lfus20131231_10k.htm

 

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 28, 2013 

   

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 [ ]

 

 
 

 

 

(Cover continued from previous page)

 

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. [ X]

 

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

 

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 22,224,090 shares of voting stock held by non-affiliates of the registrant was approximately $1,658,139,355 based on the last reported sale price of the registrant’s Common Stock as reported on the NASDAQ Global Select MarketSM on June 29, 2013.

 

As of February 14, 2014, the registrant had outstanding 22,460,247 shares of Common Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Littelfuse, Inc. Proxy Statement for the 2014 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

 

 
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TABLE OF CONTENTS

 

 

Page

   

FORWARD-LOOKING STATEMENTS

4

     

PART I

   

Item 1.

Business.

4

Item 1A.

Risk Factors.

12

Item 1B.

Unresolved Staff Comments.

17

Item 2.

Properties.

17

Item 3.

Legal Proceedings.

19

Item 4.

Mine Safety Disclosures.

19

     

PART II

   

Item 5.

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

20

Item 6.

Selected Financial Data.

22

Item 7.

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

22

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

39

Item 8.

Financial Statements and Supplementary Data.

40

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

82

Item 9A.

Controls and Procedures.

82

Item 9B.

Other Information.

83

     

PART III

   

Item 10.

Directors, Executive Officers and Corporate Governance.  

84

Item 11.

Executive Compensation.

86

Item 12.

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

86

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

87

Item 14.

Principal Accounting Fees and Services.

87

     

PART IV

   

Item 15.

Exhibits, Financial Statement Schedules.

88

 

Schedule II – Valuation and Qualifying Accounts and Reserves.

89

 

Signatures.

90

 

Exhibit Index.

91

 

 
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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, 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 being less than assumed, integration of acquisitions and other risks that may be detailed in “Item 1A. Risk Factors” below and in the company’s other Securities and Exchange Commission filings.

 

PART I

 

ITEM 1. BUSINESS.

 

GENERAL

 

Littelfuse, Inc. and its subsidiaries (the “company” or “Littelfuse” or “we” or “our”) is the world’s leading supplier of circuit protection products for the electronics, automotive and electrical industries. In addition to the broadest and deepest portfolio of circuit protection products and solutions, the company offers a comprehensive line of highly reliable electromechanical and electronic switch and control devices for commercial and specialty vehicles and sensors for automobile safety systems, as well as protection relays and power distribution centers for the safe control and distribution of electricity. The company has a network of global labs that develop new products and product enhancements, provide customer application support and test products for safety, reliability and regulatory compliance.

 

In the electronics market, the company supplies leading manufacturers such as Alcatel-Lucent, Cisco, Celestica, Delta, Flextronics, Foxconn, Hewlett-Packard, HTC, Huawei, IBM, Intel, Jabil, LG, Motorola, Nokia, Panasonic, Quanta, Samsung, Sanmina-SCI, Seagate, Siemens and Sony. The company is also the leading provider of circuit protection for the automotive industry and the third largest producer of electrical fuses in North America. In the automotive market, the company’s end customers include original equipment manufacturers in North America, Europe and Asia such as BMW, Caterpillar, Chrysler, Daimler Trucks NA, Ford Motor Company, General Motors, Hyundai Group and Volkswagen. The company also supplies wiring harness manufacturers and auto parts suppliers worldwide, including Advance Auto Parts, Continental, Delphi, Lear, Leoni, O’Reilly Auto Parts, Pep Boys, Sumitomo, Valeo and Yazaki. In the electrical market, the company supplies representative customers such as Abbott, Acuity Brands, Dow Chemical, DuPont, GE, General Motors, Heinz, International Paper, John Deere, SMA, First Solar, Samsung, Merck, Poland Springs, Procter & Gamble, Rockwell, United Technologies and 3M. Through the company’s Electrical business, the company supplies industrial ground fault protection in mining and other large industrial operations to customers such as Potash Corporation, Mosaic, Agrium and Cameco. See “Business Environment: Circuit Protection Market.”

 

The company reports its operations by three segments: Electronics, Automotive, and Electrical. For segment and geographical information and consolidated net sales and operating earnings see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 15 of the Notes to Consolidated Financial Statements included in this report.

 

 
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On May 31, 2013, the company acquired 100% of Hamlin, Inc. (“Hamlin”) from Key Safety Systems, for $144.4 million (net of cash acquired). Hamlin is a manufacturer of sensor technology providing standard products and custom solutions for leading global manufacturers in the automotive and electronic industries. The acquisition allows the company to expand its automotive and electronics product offerings in the global sensor market in both the Automotive and Electronics business segments. Hamlin is headquartered in Lake Mills, Wisconsin and has manufacturing, engineering and sales offices in the U.S., Mexico, Europe and Asia. The company funded the acquisition with available cash raised from borrowings on the company’s new credit arrangement (See Note 7 of the Notes to Consolidated Statements included in this report).

 

Net sales by business unit segment for the periods indicated are as follows (in thousands):

 

   

Fiscal Year

 
   

2013

   

2012

   

2011

 

Electronics

  $ 367,052     $ 329,466     $ 354,487  

Automotive

    267,207       206,222       197,586  

Electrical

    123,594       132,225       112,882  

Total

  $ 757,853     $ 667,913     $ 664,955  

 

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 in the company’s three geographic regions, based upon the shipped to destination, are as follows (in thousands):

 

   

Fiscal Year

 
   

2013

   

2012

   

2011

 

Americas

  $ 342,353     $ 303,598     $ 288,592  

Europe

    136,814       107,512       114,895  

Asia-Pacific

    278,686       256,803       261,468  

Total

  $ 757,853     $ 667,913     $ 664,955  

 

The company’s products are sold worldwide through distributors, a direct sales force and manufacturers’ representatives. For the fiscal year ended December 28, 2013, approximately 64% of the company’s net sales were to customers outside the United States, including approximately 20% 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.

 

References herein to “2013” or “fiscal 2013” refer to the fiscal year ended December 28, 2013. References herein to “2012” or “fiscal 2012” refer to the fiscal year ended December 29, 2012. References herein to “2011” or “fiscal 2011” refer to the fiscal year ended December 31, 2011.

 

 
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The company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through the “Investor Relations” section of the company’s Internet website (http://www.littelfuse.com), as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”), accessible via a link to the website maintained by the SEC. Except as otherwise provided herein, such information is not incorporated by reference into this Annual Report on Form 10-K.

 

BUSINESS ENVIRONMENT: CIRCUIT PROTECTION MARKET

 

Electronic Products

Electronic circuit protection products are used to protect circuits in a multitude of electronic systems. The company’s product offering includes a complete line of overcurrent and overvoltage solutions, including (i) fuses and protectors, (ii) positive temperature coefficient (“PTC”) resettable fuses, (iii) varistors, (iv) polymer electrostatic discharge (“ESD”) suppressors, (v) discrete transient voltage suppression (“TVS”) diodes, TVS diode arrays and protection thyristors, (vi) gas discharge tubes, (vii) power switching components and (viii) fuseholders, blocks and related accessories.

 

Electronic fuses and protectors are devices that contain an element that melts in an overcurrent condition. Electronic miniature and subminiature fuses are designed to provide circuit protection in the limited space requirements of electronic equipment. The company’s fuses are used in a wide variety of electronic products, including mobile phones, flat-screen TVs, computers and telecommunications equipment. The company markets these products under trademarked brand names including PICO® II and NANO2® SMF.

 

Resettable fuses are PTC polymer devices that limit the current when an overcurrent condition exists and then reset themselves once the overcurrent condition has cleared. The company’s product line offers both radial leaded and surface mount products. Varistors are ceramic-based, high-energy absorption devices that provide transient overvoltage and surge suppression for automotive, telecommunication, consumer electronics and industrial applications. The company’s product line offers both radial leaded and multilayer surface mount products.

 

Polymer ESD suppressors are polymer-based devices that protect an electronic system from failure due to rapid transfer of electrostatic charge to the circuit. The company’s PulseGuard® line of ESD suppressors is used in PC and PC peripherals, digital consumer electronics and wireless applications.

 

Discrete diodes, diode arrays and protection thyristors are fast switching silicon semiconductor structures. Discrete diodes protect a wide variety of applications from overvoltage transients such as ESD, inductive load switching or lightning, while diode arrays are used primarily as ESD suppressors. Protection thyristors are commonly used to protect telecommunications circuits from overvoltage transients such as those resulting from lightning. Applications include telephones, modems, data transmission lines and alarm systems. The company markets these products under trademarked brand names including TECCOR®, SIDACtor®, Battrax® and SPA®.

 

Gas discharge tubes are very low capacitance devices designed to suppress any transient voltage event that is greater than the breakover voltage of the device. These devices are primarily used in telecommunication interface and conversion equipment applications as protection from overvoltage transients such as lightning.

 

Power switching components are used to regulate energy to various types of loads most commonly found in industrial and home applications. These components are easily activated from simple control circuits or interfaced to computers for more complex load control. Typical applications include heating, cooling, battery chargers and lighting.

 

 
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Magnetic sensing products are used to monitor, sense and measure magnetic fields in a number of applications.  The company’s product offerings include a line of reed switches, reed based sensors and hall effect sensors. Reed switches are non-contact magnetically operated devices that provide an output based on the electrical load during the presence of magnetic field.  They are used in a wide variety of applications including security, medical, fluid monitoring, telephones, fitness equipment, metering, toys, white goods and consumer and industrial controls. Reed switch sensors utilize reed switch technology in various packaging configurations with custom enclosures, terminations and connectors to provide an application specific product as a final assembly.  Key applications include fluid level monitoring, position sensing, fluid flow and proximity sensing. Hall effect sensors utilize hall chip technology to sense magnetic fields to provide ratio metric output based on magnetic fields.  Key applications include motor speed sensing, directional sensing, rotation and linear sensing.

 

In addition to the above products, the company is also a supplier of fuse holders (including OMNI-BLOK®), fuse blocks and fuse clips primarily to customers that purchase circuit protection devices from the company.

 

Automotive Products

Fuses are extensively used in automobiles, trucks, buses and off-road equipment to protect electrical circuits and the wires that supply electrical power to operate lights, heating, air conditioning, radios, windows and other controls. Currently, a typical automobile contains 30 to 100 fuses, depending upon the options installed. The fuse content per vehicle is expected to continue to grow as more electronic features are included in automobiles. The company also supplies fuses for the protection of electric and hybrid vehicles.

 

The company is a primary supplier of automotive fuses to United States, Asian and European automotive original equipment manufacturers (“OEM”), 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. The company invented and owns U.S. and foreign patents related to blade-type fuses, which is the standard and most commonly used fuse in the automotive industry. The company’s automotive fuse products are marketed under trademarked brand names, including ATO®, MINI®, MAXI®, MIDI®, MEGA®, MasterFuse, JCASE® and CablePro®.

 

A majority of the company’s automotive fuse sales are made to main-fuse box and wire harness manufacturers that incorporate the fuses into their products. The remaining automotive fuse sales are made directly to automotive manufacturers, retailers who sell automotive parts and accessories, and distributors who in turn sell most of their products to wholesalers, service stations and non-automotive OEMs.

 

The company has expanded the Automotive Business Segment into the commercial vehicle market with the acquisition of Cole Hersee and Terra Power. Additional products in this market include:  power distribution modules, low current switches, high current switches, solenoids and relays, electronic switches, battery management products and ignition key switches.

 

The company has expanded into the automotive sensor market with the acquisitions of Accel AB and Hamlin. Additional products in this market include advanced electromechanical sensors and switches.

 

 
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Electrical Products 

The company entered the electrical market in 1983 and 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 portable custom electrical equipment for the mining industry in Canada as well as protection relays for the global mining, oil and gas, industrial and marine markets.

 

Power fuses are used to protect circuits in various types of industrial equipment and in industrial and commercial buildings. They are rated and listed under one of many Underwriters Laboratories’ fuse classifications. Major applications for power fuses include protection from overload and short-circuit currents in motor branch circuits, heating and cooling systems, control systems, lighting circuits, solar and electrical distribution networks.

 

The company’s POWR-GARD® product line features the Indicator® series power fuse used in both the OEM and MRO markets. The Indicator® technology provides visual blown-fuse indication at a glance, reducing maintenance and downtime on production equipment. The Indicator® product offering is widely used in motor protection and industrial control panel applications.

 

Protection relays are used to protect personnel and equipment in mining, oil & 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.

 

Custom electrical equipment is used in harsh environments such as underground mining where standard electrical gear will not meet customer needs for reliability and durability.  Portable power substations are used to transform and distribute electrical power to mobile equipment such as mining cutting machines and other electrical machinery. Miner control units provide power management for critical electrically operated underground production equipment.

 

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 and engineering facilities in Champaign and Chicago, Illinois, Boston, Massachusetts, Canada, China, Germany, the Philippines, Taiwan and Mexico. The Product & Development Technology departments maintain 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 and marketing personnel with input from customers. The entire product development process usually ranges from a few months to 18 months based on the complexity of development, with continuous efforts to reduce the development cycle. During fiscal years 2013, 2012 and 2011, the company expended $24.4 million, $21.2 million and $19.4 million, respectively, on research, product design and development (“R&D”). R&D operations are in Canada, China, Germany, the Philippines, Taiwan and Mexico, as well as the United States.

 

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.

 

 
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As of December 28, 2013, the company owned 274 patents in North America, 156 patents in the European Union and 107 patents in other foreign countries. The company also has registered trademark protection for certain of its brand names and logos. The 274 North American patents are in the following product categories: 168 electronics, 59 automotive and 47 electrical. Patents and licenses are amortized over a period of 7-12 years, with a weighted average life of 11.8 years. Distribution networks are amortized over a period of 3-20 years, with a weighted average life of 13.6 years. Trademarks and tradenames are amortized over a period of 5-20 years, with a weighted average life of 13.5 years. The company recorded amortization expense of $9.3 million, $6.1 million and $6.6 million in 2013, 2012 and 2011, respectively, related to amortizable intangible assets.

 

New products are continually being developed to replace older products. The company regularly applies for patent protection on such new products. Although, 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.

 

License royalties amounted to $0.6 million, $0.7 million and $1.0 million for fiscal 2013, 2012 and 2011, respectively, and are included in other expense (income), net on the Consolidated Statements of Net Income.

 

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). All thermoplastic molded component requirements used for such products as the ATO®, MINI® and MAXI® fuse product lines 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 sole 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.

 

A computer-aided design and manufacturing system (CAD/CAM) expedites product development and machine design and the company’s laboratories test new products, prototype concepts and production run samples. The company participates in “just-in-time” delivery programs with many of its major suppliers and actively promotes the building of strong cooperative relationships with its suppliers by utilizing early supplier involvement techniques and engaging them in pre-engineering product and process development.

 

 
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MARKETING

 

The company’s domestic sales and marketing staff of over 35 people maintains relationships with major OEMs and distributors. The company’s sales, marketing and engineering personnel interact directly with OEM engineers to ensure appropriate circuit protection and reliability within the parameters of the OEM’s circuit design. Internationally, the company maintains a sales and marketing staff of over 100 people with sales offices in the U.K., Germany, Spain, Italy, Singapore, Taiwan, Japan, Brazil, Hong Kong, Korea, China and India. 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

The company uses manufacturers’ representatives to sell its electronics products domestically and to call on major domestic and international OEMs and distributors. The company sells approximately 15% of its domestic products directly to OEMs, with the remainder sold through distributors nationwide.

 

In the Asia-Pacific region, the company maintains a direct sales staff and utilizes distributors in Japan, Singapore, Korea, Taiwan, China, Malaysia, Hong Kong, India and the Philippines. In the Americas, the company maintains a direct sales staff in the U.S. and Brazil and utilizes manufacturers’ representatives and distributors in Canada. In Europe, the company maintains a direct sales force and utilizes manufacturers’ representatives and distributors to support a wide array of customers.

 

Automotive

The company maintains a direct sales force to service all the major automotive and commercial vehicle OEMs and system suppliers domestically. Over 20 manufacturers’ representatives sell the company’s products to aftermarket fuse retailers such as O’Reilly Auto Parts and Pep Boys. The company also uses about 15 manufacturers’ representatives to sell to the commercial vehicle aftermarket.

 

In Europe, the company uses both a direct sales force and manufacturers’ representatives to distribute its products to OEMs, major system suppliers and aftermarket distributors. In the Asia-Pacific region, the company uses both a direct sales force and distributors to supply to major OEMs and system suppliers.

 

Electrical

The company markets and sells its power fuses and protection relays through over 35 manufacturers’ representatives across North America. These representatives sell power fuse products through an electrical and industrial distribution network comprised of approximately 2,000 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 5,000 customers and distributors worldwide. No single customer accounted for more than 10% of net sales during any of the last three years. During fiscal 2013, 2012 and 2011, net sales to customers outside the United States accounted for approximately 64%, 67% and 66%, respectively, of the company’s total net sales.

 

 
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COMPETITION

 

The company’s products compete with similar products of other manufacturers, some of which have substantially greater financial resources than the company. In the electronics market, the company’s competitors include Cooper Industries (a subsidiary of Eaton Corporation plc), Bel Fuse, Bourns, EPCOS, On Semiconductor, STMicroelectronics, Semtech, Vishay and TE Connectivity. In the automotive market, the company’s competitors include Cooper Industries, Pacific Engineering (a private company in Japan) and MTA (a private company in Italy), Wabash, D&R and Sensata. In the electrical market, the company’s major competitors include Cooper Industries 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 28, 2013 was approximately $83.2 million, compared to $79.2 million at December 29, 2012. Substantially all of the orders currently in backlog are scheduled for delivery in 2014.

 

EMPLOYEES 

 

As of December 28, 2013, the company employed approximately 7,400 employees worldwide. Approximately 1,300 employees in Mexico and three employees in Germany are covered by collective bargaining agreements. In Mexico the company has two separate collective bargaining agreements, one for 730 employees in Piedras Negras, expiring January 31, 2016 and the second for 572 employees in Matamoros, expiring January 15, 2015.

 

Approximately 18% of the company's total workforce was employed under collective bargaining agreements at December 28, 2013.  The company has no employees covered by a collective bargaining agreement that will expire within one year of December 28, 2013. The Germany collective bargaining agreement, covering three employees in Essen, expires December 31, 2014.

 

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 an environmental 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 acquisitions. 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 reserve is reviewed annually and calculated based upon the cost of remediating the shafts that the study deems most risky. Further information regarding the coal mine liability reserve is provided in Note 10 of the Notes to Consolidated Financial Statements included in this report.

 

 
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ITEM 1A. RISK FACTORS.

 

Our business, financial condition and results of operations are subject to various risks and uncertainties, including the risk factors we have identified below. These factors are not necessarily listed in order of importance. We may amend or supplement the risk factors from time to time by other reports that we file with the SEC in the future.

 

Our industry is subject to intense competitive pressures.

 

We operate in markets that are highly competitive. We compete on the basis of price, quality, service and/or brand name across the industries and markets we serve. Competitive pressures could affect the prices we are able to charge our customers or the demand for our products.

 

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

 

We may be unable to manufacture and deliver products in a manner that is responsive to our customers’ needs.

 

The end markets for our 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 our existing products obsolete and unmarketable before we can recover any or all of our research, development and commercialization expenses on capital investments. Furthermore, the life cycles of our products may change and are difficult to estimate.

 

Our future success will depend upon our ability to manufacture and deliver products in a manner that is responsive to our customers’ needs. We 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 our customers. We invest heavily in research and development without knowing that we will recover these costs. Our competitors may develop products or technologies that will render our products non-competitive or obsolete. If we cannot develop and market new products or product enhancements in a timely and cost-effective manner, our business, financial condition and results of operations could be materially adversely affected.

 

Our business may be interrupted by labor disputes or other interruptions of supplies.

 

A work stoppage could occur at certain of our facilities, most likely as a result of disputes under collective bargaining agreements or in connection with negotiations of new collective bargaining agreements. In addition, we 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 our suppliers. A significant work stoppage, or an interruption or shortage of supplies for any reason, if protracted, could substantially adversely affect our business, financial condition and results of operations. The transfer of our manufacturing operations and changes in our distribution model could disrupt operations for a limited time.

 

 
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Our revenues may vary significantly from period to period.

 

Our revenues may vary significantly from one accounting period to another due to a variety of factors including:

changes in our customers’ buying decisions;

changes in demand for our products;

changes in our distributor inventory stocking;

our product mix;

our effectiveness in managing manufacturing processes;

costs and timing of our component purchases;

the effectiveness of our inventory control;

the degree to which we are able to utilize our available manufacturing capacity;

our ability to meet delivery schedules;

general economic and industry conditions;

local conditions and events that may affect our 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 us.

 

The bankruptcy or insolvency of a major customer could result in lower sales revenue and cause a material adverse effect on our 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 our products, which likely would cause a decrease in sales revenue and have a substantial adverse impact on our business, financial condition and results of operations.

 

Our ability to manage currency or commodity price fluctuations or shortages is limited.

 

As a resource-intensive manufacturing operation, we are exposed to a variety of market and asset risks, including the effects of changes in foreign currency exchange rates, commodity prices and interest rates. We have multiple sources of supply for the majority of our commodity requirements. However, significant shortages that disrupt the supply of raw materials or result in price increases could affect prices we charge our customers, our product costs and the competitive position of our products and services. We monitor and manage these exposures as an integral part of our overall risk management program, which recognizes the unpredictability of markets and seeks to reduce the potentially adverse effects on our results. Nevertheless, changes in currency exchange rates, commodity prices and interest rates cannot always be predicted. In addition, because of intense price competition and our high level of fixed costs, we 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 our results of operations and financial condition. For additional discussion of interest rate, currency or commodity price risk, see "Item 7A. Quantitative and Qualitative Disclosures about Market Risks.”

 

 
13

 

 

Operations and supply sources located outside the United States, particularly in emerging markets, are subject to greater risks.

 

Our operating activities outside the United States contribute significantly to our revenues and earnings. Serving a global customer base and remaining competitive in the global marketplace requires the company to place our production in countries outside the United States, including emerging markets, to capitalize on market opportunities and maintain a cost-efficient structure. In addition, we source a significant amount of raw materials and other components from third-party suppliers in low-cost countries. Our international operating activities are subject to a number of risks generally associated with international 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 our ability to enforce legal rights and remedies.

 

Any of these factors could have a material adverse effect on our business, financial condition and results of operations.

 

We engage in acquisitions and may encounter difficulties in integrating these businesses.

 

We are a company that, from time to time, seeks to grow through strategic acquisitions. We have in the past acquired a number of businesses or companies and additional product lines and assets. We intend to continue to expand and diversify our operations with additional acquisitions. The success of these transactions depends on our ability to integrate the assets and personnel acquired in these acquisitions. We may encounter difficulties in integrating acquisitions with our operations and may not realize the degree or timing of the benefits that we anticipated from an acquisition.

 

Environmental liabilities could adversely impact our financial position.

 

Federal, state and local laws and regulations impose various restrictions and controls on the discharge of materials, chemicals and gases used in our manufacturing processes or in our finished goods. These environmental regulations have required us to expend a portion of our resources and capital on relevant compliance programs. Under these laws and regulations, we could be held financially responsible for remedial measures if our current or former properties are contaminated or if we send waste to a landfill or recycling facility that becomes contaminated, even if we did not cause the contamination. We may be subject to additional common law claims if we release 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 us to significant liabilities and could have a material adverse effect on our business, financial condition or results of operations.

 

 
14

 

 

In the conduct of our manufacturing operations, we have handled and do 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, we operate or own 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 us 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.

 

We derive a substantial portion of our revenues from customers in the automotive, consumer electronics and communications industries, and we are susceptible to trends and factors affecting those industries as well as the success of our customers’ products.

 

Net sales to the automotive, consumer electronics and communications industries represent a substantial portion of our revenues. Factors negatively affecting these industries and the demand for products also negatively affect our business, financial condition or results of operations. Any adverse occurrence, including industry slowdown, recession, political instability, costly or constraining regulations, armed hostilities, terrorism, excessive inflation, prolonged disruptions in one or more of our customers’ production schedules or labor disturbances, that results in significant decline in the volume of sales in these industries, or in an overall downturn in the business and operations of our customers in these industries, could materially adversely affect our business, financial condition or results of operations. For example, the automotive industry as well as the consumer electronics market is highly cyclical in nature and sensitive to changes in general economic conditions, consumer preferences and interest rates. In addition, the global automotive and electronic industries have overall manufacturing capacity far exceeding demand. To the extent that demand for certain of our customers’ products declines, the demand for our products may decline. Reduced demand relating to general economic conditions, consumer preferences, interest rates or industry over-capacity may have a material adverse effect upon our business, financial condition or results of operations.

 

The inability to maintain access to capital markets may adversely affect our business and financial results.

 

Our ability to invest in our 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 we are unable to access the capital markets or bank credit facilities, we could experience a material adverse affect on our business, financial condition and results of operations.

 

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

 

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

 

 
15

 

 

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

 

The market price of our stock has fluctuated widely. Between December 30, 2012 and December 28, 2013, the closing sale price of our common stock ranged between a low of $61.46 and a high of $94.26, experiencing greater volatility over that time than the broader markets. The volatility of our stock price may be related to any number of factors, such as general economic conditions, industry conditions, analysts’ expectations concerning our results of operations, or the volatility of our revenues as discussed above under “Our Revenues May Vary Significantly from Period to Period.” The historic market price of our common stock may not be indicative of future market prices. We may not be able to sustain or increase the value of our common stock. Declines in the market price of our stock could adversely affect our 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 our common stock.

 

Customer demands and new regulations related to conflict-free minerals may force us 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, we cannot be sure that we will be able to obtain necessary metals in sufficient quantities or at competitive prices. Also, we may face challenges with our customers and suppliers if we are unable to sufficiently verify that the metals used in our products are “conflict free.”

 

Our Information Technology (“IT”) systems could be breached.

 

We face certain security threats relating to the confidentiality and integrity of our IT systems. Despite implementation of security measures, our IT systems may be vulnerable to damage from computer viruses, cyber attacks and other unauthorized access and these security breaches could result in a disruption to our operations. A material network breach of our IT systems could involve the theft of intellectual property or customer data which may be used by competitors. To the extent that any security breach results in a loss or damage to data, or inappropriate disclosure of confidential or proprietary information, it could cause damage to our reputation, affect our customer relations, lead to claims against us, increase our costs to protect against future damage and could result in a material adverse effect on our business and financial position.

 

Lapses in disclosure controls and procedures or internal control over financial reporting could materially and adversely affect our operations, profitability or reputation.

 

We are committed to maintaining high standards of internal control over financial reporting and disclosure controls and procedures. Nevertheless, lapses or deficiencies in disclosure controls and procedures or in our internal control over financial reporting may occur from time to time. On February 5, 2014, we reported that we had reached a determination to restate our previously-filed interim financial statements for the first quarter of 2013 and that our previously-filed interim financial statements for the first quarter of 2013 should not be relied upon. We also reported, in the amendment to our quarterly report on Form 10-Q for the first quarter of 2013, filed on a Form 10-Q/A on February 18, 2014, and in this Form 10-K, management’s determination that a material weakness existed in its internal control over financial reporting at March 30, 2013 and December 28, 2013, respectively. These determinations relate to a material weakness in internal control over financial reporting relating to our evaluation of the income tax considerations, including deferred tax valuation allowances, relating to the write-off of our investment in Shocking Technologies, Inc. during the first quarter of 2013. As a result of the material weakness, management also concluded that both our internal control over financial reporting and disclosure controls and procedures were not effective at March 30, 2013 and December 28, 2013.

 

Management has commenced steps to remediate the above material weakness associated with this misstatement and has begun the process of implementing an enhanced process to review and approve the income tax accounting treatment for any material items that are of an unusual or complex nature. In accordance with our internal control over financial reporting compliance program, however, the material weakness designation cannot be remediated fully until the remediation processes have been operational for a period of time and successfully tested. Such remediation is not anticipated to be complete until later in 2014.

 

There can be no assurance that our disclosure controls and procedures will be effective in the future or that a material weakness or significant deficiency in internal control over financial reporting will not again exist. Any such lapses or deficiencies may materially and adversely affect our business and results of operations or financial condition, restrict its ability to access the capital markets, require us to expend significant resources to correct the lapses or deficiencies, expose us to regulatory or legal proceedings, subject us to fines, penalties, judgments or losses not covered by insurance, harm our reputation, or otherwise cause a decline in investor confidence.

 

 
16

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2. PROPERTIES.

 

LITTELFUSE FACILITIES 

 

The company’s operations are located in 50 owned or leased facilities worldwide, totaling approximately 2.0 million square feet. The company’s corporate headquarters is located in the U.S. in Chicago, Illinois. The company has North American manufacturing facilities in Saskatoon, Canada, Piedras Negras, Mexico, Melchor Muzquiz, Mexico, Matamoros, Mexico, Lake Mills, Wisconsin and Bellingham, Washington. During 2011, the European headquarters and the primary European distribution center located in Dünsen, Germany was closed and sold in 2012. Manufacturing operations were transferred from Dünsen to Piedras Negras, Mexico. The office and European headquarters were subsequently transferred to Bremen, Germany. The company has manufacturing facilities in Roskilde, Denmark, Kaunas, Lithuania and Arad, Romania. The company has entered into a binding agreement for the future sale of its Des Plaines, Illinois, property which was closed in 2009. The Des Plaines building was demolished in 2010 to facilitate the sale of the underlying property. The Dundalk, Ireland facility, which was also closed in 2009, was sold in 2012.

 

Asia-Pacific operations include sales and distribution centers located in Singapore, Taiwan, Japan, China and Korea, with manufacturing plants in China and the Philippines. The manufacturing plant previously located in Taiwan was closed and sold during 2012. The company does not believe that it will encounter any difficulty in renewing its existing leases upon the expiration of their current terms. Management believes that the company’s facilities are adequate to meet its requirements for the foreseeable future.

 

 
17

 

The following table provides certain information concerning the company’s facilities at December 28, 2013, and the use of these facilities during fiscal 2013:

 

Location

Use

Size
(sq. ft.)

Lease/Own

Lease Expiration

Date

Primary Product

Chicago, Illinois

Administrative, Engineering, Research and Testing

54,838

 

Leased

2024

Auto, Electronics and Electrical

Elk Grove Village, Illinois

Engineering and Research

10,000

 

Leased

2014

Auto and Electronics

Mount Prospect, Illinois

Engineering and Research

23,515

 

Leased

2018

Auto and Electronics

Champaign, Illinois

Research and Development

13,503

 

Leased

2025

Auto and Electronics

Lake Mills, Wisconsin

Manufacturing, Administrative, Engineering, Sales and Research and Development

65,000

 

Leased

2020

Electronics

Campbell, California

Engineering

1,001

 

Leased

2014

Electronics

Troy, Michigan

Sales

2,224

 

Leased

2016

Auto

Boston, Massachusetts

Administrative, Engineering, Research and Development

26,000

 

Leased

2016

Auto

Schertz, Texas

Warehouse and Distribution

32,000

 

Leased

2014

Auto

Melchor Muzquiz, Mexico

Manufacturing

39,365

 

Leased

2016

Auto

Bellingham, Washington

Manufacturing

8,000

 

Leased

2014

Auto

Piedras Negras, Mexico

Administrative / Manufacturing

99,822

 

Leased

2015

Auto

Piedras Negras, Mexico

Manufacturing

68,088

 

Leased

2014

Electrical

Piedras Negras, Mexico

Manufacturing

22,381

 

Leased

2014

Electrical

Piedras Negras, Mexico

Manufacturing

291,860

 

Owned

Auto

Matamoros, Mexico

Manufacturing, Administrative, Engineering, Testing, Distribution and Logistics

106,000

 

Owned

Auto

Eagle Pass, Texas

Distribution

15,400

 

Leased

2016

Auto, Electronics and Electrical

Saskatoon, Canada

Manufacturing

67,500

 

Owned

Electrical

Calgary, Canada

Sales

1,000

 

Leased

2017

Electrical

Sao Paulo, Brazil

Sales

3,229

 

Leased

2014

Electronics and Auto

Manaus, Brazil

Warehouse

2,002

 

Leased

2014

Electronics and Auto

Roskilde, Denmark

Administrative, Manufacturing, Research and Development and Sales

18,740

 

Leased

2017

Electrical

Dubai, UAE

Sales

1,356

 

Leased

2014

Electrical

Swindon, U.K.

Administrative

304

 

Leased

2014

Electronics

Bremen, Germany

Administrative

13,455

 

Leased

2016

Auto, Electronics and Electrical

Norwich, U.K.

Engineering

7,964

 

Leased

2020

Auto

             

Norwich, U.K.

Research and Development

2,160

 

Leased

2015

Auto

             

Essen, Germany

Leased to third party

37,244

 

Owned

Essen, Germany

Administrative

3,703

 

Leased

2014

Auto and Electronic

Amsterdam, Netherlands

Warehouse

21,851

 

Leased

2014

Auto and Electronic

Trollhättan, Sweden

Sales

3,281

 

Leased

2015

Auto

Stockholm, Sweden

Sales

150

 

Leased

2014

Auto

Kaunas, Lithuania

Administrative, Manufacturing, Testing, Research and Engineering

43,239

 

Owned

Auto

Kaunas, Lithuania

Manufacturing

40,516

 

Leased

2016

Auto

Arad, Romania

Manufacturing

13,073

 

Leased

2014

Auto

Singapore

Sales and Distribution

1,572

 

Leased

2015

Electronics

Taipei, Taiwan

Sales

7,876

 

Leased

2014

Electronics

Seoul, Korea

Sales

3,643

 

Leased

2014

Auto and Electronics

Lipa City, Philippines

Manufacturing

116,046

 

Owned

Electronics

Lipa City, Philippines

Manufacturing

22,733

 

Leased

2014

Electronics

Dongguan, China

Manufacturing

264,792

 

Leased

2023

Electronics

Suzhou, China

Manufacturing

143,458

 

Owned

Auto and Electronics

Suzhou, China

Manufacturing

37,674

 

Leased

2014

Auto and Electronics

Beijing, China

Sales

452

 

Leased

2014

Electronics

Shenzhen, China

Sales

3,100

 

Leased

2015

Electronics

Shanghai, China

Sales

4,774

 

Leased

2015

Auto and Electronics

Chu-Pei City, Taiwan

Research and Development

5,328

 

Leased

2015

Electronics

Wuxi, China

Manufacturing

221,429

 

Owned

Electronics

Hong Kong, China

Sales

743

 

Leased

2014

Auto, Electronics and Electrical

Yokohama, Japan

Sales

3,509

 

Leased

2015

Auto, Electronics and Electrical

 

Properties with lease expirations in 2014 renew at various times throughout the year. The company does not anticipate any material impact as a result of such expirations.

 
18

 

 

ITEM 3. LEGAL PROCEEDINGS.

 

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

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

 
19

 

 

PART II

 

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

 

Shares of the company’s common stock are traded under the symbol “LFUS” on the NASDAQ Global Select MarketSM. As of February 14, 2014, there were 88 holders of record of the company’s common stock.

 

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 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.

 

 

 

 
20

 

 

The Dow Jones Electrical Components and Equipment Industry Group Index includes the common stock of American Superconductor Corp.; Amphenol Corp.; Anaren, Inc.; Arrow Electronics, Inc.; Avnet, Inc.; AVX Corp.; Benchmark Electronics, Inc.; Capstone Turbine Corp.; CTS Corp.; General Cable Corp.; Hubbell Inc. Class B; Jabil Circuit, Inc.; KEMET Corp.; Littelfuse, Inc.; Methode Electronics, Inc.; Park Electrochemical Corp.; Plexus Corp.; Powerwave Technologies, Inc.; Pulse Electronics, Inc.; Regal-Beloit Corp.; Sanmina Corp.; Valence Technology, Inc.; 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 31, 2008, and reinvestment of all dividends is assumed. In the case of the company, a $100 investment made on December 31, 2008, is assumed. (The company paid no dividends in 2008 or 2009 but did pay dividends in 2010, 2011, 2012 and 2013.) Returns for the company’s fiscal years presented above are as of the last day of the respective fiscal year which was January 2, 2010, January 1, 2011, December 31, 2011, December 29, 2012 and December 28, 2013 for the fiscal years 2009, 2010, 2011, 2012 and 2013 respectively.

 

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 a minimum net worth and certain financial ratios. However, the company expects to continue paying cash dividends on a quarterly basis for the foreseeable future.

 

The 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, 2013 to April 30, 2014. The company did not repurchase any shares during 2013 and 1,000,000 shares remain available for purchase under the initial program as of December 28, 2013.

 

The company withheld 32,671 shares of stock in lieu of withholding taxes on behalf of employees who became vested in restricted share units during fiscal 2013 during the period March 31, 2013 to April 27, 2013. Shares withheld are classified as Treasury stock on the Consolidated Balance Sheet.

 

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 2013 and 2012:

 

   

2013

   

2012

 
   

4Q

   

3Q

   

2Q

   

1Q

   

4Q

   

3Q

   

2Q

   

1Q

 

High

  $ 94.26     $ 83.40     $ 75.46     $ 68.85     $ 61.23     $ 58.26     $ 64.86     $ 62.70  

Low

    74.43       73.77       63.14       61.46       51.93       50.50       55.05       43.81  

Close

    92.67       78.36       74.61       67.85       59.97       56.54       56.89       62.70  

Dividends

    0.22       0.22       0.20       0.20       0.20       0.20       0.18       0.18  

 

 

 
21

 

 

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 Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes to Consolidated Financial Statements set forth in Item 7 and Item 8, respectively, for the respective years presented (amounts in thousands, except per share data):

 

 

   

2013

   

2012

   

2011

   

2010

   

2009

 

Net sales

  $ 757,853     $ 667,913     $ 664,955     $ 608,021     $ 430,147  

Gross profit

    296,232       258,467       256,694       233,872       125,361  

Operating income

    129,881       106,870       113,904       107,574       13,695  

Net income

    88,784       75,332       87,024       78,663       9,411  

Per share of common stock:

                                       

Income from continuing operations

                                       

- Basic

    3.98       3.45       3.96       3.58       0.43  

- Diluted

    3.94       3.40       3.90       3.52       0.43  

Cash dividends paid

    0.84       0.76       0.63       0.15        

Cash and cash equivalents

    305,192       235,404       164,016       109,720       70,354  

Total assets

    1,024,373       777,728       678,424       621,129       533,127  

Short-term debt

    126,000       84,000       85,000       33,000       14,183  

Long-term debt, less current portion

    93,750                   41,000       49,000  

 

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

 

Littelfuse Overview

 

Introduction

Littelfuse, Inc. and its subsidiaries (the “company” or “Littelfuse” or “we” or “our”) is the worldwide leader in circuit protection offering the industry's broadest and deepest portfolio of circuit protection products and solutions. The company’s devices protect products in virtually every market that uses electrical energy, from consumer electronics to automobiles to industrial equipment. The company conducts its business through three reportable segments, which are defined by markets and consist of Electronics, Automotive, and Electrical. The company’s customer base includes original equipment manufacturers, tier one automotive suppliers and distributors.

 

In addition to protecting and growing its core circuit protection business, Littelfuse has been investing in power control and sensing technologies. These newer platforms, combined with the company’s strong balance sheet and operating cash flow, provide opportunities for increased organic and acquisition growth. The company has set a target to grow 15% per year; 5% organically and 10% through acquisitions.

 

To maximize shareholder value, the company’s primary strategic goals are to:

 

Grow organically faster than its markets;

 

Double the pace of acquisitions;

 

Sustain high-teens operating margins;

 

Improve return on investment; and

 

Return excess cash to shareholders.

  

 
22

 

 

The company serves markets that are directly impacted by global economic trends with significant exposures to the consumer electronics, automotive, industrial and mining end markets. The company’s results will be impacted positively or negatively by changes in these end markets.

 

Electronics Segment Overview

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

 

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

 

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

 

Automotive Segment Overview

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

 

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

 

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

 

Electrical Segment Overview

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

 

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

 

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

 

 
23

 

 

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

 

Hamlin Acquisition

 

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

 

Business Segment Information

 

U.S. Generally Accepted Accounting Principles (“GAAP”) dictates annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Within U.S. GAAP, an operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. The CODM is the company’s President and Chief Executive Officer.

 

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

 

   

Fiscal Year

 
   

2013

   

2012

   

2011

 

Business Unit

                       

Electronics(b)

  $ 367.1     $ 329.5     $ 354.5  

Automotive(c) (d)

    267.2       206.2       197.6  

Electrical(e)

    123.6       132.2       112.9  

Total

  $ 757.9     $ 667.9     $ 665.0  
                         

Geography(a)

                       

Americas(f)

  $ 342.4     $ 303.6     $ 288.6  

Europe(d) (e) (g)

    136.8       107.5       114.9  

Asia-Pacific(h)

    278.7       256.8       261.5  

Total

  $ 757.9     $ 667.9     $ 665.0  

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

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

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

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

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

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

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

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

 

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

 

 
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Results of Operations — 2013 compared with 2012

 

The following table summarizes the company’s consolidated results of operations for the periods presented. The results include incremental activity from the company’s business acquisitions as described, where applicable, in the below analysis. There were also additional expenses and accounting adjustments during 2013. These include a $1.5 million inventory adjustment in 2013 as described in Note 2, and $1.7 million in acquisition related operating expenses in 2013 both related to the Hamlin acquisition. Fiscal year 2013 included $3.3 million in foreign currency gains while fiscal year 2012 included $3.2 million in foreign currency loses, both primarily related to U.S. dollar gains or losses against the Philippine peso.

 

   

Fiscal Year

         

(In thousands)

 

2013

   

2012

   

% Change

Sales

  $ 757,853     $ 667,913       13 %

Gross profit

    296,232       258,467       15 %

Operating expense

    166,351       151,597       10 %

Operating income

    129,881       106,870       22 %

Other expense (income), net

    (4,646 )     (5,396 )     (14 %)

Income before income taxes

    124,235       100,052       24 %

Net income

  $ 88,784     $ 75,332       18 %

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Results of Operations — 2012 compared with 2011

 

The following table summarizes the company’s consolidated results of operations for the periods presented. The results include incremental activity from the company’s business acquisitions as described, where applicable, in the below analysis. There were also additional expenses and accounting adjustments during 2012. These include a $0.6 million inventory adjustment as described in Note 2, and $5.3 million pension valuation adjustment as described in Note 12. Fiscal year 2012 and 2011 included $3.2 million and $1.2 million of unfavorable foreign currency revaluation, respectively, primarily related to U.S. dollar losses against the Philippine peso.

 

 
27

 

 

   

Fiscal Year

         

(In thousands)

 

2012

   

2011

   

% Change

Sales

  $ 667,913     $ 664,955       0 %

Gross profit

    258,467       256,694       1 %

Operating expense

    151,597       142,790       6 %

Operating income

    106,870       113,904       (6 %)

Other expense (income), net

    (5,396 )     (4,126 )     31 %

Income before income taxes

    100,052       115,101       (13 %)

Net income

  $ 75,332     $ 87,024       (13 %)

 

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

 

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

 

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

 

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

 

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

 

 
28

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Impairment and equity in net loss of unconsolidated affiliate was $7.3 million in 2012. During the fourth quarter, the company determined that it had the ability to exert significant influence over Shocking and as a result began accounting for the investment using the equity method. In accordance with Accounting Standards Codification (ìASCî) 323, the company retroactively recorded its proportional share of Shocking’s operating losses, which amounted to approximately $4.0 million in 2012. The proportional amount of operating losses in 2011 was not material. In addition, the company concluded that there was an other-than-temporary impairment which existed for its remaining investment in Shocking. The company engaged a third-party valuation firm to assist in developing the fair value of the investment in Shocking. Based on the then fair value, the company determined that there was an impairment of approximately $3.3 million which was recorded as a non-operating impairment and equity loss of unconsolidated affiliate in the Consolidated Statements of Net Income. See Note 6 of the Notes to Consolidated Financial Statements included in this report.

 

 
29

 

 

Other expense (income), net, consisting of interest income, royalties, non-operating income and foreign currency items was $2.2 million of income in 2012 compared to $2.9 million of income in 2011.The year-over-year decrease in income primarily reflects the impact of unfavorable currency translation effects (primarily due to the weakening of the euro against the U.S. dollar) in 2012.

 

Income before income taxes was $100.1 million in 2012 compared to $115.1 million in 2011. Income tax expense was $24.7 million in 2012 compared to $28.1 million in 2011. The 2012 effective income tax rate was 24.7% compared to 24.4% in 2011. The 2012 effective tax rate is lower than the statutory tax rate primarily due to the result of more income earned in low tax jurisdictions.

 

Liquidity and Capital Resources 

 

As of December 28, 2013, $297.1 million of the $305.2 million of the company’s cash and cash equivalents was held by foreign subsidiaries. Of the $297.1 million held by foreign subsidiaries, approximately $13.6 million could be repatriated with minimal tax consequences. The company expects to maintain its foreign cash balances (other than the aforementioned $13.6 million) for local operating requirements, to provide funds for future capital expenditures and for potential acquisitions. The company does not expect to repatriate these funds to the U.S.

 

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

 

Term Loan and Revolving Credit Facilities

 

On May 31, 2013, the company entered into a new credit agreement with J.P. Morgan Securities LLC for up to $325.0 million which consists of an unsecured revolving credit facility of $225.0 million and an unsecured term loan of $100.0 million. The new credit agreement is for a five year period. At December 28, 2013, the company had available $103.4 million of borrowing capacity under the revolving credit agreement at an interest rate of LIBOR plus 1.25% (1.42% as of December 28, 2013).

 

The credit agreement replaces the company’s previous credit agreement dated June 13, 2011 which was terminated on May 31, 2013.

 

On January 30, 2014, the company increased the unsecured revolving credit facility entered into on May 31, 2013, by $50.0 million thereby increasing the total revolver borrowing capacity from $225.0 million to $275.0 million.

 

This arrangement contains covenants that, among other matters, impose limitations on the incurrence of additional indebtedness, future mergers, sales of assets, payment of dividends, and changes in control, as defined in the agreement. In addition, the company is required to satisfy certain financial covenants and tests relating to, among other matters, interest coverage and leverage. At December 28, 2013, the company was in compliance with all covenants under the credit agreement.

 

 
30

 

 

Other Obligations

 

For the fiscal year ended December 28, 2013, the company had $0.8 million available in letters of credit. No amounts were drawn under these letters of credit at December 28, 2013. For the fiscal year ended December 29, 2012, the company had $0.8 million outstanding in letters of credit. No amounts were drawn under these letters of credit at December 29, 2012.

 

Cash Flows and Working Capital

 

The company started 2013 with $235.4 million of cash. Net cash provided by operating activities in 2013 was approximately $117.4 million and included $88.8 million in net income and $58.3 million in non-cash adjustments (primarily $34.5 million in depreciation and amortization), partially offset by $29.7 million of changes in operating assets and liabilities.

 

Changes in operating assets and liabilities in 2013 (including short-term and long-term items) that negatively impacted cash flows in 2013 consisted of changes in accounts receivable ($16.7 million), inventory ($5.5 million), accrued expenses including post-retirement ($8.9 million) and accrued taxes ($10.8 million). Increases in accounts receivable and inventory resulted from higher sales volumes in 2013. Accrued expenses including post-retirement included pension contributions of $5.0 million in 2013 and $10.0 million in 2012. Positively impacting cash flows were changes in accounts payable ($2.0 million), accrued payroll and severance ($8.0 million) and prepaid expenses and other ($2.1 million).

 

Net cash used in investing activities in 2013 was approximately $185.6 million and included $35.0 million in purchases of property, plant and equipment (primarily production equipment and facilities for capacity expansion and new products at the company’s locations in Piedras Negras, Mexico, Wuxi, China and the Philippines), $8.5 million for purchases of short-term investments and $144.4 million for the acquisition of Hamlin Inc. Offsetting the cash used in investing activities was $0.2 million in proceeds from sales of property, plant and equipment and $2.0 million in proceeds from maturities of short-term investments.

 

Net cash provided by financing activities in 2013 was approximately $142.2 million, which included $135.8 million in net proceeds from borrowing, $4.1 million in excess tax benefits on share-based compensation and $22.0 million in cash proceeds from the exercise of stock options. Additionally the company paid cash dividends of $18.7 million during the year and incurred $0.8 million in debt issuance costs. Information regarding the company’s debt is provided in Note 7 of the Notes to Consolidated Financial Statements included in this report.

 

The effect of exchange rate changes decreased cash by $4.2 million in 2013. The net cash provided by operating activities less net cash used in financing and provided by investing activities plus the effect of exchange rate changes, resulted in a $69.8 million increase in cash and cash equivalents in 2013. This left the company with a cash balance of $305.2 million at December 28, 2013.

 

Days sales outstanding (DSO) in accounts receivable was 59 days at year-end 2013 compared to 58 days at year-end 2012 and 57 days at year-end 2011. Days inventory outstanding was 70 days at year-end 2013, compared to 69 days at year-end 2012 and 73 days at year-end 2011.

 

 
31

 

 

The ratio of current assets to current liabilities was 2.7 to 1 at year-end 2013, compared to 2.9 to 1 at year-end 2012 and 2.5 to 1 at year-end 2011. The change in the current ratio at the end of 2013 compared to the prior year reflected increased current liabilities in 2013, primarily related to higher current portion of long-term debt balance. The carrying amounts of total debt increased $135.8 million in 2013, compared to a decrease of $1.0 million in 2012 and an increase of $11.0 million in 2011. The increase in 2013 is due to higher net amounts borrowed under the revolving credit facility in 2013 and the term loan that was entered into. The ratio of long-term debt to equity was 0.14 to 1 at year-end 2013 compared to 0.00 to 1 at year-ends 2012 and 2011. Further information regarding the company’s debt is provided in Note 7 of the Notes to Consolidated Financial Statements included in this report.

 

The company started 2012 with $164.0 million of cash. Net cash provided by operating activities in 2012 was approximately $116.2 million and included $75.3 million in net income and $46.0 million in non-cash adjustments (primarily $31.4 million in depreciation and amortization), partially offset by $5.2 million of changes in operating assets and liabilities.

 

Changes in operating assets and liabilities in 2012 (including short-term and long-term items) that negatively impacted cash flows in 2012 consisted of changes in accounts receivable ($1.6 million), accrued expenses including post-retirement ($9.6 million), accrued payroll and severance ($4.4 million), accrued taxes ($0.4 million), and prepaid expenses and other (less than $0.1 million). Accrued expenses including post-retirement included $10.0 million in pension contributions in 2012. Positively impacting cash flows were changes in inventory ($5.4 million) and accounts payable ($5.4 million).

 

The company’s capital expenditures were $35.0 million in 2013, $22.5 million in 2012 and $17.6 million in 2011.

 

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, 2013 to April 30, 2014. The company did not repurchase any shares of its common stock during 2013 under this program.

 

The company withheld 32,671 shares of stock in lieu of withholding taxes on behalf of employees who became vested in restricted stock option grants during 2013.

 

Contractual Obligations and Commitments

 

The following table summarizes contractual obligations and commitments as of December 28, 2013:

 

(In thousands )

 

Total

   

< 1 Year

   

> 1 - < 3 Years

   

> 3 - < 5 Years

   

> 5 Years

 

Term loan

  $ 98,750     $ 5,000     $ 16,250     $ 77,500     $  

Revolving credit facility

    121,000       121,000                    

Interest payments

    5,613       1,395       2,529       1,689        

Supplemental Executive

Retirement Plan

    2,408       31       63       63       2,251  

Operating lease payments

    40,544       8,460       9,725       6,613       15,746  

Purchase obligations

    33,872       33,872                    

Total

  $ 302,187     $ 169,758     $ 28,567     $ 85,865     $ 17,997  

 

Off-Balance Sheet Arrangements

 

As of December 28, 2013, the company did not have any off-balance sheet arrangements, as defined under SEC rules. Specifically, the company was not liable for guarantees of indebtedness owed by third parties; the company was not directly liable for the debt of any unconsolidated entity, and the company did not have any retained or contingent interest in assets; and the company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

 

 
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Recent Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The new guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The company adopted the new guidance on January 1, 2012. There was no significant impact on its consolidated financial statements upon adoption.

 

In June 2011, the FASB issued authoritative guidance that will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in equity. The guidance does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. This guidance is effective for interim and annual periods beginning after December 15, 2011. The company adopted the new guidance on January 1, 2012, which resulted in a different presentation in its consolidated financial statements.

 

In September 2011, the FASB issued authoritative guidance on testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step 1 of the goodwill impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The guidance does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. In addition, the guidance does not amend the requirement to test goodwill for impairment between annual tests if events or circumstances warrant; however, it does revise the examples of events and circumstances that an entity should consider. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The company adopted the new guidance on January 1, 2012. There was no significant impact on its consolidated financial statements upon adoption. Goodwill testing was completed in September 2013 using the previous methodology, as permitted.

 

In July 2012, the FASB issued authoritative guidance on testing indefinite-lived intangible assets for impairment. Under the revised guidance, entities testing indefinite-lived intangible assets for impairment will have the option first to assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is not impaired, then the entity is not required to take further action. The amendment is effective for annual and interim indefinite-lived asset impairment tests performed for fiscal years beginning after September 15, 2012. The company adopted the new guidance on January 1, 2013. There was no significant impact on its consolidated financial statements upon adoption.

 

In February 2013, the FASB issued authoritative guidance on the reporting of amounts reclassified out of accumulated other comprehensive income into net income or the balance sheet. Under the new guidance, in addition to the presentation of changes in accumulated balances, an entity shall present separately for each component of other comprehensive income, current period reclassifications out of accumulated other comprehensive income and other amounts of current-period other comprehensive income. Both before-tax and net-of-tax presentations are permitted. The guidance is effective for reporting periods beginning after December 15, 2013. The company believes the adoption of the new guidance will require additional disclosures but will have no significant effect on its consolidated financial statements.

 

 
33

 

 

Critical Accounting Policies and Estimates

 

Certain of the accounting policies as discussed below require the application of significant judgment by management in selecting the appropriate estimates and assumptions for calculating amounts to record in the financial statements. Actual results could differ from those estimates and assumptions, impacting the reported results of operations and financial position. Significant accounting policies are more fully described in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report. Certain accounting policies, however, are considered to be critical in that they are most important to the depiction of the company’s financial condition and results of operations and their application requires management’s subjective judgment in making estimates about the effect of matters that are inherently uncertain. The company believes the following accounting policies are the most critical to aid in fully understanding and evaluating its reported financial results, as they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. The company has reviewed these critical accounting policies and related disclosures with the Audit Committee of its Board of Directors.

 

Net Sales

 

Revenue Recognition: The company recognizes revenue on product sales in the period in which the sales process is complete. This generally occurs when products are shipped (FOB origin) to the customer in accordance with the terms of the sale, the risk of loss has been transferred, collectability is reasonably assured and the pricing is fixed and determinable. At the end of each period, for those shipments where title to the products and the risk of loss and rewards of ownership do not transfer until the product has been received by the customer, the company adjusts revenues and cost of sales for the delay between the time that the products are shipped and when they are received by the customer. The company’s distribution channels are primarily through direct sales and independent third party distributors.

 

Revenue and Billing: The company accepts orders from customers based on long term purchasing contracts and written sales agreements. Contract pricing and selling agreement terms are based on market factors, costs and competition. Pricing normally is negotiated as an adjustment (premium or discount) from the company’s published price lists. The customer is invoiced when the company’s products are shipped to them in accordance with the terms of the sales agreement.

 

Returns and Credits: Some of the terms of the company’s sales agreements and normal business conditions provide customers (distributors) the ability to receive price adjustments on products previously shipped and invoiced. This practice is common in the industry and is referred to as a “ship and debit” program. This program allows the distributor to debit the company for the difference between the distributors’ contracted price and a lower price for specific transactions. Under certain circumstances (usually in a competitive situation or large volume opportunity), a distributor will request authorization to reduce its price to its buyer. If the company approves such a reduction, the distributor is authorized to “debit” its account for the difference between the contracted price and the lower approved price. The company establishes reserves for this program based on historic activity and actual authorizations for the debit and recognizes these debits as a reduction of revenue.

 

The company has a return to stock policy whereby a customer with previous authorization from Littelfuse management can return previously purchased goods for full or partial credit. The company establishes an estimated allowance for these returns based on historic activity. Sales revenue and cost of sales are reduced to anticipate estimated returns.

 

 
34

 

 

The company properly meets all of the criteria for recognizing revenue when the right of return exists. Specifically, the company meets those requirements because:

 

 

1.

The company’s selling price is fixed or determinable at the date of the sale.

 

2.

The company has policies and procedures to accept only credit worthy customers with the ability to pay the company.

 

3.

The company’s customers are obligated to pay the company under the contract and the obligation is not contingent on the resale of the product. (All “ship and debit” and “returns to stock” require specific circumstances and authorization.)

 

4.

The risk ownership transfers to the company’s customers upon shipment and is not changed in the event of theft, physical destruction or damage of the product.

 

5.

The company bills at the ship date and establishes a reserve to reduce revenue from the in-transit time until the product is delivered for FOB destination sales.

 

6.

The company’s customers acquiring the product for resale have economic substance apart from that provided by Littelfuse. All distributors are independent of the company.

 

7.

The company does not have any obligations for future performance to bring about resale of the product by its customers, and

 

8.

The company can reasonably estimate the amount of future returns.

  

Volume Rebates: The company offers incentives to certain customers to achieve specific quarterly or annual sales targets. If customers achieve their sales targets, they are entitled to rebates. The company estimates the future cost of these rebates and recognizes this estimated cost as a reduction to revenue as products are sold.

 

Allowance for Doubtful Accounts: The company evaluates the collectability of its trade receivables based on a combination of factors. The company regularly analyzes its significant customer accounts and, when the company becomes aware of a specific customer’s inability to meet its financial obligations, the company records a specific reserve for bad debt to reduce the related receivable to the amount the company reasonably believes is collectible. The company also records allowances for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer, macroeconomic considerations and past experience. Historically, the allowance for doubtful accounts has been adequate to cover bad debts. If circumstances related to specific customers change, the estimates of the recoverability of receivables could be further adjusted.

 

Inventory

 

The company performs regular detailed assessments of inventory, which include a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing, shelf life and quality issues. Based on the analysis, the company records adjustments to inventory for excess quantities, obsolescence or impairment when appropriate to reflect inventory at net realizable value. Historically, inventory reserves have been adequate to reflect inventory at net realizable values. During 2013, 2012 and 2011, the company was required to step up the value of inventory acquired in business combinations to its selling prices less the cost to sell under business combination accounting. This was approximately $1.5 million for Hamlin in 2013, $0.6 million in 2012 for Accel and Selco and $0.4 million in 2011 for Selco.

 

 
35

 

 

Goodwill and Other Intangible Assets

 

The company annually tests goodwill for impairment on the first day of its fiscal fourth quarter or at an interim date if there is an event or change in circumstances that indicates the asset may be impaired. The company has eight reporting units for goodwill testing purposes. Management determines the fair value of each of its reporting units by using a discounted cash flow model (which includes forecasted five-year income statement and working capital projections, a market-based weighted average cost of capital and terminal values after five years) to estimate market value. In addition, the company compares its derived enterprise value on a consolidated basis to the company’s market capitalization as of its test date to ensure its derived value approximates the market value of the company when taken as a whole.

 

As of the most recent annual test conducted on September 29, 2013, the company concluded the fair value of each of the reporting units exceeded its carrying value of invested capital and therefore, no potential goodwill impairment existed. Specifically, the company noted that its headroom, defined as the excess of fair value over the carrying value of invested capital, was 61%, 97%, 67%, 158%, 42%, 57%, 244% and 151% for its electronics (non-silicon), electronics (silicon), passenger car, commercial vehicle products, sensors, relay, custom products and fuse reporting units, respectively, at September 29, 2013. Certain key assumptions used in the annual test included a discount rate of 12.5% and a long-term growth rate of 3.0% used for all eight reporting units.

 

In addition, the company performed a sensitivity test at September 29, 2013 that showed either a 100 basis point increase in its discount rate or a 100 basis point decrease in the long-term growth rate for each reporting unit would not have changed the company’s conclusion that no potential goodwill impairment existed at September 29, 2013.

 

The company will continue to perform a goodwill impairment test as required on an annual basis and on an interim basis, if certain conditions exist. Factors the company considers important, which could result in changes to its estimates, include underperformance relative to historical or projected future operating results and declines in acquisitions and trading multiples. Due to the diverse end user base and non-discretionary product demand, the company does not believe its future operating results will vary significantly relative to its historical and projected future operating results.

 

Long-Lived Assets

 

The company evaluates long-lived asset groups on an ongoing basis. Long-lived asset groups are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the related asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted cash flows expected to be generated by the asset group. If it is determined to be impaired, the impairment recognized is measured by the amount by which the carrying value of the asset exceeds its fair value. The company’s estimates of future cash flows from such assets could be impacted if it underperforms relative to historical or projected future operating results. The company recorded asset impairment charges of $0.0 million, $0.5 million and $2.3 million for the fiscal years ended 2013, 2012 and 2011, respectively. Further information regarding asset impairments is provided in Note 11 of the Notes to Consolidated Financial Statements included in this report.

 

The company evaluates its investments quarterly or when there is an indicator of a potential impairment. During the fourth quarter of 2012, company management determined that an indicator of impairment existed for the company’s investment in Shocking Technologies, Inc. Subsequently, the company engaged a third party asset valuation firm to perform an analysis for purposes of assisting management in determining the amount of impairment. Further information regarding the impairment of the company’s investment in Shocking Technologies, Inc. is provided in Note 6 of the Notes to Consolidated Financial Statements included in this report.

 

 
36

 

 

Environmental Liabilities

 

Environmental liabilities are accrued based on estimates of the probability of potential future environmental exposure. Expenses related to on-going maintenance of environmental sites are expensed as incurred. If actual or estimated probable future losses exceed the company’s recorded liability for such claims, it would record additional charges as other expense during the period in which the actual loss or change in estimate occurred. The company evaluates its reserve for coal mine remediation annually utilizing a third party expert.

 

Pension and Supplemental Executive Retirement Plan

 

Littelfuse has a number of company-sponsored defined benefit plans primarily in North America, Europe and the Asia-Pacific region. The company recognizes the full unfunded status of these plans on the balance sheet. Actuarial gains and losses and prior service costs and credits are recognized as a component of accumulated other comprehensive income. Accounting for pensions requires estimating the future benefit cost and recognizing the cost over the employee’s expected period of employment with the company. Certain assumptions are required in the calculation of pension costs and obligations. These assumptions include the discount rate, salary scales and the expected long-term rate of return on plan assets. The discount rate is intended to represent the rate at which pension benefit obligations could be settled by purchase of an annuity contract. These assumptions are subject to change based on stock and bond market returns and other economic factors. Actual results that differ from the company’s assumptions are accumulated and amortized over future periods and, therefore, generally affect its recognized expense and accrued liability in such future periods. While the company believes that its assumptions are appropriate given current economic conditions and its actual experience, significant differences in results or significant changes in the company’s assumptions may materially affect its pension obligations and related future expense. Further information regarding these plans is provided in Note 12 of the Notes to Consolidated Financial Statements included in this report.

 

Stock-based Compensation

 

Stock-based compensation expense is recorded for stock-option grants and restricted share units based upon the fair values of the awards. The fair value of stock option awards is estimated at the grant date using the Black-Scholes option pricing model, which includes assumptions for volatility, expected term, risk-free interest rate and dividend yield. Expected volatility is based on implied volatilities from traded options on Littelfuse stock, historical volatility of Littelfuse stock and other factors. Historical data is used to estimate employee termination experience and the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The company initiated a quarterly cash dividend in 2010 and expects to continue making cash dividend payments in the foreseeable future.

 

Total stock-based compensation expense was $8.6 million, $7.3 million, and $5.8 million in 2013, 2012, and 2011, respectively. Further information regarding this expense is provided in Note 13 of the Notes to Consolidated Financial Statements included in this report.

 

 
37

 

 

Income Taxes

 

The company accounts for income taxes using the liability method. Deferred taxes are recognized for the future effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. The company recognizes deferred taxes for temporary differences, operating loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Federal and state income taxes are provided on the portion of foreign income that is expected to be remitted to the U.S. and be taxable.

 

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 14 of the Notes to Consolidated Financial Statements included in this report.

 

Outlook

 

Overall, the company expects the first quarter of 2014 to look similar to the fourth quarter of 2013. SymCom is expected to contribute about $5.0 million in incremental sales in what for them is typically a seasonally weak quarter. However, the company expects the incremental sales from SymCom to be partially offset by lower custom sales reflecting continued weakness in the mining sector.

 

Sales for the first quarter of 2014 are expected to be in the range of $195.0 to $205.0 million which, at the midpoint, represents 17% growth compared to the first quarter of 2013. Earnings for the first quarter of 2014 are expected to be in the range of $0.98 to $1.12 per diluted share.

 

For the year 2014, the company expects moderate organic growth in both the Automotive and Electronics segments. In addition, a full year of sales for the recently-acquired Hamlin business will add to 2014 sales for both of these segments. The Electrical segment is expected to continue to be challenged by the global mining downturn and delays in the expansion plans of several major potash producers. This mining weakness is expected to be partially offset by moderate growth in the solar and industrial markets and the addition of SymCom.

 

While typically the company’s business model would enable earnings growth to exceed sales growth, the newly-acquired businesses, Hamlin and SymCom, are expected to operate below their margin potential for 2014. The company is making upfront investments to grow sales and to integrate these businesses, which it believes will contribute to earnings in 2015 and beyond. The company is also actively working on margin improvement plans for both these businesses.

 

The company expects capital expenditures in 2014 to be in the range of $35 to $40 million primarily for capacity to support volume increases and new product introductions. The company expects to fund 2014 capital expansion from operating cash flows.

 

 
38

 

 

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 $219.8 million in debt outstanding at December 28, 2013 related to the unsecured revolving credit facility and term loan, which is described in Item 7 under Liquidity and Capital Resources. While this debt has a variable interest rate of LIBOR plus 1.25%, the company’s interest expense is not materially sensitive to changes in interest rate levels since debt levels and potential interest expense increases are insignificant relative to earnings.

 

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, Denmark, China, Lithuania, Taiwan and the Philippines. During 2013, sales to customers outside the U.S. were approximately 64% 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 yuan and Taiwanese dollars.

 

The company’s foreign exchange exposures result primarily from sale of products in foreign currencies, foreign currency denominated purchases, employee-related and other costs of running operations in foreign countries and translation of balance sheet accounts denominated in foreign currencies. The company’s most significant long exposure is to the euro, with lesser long exposures to the Canadian dollar, Japanese yen and Korean won. The company’s most significant short exposures are to the Mexican peso, Philippine peso and Chinese yuan. Changes in foreign exchange rates could affect the company’s sales, costs, balance sheet values and earnings. The company uses netting and offsetting intercompany account management techniques to reduce known foreign currency exposures where possible and also, from time to time, utilizes derivative instruments to hedge certain foreign currency exposures deemed to be material.

 

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 $2.0 million for copper, $0.6 million for zinc, $0.3 million for gold and $0.5 million for silver.

 

The cost of oil fluctuated dramatically over the past several years. Consequently, there is a risk that a return to high prices for oil and electricity in 2014 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 takes various actions to mitigate any negative impacts of these exposures.

 

 
39

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Index

Page

   

Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements

41

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

42

Consolidated Financial Statements

 
 

Consolidated Balance Sheets

44

 

Consolidated Statements of Net Income

45

 

Consolidated Statements of Comprehensive Income

45

 

Consolidated Statements of Cash Flows

46

 

Consolidated Statements of Equity

47

Notes to Consolidated Financial Statements

 
 

1. Summary of Significant Accounting Policies and Other Information

48

 

2. Acquisition of Businesses 

54

 

3. Inventories

58

 

4. Goodwill and Other Intangible Assets

58

 

5. Other Investments

59

 

6. Investment in Unconsolidated Affiliate

60

 

7. Debt

61

 

8. Financial Instruments and Risk Management

62

 

9. Fair Value of Assets and Liabilities

63

 

10. Coal Mining Liability

64

 

11. Asset Impairments

65

 

12. Benefit Plans

65

 

13. Shareholders’ Equity

72

 

14. Income Taxes

74

 

15. Business Unit Segment Information

76

 

16. Lease Commitments

78

 

17. Earnings Per Share

79

 

18. Selected Quarterly Financial Data (Unaudited)

81

 

19. Subsequent Event

82

 

 
40

 

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders of Littelfuse, Inc.

 

We have audited the accompanying consolidated balance sheets of Littelfuse, Inc., as of December 28, 2013 and December 29, 2012, and the related consolidated statements of net income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 28, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Littelfuse, Inc., as of December 28, 2013 and December 29, 2012, and its results of operations and its cash flows for each of the three years in the period ended December 28, 2013, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Littelfuse, Inc.'s internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 25, 2014 expressed an adverse opinion thereon.

 

/s/ Ernst & Young LLP

 

Chicago, Illinois

February 25, 2014

 

 
41

 

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders of Littelfuse, Inc.

 

We have audited Littelfuse, Inc.’s internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Littelfuse, Inc.’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. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.

 

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.

 

As indicated in the accompanying Management’s Annual Report On Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Hamlin, Inc., and subsidiaries, which are included in the 2013 consolidated financial statements of Littelfuse, Inc., and constituted approximately 18.3% of total assets as of December 28, 2013, approximately 6.7% of total revenue and approximately 1.9% of consolidated operating income for the year then ended. Our audit of internal control over financial reporting of Littelfuse, Inc. also did not include an evaluation of the internal control over financial reporting of Hamlin, Inc., and subsidiaries.

 

 
42

 

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment: A material weakness in internal control over financial reporting relating to the company’s evaluation of the income tax considerations, including deferred tax valuation allowances, relating to the write-off of its investment in Shocking Technologies, Inc. during the first quarter of 2013.

 

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Littelfuse, Inc., has not maintained effective internal control over financial reporting as of December 28, 2013, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Littelfuse, Inc., as of December 28, 2013 and December 29, 2012, and the related consolidated statements of net income and comprehensive income, equity, and cash flows for each of the three years in the period ended December 28, 2013. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2013 consolidated financial statements, and this report does not affect our report dated February 25, 2014, which expressed an unqualified opinion on those consolidated financial statements.

 

/s/ Ernst & Young LLP

 

Chicago, Illinois

February 25, 2014

 

 
43

 

 

CONSOLIDATED BALANCE SHEETS

 

(In thousands of USD)

 

December 28, 2013

   

December 29, 2012

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 305,192     $ 235,404  

Short-term investments

    6,886        

Accounts receivable, less allowances (2013 - $16,907; 2012 - $13,508)

    127,887       100,559  

Inventories

    92,591       75,580  

Deferred income taxes

    10,463       11,890  

Prepaid expenses and other current assets

    17,080       16,532  

Assets held for sale

    5,500       5,500  

Total current assets

    565,599       445,465  

Property, plant, and equipment:

               

Land

    4,382       6,243  

Buildings

    59,699       54,559  

Equipment

    354,475       304,954  

Accumulated depreciation

    (268,383 )     (244,845 )

Net property, plant and equipment

    150,173       120,911  

Intangible assets, net of amortization:

               

Patents, licenses and software

    25,166       11,144  

Distribution network

    42,685       9,773  

Customer lists, trademarks and tradenames

    30,506       27,895  

Goodwill

    186,464       133,592  

Investment in unconsolidated affiliate

          8,666  

Other investments

    12,286       10,327  

Deferred income taxes

    5,092       8,090  

Other assets

    6,402       1,865  

Total assets

  $ 1,024,373     $ 777,728  

LIABILITIES AND EQUITY

               

Current liabilities:

               

Accounts payable

  $ 33,872     $ 27,226  

Accrued payroll

    29,437       20,540  

Accrued expenses

    13,087       11,062  

Accrued severance

    182       1,033  

Accrued income taxes

    5,931       11,559  
Deferred income taxes     229        

Current portion of long-term debt

    126,000       84,000  

Total current liabilities

    208,738       155,420  

Long-term debt, less current portion

    93,750        

Deferred income taxes

    11,585        

Accrued post-retirement benefits

    8,528       22,338  

Other long-term liabilities

    14,856       12,412  

Shareholders’ equity:

               

Preferred stock, par value $0.01 per share: 1,000,000 shares authorized; no shares issued and outstanding

           

Common stock, par value $0.01 per share: 34,000,000 shares authorized; shares issued and outstanding, 2013 –22,467,491; 2012 – 22,029,446

    225       220  

Treasury stock, at cost: 17,881 and 1,561,967 shares, respectively

    (2,353 )     (60,496 )

Additional paid-in capital

    223,425       195,803  

Accumulated other comprehensive income

    20,417       16,548  

Retained earnings

    445,059       435,340  

Littelfuse, Inc. shareholders’ equity

    686,773       587,415  

Non-controlling interest

    143       143  

Total equity

    686,916       587,558  

Total liabilities and equity

  $ 1,024,373     $ 777,728  

See accompanying Notes to Consolidated Financial Statements.

 

 
44

 

 

CONSOLIDATED STATEMENTS OF NET INCOME

 

   

Year Ended

 

(In thousands of USD, except per share amounts)

 

December 28, 2013

   

December 29, 2012

   

December 31, 2011

 
                         

Net sales

  $ 757,853     $ 667,913     $ 664,955  

Cost of sales

    461,621       409,446       408,261  

Gross profit

    296,232       258,467       256,694  
                         

Selling, general and administrative expenses

    132,657       124,277       116,740  

Research and development expenses

    24,415       21,231       19,439  

Amortization of intangibles

    9,279       6,089       6,611  

Total operating expenses

    166,351       151,597       142,790  

Operating income

    129,881       106,870       113,904  
                         

Interest expense

    2,917       1,701       1,691  

Impairment and equity in net loss of unconsolidated affiliate

    10,678       7,334        

Foreign exchange (gain) loss

    (3,303 )     3,179       1,238  

Other expense (income), net

    (4,646 )     (5,396 )     (4,126 )

Income before income taxes

    124,235       100,052       115,101  

Income taxes

    35,451       24,720       28,077  

Net income

  $ 88,784     $ 75,332     $ 87,024  
                         

Income per share:

                       

Basic

  $ 3.98     $ 3.45     $ 3.96  

Diluted

  $ 3.94     $ 3.40     $ 3.90  
                         

Weighted-average shares and equivalent shares outstanding:

                       

Basic

    22,315       21,822       21,901  

Diluted

    22,537       22,098       22,255  

 

 


 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   

Year Ended

 

(In thousands of USD )

 

December 28, 2013

   

December 29, 2012

   

December 31, 2011

 
                         

Net income

  $ 88,784     $ 75,332     $ 87,024  

Other comprehensive income (loss):

                       

Pension liability adjustments (net of tax of ($6,253), $4,181 and $3,587, respectively)

    3,739       (7,301 )     (6,703 )

Unrealized gain (loss) on investments

    1,526       1,225       (2,702 )

Foreign currency translation adjustments

    (1,396 )     13,993       (3,205 )

Comprehensive income

  $ 92,653     $ 83,249     $ 74,414  

 

See accompanying Notes to Consolidated Financial Statements.

 

 
45

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

   

Year Ended

 

(In thousands of USD)

 

December 28, 2013

   

December 29, 2012

   

December 31, 2011

 

Operating activities

                       

Net income

  $ 88,784     $ 75,332     $ 87,024  

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

                       

Depreciation

    25,201       25,344       25,641  

Amortization of intangibles

    9,279       6,089       6,611  

Impairment of assets

          549       2,320  

Provision for bad debts

    289       242       444  

Non-cash inventory charge

    1,525       567       4,145  

Pension settlement losses

          5,348        

Impairment and equity in net loss of unconsolidated affiliate

    10,678       7,334        

Loss (gain) on sale of property, plant and equipment

    92       (1,443 )     183  

Stock-based compensation

    8,609       7,348       5,805  

Excess tax benefit on share-based compensation

    (4,054 )     (2,728 )     (4,220 )

Deferred income taxes

    6,640       (2,661 )     (1,363 )

Changes in operating assets and liabilities:

                       

Accounts receivable

    (16,683 )     (1,587 )     4,768  

Inventories

    (5,486 )     5,439       2,612  

Accounts payable

    2,000       5,353       (5,272 )

Accrued expenses (including post-retirement)

    (8,906 )     (9,570 )     (421 )

Accrued payroll and severance

    8,032       (4,387 )     (3,226 )

Accrued taxes

    (10,773 )     (357 )     (6,057 )

Prepaid expenses and other

    2,140       (42 )     1,756  

Net cash provided by operating activities

    117,367       116,170       120,750  
                         

Investing activities

                       

Acquisitions of businesses, net of cash acquired

    (144,382 )     (34,016 )     (11,077 )

Purchases of short-term investments

    (8,478 )     (4,616 )     (14,228 )

Proceeds from maturities of short-term investments

    2,044       17,805        

Investments in unconsolidated affiliate

          (10,000 )     (6,000 )

Loan to unconsolidated affiliate

          (2,000 )      

Purchases of property, plant and equipment

    (34,953 )     (22,529 )     (17,555 )

Proceeds from sale of property, plant and equipment

    176       3,664       217  

Net cash used in investing activities

    (185,593 )     (51,692 )     (48,643 )
                         

Financing activities

                       

Proceeds from debt

    260,500       23,251       110,000  

Payments of term debt

    (1,250 )           (49,000 )

Payments of revolving credit facility

    (123,500 )     (25,032 )     (50,000 )

Proceeds from exercise of stock options

    21,959       16,367       23,036  

Debt issuance costs

    (809 )           (716 )

Cash dividends paid

    (18,722 )     (16,564 )     (14,508 )

Excess tax benefit on share-based compensation

    4,054       2,728       4,220  

Purchases of common stock

                (37,092 )

Net cash provided by (used in) financing activities

    142,232       750       (14,060 )

Effect of exchange rate changes on cash and cash equivalents

    (4,218