applications. Products include a comprehensive portfolio of semiconductor components including thyristors, rectifiers and fast recovery diodes, IGBTs and wide band gap devices. The acquisition of IXYS is expected to accelerate the Company’s growth across the power control market driven by IXYS’s extensive power semiconductor portfolio in medium and high power applications and technology expertise. With IXYS, the Company will be able to diversify and expand its presence within industrial electronics markets, leveraging the strong IXYS industrial OEM customer base. The Company also expects to increase long-term penetration of its power semiconductor portfolio in automotive markets, expanding its global content per vehicle.

 

Another strategic area of focus in the Electronics Segment is the Company’s continued investment in silicon carbide, a promising semiconductor material that enables more efficient power conversion than traditional silicon-based devices. The Company increased its investment in Monolith during 2017 and introduced its first silicon carbide products to the market.

 

As products become increasingly sophisticated, smarter and more connected, the need for complex sensor technologies continues to grow. Sensors products in the Electronics Segment are used in a wide variety of applications including appliances, security systems, medical equipment, and consumer and industrial controls. With the acquisition of U.S. Sensor, the Company has added temperature sensors to its existing portfolio.

 

Automotive Segment

 

The Company is a primary supplier of fuses and circuit protection technologies to global automotive OEMs, through sales made to Tier One automotive suppliers, main-fuse box, and wire harness manufacturers that incorporate the fuses into their products, as well as automotive component parts manufacturers, and automotive parts distributors. The Company also sells its fuses in the replacement parts market, with its products being sold through merchandisers, discount stores, and service stations, as well as under private label by national firms.

 

Circuit protection needs in the automotive space are expected to generate additional content-per-vehicle with the increased electrification of vehicles, as well as the continued development and market penetration of hybrid and electric vehicles.

 

Over the past several years, the Company has expanded the Automotive segment into the commercial vehicle market with various acquisitions, also expanding the Company’s portfolio of power control products. Additional products in this market include:  power distribution modules, low and high current switches, solenoids and relays, electronic switches, battery management products, ignition key switches, and trailer connectors. Custom and market products are sold directly to a mix of OEMs, Tier One suppliers, aftermarket channels, as well as through general distribution.

 

The Company continues to expand its automotive sensor business and products and expects this market to provide meaningful growth opportunities over the long-term. Products sold into the market include a wide range of automotive and commercial vehicle sensors designed to monitor the passenger compartment occupants and environment as well as the vehicle’s powertrain, emissions, speed and suspension. A majority of the Company’s automotive sensor sales are made to Tier One suppliers.

 

Industrial Segment

 

The Company manufactures and sells a broad range of low-voltage and medium-voltage circuit protection products to electrical distributors and their customers in the construction, OEM and industrial maintenance, repair and operating supplies (“MRO”) markets. The Company also designs and manufactures protection relays for the global mining, oil and gas, and general industrial markets as well as portable custom electrical equipment for the mining industry in Canada. The Company sees growth opportunity by expanding both the geographic markets and distributors it serves as well as continuing to invest in new product development.

 

Power fuses are used to protect circuits in various types of industrial equipment and in industrial and commercial buildings. Protection relays are used to protect personnel and equipment in harsh environments such as mining, oil and gas, and industrial environments from excessive currents, over voltages, and electrical shock hazards called ground faults. Major applications for protection relays include protection of motor, transformer, and power-line distribution circuits. Ground-fault relays are used to protect personnel and equipment in wet environments such as underground mining or water treatment applications where there is a greater risk for electricity to come in contact with water and create a shock hazard.

 

 

Littelfuse custom-engineered electrical equipment is designed and built for use in harsh or demanding environments such as mines, where standard industrial electrical gear will not meet customer needs for reliability and durability.

 

PRODUCT DESIGN AND DEVELOPMENT

 

The Company employs scientific, engineering, and other personnel to continually improve its existing product lines and to develop new products at its research, product design, and development (“R&D”) and engineering facilities in Champaign and Mt. Prospect, Illinois; Fremont, California; Rapid City, South Dakota; Canada; mainland China; Japan; Italy; the Philippines; Taiwan, China; Lithuania; Germany; and Mexico. The Company maintains a staff of engineers, chemists, material scientists and technicians whose primary responsibility is to design and develop new products.

 

Proposals for the development of new products are initiated primarily by sales, marketing, and product management personnel with input from customers. The entire product development process usually ranges from a few months to 24 months based on the complexity of development, with continuous efforts to reduce the development cycle. During fiscal years 2017, 2016, and 2015, the Company expended $50.5 million, $42.2 million, and $30.8 million, respectively, on R&D.

 

PATENTS, TRADEMARKS, AND OTHER INTELLECTUAL PROPERTY

 

The Company generally relies on patents, trademarks, licenses, and nondisclosure agreements to protect its intellectual property and proprietary products. In cases where it is deemed necessary by management, key employees are required to sign an agreement that they will maintain the confidentiality of the Company’s proprietary information and trade secrets.

 

The Company owns a large portfolio of patents worldwide and new products are continually being developed to replace older products. The Company regularly applies for patent protection on such new products. While, in the aggregate, the Company’s patents are important in the operation of its businesses, the Company believes that the loss by expiration or otherwise of any one patent or group of patents would not materially affect its business.

 

MANUFACTURING

 

The Company performs the majority of its own fabrication, stamps some of the metal components used in its fuses, holders and switches from raw metal stock and makes its own contacts and springs. In addition, the Company fabricates silicon wafers for certain applications and performs its own plating (silver, nickel, zinc, tin, and oxides). Thermoplastic molded component requirements are met through the Company’s in-house molding capabilities. After components are stamped, molded, plated, and readied for assembly, final assembly is accomplished on fully automatic and semi-automatic assembly machines. Quality assurance and operations personnel, using techniques such as statistical process control, perform tests, checks and measurements during the production process to maintain the highest levels of product quality and customer satisfaction.

 

The principal raw materials for the Company’s products include copper and copper alloys, heat-resistant plastics, zinc, melamine, glass, silver, gold, raw silicon, solder, and various gases. The Company uses a single source for several heat-resistant plastics and for zinc, but believes that suitable alternative heat-resistant plastics and zinc are available from other sources at comparable prices. All other raw materials are purchased from a number of readily available outside sources.

 

MARKETING

 

The Company’s sales and marketing staff maintains relationships with major OEMs and global distributors. The Company’s sales, marketing and engineering personnel also interact directly with OEM engineers to ensure appropriate sensor design, circuit protection and reliability within the OEM’s parameters. The Company also markets its products indirectly through a worldwide organization of over 60 manufacturers’ representatives and distributes through an extensive network of electronics, automotive and electrical distributors.

 

Electronics Segment

 

The majority of the Electronics segment’s products are sold through distribution, including global distributors such as Arrow Electronics, Inc., Future Electronics and TTI, Inc, with most of the remainder sold directly to OEMs. In the Americas, the Company maintains a direct sales staff and utilizes manufacturers’ representatives to sell its electronics products in the U.S. and to call on major U.S. and international OEMs and distributors. In Canada, the Company utilizes manufacturers’ representatives and distributors. In Europe and Asia-Pacific regions, the Company also maintains a direct sales staff and utilizes distributors.

 

 

Automotive Segment

 

The Company maintains a direct sales force to service all the major automotive and commercial vehicle OEMs, system suppliers, and Tier One suppliers in the U.S. The Company also has manufacturers’ representatives that sell the Company’s products to aftermarket fuse retailers and commercial vehicle product OEMs.

 

In Europe, the Company uses both a direct sales force and manufacturers’ representatives to service its OEMs, major system suppliers and aftermarket distribution customers. In the Asia-Pacific region, the Company uses both a direct sales force and distributors to supply to major OEM system suppliers and Tier One suppliers.

 

Industrial Segment

 

The Company markets and sells its power fuses and protection relays through manufacturers’ representatives across North America. These representatives sell power fuse products through an electrical and industrial distribution network comprised of over 2,500 distributor buying locations. These distributors have customers that include electrical contractors, municipalities, utilities and factories (including both MRO and OEM).

 

The Company’s field sales force (including regional sales managers and application engineers) and manufacturers’ representatives call on both distributors and end-users (consulting engineers, municipalities, utilities, and OEMs) in an effort to educate these customers on the capabilities and characteristics of the Company’s products.

 

CUSTOMERS

 

The Company sells to over 6,700 customers and distributors worldwide. Sales to Arrow Electronics, Inc., which were reported in our Electronics, Automotive and Industrial segments were 10.6% of consolidated net sales in 2017 but less than 10% in 2016 and 2015. No other single customer accounted for more than 10% of net sales during any of the last three years. During fiscal 2017, 2016, and 2015, net sales to customers outside the U.S. accounted for approximately 69%, 66%, and 60%, respectively, of the Company’s total net sales.

 

COMPETITION

 

The Company’s products compete with similar products of other manufacturers, some of which may have substantially greater financial resources than the Company. In the electronics market, the Company’s competitors include Eaton Corporation, Bel Fuse Inc., Bourns Inc., EPCOS, ON Semiconductor Corporation, STMicroelectronics NV, Semtech Corporation, and Vishay Intertechnology Inc. In the automotive market, the Company’s competitors include Eaton Corporation, Pacific Engineering, MTA, CTS Corporation, Amphenol Corporation, Sensata Technologies Holding NV, and TE Connectivity Ltd. In the industrial market, the Company’s major competitors include Eaton Corporation, GE Multilin, and Mersen. The Company believes that it competes on the basis of innovative products, the breadth of its product line, the quality and design of its products, and the responsiveness of its customer service, in addition to price.

 

BACKLOG

 

The backlog of unfilled orders at December 30, 2017 was approximately $243.7 million, compared to $110.3 million at December 31, 2016 with the increase primarily driven by the Electronics segment. Substantially all of the orders currently in backlog are scheduled for delivery in 2018.

 

EMPLOYEES

 

As of December 30, 2017, the Company employed approximately 10,700 employees worldwide. Approximately 20% of the Company's total workforce was employed under collective bargaining agreements at December 30, 2017. In Mexico, the Company has two separate collective bargaining agreements, one for 1,500 employees in Piedras Negras, expiring January 31, 2020 and the second for 650 employees in Matamoros, expiring January 1, 2020. Overall, the Company has historically maintained satisfactory employee relations and considers employee relations to be good.

 

ENVIRONMENTAL REGULATION

 

The Company is subject to numerous foreign, federal, state, and local regulations relating to air and water quality, the disposal of hazardous waste materials, safety and health. Compliance with applicable environmental regulations has not significantly changed the Company’s competitive position, capital spending or earnings in the past and the Company does not presently anticipate that compliance with such regulations will change its competitive position, capital spending or earnings for the foreseeable future.

 

The Company employs a chemical engineer to monitor regulatory matters and believes that it is currently in compliance in all material respects with applicable environmental laws and regulations.

 

 

Littelfuse GmbH, which was acquired by the Company in May 2004, is responsible for maintaining closed coal mines from legacy operations. The Company is compliant with German regulations pertaining to the maintenance of the mines and has an accrual related to certain of these coal mine shafts based on an engineering study estimating the cost of remediating the dangers (such as a shaft collapse) of certain of these closed coal mine shafts in Germany. The accrual is reviewed annually and calculated based upon the cost of remediating the shafts. Further information regarding the coal mine liability accrual is provided in Note 1, Summary of Significant Accounting Policies and Other Information, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

ITEM 1A. RISK FACTORS.

 

The Company’s business, financial condition, and results of operations are subject to various risks and uncertainties, including the risk factors it has identified below. Any of the following risk factors could materially and adversely affect the Company’s business, financial condition, or results of operations. These factors are not necessarily listed in order of importance.

 

The Company’s industry is subject to intense competitive pressures.

 

The Company operates in markets that are highly competitive. The Company competes on the basis of price, quality, service, and / or brand name across the industries and markets it serves. Competitive pressures could affect the prices the Company is able to charge its customers or the demand for its products.

 

The Company may not always be able to compete on price, particularly when compared to manufacturers with lower cost structures. Some of the Company’s competitors have substantially greater sales, financial and manufacturing resources and may have greater access to capital than the Company. As other companies enter its markets or develop new products, competition may further intensify. The Company’s failure to compete effectively could materially adversely affect its business, financial condition, and results of operations.

 

The Company engages in strategic acquisitions and may not realize the anticipated benefits of the acquisitions and / or may encounter difficulties in integrating these businesses.

 

The Company seeks to grow through strategic acquisitions. In the past, the Company has acquired a number of businesses or companies and additional product lines and assets. The Company intends to continue to expand and diversify its operations with additional future acquisitions.

 

An acquired business, technology, service or product could under-perform relative to the Company’s expectations and the price paid for it, or not perform in accordance with the Company’s anticipated timetable.  This could cause the Company’s financial results to differ from expectations in any given fiscal period, or over the long term.  The success of these transactions also depends on the Company’s ability to integrate the assets, operations, and personnel associated with these acquisitions. The Company may encounter difficulties in integrating acquisitions with the Company’s operations and may not realize the degree or timing of the benefits that are anticipated from an acquisition.

 

The Company may also discover liabilities or deficiencies associated with the companies or assets it acquires that were not identified in advance, which may result in significant unanticipated costs. The effectiveness of the Company’s due diligence review and its ability to evaluate the results of such due diligence are dependent upon the accuracy and completeness of statements and disclosures made or actions taken by the companies acquired or their representatives, as well as the limited amount of time in which acquisitions are executed. In addition, the Company may fail to accurately forecast the financial impact of an acquisition transaction, including tax and accounting charges. Acquisitions may also result in recording of significant additional expenses to the results of operations and recording of substantial intangible assets on the balance sheet upon closing. Any of these factors may adversely affect the Company’s financial condition or results of operations.

 

Reorganization activities may lead to additional costs and material adverse effects.

 

In the past, the Company has taken actions to restructure and optimize its production and manufacturing capabilities and efficiencies through relocations, consolidations, plant closings or asset sales. In the future, the Company may take additional restructuring actions including the consolidating, closing or selling of additional facilities. These actions could result in impairment charges and various charges for such items as idle capacity, disposition costs and severance costs, in addition to normal or attendant risks and uncertainties. The Company may be unsuccessful in any of its current or future efforts to restructure or consolidate its business. Plans to minimize or eliminate any loss of revenues during restructuring or consolidation may not be achieved. These activities may have a material adverse effect upon the Company’s business, financial condition or results of operations.

 

The Company may be unable to manufacture and deliver products in a manner that is responsive to its customers’ needs.

 

The end markets for the Company’s products are characterized by technological change, frequent new product introductions and enhancements, changes in customer requirements and emerging industry standards. The introduction of products embodying new technologies and the emergence of new industry standards could render its existing products obsolete and unmarketable before it can recover any or all of its research, development, and commercialization expenses on capital investments. Furthermore, the life cycles of its products may change and are difficult to estimate.

 

 

The Company’s future success will depend upon its ability to manufacture and deliver products in a manner that is responsive to its customers’ needs. The Company will need to develop and introduce new products and product enhancements on a timely basis that keep pace with technological developments and emerging industry standards and address increasingly sophisticated requirements of its customers. The Company invests heavily in research and development without knowing that it will recover these costs. The Company’s competitors may develop products or technologies that will render its products non-competitive or obsolete. If it cannot develop and market new products or product enhancements in a timely and cost-effective manner, its business, financial condition, and results of operations could be materially adversely affected.

 

The Company’s ability to manage currency or commodity price fluctuations or supply shortages is limited.

 

As a resource-intensive manufacturing operation, the Company is exposed to a variety of market and asset risks, including the effects of changes in commodity prices, foreign currency exchange rates, and interest rates. The Company has multiple sources of supply for the majority of its commodity requirements. However, significant shortages that disrupt the supply of raw materials or result in price increases could affect prices the Company charges its customers, its product costs, and the competitive position of its products and services. The Company monitors and manages these exposures as an integral part of its overall risk management program, which recognizes the unpredictability of markets and seeks to reduce the potentially adverse effects on its results. Nevertheless, changes in currency exchange rates, commodity prices and interest rates cannot always be predicted. In addition, because of intense price competition and the Company’s high level of fixed costs, it may not be able to address such changes even if they are foreseeable. Substantial changes in these rates and prices could have a material adverse effect on the Company’s results of operations and financial condition. In addition, significant portions of its revenues and earnings are exposed to changes in foreign currency rates. As it operates in multiple foreign currencies, changes in those currencies relative to the U.S. dollar will impact its revenues and expenses. The impact of possible currency devaluation in countries experiencing high inflation rates or significant exchange fluctuations can impact the Company’s results and financial guidance. For additional discussion of interest rate, currency or commodity price risk, see Item 7A, Quantitative and Qualitative Disclosures about Market Risks.

 

The Company’s effective tax rate could materially increase as a consequence of various factors, including interpretations and administrative guidance in regard to the Tax Act (defined below), U.S. and/or international tax legislation, mix of the Company’s earnings by jurisdiction, and U.S. and foreign jurisdictional tax audits.

 

On December 22, 2017, the U.S. enacted legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). Among other things, the Tax Act reduces the U.S. corporate federal income tax rate from 35% to 21%, adds base broadening provisions which limit deductions and address tax efficient international structures, imposes a one-time tax (the “Toll Charge”) on accumulated earnings of certain non-U.S. subsidiaries and enables repatriation of earnings of non-U.S. subsidiaries free of U.S. federal income tax. Other than the Toll Charge (which is applicable to the Company for 2017), the provisions will generally be applicable to the Company in 2018 and beyond. In accordance with the guidance provided in SEC Staff Accounting Bulletin (“SAB”) No. 118, in the fourth quarter of 2017 the Company recorded a charge of $47 million as a provisional reasonable estimate of the impact of the Tax Act, including $49 million for the Toll Charge net of $2 million for other net tax benefits. The Company is continuing to analyze the Tax Act and plans to finalize the estimate within the measurement period outlined in SAB No.118. The final charge may differ from the provisional reasonable estimate (and such difference may be material) if provisions of the Tax Act, and their interaction with other provisions of the U.S. Internal Revenue Code, are interpreted differently than interpretations made by the Company in determining the estimate, whether through issuance of administrative guidance, or through further review of the Tax Act by the Company and its advisors. Depending upon future interpretations and administrative guidance in respect of the Tax Act’s base broadening provisions, the Tax Act could have a material adverse effect on the Company’s effective tax rate and cash flows.

 

The Company is subject to taxes in the U.S. and numerous non-U.S. jurisdictions. Therefore, it is subject to changes in tax laws in each of these jurisdictions and such changes could have a material adverse affect on the Company’s effective tax rate and cash flows. As a U.S. Company with significant non-U.S. operations (generally taxed at rates that are lower than the U.S. statutory rate), it is particularly susceptible to changes in U.S. tax rules. In addition, certain non-U.S. jurisdictions are considering tax legislation based upon recommendations made by the Organization for Economic Co-operation and Development in connection with its Base Erosion and Profit Shifting study. The outcome of these legislative developments could have a material adverse effect on the Company’s effective tax rate and cash flows.

 

The tax rates applicable in the jurisdictions within which the Company operates vary widely. Therefore, the Company’s effective tax rate may be adversely affected by changes in the mix of its earnings by jurisdiction.

 

The Company is also subject to examination of its tax returns by the U.S. Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for income taxes. However, there can be no assurance as to the outcome of these examinations.

 

 

A decline in expected profitability of the Company or individual reporting units of the Company could results in the impairment of assets, including goodwill and other long-lived assets.

 

The Company holds material amounts of goodwill and other long-lived assets on its balance sheet. A decline in expected profitability, particularly if there is a decline in the global economy, could call into question the recoverability of the Company’s related goodwill and other long-lived tangible and intangible assets and require the write down or write off of these assets. Such an occurrence has had and could continue to have a material adverse effect on the Company’s consolidated results of operations, financial position and cash flows.

 

A significant fluctuation between the U.S. dollar and other currencies could adversely impact the Company's revenue and earnings.

 

Although the Company's financial results are reported in U.S. dollars, the majority of the Company’s operations consist of manufacturing and sales activities in foreign countries. The Company’s most significant net long exposure is to the euro. The Company’s most significant net short exposures are to the Chinese renminbi, Mexican peso, and Philippine peso. Changes in foreign exchange rates and in particular, an increase in the value of the U.S. dollar against foreign currencies, could have an adverse effect on profitability and financial condition

 

The Company’s revenues may vary significantly from period to period.

 

The Company’s revenues may vary significantly from one accounting period to another due to a variety of factors including:

 

 

changes in customers’ buying decisions;

 

changes in demand for its products;

 

changes in its distributor inventory stocking;

 

the Company’s product mix;

 

the Company’s effectiveness in managing manufacturing processes;

 

costs and timing of its component purchases;

 

the effectiveness of its inventory control;

 

the degree to which it is able to utilize its available manufacturing capacity;

 

the Company’s ability to meet delivery schedules;

 

general economic and industry conditions;

 

local conditions and events that may affect its production volumes, such as labor conditions and political instability; and

 

seasonality of certain product lines.

 

The bankruptcy or insolvency of a major customer could adversely affect the Company.

 

The bankruptcy or insolvency of a major customer could result in lower sales revenue and cause a material adverse effect on the Company’s business, financial condition, and results of operations. In addition, the bankruptcy or insolvency of a major U.S. auto manufacturer or significant supplier likely could lead to substantial disruptions in the automotive supply base, resulting in lower demand for the Company’s products, which likely would cause a decrease in sales revenue and have a substantial adverse impact on the Company’s business, financial condition and results of operations.

 

The Company is exposed to political, economic, and other risks that arise from operating a multinational business.

 

The Company has significant operating activities in numerous countries around the globe that contribute significantly to its revenues and earnings. Serving a global customer base and remaining competitive in the global marketplace requires the Company to place its production in countries outside the U.S., including emerging markets, to capitalize on market opportunities and maintain a cost-efficient structure. In addition, the Company sources a significant amount of raw materials and other components from third-party suppliers in low-cost countries. The Company’s operating activities are subject to a number of risks generally associated with multi-national operations, including risks relating to the following:

 

 

general economic conditions;

 

currency fluctuations and exchange restrictions;

 

import and export duties and restrictions;

 

the imposition of tariffs and other import or export barriers;

 

compliance with regulations governing import and export activities;

 

 

 

 

current and changing regulatory requirements;

 

political and economic instability;

 

potentially adverse income tax consequences;

 

transportation delays and interruptions;

 

labor unrest;

 

natural disasters;

 

terrorist activities;

 

public health concerns;

 

difficulties in staffing and managing multi-national operations; and

 

limitations on the Company’s ability to enforce legal rights and remedies.

 

Any of these factors could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Disruptions in the Company’s manufacturing, supply or distribution chain could result in an adverse impact on results of operations.

 

The Company sources materials and sell product through various international network channels. A disruption could occur within the Company’s manufacturing, distribution or supply chain network. This could include damage or destruction due to various causes including natural disasters or political instability which would cause one or more of these network channels to become non-operational. This could adversely affect the Company’s ability to manufacture or deliver its products in a timely manner, impair its ability to meet customer demand for products and result in lost sales or damage to its reputation. Such a disruption could have a material adverse effect upon the Company’s business, financial condition or results of operations.

 

The inability to maintain access to capital markets may adversely affect the Company’s business and financial results.

 

The Company’s ability to invest in its businesses, make strategic acquisitions, and refinance maturing debt obligations may require access to the capital markets and sufficient bank credit lines to support short-term borrowings. If the Company is unable to access the capital markets or bank credit facilities, it could experience a material adverse effect on its business, financial condition, and results of operations.

 

Fixed costs may reduce operating results if sales fall below expectations.

 

The Company’s expense levels are based, in part, on its expectations for future sales. Many of the Company’s expenses, particularly those relating to capital equipment and manufacturing overhead, are relatively fixed. The Company might be unable to reduce spending quickly enough to compensate for reductions in sales. Accordingly, shortfalls in sales could materially and adversely affect the Company’s operating results.

 

The volatility of the Company’s stock price could affect the value of an investment in the Company’s stock and future financial position.

 

The market price of the Company’s stock can fluctuate widely. Between December 31, 2016 and December 30, 2017, the closing sale price of the Company’s common stock ranged between a low of $146.94 and a high of $215.00. The volatility of the stock price may be related to any number of factors, such as volatility in the financial markets, general macroeconomic conditions, industry conditions, analysts’ expectations concerning the Company’s results of operations, or the volatility of its revenues as discussed above under “The Company’s Revenues May Vary Significantly from Period to Period.” The historic market price of the Company’s common stock may not be indicative of future market prices. The Company may not be able to sustain or increase the value of its common stock. Declines in the market price of the Company’s stock could adversely affect the Company’s ability to retain personnel with stock incentives, to acquire businesses or assets in exchange for stock and/or to conduct future financing activities with or involving the Company’s common stock.

 

 

The Company is exposed to, and may be adversely affected by, potential security breaches or other disruptions to its information technology systems and data security.

 

The Company relies on its information technology systems and networks in connection with many of its business activities. Some of these networks and systems are managed by third-party service providers and are not under the Company’s direct control. The Company’s operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to its business, customers, dealers, suppliers, employees, and other sensitive matters. As with most companies, the Company has experienced cyber-attacks, attempts to breach its systems, and other similar incidents, none of which have been material. Any future cyber incidents could, however, materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively sensitive information; compromise personally identifiable information regarding customers or employees; and jeopardize the security of the Company’s facilities. A cyber incident could be caused by malicious outsiders using sophisticated methods to circumvent firewalls, encryption, and other security defenses. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, the Company may be unable to anticipate these techniques or to implement adequate preventative measures. Information technology security threats, including security breaches, computer malware, and other cyber-attacks are increasing in both frequency and sophistication and could create financial liability, subject the Company to legal or regulatory sanctions or damage the Company’s reputation with customers, dealers, suppliers, and other stakeholders. The Company continuously seeks to maintain a robust program of information security and controls, but the impact of a material information technology event could have a material adverse effect on the Company’s competitive position, reputation, results of operations, financial condition, and cash flows.

 

The Company’s business may be interrupted by labor disputes or other interruptions of supplies.

 

A work stoppage could occur at certain of the Company’s facilities, most likely as a result of disputes under collective bargaining agreements or in connection with negotiations of new collective bargaining agreements. In addition, the Company may experience a shortage of supplies for various reasons, such as financial distress, work stoppages, natural disasters or production difficulties that may affect one of its suppliers. A significant work stoppage, or an interruption or shortage of supplies for any reason, if protracted, could substantially adversely affect the Company’s business, financial condition, and results of operations. The transfer of the Company’s manufacturing operations and changes in its distribution model could disrupt operations for a limited time.

 

Failure to attract and retain qualified personnel could affect the Company’s business results.

 

The Company’s success, both generally and in connection with mergers and acquisitions, depends on the Company’s ability to attract, retain, and motivate a highly-skilled and diverse management team and workforce. Failure to ensure that the Company has the depth and breadth of personnel with the necessary skill set and experience could impede its ability to deliver growth objectives and execute the Company’s strategy. Competition for qualified employees among companies that rely heavily upon engineering and technology is at times intense, and the loss of qualified employees could hinder the Company’s ability to conduct research activities successfully and develop marketable products.

 

Environmental liabilities could adversely impact the Company’s financial position.

 

Foreign, federal, state and local laws and regulations impose various restrictions and controls on the discharge of materials, chemicals and gases used in the Company’s manufacturing processes or in its finished goods. These environmental regulations have required the Company to expend a portion of its resources and capital on relevant compliance programs. Under these laws and regulations, the Company could be held financially responsible for remedial measures if its current or former properties are contaminated or if it sends waste to a landfill or recycling facility that becomes contaminated, even if the Company did not cause the contamination. The Company may be subject to additional common law claims if it releases substances that damage or harm third parties. In addition, future changes in environmental laws or regulations may require additional investments in capital equipment or the implementation of additional compliance programs. Any failure to comply with new or existing environmental laws or regulations could subject the Company to significant liabilities and could have a material adverse effect on its business, financial condition or results of operations.

 

In the conduct of manufacturing operations, the Company has handled and does handle materials that are considered hazardous, toxic or volatile under federal, state, and local laws. The risk of accidental release of such materials cannot be completely eliminated. In addition, the Company operates or owns facilities located on or near real property that was formerly owned and operated by others. Certain of these properties were used in ways that involved hazardous materials. Contaminants may migrate from, within or through these properties. These releases or migrations may give rise to claims. Where third parties are responsible for contamination, the third parties may not have funds, or not make funds available when needed, to pay remediation costs imposed upon the Company under environmental laws and regulations.

 

The Company is responsible for the maintenance of discontinued coal mining operations in Germany. The risk of environmental remediation exists and the Company is in the process of remediating the mines considered to be the most at risk.

 

 

Customer demands and new regulations related to conflict-free minerals may force the Company to incur additional expenses.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires disclosure of use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries and efforts to prevent the use of such minerals. In the semiconductor industry, these minerals are most commonly found in metals. As there may be only a limited number of suppliers offering “conflict free” metals, the Company cannot be certain that it will be able to obtain necessary metals in sufficient quantities or at competitive prices. Also, the Company may face challenges with its customers and suppliers if it is unable to sufficiently verify that the metals used in its products are “conflict free.”

 

The Company may not be successful protecting its patents and trademarks.

 

The Company considers its intellectual property, including patents, trade names, and trademarks, to be of significant value to its business as a whole. The Company’s products are manufactured, marketed, and sold under a portfolio of patents, trademarks, licenses, and other forms of intellectual property, some of which expire or are allowed to lapse at various dates in the future. The Company develops and acquires new intellectual property on an ongoing basis and consider all of its intellectual property to be valuable. The Company's policy is to file applications and obtain patents for the great majority of its novel and innovative new products including product modifications and improvements. Based on the broad scope of its product lines, the Company believes that the loss or expiration of any single intellectual property right would not have a material adverse effect upon its business, financial condition or results of operations; however, multiple losses or expirations could have a material adverse effect upon the Company’s business, financial condition or results of operations.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2. PROPERTIES. 

 

The Company’s operations are located in approximately 50 owned or leased facilities worldwide, totaling approximately 2.8 million square feet. The Company’s owned facilities include approximately 1.8 million square feet and the Company’s leased facilities include approximately 1.0 million square feet. The Company’s corporate headquarters is located in the U.S. in Chicago, Illinois.

 

The Company’s primary North American manufacturing facilities include: (i) Saskatoon, Canada and Rapid City, South Dakota which manufacture products for the Industrial segment, (ii) Melchor Muzquiz and Matamoros, Mexico which manufacture products primarily for the Automotive segment, and (iii) Piedras Negras, Mexico, which primarily manufactures products for the Automotive segment as well as the Industrial segment.

 

The Company’s primary European manufacturing facilities include Kaunas, Lithuania, and Legnago and Ozegna, Italy, all of which manufacture products for the Automotive segment.

 

The Company’s primary Asia-Pacific manufacturing facilities include: (i) Lipa City, Philippines, (ii) Inashiki, Japan, and (iii) Suzhou, Wuxi, Kunshan, Dongguan, and Shanghai, China, which manufacture products for the Electronics segment as well as the Automotive segment.

 

The Company also has engineering and research and development, sales, and distribution centers located in Asia, North America, and Europe.

 

The Company believes its facilities are adequate to meet its requirements for the foreseeable future.

 

ITEM 3. LEGAL PROCEEDINGS.

 

The Company is not a party to any material legal proceedings, other than routine litigation incidental to its business.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Shares of the Company’s common stock are traded under the symbol “LFUS” on the NASDAQ Global Select MarketSM.

 

The table below provides information with respect to the Company’s quarterly stock prices and cash dividends declared and paid for each quarter during fiscal 2017 and 2016:

 

           

2017

   

2016

 
   

4Q

   

3Q

   

2Q

   

1Q

   

4Q

   

3Q

   

2Q

   

1Q

 

High

  $ 215.00     $ 199.26     $ 173.14     $ 167.21     $ 156.54     $ 130.79     $ 123.15     $ 124.59  

Low

    182.03       161.65       149.81       146.94       124.32       113.42       106.26       90.61  

Close

    197.82       195.88       165.00       159.91       151.77       128.81       116.56       123.40  

Dividends

    0.37       0.37       0.33       0.33       0.33       0.33       0.29       0.29  

 

Number of Holders 

 

As of February 16, 2018, there were 79 holders of record of the Company’s common stock.

 

Dividend Policy

 

The Company expects that its practice of paying quarterly dividends on its common stock will continue, although future dividend policy will be determined by the Board of Directors based upon its evaluation of earnings, cash availability, and general business prospects. Currently, there are restrictions on the payment of dividends contained in the Company’s credit agreements that relate to the maintenance of certain financial ratios. However, the Company expects to continue paying cash dividends on a quarterly basis for the foreseeable future.

 

Recent Sales of Unregistered Securities

 

There were no sales of unregistered securities by us or affiliates during the three months ended December 30, 2017.

 

Purchases of Equity Securities

 

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, 2017 to April 30, 2018. The Company did not repurchase any shares of its common stock during fiscal 2017 and 1,000,000 shares may yet be purchased under the program as of December 30, 2017.

 

The table below presents shares of the Company’s common stock which were acquired by the Company during the three months ended December 30, 2017:

 

Period

 

Total number of shares purchased

   

Average price paid per share

   

Total number of shares purchased as part of publicly announced plans or programs

   

Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs

 

October 1 through October 31

                      1,000,000  

November 1 through November 30

                      1,000,000  

December 1 through December 30

                      1,000,000  

Total

                      1,000,000  

 

 

Stock Performance Graph

 

The following stock performance graph and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

 

The following stock performance graph compares the five-year cumulative total return on Littelfuse common stock to the five-year cumulative total returns on the Russell 2000 Index and the Dow Jones Electrical Components and Equipment Industry Group Index. The Company believes that the Russell 2000 Index and the Dow Jones Electrical Components and Equipment Industry Group Index represent a broad market index and peer industry group for total return performance comparison. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.

 

 

   

12/12

   

12/13

   

12/14

   

12/15

   

12/16

   

12/17

 

Littelfuse, Inc.

  $ 100     $ 152     $ 160     $ 179     $ 257     $ 337  

Russell 2000

    100       139       146       139       169       194  

Dow Jones US Electrical Components & Equipment

    100       138       149       141       171       217  

 

The Dow Jones Electrical Components and Equipment Industry Group Index includes the common stock of A. O. Smith Corp.; AAON, Inc.; American Superconductor Corp.; AMETEK, Inc.; Amphenol Corp.; Arrow Electronics, Inc.; Avnet, Inc.; AVX Corp.; Capstone Turbine Corp.; CTS Corp.; General Cable Corp.; Hubbell Inc. Class B; Jabil Circuit, Inc.; KEMET Corp.; Littelfuse, Inc.; Methode Electronics, Inc.; Plexus Corp.; Powerwave Technologies, Inc.; Regal-Beloit Corp.; Vicor Corp.; and Vishay Intertechnology, Inc.

 

In the case of the Russell 2000 Index and the Dow Jones Electrical Components and Equipment Industry Group Index, a $100 investment made on December 29, 2012 and reinvestment of all dividends is assumed. In the case of the Company, a $100 investment made on December 29, 2012 is assumed. Returns for the Company’s fiscal years presented above are as of the last day of the respective fiscal year which was, December 28, 2013, December 27, 2014, January 2, 2016, December 31, 2016, and December 30, 2017 for the fiscal years 2013, 2014, 2015, 2016, and 2017, respectively.

 

 

ITEM 6. SELECTED FINANCIAL DATA.

 

The information presented below provides selected financial data of the Company during the past five fiscal years and should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, for the respective years presented:

 

(in thousands, except per share data)

 

2017

   

2016

   

2015

   

2014

   

2013

 

Net sales

  $ 1,221,534     $ 1,056,159     $ 867,864     $ 851,995     $ 757,853  

Gross profit

    506,533       413,117       330,499       324,428       296,232  

Operating income

    218,511       130,644       104,157       133,830       129,881  

Net income

    119,519       104,488       80,866       98,100       87,814  

Per share of common stock:

                                       

Income from continuing operations

                                       

- Basic

    5.27       4.63       3.58       4.35       3.94  

- Diluted

    5.21       4.60       3.56       4.32       3.90  

Cash dividends paid

    1.40       1.24       1.08       0.94       0.84  

Cash and cash equivalents

    429,676       275,124       328,786       297,571       305,192  

Total assets

    1,740,102       1,491,194       1,065,475       1,069,859       1,024,373  

Short-term debt

    6,250       6,250       87,000       88,500       126,000  

Long-term debt, less current portion

    489,361       447,892       83,753       105,691       93,750  

 

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

 

The following discussion of Littelfuse’s financial condition and results of operations should be read together with the Consolidated Financial Statements and notes to those statements included in Item 8 of Part II of this Annual Report on Form 10-K.

 

Business

 

For a description of the Company’s business, segments and product offerings, see Item 1, Business.

 

2017 EXECUTIVE OVERVIEW

 

Net sales increased by $165.4 million, or 15.7%, in 2017 compared to 2016. The increase in net sales was primarily driven by the acquisitions of ON Portfolio, PolySwitch, and U.S. Sensor, higher volume and growth across each of the Electronics segment reporting units and volume growth in the Automotive segment driven by increases in passenger car and commercial vehicle businesses.

 

For the year ended December 30, 2017, the Company recognized net income of $119.5 million, or $5.21 per diluted share compared to net income of $104.5 million, or $4.60 per diluted share for the year ended December 31, 2016. Net income increased due to the impacts of the acquisitions and volume increases, higher gross profit largely driven by a favorable mix within the Electronics segment, a $14.8 million impairment to goodwill and other intangible assets impairment charge recorded in the Custom Products reporting unit in 2016 partially offset by higher income tax expense primarily driven by the enactment of the Tax Cuts and Jobs Act in December 2017.

 

Net cash provided by operating activities was $269.2 million for the year ended December 30, 2017 as compared to $180.1 million for the year ended December 31, 2016. The increase in net cash provided by operating activities reflected higher earnings, lower cash taxes, lower acquisition-related and integration payments and the impact of working capital changes largely driven by collections efficiency and lower vendor prepayments.

 

On January 17, 2018, the Company acquired IXYS Corporation “IXYS”, a global pioneer in the power semiconductor and integrated circuit markets with a focus on medium to high voltage power control semiconductors across the industrial, communications, consumer and medical markets. IXYS has a broad customer base, serving more than 3,500 customers through its direct sales force and global distribution partners. The purchase price for IXYS was approximately $856.5 million, which included consideration of cash, Littelfuse common stock, and the value of converted or cash settled IXYS equity awards. For the twelve months ended December 30, 2017, IXYS generated net sales of approximately $340 million. IXYS’ operations will be included in the Electronics segment.

 

On July 7, 2017, the Company acquired the assets of U.S. Sensor for $24.3 million. The acquired business, which is included in the Electronics segment expands the Company’s existing sensor portfolio in several key electronics and industrial end markets. U.S. Sensor manufactures a variety of high quality negative temperature coefficient thermistors as well as thermistor probes and assemblies. Product lines also include thin film platinum resistance temperature detectors (“RTDs”) and RTD assemblies. 

 

 

On February 28, 2017, pursuant to a Securities Purchase Agreement between the Company and the stockholders of Monolith, a U.S. start-up Company developing silicon carbide technology, and conditioned on Monolith achieving a product development milestone and other provisions, the Company acquired approximately 62% of the outstanding common stock of Monolith for $15 million. This was in addition to the Company’s initial investment of $3.5 million in the preferred stock of Monolith Semiconductor in December 2015. Monolith operations are included in the Electronics segment.

 

On October 13, 2017, the Company amended its existing credit agreement to increase the unsecured revolving credit facility from $575.0 million to $700.0 million, increase the unsecured term loan credit facility from $125.0 million to $200.0 million and to extend the expiration date from March 4, 2021 to October 13, 2022. The credit agreement also includes the option for the Company to increase the size of the revolving credit facility and the term loan facility by up to an additional $300.0 million, in the aggregate, subject to the satisfaction of certain conditions set forth in the credit agreement. Additionally, on November 15, 2017, the Company entered into a note purchase agreement pursuant to which the Company issued and sold $175 million in aggregate principal amount of senior notes. On January 16, 2018, $50 million in aggregate principal amount of 3.48% Senior Notes, Series A, due February 15, 2025 and $125 million in aggregate principal amount of 3.78% Senior Notes, Series B, due February 15, 2030 were funded.

 

OUTLOOK

 

Vision and Strategy

 

The Company works with its customers to design and develop technologies that help them build safer, more reliable and more efficient products for the connected world in virtually every market that uses electrical energy, ranging across consumer electronics, IT and telecommunication applications, industrial electronics, automobiles and other transportation, and heavy industrial applications. Built upon that framework, the Company’s strategy is centered on growing its core circuit protection business, accelerating its growth in power control, and doubling its sensor platform.

 

The Company’s strategic plan is focused on maximizing shareholder value by driving profitable sales growth, earnings per share growth, strong cash flow generation, and maintaining a balanced approach to capital allocation. The Company pursues the following major strategic initiatives, which are summarized below, along with more specific areas of focus.

 

Strategic Objective

 

2018 and Future Priorities

Double digit sales growth

 

Grow through increased product content with existing customers and increased market share

    Expand portfolio into new and underpenetrated geographies and end markets
    Increase innovation capabilities and investments
    Expand presence in products and applications that are converging across business segments
    Targeted mergers and acquisitions
       

EPS growth

 

Focus on higher profitability growth opportunities

    Grow operating margins through operational excellence
    Disciplined approach to managing costs
       

Cash flow and liquidity

 

Disciplined management of working capital

    Prudent deployment of capital
    Disciplined approach to mergers and acquisitions
    Grow dividend in line with earnings
    Periodic share repurchases

 

The Company’s strategy is to generate profitable sales growth. In order to accomplish this, The Company is focusing on accelerating organic growth by increasing its content and share gains, enhancing technology efforts to drive innovation, capitalizing on cross segment opportunities, and gaining traction in underpenetrated geographies and markets. The Company will continue to make targeted strategic acquisitions that align to its strategy and financial targets to support new business, products, markets, and technologies while leveraging existing customers.

 

 

Management believes that sustaining profitability through a combination of profitable organic growth and acquisitions is critical to the Company’s competitiveness, while enhancing value the Company delivers to its customers. In addition, the Company continues to implement initiatives across all platforms to enhance productivity while managing its cost structure, including integration of operations and streamlining administrative and support activities to drive operating margins.

 

The Company seeks to deploy its capital using a balanced approach. Priorities for capital deployment, over time, include investments to drive increased organic growth, targeted acquisitions that align to the Company’s strategic and financial metrics and returning capital to shareholders through dividends and periodic share repurchases.

 

The Company uses several key indicators to gauge progress toward achieving these objectives. These indicators include organic sales growth, operating margins, cash flow from operations and capital expenditures. The Company targets long-term sales double digit sales growth, split between 5-7% annual organic sales growth and 5-7% annual growth from strategic acquisitions, while targeting operating margins between 17% and 19% and double-digit earnings per share growth. Cash flow from operations less capital expenditures is targeted to approximate net income but in any given year can be significantly impacted by the timing of non-recurring or infrequent expenditures.

 

Significant Accounting Policies and Critical Estimates

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The Company has identified the following as its most critical accounting policies and judgments. Although management believes that its estimates and assumptions are reasonable, they are based upon information available when they are made, and therefore, actual results may differ from these estimates under different assumptions or conditions. The Company has reviewed these critical accounting policies and related disclosures with the Audit Committee of its Board of Directors. Significant accounting policies are more fully described in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report.

 

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 persuasive evidence of an arrangement exists, 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 sales 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.

 

Return to Stock: The Company has a return to stock policy whereby a customer, with previous authorization from 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.

 

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 2017, 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 step-up was approximately $1.6 million for the U.S. Sensor acquisition in 2017.

 

Goodwill

 

The Company’s methodology for allocating the purchase price of acquisitions is based on established valuation techniques that reflect the consideration of a number of factors, including valuations performed by third-party appraisers when appropriate. Goodwill is measured as the excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed. Based on its current organization structure, the Company has seven reporting units for which cash flows are determinable and to which goodwill has be allocated. Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative excess fair value of each reporting unit.

 

The Company annually tests goodwill for impairment on the first day of its fiscal fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company also performs an interim review for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit. As part of its interim reviews, management analyzes potential changes in the value of individual reporting units based on each reporting unit’s operating results for the period compared to expected results as of the prior year’s annual impairment test. In addition, management considers how other key assumptions, including discount rates and expected long-term growth rates, used in the last annual impairment test, could be impacted by changes in market conditions and economic events. Based on the interim assessments, management concluded that no events or changes in circumstances indicated that it was more likely than not that the fair value for any reporting unit had declined below its carrying value

 

Quantitative Assessment for Impairment

 

For the seven reporting units with goodwill, the Company compared the estimated fair value of each reporting unit to its carrying value. If the carrying value of a reporting unit exceeded the estimated fair value, the difference between the estimated fair value and carrying value is recorded as the amount of the goodwill impairment charge. The results of the goodwill impairment test as of October 1, 2017 indicated that the estimated fair values for each of the seven reporting units with goodwill exceeded their respective carrying values. Accordingly, there were no goodwill impairment charges recorded as part of the Company’s 2017 annual goodwill impairment test.

 

As part of its impairment test for these reporting units, the Company engaged a third-party appraisal firm to assist in the Company’s determination of the estimated fair values. This determination included estimating the fair value of each reporting unit using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected operating results, economic projections, anticipated future cash flows, discount rates and the allocation of shared or corporate items. The market approach estimates fair values using comparable marketplace fair value data from within a comparable industry grouping. The Company weighted both the income and market approach equally to estimate the concluded fair value of each reporting unit. The determination of fair value requires the Company to make significant estimates and assumptions, which primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization and capital expenditures.

 

Goodwill Impairment Assumptions

 

Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on the fair value of the reporting units. Future declines in the overall market value of the Company’s equity may also result in a conclusion that the fair value of one or more reporting units has declined below its carrying value.

 

 

One measure of the sensitivity of the amount of goodwill impairment charges to key assumptions is the amount by which each reporting unit “passed” (fair value exceeds the carrying value”) the goodwill impairment test. All seven of the reporting units passed the goodwill impairment test, with fair values that exceeded the carrying values by between 25% and 314% of their respective estimated fair values. As of the most recent annual test conducted on October 1, 2017, the Company noted that the excess of fair value over the carrying value, was 161%, 314%, 247%, 218%, 100%, 25%, and 248% for its reporting units: Electronics (non-silicon), Electronics (silicon), Passenger Car, Commercial Vehicle Products, Sensors, Relays, and Power Fuse, respectively. Relatively small changes in the Company’s key assumptions would not have resulted in any reporting units failing the goodwill impairment test.

 

Generally, changes in estimates of expected future cash flows would have a similar effect on the estimated fair value of the reporting unit. That is, a 1.0% decrease in estimated annual future cash flows would decrease the estimated fair value of the reporting unit by approximately 1.0%. The estimated long-term net sales growth rate can have a significant impact on the estimated future cash flows, and therefore, the fair value of each reporting unit. A 1.0% decrease in the long-term net sales growth rate would have resulted in no reporting units failing the goodwill impairment test. Of the other key assumptions that impact the estimated fair values, most reporting units have the greatest sensitivity to changes in the estimated discount rate. The estimated discount rate was 9.6% for all reporting units except for Relays which had a discount rate of 10.1%. A 1.0% increase in the estimated discount rates would have resulted in no reporting units failing the annual goodwill impairment test. The Company believes that its estimates of future cash flows and discount rates are reasonable, but future changes in the underlying assumptions could differ due to the inherent uncertainty in making such estimates. Additionally, price deterioration or lower volume could have a significant impact on the fair values of the reporting units.

 

Long-Lived Assets

 

The Company evaluates the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Factors which could trigger an impairment review include significant underperformance relative to historical or projected operating results, significant changes in the manner of use of the assets or the strategy for the overall business, a significant decrease in the market value of the assets or significant negative industry or economic trends. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying value of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying value over its fair value. During the year ended December 30, 2017, the Company recognized non-cash impairment charges of $2.9 million related to certain machinery and equipment in the Electronics and Automotive segments due to changes in the expected use of these certain assets. During the year ended December 31, 2016, the Company recognized non-cash impairment charges totaling $6.0 million, of which $2.2 million related to the impairment of certain customer relationship intangible assets in the Custom Products reporting unit within the Industrial segment and $3.8 million related to the impairment of the Custom Products tradename. The impairment of the customer relationship intangible assets resulted from lower expectations of future revenue to be derived from those relationships while the tradename impairment resulted from lower expectations of future cash flows of the Custom Products reporting unit.

 

Environmental Liabilities

 

Environmental liabilities are accrued based on estimates of the probability of potential future environmental exposure. Costs 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

 

The Company records annual income and expense amounts relating to its pension and postretirement benefits plans based on calculations which include various actuarial assumptions including discount rates, expected long-term rates of return and compensation increases. The Company reviews its actuarial assumptions on an annual basis as of the fiscal year-end balance sheet date (or more frequently if a significant event requiring remeasurement occurs) and modifies the assumption based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the Consolidated Balance Sheets, but are generally amortized into operating earnings over future periods, with the deferred amount recorded in accumulated other comprehensive income (loss). The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. The Company maintains several pension plans in international locations. The expected returns on plan assets and discount rates are determined based on each plan’s investment approach, local interest rates and plan participant profiles. The discount rates for the Company’s defined benefit plans primarily in Europe and the Asia-Pacific regions at December 30, 2017 and December 31, 2016 were 3.1% and 2.6%, respectively. During 2015, the Company settled its U.S. defined benefit pension plan as described in Note 8, Benefit Plans, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

 

A 50 basis point change in the discount rates at December 30, 2017 would have the following effect on the projected benefit obligation:

 

(in millions)

 

0.5%

Increase

   

0.5%

Decrease

 

Projected benefit obligation

  $ (5.6 )   $ 6.2  

 

Equity-based Compensation

 

Equity-based compensation expense is recorded for stock-option awards 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 equity-based compensation expense for all equity compensation plans was $17.3 million, $12.8 million, and $10.7 million in 2017, 2016, and 2015, respectively. Further information regarding this expense is provided in Note 9, Shareholders’ Equity, of the Notes to Consolidated Financial Statements included in this Annual 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. U.S. state and non-U.S. income taxes are provided on the portion of foreign income that is expected to be remitted to the U.S. and be taxable (and non-U.S. income taxes are provided on the portion of non-U.S. income that is expected to be remitted to an upper-tier non-U.S. entity).

 

Deferred income taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in those non-U.S. subsidiaries for which such excess is considered to be permanently reinvested in those operations. The Company recognized deferred tax liabilities of $12.0 million ($11.8 million for non-U.S. taxes and $0.2 million for U.S. state taxes) as of December 30, 2017 related to taxes on certain non-U.S. earnings which are not considered to be permanently reinvested. Management regularly evaluates whether foreign earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company’s non-U.S. subsidiaries. Changes in economic and business conditions, foreign or U.S. tax laws (such as the Tax Act), or the Company’s financial situation could result in changes to these judgments and the need to record additional tax liabilities.

 

In accordance with the guidance provided in SEC SAB No. 118, in the fourth quarter of 2017 the Company recorded a charge of $47 million as a provisional reasonable estimate of the impact of the Tax Act, including $49 million for the Toll Charge net of $2 million for other net tax benefits. The Company is continuing to analyze the Tax Act and plans to finalize the estimate within the measurement period outlined in SAB No.118. The final charge may differ from the provisional reasonable estimate if provisions of the Tax Act, and their interaction with other provisions of the U.S. Internal Revenue Code, are interpreted differently than interpretations made by the Company in determining the estimate, whether through issuance of administrative guidance, or through further review of the Tax Act by the Company and its advisors. Aside from these interpretation issues, the final charge may differ from the provisional reasonable estimate due to refinements of accumulated non-U.S. earnings and tax pool data.

 

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 10, Income Taxes, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

 

Off-Balance Sheet Arrangements

 

Other than non-cancellable operating lease commitments, the Company does not have off-balance sheet arrangements, financings or special purpose entities.

 

Financial Review

 

In the financial review that follows, the Company discusses its consolidated results of operations, financial position, cash flows and certain other information. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and related notes that begin on page F-1.

 

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 30, 2017 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2016

 

The following table summarizes the Company’s consolidated results of operations for periods presented. The fiscal year 2017 includes approximately $10.3 million of non-segment charges.  These included acquisition-related and integration costs related to legal, accounting and other expenses associated with completed or pending acquisitions of approximately $8.0 million, including $1.6 million of purchase accounting inventory charges related to the Company’s 2017 acquisition of U.S. Sensor as described in Note 2, Acquisitions and Dispositions, of the Notes to the Consolidated Financial Statements included in this Annual Report, and $2.2 million of charges related to restructuring and production transfers in the Company’s Asia operations.

 

The fiscal year 2016 includes approximately $50.0 million of non-segment charges.  These included $14.8 million of charges related to the impairment of the Custom Products reporting unit, $21.4 million of acquisition and integration costs associated with the Company’s 2016 acquisitions, primarily PolySwitch, $7.8 million of non-cash fair value step-up inventory charges relating to the Company’s 2016 acquisitions, primarily PolySwitch, as described in Note 2, Acquisitions and Dispositions, of the Notes to Consolidated Financial Statements included in this Annual Report, $1.9 million in charges related to the closure of the Company’s manufacturing facility in Denmark, $1.6 million related to the Company’s transfer of its reed sensor manufacturing operations from the U.S. and China to the Philippines, and $2.5 million related to restructuring costs.

 

Fiscal year 2017 also included approximately $2.4 million in foreign currency expenses primarily attributable to changes in the value of the euro, Philippine peso and Chinese renminbi against the U.S. dollar, while fiscal year 2016 also included approximately $0.5 million in foreign currency expenses primarily attributable to changes in the value of the euro, Philippine peso and Chinese renminbi against the U.S. dollar.

 

   

Fiscal Year

                 

(in thousands, except % change)

 

2017

   

2016

   

Change

   

% Change

 

Sales

  $ 1,221,534     $ 1,056,159     $ 165,375     15.7 %  

Gross profit

    506,533       413,117       93,416     22.6 %  

Operating expenses

    288,022       282,473       5,549     2.0 %  

Operating income

    218,511       130,644       87,867     67.3 %  

Other expense (income), net

    (1,282 )     (1,730 )     (448 )   (25.9 %)  

Income before income taxes

    204,037       123,274       80,763     65.5 %  

Income taxes

    84,518       18,786       65,732     349.9 %  

Net income

    119,519       104,488       15,031     14.4 %  

 

Sales

 

Net sales for 2017 of $1,221.5 million increased $165.4 million, or 15.7%, compared to the prior year, resulting from the prior year acquisitions of PolySwitch, ON Portfolio, and Menber’s and $5.4 million from the current year U.S. Sensor acquisition. The remaining increase in net sales was primarily due to higher volume across all product lines in the Electronics segment and passenger car and commercial vehicle businesses within the Automotive segment partially offset by the divestitures of two non-core product lines within the Industrial segment in 2016.

 

Gross Profit

 

Gross profit was $506.5 million, or 41.5% of sales, in 2017, compared to $413.1 million, or 39.1% of sales, in 2016. The increase in gross profit and gross margin reflects the incremental net sales and improved leverage in expenses and profits related to the prior year acquisitions, primarily in the Electronics segment.

 

Operating Expenses

 

Total operating expenses were $288.0 million, or 23.6% of net sales, for 2017 compared to $282.5 million, or 26.7% of net sales, for 2016. The increase in operating expenses of $5.5 million was primarily due to acquisitions, higher selling costs, higher research and development costs of $8.3 million and an increase of $5.4 million in amortization expense of intangible assets due to the acquisitions, partially offset by the $14.8 million of goodwill and other intangible asset impairment charges recognized in 2016 and lower acquisition-related expenses and integration costs of $13.4 million. Selling, general and administrative expenses increased by $6.7 million to $212.8 million, but decreased from 19.5% to 17.4% as a percentage of net sales for 2017 compared to 2016 primarily as a result of lower acquisition-related expenses and integration costs of $13.4 million and cost control initiatives partially offset by the acquisitions.

 

 

Operating Income

 

Operating income for 2017 was $218.5 million, an increase of $87.9 million or 67.3% compared to $130.6 million for 2016. The increase in operating income was the result of acquisitions and higher volume in the Electronics segment. Operating margins increased from 12.4% to 17.9% for 2017 due to the acquisitions, improvement in gross margins primarily driven by the Electronics segment, lower acquisition and integration related costs, the prior year goodwill and other intangible asset impairment charge and operational efficiencies. Also, the prior year goodwill and other intangible asset impairment charge reduced the operating margin by 1.4% in 2016.

 

Income Before Income Taxes

 

Income before income taxes for 2017 was $204.0 million, or 16.7% of net sales compared to $123.3 million, or 11.7% of net sales, for 2016. Income before income taxes was impacted by an increase in operating income described above, partially offset by higher interest expense of $4.8 million reflecting increased borrowings and unfavorable changes in foreign exchange rates of $1.9 million primarily as a result of fluctuations in the Chinese renminbi and Philippine peso against the U.S. dollar partially offset by fluctuations in the Euro against U.S. dollar.

 

Income Taxes

 

Income tax expense for 2017 was $84.5 million, or an effective tax rate of 41.4% compared to income tax expense of $18.8 million, or an effective tax rate of 15.2%, for 2016. The increase in 2017 reflects a fourth quarter charge of $47 million as a provisional reasonable estimate of the impact of the Tax Act, including $49 million for the Toll Charge net of $2 million for other net tax benefits. The Company is continuing to analyze the Tax Act and plans to finalize the estimate within the measurement period outlined in SAB No.118. The final charge may differ from the provisional reasonable estimate if provisions of the Tax Act, and their interaction with other provisions of the U.S. Internal Revenue Code, are interpreted differently than interpretations made by the Company in determining the estimate, whether through issuance of administrative guidance, or through further review of the Tax Act by the Company and its advisors. Aside from these interpretation issues, the final charge may differ from the provisional reasonable estimate due to refinements of accumulated non-U.S. earnings and tax pool data. Excluding the impact of the Tax Act, the effective tax rates for 2017 and 2016 are lower than the U.S. statutory tax rate primarily due to income earned in lower tax jurisdictions partially offset by the impact of taxes on unremitted earnings, and, with respect to 2016, a one-time deduction with respect to the stock of one of the Company’s affiliates, partially offset by the impact of the impairment of goodwill for which no tax benefit was recorded.

 

Segment Information

 

The Company reports its operations by the following segments: Electronics, Automotive and Industrial. Segment information is described more fully in Note 12, Segment Information, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

The following table is a summary of the Company’s net sales by segment:

 

   

Fiscal Year

                 

(in millions)

 

2017

   

2016

   

Change

   

% Change

 

Electronics

  $ 661.9     $ 535.2     $ 126.7       23.7 %

Automotive

    453.2       415.2       38.0       9.2 %

Industrial

    106.4       105.8       0.6       0.6 %

Total

  $ 1,221.5     $ 1,056.2     $ 165.3       15.7 %

 

Electronics Segment

 

The Electronics segment net sales increased $126.7 million, or 23.7%, in 2017 compared to 2016 primarily due to the PolySwitch, and ON Portfolio acquisitions in 2016, and the U.S Sensor acquisition in 2017 along with higher volume across the passives, sensors and semiconductor product lines.

 

Automotive Segment

 

Net sales in the Automotive segment increased $38.0 million, or 9.2%, in 2017 compared to 2016 primarily due to the incremental net sales associated with the PolySwitch and Menber’s acquisitions in 2016, higher volume in passenger car and commercial vehicle products and favorable foreign exchange impacts of $1.9 million, partially offset by lower volume in automotive sensor products.

 

 

Industrial Segment

 

The Industrial segment net sales increased $0.6 million, or 0.6%, in 2017 compared to 2016 primarily due higher volume across all product lines, partially offset by the divestiture of two non-core product lines, one in the fourth quarter of 2016 and the other in the first quarter of 2016.

 

Geographic Sales Information

 

Sales by geography represent sales to customer or distributor locations. The following table is a summary of the Company’s net sales by geography:

 

   

Fiscal Year

                 

(in millions)

 

2017

   

2016

   

Change

   

% Change

 

Americas

  $ 436.5     $ 411.1     $ 25.4       6.2 %

Europe

    243.9       200.3       43.6       21.8 %

Asia-Pacific

    541.1       444.8       96.3       21.7 %

Total

  $ 1,221.5     $ 1,056.2     $ 165.3       15.7 %

 

Americas

 

Net sales in the Americas increased $25.4 million, or 6.2%, in 2017 compared to 2016 resulting from acquisitions and higher volume in the passive and semiconductor product lines in the Electronics segment and the passenger car and commercial vehicle businesses in the Automotive segment that were partially offset by lower volume in sensor products in the Automotive segment and the divestiture of a non-core product line in the Industrial segment.

 

Europe 

 

European net sales increased $43.6 million, or 21.8%, in 2017 compared to 2016. The increase in net sales was primarily due to acquisitions and increased net sales across all product lines in the Electronics segment and the passenger car and commercial vehicle products businesses in the Automotive segment.

 

Asia-Pacific 

 

Asia-Pacific net sales increased $96.3 million, or 21.7%, in 2017 compared to 2016, primarily due to incremental net sales from prior year acquisitions and increased volume across all product lines in the Electronics segment.

 

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2016 AS COMPARED TO THE YEAR ENDED JANUARY 2, 2016

 

The following table summarizes the Company’s consolidated results of operations for periods presented. The fiscal year 2016 includes approximately $50.0 million of non-segment charges.  These included $14.8 million of charges related to the impairment of the Custom Products reporting unit, $21.4 million of acquisition and integration costs associated with the Company’s 2016 acquisitions, primarily PolySwitch, $7.8 million of non-cash fair value step-up inventory charges relating to the Company’s 2016 acquisitions, primarily PolySwitch, as described in Note 2, Acquisitions and Dispositions, of the Notes to Consolidated Financial Statements included in this Annual Report, $1.9 million in charges related to the closure of the Company’s manufacturing facility in Denmark, $1.6 million related to the Company’s transfer of its reed sensor manufacturing operations from the U.S. and China to the Philippines, and $2.5 million related to restructuring costs. 

 

Fiscal year 2015 includes approximately $45.2 million of other non-segment charges.  These included $5.2 million related to the Company’s transfer of its reed sensor manufacturing operations from the U.S. and China to the Philippines, $3.6 million related to restructuring, $4.6 million related to acquisition costs and $31.9 million of expense related to the planned termination of the U.S. pension as described in Note 8, Benefit Plans, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

Fiscal year 2016 also included approximately $0.5 million in foreign currency expenses primarily attributable to changes in the value of the euro, Philippine peso and Chinese renminbi against the U.S. dollar, while fiscal year 2015 also included $1.5 million in foreign currency gains primarily attributable to changes in the value of both the euro and Philippine peso against the U.S. dollar.

 

   

Fiscal Year

                 

(in thousands, except % change)

 

2016

   

2015

   

Change

   

% Change

 

Sales

  $ 1,056,159     $ 867,864     $ 188,295       21.7 %

Gross profit

    413,117       330,499       82,618       25.0 %

Operating expenses

    282,473       226,342       56,131       24.8 %

Operating income

    130,644       104,157       26,487       25.4 %

Other expense (income), net

    (1,730 )     (5,417 )     3,687       (68.1 %)

Income before income taxes

    123,274       106,948       16,326       15.3 %

Income taxes

    18,786       26,082       (7,296 )     (28.0 %)

Net income

    104,488       80,866       23,622       29.2 %

 

 

Sales

 

Net sales for 2016 of $1,056.2 million increased $188.3 million, or 21.7%, compared to the prior year, reflecting $170.2 million of incremental revenues from businesses acquired over the previous two years as well as organic growth in the Electronics and Automotive segments, partially offset by lower sales from the Industrial segment due to weaker end markets. The Company also experienced $7.3 million in unfavorable foreign currency effects in 2016 compared to 2015 primarily resulting from sales denominated in Chinese renminbi.

 

The increase in sales in 2016 reflects a $75.2 million, or 22%, increase in Automotive segment sales and a $129.7 million, or 32%, increase in Electronics segment sales, partially offset by a $16.6 million, or 14%, decrease in Industrial segment sales.

 

Gross Profit

 

Gross profit was $413.1 million, or 39.1% of sales, in 2016, compared to $330.5 million, or 38.1% of sales, in 2015. Gross profit for 2016 was negatively impacted by $10.8 million of charges primarily related to the inventory step-up from the acquisition of PolySwitch and to a lesser extent the ON Portfolio and Menber’s acquisitions. Gross profit for 2015 was negatively impacted by $5.2 million of charges related to the transfer of the Company’s reed switch production from the U.S. and China to the Philippines.

 

Operating Expenses

 

Total operating expense was $282.5 million, or 26.7% of net sales, for 2016 compared to $226.3 million, or 26.1% of net sales, for 2015. Operating expense in 2016 included $39.1 million of charges primarily consisting of acquisition and integration costs of $21.4 million and $14.8 million of charges related to the impairment of the Custom Products reporting unit. Operating expense in 2015 included $39.9 million of charges, primarily related to the U.S. pension settlement of $31.9 million and restructuring and acquisition costs of $8.0 million.

 

Operating Income

 

Operating income was $130.6 million, or 12.4% of net sales, in 2016 compared to $104.2 million, or 12.0% of net sales, in the prior year. The increase in operating income in the current year was due primarily to higher revenue as well as the factors affecting operating expenses discussed above.

 

Interest expense was $8.6 million in 2016 compared to $4.1 million in 2015 and is primarily related to the Company’s increased borrowing to fund acquisitions.

 

Foreign exchange (gain) loss was $0.5 million of loss in 2016 compared to $1.5 million of gain in 2015. The fluctuation in foreign exchange was primarily attributable to changes in the value of the euro, Philippine peso and Chinese renminbi against the U.S. dollar in 2016 and 2015.

 

Other Expense (Income), Net

 

Other expense (income), net, consisting of interest income, royalties and non-operating income was $1.7 million of income in 2016 compared to $5.4 million of income in 2015. The year-over-year decrease in income primarily reflects lower interest income in 2016.

 

Income Taxes

 

Income tax expense was $18.8 million with an effective tax rate of 15.2% in 2016 compared to income tax expense of $26.1 million with an effective tax rate of 24.4% in 2015. The effective tax rates for these periods are lower than the U.S. statutory tax rate primarily due to income earned in lower tax jurisdictions and, with respect to the 2016 period, a one-time deduction with respect to the stock of one of the Company’s affiliates partially offset by the impact of the impairment of goodwill for which no tax benefit was recorded and taxes on unremitted earnings, and, with respect to the 2015 period, the impact of a pension settlement partially offset by the impact from the restructuring of the legal ownership of the Company’s Mexican manufacturing operations.

 

Segment Information

 

The Company reports its operations by the following segments: Electronics, Automotive and Industrial. Segment information is described more fully in Note 12, Segment Information, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

 

The following table is a summary of the Company’s net sales by segment:

 

   

Fiscal Year

         

(in millions)

 

2016

   

2015

   

Change

 

Electronics

  $ 535.2     $ 405.5     $ 129.7  

Automotive

    415.2       340.0       75.2  

Industrial

    105.8       122.4       (16.6 )

Total

  $ 1,056.2     $ 867.9     $ 188.3  

 

Electronics Segment

 

The Electronics segment, which accounted for approximately 51% of total sales in 2016, has produced modest organic revenue growth over the last few years. In 2016, sales increased $129.7 million, or 32%, compared to the prior year, reflecting $110.0 million of sales from businesses acquired in 2016 as well as organic growth in sensor products and to a lesser extent passive and semiconductor products. Operating margins also improved in 2016 compared to 2015 due to better leverage from the higher sales, as well as favorable product and regional mix.

 

Fourth quarter 2016 sales were unseasonably strong due to higher demand in some markets, along with an earlier than usual Chinese New Year. The book-to-bill ratio of 1.05 at the end of the fourth quarter is primarily due to stronger than normal seasonal trends.

 

Automotive Segment

 

The Automotive segment, which accounted for approximately 39% of total sales in 2016, has been the Company’s fastest growing business over the last few years. In 2016, sales increased $75.2 million, or 22%, compared to the prior year, reflecting $60.2 million of incremental sales from businesses acquired in 2016 and the fourth quarter of 2015 as well as organic growth related to sensor and passenger car products. These increases in sales were partially offset by lower sales of legacy commercial vehicle products, reflecting weakness in the North American heavy truck, construction, and agricultural end markets.

 

The segment realized growth in fuse content which was driven by more sophisticated electronics in vehicles and sales of high-current products, especially the Masterfuse® line. Also contributing to segment performance was the automotive sensor business which experienced strong growth in sales and a significant improvement in margins. Sales in China were strong due to the Chinese government’s tax incentives for smaller cars driving higher growth in the China car industry.

 

Industrial Segment

 

The Industrial segment, which accounted for approximately 10% of total sales in 2016, experienced a sales decrease of 14% over the prior year with declines across all businesses. The Company also divested certain non-core product lines during 2016. See Note 2, Acquisitions and Dispositions of the Notes to the Consolidated Financial Statements included in this Annual Report, for additional information. The Company’s power fuse business has benefited from a strong U.S. solar market in recent years; however, this market slowed in the second half of 2016. Sales in the protection relay business continued to be impacted by weakness in the heavy industrial and oil and gas markets, as those customers have restricted their capital spending. In the custom products business, the Company continued to see a decline in the potash market, which has resulted in the aforementioned impairment charge in the third quarter of 2016. It is possible that the Company could recognize impairment charges for the Relays reporting unit if there are declines in profitability or projected future operating results due to changes in volume, market pricing, cost, or the business environment.

 

Geographic Sales Information

 

Sales by geography represent sales to customer or distributor locations. The following table is a summary of the Company’s net sales by geography:

 

   

Fiscal Year

         

(in millions)

 

2016

   

2015

   

Change

 

Americas

  $ 411.1     $ 401.2     $ 9.9  

Europe

    200.3       152.7       47.6  

Asia-Pacific

    444.8       314.0       130.8  

Total

  $ 1,056.2     $ 867.9     $ 188.3  

 

Americas

 

Sales in the Americas increased $9.9 million, or 2%, in 2016 compared to 2015, primarily due to acquisitions and increased demand for Electronics products, partially offset by lower Industrial sales. Electronics sales increased $23.3 million, or 20%, primarily due to acquisitions as well as increased sales for passive and sensor products. Industrial sales decreased $14.0 million, or 13%, resulting from decreases in demand for power fuses, custom products, and relay products.

 

Europe 

 

European sales increased $47.6 million, or 31%, in 2016 compared to 2015 primarily due to acquisitions and increased demand for Automotive and Electronics products, partially offset by lower Industrial sales. Automotive sales increased $26.8 million, or 27%, in 2016 primarily due to acquisitions and increased sales for sensor products. Electronics sales increased $22.4 million, or 46%, primarily due to acquisitions as well as increased sales for the passive and sensor products. Industrial sales decreased $1.5 million, or 24%, in 2016 primarily from lower sales of fuse and relay products.

 

 

Asia-Pacific 

 

Asia-Pacific sales increased $130.8 million, or 42%, in 2016 compared to 2015, primarily due to acquisitions and increased demand for Automotive and Electronics products offset by lower Industrial sales and changes in foreign exchange rates of $5.4 million. Electronics sales increased $84.0 million, or 35%, primarily due to acquisitions as well as increased sales for passive and sensor products partially offset by $2.3 million due to changes in foreign exchange rates. Automotive sales increased $47.8 million, or 72%, primarily due to acquisitions as well as increased sales for passenger car and sensor products, partially offset by $3.3 million of changes in foreign exchange rates. Industrial sales decreased $1.2 million, or 13%.

 

Liquidity and Capital Resources

 

Cash and cash equivalents were $429.7 million as of December 30, 2017, an increase of $154.6 million as compared to December 31, 2016.

 

As of December 30, 2017, $309.5 million of the $429.7 million of the Company’s cash and cash equivalents was held by non-U.S. subsidiaries. Of the $309.5 million, at least $160 million can be repatriated with minimal tax consequences. With respect to the remaining $149.5 million, the Company has recognized deferred tax liabilities of $12.0 million as of December 30, 2017 (including $11.8 million for non-U.S. taxes and $0.2 million for U.S. state taxes) on approximately $118 million of the non-U.S. cash balance because the amounts are not considered to be permanently reinvested. In addition, repatriation of some non-U.S. cash balances is further restricted by local laws. Management regularly evaluates whether non-U.S. earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company and its non-U.S. subsidiaries. Changes in economic and business conditions, tax laws, or the Company’s financial situation could result in changes to these judgments and the need to record additional tax liabilities.

 

The Company has historically supported its liquidity needs through cash flows from operations. Management expects that the Company’s (i) current level of cash, cash equivalents, and marketable securities, (ii) current and forecasted cash flows from operations, (iii) availability under existing funding arrangements, and (iv) access to capital in the capital markets will provide sufficient funds to support the Company’s operations, capital expenditures, investments, and debt obligations on both a short-term and long-term basis.

 

Revolving Credit Facility/Term Loan

 

On March 4, 2016, the Company entered into a five-year credit agreement (“Credit Agreement”) with a group of lenders for up to $700.0 million. The Credit Agreement consisted of an unsecured revolving credit facility (“Revolving Credit Facility”) of $575.0 million and an unsecured term loan credit facility (“Term Loan”) of up to $125.0 million. In addition, the Company had the ability, from time to time, to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $150.0 million, in the aggregate, in each case in minimum increments of $25.0 million, subject to certain conditions and the agreement of participating lenders. For the Term Loan, the Company was required to make quarterly principal payments of $1.6 million through March 31, 2018 and $3.1 million from June 30, 2018 through December 31, 2020 with the remaining balance due on March 4, 2021.

 

On October 13, 2017, the Company amended the Credit Agreement to increase the Revolving Credit Facility from $575.0 million to $700.0 million and increase the Term Loan from $125.0 million to $200.0 million and to extend the expiration date from March 4, 2021 to October 13, 2022. The Credit Agreement also includes the option for the Company to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $300.0 million, in the aggregate, subject to the satisfaction of certain conditions set forth in the Credit Agreement. Term Loans may be made in up to two advances. The first advance of $125.0 million occurred on October 13, 2017 and the second advance of $75.0 million occurred on January 16, 2018. For the Term Loan, the Company is required to make quarterly principal payments of 1.25% of the original term loan ($1.6 million as of December 30, 2017 increasing to $2.5 million with the second advance on January 16, 2018) through maturity, with the remaining balance due on October 13, 2022

 

Outstanding borrowings under the Credit Agreement bear interest, at the Company’s option, at either LIBOR, fixed for interest periods of one, two, three or six-month periods, plus 1.00% to 2.00%, or at the bank’s Base Rate, as defined, plus 0.00% to 1.00%, based upon the Company’s Consolidated Leverage Ratio, as defined. The Company is also required to pay commitment fees on unused portions of the credit agreement ranging from 0.15% to 0.25%, based on the Consolidated Leverage Ratio, as defined. The credit agreement includes representations, covenants and events of default that are customary for financing transactions of this nature. The effective interest rate on outstanding borrowings under the credit facility was 3.07% at December 30, 2017.

 

 

Senior Notes

 

On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold €212 million aggregate principal amount of senior notes in two series. The funding date for the Euro denominated senior notes occurred on December 8, 2016 for €117 million in aggregate amount of 1.14% Senior Notes, Series A, due December 8, 2023 (“Euro Senior Notes, Series A due 2023”), and €95 million in aggregate amount of 1.83% Senior Notes, Series B due December 8, 2028 (“Euro Senior Notes, Series B due 2028”) (together, the “Euro Senior Notes”). Interest on the Euro Senior Notes is payable semiannually on June 8 and December 8, commencing June 8, 2017.

 

On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold $125 million aggregate principal amount of senior notes in two series. On February 15, 2017, $25 million in aggregate principal amount of 3.03% Senior Notes, Series A, due February 15, 2022 (“U.S. Senior Notes, Series A due 2022”), and $100 million in aggregate principal amount of 3.74% Senior Notes, Series B, due February 15, 2027 (“U.S. Senior Notes, Series B due 2027”) (together, the “U.S. Senior Notes due 2022 and 2027”) were funded. Interest on the U.S. Senior Notes due 2022 and 2027 is payable semiannually on February 15 and August 15, commencing August 15, 2017.

 

On November 15, 2017, the Company entered into a Note Purchase Agreement pursuant to which the Company issued and sold $175 million in aggregate principal amount of senior notes in two series. On January 16, 2018, $50 million aggregate principal amount of 3.48% Senior Notes, Series A, due February 15, 2025 (“U.S. Senior Notes, Series A due 2025”) and $125 million in aggregate principal amount of 3.78% Senior Notes, Series B, due February 15, 2030 (“U.S. Senior Notes, Series A due 2030”) (together the “U.S. Senior Notes due 2025 and 2030” and with the Euro Senior Notes and the U.S. Senior Notes 2022 and 2027, the “Senior Notes”) were funded. Interest on the U.S. Senior Notes due 2025 and 2030 will be payable on February 15 and August 15, commencing on August 15, 2018.

 

The Company was in compliance with its debt covenants as of December 30, 2017, and expects to remain in compliance based on management’s estimates of operating and financial results for 2017 and the foreseeable future. As of December 30, 2017, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions.

 

Acquisitions

 

During the year ended December 30, 2017, the Company paid $38.5 million, net of cash acquired, for the acquisitions of U.S Sensor and Monolith. The Company financed the cash portion of the acquisition with a combination of cash on hand and borrowings under the credit facility.

 

During the year ended December 31, 2016, the Company paid $417.1 million of total purchase prices, net of cash acquired, for the acquisitions of the ON Portfolio, Menber’s and PolySwitch. The Company financed the cash portion of these acquisitions with a combination of cash on hand and borrowings under the credit facility.

 

During the year ended January 2, 2016, the Company paid $4.6 million, net of cash acquired, substantially all for the acquisition of Sigmar. The Company financed the cash portion of the acquisition with cash on hand.

 

Cash Flow Overview

 

Operating cash inflows are largely attributable to sales of the Company’s products. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities.

 

The following describes the Company’s cash flows for the twelve months ended December 30, 2017 and December 31, 2016

 

   

Fiscal Year

 

(in millions)

 

2017

   

2016

 

Net cash provided by operating activities

  $ 269.2     $ 180.1  

Net cash provided used in investing activities

    (96.1 )     (511.2 )

Net cash (used in) provided by financing activities

    (24.7 )     284.2  

Effect of exchange rate changes on cash and cash equivalents

    6.2       (6.8 )

Increase (decrease) in cash and cash equivalents

    154.6       (53.7 )

Cash and cash equivalents at beginning of period

    275.1       328.8  

Cash and cash equivalents at end of period

  $ 429.7     $ 275.1  

 

Cash flows from Operating Activities

 

Net cash provided by operating activities was $269.2 million for 2017, compared to $180.1 million during 2016. The increase in net cash provided by operating activities was primarily driven by higher earnings, lower cash taxes, reduced acquisition and integration payments and the timing of supplier and customer payments.

 

 

Cash flows from Investing Activities

 

Net cash used in investing activities was $96.1 million for 2017, compared to $511.2 million during 2016. Net cash used for acquisitions of $38.5 million in 2017 related to the acquisition of a majority stake in Monolith for $14.2 million and the acquisition of U.S. Sensor for $24.3 million. Net cash used for acquisitions of $471.1 million for 2016 primarily related to the acquisitions of PolySwitch for $344.5 million, the ON Portfolio for $104.0 million and Menber’s for $19.2 million. Capital expenditures were $65.9 million, representing an increase of $19.7 million compared to 2016.

 

Cash flows from Financing Activities

 

Net cash used in financing activities was $24.6 million for 2017 compared to net cash provided by financing activities of $284.2 million for 2016. The Company had $149.4 million of proceeds from the credit facility and senior notes payable and $134.7 million of payments on the term loan and credit facility in 2017 as compared to $718.4 million of proceeds from the credit facility and term loan and $421.2 million of payments on the term loan and credit facility. Additionally, dividends paid increased $3.8 million from $27.9 million in 2016 to $31.7 million for 2017.

 

The following describes the Company’s cash flows for the twelve months ended December 31, 2016 and January 2, 2016

 

   

Fiscal Year

 

(in millions)

 

2016

   

2015

 

Net cash provided by operating activities

  $ 180.1     $ 165.8  

Net cash used in investing activities

    (511.2 )     (44.2 )

Net cash used in financing activities

    284.2       (67.6 )

Effect of exchange rate changes on cash and cash equivalents

    (6.8 )     (22.8 )

Increase (decrease) in cash and cash equivalents

    (53.7 )     31.2  

Cash and cash equivalents at beginning of period

    328.8       297.6  

Cash and cash equivalents at end of period

  $ 275.1     $ 328.8  

 

Cash flows from Operating Activities

 

Net cash provided by operating activities increased $14.3 million in 2016 compared to 2015. Cash provided by operating activities in 2016 included $104.5 million in net income, $83.0 million in non-cash adjustments (primarily $53.1 million in depreciation and amortization) and $7.4 million of unfavorable changes in operating assets and liabilities.

 

Changes in operating assets and liabilities (including short-term and long-term items) that negatively impacted cash flows in 2016 consisted of changes in accounts receivable ($25.2 million), accrued taxes ($18.1 million) and prepaid expenses and other ($0.3 million). The increase in accounts receivable reflects increased sales in 2016 compared to the prior year. Positively impacting cash flows were changes in inventory ($8.5 million), accrued expenses including post-retirement ($2.3 million), accounts payable ($19.2 million) and accrued payroll and severance ($6.1 million).

 

Cash flows from Investing Activities

 

Net cash used in investing activities increased $467.1 million in 2016 compared to 2015 primarily due to the acquisitions of PolySwitch ($344.5 million, net of cash acquired), the ON portfolio business ($104.0 million), and Menber’s ($19.2 million).

 

Cash flows from Financing Activities

 

Net cash provided by financing activities increased $351.9 million in 2016 compared to 2015. The increase was primarily due to an increase in net proceeds from debt of $314.8 million in 2016 compared to 2015. In March the company replaced its credit agreement with a new agreement and in December the company received proceeds from the issuance of senior notes. Also contributing to the increase in comparative periods was the use of cash for the share repurchase in 2015 of $31.3 million. Information regarding the company’s debt is provided in Note 6, Debt, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

Capital Resources

 

The Company expends capital to support its operating and strategic plans. Such expenditures include strategic acquisitions, investments to maintain capital assets, develop new products or improve existing products, and to enhance capacity or productivity. Many of the associated projects have long lead-times and require commitments in advance of actual spending.

 

Share Repurchase Program

 

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, 2017 to April 30, 2018. The Company did not repurchase any shares of its common stock during fiscal 2017 and the full 1,000,000 shares may yet be purchased under the program as of December 30, 2017.

 

 

Contractual Obligations and Commitments

 

The following table summarizes outstanding contractual obligations and commitments as of December 30, 2017:

 

(in thousands)

 

Total

   

Less than

1 Year

   

1 to 3 Years

   

3 to 5 Years

   

Greater

than 5

Years

 

Long-term debt(a)

  $ 500,492     $ 6,250     $ 12,500     $ 128,750     $ 352,992  

Interest payments(b)

    85,973       11,809       22,697       20,597       30,870  

Operating lease payments(c)

    34,578       10,842       11,619       8,096       5,021  

Income Tax Obligation(d)

    35,400       3,400       6,000       6,000       20,000  

Purchase obligations(e)

    27,600       27,600                    

Total

  $ 685,043     $ 59,901     $ 52,816     $ 163,443     $ 408,883  

 

 

(a)

Excludes offsetting issuance costs of $4.9 million. Euro denominated debt amounts are converted based on the Euro to U.S. Dollar spot rate at year end. Excludes funding of $50 million and $125 million from the U.S Senior Notes, Series A due 2025 and U.S. Senior Notes, Series A due 2030, respectively, as these occurred subsequent to December 30, 2017. For more information see Note 6, Debt, of the Notes to the Consolidated Financial Statements.

 

 

(b)

Amounts represent estimated contractual interest payments on outstanding debt. Rates in effect as of December 30, 2017 are used for variable rate debt. For more information see Note 6, Debt, of the Notes to the Consolidated Financial Statements.

 

 

(c)

For more information see Note 5, Lease Commitments, of the Notes to the Consolidated Financial Statements.

 

 

(d)

The Income Tax Obligation represents the current federal and state income tax expense for 2017 including the preliminary estimate of $49 million for the Toll Charge, partially offset by $13 million of foreign tax credits. The Company will elect to pay the 2017 current federal income tax over the eight-year period as prescribed by the Tax Act. For more information see Note 10, Income Taxes, of the Notes to the Consolidated Financial Statements.

 

 

(e)

Purchase obligations include commitments for capital expenditures not recognized in the Company’s Consolidated Balance Sheets.

 

In addition to the above contractual obligations and commitments, the Company had the following obligations at December 30, 2017:

 

The Company has Company-sponsored defined benefit pension plans covering employees at various non-U.S. subsidiaries including the U.K., Germany, the Philippines, China, Japan, Mexico, Italy and France. At December 30, 2017, the Company had a net unfunded status of $19.1 million. The Company expects to make approximately $1.4 million of contributions to the plans in 2018. For additional information, see Note 8, Benefit Plans, of the Notes to the Consolidated Financial Statements.

 

The Company has a non-qualified Supplemental Retirement and Savings Plan which provides additional retirement benefits for certain management employees and named executive officers by allowing participants to defer a portion of their annual compensation. As of December 30, 2017, there was $8.0 million of accrued compensation benefits included in Other long-term liabilities. For additional information, see Note 8, Benefit Plans, of the Notes to the Consolidated Financial Statements.

 

As of December 30, 2017, the Company recognized various accruals related to employee compensation including its annual incentive program that are expected to be paid in 2018.

 

Due to the uncertainty with respect to the cash outflows, the preceding table excludes unrecognized tax benefits of $7.7 million. The Company does not expect to make significant payments of these liabilities within the next year. For additional information, see Note 10, Income Taxes, of the Notes to the Consolidated Financial Statements.

 

Off-Balance Sheet Arrangements

 

As of December 30, 2017, 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. 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.

 

Recent Accounting Pronouncements

 

Recently issued accounting standards and their estimated effect on the Company’s Consolidated Financial Statements are described in Note 1, Summary of Significant Accounting Policies and Other Information, of the Notes to the Consolidated Financial Statements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

The Company is exposed to market risk from changes in interest rates, foreign exchange rates and commodity prices.

 

Interest Rates

 

The Company had $122.5 million in debt outstanding at December 30, 2017 related to the unsecured revolving credit facility and term loan. Because 100% of this debt has variable interest rates, the Company is subject to future interest rate fluctuations in relation to these borrowings which could potentially have a negative impact on cash flows of the Company. A prospective increase of 100 basis points in the interest rate applicable to the Company’s outstanding borrowings under its credit facility would result in an increase of approximately $1.2 million in annual interest expense. The Company is not party to any currency exchange or interest rate protection agreements as of December 30, 2017.

 

 

Foreign Exchange Rates

 

The majority of the company’s operations consist of manufacturing and sales activities in foreign countries. The company has manufacturing facilities in the U.S., Mexico, Canada, China, Italy, Lithuania, Japan and the Philippines. During 2017, sales to customers outside the U.S. were approximately 69% of total net sales. During 2016, sales to customers outside the U.S. were approximately 66% of total net sales. Substantially all sales in Europe are denominated in euros and substantially all sales in the Asia-Pacific region are denominated in U.S. dollars, Japanese yen, Korean won, Chinese renminbi or Taiwanese dollars.

 

The company’s foreign exchange exposures result primarily from inter-company loans, external borrowings, sale of products in foreign currencies, foreign currency denominated purchases, employee-related and other costs of running operations in foreign countries. The company’s most significant net long exposures are to the Philippine peso and the euro. The company’s most significant net short exposures are to the Chinese renminbi, Mexican peso, and Philippine peso. Changes in foreign exchange rates could affect the company’s sales, costs, balance sheet values and earnings.

 

At December 30, 2017, the net value of the Company’s assets with exposure to foreign currency risk was approximately $298 million, with the largest exposure being U.S. Dollar denominated inter-company loans with a Philippine peso functional currency subsidiary. The reduction in earnings from a hypothetical instantaneous 10% adverse change in quoted foreign currency spot rates applied to foreign currency sensitive asset instruments would be $30 million at December 30, 2017. At December 30, 2017, the net value of the Company’s liabilities with exposure to foreign currency risk was $204 million, with the largest exposure being U.S. Dollar denominated inter-company loans with a euro functional currency subsidiary. The reduction in earnings from a hypothetical instantaneous 10% adverse change in quoted foreign currency spot rates applied to foreign currency sensitive liability instruments would be $20 million at December 30, 2017. As a result of the mix in currencies impacting the hypothetical 10% changes, the movements in some instruments would offset movements in other instruments reducing the hypothetical exposure to the Company.

 

Commodity Prices

 

The Company uses various metals in the manufacturing of its products, including copper, zinc, tin, gold, and silver. Prices of these commodities can and do fluctuate significantly, which can impact the Company’s earnings. The most significant of these exposures is to copper, zinc, gold, and silver, where at current prices and volumes, a 10% price change would affect annual pre-tax profit by approximately $3.9 million for copper, $1.5 million for zinc, $0.2 million for gold, $0.8 million for silver, and $0.6 million for tin.

 

The cost of oil has fluctuated dramatically over the past several years. Consequently, there is a risk that a return to high prices for oil and electricity in 2018 could have a significant impact on the Company’s transportation and utility expenses.

 

While the Company is exposed to significant changes in certain commodity prices and foreign currency exchange rates, the Company actively monitors these exposures and may take various actions from time to time to mitigate any negative impacts of these exposures.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Index

Page

   

Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements

34

Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting

35

Consolidated Financial Statements

 
 

Consolidated Balance Sheets

36

 

Consolidated Statements of Net Income

37

 

Consolidated Statements of Comprehensive Income

37

 

Consolidated Statements of Cash Flows

38

 

Consolidated Statements of Equity

39

Notes to Consolidated Financial Statements

 
 

1. Summary of Significant Accounting Policies and Other Information

40

 

2. Acquisitions and Divestitures

46

 

3. Inventories

51

 

4. Goodwill and Other Intangible Assets

52

 

5. Lease Commitments

53

 

6. Debt

53

 

7. Fair Value of Assets and Liabilities

55

 

8. Benefit Plans

57

 

9. Shareholders’ Equity

60

 

10. Income Taxes

62

 

11. Earnings Per Share

65

 

12. Segment Information

65

 

13. Selected Quarterly Financial Data (Unaudited)

68

 

 

Report of Independent Registered Public Accounting Firm

 

 

Board of Directors and Shareholders

 

Littelfuse, Inc.

 

 

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Littelfuse, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 30, 2017 and December 31, 2016, the related consolidated statements of net income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 30, 2017, and the related notes and schedule (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2017 and December 31, 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 30, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 23, 2018, expressed an unqualified opinion on those financial statements.

 

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

 

/s/ GRANT THORNTON LLP

 

We have served as the Company’s auditor since 2014.

 

 

Chicago, Illinois

February 23, 2018

 

 

Report of Independent Registered Public Accounting Firm

 

 

Board of Directors and Shareholders

 

Littelfuse, Inc.

 

 

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of Littelfuse, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 30, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 30, 2017, and our report dated February 23, 2018 expressed an unqualified opinion on those financial statements.

 

Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/ GRANT THORNTON LLP

 

Chicago, Illinois

February 23, 2018

 

 

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands)

 

 

December 30,

2017

   

 

December 31,

2016

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 429,676     $ 275,124  

Short-term investments

    35       3,690  

Trade receivables, less allowances (2017 - $27,516; 2016 - $25,874)

    182,699       176,032  

Inventories

    140,789       114,063  

Prepaid income taxes and income taxes receivable

    1,689       11,671  

Prepaid expenses and other current assets

    37,452       31,501  

Total current assets

    792,340       612,081  

Property, plant, and equipment:

               

Land

    9,547       9,268  

Buildings

    86,599       80,553  

Equipment

    505,838       439,542  

Accumulated depreciation and amortization

    (351,407 )     (312,188 )

Net property, plant, and equipment

    250,577       217,175  

Intangible assets, net of amortization

    203,850       213,027  

Goodwill

    453,414       403,544  

Investments

    10,993       13,933  

Deferred income taxes

    11,858       20,585  

Other assets

    17,070       10,849  

Total assets

  $ 1,740,102     $ 1,491,194  

LIABILITIES AND EQUITY

               

Current liabilities:

               

Accounts payable

  $ 101,844     $ 90,712  

Accrued payroll

    49,962       42,810  

Accrued expenses

    48,994       36,138  

Accrued severance

    1,459       2,785  

Accrued income taxes

    16,285       8,846  

Current portion of long-term debt

    6,250       6,250  

Total current liabilities

    224,794       187,541  

Long-term debt, less current portion

    489,361       447,892  

Deferred income taxes

    17,069       7,066  

Accrued post-retirement benefits

    18,742       13,398  

Other long-term liabilities

    62,580       20,366  

Shareholders’ equity:

               

Common stock, par value $0.01 per share: 34,000,000 shares authorized; shares issued, 2017 –22,713,198; 2016 –22,626,922

    229       228  

Treasury stock, at cost: 439,598 and 409,115 shares, respectively

    (41,294 )     (36,510 )

Additional paid-in capital

    310,012       291,258  

Accumulated other comprehensive income

    (63,668 )     (74,579 )

Retained earnings

    722,140       634,391  

Littelfuse, Inc. shareholders’ equity

    927,419       814,788  

Non-controlling interest

    137       143  

Total equity

    927,556       814,931  

Total liabilities and equity

  $ 1,740,102     $ 1,491,194  

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

CONSOLIDATED STATEMENTS OF NET INCOME

 

   

Year Ended

 

(in thousands, except per share data)

 

December 30,

2017

   

December 31,

2016

   

January 2,

2016

 
                         

Net sales

  $ 1,221,534     $ 1,056,159     $ 867,864  

Cost of sales

    715,001       643,042       537,365  

Gross profit

    506,533       413,117       330,499  
                         

Selling, general, and administrative expenses

    212,833       206,129       153,714  

Research and development expenses

    50,489       42,198       30,802  

Pension settlement expenses

                29,928  

Amortization of intangibles

    24,700       19,337       11,898  

Impairment of goodwill and intangible assets

          14,809        

Total operating expenses

    288,022       282,473       226,342  

Operating income

    218,511       130,644       104,157  
                         

Interest expense

    13,380       8,628       4,091  

Foreign exchange loss (gain)

    2,376       472       (1,465 )

Other (income) expense, net

    (1,282 )     (1,730 )     (5,417 )

Income before income taxes

    204,037       123,274       106,948  

Income taxes

    84,518       18,786       26,082  

Net income

  $ 119,519     $ 104,488     $ 80,866  
                         

Income per share:

                       

Basic

  $ 5.27     $ 4.63     $ 3.58  

Diluted

  $ 5.21     $ 4.60     $ 3.56  
                         

Weighted-average shares and equivalent shares outstanding:

                       

Basic

    22,687       22,559       22,565  

Diluted

    22,931       22,727       22,719  

 


 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   

Year Ended

 

(in thousands)

 

December 30,

2017

   

December 31,

2016

   

January 2,

2016

 
                         

Net income

  $ 119,519     $ 104,488     $ 80,866  

Other comprehensive income (loss):

                       

Pension and postemployment liability adjustments net of tax expense (benefit) of $535, ($1,302) and ($106), respectively

    1,235       (3,673 )     (1,761 )

Pension and postemployment reclassification adjustments net of tax (benefit) expense of ($150), $0 and $746, respectively

    (88 )     412       1,530  

Unrealized (loss) gain on investments

    (974 )     (815 )     793  

Reclassification of pension settlement costs to expense net of tax expense of $11,742 in 2015

                21,124  

Foreign currency translation adjustments

    10,738       (24,832 )     (46,231 )

Comprehensive income

  $ 130,430     $ 75,580     $ 56,321  

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

Year Ended

 

(in thousands)

 

December 30,

2017

   

December 31,

2016

   

January 2,

2016

 

Operating activities

                       

Net income

  $ 119,519     $ 104,488     $ 80,866  

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

                       

Depreciation

    38,311       33,800       29,701  

Amortization of intangibles

    24,700       19,337       11,898  

Impairment of goodwill and intangible assets

          14,809        

Provision for bad debts

    2,414       1,769       164  

Non-cash inventory charges

    1,607       7,834        

Net loss on pension settlement, net of tax

                19,308  

Loss on sale of product line

          1,391        

Loss on sale of property, plant, and equipment

    3,634       813       1,253  

Stock-based compensation

    16,315       11,987       10,266  

Excess tax benefit on share-based compensation

          (3,421 )     (1,891 )

Deferred income taxes

    17,063       (5,269 )     11,479  

Changes in operating assets and liabilities:

                       

Accounts receivable

    (11,087 )     (22,779 )     (3,397 )

Inventories

    (20,180 )     8,539       (3,577 )

Accounts payable

    6,494       19,190       2,573  

Accrued expenses (including post-retirement)

    7,641       2,287       6,482  

Accrued payroll and severance

    3,709       6,131       5,883  

Accrued taxes

    39,276       (18,062 )     557  

Prepaid expenses and other

    19,754       (2,711 )     (5,739 )

Net cash provided by operating activities

    269,170       180,133       165,826  
                         

Investing activities

                       

Acquisitions of businesses, net of cash acquired

    (38,512 )     (471,118 )     (4,558 )

Purchase of cost method investment

                (3,500 )

Proceeds from maturities of short-term investments

    3,739       345        

Decrease in entrusted loan

    3,599       5,510       7,811  

Purchases of property, plant, and equipment

    (65,925 )     (46,228 )     (44,019 )

Proceeds from sale of property, plant, and equipment

    962       248       102  

Net cash used in investing activities

    (96,137 )     (511,243 )     (44,164 )
                         

Financing activities

                       

Proceeds of revolving credit facility

    15,000       367,000       49,000  

Proceeds of term loan

    9,375       125,000        

Proceeds of senior notes payable

    125,000       226,428        

Payments of term loan

    (7,188 )     (89,688 )     (8,750 )

Payments of revolving credit facility

    (127,500 )     (331,500 )     (55,500 )

Net (payments) proceeds related to stock-based award activities

    (2,373 )     20,494       9,150  

Proceeds (payments) from entrusted loan

    (3,599 )     (5,510 )     (7,811 )

Debt issuance costs

    (1,626 )     (3,583 )     (42 )

Cash dividends paid

    (31,770 )     (27,866 )     (24,341 )

Excess tax benefit on share-based compensation

          3,421       1,891  

Purchases of common stock

                (31,252 )

Net cash (used in) provided by financing activities

    (24,681 )     284,196       (67,655 )

Effect of exchange rate changes on cash and cash equivalents

    6,200       (6,748 )     (22,792 )

Increase (decrease) in cash and cash equivalents

    154,552       (53,662 )     31,215  

Cash and cash equivalents at beginning of year

    275,124       328,786       297,571  

Cash and cash equivalents at end of year

  $ 429,676     $ 275,124     $ 328,786  

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

CONSOLIDATED STATEMENTS OF EQUITY

 

   

Littelfuse, Inc. Shareholders’ Equity

                 

(in thousands)

 

Common Stock

   

Addl. Paid in Capital

   

Treasury Stock

   

Accum. Other Comp. Inc. (Loss)

   

Retained Earnings

   

Non-controlling Interest

   

Total

 

Balance at December 27, 2014

  $ 226     $ 243,844     $ (18,724 )   $ (21,126 )   $ 519,956     $ 143     $ 724,319  

Comprehensive income:

                                                       

Net income for the year

                            80,866             80,866  

Pension liability adjustments, net

                      (1,761 )                 (1,761 )

Pension settlement, net

                      21,124                   21,124  

Pension and postemployment reclassification adjustments, net

                      1,530                   1,530  

Unrealized gain on investments

                      793                   793  

Foreign currency translation adjustments

                      (46,231 )                 (46,231 )

Comprehensive income