lfus20161231_10k.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-K

 

 

[X]

Annual Report Pursuant to Section 13 or 15(d)

   
   

of the Securities Exchange Act of 1934

   

(Mark one)

 

for the fiscal year ended December 31, 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

On Which Registered

Common Stock, $0.01 par value

NASDAQ Global Select MarketSM

 

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

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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 22,368,817 shares of voting stock held by non-affiliates of the registrant was approximately $2,607,309,310 based on the last reported sale price of the registrant’s Common Stock as reported on the NASDAQ Global Select MarketSM on July 2, 2016.

 

As of February 16, 2017, the registrant had outstanding 22,632,855 shares of Common Stock, net of Treasury Shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

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

 

 
 

 

 

TABLE OF CONTENTS

 

 

Page

   

FORWARD-LOOKING STATEMENTS

3

     

PART I

   

Item 1.

Business

3

Item 1A.

Risk Factors

9

Item 1B.

Unresolved Staff Comments

14

Item 2.

Properties

14

Item 3.

Legal Proceedings

16

Item 4.

Mine Safety Disclosures

16

     

PART II

   

Item 5.

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

16

Item 6.

Selected Financial Data

18

Item 7.

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

18

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 8.

Financial Statements and Supplementary Data

32

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

65

Item 9A.

Controls and Procedures

65

Item 9B.

Other Information

66

     

PART III

   

Item 10.

Directors, Executive Officers and Corporate Governance 

67

Item 11.

Executive Compensation

68

Item 12.

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

69

Item 13.

Certain Relationships and Related Transactions, and Director Independence

69

Item 14.

Principal Accounting Fees and Services

69

     

PART IV

   

Item 15.

Exhibits, Financial Statement Schedules.

70

 

Schedule II – Valuation and Qualifying Accounts and Reserves

71

 

Signatures

72

 

Exhibit Index

73

     

 

 
2

 

 

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, uncertainties related to political and regulatory changes and other risks that may be detailed in “Item 1A. Risk Factors” below and in the company’s other Securities and Exchange Commission filings.

 

AVAILABLE INFORMATION

 

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

 

PART I

 

ITEM 1. BUSINESS.

 

GENERAL

 

Littelfuse, Inc., was incorporated under the laws of the State of Delaware in 1991. References herein to the “company,” “we,” “our” or “Littelfuse” refer to Littelfuse, Inc. and its subsidiaries. References herein to “2016”, “fiscal 2016” or “fiscal year 2016” refer to the fiscal year ended December 31, 2016. References herein to “2015”, “fiscal 2015” or “fiscal year 2015” refer to the fiscal year ended January 2, 2016. References herein to “2014”, “fiscal 2014” or “fiscal year 2014” refer to the fiscal year ended December 27, 2014. The company operates on a 52-53 week fiscal year (4-4-5 basis) ending on the Saturday closest to December 31. Therefore, the financial results of certain fiscal years and the associated 14 week quarters will not be exactly comparable to the prior and subsequent 52 week fiscal years and the associated quarters having only 13 weeks. As a result of using this convention, each of fiscal 2016 and fiscal 2014 contained 52 weeks whereas fiscal 2015 contained 53 weeks.

 

OVERVIEW

 

We are one of the world’s leading suppliers of circuit protection products for the electronics, automotive, and industrial markets, with expanding platforms in sensors and power control components and modules. In addition to 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. The company’s devices protect products in virtually every market that uses electrical energy, from consumer electronics to automobiles to industrial equipment.

 

Segments

 

The company conducts its business through three reportable segments which are defined by markets and consist of: Electronics, Automotive, and Industrial. For segment and geographical information and consolidated net sales and operating income see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 14, Segment Information, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

 

Electronics Segment: Provides circuit protection components for overcurrent and overvoltage protection, as well as sensor components and modules to leading global manufacturers of a wide range of electronic products. The segment covers a broad range of end markets, including consumer electronics, telecommunications equipment, medical devices, lighting products, and white goods. The Electronics segment has one of the broadest product offering in the industry including fuses and protectors, positive temperature coefficient (“PTC”) resettable fuses, varistors, polymer electrostatic discharge (“ESD”) suppressors, discrete TVS diodes, TVS diode arrays protection and switching thyristors, gas discharge tubes, power switching components, fuseholders, reed switch and sensor assemblies, insulated gate bipolar transistors (“IGBT”) blocks, and related accessories. The Electronics segment supplies products to leading manufacturers such as Cisco, Celestica, Delta, Flextronics, Foxconn, Huawei, IBM, Intel, Jabil, LG, Microsoft, Nokia, Panasonic, Quanta, Samsung, Sanmina-SCI, Seagate, Siemens, and Sony, as well as to leading electronics distributors such as Arrow Electronics, Future Electronics, TTI, Mouser Electronics and Digi-Key.

 

 
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Automotive Segment: Provides circuit protection and sensor products to the worldwide automotive original equipment manufacturers (“OEM”) and parts distributors of passenger automobiles, trucks, buses, and off-road equipment. In addition, the company supplies heavy duty power distribution modules, switches and relays to the commercial vehicle industry. The company also sells its fuses, including blade fuses, high current fuses, battery cable protectors, and varistors, in the automotive replacement parts market. In the automotive passenger car and commercial vehicle market, the company’s end customers include worldwide OEMs and Tier One suppliers such as Autoliv, BMW, Caterpillar, Chrysler, Daimler Trucks NA, Delphi, Ford Motor Company, General Motors, Hyundai Group, John Deere, Key Safety Systems, Lear, Navistar, Stabilus, and Volkswagen. The company also supplies wiring harness manufacturers and auto parts suppliers worldwide, including Advance Auto Parts, Alphabet, Continental, Delphi, Lear, O’Reilly Auto Parts, Pep Boys, Sumitomo, Valeo, and Yazaki.

 

 

Industrial Segment: Provides circuit protection products for industrial and commercial customers. Products include power fuses and other circuit protection devices, including protection and time delay relays, which are used in commercial and industrial buildings and large equipment such as HVAC systems, elevators, and machine tools. The company also supplies industrial ground fault protection in mining and other large industrial operations. In the industrial market, the company supplies representative customers such as Agrium, Corning, Gamesa, LG, Mosaic, Potash Corporation of Saskatchewan, Trane, as well as leading industrial distributors.

 

Strategy

 

In December 2016, we announced a new five-year strategic plan. Building upon our achievements from our previous five-year plan and leveraging our position in global mega trends such as safety, connectivity, and energy efficiency, we are targeting accelerated annual organic growth of 5-7% and annual growth from strategic acquisitions of 5-7%. Our strategic goals include the continued growth of our circuit protection business, accelerated growth in our power control business and the doubling of the sensor platform revenue over the next five years. We expect to do this through content and share gains, targeting underpenetrated geographies and markets, and innovation while continuing to acquire and integrate businesses that fit our strategic focus areas.

 

Recent Acquisitions

 

In 2016, 2015, and 2014, we completed several acquisitions that have broadened our product offerings and contributed to our growth.

 

 

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

 

 

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

 

 

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

 

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

 

 

SymCom: 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 segment.

 

Sales and Operations

 

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

 

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

 

   

Fiscal Year

 

(in thousands)

 

2016

   

2015

   

2014

 

Electronics

  $ 535,191     $ 405,497     $ 410,065  

Automotive

    415,200       339,957       325,415  

Industrial

    105,768       122,410       116,515  

Total

  $ 1,056,159     $ 867,864     $ 851,995  

 

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

 

   

Fiscal Year

 

(in thousands)

 

2016

   

2015

   

2014

 

Americas

  $ 411,105     $ 401,173     $ 377,660  

Europe

    200,277       152,661       163,918  

Asia-Pacific

    444,777       314,030       310,417  

Total

  $ 1,056,159     $ 867,864     $ 851,995  

 

The company’s products are sold worldwide through distributors, a direct sales force and manufacturers’ representatives. For the fiscal year 2016, approximately 66% of the company’s net sales were to customers outside the United States (“U.S.”), including approximately 25% to China.

 

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

 

Additional information regarding the company’s sales by geographic area and long-lived assets in different geographic areas is in Note 14, Segment Information, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

BUSINESS ENVIRONMENT

 

Electronics Segment

 

Electronic circuit protection, sensing, and control products are used to protect circuits in a multitude of electronic systems. The company’s product offering includes a complete line of overcurrent and overvoltage solutions including (i) fuses and protectors, (ii) PTC resettable fuses, (iii) varistors, (iv) polymer ESD suppressors, (v) discrete TVS diodes, TVS diode arrays, protection and switching thyristors, (vi) gas discharge tubes, (vii) power switching components, (viii) fuseholders, (ix) reed switch and sensor assemblies, (x) IGBT blocks, and (xi) 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.

 

 
5

 

 

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 PULSE-GUARD® line of ESD suppressors is used in PC and PC peripherals, digital consumer electronics, and wireless applications.

 

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

 

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

 

Power switching components, such as switching thyristors and IGBTs, 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 Segment

 

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 and as a result of vehicle electrification such as 48 volt, hybrid, and battery electric vehicles, for which the company also supplies.

 

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

 

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 CABLE PRO®.

 

Products sold into the market include speed, position, and direction sensors, occupant safety sensors, solar sensors, fluid level, and quality sensors, fuel heating systems, rotary sensors for comfort applications, and water in fuel sensors. A majority of the company’s automotive sensor sales are made to Tier One suppliers and distributors.

 

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

 

 
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Industrial Segment

 

The company manufactures and sells a broad range of low-voltage and medium-voltage circuit protection products to electrical distributors and their customers in the construction, OEM and industrial maintenance, repair and operating supplies (“MRO”) markets. The company also designs and manufactures 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 and gas, and industrial environments from excessive currents, over voltages, and electrical shock hazards called ground faults. Major applications for protection relays include protection of motor, transformer, and power-line distribution circuits. Ground-fault relays are used to protect personnel and equipment in wet environments such as underground mining or water treatment applications where there is a greater risk for electricity to come in contact with water and create a shock hazard.

 

Littelfuse custom-engineered electrical equipment is designed and built for use in harsh or demanding environments 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.

 

PRODUCT DESIGN AND DEVELOPMENT

 

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

 

Proposals for the development of new products are initiated primarily by sales, marketing, and product management 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 2016, 2015, and 2014, the company expended $42.2 million, $30.8 million, and $31.1 million, respectively, on R&D.

 

PATENTS, TRADEMARKS, AND OTHER INTELLECTUAL PROPERTY

 

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

 

The company owns a large portfolio of patents worldwide and new products are continually being developed to replace older products. The company regularly applies for patent protection on such new products. 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.

 

MANUFACTURING

 

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

 

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

 

MARKETING

 

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

 

 
7

 

 

Electronics Segment

 

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

 

Automotive Segment

 

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

 

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

 

Industrial Segment

 

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

 

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

 

CUSTOMERS

 

The company sells to over 6,000 customers and distributors worldwide. No single customer accounted for more than 10% of net sales during any of the last three years. During fiscal 2016, 2015, and 2014, net sales to customers outside the U.S. accounted for approximately 66%, 60%, and 63%, respectively, of the company’s total net sales.

 

COMPETITION

 

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

 

 
8

 

 

BACKLOG

 

The backlog of unfilled orders at December 31, 2016 was approximately $110.3 million, compared to $96.4 million at January 2, 2016. Substantially all of the orders currently in backlog are scheduled for delivery in 2017.

 

EMPLOYEES

 

As of December 31, 2016, the company employed approximately 10,300 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 18% of the company's total workforce was employed under collective bargaining agreements at December 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.

 

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

 

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

 

ITEM 1A. RISK FACTORS.

 

Our business, financial condition, and results of operations are subject to various risks and uncertainties, including the risk factors we have identified below. Any of the following risk factors could materially and adversely affect our business, financial condition, or results of operations. These factors are not necessarily listed in order of importance.

 

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.

 

 
9

 

 

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.

 

Our ability to manage currency or commodity price fluctuations or supply 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 commodity prices, foreign currency exchange rates, 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.

 

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

 

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

 

 
10

 

 

We are exposed to political, economic, and other risks that arise from operating a multinational business.

 

We have significant operating activities in numerous countries around the globe that 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 U.S., 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 operating activities are subject to a number of risks generally associated with multi-national operations, including risks relating to the following:

 

 

general economic conditions;

 

 

currency fluctuations and exchange restrictions;

 

 

import and export duties and restrictions;

 

 

the imposition of tariffs and other import or export barriers;

 

 

compliance with regulations governing import and export activities;

 

 

current and changing regulatory requirements;

 

 

political and economic instability;

 

 

potentially adverse income tax consequences;

 

 

transportation delays and interruptions;

 

 

labor unrest;

 

 

natural disasters;

 

 

terrorist activities;

 

 

public health concerns;

 

 

difficulties in staffing and managing multi-national operations; and

 

 

limitations on our ability to enforce legal rights and remedies.

 

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

 

We engage in strategic acquisitions and may not realize the anticipated benefits of the acquisitions and / or may encounter difficulties in integrating these businesses.

 

We are a company that 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 future acquisitions.

 

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

 

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 intangible assets on our balance sheet upon closing. Any of these factors may adversely affect our financial condition or results of operations.

 

 
11

 

 

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

 

In the past we have taken actions to restructure and optimize our production and manufacturing capabilities and efficiencies through relocations, consolidations, plant closings or asset sales. In the future we may take additional restructuring actions including the consolidating, closing or selling of additional facilities. These actions could result in impairment charges and various charges for such items as idle capacity, disposition costs and severance costs, in addition to normal or attendant risks and uncertainties. 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.

 

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

 

We source materials and sell product through various international network channels. A disruption could occur within our manufacturing, distribution or supply chain network. This could include damage or destruction due to various causes including natural disasters or political instability which would cause one or more of these network channels to become non-operational. This could adversely affect 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 industry and we are susceptible to trends and factors affecting this industry including industry cyclicality, and unexpected product recalls as well as the success of our customers’ products.

 

Net sales to the automotive industry represent a substantial portion of our revenues. Factors negatively affecting this industry 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, tax policies and 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. 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, or interest rates 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.

 

 
12

 

 

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 January 2, 2016 and December 31, 2016, the closing sale price of our common stock ranged between a low of $90.61 and a high of $156.54. 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.

 

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 certain 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.”

 

We are exposed to, and may be adversely affected by, potential security breaches or other disruptions to our information technology systems and data security. 

 

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

 

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.

 

 
13

 

 

The company’s effective tax rate could materially increase as a consequence of various factors, including U.S. and/or international tax legislation, mix of the company’s earnings by jurisdiction, and U.S. and foreign jurisdictional tax audits.

 

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

 

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

 

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

  

Failure to attract and retain qualified personnel could affect our business results. 

 

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

 

We may not be successful protecting our patents and trademarks.

 

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

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2. PROPERTIES.

 

The company’s operations are located in 51 owned or leased facilities worldwide, totaling approximately 2.8 million square feet. The company’s corporate headquarters is located in the U.S. in Chicago, Illinois. The company has North American manufacturing facilities in Saskatoon, Canada, Piedras Negras, Mexico, Melchor Muzquiz, Mexico, Matamoros, Mexico, and Rapid City, South Dakota. The company has European manufacturing facilities in Kaunas, Lithuania, and Legnago and Ozegna, Italy. Asia-Pacific operations include sales and distribution centers located in Singapore, Taiwan, Japan, China, and Korea, with manufacturing plants located in the Philippines, Japan, and various cities in China.

 

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.

 

 
14

 

 

The following table provides certain information concerning the company’s facilities at December 31, 2016, and the use of these facilities during fiscal year 2016:

 

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

 

18,908

 

Leased

 

2025

 

Auto and Electronics

Lake Mills, Wisconsin

 

Administrative, Engineering, Sales, and Research and Development

 

65,000

 

Leased

 

2020

 

Electronics

Troy, Michigan

 

Sales

 

4,461

 

Leased

 

2021

 

Auto

Rapid City, South Dakota

 

Manufacturing and Administrative

 

230,000

 

Owned

 

 

Industrial

Waltham, Massachusetts

 

Administrative, Engineering, and Research and Development

 

3,858

 

Leased

 

2022

 

Auto

Fremont, CA

 

Research and Development

 

18,000

 

Leased

 

2023

 

Electronics

Bellingham, Washington

 

Sales and Research and Development

 

2,000

 

Leased

 

2017

 

Auto

Melchor Muzquiz, Mexico

 

Manufacturing

 

39,364

 

Leased

 

2019

 

Auto

Piedras Negras, Mexico

 

Administrative, Manufacturing

 

99,822

 

Leased

 

2017

 

Auto

Piedras Negras, Mexico

 

Manufacturing

 

291,860

 

Owned

 

 

Auto and Industrial

Matamoros, Mexico

 

Administrative, Logistics, Manufacturing, Engineering, Testing, and Distribution

 

104,000

 

Owned

 

 

Auto

Eagle Pass, Texas

 

Distribution

 

7,600

 

Leased

 

2017

 

Auto, Electronics, and Industrial

Saskatoon, Canada

 

Administrative, Manufacturing, Engineering, and Research and Development

 

88,390

 

Owned

 

 

Industrial

Sao Paulo, Brazil

 

Sales

 

3,229

 

Leased

 

2017

 

Electronics and Auto

Manaus, Brazil

 

Warehouse

 

2,152

 

Leased

 

2017

 

Electronics and Auto

Swindon, U.K.

 

Administrative

 

304

 

Leased

 

2017

 

Electronics

Norwich, U.K.

 

Engineering

 

7,964

 

Leased

 

2020

 

Auto

Deventer, The Netherlands

 

Administrative

 

1,076

 

Leased

 

2017

 

Essen, Germany

 

Leased to third party

 

37,244

 

Owned

 

 

Essen, Germany

 

Administrative

 

3,703

 

Leased

 

2017

 

Auto and Electronics

Bremen, Germany

 

Administrative

 

13,455

 

Leased

 

2021

 

Auto, Electronics, and Industrial

Lauf, Germany

 

Administrative

 

1,362

 

Leased

 

2018

 

Electronic

Taufkirchen, Germany

 

Administrative

 

318

 

Leased

 

2017

 

Electronic

Lenzenburg, Switzerland

 

Administrative

 

215

 

Leased

 

2017

 

Auto

Arstad, Sweden

 

Sales

 

328

 

Leased

 

2017

 

Auto

Kaunas, Lithuania

 

Administrative, Manufacturing, Research and Development, and Engineering

 

43,239

 

Owned

 

 

Auto

Kaunas, Lithuania

 

Manufacturing

 

84,712

 

Leased

 

2021

 

Auto

Kaunas, Lithuania

 

Research and Development

 

4,596

 

Leased

 

2017

 

Auto

Ozegna, Italy

 

Administrative, Manufacturing, and Research and Development

 

32,292

 

Leased

 

2021

 

Auto

Legnago, Italy

 

Administrative, Manufacturing, and Research and Development

 

96,875

 

Leased

 

2022

 

Auto

Singapore

 

Sales and Distribution

 

1,572

 

Leased

 

2018

 

Electronics

Taipei, Taiwan

 

Sales

 

7,876

 

Leased

 

2017

 

Electronics

Seoul, Korea

 

Sales

 

3,643

 

Leased

 

2017

 

Electronics

Lipa City, Philippines

 

Manufacturing

 

116,046

 

Owned

 

 

Electronics

Lipa City, Philippines

 

Manufacturing

 

105,827

 

Owned

 

 

Electronics

Dongguan, China

 

Administrative and Manufacturing

 

264,792

 

Leased

 

2023

 

Electronics

Suzhou, China

 

Manufacturing

 

143,458

 

Owned

 

 

Auto and Electronics

Beijing, China

 

Sales

 

452

 

Leased

 

2017

 

Electronics

Shenzhen, China

 

Sales

 

3,100

 

Leased

 

2017

 

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

Tsukuba, Japan

 

Manufacturing

 

80,500

 

Owned

 

 

Auto and Electronics

Tokyo, Japan

 

Sales

 

4,123

 

Leased

 

2019

 

Auto and Electronics

Shanghai, China

 

Manufacturing

 

87,737

 

Leased

 

2021

 

Auto and Electronics

Shanghai, China

 

Warehouse

 

35,015

 

Leased

 

2017

 

Auto and Electronics

Kunshan, China

 

Manufacturing

 

293,282

 

Owned

 

 

Auto and Electronics

Kunshan, China

 

Warehouse

 

2,687

 

Owned

 

 

Auto and Electronics

 

Properties with lease expirations in 2017 may be renewed at various times throughout the year. The company does not anticipate any material impact as a result of such expirations.

 

 
15

 

 

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.

 

PART II

 

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

 

Market Information

 

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

 

The table below provides information with respect to the company’s quarterly stock prices and cash dividends declared and paid for each quarter during fiscal 2016 and 2015:

 

    2016    

2015

 
   

4Q

   

3Q

   

2Q

   

1Q

   

4Q

   

3Q

   

2Q

   

1Q

 

High

  $ 156.54     $ 130.79     $ 123.15     $ 124.59     $ 114.90     $ 97.96     $ 102.78     $ 103.08  

Low

    124.32       113.42       106.26       90.61       87.32       82.53       93.31       89.11  

Close

    151.77       128.81       116.56       123.40       107.01       89.09       97.76       98.36  

Dividends

    0.33       0.33       0.29       0.29       0.29       0.29       0.25       0.25  

 

Number of Holders

 

As of February 16, 2017, there were 76 holders of record of the company’s common stock.

 

Dividend Policy

 

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

 

Recent Sales of Unregistered Securities

 

There were no sales of unregistered securities by us or affiliates during the three months ended December 31, 2016.

 

Purchases of Equity Securities

 

The company’s Board of Directors authorized the repurchase of up to 1,000,000 shares of the company’s common stock under a program for the period May 1, 2016 to April 30, 2017. The company did not repurchase any shares of its common stock during fiscal 2016 and 1,000,000 shares may yet be purchased under the program as of December 31, 2016.

 

The table below presents shares of the company’s common stock which were acquired by the company during the three months ended December 31, 2016:

 

Period

 

Total number

of shares

purchased

   

Average price

paid per

share

   

Total number of

shares purchased

as part of publicly

announced plans

or programs

   

Maximum number

(or approximate dollar

value) of shares that

may yet be purchased

under the plans or

programs

 

October 1 through October 31

                      1,000,000  

November 1 through November 30

                      1,000,000  

December 1 through December 31

                      1,000,000  

Total

                      1,000,000  

 

 
16

 

 

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.

 

 

 

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

 

In the case of the Russell 2000 Index and the Dow Jones Electrical Components and Equipment Industry Group Index, a $100 investment made on December 31, 2011 and reinvestment of all dividends is assumed. In the case of the company, a $100 investment made on December 31, 2011 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 29, 2012, December 28, 2013, December 27, 2014, January 2, 2016, and December 31, 2016 for the fiscal years 2012, 2013, 2014, 2015, and 2016, respectively.

 

 
17

 

 

ITEM 6. SELECTED FINANCIAL DATA.

 

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

 

(in thousands, except per share data)

 

2016

   

2015

   

2014

   

2013

   

2012

 

Net sales

  $ 1,056,159     $ 867,864     $ 851,995     $ 757,853     $ 667,913  

Gross profit

    413,117       330,499       324,428       296,232       258,467  

Operating income

    130,644       104,157       133,830       129,881       106,870  

Net income

    104,488       80,866       98,100       87,814       74,370  

Per share of common stock:

                                       

Income from continuing operations

                                       

- Basic

    4.63       3.58       4.35       3.94       3.41  

- Diluted

    4.60       3.56       4.32       3.90       3.37  

Cash dividends paid

    1.24       1.08       0.94       0.84       0.76  

Cash and cash equivalents

    275,124       328,786       297,571       305,192       235,404  

Total assets

    1,491,194       1,065,475       1,069,859       1,024,373       777,728  

Short-term debt

    6,250       87,000       88,500       126,000       84,000  

Long-term debt, less current portion

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

 

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

 

Managements Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide information that is supplemental to, and should be read together with, our consolidated financial statements and the accompanying notes. Information in MD&A is intended to assist the reader in obtaining an understanding of (i) our consolidated financial statements, (ii) the changes in certain key items within those financial statements from year-to-year, (iii) the primary factors that contributed to those changes, and (iv) any changes in known trends or uncertainties that we are aware of and that may have a material effect on our future performance. In addition, MD&A provides information about our segments and how the results of those segments impact our results of operations and financial condition as a whole.

 

Executive Overview

 

Littelfuse is one of the world’s leading suppliers of circuit protection products for the electronics, automotive, and industrial markets, with expanding platforms in sensor and power control components and modules. In addition to 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, provides customer application support and test products for safety, reliability, and regulatory compliance. The company’s devices protect products in virtually every market that uses electrical energy, from various electronic devices 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. The company’s customer base includes OEMs, Tier One automotive suppliers, and distributors.

 

Executive Summary

 

We experienced strong performance improvements in 2016 including crossing the milestone of $1 billion in revenue and recognizing record earnings and cash flow. We made substantial progress in growth from our strategic 2016 acquisitions which contributed approximately $250 million in annualized revenue. We are well positioned for success with our updated strategy, which focuses on accelerated organic growth, while continuing to add acquisitions aligned to our core circuit protection, sensor, and power control platforms.

 

For 2016, we recognized net sales of $1,056.2 million, a 22% increase versus the prior year period. Acquisitions contributed significantly to the growth in revenue. Organic growth was due to growth in most end markets across our electronics segment as well as our automotive fuses and sensor business. This was partially offset by declines in our industrial segment and our commercial vehicle products business within our automotive segment.

 

We recognized Net Income of $104.5 million, an increase of 29.2%. Diluted EPS was $4.60, a 29.2% increase over last year.

 

 
18

 

 

Business Outlook and Key Trends & Events 

 

We continually look for ways to improve the efficiency and performance of our operations. Certain trends have affected our results of operations for 2016 compared to 2015 and 2014. These trends, as well as the key trends that we expect will impact our future results of operations, are as follows.

 

Business Acquisitions – The company continues to review its existing product portfolio and looks for additional strategic acquisitions that complement existing product offerings or provide for further expansion of its portfolio. During 2016 and 2015, the company completed the following acquisitions:

 

 

On August 29, 2016, the company acquired the ON portfolio for $104.0 million. The acquired business, which is included in the Electronics segment, consists of a product portfolio that includes TVS diodes, switching thyristors and IGBTs for automotive ignition applications. This transaction expands the company’s presence in each of these product categories.

 

 

On April 4, 2016, the company acquired 100% of Menber’s for $19.2 million, net of cash acquired and after settlement of a working capital adjustment. Located in Legnago, Italy, Menber’s specializes in the design, manufacturing, and selling of manual and electrical battery switches and trailer connectors for commercial vehicles. The acquisition expands the company’s commercial vehicle platform globally.

 

 

On March 25, 2016, the company acquired PolySwitch, the circuit protection business of TE Connectivity Ltd., for $348.3 million, net of cash acquired and after settlement of certain post-closing adjustments. PolySwitch has operations in Fremont, California and manufacturing facilities in Shanghai and Kunshan, China, and Tsukuba, Japan. The acquisition allows the company to strengthen its global circuit protection product portfolio, as well as strengthen its presence in the automotive electronics and battery end markets. The acquisition also significantly increases the company’s presence in Japan.

 

 

On October 1, 2015, the company acquired 100% of Sigmar. The total purchase price for Sigmar was $6.5 million, net of cash acquired and including estimated additional net payments of up to $0.9 million, a portion of which is subject to the achievement of certain milestones. Located in Ozegna, Italy, Sigmar is a leading global manufacturer of water-in-fuel and 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.

 

Financing The company increased its already strong liquidity position during 2016. Cash flow from operations was $180.1 million for 2016, which was a 9% increase compared to the prior year. In March 2016, the company completed the refinancing of its credit facility, increasing capacity to $700 million with the potential for future increases of up to an additional $150 million and extending the maturity to March 2021. In December 2016, the company completed a private placement of approximately $350 million of senior notes denominated in both U.S. dollars and Euros, a portion of which was funded in December with the remaining funding occurring in February 2017. The senior notes range from five to twelve year maturities and have an average interest rate of approximately 2.25%.

 

Asset Impairment During 2016, the potash mining industry experienced a continued decline in market pricing. Due to this continuing decline in potash pricing, the custom products reporting unit recognized charges of $14.8 million to write down the reporting unit’s carrying value. The charges included a goodwill impairment loss of $8.8 million and intangible assets impairments aggregating $6.0 million, including a $3.8 million reduction of the custom products trade names to a $0.7 million remaining value and a $2.2 million reduction of the reporting unit’s customer relationships to zero value.

 

Outlook Sales for the first quarter of 2017 are expected to be in the range of $277 to $287 million which represents 29% revenue growth over the first quarter of 2016, at the midpoint of the range.

 

Results of Operations — 2016 compared with 2015

 

The following table summarizes the company’s consolidated results of operations for periods presented. The fiscal year 2016 includes approximately $50.0 million of non-segment charges.  These included $14.8 million of charges related to the impairment of the custom products reporting unit, $21.4 million of acquisition and integration costs associated with the company’s 2016 acquisitions, primarily PolySwitch, $7.8 million of non-cash fair value step-up inventory charges relating to the company’s 2016 acquisitions, primarily PolySwitch, as described in Note 3, Acquisitions, of the Notes to Consolidated Financial Statements included in this Annual Report, $1.9 million in charges related to the closure of the company’s manufacturing facility in Denmark, $1.6 million related to the company’s transfer of its reed sensor manufacturing operations from the U.S. and China to the Philippines, and $2.5 million related to restructuring costs. 

 

 
19

 

 

Fiscal year 2015 includes approximately $45.2 million of other non-segment charges.  These included $5.2 million related to the company’s transfer of its reed sensor manufacturing operations from the U.S. and China to the Philippines, $3.6 million related to restructuring, $4.6 million related to acquisition costs and $31.9 million of expense related to the planned termination of the U.S. pension as described in Note 10, Benefit Plans, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

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

 

   

Fiscal Year

         

(in thousands, except % change)

 

2016

   

2015

   

% Change

 

Sales

  $ 1,056,159     $ 867,864       22%  

Gross profit

    413,117       330,499       25%  

Operating expenses

    282,473       226,342       25%  

Operating income

    130,644       104,157       25%  

Other expense (income), net

    (1,730 )     (5,417 )     (68%)  

Income before income taxes

    123,274       106,948       15%  

Income taxes

    18,786       26,082       (28%)  

Net income

    104,488       80,866       29%  

 

Sales

 

Net sales for 2016 of $1,056.2 million increased $188.3 million, or 22%, compared to the prior year, reflecting $170.2 million of incremental revenues from businesses acquired over the previous two years as well as organic growth in the Electronics and Automotive segments, partially offset by lower sales from the Industrial segment due to weaker end markets. The company also experienced $7.3 million in unfavorable foreign currency effects in 2016 compared to 2015 primarily resulting from sales denominated in Chinese renminbi.

 

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

 

Gross Profit

 

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

 

Operating Expenses

 

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

  

Operating Income

 

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

 

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

 

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

 

 
20

 

 

Other Expense (Income), Net

 

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

 

Income Taxes

 

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

 

Segment Information

 

The company reports its operations by the following segments: Electronics, Automotive and Industrial. Segment information is described more fully in Note 14, Segment Information, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

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

 

   

Fiscal Year

         

(in millions)

 

2016

   

2015

   

Change

 

Electronics

  $ 535.2     $ 405.5     $ 129.7  

Automotive

    415.2       340.0       75.2  

Industrial

    105.8       122.4       (16.6 )

Total

  $ 1,056.2     $ 867.9     $ 188.3  

 

Electronics Segment

 

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

 

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

 

Automotive Segment

 

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

 

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

 

Industrial Segment

 

The Industrial segment, which accounted for approximately 10% of total sales in 2016, experienced a sales decrease of 14% over the prior year with declines across all businesses. The company also divested certain non-core product lines during 2016. See Note 4, Divestitures, for additional information. The company’s power fuse business has benefited from a strong U.S. solar market in recent years; however, this market slowed in the second half of 2016. Sales in the protection relay business continued to be impacted by weakness in the heavy industrial and oil and gas markets, as those customers have restricted their capital spending. In the custom products business, the company continued to see a decline in the potash market, which has resulted in the aforementioned impairment charge in the third quarter of 2016. It is possible that we could recognize impairment charges for the relays reporting unit if we have declines in profitability or projected future operating results due to changes in volume, market pricing, cost, or the business environment.

 

 
21

 

 

Geographic Sales Information

 

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

 

   

Fiscal Year

         

(in millions)

 

2016

   

2015

   

Change

 

Americas

  $ 411.1     $ 401.2     $ 9.9  

Europe

    200.3       152.7       47.6  

Asia-Pacific

    444.8       314.0       130.8  

Total

  $ 1,056.2     $ 867.9     $ 188.3  

 

Americas

 

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

 

Europe 

 

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

 

Asia-Pacific 

 

Asia-Pacific sales increased $130.8 million, or 42%, in 2016 compared to 2015, primarily due to acquisitions and increased demand for Automotive and Electronics products offset by lower Industrial sales. Excluding currency effects, Asia-Pacific sales increased $136.2 million, or 43%. Electronics sales increased $84.0 million, or 35%, primarily due to acquisitions as well as increased sales for passive and sensor products. Excluding currency effects, Electronics sales increased $86.3 million, or 36%. Automotive sales increased $47.8 million, or 72%, primarily due to acquisitions as well as increased sales for passenger car and sensor products, partially offset by net unfavorable currency effects. Excluding currency effects, Automotive sales increased $51.1 million, or 77%. Industrial sales decreased $1.2 million, or 13%.

 

Results of Operations — 2015 compared with 2014

 

The following table summarizes the company’s consolidated results of operations for the periods presented. The fiscal year 2015 includes approximately $45.2 million of other non-segment charges.  These included $4.6 million in acquisition-related costs primarily related to the transaction and integration planning costs for the PolySwitch acquisition, $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 U.S. 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 U.S. dollar.

 

   

Fiscal Year

         

(in thousands, except % change)

 

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

    80,866       98,100       (18%)  

 

 
22

 

 

Sales 

 

Net sales increased $15.9 million, or 2%, to $867.9 million for 2015 compared to $852.0 million in 2014 due primarily to strong growth in the Automotive segment and improvement in the Industrial segment partially offset by lower sales in the Electronics segment. The company also experienced $38.9 million in unfavorable foreign currency effects in 2015 compared to 2014 primarily resulting from sales denominated in the euro. Excluding currency effects, net sales increased $54.7 million, or 6%, in 2015 compared to 2014.

 

The increase in sales in 2015 reflects a $14.5 million, or 4%, increase in Automotive segment sales and a $5.9 million, or 5%, increase in Industrial segment sales, partially offset by a $4.6 million, or 1%, decrease in Electronics segment sales.

 

Gross Profit

 

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 costs incurred to 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 compared to $329.9 million, or 38.7% of sales, in 2014.

 

Operating Expenses

 

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 that primarily related to U.S. 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. 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

 

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 compared to $4.9 million in 2014 and is primarily related to the company’s increased borrowings to fund acquisitions. The lower interest expense in 2015 resulted from lower average debt balances 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

 

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 Taxes

 

Income tax expense was $26.1 million in 2015 compared to $33.5 million in 2014. The 2015 effective income tax rate was 24.4% compared to 25.5% in 2014. The lower effective tax rate in 2015 is primarily related to more income earned in lower-tax jurisdictions in 2015 compared to 2014 and the impact of a pension settlement, partially offset by the impact from the restructuring of the legal ownership of the company’s Mexican manufacturing operations.

 

 
23

 

 

Segment Information

 

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

 

   

Fiscal Year

         

(in millions)

 

2015

   

2014

   

Change

 

Electronics

  $ 405.5     $ 410.1     $ (4.6 )

Automotive

    340.0       325.4       14.6  

Industrial

    122.4       116.5       5.9  

Total

  $ 867.9     $ 852.0     $ 15.9  

 

Electronics Segment

 

The decrease in Electronics sales primarily resulted from net unfavorable currency effects of $11.7 million in 2015. Excluding currency effects, Electronics sales increased $7.2 million, or 2%, compared to 2014 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.

 

Automotive Segment

 

The increase in Automotive sales was primarily due to strong growth for automotive sensor products. Sales in the commercial vehicle market were up slightly compared to 2014 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 compared to 2014, primarily resulting from sales denominated in the euro. Excluding currency effects, Automotive sales increased $37.0 million, or 11% compared to 2014.

 

Industrial Segment

 

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%, compared to 2014. 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.

 

Geographic Sales Information

 

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

 

   

Fiscal Year

         

(in millions)

 

2015

   

2014

   

Change

 

Americas

  $ 401.2     $ 377.7       23.5  

Europe

    152.7       163.9       (11.2 )

Asia-Pacific

    314.0       310.4       3.6  

Total

  $ 867.9     $ 852.0       15.9  

 

Americas

 

Sales in the Americas increased $23.5 million, or 6%, in 2015 compared to 2014 due primarily to growth in all 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.

 

Europe 

 

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 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 

 

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%.

 

Liquidity and Capital Resources

 

As of December 31, 2016, $266.7 million of the $275.1 million of the company’s cash and cash equivalents was held by foreign subsidiaries. Of the $266.7 million held by foreign subsidiaries, at least $50 million can be repatriated with minimal tax consequences, considering both U.S. and foreign taxes. Other than amounts which can be repatriated with minimal tax consequences, the company expects to maintain its foreign cash balances for local operating requirements, to provide funds for future capital expenditures and for potential acquisitions and does not expect to repatriate these funds to the U.S.

 

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

 

Revolving Credit Facility/Term Loan

 

On March 4, 2016, the company entered into a new five-year credit agreement with a group of lenders for up to $700.0 million and terminated the company’s previous credit agreement. The new credit agreement consists of an unsecured revolving credit facility of $575.0 million and an unsecured term loan credit facility of up to $125.0 million. In addition, the company has the ability, from time to time, to increase the size of the revolving credit facility and the term loan facility by up to an additional $150.0 million, in the aggregate, in each case in minimum increments of $25.0 million, subject to certain conditions and the agreement of participating lenders. For the term loan credit facility, the company is required to make quarterly principal payments of $1.6 million through March 31, 2018 and $3.1 million from June 30, 2018 through December 31, 2020 with the remaining balance due on March 4, 2021.

 

Outstanding borrowings under the credit agreement bear interest, at the company’s option, at either LIBOR, fixed for interest periods of one, two, three or six month periods, plus 1.00% to 2.00%, or at the bank’s Base Rate, as defined, plus 0.00% to 1.00%, based upon the company’s Consolidated Leverage Ratio, as defined. The company is also required to pay commitment fees on unused portions of the credit agreement ranging from 0.15% to 0.30%, based on the Consolidated Leverage Ratio, as defined. The effective interest rate on outstanding borrowings under the credit facility was 2.27% at December 31, 2016. As of December 31, 2016, the company had $0.1 million outstanding in letters of credit and had available $462.4 million of borrowing capacity under the revolving credit facility. Further information regarding the company’s credit agreement is provided in Note 8, Debt, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

Senior Notes

 

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

 

On December 8, 2016, the company entered into a Note Purchase Agreement, pursuant to which the company issued and sold $125 million aggregate principal amount of senior notes in two series. On February 15, 2017, $25 million in aggregate principal amount of 3.03% Senior Notes, Series A, due February 15, 2022, and $100 million in aggregate principal amount of 3.74% Senior Notes, Series B, due February 15, 2027 (together, the “U.S. Senior Notes,” and together with the Euro Senior Notes, the “Senior Notes”) were funded. Interest on the U.S. Senior Notes will be payable semiannually on February 15 and August 15, commencing August 15, 2017. Further information regarding the company’s Senior Notes is provided in Note 8, Debt, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

 
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Cash Flow Overview

 

   

Fiscal Year

 

(in millions)

 

2016

   

2015

 

Net cash provided by operating activities

  $ 180.1     $ 165.8  

Net cash provided used in investing activities

    (511.2 )     (44.2 )

Net cash provided by (used in) financing activities

    284.2       (67.6 )

Effect of exchange rate changes on cash and cash equivalents

    (6.8 )     (22.8 )

Increase (decrease) in cash and cash equivalents

    (53.7 )     31.2  

Cash and cash equivalents at beginning of period

    328.8       297.6  

Cash and cash equivalents at end of period

  $ 275.1     $ 328.8  

 

Cash Flow from Operating Activities

 

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

 

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

 

Cash Flow from Investing Activities

 

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

 

Cash Flow from Financing Activities

 

Net cash provided by financing activities increased $351.9 million in 2016 compared to 2015. The increase was primarily due to an increase in net proceeds from debt of $314.8 million in 2016 compared to 2015. In March the company replaced its credit agreement with a new agreement and in December the company received proceeds from the issuance of senior notes. Also contributing to the increase in comparative periods was the use of cash for the share repurchase in 2015 of $31.3 million. Information regarding the company’s debt is provided in Note 8, Debt, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

   

Fiscal Year

 

(in millions)

 

2015

   

2014

 

Net cash provided by operating activities

  $ 165.8     $ 153.1  

Net cash used in investing activities

    (44.2 )     (104.0 )

Net cash used in financing activities

    (67.6 )     (43.2 )

Effect of exchange rate changes on cash and cash equivalents

    (22.8 )     (13.5 )

Increase (decrease) in cash and cash equivalents

    31.2       (7.6 )

Cash and cash equivalents at beginning of period

    297.6       305.2  

Cash and cash equivalents at end of period

  $ 328.8     $ 297.6  

 

Cash Flow from Operating Activities

 

Net cash provided by operating activities increased $12.7 million in 2015 compared to 2014. Net cash provided by operating activities in 2015 was approximately $165.8 million and included $80.9 million in net income, $82.2 million in non-cash adjustments (primarily $41.7 million in depreciation and amortization) and $2.7 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 2015 consisted of changes in accounts receivable ($14.4 million), inventory ($3.6 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), accrued taxes ($0.6 million), and prepaid expenses and other ($5.2 million).

 

Cash Flow from Investing Activities

 

Net cash used in investing activities decreased $59.8 million in 2015 compared to 2014 primarily due to less cash used for business acquisitions in 2015 compared to 2014. In 2014 the company acquired Symcom for $52.8 million, net of cash acquired while in 2015 the company paid $4.6 million, net of cash acquired, toward the acquisition of Sigmar.

 

 
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Cash Flow from Financing Activities

 

Net cash used in financing activities increased $24.4 million in 2015 compared to 2014 primarily due to increased use of cash for the repurchase of stock. 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.

 

Capital Resources

 

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

 

Share Repurchase Program

 

The company’s Board of Directors authorized the repurchase of up to 1,000,000 shares of the company’s common stock under a program for the period May 1, 2016 to April 30, 2017. The company did not repurchase any shares of its common stock during fiscal 2016 and the full 1,000,000 shares may yet be purchased under the program as of December 31, 2016.

 

Contractual Obligations and Commitments

 

The following table summarizes contractual obligations and commitments as of December 31, 2016:

 

(in thousands)

 

Total

   

Less than

1 Year

   

1 to 3

Years

   

3 to 5

Years

   

Greater

than 5

Years

 

Revolving credit facility

  $ 112,500     $     $     $ 112,500     $  

Term loan

    120,313       6,250       23,437       90,626        

Entrusted loan

    3,522             3,522              

Euro Senior Notes, Series A

    122,313                         122,313  

Euro Senior Notes, Series B

    99,314                         99,314  

Interest payments

    52,002       8,611       16,534       11,614       15,243  

Supplemental Executive Retirement Plan

    2,470       1,886       359       63       162  

Operating lease payments

    39,322       11,971       11,112       8,214       8,025  

Purchase obligations

    90,712       90, 712                    

Total

  $ 642,468     $ 119,430     $ 54,964     $ 223,017     $ 245,057  

 

Off-Balance Sheet Arrangements

 

As of December 31, 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 May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606) which supersedes the revenue recognition requirements in ASC 605, "Revenue Recognition." This ASU 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 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. In August, 2015, the FASB issued ASU No. 2015-14, which postponed the effective date of ASU No. 2014-09 to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016. The company is in the process of performing its initial assessment of the potential impact on its consolidated financial statements and has not concluded on its adoption methodology. While the company is currently assessing the impact of the new standards, the company’s revenue is primarily generated from the sale of finished products to customers. Sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks, and rewards transfer. These are largely un-affected by the new standard. The company does not expect this new guidance to have a material impact on the amount of overall sales recognized; however, the timing of sales on certain projects may be affected. The company has not yet quantified this potential impact.

 

 
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In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Adoption will require a modified retrospective transition. The company is currently evaluating the impact of this ASU on its consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other” (Topic 350). This ASU modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because the update will eliminate Step 2 from the goodwill impairment test, it should reduce the cost and complexity of evaluating goodwill for impairment. This ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020, with early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

 

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 sales and cost of sales for the delay between the time that the products are shipped and when they are received by the customer. The company’s distribution channels are primarily through direct sales and independent third party distributors.

 

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

 

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

 

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

 

 
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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 2016, 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 $7.8 million for the PolySwitch, ON portfolio, and Menber’s acquisitions in 2016.

 

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. 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.

 

Due to negative events in the potash market in 2016, management revisited its long term projections and conducted a step one goodwill impairment analysis for its custom products reporting unit in the third quarter of 2016. The reporting unit failed the step one test and management conducted a step two analysis with the revised projections. The fair value of the unit was estimated using the expected present value of future cash flows over a seven year forecast period and appraisal of certain assets. As a result, the company recognized a charge for goodwill impairment of $8.8 million as it wrote off the entire goodwill balance. In addition, the company recognized intangible assets impairments aggregating $6.0 million, including a $3.8 million reduction of the custom products trade names to a $0.7 million remaining value and a $2.2 million reduction of the reporting unit’s customer relationships to zero value.

 

As of the most recent annual test conducted on October 2, 2016, the company had seven reporting units for goodwill testing purposes and 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 the excess of fair value over the carrying value of invested capital, was 65%, 154%, 218%, 132%, 70%, 15%, and 150% for its reporting units; electronics (non-silicon), electronics (silicon), passenger car, commercial vehicle products, sensors, relays, and power fuse, respectively, at October 2, 2016.

 

Certain key assumptions used in the annual test included a discount rate of 9.8% and a long-term growth rate of 3.0% which were used for all reporting units except for relays which had a discount rate of 10.3% as a result of a 0.5% premium factor.

 

In addition, the company performed a sensitivity test at October 2, 2016 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 October 2, 2016.

 

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. However, it is possible that we could recognize impairment charges for the relays reporting unit if we have declines in profitability or projected future operating results due to changes in volume, market pricing, cost, or the business environment. As of the 2016 annual test date, the relays reporting unit had $41.4 million of goodwill and intangible assets.

 

 
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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 did not record asset impairment charges in 2016 or 2015, but did recognize asset impairment charges of $0.3 million in 2014.

 

Environmental Liabilities

 

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

 

Pension and Supplemental Executive Retirement Plan

 

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 10, Benefit Plans, of the Notes to Consolidated Financial Statements included in this Annual Report. Further information regarding these plans is also provided in Note 10, Benefit Plans, of the Notes to Consolidated Financial Statements included in this Annual 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 $12.8 million, $10.7 million, and $9.4 million in 2016, 2015, and 2014, respectively. Further information regarding this expense is provided in Note 11, Shareholders’ Equity, of the Notes to Consolidated Financial Statements included in this Annual Report.

 

Income Taxes

 

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

 

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

 

 
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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 $232.8 million in debt outstanding at December 31, 2016 related to the unsecured revolving credit facility and term loan. Because 100% of this debt has variable interest rates, the company is subject to future interest rate fluctuations in relation to these borrowings which could potentially have a negative impact on cash flows of the company. A prospective increase of 100 basis points in the interest rate applicable to the company’s outstanding borrowings under its credit facility would result in an increase of approximately $2.3 million in annual interest expense. The company is not party to any currency exchange or interest rate protection agreements as of December 31, 2016.

 

Foreign Exchange Rates

 

The majority of the company’s operations consist of manufacturing and sales activities in foreign countries. The company has manufacturing facilities in the U.S., Mexico, Canada, China, Italy, Lithuania, Japan and the Philippines. During 2016, sales to customers outside the U.S. were approximately 66% of total net sales. 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 renminbi or Taiwanese dollars.

 

The company’s foreign exchange exposures result primarily from sale of products in foreign currencies, foreign currency denominated purchases, external borrowings, inter-company loans, 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 renminbi, 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.

 

Commodity Prices

 

The company uses various metals in the manufacturing of its products, including copper, zinc, tin, gold, and silver. Prices of these commodities can and do fluctuate significantly, which can impact the company’s earnings. The most significant of these exposures is to copper, zinc, gold, and silver, where at current prices and volumes, a 10% price change would affect annual pre-tax profit by approximately $2.4 million for copper, $0.9 million for zinc, $0.2 million for gold, $0.5 million for silver, and $0.3 million for tin.

 

The cost of oil has fluctuated dramatically over the past several years. Consequently, there is a risk that a return to high prices for oil and electricity in 2017 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.

 

 
31

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Index

Page

   

Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements

33

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

34

Consolidated Financial Statements

 

Consolidated Balance Sheets

35

Consolidated Statements of Net Income

36

Consolidated Statements of Comprehensive Income

36

Consolidated Statements of Cash Flows

37

Consolidated Statements of Equity

38

Notes to Consolidated Financial Statements

 

1. Summary of Significant Accounting Policies and Other Information

39

2. Correction of Immaterial Errors

44

3. Acquisitions

45

4. Divestitures

48

5. Inventories

49

6. Goodwill and Other Intangible Assets

49

7. Lease Commitments

50

8. Debt

50

9. Fair Value of Assets and Liabilities

52

10. Benefit Plans

53

11. Shareholders’ Equity

57

12. Income Taxes

58

13. Earnings Per Share

60

14. Segment Information

61

15. Selected Quarterly Financial Data (Unaudited)

64

 

 
32

 

  

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 December 31, 2016 and January 2, 2016, and the related consolidated statements of net income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 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 December 31, 2016 and January 2, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 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.

 

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 December 31, 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 February 27, 2017 expressed an unqualified opinion

 

/s/ GRANT THORNTON LLP 

 

Chicago, Illinois

 

February 27, 2017

 

 
33

 

 

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 December 31, 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 (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of PolySwitch, Menber’s and the ON Portfolio businesses, wholly-owned subsidiaries, whose financial statements reflect total assets and revenues constituting 36 percent and 16 percent, respectively, in aggregate, of the related consolidated financial statement amounts as of and for the year ended December 31, 2016. As indicated in Management’s Report, PolySwitch, Menber’s and the ON Portfolio businesses were acquired during 2016. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of PolySwitch, Menber’s and the ON Portfolio businesses.

 

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 December 31, 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 year ended December 31, 2016, and our report dated February 27, 2017 expressed an unqualified opinion on those financial statements.

 

/s/ GRANT THORNTON LLP

 

Chicago, Illinois

 

February 27, 2017

 

 
34

 

 

CONSOLIDATED BALANCE SHEETS

 

(in thousands)

 

December 31, 2016

   

January 2, 2016

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 275,124     $ 328,786  

Short-term investments

    3,690       4,179  

Accounts receivable, less allowances (2016 - $25,874; 2015 - $17,486)

    198,095       142,882  

Inventories

    114,063       98,629  

Prepaid income taxes

    11,671       1,510  

Prepaid expenses and other current assets

    9,438       7,943  

Total current assets

    612,081       583,929  

Property, plant, and equipment:

               

Land

    9,268       5,236  

Buildings

    80,553       71,383  

Equipment

    439,542       382,429  

Accumulated depreciation and amortization

    (312,188 )     (296,480 )

Net property, plant, and equipment

    217,175       162,568  

Intangible assets, net of amortization:

               

Patents, licenses and software

    83,607       20,221  

Distribution network

    18,995       16,490  

Customer relationships, trademarks and tradenames

    110,425       54,912  

Goodwill

    403,544       189,767  

Investments

    13,933       15,197  

Deferred income taxes

    20,585       8,333  

Other assets

    10,849       14,058  

Total assets

  $ 1,491,194     $ 1,065,475  

LIABILITIES AND EQUITY

               

Current liabilities:

               

Accounts payable

  $ 90,712     $ 51,658  

Accrued payroll

    42,810       32,611  

Accrued expenses

    36,138       24,145  

Accrued severance

    2,785       3,798  

Accrued income taxes

    8,846       11,836  

Current portion of long-term debt

    6,250       87,000  

Total current liabilities

    187,541       211,048  

Long-term debt, less current portion

    447,892       83,753  

Deferred income taxes

    7,066       8,014  

Accrued post-retirement benefits

    13,398       5,653  

Other long-term liabilities

    20,366       17,755  

Shareholders’ equity:

               

Common stock, par value $0.01 per share: 34,000,000 shares authorized; shares issued, 2016 –22,626,922; 2015 –22,420,785

    228       224  

Treasury stock, at cost: 409,115 and 362,748 shares, respectively

    (36,510 )     (32,766 )

Additional paid-in capital

    291,258       259,553  

Accumulated other comprehensive income

    (74,579 )     (45,673 )

Retained earnings

    634,391       557,771  

Littelfuse, Inc. shareholders’ equity

    814,788       739,109  

Non-controlling interest

    143       143  

Total equity

    814,931       739,252  

Total liabilities and equity

  $ 1,491,194     $ 1,065,475  

 

See accompanying Notes to Consolidated Financial Statements.

 

 
35

 

 

CONSOLIDATED STATEMENTS OF NET INCOME

 

   

Year Ended

 

(in thousands, except per share data)

 

December 31,

2016

   

January 2,

2016

   

December 27,

2014

 
                         

Net sales

  $ 1,056,159     $ 867,864     $ 851,995  

Cost of sales

    643,042       537,365       527,567  

Gross profit

    413,117       330,499       324,428  
                         

Selling, general, and administrative expenses

    206,129       153,714       146,975  

Research and development expenses

    42,198       30,802       31,122  

Pension settlement expenses

          29,928        

Amortization of intangibles

    19,337       11,898       12,501  

Impairment of goodwill and intangible assets

    14,809              

Total operating expenses

    282,473       226,342       190,598  

Operating income

    130,644       104,157       133,830  
                         

Interest expense

    8,628       4,091       4,903  

Foreign exchange (gain) loss

    472       (1,465 )     3,925  

Other expense (income), net

    (1,730 )     (5,417 )     (6,644 )

Income before income taxes

    123,274       106,948       131,646  

Income taxes

    18,786       26,082       33,546  

Net income

  $ 104,488     $ 80,866     $ 98,100  
                         

Income per share:

                       

Basic

  $ 4.63     $ 3.58     $ 4.35  

Diluted

  $ 4.60     $ 3.56     $ 4.32  
                         

Weighted-average shares and equivalent shares outstanding:

                       

Basic

    22,559       22,565       22,543  

Diluted

    22,727       22,719       22,727  

 


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   

Year Ended

 

(in thousands)

 

December 31,

2016

   

January 2,

2016

   

December 27,

2014

 
                         

Net income

  $ 104,488     $ 80,866     $ 98,100  

Other comprehensive income (loss):

                       

Pension and postemployment liability adjustments (net of tax of $1,302, $106 and $6,308, respectively)

    (3,673 )     (1,761 )     (12,475 )

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

    412       1,530        

Unrealized gain (loss) on investments

    (815 )     793       1,398  

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

          21,124        

Foreign currency translation adjustments

    (24,832 )     (46,231 )     (30,466 )

Comprehensive income

  $ 75,580     $ 56,321     $ 56,557  

 

See accompanying Notes to Consolidated Financial Statements.

 

 
36

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

Year Ended

 

(in thousands)

 

December 31,

2016

   

January 2,

2016

   

December 27,

2014

 

Operating activities

                       

Net income

  $ 104,488     $ 80,866     $ 98,100  

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

                       

Depreciation

    33,800       29,701       29,374  

Amortization of intangibles

    19,337       11,898       12,501  

Impairment of assets

    14,809             293  

Provision for bad debts

    1,769       164       130  

Non-cash inventory charge

    7,834             2,769  

Net loss on pension settlement, net of tax

          19,308