lfus20151226_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 January 2, 2016 

   

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:

 

Title of Each Class 

 

Name of Each Exchange

Common Stock, $0.01 par value

 

On Which Registered

 

 

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 22,725,882 shares of voting stock held by non-affiliates of the registrant was approximately $2,201,579,542 based on the last reported sale price of the registrant’s Common Stock as reported on the NASDAQ Global Select MarketSM on June 27, 2015.

 

As of February 19, 2016, the registrant had outstanding 22,342,813 shares of Common Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Littelfuse, Inc. Proxy Statement for the 2016 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.

18

Item 3.

Legal Proceedings.

20

Item 4.

Mine Safety Disclosures.

20

     

PART II

   

Item 5.

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

21

Item 6.

Selected Financial Data.

23

Item 7.

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

23

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

39

Item 8.

Financial Statements and Supplementary Data.

41

Item 9.

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

78

Item 9A.

Controls and Procedures.

78

Item 9B.

Other Information.

79

     

PART III

   

Item 10.

Directors, Executive Officers and Corporate Governance.  

80

Item 11.

Executive Compensation.

83

Item 12.

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

83

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

83

Item 14.

Principal Accounting Fees and Services.

83

     

PART IV

   

Item 15.

Exhibits, Financial Statement Schedules.

84

 

Schedule II – Valuation and Qualifying Accounts and Reserves.

85

 

Signatures.

86

 

Exhibit Index.

87

     

  

 
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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 reserves, failure of an indemnification for environmental liability, exchange rate fluctuations, commodity price fluctuations, the effect of the company’s accounting policies, labor disputes, restructuring costs in excess of expectations, pension plan asset returns less than assumed, 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 industrial markets. In addition to the broadest and deepest portfolio of circuit protection products and solutions, the company offers electronic reed switches and sensors, automotive sensors for comfort and safety systems and a comprehensive line of highly reliable electromechanical and electronic switch and control devices for commercial and specialty vehicles, as well as protection relays and power distribution centers for the safe control and distribution of electricity. The company has a network of global engineering centers and 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 passenger car and commercial vehicle market, the company’s end customers include original equipment manufacturers (“OEM”) 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 automotive sensor market, the company end customers include GM, Autoliv, Delphi, Key Safety Systems and Stabilus. In the industrial market, the company supplies representative customers such as Abbott, Acuity Brands, Applied Materials, Caterpillar, Cummins Engine, First Solar, GE, Generac, Heinz, Ingersoll-Rand, John Deere, Lennox, Merck, Poland Springs, Procter & Gamble, Rockwell, Schneider, United Technologies and 3M. The company also supplies industrial ground fault protection in mining and other large industrial operations to customers such as Agrium, Cameco, Mosaic and Potash Corporation of Saskatachewan. See “Business Environment: Circuit Protection Market.”

 

The company reports its operations by three business segments: Electronics, Automotive and Industrial (formerly 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 October 1, 2015, the company acquired 100% of Sigmar S.r.l. (“Sigmar”) for $5.4 million (net of cash acquired). Located in Ozegna, Italy, Sigmar is a leading global manufacturer of water-in-fuel and selective catalytic reduction (SCR) quality sensors, as well as diesel fuel heaters, solenoid valves and rotating oil filters for automotive and commercial vehicle applications. The acquisition further expands the company’s automotive sensor product line offerings within its Automotive business segment. The company funded the acquisition with available cash.

 

On January 3, 2014, the company acquired 100% of SymCom, Inc. (“SymCom”) for $52.8 million (net of cash acquired). Located in Rapid City, South Dakota, SymCom provides overload relays and pump controllers primarily to the industrial market. The acquisition allows the company to strengthen its position in the relay products market by adding new products and new customers within its Industrial business segment. The company funded the acquisition with available cash and proceeds from credit facilities.

 

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

 

   

Fiscal Year

 
   

2015

   

2014

   

2013

 

Electronics

  $ 405,497     $ 410,065     $ 367,052  

Automotive

    339,957       325,415       267,207  

Industrial

    122,410       116,515       123,594  

Total

  $ 867,864     $ 851,995     $ 757,853  

 

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

 
   

2015

   

2014

   

2013

 

Americas

  $ 401,173     $ 377,660     $ 342,353  

Europe

    152,661       163,918       136,814  

Asia-Pacific

    314,030       310,417       278,686  

Total

  $ 867,864     $ 851,995     $ 757,853  

 

The company’s products are sold worldwide through distributors, a direct sales force and manufacturers’ representatives. For the fiscal year 2015, approximately 60% of the company’s net sales were to customers outside the United States, including approximately 22% 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.

 

 
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References herein to “2015”, “fiscal 2015” or “fiscal year 2015” refer to the fiscal year ended January 2, 2016. References herein to “2014”, “fiscal 2014” or “fiscal year 2014” refer to the fiscal year ended December 27, 2014. References herein to “2013”, “fiscal 2013” or “fiscal year 2013” refer to the fiscal year ended December 28, 2013. The company operates on a “4-4-5” fiscal calendar that normally keeps the number of weeks constant during each quarter except during a leap year, which occurred in fiscal 2015. As a result of using this convention, each of fiscal 2014 and fiscal 2013 contained 52 weeks whereas fiscal 2015 contained 53 weeks.

 

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, as well as sensors, 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, (viii) fuseholders, and (ix) reed switch and sensor assemblies, 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®.

 

 
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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.

 

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, fuse blocks (including OMNI-BLOK®) 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 OEMs, 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®, 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.

 

 
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The company has expanded into the automotive sensor market with the acquisitions of Sigmar, Hamlin and Accel AB. Additional products in this market include advanced electromechanical, occupant safety sensors, solar sensors, fluid quality sensors and fuel heating systems.

 

The company has expanded the Automotive Business Segment into the commercial vehicle market with the acquisitions 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.

 

Industrial Products

The company manufactures and sells a broad range of low-voltage and medium-voltage circuit protection products to electrical distributors and their customers in the construction, OEM and industrial maintenance, repair and operating supplies (“MRO”) markets. The company also designs and manufactures portable custom electrical equipment for the mining and utility industry in Canada as well as protection relays for the global mining, oil and gas and general industrial 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 solar, 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.

 

Littelfuse custom-engineered electrical equipment is designed and built for use in harsh or demanding environments where standard industrial electrical gear will not meet customer needs for reliability and durability.  Portable power substations are used throughout mines to transform voltage from distribution to utilization levels and provide local protection and control for equipment such as mining machines, pumps, fans, conveyors, and other electrical machinery. Custom-built switchgear is used in mining, oil and gas, and power generation where rugged designs, quick turnaround, unique footprints, or arc-resistant equipment is required. E-Houses, complete with switchgear, protective-relay panels, and other related equipment, are designed and built in the company’s factory and then shipped to remote sites with potentially extreme environments where a permanent structure may not be feasible or economical.

 

PRODUCT DESIGN AND DEVELOPMENT

 

The company employs scientific, engineering and other personnel to continually improve its existing product lines and to develop new products at its research, product design and development (“R&D”) and engineering facilities in Champaign and Mt. Prospect, Illinois, Boston, Massachusetts, Canada, China, Denmark, Italy, the Philippines, Taiwan, Lithuania 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.

 

 
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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 2015, 2014 and 2013, the company expended $30.8 million, $31.1 million and $24.4 million, respectively, on R&D.

 

PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY

 

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

 

As of January 2, 2016, the company owned 640 worldwide patents including 289 patents in the United States and 351 patents in other countries. The company also has registered trademark protection for certain of its brand names and logos. The 640 worldwide patents are in the following product categories: 346 electronics, 227 automotive and 67 industrial. Patents and licenses are amortized over a period of 7-50 years, with a weighted average life of 11.6 years. Distribution networks are amortized over a period of 3-20 years, with a weighted average life of 12.4 years. Trademarks and tradenames are amortized over a period of 5-20 years, with a weighted average life of 13.0 years. The company recorded amortization expense of $11.9 million, $12.5 million and $9.3 million in 2015, 2014 and 2013, 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 $0.4 million, $0.5 million and $0.6 million for fiscal 2015, 2014 and 2013, 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® and MINI® 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.

 

 
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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.

 

MARKETING

 

The company’s domestic sales and marketing staff of over 100 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, Brazil, Singapore, Taiwan, Japan, 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.

 

Industrial

The company markets and sells its power fuses and protection relays through more than 50 manufacturers’ representatives across North America. These representatives sell power fuse products through an electrical and industrial distribution network comprised of over 2,500 distributor buying locations. These distributors have customers that include electrical contractors, municipalities, utilities and factories (including both MRO and OEM).

 

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

 

 
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CUSTOMERS

 

The company sells to over 5,800 customers and distributors worldwide. No single customer accounted for more than 10% of net sales during any of the last three years. During fiscal 2015, 2014 and 2013, net sales to customers outside the United States accounted for approximately 60%, 63% and 64%, respectively, of the company’s total net sales.

 

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 Inc., Bourns Inc., EPCOS, On Semiconductor Corporation, STMicroelectronics NV, Semtech Corporation, Vishay Intertechnology Inc, and TE Connectivity Ltd. In the automotive market, the company’s competitors include Cooper Industries, Pacific Engineering (a private company in Japan), MTA (a private company in Italy), D&R Technologies (a subsidiary of CTS Corporation) and Sensata Technologies Holding NV. In the industrial market, the company’s major competitors include Cooper Industries, GE Multilin and Mersen. The company believes that it competes on the basis of innovative products, the breadth of its product line, the quality and design of its products and the responsiveness of its customer service, in addition to price.

 

BACKLOG

 

The backlog of unfilled orders at January 2, 2016 was approximately $96.4 million, compared to $92.9 million at December 27, 2014. Substantially all of the orders currently in backlog are scheduled for delivery in 2016.

 

EMPLOYEES 

 

As of January 2, 2016, the company employed approximately 8,800 employees worldwide. Approximately 1,900 employees in Mexico are covered by collective bargaining agreements. In Mexico the company has two separate collective bargaining agreements, one for 1,200 employees in Piedras Negras, expiring January 31, 2018 and the second for 720 employees in Matamoros, expiring January 1, 2018. Approximately 22% of the company's total workforce was employed under collective bargaining agreements at January 2, 2016.  The company has no employees covered by a collective bargaining agreement that will expire within one year of January 2, 2016. The Germany collective bargaining agreement, which covers three employees in Essen, will expire March 31, 2016.

 

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.

 

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

 

Littelfuse GmbH, which was acquired by the company in May 2004, is responsible for maintaining closed coal mines from legacy operations. The company is compliant with German regulations pertaining to the maintenance of the mines and has an accrual related to certain of these coal mine shafts based on an engineering study estimating the cost of remediating the dangers (such as a shaft collapse) of certain of these closed coal mine shafts in Germany. The accrual is reviewed annually and calculated based upon the cost of remediating the shafts. Further information regarding the coal mine liability accrual is provided in Note 10 of the Notes to Consolidated Financial Statements included in this report.

 

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.

 

 
12

 

 

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.

 

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.

 

 
13

 

 

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. In addition, significant portions of our revenues and earnings are exposed to changes in foreign currency rates. As we operate in multiple foreign currencies, changes in those currencies relative to the U.S. dollar will impact our revenues and expenses. The impact of possible currency devaluation in countries experiencing high inflation rates or significant exchange fluctuations can impact our results and financial guidance. For additional discussion of interest rate, currency or commodity price risk, see "Item 7A. Quantitative and Qualitative Disclosures about Market Risks.”

 

Operations and supply sources located outside the United States, particularly in emerging markets, exposes us to political, economic and other 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.

 

 
14

 

 

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, material weaknesses in the acquired company’s internal control environment and may not realize the degree or timing of the benefits that we anticipated from an acquisition.

 

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

 

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

 

We are a company that, from time to time, seeks to optimize its production and manufacturing capabilities and efficiencies through relocations, consolidations, plant closings or asset sales. We may make further specific determinations to consolidate, close or sell additional facilities. Possible adverse consequences related to such actions may include various charges for such items as idle capacity, disposition costs and severance costs, in addition to normal or attendant risks and uncertainties. We may be unsuccessful in any of our current or future efforts to restructure or consolidate our business. Our plans to minimize or eliminate any loss of revenues during restructuring or consolidation may not be achieved. These activities may have a material adverse effect upon our business, financial condition or results of operations.

 

Environmental liabilities could adversely impact our financial position.

 

Foreign, federal, state and local laws and regulations impose various restrictions and controls on the discharge of materials, chemicals and gases used in 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.

 

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.

 

 
15

 

 

Disruptions in our manufacturing, supply or distribution chain could result in an adverse impact on results of operations.

 

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

 

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 including unexpected product recalls 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, unexpected product recalls 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 effect 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.

 

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 can fluctuate widely. Between December 27, 2014 and January 2, 2016, the closing sale price of our common stock ranged between a low of $83.06 and a high of $114.09. The volatility of our stock price may be related to any number of factors, such as volatility in the financial markets, general macroeconomic conditions, industry conditions, analysts’ expectations concerning 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.

 

 
16

 

 

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.

 

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 exist. Any such lapses or deficiencies may materially and adversely affect our business and results of operations or financial condition, restrict our 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.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

 

None.

 

 
17

 

  

ITEM 2.

PROPERTIES.

 

LITTELFUSE FACILITIES 

 

The company’s operations are located in 48 owned or leased facilities worldwide, totaling approximately 2.3 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, Winnipeg, Canada, Piedras Negras, Mexico, Melchor Muzquiz, Mexico, Matamoros, Mexico, Lake Mills, Wisconsin and Rapid City, South Dakota. The company has European manufacturing facilities in Roskilde, Denmark, Kaunas, Lithuania and Ozegna, Italy. Asia-Pacific operations include sales and distribution centers located in Singapore, Taiwan, Japan, China and Korea, with manufacturing plants located in various cities in China and the Philippines.

 

During 2015, the company began the transfer of its Lake Mills, Wisconsin manufacturing operations to the Philippines. This transfer is expected to be completed during 2016.

 

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.

 

The following table provides certain information concerning the company’s facilities at January 2, 2016, and the use of these facilities during fiscal year 2015:

 

Location

Use

Size
(sq. ft.)

Lease/Own

Lease

Expiration

Date

Primary Product

Chicago, Illinois

Administrative, Engineering, Research and Development and Testing

54,838

 

Leased

2024

Auto, Electronics and Industrial

Mount Prospect, Illinois

Engineering and Research and Development

23,515

 

Leased

2018

Auto and Electronics

Champaign, Illinois

Research and Development

13,503

 

Leased

2025

Auto, Electronics and Industrial

Lake Mills, Wisconsin

Manufacturing, Administrative, Engineering, Sales and Research and Development

65,000

 

Leased

2020

Auto and Electronics

San Jose, California

Engineering

960

 

Leased

2016

Electronics

Troy, Michigan

Sales

2,224

 

Leased

2016

Auto

Rapid City, South Dakota

Manufacturing and Administrative

230,000

 

Owned

Industrial

Cicero, New York

Office

1,200

 

Leased

2017

Industrial

Boston, Massachusetts

Administrative, Engineering, Research and Development

26,000

 

Leased

2016

Auto

Melchor Muzquiz, Mexico

Manufacturing

39,364

 

Leased

2016

Auto

Bellingham, Washington

Office

2,000

 

Leased

2017

Auto

Piedras Negras, Mexico

Administrative,  Manufacturing

99,822

 

Leased

2016

Auto

Piedras Negras, Mexico

Manufacturing

291,860

 

Owned

Auto and Industrial

Matamoros, Mexico

Administrative, Logistics, Manufacturing, Engineering, Testing and Distribution

106,000

 

Owned

Auto

 

 
18

 

 

Location Use Size
(sq. ft.)
Lease/Own

Lease

Expiration

Date

Primary Product

Eagle Pass, Texas

Distribution

7,600

 

Leased

2016

Auto, Electronics and Industrial

Saskatoon, Canada

Administrative, Manufacturing, Engineering, Research and Development

88,585

 

Owned

Industrial

Calgary, Canada

Sales

240

 

Leased

2017

Industrial

Winnipeg, Canada

Administrative and Manufacturing

63,500

 

Leased

2018

Industrial

Sao Paulo, Brazil

Sales

3,229

 

Leased

2016

Electronics and Auto

Manaus, Brazil

Warehouse

2,152

 

Leased

2016

Electronics and Auto

Roskilde, Denmark

Administrative, Manufacturing, Research and Development and Sales

18,740

 

Leased

2016

Industrial

Swindon, U.K.

Administrative

304

 

Leased

2016

Electronics

Bremen, Germany

Administrative

13,455

 

Leased

2021

Auto, Electronics and Industrial

Norwich, U.K.

Engineering

7,964

 

Leased

2020

Auto

Essen, Germany

Leased to third party

37,244

 

Owned

Essen, Germany

Administrative

3,703

 

Leased

2017

Auto and Electronics

Amsterdam, Netherlands

Warehouse

21,851

 

Leased

2016

Auto and Electronics

Lauf, Germany

Adminstrative

127

 

Leased

2018

Auto

Lenzenburg, Switzerland

Administrative

215

 

Leased

2016

Auto, Electronics and Industrial

Arstad, Sweden

Sales

328

 

Leased

2016

Auto

Kaunas, Lithuania

Administrative, Manufacturing, Testing, Research and Development and Engineering

43,239

 

Owned

Auto

Kaunas, Lithuania

Manufacturing

62,862

 

Leased

2016

Auto

Kaunas, Lithuania

Research and Development

4,596

 

Leased

2017

Auto

Ozegna, Italy

Administrative, Manufacturing and Research and Development

32,292

 

Leased

2021

Auto

Singapore

Sales and Distribution

1,572

 

Leased

2018

Electronics

Taipei, Taiwan

Sales

7,876

 

Leased

2017

Electronics

Seoul, Korea

Sales

3,643

 

Leased

2016

 Electronics

Lipa City, Philippines

Manufacturing

116,046

 

Owned

Electronics

Lipa City, Philippines

Manufacturing

105,827

 

Owned

Electronics

Dongguan, China

Manufacturing

264,792

 

Leased

2023

Electronics

Suzhou, China

Manufacturing

143,458

 

Owned

Auto and Electronics

Suzhou, China

Manufacturing

37,674

 

Leased

2016

Auto and Electronics

Beijing, China

Sales

452

 

Leased

2016

Electronics

Shanghai, China

Sales

6,324

 

Leased

2018

Auto and Electronics

Chu-Pei City, Taiwan

Research and Development

10,505

 

Leased

2019

Electronics

Wuxi, China

Manufacturing

221,214

 

Owned

Electronics

Hong Kong, China

Sales

743

 

Leased

2017

Auto, Electronics and Industrial

Yokohama, Japan

Sales

3,509

 

Leased

2017

Auto, Electronics and Industrial

             

 

Properties with lease expirations in 2016 may be renewed at various times throughout the year. The company does not anticipate any material impact as a result of such expirations.

 

 
19

 

 

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.

  

 
20

 

 

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 19, 2016, there were 81 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 Exchange Act of 1934, each as amended, except to the extent that the company specifically incorporates it by reference into such filing.

 

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

 

 

 
21

 

 

The Dow Jones Electrical Components and Equipment Industry Group Index includes the common stock of American Superconductor Corp.; Amphenol Corp.; 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.; 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, 2010 and reinvestment of all dividends is assumed. In the case of the company, a $100 investment made on December 31, 2010 is assumed. Returns for the company’s fiscal years presented above are as of the last day of the respective fiscal year which was, December 31, 2011, December 29, 2012, December 28, 2013, December 27, 2014, and January 2, 2016 for the fiscal years 2011, 2012, 2013, 2014 and 2015, 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 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, 2015 to April 30, 2016. The company repurchased 350,000 shares of its common stock during the third quarter of 2015 and 650,000 shares remain available for purchase under the program as of January 2, 2016.

 

The company withheld 28,286 shares of stock in lieu of withholding taxes on behalf of employees who became vested in restricted share units during fiscal 2015 during the period April 25, 2014 to January 2, 2016. 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 2015 and 2014:

 

   

2015

   

2014

 
   

4Q

   

3Q

   

2Q

   

1Q

   

4Q

   

3Q

   

2Q

   

1Q

 

High

  $ 114.90     $ 97.96     $ 102.78     $ 103.08     $ 100.82     $ 97.45     $ 99.46     $ 97.54  

Low

    87.32       82.53       93.31       89.11       78.68       84.14       84.60       85.55  

Close

    107.01       89.09       97.76       98.36       98.76       87.65       93.20       91.20  

Dividends

    0.29       0.29       0.25       0.25       0.25       0.25       0.22       0.22  

 

 

 
22

 

 

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):

 

   

2015

   

2014

   

2013

   

2012

   

2011

 

Net sales

  $ 867,864     $ 851,995     $ 757,853     $ 667,913     $ 664,955  

Gross profit

    330,499       324,428       296,232       258,467       256,694  

Operating income

    104,157       133,830       129,881       106,870       113,904  

Net income

    82,466       99,418       88,784       75,332       87,024  

Per share of common stock:

                                       

Income from continuing operations

                                       

- Basic

    3.65       4.41       3.98       3.45       3.96  

- Diluted

    3.63       4.37       3.94       3.40       3.90  

Cash dividends paid

    1.08       0.94       0.84       0.76       0.63  

Cash and cash equivalents

    328,786       297,571       305,192       235,404       164,016  

Total assets

    1,064,981       1,070,826       1,024,373       777,728       678,424  

Short-term debt

    87,000       88,500       126,000       84,000       85,000  

Long-term debt, less current portion

    84,474       106,658       93,750              

 

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 Industrial (formerly 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. In 2012, the company set a five-year strategic target plan to grow annual sales at 15% per year; 5% organically and 10% through acquisitions. As of January 2, 2016, three years into the five-year plan, the company has achieved an annual sales growth of 9%; 4% organically and 5% through acquisitions.

 

In November, 2015, the company announced its planned acquisition of TE Connectivity’s circuit protection devices business (“CPD”) which is expected to close by the end of the first quarter of 2016. The company believes that the pending acquisition of the CPD business in 2016 puts the company on track with the five-year growth targets set in 2012 as described above.

 

 
23

 

 

The company remains focused on only those acquisitions that will add shareholder value. Overall, the company believes its strategy is sound, the fundamentals of its business have not changed, and its long-term goals are achievable. 

 

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

 

Grow organically faster than its markets;

 

Continue the pace of acquisitions;

 

Sustain operating margins in the high teens;

 

Improve return on investment; and

 

Return excess cash to shareholders.

 

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

 

Electronics Segment Overview

The Electronics segment, which accounted for approximately 47% of total sales in 2015, has produced modest revenue growth and strong operating margins over the last few years. In 2015, sales decreased 1% (a 2% increase excluding currency effects) and operating margins were 19.0% for 2015 as compared to 21.2% in 2014. Strong sales in both Europe and China helped to offset continued adjustments in channel inventory and capacity constraints for electronic sensor products as the company continues to transfer production to the Philippines. The company believes the revenue growth is the result of a stable electronics market combined with ongoing design wins and market share gains for Littelfuse.

 

The electronics business is affected by seasonality. Sales are typically weaker in the first and fourth quarters and stronger in the second quarter and third quarters. This reflects the production ramp-up for consumer electronics in advance of the year-end holidays and other factors.

 

Fourth quarter 2015 sales for Electronics were consistent with normal seasonality as channel inventories remain at appropriate levels. The book-to-bill ratio of 1.00 at the end of the fourth quarter is also consistent with normal seasonal trends.

 

Automotive Segment Overview 

The Automotive segment, which accounted for approximately 39% of sales in 2015, has been the company’s fastest growing business over the last few years. In 2015, Automotive sales increased 4% (11% excluding currency effects) primarily resulting from a strong performance in automotive sensor sales which increased 20% over the prior year.

 

Passenger car fuse sales continue to outperform global car production due primarily to the success of the company’s new high current fuses which are driving increases in content per vehicle. Automotive sensors also had its third consecutive year of double-digit sales growth primarily reflecting ramp-up of new solar sensor and speed and position sensor platforms. The company continues to make good progress on its objective to improve sensor margins by growing the business and replacing low margin legacy business with more profitable design wins.

  

 
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In summary, 2015 was a record year for the Automotive segment. Growth in fuse content was driven by more sophisticated electronics in vehicles and sales of our high-current products, especially the MasterfuseTM line. Our automotive sensor business had an excellent year, with strong growth in sales and a significant improvement in margins. For the CVP business, the main contributor to sales was the North American heavy duty truck market.

 

Industrial Segment Overview

The Industrial segment, which accounted for approximately 14% of total sales in 2015, experienced an improved performance in 2015 with sales increasing 5% (9% excluding currency effects) over the prior year with strong sales in power fuses and continued improvement in the custom business more than offsetting a decline in relay sales. The increase in fuse sales was due to continuing strength in the solar market, as well as distributors increasing purchases after working down inventories in response to the weak end markets. Within the custom business, the company has diversified its portfolio beyond the potash market and into e-houses used in the heavy industrial and utility markets.

 

In summary, 2015 was a good year for the Industrial segment overall. The business saw a rebound in electrical fuse sales and margins, with fuse sales into the solar market almost doubling. It also made progress in diversifying the custom products and relay businesses beyond potash mining.

 

Business Acquisitions

 

On October 1, 2015, the company acquired 100% of Sigmar S.r.l. (“Sigmar”) for $5.4 million (net of cash acquired). Located in Ozegna, Italy, Sigmar is a leading global manufacturer of water-in-fuel and selective catalytic reduction (SCR) quality sensors, as well as diesel fuel heaters, solenoid valves and rotating oil filters for automotive and commercial vehicle applications. The acquisition further expands the company’s automotive sensor product line offerings within its Automotive business segment.

 

On January 3, 2014, the company acquired 100% of SymCom, Inc. (“SymCom”) for $52.8 million (net of cash acquired). Located in Rapid City, South Dakota, SymCom provides overload relays and pump controllers primarily to the industrial market. The acquisition allows the company to strengthen its position in the relay products market by adding new products and new customers within its Industrial business segment.

 

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.

 

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

 

   

Fiscal Year

 
   

2015

   

2014

   

2013

 

Business Unit

                       

Electronics(b)

  $ 405.5     $ 410.1     $ 367.1  

Automotive(c)

    340.0       325.4       267.2  

Industrial(g)

    122.4       116.5       123.6  

Total

  $ 867.9     $ 852.0     $ 757.9  
                         

Geography(a)

                       

Americas(d)(g)

  $ 401.2     $ 377.7     $ 342.4  

Europe(e)

    152.7       163.9       136.8  

Asia-Pacific(f)

    314.0       310.4       278.7  

Total

  $ 867.9     $ 852.0     $ 757.9  

 

(a)

Sales by geography represent sales to customer or distributor locations.

 

(b)

2014 includes incremental Hamlin net sales of $36.5 million.

 

(c)

2014 includes incremental Hamlin net sales of $20.2 million.

 

(d)

2014 includes incremental Hamlin net sales of $16.7 million.

 

(e)

2014 includes incremental Hamlin net sales of $9.3 million.

 

(f)

2014 includes incremental Hamlin net sales of $10.4 million.

 

(g)

2014 includes incremental SymCom net sales of $19.6 million.

 

Business 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 January 2, 2016 and December 27, 2014, and for the three fiscal years ended January 2, 2016, December 27, 2014 and December 28, 2013.

 

Results of Operations — 2015 compared with 2014

 

The following table summarizes the company’s consolidated results of operations for the periods presented. There were additional charges incurred during 2015. These included $4.6 million in acquisition-related costs primarily related to the transaction and integration planning costs for the pending acquisition of TE Connectivity’s circuit protection device business, $5.2 million in charges related to the transfer of the company’s reed switch manufacturing operations from its Lake Mills, Wisconsin and Suzhou, China locations to the Philippines, $3.6 million in internal restructuring costs that will improve the company’s worldwide legal structure and $31.9 million in pension settlement and wind-up costs.

 

Fiscal year 2015 also included $1.5 million in foreign currency gains primarily attributable to changes in the value of both the euro and Philippine peso against the U.S. dollar while fiscal year 2014 included $3.9 million in foreign currency losses primarily related to the value of the Philippine peso against the dollar.

 

   

Fiscal Year

         

(In thousands)

 

2015

   

2014

   

% Change

 

Sales

  $ 867,864     $ 851,995       2%  

Gross profit

    330,499       324,428       2%  

Operating expenses

    226,342       190,598       19%  

Operating income

    104,157       133,830       (22%)  

Other expense (income), net

    (5,417 )     (6,644 )     (18%)  

Income before income taxes

    106,948       131,646       (19%)  

Net income

  $ 82,466     $ 99,418       (17%)  

 

 
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Net sales increased $15.9 million or 2% to $867.9 million for fiscal year 2015 compared to $852.0 million in fiscal year 2014 due primarily to strong growth in automotive products and improvement in the Industrial business segment partially offset by lower Electronics sales. The company also experienced $38.9 million in unfavorable foreign currency effects in 2015 as compared to 2014 primarily resulting from sales denominated in the euro. Excluding currency effects, net sales increased $54.7 million or 6% year-over-year. The Automotive business segment sales increased $14.5 million or 4% to $340.0 million. The Electronics business segment sales decreased $4.6 million or 1% to $405.5 million, and the Industrial business segment sales increased $5.9 million or 5% to $122.4 million. Sales levels in 2015, excluding currency effects, were positively impacted by increased demand for the company’s automotive and industrial products partially offset by lower demand for the company’s electronics products.

 

The increase in Automotive sales was primarily due to strong growth for automotive sensor products. Sales in the commercial vehicle market were up slightly year-over-year as continued strength in the heavy truck market was offset by general market weakness in construction, agriculture and the global mining industry. Automotive sales were negatively impacted by net unfavorable currency effects of $22.4 million in 2015 as compared to 2014 primarily resulting from sales denominated in the euro. Excluding currency effects, Automotive sales increased $37.0 million or 11% year-over-year.

 

The decrease in Electronics sales primarily resulted from net unfavorable currency effects of $11.7 million for the full year 2015. Excluding currency effects, Electronics sales increased $7.2 million or 2% year-over-year reflecting solid growth for passive components offset by lower sensor sales. Strong sales of electronic products in Europe and China helped to offset continued adjustments in channel inventory and capacity constraints for our electronic sensor products as the company continues to transfer production from the U.S. and China to the Philippines.

 

The increase in Industrial sales was primarily from higher custom and power fuse sales which were offset by lower relay sales. The Industrial segment experienced net unfavorable currency effects of $4.7 million primarily from sales denominated in Canadian dollars and the euro. Excluding currency effects, Industrial sales increased $10.6 million or 9% year over year. The increase in fuse sales is primarily due to continuing strength in the solar market, while higher custom product sales benefited from some recovery in the potash mining end market.

 

On a geographic basis, sales in the Americas increased $23.5 million or 6% in 2015 as compared to 2014 due primarily to growth in all business segments offset by $3.6 million in unfavorable currency effects resulting from sales denominated in Canadian dollars. Excluding currency effects, Americas’ sales increased $27.1 million or 7%. Automotive sales increased $15.1 million or 9% primarily reflecting strong growth in the automotive sensor and passenger vehicle markets. Electronics sales increased $3.2 million or 3% primarily reflecting higher demand for passive products. Industrial sales increased $5.2 million or 5% resulting from increases in demand for power fuses and custom products.

 

European sales decreased $11.3 million or 7% in 2015 compared to 2014 primarily due to net unfavorable currency effects of $32.8 million primarily from sales denominated in the euro. Excluding currency effects, European sales increased $21.5 million or 13% reflecting strong demand across all business segments. Automotive sales decreased $6.9 million or 7% in 2015 reflecting net unfavorable currency effects. Excluding currency effects, Automotive sales increased $14.2 million or 13% reflecting strong demand for automotive sensor products. Electronics sales decreased $3.7 million or 7% reflecting the impact of net unfavorable currency effects. Excluding currency effects, Electronics sales increased $6.6 million or 13% reflecting strong demand for semiconductor products. Industrial sales decreased $0.7 million or 10% in 2015 primarily from the impact of net unfavorable currency effects. Excluding currency effects, Industrial sales increased $0.7 million or 10%.

 

 
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Asia-Pacific sales increased $3.6 million or 1% in 2015 compared to 2014 primarily due to increased demand for Automotive and Industrial products offset by lower Electronics sales. Net unfavorable currency effects amounted to $2.5 million. Excluding currency effects, Asia-Pacific sales increased $6.1 million or 2%. Electronics sales decreased $4.1 million or 2% reflecting weakness in the Taiwan, Japan and Korea markets. Automotive sales increased $6.4 million or 11% reflecting continued increased demand for passenger vehicles in China as well as gains in market share. Industrial sales increased $1.4 million or 19%.

 

Gross profit was $330.5 million or 38.1% of sales in 2015, compared to $324.4 million or 38.1% of sales in 2014. Gross profit for 2015 was negatively impacted by $5.3 million of charges related to the transfer of the company’s reed switch production from the U.S. and China to the Philippines. Gross profit for 2014 was negatively impacted by $2.8 million for accounting adjustments related to the SymCom inventory which had been stepped up to fair value at the acquisition date as required by purchase accounting rules. Additionally, 2014 gross profit was negatively impacted by $2.7 million in severance charges. These severance charges primarily related to post-Hamlin acquisition reorganization changes. Excluding the impact of these charges, gross profit was $335.8 million or 38.7% of sales in 2015 as compared to $329.9 million or 38.7% of sales in 2014.

 

Total operating expense was $226.3 million or 26.1% of net sales for 2015 compared to $190.6 million or 22.4% of net sales for 2014. Operating expense in 2015 included $39.9 million of charges primarily related to pension settlement and wind-up costs of $31.9 million and restructuring and acquisition costs of $8.0 million. Operating expense in 2014 included $3.5 million in restructuring, acquisition and impairment costs, $2.2 million of which was to effect changes in the company’s legal structure to allow tax-efficient repatriation of cash. Excluding these charges, total operating expense was $186.4 million or 21.5% of net sales for 2015 compared to $187.1 million or 22.0% of net sales in 2014.

 

Operating income was $104.2 million or 12.0% of net sales in 2015 compared to $133.8 million or 15.7% of net sales in the prior year. The decrease in operating income in the current year was due primarily to the factors affecting operating expenses discussed above.

 

Interest expense was $4.1 million in 2015 as compared to $4.9 million in 2014 and is primarily related to the company’s increased borrowing to fund acquisitions. The lower interest expense in 2015 resulted from lower average debt balances as compared to the prior year.

 

Foreign exchange (gain) loss was $1.5 million of gain in 2015 compared to $3.9 million of loss in 2014. The fluctuation in foreign exchange was primarily attributable to changes in the value of both the euro and the Philippine peso against the U.S. dollar in 2015 and 2014.

 

Other expense (income), net, consisting of interest income, royalties and non-operating income was $5.4 million of income in 2015 compared to $6.6 million of income in 2014. The year-over-year decrease in income primarily reflects lower interest income in 2015.

 

Income before income taxes was $106.9 million in 2015 compared to $131.6 million in 2014. Income tax expense was $24.5 million in 2015 compared to $32.2 million in 2014. The 2015 effective income tax rate was 22.9% compared to 24.5% in 2014. The lower effective tax rate in 2015 is primarily related to more income earned in low-tax jurisdictions in 2015 as compared to 2014. The effective tax rates are lower than the U.S. statutory tax rate primarily as a result of income earned in low-tax jurisdictions. 

 

 
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Results of Operations — 2014 compared with 2013

 

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 charges and accounting adjustments during 2014. These include a $2.8 million inventory adjustment in 2014 related to the SymCom acquisition as described in Note 2, $0.4 million in acquisition-related costs, $3.2 million in severance charges related to the Lake Mills, Wisconsin and Matamoros, Mexico locations, $2.2 million in internal legal restructuring costs that will improve the company’s worldwide legal structure and $0.3 million in asset impairments.

 

Fiscal year 2014 also included $3.9 million in foreign currency losses primarily attributable to changes in the value of both the euro and Philippine peso against the U.S. dollar while fiscal year 2013 included $3.3 million in foreign currency gains primarily related to the value of the Philippine peso against the U.S. dollar.

 

   

Fiscal Year

         

(In thousands)

 

2014

   

2013

   

% Change

 

Sales

  $ 851,995     $ 757,853       12 %

Gross profit

    324,428       296,232       10 %

Operating expenses

    190,598       166,351       15 %

Operating income

    133,830       129,881       3 %

Other expense (income), net

    (6,644 )     (4,646 )     43 %

Income before income taxes

    131,646       124,235       6 %

Net income

  $ 99,418     $ 88,784       12 %

 

Net sales increased $94.1 million or 12% to $852.0 million for fiscal year 2014 compared to $757.9 million in fiscal year 2013 due primarily to an incremental $56.1 million from business acquisitions and growth in electronic and automotive products, offset by lower Industrial sales. The company also experienced $0.4 million in unfavorable foreign currency effects in 2014 as compared to 2013 primarily resulting from sales denominated in Canadian dollars and Japanese yen. During the fourth quarter of 2014, sales were negatively impacted by the steep decline in the euro. Excluding acquisitions and currency effects, net sales increased $38.5 million or 5% year over year. The Automotive business segment sales increased $58.2 million or 22% to $325.4 million. The Electronics business segment sales increased $43.0 million or 12% to $410.1 million, and the Industrial business segment sales decreased $7.1 million or 6% to $116.5 million. Sales levels in 2014, 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 industrial products.

 

The increase in Automotive sales was primarily due to strong organic growth in all product categories and an incremental $20.2 million in sales from Hamlin. Currency effects increased sales by $0.6 million for the full year 2014 compared to 2013. Excluding incremental sales from Hamlin and currency effects, Automotive sales increased $37.3 million or 14% year over year due primarily to increases in content per vehicle and strength in the heavy truck market.

 

The increase in Electronics sales reflected solid growth for both semiconductor and passive components and incremental sales from Hamlin of $16.3 million. In addition, sales were positively impacted by net favorable currency effects of $0.2 million for the full year 2014. Excluding acquisitions and currency effects, Electronics sales increased $26.5 million or 7% year over year.

 

 
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The decrease in Industrial sales was primarily from declines in custom and relay sales into the mining market and power fuses into the solar market. These declines more than offset incremental sales of $19.6 million from the SymCom acquisition in 2014. The Industrial segment experienced net unfavorable currency effects of $1.3 million primarily from sales denominated in Canadian dollars. Excluding incremental sales and currency effects, Industrial sales decreased $25.4 million or 21% year over year.

 

On a geographic basis, sales in the Americas increased $35.3 million or 10% in 2014 as compared to 2013 due primarily to incremental sales from business acquisitions of $36.3 million offset by $1.4 million in unfavorable currency effects resulting from sales denominated in Canadian dollars. Excluding acquisitions and currency effects, Americas’ sales increased $0.4 million or less than 1%. Increases in the company’s Automotive and Electronics sales were mostly offset by a decline in Industrial sales. Automotive sales increased $33.4 million or 26% primarily reflecting incremental sales from acquisitions of $12.5 million, strong growth in the passenger vehicle market and growth in the commercial vehicle market. Electronics sales increased $9.6 million or 9% primarily reflecting higher demand and incremental sales from Hamlin of $4.3 million. Industrial sales decreased $7.7 million or 7% resulting from decreases in demand for protection relays and custom products due to continued weakness in the mining segment. This decrease more than offset $19.6 million in incremental sales from SymCom in 2014.

 

European sales increased $27.1 million or 20% in 2014 compared to 2013 primarily due to strong demand for electronics and automotive products, incremental sales from Hamlin of $9.4 million and $1.0 million in favorable currency effects from sales denominated in euros. Excluding acquisitions and currency effects, European sales increased $16.8 million or 12%. This resulted from increases in the company’s Electronics and Automotive sales partially offset by a decrease in Industrial sales. Automotive sales increased $18.2 million or 21% in 2014 primarily reflecting incremental sales from Hamlin sensors of $6.2 million and higher sales in the passenger vehicle markets driven primarily by increased content. Excluding the impact of incremental sales from Hamlin and favorable currency effects, Automotive sales increased $11.5 million or 13%. Electronics sales increased $9.2 million or 22% reflecting incremental sales from Hamlin of $3.2 million and higher demand in 2014. Industrial sales decreased $0.3 million or 4% in 2014 primarily from decreased demand in the marine market for relays.

 

Asia-Pacific sales increased $31.7 million or 11% in 2014 compared to 2013 primarily due to increased demand across all product categories and incremental sales from Hamlin of $10.4 million. Currency effects amounted to less than $0.1 million. Excluding acquisitions and currency effects, Asia-Pacific sales increased $21.3 million or 8%. Electronics sales increased $24.2 million or 11% reflecting incremental sales from Hamlin of $8.9 million and increased sales in China offset by weakness in the Taiwan, Japan and Korea markets. Automotive sales increased $6.6 million or 12% reflecting incremental sales from acquisitions of $1.5 million and continued increased demand for passenger vehicles in China as well as gains in market share.

 

Gross profit was $324.4 million or 38.1% of sales in 2014, compared to $296.2 million or 39.1% of sales in 2013. Gross profit in both 2014 and 2013 were negatively impacted by purchase accounting adjustments in cost of sales of $2.8 million and $1.5 million, respectively. These charges were the additional cost of goods sold for SymCom and Hamlin inventories which had been stepped up to fair value at the acquisition dates as required by purchase accounting rules. Additionally, 2014 gross profit was negatively impacted by $2.7 million in severance charges. These severance charges primarily related to post-Hamlin acquisition reorganization changes. Excluding the impact of these charges, gross profit was $329.9 million or 38.7% of sales as compared to $297.8 million or 39.3% of sales in 2013. The decrease in gross margin was primarily attributable to higher sales of sensors in 2014 which carry lower margins than the company’s core products.

 

 
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Total operating expense was $190.6 million or 22.4% of net sales for 2014 compared to $166.4 million or 22.0% of net sales for 2013. The increase in operating expenses primarily reflects incremental operating expenses of $14.2 million from business acquisitions and $3.5 million in restructuring, acquisition and impairment costs, $2.2 million of which was to effect changes in the company’s legal structure to allow tax-efficient repatriation of approximately $90.0 million of cash in the fourth quarter of 2014.

 

Operating income was $133.8 million or 15.7% of net sales in 2014 compared to $129.9 million or 17.1% of net sales in the prior year. The increase in operating income and decrease in operating margin in the current year was due primarily to the factors affecting gross profit and operating expenses discussed above.

 

Interest expense was $4.9 million in 2014 as compared to $2.9 million in 2013 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 of 2013, 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 $3.9 million of loss in 2014 compared to $3.3 million of gain in 2013. The fluctuation in foreign exchange was primarily attributable to changes in the value of both the euro and the Philippine peso against the U.S. dollar in 2014 and the Philippine peso against the dollar in 2013.

 

Other expense (income), net, consisting of interest income, royalties and non-operating income was $6.6 million of income in 2014 compared to $4.6 million of income in 2013. The year-over-year increase in income primarily reflects higher interest income in 2014.

 

Income before income taxes was $131.6 million in 2014 compared to $124.2 million in 2013. Income tax expense was $32.2 million in 2014 compared to $35.5 million in 2013. The 2014 effective income tax rate was 24.5% compared to 28.5% in 2013. The lower effective tax rate in 2014 is primarily related to the $6.1 million Shocking tax adjustment booked in 2013. The 2014 and 2013 effective tax rates are lower than the U.S. statutory tax rate primarily the result of income earned in low-tax jurisdictions.

 

Liquidity and Capital Resources

 

As of January 2, 2016, $318.5 million of the $328.8 million of the company’s cash and cash equivalents was held by foreign subsidiaries. Of the $318.5 million held by foreign subsidiaries, approximately $24.6 million could be repatriated with minimal tax consequences. The company expects to maintain its foreign cash balances (other than the aforementioned $24.6 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.

  

 
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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 January 2, 2016, the company had available $197.9 million of borrowing capacity under the credit agreement at an interest rate of LIBOR plus 1.25%, or a total interest rate of 1.68% as of January 2, 2016.

 

The credit agreement replaced 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 January 2, 2016, the company was in compliance with all covenants under the credit agreement.

 

Entrusted Loan

 

During the fourth quarter of 2014, the company entered into an entrusted loan arrangement (“Entrusted Loan”) of RMB 110.0 million (approximately $17.9 million) between two of its China legal entities, Littelfuse Semiconductor (Wuxi) Company (the “Lender”) and Suzhou Littelfuse OVS Ltd. (the “Borrower”), utilizing Bank of America, N.A., Shanghai Branch as agent. Direct borrowing and lending between two commonly owned commercial entities was strictly forbidden at the time under China’s regulations requiring the use of a third party agent to enable loans between Chinese legal entities. As a result, the Entrusted Loan is reflected as both a long-term asset and long-term debt on the company’s Consolidated Balance Sheets and is reflected in the investing and financing activities in its Consolidated Statements of Cash Flows. Interest expense and interest income will be recorded between the lender and borrower with no net impact on the company’s Consolidated Statements of Income since the amounts will be offsetting. The loan interest rate per annum is 5.25%. The Entrusted Loan is used to finance the operation and working capital needs of the borrower and matures in November 2019. The balance of the Entrusted Loan was RMB 61.5 million (approximately $9.5 million) at January 2, 2016.

 

Other Obligations

 

For the fiscal year ended January 2, 2016, the company had $0.1 million available in letters of credit. No amounts were drawn under these letters of credit at January 2, 2016.

 

Cash Flows and Working Capital

 

The company started 2015 with $297.6 million of cash. Net cash provided by operating activities in 2015 was approximately $165.8 million and included $82.5 million in net income, $82.1 million in non-cash adjustments (primarily $41.6 million in depreciation and amortization) and $1.2 million of favorable changes in operating assets and liabilities.

 

 
32

 

 

Changes in operating assets and liabilities (including short-term and long-term items) that negatively impacted cash flows in 2015 consisted of changes in accounts receivable ($14.4 million), inventory ($3.6 million) and accrued taxes ($1.0 million). Increases in accounts receivable and inventory resulted from higher sales volumes in 2015. Positively impacting cash flows were changes in accrued expenses including post-retirement ($6.5 million), accounts payable ($2.6 million), accrued payroll and severance ($5.9 million) and prepaid expenses and other ($5.2 million).

 

Net cash used in investing activities in 2015 was approximately $44.2 million and included $44.0 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), $3.5 million for the purchase of an investment and $4.6 million for a business acquisition. Offsetting the cash used in investing activities was a $7.8 million decrease in the Entrusted Loan receivable (see Note 7 of the Notes to Consolidated Financial Statements included in this report) and $0.1 million in proceeds from sales of property, plant and equipment.

 

Net cash used in financing activities in 2015 was approximately $67.7 million, which included $23.1 million in net payments of debt, $1.9 million in excess tax benefits on share-based compensation and $9.2 million in cash proceeds from the exercise of stock options. The company also repurchased $31.3 million of its own stock in 2015. Additionally the company paid cash dividends of $24.3 million during the year. Information regarding the company’s debt is provided in Note 7 of the Notes to Consolidated Financial Statements included in this report.

 

The effect of exchange rate changes decreased cash by $22.8 million in 2015. 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 $31.2 million increase in cash and cash equivalents in 2015. This left the company with a cash balance of $328.8 million at January 2, 2016.

 

Days sales outstanding (DSO) in accounts receivable was 59 days at year-end 2015 compared to 60 days at year-end 2014 and 59 days at year-end 2013. Days inventory outstanding was 65 days at year-end 2015, compared to 68 days at year-end 2014 and 70 days at year-end 2013.

 

The ratio of current assets to current liabilities was 2.8 to 1 at year-end 2015, compared to 2.7 to 1 at year-end 2014 and 2.7 to 1 at year-end 2013. The change in the current ratio at the end of 2015 compared to the prior year reflected increased current assets in 2015, primarily related to higher cash balances. The carrying amounts of total debt decreased $23.1 million in 2015, compared to a decrease of $24.6 million in 2014 and an increase of $135.8 million in 2013. The decrease in 2015 was due to higher net payments under the revolving credit facility in 2015. The ratio of long-term debt to equity was 0.11 to 1 at year-end 2015 compared to 0.15 to 1 at year-end 2014 and 0.14 to 1 at year-end 2013. 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 2014 with $305.2 million of cash. Net cash provided by operating activities in 2014 was approximately $153.1 million and included $99.4 million in net income and $47.8 million in non-cash adjustments (primarily $41.9 million in depreciation and amortization), and $5.9 million of favorable changes in operating assets and liabilities.

 

Changes in operating assets and liabilities (including short-term and long-term items) that negatively impacted cash flows in 2014 consisted of changes in accounts receivable ($13.1 million), inventory ($2.3 million), accrued expenses including post-retirement ($1.6 million) and accrued taxes ($0.5 million). Increases in accounts receivable and inventory resulted from higher sales volumes in 2014. Accrued expenses including post-retirement included pension contributions of $9.9 million in 2014 and $5.0 million in 2013. Positively impacting cash flows were changes in accounts payable ($17.3 million), accrued payroll and severance ($2.4 million) and prepaid expenses and other ($3.7 million). The increase in accounts payable primarily resulted from large capital purchases in December 2014 and the lengthening of vendor payment terms.

 

 
33

 

 

The company’s capital expenditures were $44.0 million in 2015, $32.3 million in 2014 and $35.0 million in 2013.

 

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, 2015 to April 30, 2016. The company repurchased 350,000 shares of its common stock during 2015 under this program and 650,000 shares may yet be purchased under the program as of January 2, 2016. The company withheld 28,286 shares of stock in lieu of withholding taxes on behalf of employees who became vested in restricted stock option grants during 2015.

 

Contractual Obligations and Commitments

 

The following table summarizes contractual obligations and commitments as of January 2, 2016:

 

(In thousands )

 

Total

   

< 1 Year

   

> 1 - < 3 Years

   

> 3 - < 5 Years

   

> 5 Years

 

Term loan

  $ 85,000     $ 10,000     $ 75,000     $     $  

Revolving credit facility

    77,000       77,000                    

Entrusted loan

    9,474                   9,474        

Interest payments

    3,098       1,365       1,733              
Supplemental Executive                                        

Retirement Plan

    2,461       31       1,880       63       487  

Operating lease payments

    34,639       8,886       9,211       6,521       10,021  

Purchase obligations

    51,658       51,658                    

Total

  $ 263,330     $ 148,940     $ 87,824     $ 16,058     $ 10,508  

 

Off-Balance Sheet Arrangements

 

As of January 2, 2016, the company did not have any off-balance sheet arrangements, as defined under SEC rules. Specifically, the company was not liable for guarantees of indebtedness owed by third parties, the company was not directly liable for the debt of any unconsolidated entity and the company did not have any retained or contingent interest in assets. The company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

 

Recent Accounting Pronouncements 

 

In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-17 – Income taxes (Topic 740): Balance Sheet Classification of Deferred Taxes which amends the presentation of deferred income tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. The amendments in the ASU are effective for financial statements issued for annual periods beginning after December 15, 2016. The company has adopted the new standard on January 2, 2016 and has restated the presentation of deferred income taxes on its comparative Consolidated Balance Sheets as of December 27, 2014 to reflect the change.

 

 
34

 

 

In May 2014, the FASB amended prior authoritative guidance for revenue recognition which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The standard is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The company is currently evaluating the impact of the adoption of this accounting standard on its consolidated financial statements.

 

Critical Accounting Policies and Estimates

 

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

 

Net Sales

 

Revenue Recognition: The company recognizes revenue on product sales in the period in which the sales process is complete. This generally occurs when persuasive evidence of an arrangement exists, products are shipped (FOB origin) to the customer in accordance with the terms of the sale, the risk of loss has been transferred, collectability is reasonably assured and the pricing is fixed and determinable. At the end of each period, for those shipments where title to the products and the risk of loss and rewards of ownership do not transfer until the product has been received by the customer, the company adjusts 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.

 

 
35

 

 

Return to Stock: 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.

 

 

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 2014, the company was required to step up the value of inventory acquired in business combinations to its selling prices less the cost to sell under business combination accounting. This step-up was approximately $2.8 million for SymCom in 2014.

 

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.

 

 
36

 

 

As of the most recent annual test conducted on September 27, 2015, 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 148%, 95%, 188%, 218%, 76%, 26%, 12% and 198% for its reporting units; electronics (non-silicon), electronics (silicon), passenger car, commercial vehicle products, sensors, relays, custom products and power fuse, respectively, at September 27, 2015.

Certain key assumptions used in the annual test included a discount rate of 11.7% and a long-term growth rate of 3.0% which were used for all reporting units except for automotive sensor and relay which had a discount rate of 13.7% as a result of a 2.0% premium factor and custom products which had a discount rate of 14.7% as a result of a 3.0% premium factor.

 

In addition, the company performed a sensitivity test at September 27, 2015 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 27, 2015.

 

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, $0.3 million and $0.0 million for the fiscal years ended 2015, 2014 and 2013, respectively. Further information regarding asset impairments is provided in Note 11 of the Notes to Consolidated Financial Statements included in this report.

 

Environmental Liabilities

 

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

 

 
37

 

 

Pension and Supplemental Executive Retirement Plan

 

Littelfuse has a number of company-sponsored defined benefit plans primarily in 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. During 2015, the company settled its U.S. defined benefit pension plan as described in Note 12 of the Notes to Consolidated Financial Statements included in this report. Further information regarding these plans is also provided in Note 12 of the Notes to Consolidated Financial Statements included in this report.

 

Equity-based Compensation

 

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

 

Total equity-based compensation expense for all equity compensation plans was $10.7 million, $9.4 million, and $8.9 million in 2015, 2014, and 2013, respectively. Further information regarding this expense is provided in Note 13 of the Notes to Consolidated Financial Statements included in this report.

 

Income Taxes

 

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

 

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.

 

 
38

 

 

Outlook 

 

Sales for the first quarter of 2016 are expected to be in the range of $213.0 to $223.0 million which represents 4% revenue growth over the prior quarter at the midpoint of the range (approximately 6% growth excluding currency effects). Despite concerns about the global economy and weakness in some of its end markets, the company believes it can grow revenue in the low to mid single digits in 2016. Assuming modest top-line growth, the company believes it can expand its operating margin by approximately 150 basis points compared to 2015 as it benefits from completion of its footprint consolidation projects, further progress on automotive sensor profitability initiatives and continued gains in manufacturing performance.

 

The company expects capital expenditures in 2016 to be in the range of $40 to $45 million, primarily for capacity to support volume increases, new product introductions and restructuring activities. The company expects to fund 2016 capital expenditures from operating cash flows.

 

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 $162.0 million in debt outstanding at January 2, 2016 related to the unsecured revolving credit facility and term loan which are 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, Italy, Lithuania and the Philippines. During 2015, sales to customers outside the U.S. were approximately 60% 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 net long exposure is to the euro. The company’s most significant net short exposures are to the Chinese yuan, Mexican peso and Philippine peso. 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.

 

 
39

 

 

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 $1.6 million for copper, $0.6 million for zinc, $0.2 million for gold and $0.6 million for silver.

 

The cost of oil has fluctuated dramatically over the past several years. Consequently, there is a risk that a return to high prices for oil and electricity in 2016 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.

   

 
40

 

 

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Index

Page

   

Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements

42

Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements

43

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

44

Consolidated Financial Statements

 
 

Consolidated Balance Sheets

45

 

Consolidated Statements of Net Income

46

 

Consolidated Statements of Comprehensive Income

46

 

Consolidated Statements of Cash Flows

47

 

Consolidated Statements of Equity

48

Notes to Consolidated Financial Statements

 
 

1. Summary of Significant Accounting Policies and Other Information

49

 

2. Acquisition of Businesses 

54

 

3. Inventories

56

 

4. Goodwill and Other Intangible Assets

56

 

5. Other Investments

57

 

6. Investment in Unconsolidated Affiliate

57

 

7. Debt

58

 

8. Financial Instruments and Risk Management

60

 

9. Fair Value of Assets and Liabilities

60

 

10. Coal Mining Liability

61

 

11. Asset Impairments

62

 

12. Benefit Plans

62

 

13. Shareholders’ Equity

67

 

14. Income Taxes

70

 

15. Business Unit Segment Information 71

72

 

16. Lease Commitments

75

 

17. Earnings Per Share

75

 

18. Selected Quarterly Financial Data (Unaudited)

77

 

19. Subsequent Event

77

 

 
41

 

  

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. (a Delaware corporation) and subsidiaries (the Company) as of January 2, 2016 and December 27, 2014, and the related consolidated statements of net income, comprehensive income, equity, and cash flows for each of the two years in the period ended January 2, 2016. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Littelfuse, Inc. and subsidiaries as of January 2, 2016 and December 27, 2014, and the results of their operations and their cash flows for each of the two years in the period ended January 2, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

 

As discussed in Note 1 to the consolidated financial statements, the Company adopted new accounting guidance in 2015 and 2014, related to the presentation of deferred income taxes.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 2, 2016, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2016, expressed an unqualified opinion.

 

/s/ GRANT THORNTON LLP

 

Chicago, Illinois

March 1, 2016 

 

 
42

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

The Board of Directors and Shareholders of Littelfuse, Inc.

 

We have audited the accompanying consolidated statements of net income, comprehensive income, equity, and cash flows of Littelfuse, Inc. for the year ended December 28, 2013. Our audit also included the financial statement schedule listed in the Index at Item 15(a)(2)(i). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

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 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 audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, Littelfuse Inc.’s consolidated results of its operations and its cash flows for the year ended December 28, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

 /s/ Ernst & Young LLP

 

Chicago, Illinois

February 25, 2014

 

 
43

 

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders of Littelfuse, Inc.

 

We have audited the internal control over financial reporting of Littelfuse, Inc. (a Delaware corporation) and subsidiaries (the Company) as of January 2, 2016, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. 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.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2, 2016, based on criteria established in the 2013 Internal Control - Integrated Framework issued by COSO.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the period ended January 2, 2016, and our report dated March 1, 2016, expressed an unqualified opinion on those financial statements.

 

/s/ GRANT THORNTON LLP

 

Chicago, Illinois

March 1, 2016

 

 
44

 

 

CONSOLIDATED BALANCE SHEETS

 

(In thousands of USD)

 

January 2, 2016

   

December 27, 2014

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 328,786     $ 297,571  

Short-term investments

    4,179       4,302  

Accounts receivable, less allowances (2015 - $17,487; 2014 - $19,418)

    142,882       135,356  

Inventories

    98,629       97,391  

Prepaid expenses and other current assets

    8,959       13,904  

Assets held for sale

          5,500  

Total current assets

    583,435       554,024  

Property, plant, and equipment:

               

Land

    5,236       5,697  

Buildings

    71,383       64,609  

Equipment

    382,429       370,179  

Accumulated depreciation and amortization

    (296,480 )     (281,845 )

Net property, plant and equipment

    162,568       158,640  

Intangible assets, net of amortization:

               

Patents, licenses and software

    20,221       23,640  

Distribution network

    16,490       19,428  

Customer lists, trademarks and tradenames

    54,912       60,605  

Goodwill

    189,767       196,256  

Investments

    15,197       12,056  

Deferred income taxes

    8,333       22,874  

Other assets

    14,058       23,303  

Total assets

  $ 1,064,981     $ 1,070,826  

LIABILITIES AND EQUITY

               

Current liabilities:

               

Accounts payable

  $ 51,658     $ 50,793  

Accrued payroll

    32,611       30,511  

Accrued expenses

    24,145       13,059  

Accrued severance

    3,798       790  

Accrued income taxes

    10,621       9,045  

Current portion of accrued post-retirement benefits

          11,768  

Current portion of long-term debt

    87,000       88,500  

Total current liabilities

    209,833       204,466  

Long-term debt, less current portion

    84,474       106,658  

Deferred income taxes

    8,014       11,076  

Accrued post-retirement benefits

    5,653       5,147  

Other long-term liabilities

    12,809       15,814  

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, 2015 –22,420,785; 2014 – 22,585,529

    224       226  

Treasury stock, at cost: 362,748 and 199,266 shares, respectively

    (32,766 )     (18,724 )

Additional paid-in capital

    259,553       243,844  

Accumulated other comprehensive income

    (45,673 )     (21,126 )

Retained earnings

    562,717       523,302  

Littelfuse, Inc. shareholders’ equity

    744,055       727,522  

Non-controlling interest

    143       143  

Total equity

    744,198       727,665  

Total liabilities and equity

  $ 1,064,981     $ 1,070,826  

 

See accompanying Notes to Consolidated Financial Statements.

 

 
45

 

 

CONSOLIDATED STATEMENTS OF NET INCOME

 

   

Year Ended

 

(In thousands of USD, except per share amounts)

 

January 2, 2016

   

December 27, 2014

   

December 28, 2013

 
                         

Net sales

  $ 867,864     $ 851,995     $ 757,853  

Cost of sales

    537,365       527,567       461,621  

Gross profit

    330,499       324,428       296,232  
                         

Selling, general and administrative expenses

    153,714       146,975       132,657  

Research and development expenses

    30,802       31,122       24,415  

Pension settlement expenses

    29,928              

Amortization of intangibles

    11,898       12,501       9,279  

Total operating expenses

    226,342       190,598       166,351  

Operating income

    104,157       133,830       129,881  
                         

Interest expense

    4,091       4,903       2,917  

Impairment and equity in net loss of unconsolidated affiliate

                10,678  

Foreign exchange (gain) loss

    (1,465 )     3,925       (3,303 )

Other expense (income), net

    (5,417 )     (6,644 )     (4,646 )

Income before income taxes

    106,948       131,646       124,235  

Income taxes

    24,482       32,228       35,451  

Net income

  $ 82,466     $ 99,418     $ 88,784  
                         

Income per share:

                       

Basic

  $ 3.65     $ 4.41     $ 3.98  

Diluted

  $ 3.63     $ 4.37     $ 3.94  
                         

Weighted-average shares and equivalent shares outstanding:

                       

Basic

    22,565       22,543       22,315  

Diluted

    22,719       22,727       22,537  

 


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   

Year Ended

 

(In thousands of USD )

 

January 2, 2016

   

December 27, 2014

   

December 28, 2013

 
                         

Net income

  $ 82,466     $ 99,418     $ 88,784  

Other comprehensive income (loss):

                       

Pension liability adjustments (net of tax of $106, $6,308 and ($5,270), respectively)

    (1,761 )     (12,475 )     3,739  

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

    1,530              

Unrealized gain on investments

    793       1,398       1,526  

Reclassification of pension settlement costs to expense (net of tax of $11,742, $0 and $0, respectively)

    21,124              

Foreign currency translation adjustments

    (46,231 )     (30,466 )     (1,396 )

Comprehensive income

  $ 57,921     $ 57,875     $ 92,653  

See accompanying Notes to Consolidated Financial Statements.

  

 
46

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

Year Ended

 

(In thousands of USD)

 

January 2, 2016

   

December 27, 2014

   

December 28, 2013

 

Operating activities

                       

Net income

  $ 82,466     $ 99,418     $ 88,784  

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

                       

Depreciation

    29,701       29,374       25,201  

Amortization of intangibles

    11,898       12,501       9,279  

Impairment of assets

          293        

Provision for bad debts

    164       130       289  

Non-cash inventory charge

          2,769       1,525  

Net loss on pension settlement, net of tax

    19,308              

Impairment and equity in net loss of unconsolidated affiliate

                10,678  

Loss on sale of property, plant and equipment

    1,253       1,042       92  

Stock-based compensation

    10,266       9,069       8,609  

Excess tax benefit on share-based compensation

    (1,891 )     (2,843 )     (4,054 )

Deferred income taxes

    11,479       (4,488 )     6,640  

Changes in operating assets and liabilities:

                       

Accounts receivable

    (14,377 )     (13,062 )     (16,683 )

Inventories

    (3,577 )     (2,258 )     (5,486 )

Accounts payable

    2,573       17,281       2,000  

Accrued expenses (including post-retirement)

    6,482       (1,577 )     (8,906 )

Accrued payroll and severance

    5,883       2,360       8,032  

Accrued taxes

    (1,043 )     (549 )     (10,773 )

Prepaid expenses and other

    5,241       3,681       2,140  

Net cash provided by operating activities

    165,826       153,141       117,367  
                         

Investing activities

                       

Acquisitions of businesses, net of cash acquired

    (4,558 )     (56,368 )     (144,382 )

Purchases of short-term investments

          (4,331 )     (8,478 )

Purchase of cost method investment

    (3,500 )            

Proceeds from maturities of short-term investments

          6,770       2,044  

Decrease (increase) in entrusted loan receivable (see note 7)

    7,811       (17,908 )      

Purchases of property, plant and equipment

    (44,019 )     (32,281 )     (34,953 )

Proceeds from sale of property, plant and equipment

    102       125       176  

Net cash used in investing activities

    (44,164 )     (103,993 )     (185,593 )
                         

Financing activities

                       

Proceeds from debt

    49,000       97,500       260,500  

Payments of term debt

    (8,750 )     (5,000 )     (1,250 )

Payments of revolving credit facility

    (55,500 )     (135,000 )     (123,500 )

Proceeds from exercise of stock options

    9,150       14,061       21,959  

(Payments) proceeds from entrusted loan (see note 7)

    (7,811 )     17,908        

Debt issuance costs

    (42 )     (107 )     (809 )

Cash dividends paid

    (24,341 )     (21,175 )     (18,722 )

Excess tax benefit on share-based compensation

    1,891       2,843       4,054  

Purchases of common stock

    (31,252 )     (14,283 )      

Net cash (used in) provided by financing activities

    (67,655 )     (43,253 )     142,232  

Effect of exchange rate changes on cash and cash equivalents

    (22,792 )     (13,516 )     (4,218 )

Increase (decrease) in cash and cash equivalents

    31,215       (7,621 )     69,788  

Cash and cash equivalents at beginning of year

    297,571       305,192       235,404  

Cash and cash equivalents at end of year

  $ 328,786     $ 297,571     $ 305,192  

 

See accompanying Notes to Consolidated Financial Statements.

  

 
47

 

 

CONSOLIDATED STATEMENTS OF EQUITY

 

   

Littelfuse, Inc. Shareholders’ Equity

                 

(In thousands of USD)

 

Common Stock

   

Addl. Paid in Capital

   

 

Treasury Stock

   

Accum. Other Comp. Inc. (Loss)

   

Retained Earnings

   

Non-controlling Interest

   

Total

 

Balance at December 29, 2012

  $ 220     $ 195,803     $ (60,496 )   $ 16,548     $ 435,340     $ 143