UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
800 EAST NORTHWEST HIGHWAY
DES PLAINES, ILLINOIS 60016
(Address of principal executive offices) (Zip Code)
(847) 824-1188
Registrant's telephone number, including area code:
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 is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of September 30, 2006, 22,389,992 shares of common stock, $.01 par
value, of the Registrant were outstanding.
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2006
and December 31, 2005 (unaudited)...................................... 1
Condensed Consolidated Statements of Income for the periods
ended September 30, 2006 and October 1, 2005 (unaudited)............... 2
Condensed Consolidated Statements of Cash Flows for the
periods ended September 30, 2006 and October 1, 2005 (unaudited)....... 3
Notes to the Condensed Consolidated Financial Statements (unaudited)... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 18
Item 4. Controls and Procedures................................................ 18
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............ 19
Item 6. Exhibits............................................................... 20
LITTELFUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
SEPTEMBER 30, 2006 December 31, 2005
------------------ -----------------
ASSETS:
Cash and cash equivalents.................... $ 42,889 $ 21,947
Receivables.................................. 99,929 80,303
Inventories.................................. 66,187 63,423
Deferred income taxes........................ 12,960 11,927
Assets held for sale (EFEN).................. -- 17,633
Other current assets......................... 11,523 7,936
-------- --------
Total current assets 233,488 203,169
Property, plant, and equipment, net.......... 128,864 125,493
Intangible assets, net....................... 32,042 14,742
Goodwill..................................... 63,051 54,440
Investments.................................. 5,422 5,590
Long-term deferred tax asset................. 11,360 --
Other assets................................. 860 497
-------- --------
Total assets $475,087 $403,931
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable............................. $ 26,672 $ 20,457
Accrued payroll.............................. 22,960 20,128
Accrued expenses............................. 9,056 8,141
Accrued severance............................ 28,854 7,866
Accrued income tax........................... 23,498 9,920
Liabilities held for sale (EFEN)............. -- 6,722
Current portion of long-term debt............ 25,927 26,682
-------- --------
Total current liabilities 136,967 99,916
Long-term debt............................... 1,863 --
Deferred income taxes........................ -- 1,879
Accrued post-retirement benefits............. 21,082 19,268
Other long-term liabilities.................. 5,368 5,658
Minority interest............................ 143 144
Shareholders' equity......................... 309,664 277,066
-------- --------
Total liabilities and shareholders' equity $475,087 $403,931
======== ========
Common shares issued and outstanding
of 22,389,992 and 22,229,288,
at September 30, 2006, and December 31,
2005, respectively
1
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data, unaudited)
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
SEPT 30, Oct 1, SEPT 30, Oct 1,
2006 2005 2006 2005
-------- -------- -------- --------
Net sales..................................................... $143,471 $122,266 $407,023 $351,716
Cost of sales................................................. 96,386 87,957 283,849 245,069
-------- -------- ------- --------
Gross profit.................................................. 47,085 34,309 123,174 106,647
Selling, general and administrative expenses.................. 29,174 25,513 83,595 74,512
Research and development expenses............................. 4,634 4,257 14,099 12,782
Amortization of intangibles................................... 909 436 2,020 1,501
-------- -------- ------- --------
Total operating expense....................................... 34,717 30,206 99,714 88,795
Operating income.............................................. 12,368 4,103 23,460 17,852
Interest expense.............................................. 480 587 1,252 1,628
Other income.................................................. (117) (2,988) (1,627) (3,215)
-------- -------- ------- --------
Earnings from continuing operations before minority
interest and income taxes ................................. 12,005 6,504 23,835 19,439
Minority interest............................................. -- (40) -- (38)
Income taxes.................................................. 2,645 3,423 5,243 7,756
-------- -------- -------- --------
Earnings from continuing operations........................... 9,360 3,121 18,592 11,721
Discontinued operations (net of tax).......................... -- 650 588 746
-------- -------- ------- --------
Net income.................................................... $ 9,360 $ 3,771 $ 19,180 $ 12,467
======== ======== ======== ========
Net income per share:
Basic:
Continuing operations...................................... $ 0.42 $ 0.14 $ 0.83 $ 0.52
======== ======== ======== ========
Discontinued operations.................................... $ -- $ 0.03 $ 0.03 $ 0.04
======== ======== ======== ========
Net income................................................. $ 0.42 $ 0.17 $ 0.86 $ 0.56
======== ======== ======== ========
Diluted:
Continuing operations...................................... $ 0.42 $ 0.14 $ 0.82 $ 0.52
======== ======== ======== ========
Discontinued operations.................................... $ -- $ 0.03 $ 0.03 $ 0.03
======== ======== ======== ========
Net income................................................. $ 0.42 $ 0.17 $ 0.85 $ 0.55
======== ======== ======== ========
Weighted average shares and equivalent shares outstanding:
Basic...................................................... 22,347 22,441 22,308 22,449
======== ======== ======== ========
Diluted.................................................... 22,504 22,626 22,440 22,671
======== ======== ======== ========
2
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
SEPT 30, Oct 1, SEPT 30, Oct 1,
2006 2005 2006 2005
-------- -------- -------- --------
Operating activities:
Net income........................................................... $ 9,360 $ 3,771 $ 19,180 $ 12,467
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation...................................................... 8,299 7,547 23,199 21,699
Amortization...................................................... 909 496 2,020 1,590
Stock-based compensation.......................................... 1,199 -- 3,903 --
Changes in operating assets and liabilities:
Accounts receivable............................................... (3,292) (2,618) (13,914) (9,053)
Inventories....................................................... (104) 1,894 392 6,845
Accounts payable and accrued expenses............................. (805) 3,236 18,686 (5,998)
Prepaid expenses and other........................................ 98 796 900 (218)
-------- -------- -------- --------
Net cash provided by operating activities............................ 15,664 15,122 54,366 27,332
Cash used in investing activities:
Purchases of property, plant, and equipment....................... (4,716) (4,979) (14,116) (21,943)
Acquisitions of businesses........................................ (6,116) (398) (37,642) (1,417)
Sale of EFEN...................................................... -- -- 11,574 --
-------- -------- -------- --------
Net cash used in investing activities................................ (10,832) (5,377) (40,184) (23,360)
Cash provided by (used in) financing activities:
Proceeds from long-term debt...................................... 12,415 19,729 35,273 46,680
Payments of long-term debt........................................ (10,637) (23,901) (35,935) (40,114)
Proceeds from repayment of notes receivable, common stock......... -- -- 7 3,533
Proceeds from exercise of stock options........................... 1,607 3,075 5,984 3,750
Excess tax benefit on share-based compensation.................... 408 -- 408 --
Purchase of treasury stock........................................ (652) (6,761) (652) (9,960)
-------- -------- -------- --------
Net cash provided by (used in) financing activities.................. 3,141 (7,858) 5,085 3,889
Effect of exchange rate changes on cash.............................. 136 (201) 1,675 (2,111)
-------- -------- -------- --------
Increase in cash and cash equivalents................................ 8,109 1,686 20,942 5,750
Cash and cash equivalents at beginning of period..................... 34,780 32,647 21,947 28,583
-------- -------- -------- -------
Cash and cash equivalents at end of period........................... $ 42,889 $ 34,333 $ 42,889 $ 34,333
======== ======== ======== ========
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2006
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, Ireland severance, the Witten building and other
asset write-downs, accrued employee-related costs pursuant to contractual
obligations and the Teccor net operating loss tax benefit, considered necessary
for a fair presentation have been included. Operating results for the three and
nine months ended September 30, 2006 are not necessarily indicative of the
results that may be expected for the year ending December 30, 2006. For further
information, refer to the Company's consolidated financial statements and the
notes thereto incorporated by reference in the Company's Annual Report on Form
10-K for the year ended December 31, 2005.
2. BUSINESS SEGMENT INFORMATION
The Company designs, manufactures and sells circuit protection devices
throughout the world. The Company has three reportable geographic segments:
Americas, Europe and Asia-Pacific. The circuit protection market in these
geographical segments is categorized into three major product areas: electronic,
automotive and electrical.
The Company evaluates the performance of each geographic segment based on its
sales and net income or loss. The Company accounts for intersegment sales as if
the sales were to third parties. The Company's reportable segments are the
geographical regions where the revenue is earned and expenses are incurred. The
Company has subsidiaries in Americas, Europe and Asia-Pacific.
Export sales to Hong Kong were 18.5% and 15.5% of consolidated sales for the
three and nine months ended September 30, 2006, respectively. No other foreign
country sales exceeded 10% for the three and nine months ended September 30,
2006. Export sales to Hong Kong were 7.6% and 14.0% of consolidated sales for
the three and nine months ended October 1, 2005, respectively. No other foreign
country sales exceeded 10% for the three and nine months ended October 1, 2005.
Sales to Arrow Pemco Group were 8.9% and 10.7% of consolidated sales for the
three and nine months ended September 30, 2006, respectively. Sales to no other
single customer amounted to 10% or more of the Company's total revenues for the
three and nine months ended September 30, 2006. Sales to no single customer
amounted to 10.0% or more for the three and nine months ended October 1, 2005.
Information concerning the operations in these geographic segments for the three
and nine months ended September 30, 2006, and October 1, 2005, is as follows (in
thousands):
Three Months Three Months Nine Months Nine months
Ended Ended Ended Ended
Sept 30, 2006 Oct 1, 2005 Sept 30, 2006 Oct 1, 2005
------------- ------------ ------------- -----------
NET SALES
Americas $ 54,574 $ 51,305 $ 166,404 $ 150,890
Europe 27,777 24,728 85,254 75,018
Asia-Pacific 61,120 46,233 155,365 125,808
--------- --------- --------- ---------
Consolidated total $ 143,471 $ 122,266 $ 407,023 $ 351,716
INTERSEGMENT SALES
Americas $ 55,263 $ 39,600 $ 151,817 $ 120,372
Europe 18,414 18,334 60,470 43,860
Asia-Pacific 32,145 22,550 80,931 48,695
--------- --------- --------- ---------
Combined total 105,822 80,484 293,218 212,927
Eliminations (105,822) (80,484) (293,218) (212,927)
--------- --------- --------- ---------
Consolidated total $ -- $ -- $ -- $ --
4
INTEREST EXPENSE
Americas $ 456 $ 564 $ 1,159 $ 1,556
Europe (1) 11 44 35
Asia-Pacific 25 12 49 37
--------- --------- --------- ---------
Consolidated total $ 480 $ 587 $ 1,252 $ 1,628
DEPRECIATION AND AMORTIZATION
Americas $ 3,908 $ 4,512 $ 11,544 $ 13,357
Europe 3,285 2,878 9,656 8,236
Asia-Pacific 2,015 653 4,019 1,696
--------- --------- --------- ---------
Consolidated total $ 9,208 $ 8,043 $ 25,219 $ 23,289
OTHER (INCOME) EXPENSE
Americas $ (144) $ (3,106) $ (979) $ (2,924)
Europe 339 358 7 347
Asia-Pacific (312) (240) (655) (638)
--------- --------- --------- ---------
Consolidated total $ (117) $ (2,988) $ (1,627) $ (3,215)
INCOME TAXES (BENEFIT)
Americas $ 2,816 $ 2,509 $ 3,908 $ 3,463
Europe (1,247) (752) (1,951) 849
Asia-Pacific 1,076 1,666 3,286 3,444
--------- --------- --------- ---------
Consolidated total $ 2,645 $ 3,423 $ 5,243 $ 7,756
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS*
Americas $ 4,768 $ 2,655 $ 20,792 $ 4,960
Europe (3,024) (6,060) (19,899) (6,586)
Asia-Pacific 7,616 6,526 17,699 13,347
--------- --------- --------- ---------
Consolidated total $ 9,360 $ 3,121 $ 18,592 $ 11,721
NET INCOME (LOSS) *
Americas $ 4,768 $ 2,655 $ 20,792 $ 4,960
Europe (3,024) (5,410) (19,311) (5,840)
Asia-Pacific 7,616 6,526 17,699 13,347
--------- --------- --------- ---------
Consolidated total $ 9,360 $ 3,771 $ 19,180 $ 12,467
NET SALES *
Electronic $ 101,118 $ 80,768 $ 279,861 $ 228,588
Automotive 30,225 29,950 92,806 90,797
Electrical 12,128 11,548 34,356 32,331
--------- --------- --------- ---------
Consolidated total $ 143,471 $ 122,266 $ 407,023 $ 351,716
IDENTIFIABLE ASSETS *
September 30, 2006 December 31, 2005
------------------ -----------------
Americas $ 352,254 $ 280,964
Europe 161,073 208,192
Asia-Pacific 146,859 90,233
--------- ---------
Combined total 660,186 579,389
Goodwill and intangibles 95,093 69,182
Eliminations (280,192) (244,640)
--------- ---------
Consolidated total $ 475,087 $ 403,931
========= =========
* Certain prior year amounts have been reclassified to conform to the current
year presentation.
5
3. INVENTORIES
The components of inventories are as follows (in thousands):
September 30, December 31,
2006 2005
------------- ------------
Raw material $15,201 $13,010
Work in process 17,533 18,996
Finished goods 33,453 31,417
------- -------
Total $66,187 $63,423
======= =======
4. LONG-TERM OBLIGATIONS
Total debt at the end of the third quarter 2006 totaled $27.8 million and
consisted of the following: (1) credit revolver borrowings totaling $21.5
million, (2) foreign revolver borrowings totaling $6.3 million.
The Company has an unsecured domestic financing arrangement consisting of a
credit agreement with banks that provides a $75.0 million revolving credit
facility, with a potential increase of up to $125.0 million upon request of the
Company and agreement with the lenders, that expires on July 21, 2011. The
revolving credit facility is subject to a maximum indebtedness calculation and
other financial covenants. At September 30, 2006, the Company had available
$53.5 million of borrowing capability under the revolving credit facility at an
interest rate of LIBOR plus 0.50% (6.01% as of September 30, 2006). The Company
also had $6.0 million in letters of credit outstanding at September 30, 2006.
The Company also has an unsecured bank line of credit that provides a Yen 0.9
billion (equivalent to $7.6 million) revolving credit facility at an interest
rate of TIBOR plus 0.875% (1.24% as of September 30, 2006). The revolving line
of credit becomes due on July 21, 2011. At September 30, 2006, the Company had
an equivalent $3.8 million outstanding on the Yen facility.
The Company also has an unsecured bank line of credit that provides a Taiwanese
Dollar 35.0 million (equivalent to $1.1 million) revolving credit facility at an
interest rate of two-years Time Deposit plus 0.145% (2.3% as of September 30,
2006). The revolving line of credit becomes due on August 18, 2009. At September
30, 2006, the Company had an equivalent $1.0 million outstanding on the
Taiwanese Dollar facility.
The Company also has various other foreign fixed rate loans totaling $1.5
million with maturity dates through August 2013.
5. IMPAIRMENT OF LONG-LIVED ASSETS
During the second quarter of 2006, the Company wrote down the carrying value of
its property located in Witten, Germany, by $2.7 million. This charge was
reported as part of selling, general and administrative expenses in the European
segment of the Company's financial results. The assets are also reported as part
of the European segment. This write down was based upon an offer the Company
received and accepted during the second quarter of 2006 for the sale of the
property. The property consists of land and several buildings currently used for
manufacturing and administrative offices.
During the third quarter of 2006, the Company wrote down the carrying value of
certain long-term assets located in Witten, Germany, by $1.6 million. This
charge was reported as a $0.8 million expense as part of cost of sales and a
$0.8 million expense as part of selling, general and administrative expenses in
the European segment of the Company's financial results.
6
6. PER SHARE DATA
Net income per share amounts for the three and nine months ended September 30,
2006, and October 1, 2005, are based on the weighted average number of common
and common equivalent shares outstanding during the periods as follows (in
thousands, except per share data):
Three months ended Nine months ended
------------------ ------------------
Sept 30, Oct 1, Sept 30, Oct 1,
2006 2005 2006 2005
-------- ------- -------- -------
Net income $ 9,360 $ 3,771 $19,180 $12,467
======= ======= ======= =======
Average shares outstanding - Basic 22,347 22,441 22,308 22,449
Net effect of dilutive stock options
and restricted shares
- Diluted 157 185 132 222
------- ------- ------- -------
Average shares outstanding
- Diluted 22,504 22,626 22,440 22,671
======= ======= ======= =======
Net income per share
- Basic $ 0.42 $ 0.17 $ 0.86 $ 0.56
======= ======= ======= =======
- Diluted $ 0.42 $ 0.17 $ 0.85 $ 0.55
======= ======= ======= =======
The following potential shares of common stock were excluded from the EPS
calculation because their effect would be anti-dilutive.
Three months ended Nine months ended
--------------------------- ---------------------------
Sept 30, 2006 Oct 1, 2005 Sept 30, 2006 Oct 1, 2005
------------- ----------- ------------- -----------
Stock options 1,150,052 732,430 1,059,066 538,600
Restricted shares -- -- -- --
--------- ------- --------- -------
Total 1,150,052 732,430 1,059,066 538,600
7. ACQUISITIONS
On May 6, 2004, the Company acquired 82% of the common stock of Heinrich
Industrie AG ("Heinrich") for Euro 39.5 million (approximately $47.1 million) in
cash and acquisition costs of approximately $1.8 million. Subsequent to May 6,
2004, the Company purchased additional shares of Heinrich stock for
approximately $8.7 million, bringing the total ownership to 97.2% as of January
1, 2005. During 2005 the Company acquired the remaining outstanding shares for
approximately $3.7 million, bringing the total ownership to 100% as of December
31, 2005.
Purchase accounting liabilities in connection with the Heinrich acquisition were
estimated to be $11.5 million and are primarily for redundancy costs to be paid
through 2006 related to manufacturing operations and selling, general and
administrative functions. The Company began formulating its plan to incur these
costs as of the acquisition date. Additions to the Heinrich purchase accounting
liability during 2005 relate to redundancy costs recognized after 100% ownership
was achieved. As of September 30, 2006, $10.5 million has been paid related to
these liabilities.
A summary of the purchase accounting liability activity is as follows:
7
Purchase accounting liability (in thousands)
--------------------------------------------
Balance, May 6, 2004 $ 7,281
Payments (85)
-------
Balance, January 1, 2005 7,196
Additions 4,179
Payments (8,685)
-------
Balance, December 31, 2005 2,690
Payments (136)
-------
Balance, April 1, 2006 2,554
Payments (658)
-------
Balance, July 1, 2006 1,896
Payments (891)
-------
Balance, September 30, 2006 $ 1,005
=======
Increases in the purchase accounting reserve pertain to additional liabilities
anticipated at the acquisition date and recognized in conjunction with the
registration of the domination agreement needed to obtain control of the company
and related requirement to purchase remaining shares from minority shareholders.
These additional liabilities are primarily for redundancy costs to be paid
through 2006 related to manufacturing operations and selling, general and
administrative functions.
On February 3, 2006, the Company acquired SurgX Corporation ("SurgX") for $2.5
million. All of the assets of SurgX were classified as patents in the Americas
segment with an average useful life of seven years. Pro forma financial
information is not presented due to amounts not being materially different than
actual results.
On May 30, 2006, the Company acquired all of the common stock of Concord
Semiconductor ("Concord") for $23.8 million in cash and acquisition costs of
approximately $0.2 million. The Company funded the acquisition with $14.0
million in cash and $10.0 million of borrowings on an existing revolving line of
credit.
Littelfuse has continued to operate Concord's electronics business subsequent to
the acquisition. The Concord acquisition expands the Company's product offering
and strengthens the Company's position in the circuit protection industry.
The acquisition was accounted for using the purchase method of accounting and
the operations of Concord are included in the Company's operations from the date
of acquisition. The following table sets forth the purchase price allocation for
the acquisition of Concord in accordance with the purchase method of accounting
with adjustments to record the acquired assets and liabilities of Concord at
their estimated fair market or net realizable values.
Purchase price allocation (in thousands)
----------------------------------------
Current assets $ 9,842
Property, plant and equipment 7,771
Patents and licenses 4,299
Distribution network 6,444
Goodwill 6,284
Current liabilities (5,717)
Deferred taxes (2,343)
Other long-term liabilities (2,594)
-------
$23,986
=======
All goodwill and intangible assets are recorded in the Asian segment. Patents
and licenses have an average estimated useful life of approximately 12 years.
The distribution network has an average estimated useful life of approximately
17 years. The fair values are estimates and subject to revision as the Company
completes its fair value analysis. Pro forma financial information is not
presented due to amounts not being materially different than actual results.
On June 26, 2006, the Company acquired Catalina Performance Accessories, Inc.
("Catalina") for $4.5 million. The Company acquired $0.4 million of accounts
receivable, $0.5 million of inventory and a $3.6 million customer list. The
customer list was reported in the Americas segment with a useful life of ten
years. Pro forma financial information is not presented due to amounts not being
materially different than actual results.
8
On August 1, 2006 the Company acquired the gas discharge tube (GDT) assets of
SRC Devices, Inc. ("SRC"), for $6.0 million in cash, subject to post-closing
purchase price adjustments. The Company acquired $0.3 million of inventory, $0.9
million of fixed assets and a $4.8 million customer list. The customer list was
reported in the Americas segment with a useful life of ten years. The fair
values are estimates and subject to revision as the Company completes its fair
value analysis. Pro forma financial information is not presented due to amounts
not being materially different than actual results. The Company plans to move
production of the GDT product line from the SRC manufacturing facility in Mexico
to its existing operation in Suzhou, China.
8. RESTRUCTURING CHARGES
During the first quarter of 2006, the Company recorded a $2.1 million charge
related to the downsizing of the European segment's Heinrich operations. These
charges are primarily for redundancy costs to be paid through 2007.
Manufacturing related charges of $0.9 million are recorded as part of cost of
sales and non-manufacturing related charges of $1.2 million are recorded as part
of selling, general and administrative expenses. Employees affected by this
downsizing include technical, production, administrative and support employees.
In the second quarter of 2006, additional expense was recognized primarily as
part of selling, general and administrative expenses. In the third quarter of
2006, additional expense was recognized as $1.3 million as part of cost of sales
and $1.0 million as part of selling, general and administrative expenses. A
summary of activity of this liability is as follows:
Heinrich restructuring (in thousands)
-------------------------------------
Balance, December 31, 2005 $ --
Additions 2,080
------
Balance, April 1, 2006 2,080
Additions 518
Payments (693)
------
Balance, July 1, 2006 1,905
Additions 2,397
Payments --
------
Balance, September 30, 2006 $4,302
======
During 2005, the Company announced a downsizing of its European segment's
Ireland operation and outsourcing of more of its varistor manufacturing to lower
cost Asian subcontractors. A liability of $4.9 million was recorded as part of
cost of sales related to redundancy costs for the manufacturing operation
associated with this downsizing. This restructuring impacts approximately 35
associates in various production and support related roles. In the second
quarter of 2006, an additional $17.1 million, consisting of $20.0 million of
accrued severance less a government rebate of $2.9 million recorded as a current
asset, was recorded as part of cost of sales related to the closure of the
entire facility. This portion of the restructuring impacts approximately 131
employees. Restructuring charges are based upon each associate's current salary
and length of service with the Company. A summary of activity of this liability
is as follows:
Ireland restructuring (in thousands)
------------------------------------
Balance, October 1, 2005 $ 4,900
Payments (897)
-------
Balance, December 31, 2005 4,003
Payments (858)
-------
Balance, April 1, 2006 3,145
Additions 20,019
Payments (1,609)
-------
Balance, July 1, 2006 21,555
Additions 204
Payments (52)
-------
Balance, September 30, 2006 $21,707
=======
9
9. DISCONTINUED OPERATIONS
In February 2006, the Company sold the EFEN product line that consists of
production and sales facilities in Uebigau and Eltville, Germany and Kaposvar,
Hungary. The Company obtained EFEN as part of its acquisition of Heinrich in May
2004. Results of operations for EFEN have been reclassified and presented as
discontinued operations for 2006 and 2005.
EFEN's operating results are summarized as follows (in thousands):
For the Three Months Ended For the Nine Months Ended
--------------------------- ---------------------------
Sept 30, 2006 Oct 1, 2005 Sept 30, 2006 Oct 1, 2005
------------- ----------- ------------- -----------
Net sales $-- $8,784 $3,789 $24,890
Income before taxes -- 827 773 1,324
Income taxes -- 177 324 578
--- ------ ------ -------
Net income (loss) $-- $ 650 $ 449* $ 746
=== ====== ====== =======
* Additionally, for the nine months ended September 30, 2006, other Heinrich
companies incurred a gain of $139 related to discontinuing the EFEN
operation.
The EFEN product line was sold for Euro 9.5 million (approximately $11.6
million). In connection with the sale, a pretax loss of approximately $0.0
million, resulting in an after tax gain of $0.1 million after recognizing a tax
benefit on the sale of $0.1 million.
10. PENSIONS
The components of net periodic benefit cost for the three and nine months ended
September 30, 2006, compared with the three and nine months ended October 1,
2005, were (in thousands):
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
------------------ ----------------- ------------------ -----------------
U.S. Pension Benefits Foreign Plans
-------------------------------------- --------------------------------------
2006 2005 2006 2005 2006 2005 2006 2005
------- ----- ------- ------- ----- ----- ------- -------
Service cost $ 798 $ 815 $ 2,394 $ 2,445 $ 361 $ 303 $ 1,083 $ 909
Interest cost 950 916 2,850 2,748 495 493 1,485 1,479
Expected return on plan
assets (1,037) (932) (3,110) (2,796) (496) (420) (1,488) (1,260)
Amortization of prior
service cost 2 3 7 9 (3) (3) (9) (9)
Amortization of transition
asset -- -- -- -- (27) (28) (81) (84)
Amortization of net loss 14 102 43 306 74 43 222 129
------- ----- ------- ------- ----- ----- ------- -------
Total cost of the plan 727 904 2,184 2,712 404 388 1,212 1,164
Expected plan participants'
contribution -- -- -- -- (89) (98) (267) (294)
------- ----- ------- ------- ----- ----- ------- -------
Net periodic benefit cost $ 727 $ 904 $ 2,184 $ 2,712 $ 315 $ 290 $ 945 $ 870
======= ===== ======= ======= ===== ===== ======= =======
The expected rate of return on pension assets is 8.50% and 8.50% in 2006 and
2005, respectively.
11. COMPREHENSIVE INCOME
Total comprehensive income for the three months ended September 30, 2006, and
October 1, 2005, was approximately $10.9 million and $9.8 million, respectively,
and for the nine months ended September 30, 2006, and October 1, 2005, was
approximately $25.0 million and $13.8 million, respectively. The adjustment for
comprehensive income consists of deferred gains and losses from foreign currency
translation adjustments and losses on available-for-sale securities for the
three and nine months ended September 30, 2006 and deferred gains and losses
from foreign currency translation adjustments and qualified cash flow hedges and
unrealized gains and losses on available-for-sale securities for the three and
nine months ended October 1, 2005. Foreign currency translation adjustment
accounts for $6.5 million and $1.0 million of the difference between other
comprehensive income and net income for the nine months ended September 30, 2006
and October 1, 2005, respectively.
10
12. INCOME TAXES
Income taxes for the three and nine months ended September 30, 2006 was $2.6
million and $5.2 million, respectively. Income taxes for the three months ended
September 30, 2006 includes a $1.2 million favorable tax reserve adjustment.
Income taxes for the nine months ended September 30, 2006 includes a $1.2
million favorable tax reserve adjustment, a $2.8 million benefit related to the
recognition of certain previous years net operating losses from the Teccor
acquisition partially offset by $0.9 million of charges.
13. STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123(R), "Share-Based Payment" ("SFAS
123(R)"). SFAS 123(R) requires public companies to recognize compensation
expense for the cost of awards of equity compensation using a fair value method.
The Company adopted SFAS 123(R) on January 1, 2006 (i.e., the first quarter of
2006) using the modified prospective method. The Company recognized the
compensation cost of all share-based awards as an expense on a straight-line
basis over the vesting period of the award. Under SFAS 123(R), benefits of tax
deductions in excess of recognized compensation expense are now reported as a
financing cash flow, rather than an operating cash flow as prescribed under the
prior accounting rules. Prior to October 1, 2005, the Company applied Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") to account for its stock-based compensation plans. Under APB 25, no
compensation expense was recognized for non-qualified stock option awards as
long as the exercise price of the awards on the date of grant was equal to the
current market price of the Company's stock. However, the Company did recognize
compensation expense in connection with the issuance of restricted stock. The
adoption of SFAS 123(R) primarily resulted in compensation expense being
recorded for stock options.
The following table shows total stock-based compensation expense included in the
Condensed Consolidated Statements of Income:
(in thousands, except per share amounts)
Three months Nine months
ended ended
------------- -------------
Sept 30, 2006 Sept 30, 2006
------------- -------------
Pre-tax stock-based compensation $1,199 $ 3,903
Income tax (456) (1,483)
------ -------
Stock-based compensation expense, net $ 743 $ 2,420
Basic earnings per share impact $ 0.03 $ 0.11
Diluted earnings per share impact $ 0.03 $ 0.11
Results for fiscal 2005 have not been restated to reflect the adoption of SFAS
123(R). The following table discloses the Company's pro forma net income and
diluted net income per share for the three and nine months ended October 1,
2005, had the fair value recognition method under SFAS 123 been used for the
Company's stock option grants. The table also discloses the weighted average
assumptions used in estimating the fair value using the Black-Scholes option
pricing model.
(in thousands, except per share amounts)
Three months Nine months
ended ended
--------------- ---------------
October 1, 2005 October 1, 2005
--------------- ---------------
Net income as reported $3,771 $12,467
Stock option compensation expense under
fair value method, net of tax (720) (2,191)
------ -------
11
Pro forma net income $3,051 $10,276
Basic net income per share
As reported $ 0.17 $ 0.56
Pro forma $ 0.14 $ 0.46
Diluted net income per share
As reported $ 0.17 $ 0.56
Pro forma $ 0.13 $ 0.45
Assumptions:
Expected dividend yield 0% 0%
Expected stock price volatility 38.6% 38.6%
Risk-free interest rate 4.66% 4.66%
Expected life of option (years) 7 7
During the nine-month period ended September 30, 2006, options on 373,750 shares
with a strike price equal to the market price on the date of the grant were
awarded to employees and directors. These options expire seven years after the
grant date, and vest ratably over four and five years for employees and
directors, respectively. The Company used the Black-Scholes option valuation
model to determine the fair value of awards granted during the nine-month period
ended September 30, 2006. The weighted average fair value of and related
assumptions for options granted were as follows:
Three months ended Nine months ended
------------------ -----------------
Sept 30, 2006 Sept 30, 2006
------------- -------------
Weighted average fair value of options granted
at fair value of underlying stock $13.75 $13.91
Assumptions:
Expected dividend yield 0% 0%
Expected stock price volatility 39.0% 39.0%
Risk-free interest rate 4.82% 4.82%
Expected life of option (years) 4.8 4.8
Forfeitures are estimated at a rate that would yield 10% over the life of the
awards.
The Company has stock option plans authorizing the granting of both incentive
and nonqualified options and other stock rights of common stock to employees and
directors. The stock options issued prior to 2002 vest over a five-year period
and are exercisable over a 10-year period commencing from the date of vesting.
The Company changed its policy in 2002 whereby the stock options vest over a
five-year period and are exercisable over a 10-year period commencing from the
date of the grant. This change was not made to stock options already granted.
The Company also has a performance share agreement in which a target amount of
performance share awards are granted based on the Company attaining certain
financial performance goals relating to return on net tangible assets and
earnings before interest, taxes, depreciation and amortization. These shares
vest over a three-year period commencing from the date of issuance. A
reconciliation of outstanding stock options and performance shares for the
period ending September 30, 2006, are shown below:
RECONCILIATION OF STOCK OPTIONS OUTSTANDING
Aggregate
Weighted Weighted Average Intrinsic
Shares Under Average Remaining Value
Option Exercise Price Contractual Life ($ Thousands)
------------ -------------- ---------------- -------------
Outstanding December 31, 2005 1,820,010 $27.82 7.7 4,470
Granted 373,750 34.07 -- --
Forfeited (25,703) 30.43 -- --
Exercised (166,577) 22.00 -- 1,827
Outstanding September 30, 2006 2,001,480 29.43 6.9 11,877
Exercisable September 30, 2006 1,000,780 27.46 6.2 7,891
12
RECONCILIATION OF PERFORMANCE SHARES OUTSTANDING
Weighted Aggregate
Average Grant- Projected Intrinsic
Stock Performance Date Fair Performance Share Value
Price Shares Value Award Ratio ($ Thousands)
------ ----------- -------------- ----------------- -------------
Outstanding December 31, 2005 $27.25 45,500 $27.95 42.2% 523
Granted -- 26,000 34.33 100% --
Forfeited -- -- -- -- --
Vested -- -- -- -- --
Outstanding September 30, 2006 34.70 71,500 30.27 63.2% 1,568
At September 30, 2006, the unrecognized compensation cost for options and
performance shares was $14.4 million before tax, and will be recognized over a
weighted average period of 3.3 years.
14. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 ("FIN48"), Accounting for Uncertainty in Income Taxes,
which is an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48
clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. We will implement this interpretation in the fiscal year
starting January 1, 2007. We cannot reasonably estimate the impact of this
interpretation at this time.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB
Statements No. 87, 88, 106 and 132. SFAS 158 will require recognizing in the
condensed consolidated balance sheets the overfunded and underfunded status of
defined benefit postretirement plans. The overfunded or underfunded status is
defined as the difference between the fair value of plan assets and the benefit
obligation. SFAS 158 also requires the recognition the actuarial gains and
losses and the prior service costs and credits that arise during the period as a
component of other comprehensive income. We are required to adopt the statement
for our fiscal year ended December 30, 2006. We are currently evaluating the
effect that this Statement will have on our consolidated financial statements.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net Sales by Geography and Market*
(in millions)
THIRD QUARTER YEAR-TO-DATE
-------------------------- --------------------------
2006 2005 % CHANGE 2006 2005 % CHANGE
------ ------ -------- ------ ------ --------
GEOGRAPHY
AMERICAS $ 55.4 $ 51.3 8% $167.9 $150.9 11%
EUROPE 27.9 23.6 18% 84.7 75.0 13%
ASIA-PACIFIC 60.1 47.4 27% 154.4 125.8 23%
------ ------ --- ------ ------ ---
TOTAL $143.4 $122.3 17% $407.0 $351.7 16%
====== ====== === ====== ====== ===
THIRD QUARTER YEAR-TO-DATE
-------------------------- --------------------------
2006 2005 % CHANGE 2006 2005 % CHANGE
------ ------ -------- ------ ------ --------
MARKET
ELECTRONICS $101.1 $ 80.8 25% $279.9 $228.6 22%
AUTOMOTIVE 30.2 30.1 0% 92.8 90.8 2%
ELECTRICAL 12.1 11.4 6% 34.3 32.3 6%
------ ------ --- ------ ------ ---
TOTAL $143.4 $122.3 17% $407.0 $351.7 16%
====== ====== === ====== ====== ===
* Certain prior year amounts have been reclassified to conform to the current
year presentation. Sales by geography represent sales to customer or
distributor locations.
Results of Operations
Third Quarter, 2006
Sales increased $21.1 million or 17% to $143.4 million in the third quarter of
2006, compared to $122.3 million in the third quarter of 2005 due to improved
sales across all geographic segments. The Concord Semiconductor acquisition
added $4.0 million of sales to the Asia-Pacific segment for the third quarter of
2006.
On a geographic basis, sales in the Americas increased $4.1 million or 8% in the
third quarter of 2006, compared to the third quarter of last year. The
electronics business was the largest contributor to the sales increase
reflecting strong demand from North American distributors driven by improvement
in the markets for telecommunications and consumer electronics. The electrical
business also contributed to growth in the Americas due to continued improvement
in industrial manufacturing and realization of price increases. Automotive sales
in the Americas declined primarily due to a weaker domestic automotive market
and continued price erosion. Europe sales increased $4.3 million or 18% in the
third quarter of 2006 compared to the third quarter of 2005. The increase in
European sales was primarily due to increased sales to electronics distributors
and to a lesser extent improvement in automotive sales. Asia-Pacific sales
increased $12.7 million or 27% compared to the prior year third quarter. The
increase in Asia-Pacific sales was mainly due to strong demand for digital
consumer and telecommunications products throughout the region. Increases in
automotive sales also contributed to the Asia-Pacific growth reflecting share
gain in the growing Asian markets outside of Japan. Exchange rates had a
favorable $1.4 million effect on sales in the third quarter of 2006 compared to
the prior year quarter primarily due to changes in the Euro.
Gross profit was $47.1 million or 32.8% of sales for the third quarter of 2006,
compared to $34.3 million or 28.1% of sales in the same quarter last year. The
third quarter 2006 gross margin increased compared to the prior year quarter due
to higher sales across all geographies and the related favorable operating
leverage, partially offset by higher commodity prices for zinc and copper. The
third quarter of 2006 also includes $2.1 million of charges
14
related to asset write-downs and employee-related cost pursuant to contract
obligations while the third quarter of 2005 includes $4.8 million for Ireland
severance.
Total operating expense was $34.7 million or 24.2% of sales for the third
quarter of 2006 compared to $30.2 million or 24.7% of sales for the same quarter
in the prior year. The increase in operating expense reflects additional
research and development spending to support the Company's solution selling
strategy, stock-based compensation expense of $1.2 million, higher bonus
expense, $0.8 million for asset write-downs and $1.0 million of employee-related
cost pursuant to contract obligations.
Operating income was $12.4 million or 8.6% of sales for the third quarter of
2006 compared to $4.1 million or 3.4% of sales for the same quarter of last
year. The increase in operating income compared to the prior year was due to
higher sales and operating leverage and lower severance related expenses
partially offset higher commodity prices for zinc and copper.
Interest expense was $0.5 million in the third quarter of 2006 compared to $0.6
million in the third quarter of the prior year reflecting a lower average debt
balance in 2006 compared to the prior year quarter. Other income was $0.1
million for the third quarter of 2006 compared to other income of $3.0 million
in the third quarter of last year. Other income in 2005 includes favorable
changes in exchange rates and a gain of $1.4 million related to the sale of a
40% interest in a wafer fabrication facility in Swindon, England.
Earnings from continuing operations before minority interest and income taxes
was $12.0 million for the third quarter 2006 compared to $6.5 million for the
third quarter of 2005. Income taxes were $2.6 million or a 22% effective rate,
for the third quarter of 2006 compared to $3.4 million, in the third quarter of
last year. Income taxes in the current year quarter include a $1.2 million
benefit related to a favorable tax reserve adjustment.
Net income for the third quarter of 2006 was $9.4 million or $0.42 per diluted
share compared to $3.8 million or $0.17 per diluted share for the same quarter
of last year due to the factors discussed above.
Nine Months, 2006
Sales for the first nine months of 2006 increased 16% to $407.0 million from
$351.7 million for the first nine months of last year. On a geographic basis,
sales in the Americas increased $17.0 million or 11% in the first nine months of
2006 compared to the prior year due primarily to increased North American
electronics distributor sales partially offset by lower automotive sales. Europe
sales increased $9.7 million or 13% in the first nine months of 2006 compared to
the prior year largely due to increased electronics demand and to a lesser
extent increased automotive sales. Asia-Pacific sales increased $28.6 million or
23% for the first nine months of 2006 compared to the same period in the prior
year primarily due to increased electronics sales throughout the region driven
largely by improvements in the markets for digital consumer and
telecommunications products. Automotive sales also increased over the prior year
quarter reflecting share gain in the growing Asian markets outside of Japan.
Changes in exchange rates had the effect of decreasing sales by $1.6 million for
the first nine months of 2006 compared to the prior year.
Gross profit was $123.2 million or 30.3% of sales for the first nine months of
2006 compared to $106.6 million or 30.3% of sales for the first nine months of
last year. The 2006 gross margin percentage was flat compared to the prior year
as higher sales volume and related operating leverage was offset by Ireland
severance charges of $17.1 million, higher zinc and copper commodity prices,
$2.2 million of employee-related cost pursuant to contract obligations, and $0.8
million of charges related to asset write-downs, while 2005 includes $7.5
million for Ireland severance.
Total operating expense was $99.7 million or 24.5% of sales for the first nine
months of 2006 compared to $88.8 million or 25.2% of sales last year. The
increase in operating expense reflects additional research and development
spending of $1.3 million to support the Company's solution selling strategy,
stock-based compensation expense of $3.9 million, higher bonus expense, $3.5
million related to asset write-downs and $1.0 million of accrued employee
related costs pursuant to contract obligations.
15
Operating income for the first nine months of 2006 was $23.5 million or 5.8% of
sales compared to $17.9 million or 5.1% of sales for the prior year. The
improvement in operating income compared to the prior year was due to higher
sales and improved operating leverage partially offset by Ireland restructuring
charges, asset write-downs, accrued employee related costs pursuant to contract
obligations, higher commodity prices and the inclusion of stock-based
compensation expense in 2006
Interest expense was $1.3 million for the first nine months of 2006 compared to
$1.6 million last year due to lower average debt levels. Other income was $1.6
million for the first nine months of 2006 compared to $3.2 million for the same
period last year with the decrease due to a 2005 gain of $1.4 million related to
the sale of a 40% interest in a wafer fabrication facility in Swindon, England.
Earnings from continuing operations before minority interest and income taxes
was $23.8 million for the first nine months of 2006 compared to $19.4 million
the first nine months of last year. Income taxes were $5.2 million for the first
nine months of 2006 compared to $7.8 million for the first nine months of last
year. Income taxes for the first nine months of 2006 include a $2.8 million
benefit related to the recognition of certain previous years net operating
losses from the Teccor acquisition and a $1.2 million favorable tax reserve
adjustment partially offset by $0.9 million of charges.
Net income for the first nine months of 2006 was $19.2 million compared to $12.5
million for the same period last year. Earnings per share for the first nine
months of 2006 was $0.85 per diluted share compared to $0.55 per diluted share
last year.
Liquidity and Capital Resources
Assuming no material adverse changes in market conditions or interest rates,
management expects that the Company will have sufficient cash from operations to
support both its operations and its current debt obligations for the foreseeable
future.
The EFEN business, which is presented as a discontinued operation, did not
contribute significantly to cash from operations for the first, second and third
quarters of 2006 or 2005.
Littelfuse started the 2006 year with $21.9 million of cash and cash
equivalents. Net cash provided by operations was $54.4 million for the first
nine months. Net cash provided by operations includes net income of $19.2
million, stock based compensation of $3.9 million, depreciation of $23.2 million
and amortization of $2.0 million in addition to various working capital and
other items. Accounts receivable increased $13.9 million due primarily to the
increase in sales during the current year. Inventory, excluding inventory
increases as a result of 2006 acquisitions, decreased $0.4 million. Accounts
payable, accrued expenses, prepaid expenses and other items contributed $19.6
million to cash flow, primarily due to the recognition of restructuring
liabilities, partially offset by the payment of management bonuses and
restructuring charges that were previously accrued. Net cash used in investing
activities included $14.1 million in net purchases of property, plant and
equipment, $24.0 million for the purchase of Concord, $4.5 million for the
purchase of Catalina, $6.0 million for the purchase of SRC and $3.2 million of
other acquisition activity primarily for the purchase of SurgX, partially offset
by $11.6 million received from the sale of EFEN. In addition, net cash provided
by financing activities included stock option exercises of $6.0 million and
excess tax benefits on shared-based compensation of $0.4 million partially
offset by net payments of debt of $0.7 million and the purchase of $0.6 million
of treasury stock. The effects of exchange rate changes increased cash by $1.7
million. The net cash provided by operations and financing activities less
investing activities plus the effects of exchange rate changes resulted in a
$20.9 million net increase in cash. This left the Company with a cash balance of
$42.9 million at September 30, 2006.
The ratio of current assets to current liabilities was 1.7 to 1 at the end of
the third quarter of 2006 compared to 1.9 to 1 at the end of the third quarter
of 2005. The days sales in receivables was approximately 63 days at the end of
the third quarter of 2006, compared to 63 days at the end of fiscal 2005 and 60
days at the end of the third quarter of 2005. The increase in days sales in
receivables from the third quarter of the prior year was due primarily to a
higher percentage of Asian sales, which typically have longer payment cycles.
The days inventory outstanding was approximately 63 days at the end of the third
quarter of 2006 compared to 75 days at the end of
16
2005 and 73 days at end of the third quarter of 2005. The improvement in days
inventory outstanding was due to lean manufacturing and logistics initiatives
and improved production planning.
The Company's capital expenditures, net of cash from asset sales, were $4.7
million for the third quarter of 2006 compared to $5.0 million for the third
quarter of 2005. Most of the spending in 2006 relates to manufacturing process
improvements, new product introductions and capacity expansion.
Total debt at the end of the third quarter 2006 totaled $27.8 million and
consisted of the following: (1) credit revolver borrowings totaling $21.5
million, (2) foreign revolver borrowings totaling $6.3 million.
The Company has an unsecured domestic financing arrangement consisting of a
credit agreement with banks that provides a $75.0 million revolving credit
facility that expires on July 21, 2011. The revolving credit facility is subject
to a maximum indebtedness calculation and other financial covenants. At
September 30, 2006, the Company had available $53.5 million of borrowing
capability under the revolving credit facility at an interest rate of LIBOR plus
0.50% (6.01% as of September 30, 2006). The Company also had $6.0 million in
letters of credit outstanding at September 30, 2006.
The Company also has an unsecured bank line of credit that provides a Yen 0.9
billion (equivalent to $7.6 million) revolving credit facility at an interest
rate of TIBOR plus 0.875% (1.24% as of September 30, 2006). The revolving line
of credit becomes due on July 21, 2011. At September 30, 2006, the Company had
an equivalent $3.8 million outstanding on the Yen facility. The Company intends
to renew this line of credit upon maturity.
The Company also has an unsecured bank line of credit that provides a Taiwanese
Dollar 35.0 million (equivalent to $1.1 million) revolving credit facility at an
interest rate of two-years Time Deposit plus 0.145% (2.3% as of September 30,
2006). The revolving line of credit becomes due on August 18, 2009. At September
30, 2006, the Company had an equivalent $1.0 million outstanding on the
Taiwanese Dollar facility. The Company intends to renew this line of credit upon
maturity.
The Company also has various other foreign fixed rate loans totaling $1.5
million with maturity dates through August 2013.
Outlook
Fourth quarter sales are forecasted to be down at least 10% sequentially, and
maybe as much as 15%, reflecting an electronics inventory correction on top of
the normal fourth quarter seasonal decline. At these sales levels, earnings per
share would be expected to be in the $0.18 to $0.25 range, reflecting negative
operating leverage, continued costs related to acquisition integrations and
manufacturing transitions and a temporary increase in the tax rate to 36-38%.
Price increases have been implemented that will partially offset the higher
commodity prices, but because of existing contracts, some of the largest
increases will not take effect until early next year.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
The statements in this section and in the other sections of this report which
are not historical facts contained in this report are intended to be
forward-looking statements that involve risks and uncertainties, including, but
not limited to, product demand and market acceptance risks, the effect of
economic conditions, the impact of competitive products and pricing, the
integration of acquisitions, product development and patent protection,
commercialization and technological difficulties, capacity and supply
constraints or difficulties, the impact of changes in commodity prices, exchange
rate fluctuations, actual purchases under agreements, the effect of the
Company's accounting policies, labor disputes, restructuring costs in excess of
expectations, costs related to former coal mining activities, pension plan asset
returns less than expected, and other risks which may be detailed in the
Company's Securities and Exchange Commission filings. Should one or more of
these risks or uncertainties materialize or should the underlying assumptions
prove incorrect, actual results and outcomes may differ materially from those
indicated or implied in the forward-looking statements. This report should be
read in conjunction with information provided in
17
the financial statements appearing in the Company's Annual Report on Form 10-K
for the year ended December 31, 2005.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in foreign exchange rates,
commodities and, to a lesser extent, interest rates. Management believes that
the Company's exposure to foreign exchange rates and interest rates is
immaterial and not significant enough to warrant disclosure of quantitative
information regarding market risk.
The Company had $27.8 million of debt outstanding at September 30, 2006 in the
form of lines of credit with variable rates of interest. Approximately $1.5
million of the Company's debt is at fixed rates.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign countries. The Company has foreign manufacturing
facilities in Mexico, England, Ireland, China, Germany and the Philippines.
Substantially all sales in Europe are denominated in Euro, U.S. Dollar and
British Pound Sterling, and substantially all sales in the Asia-Pacific region
are denominated in U.S. Dollar, Japanese Yen and South Korean Won.
The Company's identifiable foreign exchange exposures result from the purchase
and sale of products from affiliates, repayment of intercompany trade and loan
amounts and translation of local currency amounts in consolidation of financial
results. Changes in foreign currency exchange rates or weak economic conditions
in the foreign countries in which it manufactures and distributes products could
affect the Company's sales, accounts receivable values and financial results.
The Company uses netting and offsetting intercompany account management
techniques to reduce known foreign currency exposures deemed to be material.
A risk management policy has been implemented by the Company that establishes
the procedures and controls over derivative financial instruments. Under the
policy, the Company does not use derivative financial instruments for trading
purposes and the use of such instruments is subject to the approval of senior
officers. Typically, the use of such derivative instruments is limited to
hedging activities related to specific foreign currency cash flows. The
Company's exposure related to such transactions is, in the aggregate, not
material to the Company's financial position, results of operations and cash
flows.
The Company uses various metals in the production of its products, including
zinc, copper and silver. The Company's earnings are exposed to fluctuations in
the prices of these commodities. The Company does not currently use derivative
financial instruments to mitigate this commodity price risk. A 10% increase in
the price of zinc and copper would reduce pre-tax profit by approximately $1.0
million and $1.1 million, respectively.
Item 4. Controls and Procedures
As of September 30, 2006, the Chief Executive Officer and Chief Financial
Officer of the Company evaluated the effectiveness of the disclosure controls
and procedures of the Company and concluded that these disclosure controls and
procedures are effective to ensure that material information relating to the
Company and its consolidated subsidiaries has been made known to them by the
employees of the Company and its consolidated subsidiaries during the period
preceding the filing of this Report. There were no significant changes in the
Company's internal controls during the period covered by this Report that could
materially affect these controls or could reasonably be expected to materially
affect the Company's internal control reporting, disclosures and procedures
subsequent to the last day they were evaluated by the Company's Chief Executive
Officer and Chief Financial Officer.
18
PART II - OTHER INFORMATION
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
(c) The table below provides information with respect to purchases by the
Company of shares of its common stock during each fiscal month of the
third quarter of fiscal 2006:
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Shares
Purchased as Part of Maximum Number of Shares
Total Number of Average Price Publicly Announced that May Yet Be Purchased
Period Shares Purchased Paid per Share Plans or Programs Under the Plans or Programs
-------------- ---------------- -------------- ---------------------- ---------------------------
July 2006 -- -- -- 1,000,000
August 2006 25,000 -- -- 975,000
September 2006 -- -- -- 975,000
Total -- -- -- 975,000
The Company's Board of Directors authorized the repurchase of up to 1,000,000
shares under a program for the period May 1, 2006 to April 30, 2007.
19
Item 6: Exhibits
Exhibit Description
------- ----------------------------------------------------------------------
10.1 Littelfuse Credit Agreement dated July 21, 2006
31.1 Certification of Gordon Hunter, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Philip G. Franklin, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter
ended September 30, 2006, to be signed on its behalf by the undersigned
thereunto duly authorized.
LITTELFUSE, INC.
Date: November 9, 2006 By /s/ Philip G. Franklin
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Philip G. Franklin
Vice President, Operations Support and
Chief Financial Officer
(As duly authorized officer and as
the principal financial and accounting
officer)
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