Littelfuse Inc 10-Q for FY2020 Q1
Littelfuse Inc /De (LFUS)
10-Q
2020-04-29
For: 2020-03-28
View Original
Added on
April 10, 2026
About this 10-Q
Littelfuse Inc filed this 10-Q on April 29, 2020, covering the quarter ended March 28, 2020 (FY2020 Q1).
Headline figures
Quarter ended March 28, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $346.1M
- down 14.6% from $405.5M a year earlier
- Net income
- $24.64M
- down 33.4% from net income of $36.99M a year earlier
- Diluted EPS
- $1.00
- down 32.4% from $1.48 a year earlier
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 28, 2020
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)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | (ZIP Code) | |
Registrant’s telephone number, including area code: 773 -628-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of exchange on which registered | |||
Global Select Market | |||||
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes [ ] No [ ]
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 April 24, 2020, the registrant had outstanding 24,276,841 shares of Common Stock, net of Treasury Shares.
TABLE OF CONTENTS
Page | ||
PART I | ||
Item 1. | ||
Condensed Consolidated Balance Sheets as of March 28, 2020 (unaudited) and December 28, 2019 | ||
Condensed Consolidated Statements of Net Income for the three months ended March 28, 2020 (unaudited) and March 30, 2019 (unaudited) | ||
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 28, 2020 (unaudited) and March 30, 2019 (unaudited) | ||
Condensed Consolidated Statements of Cash Flows for the three months ended March 28, 2020 (unaudited) and March 30, 2019 (unaudited) | ||
Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 28, 2020 (unaudited) and March 30, 2019 (unaudited) | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
2
LITTELFUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) | ||||||||
(in thousands) | March 28, 2020 | December 28, 2019 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Short-term investments | ||||||||
Trade receivables, less allowances of $37,482 and $42,043 at March 28, 2020 and December 28, 2019, respectively | ||||||||
Inventories | ||||||||
Prepaid income taxes and income taxes receivable | ||||||||
Prepaid expenses and other current assets | ||||||||
Total current assets | ||||||||
Net property, plant, and equipment | ||||||||
Intangible assets, net of amortization | ||||||||
Goodwill | ||||||||
Investments | ||||||||
Deferred income taxes | ||||||||
Right of use lease assets, net | ||||||||
Other assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Accrued liabilities | ||||||||
Accrued income taxes | ||||||||
Current portion of long-term debt | ||||||||
Total current liabilities | ||||||||
Long-term debt, less current portion | ||||||||
Deferred income taxes | ||||||||
Accrued post-retirement benefits | ||||||||
Non-current operating lease liabilities | ||||||||
Other long-term liabilities | ||||||||
Shareholders’ equity: | ||||||||
Common stock, par value $0.01 per share: 34,000,000 shares authorized; shares issued, March 28, 2020–25,902,213; December 28, 2019–25,855,203 | ||||||||
Treasury stock, at cost: 1,626,357 and 1,473,901 shares, respectively | ( | ) | ( | ) | ||||
Additional paid-in capital | ||||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Retained earnings | ||||||||
Littelfuse, Inc. shareholders’ equity | ||||||||
Non-controlling interest | ||||||||
Total equity | ||||||||
Total liabilities and equity | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME
(Unaudited)
Three Months Ended | ||||||||
(in thousands, except per share data) | March 28, 2020 | March 30, 2019 | ||||||
Net sales | $ | $ | ||||||
Cost of sales | ||||||||
Gross profit | ||||||||
Selling, general, and administrative expenses | ||||||||
Research and development expenses | ||||||||
Amortization of intangibles | ||||||||
Total operating expenses | ||||||||
Operating income | ||||||||
Interest expense | ||||||||
Foreign exchange loss | ||||||||
Other expense, net | ||||||||
Income before income taxes | ||||||||
Income taxes | ||||||||
Net income | $ | $ | ||||||
Income per share: | ||||||||
Basic | $ | $ | ||||||
Diluted | $ | $ | ||||||
Weighted-average shares and equivalent shares outstanding: | ||||||||
Basic | ||||||||
Diluted | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended | ||||||||
(in thousands) | March 28, 2020 | March 30, 2019 | ||||||
Net income | $ | $ | ||||||
Other comprehensive income (loss): | ||||||||
Pension and postemployment adjustment, net of tax | ( | ) | ||||||
Foreign currency translation adjustments | ( | ) | ||||||
Comprehensive income | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended | ||||||||
(in thousands) | March 28, 2020 | March 30, 2019 | ||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | ||||||||
Amortization of intangibles | ||||||||
Deferred revenue | ( | ) | ||||||
Impairment charges | — | |||||||
Stock-based compensation | ||||||||
Loss on investments and other assets | ||||||||
Deferred income taxes | ( | ) | ||||||
Other | ||||||||
Changes in operating assets and liabilities: | ||||||||
Trade receivables | ( | ) | ( | ) | ||||
Inventories | ( | ) | ||||||
Accounts payable | ( | ) | ( | ) | ||||
Accrued liabilities and income taxes | ( | ) | ( | ) | ||||
Prepaid expenses and other assets | ( | ) | ||||||
Net cash provided by operating activities | ||||||||
INVESTING ACTIVITIES | ||||||||
Acquisitions of businesses, net of cash acquired | ( | ) | ||||||
Purchases of property, plant, and equipment | ( | ) | ( | ) | ||||
Net proceeds from sale of property, plant and equipment | ||||||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
FINANCING ACTIVITIES | ||||||||
Proceeds of revolving credit facility | ||||||||
Payments of term loan | ( | ) | ( | ) | ||||
Net proceeds related to stock-based award activities | ||||||||
Purchases of common stock | ( | ) | ( | ) | ||||
Cash dividends paid | ( | ) | ( | ) | ||||
Net cash provided by (used in) financing activities | ( | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
Increase (decrease) in cash and cash equivalents | ( | ) | ||||||
Cash and cash equivalents at beginning of period | ||||||||
Cash and cash equivalents at end of period | $ | $ | ||||||
Supplementary Cash Flow Information | ||||||||
Cash paid during the period for interest | $ | $ | ||||||
Capital expenditures, not yet paid | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
6
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Littelfuse, Inc. Shareholders’ Equity | |||||||||||||||||||||||||||
(in thousands, except share and per share data) | Common Stock | Addl. Paid in Capital | Treasury Stock | Accum. Other Comp. Inc. (Loss) | Retained Earnings | Non-controlling Interest | Total | ||||||||||||||||||||
Balance at December 28, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||
Net income | — | — | — | — | — | ||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||
Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||
Withheld shares on restricted share units for withholding taxes | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||
Stock options exercised | — | — | — | — | — | ||||||||||||||||||||||
Repurchases of common stock | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||
Cash dividends paid ($0.48 per share) | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||
Balance at March 28, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||
Littelfuse, Inc. Shareholders’ Equity | |||||||||||||||||||||||||||
(in thousands, except share and per share data) | Common Stock | Addl. Paid in Capital | Treasury Stock | Accum. Other Comp. Inc. (Loss) | Retained Earnings | Non-controlling Interest | Total | ||||||||||||||||||||
Balance at December 29, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||
Net income | — | — | — | — | — | ||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | ||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||
Withheld shares on restricted share units for withholding taxes | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||
Stock options exercised | — | — | — | — | — | ||||||||||||||||||||||
Repurchases of common stock | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||
Cash dividends paid ($0.43 per share) | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||
Balance at March 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
7
Notes to Condensed Consolidated Financial Statements
1. Summary of Significant Accounting Policies and Other Information
Nature of Operations
Littelfuse, Inc. and subsidiaries (the “Company”) is a global manufacturer of leading technologies in circuit protection, power control and sensing. Serving over 100,000 end customers, the Company’s products are found in automotive and commercial vehicles, industrial applications, data and telecommunications, medical devices, consumer electronics and appliances. With its broad product portfolio of fuses, semiconductors, polymers, ceramics, relays and sensors, and extensive global infrastructure, the Company’s worldwide associates partner with its customers to design, manufacture and deliver innovative, high-quality solutions for a safer, greener and increasingly connected world.
Basis of Presentation
The Company’s accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and disclosures normally included in the consolidated balance sheets, statements of net income and comprehensive income, statements of cash flows, and statement of stockholders' equity prepared in conformity with U.S. GAAP have been condensed or omitted as permitted by such rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. They have been prepared in accordance with accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019 which should be read in conjunction with the disclosures therein. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Operating results for interim periods are not necessarily indicative of annual operating results.
Revenue Recognition
Revenue Disaggregation
The following tables disaggregate the Company’s revenue by primary business units for the three months ended March 28, 2020 and March 30, 2019:
Three Months Ended March 28, 2020 | ||||||||||||||||
(in thousands) | Electronics Segment | Automotive Segment | Industrial Segment | Total | ||||||||||||
Electronics – Passive Products and Sensors | $ | $ | $ | $ | ||||||||||||
Electronics – Semiconductor | ||||||||||||||||
Passenger Car Products | ||||||||||||||||
Automotive Sensors | ||||||||||||||||
Commercial Vehicle Products | ||||||||||||||||
Industrial Products | ||||||||||||||||
Total | $ | $ | $ | $ | ||||||||||||
8
Three Months Ended March 30, 2019 | ||||||||||||||||
(in thousands) | Electronics Segment | Automotive Segment | Industrial Segment | Total | ||||||||||||
Electronics – Passive Products and Sensors | $ | $ | $ | $ | ||||||||||||
Electronics – Semiconductor | ||||||||||||||||
Passenger Car Products | ||||||||||||||||
Automotive Sensors | ||||||||||||||||
Commercial Vehicle Products | ||||||||||||||||
Industrial Products | ||||||||||||||||
Total | $ | $ | $ | $ | ||||||||||||
See Note 16, Segment Information for net sales by segment and countries.
Revenue Recognition
The Company recognizes revenue on product sales in the period in which the Company satisfies its performance obligation and control of the product is transferred to the customer. The Company’s sales arrangements with customers are predominately short term in nature and generally provide for transfer of control at the time of shipment as this is the point at which title and risk of loss of the product transfers to the customer. At the end of each period, for those shipments where title to the products and the risk of loss and rewards of ownership do not transfer until the product has been received by the customer, the Company adjusts revenues and cost of sales for the delay between the time that the products are shipped and when they are received by the customer. The amount of revenue recorded reflects the consideration to which the Company expects to be entitled in exchange for goods and may include adjustments for customer allowance, rebates and price adjustments. The Company’s distribution channels are primarily through direct sales and independent third-party distributors.
The Company elected the practical expedient under Accounting Standards Codification ("ASC") 340-40-25-4 to expense commissions when incurred as the amortization period of the commission asset the Company would have otherwise recognized is less than one year.
Revenue and Billing
The Company generally accepts orders from customers through receipt of purchase orders or electronic data interchange based on written sales agreements and purchasing contracts. Contract pricing and selling agreement terms are based on market factors, costs, and competition. Pricing is often 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. As the Company’s standard payment terms are less than one year, the Company elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. The Company also elected the practical expedient provided in ASC 606-10-25-18B to treat all product shipping and handling activities as fulfillment activities, and therefore recognize the gross revenue associated with the contract, inclusive of any shipping and handling revenue.
Ship and Debit Program
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 for pricing allowances to reduce its price. When 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, electronic distributor inventory levels and actual authorizations for the debit and recognizes these debits as a reduction of revenue.
9
Return to Stock
The Company has a return to stock policy whereby certain customers, with prior 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 volume based sales incentives to certain customers to encourage greater product sales. If customers achieve their specific quarterly or annual sales targets, they are entitled to rebates. The Company estimates the projected amount of rebates that will be achieved by the customer and recognizes this estimated cost as a reduction to revenue as products are sold.
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." The standard modifies the measurement approach for credit losses on financial instruments, including trade receivables, from an incurred loss method to a current expected credit loss method ("CECL"). The standard requires the measurement of expected credit losses to be based on relevant information, including historical experiences, current conditions and a forecast that is supportable. The Company adopted the new standard on December 29, 2019. The adoption of the standard did not have a material effect on our Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurement." ASU 2018-13 modifies the disclosure requirements in Topic 820: "Fair Value Measurement," based on the FASB Concepts Statement, "Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements," including consideration of costs and benefits. The new standard removes certain disclosures, modifies certain disclosures and adds additional disclosures related to fair value measurement. The Company adopted the new standard on December 29, 2019. The adoption of ASU 2018- 13 did not have a material impact on our Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic: 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)." ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted the new standard on December 29, 2019. The adoption of ASU 2018-15 did not have a material impact on our Condensed Consolidated Financial Statements.
In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The objective of this is to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting due to the cessation of the London Interbank Offered Rate (LIBOR). The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect a material effect from the adoption of this guidance on its Condensed Consolidated Financial Statements.
2. Inventories
The components of inventories at March 28, 2020 and December 28, 2019 are as follows:
(in thousands) | March 28, 2020 | December 28, 2019 | ||||||
Raw materials | $ | $ | ||||||
Work in process | ||||||||
Finished goods | ||||||||
Inventory Reserves | ( | ) | ( | ) | ||||
Total | $ | $ | ||||||
10
3. Property, Plant, and Equipment
The components of net property, plant, and equipment at March 28, 2020 and December 28, 2019 are as follows:
(in thousands) | March 28, 2020 | December 28, 2019 | ||||||
Land | $ | $ | ||||||
Building | ||||||||
Equipment | ||||||||
Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
Total | $ | $ | ||||||
The Company recorded depreciation expense of $13.8 million and $13.1 million for the three months ended March 28, 2020 and March 30, 2019, respectively.
4. Goodwill and Other Intangible Assets
The amounts for goodwill and changes in the carrying value by segment for the three months ended March 28, 2020 are as follows:
(in thousands) | Electronics | Automotive | Industrial | Total | ||||||||||||
As of December 28, 2019 | $ | $ | $ | $ | ||||||||||||
Currency translation | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
As of March 28, 2020 | $ | $ | $ | $ | ||||||||||||
The components of other intangible assets at March 28, 2020 and December 28, 2019 are as follows:
As of March 28, 2020 | ||||||||||||
(in thousands) | Gross Carrying Value | Accumulated Amortization | Net Book Value | |||||||||
Land use rights | $ | $ | $ | |||||||||
Patents, licenses and software | $ | $ | ||||||||||
Distribution network | ||||||||||||
Customer relationships, trademarks, and tradenames | ||||||||||||
Total | $ | $ | $ | |||||||||
As of December 28, 2019 | |||||||||||
(in thousands) | Gross Carrying Value | Accumulated Amortization | Net Book Value | ||||||||
Land use rights | $ | $ | $ | ||||||||
Patents, licenses and software | |||||||||||
Distribution network | |||||||||||
Customer relationships, trademarks, and tradenames | |||||||||||
Total | $ | $ | $ | ||||||||
During the three months ended March 28, 2020 and March 30, 2019, the Company recorded amortization expense of $10.0 million and $10.2 million, respectively.
During the three months ended March 28, 2020, the Company recognized a $0.3 million non-cash impairment charge on a certain patent triggered by the Company’s announcement to consolidate a manufacturing facility within the Industrial segment.
11
Estimated annual amortization expense related to intangible assets with definite lives as of March 28, 2020 is as follows:
(in thousands) | Amount | ||
2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
2025 and thereafter | |||
Total | $ | ||
5. Lease Commitments
The Company leases office and production space under various non-cancelable operating leases that expire no later than 2028. Certain real estate leases include one or more options to renew. The exercise of lease renewal options is at the Company's sole discretion. Options to extend the lease are included in the lease term when it is reasonably certain the Company will exercise the option. The Company also has production equipment, office equipment and vehicles under operating leases. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option that is reasonably certain of exercise. Certain leases include rental payments adjusted periodically for inflation. The lease agreements do not contain any material residual value guarantee or material restrictive covenants.
The Company does not have a published credit rating because it has no publicly traded debt; therefore, the Company is generating its incremental borrowing rate (IBR), using a synthetic credit rating model that compares its credit quality to other rated companies based on certain financial metrics and ratios. The reference rate will be based on the yield curve of companies with similar credit quality based on the metrics and adjusted for currency in regions where we have significant operations.
All leases with an initial term of 12 months or less that do not include an option to extend or purchase the underlying asset that the Company is reasonably certain to exercise (“short-term leases”) are not recorded on the Condensed Consolidated Balance Sheet. Short-term lease expenses are recognized on a straight-line basis over the lease term.
The following table presents the classification of ROU assets and lease liabilities at March 28, 2020 and December 28, 2019:
Leases (in thousands) | Condensed Consolidated Balance Sheet Classification | March 28, 2020 | December 28, 2019 | ||||
Assets | |||||||
Operating ROU assets | Right of use lease assets, net | $ | $ | ||||
Liabilities | |||||||
Current operating lease liabilities | Accrued liabilities | $ | $ | ||||
Non-current operating lease liabilities | Non-current operating lease liabilities | $ | $ | ||||
Total lease liabilities | $ | $ | |||||
12
The following table represents the lease costs for the three months ended March 28, 2020 and March 30, 2019:
Leases cost (in thousands) | Condensed Consolidated Statements of Net Income Classification | Three Months Ended March 28, 2020 | Three Months Ended March 30, 2019 | ||||
Short-term lease expenses | Cost of sales, SG&A expenses | $ | $ | ||||
Variable lease expenses | Cost of sales, SG&A expenses | ||||||
Operating lease rent expenses | Cost of sales, SG&A expenses | ||||||
Total operating lease costs | Cost of sales, SG&A expenses | $ | $ | ||||
Maturity of Lease Liabilities as of March 28, 2020 (in thousands) | Operating leases | ||
2020 (excluding the three months ended March 28, 2020) | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
2025 and thereafter | |||
Total lease payments | $ | ||
Present value of lease liabilities | $ | ||
Operating Lease Term and Discount Rate | March 28, 2020 | |
Weighted-average remaining lease term (years) | ||
Weighted-average discount rate | % | |
Other Information (in thousands) | Three Months Ended March 28, 2020 | ||
Cash paid for amounts included in the measurement of lease liabilities | |||
Operating cash flow payments for operating leases | $ | ( | ) |
Leased assets obtained in exchange for operating lease liabilities | |||
13
6. Accrued Liabilities
The components of accrued liabilities at March 28, 2020 and December 28, 2019 are as follows:
(in thousands) | March 28, 2020 | December 28, 2019 | ||||||
Employee-related liabilities | $ | $ | ||||||
Operating lease liability | ||||||||
Interest | ||||||||
Professional services | ||||||||
Restructuring liability | ||||||||
Other non-income taxes | ||||||||
Other | ||||||||
Total | $ | $ | ||||||
Employee-related liabilities consist primarily of payroll, sales commissions, bonus, employee benefit accruals and workers’ compensation. Bonus accruals include amounts earned pursuant to the Company’s primary employee incentive compensation plans. Other accrued liabilities include miscellaneous operating accruals and other client-related liabilities.
7. Restructuring, Impairment and Other Charges
The Company recorded restructuring, impairment and other charges for the three months ended March 28, 2020 and March 30, 2019 as follows:
Three months ended March 28, 2020 | |||||||||||||||
(in thousands) | Electronics | Automotive | Industrial | Total | |||||||||||
Employee terminations | $ | $ | $ | $ | |||||||||||
Other restructuring charges | |||||||||||||||
Total restructuring charges | |||||||||||||||
Impairment | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
Three months ended March 30, 2019 | |||||||||||||||
(in thousands) | Electronics | Automotive | Industrial | Total | |||||||||||
Employee terminations | $ | $ | $ | $ | |||||||||||
Other restructuring charges | |||||||||||||||
Total restructuring charges | |||||||||||||||
Impairment | |||||||||||||||
Total | $ | $ | $ | $ | |||||||||||
2020
For the three months ended March 28, 2020, the Company recorded total restructuring charges of $1.7 million, for employee termination costs and other restructuring charges. These charges primarily related to the reorganization of certain manufacturing, selling and administrative functions across all segments and the announced consolidation of a manufacturing facility within the Industrial segment. The Company also recognized $2.2 million of impairment charges related to the land and building associated
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with the Company’s announcement to consolidate a manufacturing facility within the Industrial segment. The impairment charges were included in selling, general and administrative expenses.
2019
For three months ended March 30, 2019, the Company recorded total restructuring charges of $2.7 million, of which $2.5 million, was for employee termination costs and $0.3 million for other restructuring charges. These charges primarily related to reorganization of operations and selling, general and administrative functions as well as integration of IXYS within the Electronics segment and the reorganization of operations in the commercial vehicle products and automotive sensors businesses within the Automotive segment.
The restructuring reserves as of March 28, 2020 and December 28, 2019 are $3.3 million and $2.7 million, respectively. The restructuring reserves are included within accrued liabilities in the Condensed Consolidated Balance Sheets. The Company anticipates the remaining payments associated with employee terminations will primarily be completed by March 2021.
8. Debt
The carrying amounts of debt at March 28, 2020 and December 28, 2019 are as follows:
(in thousands) | March 28, 2020 | December 28, 2019 | ||||||
Revolving Credit Facility | $ | $ | ||||||
Term Loan | ||||||||
Euro Senior Notes, Series A due 2023 | ||||||||
Euro Senior Notes, Series B due 2028 | ||||||||
U.S. Senior Notes, Series A due 2022 | ||||||||
U.S. Senior Notes, Series B due 2027 | ||||||||
U.S. Senior Notes, Series A due 2025 | ||||||||
U.S. Senior Notes, Series B due 2030 | ||||||||
Other | ||||||||
Unamortized debt issuance costs | ( | ) | ( | ) | ||||
Total debt | ||||||||
Less: Current maturities | ( | ) | ( | ) | ||||
Total long-term debt | $ | $ | ||||||
Revolving Credit Facility / Term Loan
On March 4, 2016, the Company entered into a five-year credit agreement (“Credit Agreement”) with a group of lenders for up to $700.0 million. The Credit Agreement consisted of an unsecured revolving credit facility (“Revolving Credit Facility”) of $575.0 million and an unsecured term loan credit facility (“Term Loan”) of up to $125.0 million. In addition, the Company had the ability, from time to time, to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $150.0 million, in the aggregate, in each case in minimum increments of $25.0 million, subject to certain conditions and the agreement of participating lenders.
On October 13, 2017, the Company amended the Credit Agreement to increase the Revolving Credit Facility from $575.0 million to $700.0 million and increase the Term Loan from $125.0 million to $200.0 million and to extend the expiration date from March 4, 2021 to October 13, 2022. The Credit Agreement also included the option for the Company to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $300.0 million, in the aggregate, subject to the satisfaction of certain conditions set forth in the Credit Agreement. Term Loans could be made in up to two advances. The first advance of $125.0 million occurred on October 13, 2017 and the second advance of $75.0 million occurred on January 16, 2018. For the Term Loan, the Company was required to make quarterly principal payments of 1.25 % of the original term loan ($2.5 million quarterly) through maturity, with the remaining balance due on October 13, 2022. The Company paid $2.5 million of principal payments on the term loan during the three months ended March 28, 2020.
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Outstanding borrowings under the Credit Agreement bore 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 was also required to pay commitment fees on unused portions of the credit agreement ranging from 0.15 % to 0.25 %, based on the Consolidated Leverage Ratio, as defined in the agreement. The Credit Agreement included representations, covenants and events of default that are customary for financing transactions of this nature. The effective interest rate on outstanding borrowings under the credit facility was 2.47 % at March 28, 2020.
On March 25, 2020, the company borrowed $100.0 million from the revolving credit facility to preserve financial flexibility and enhance liquidity, given the increasing levels of uncertainty related to coronavirus disease 2019 ("COVID-19").
As of March 28, 2020, the Company had no amount outstanding in letters of credit and had available $219.8 million of borrowing capacity under the Revolving Credit Facility based on financial covenants. At March 28, 2020, the Company was in compliance with all covenants under the Credit Agreement.
On April 3, 2020, the Company amended the Credit Agreement to effect certain changes, including, among others: (i) eliminating the $200.0 million unsecured term loan credit facility, the remaining outstanding balance of which was repaid in full on April 3, 2020 through the revolving credit facility; (ii) making certain financial and non-financial covenants less restrictive on the Company; (iii) modifying performance-based interest rate margins and undrawn fees; and (iv) extending the maturity date to April 3, 2025. The amended Credit Agreement also allows the Company to increase the size of the revolving credit facility or enter into one or more tranches of term loans if there is no event of default and the Company is in compliance with certain financial covenants. The balance under the facility is $240.0 million as of April 3, 2020.
Senior Notes
On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold €212 million aggregate principal amount of senior notes in two series. The funding date for the Euro denominated senior notes occurred on December 8, 2016 for €117 million in aggregate amount of 1.14 % Senior Notes, Series A, due December 8, 2023 (“Euro Senior Notes, Series A due 2023”), and €95 million in aggregate amount of 1.83 % Senior Notes, Series B due December 8, 2028 (“Euro Senior Notes, Series B due 2028”) (together, the “Euro Senior Notes”). Interest on the Euro Senior Notes is payable semiannually on June 8 and December 8, commencing June 8, 2017.
On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold $125 million aggregate principal amount of senior notes in two series. On February 15, 2017, $25 million in aggregate principal amount of 3.03 % Senior Notes, Series A, due February 15, 2022 (“U.S. Senior Notes, Series A due 2022”), and $100 million in aggregate principal amount of 3.74 % Senior Notes, Series B, due February 15, 2027 (“U.S. Senior Notes, Series B due 2027”) (together, the “U.S. Senior Notes due 2022 and 2027”) were funded. Interest on the U.S. Senior Notes due 2022 and 2027 is payable semiannually on February 15 and August 15, commencing August 15, 2017.
On November 15, 2017, the Company entered into a Note Purchase Agreement pursuant to which the Company issued and sold $175 million in aggregate principal amount of senior notes in two series. On January 16, 2018, $50 million aggregate principal amount of 3.48 % Senior Notes, Series A, due February 15, 2025 (“U.S. Senior Notes, Series A due 2025”) and $125 million in aggregate principal amount of 3.78 % Senior Notes, Series B, due February 15, 2030 (“U.S. Senior Notes, Series B due 2030”) (together the “U.S. Senior Notes due 2025 and 2030” and with the Euro Senior Notes and the U.S. Senior Notes due 2022 and 2027, the “Senior Notes”) were funded. Interest on the U.S. Senior Notes due 2025 and 2030 is payable semiannually on February 15 and August 15, commencing on August 15, 2018.
The Senior Notes have not been registered under the Securities Act, or applicable state securities laws. The Senior Notes are general unsecured senior obligations and rank equal in right of payment with all existing and future unsecured unsubordinated indebtedness of the Company.
The Senior Notes are subject to certain customary covenants, including limitations on the Company’s ability, with certain exceptions, to engage in mergers, consolidations, asset sales and transactions with affiliates, to engage in any business that would substantially change the general business of the Company, and to incur liens. In addition, the Company is required to satisfy certain financial covenants and tests relating to, among other matters, interest coverage and leverage. At March 28, 2020, the Company was in compliance with all covenants under the Senior Notes.
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The Company may redeem the Senior Notes upon the satisfaction of certain conditions and the payment of a make-whole amount to noteholders and are required to offer to repurchase the Senior Notes at par following certain events, including a change of control.
9. Fair Value of Assets and Liabilities
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, the Company classifies each fair value measurement as follows:
Level 1—Valuations based on unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2—Valuations based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and
Level 3—Valuations based upon one or more significant unobservable inputs.
Following is a description of the valuation methodologies used for instruments measured at fair value and their classification in the valuation hierarchy.
Cash Equivalents
Cash equivalents primarily consist of money market funds, which are held with an institution with sound credit rating and are highly liquid. The Company classified cash equivalents as Level 1 and are valued at cost which approximates fair value.
Investments in Equity Securities
Investments in equity securities listed on a national market or exchange are valued at the last sales price and classified within Level 1 of the valuation hierarchy and recorded in investments and other assets.
The Company has certain convertible debt and convertible preferred stock investments that are accounted for under the cost method reflected in other assets in the Condensed Consolidated Balance Sheets. During the three months ended March 30, 2019, the Company recorded impairment charges of $2.8 million in Other expense (income), net in the Condensed Consolidated Statements of Net Income to adjust these certain investments to their estimated fair value. As of March 28, 2020 and December 28, 2019, the balances of these investments were $0.4 million. The fair value of these investments are measured on a nonrecurring basis and determined to be Level 3 under the fair value hierarchy. The Company's accounting and finance management determines the valuation policies and procedures for Level 3 fair value measurements and is responsible for the development and determination of unobservable inputs.
Mutual Funds
The Company has a non-qualified Supplemental Retirement and Savings Plan which provides additional retirement benefits for certain management employees and named executive officers by allowing participants to defer a portion of their annual compensation. The Company maintains accounts for participants through which participants make investment elections. The marketable securities are classified as Level 1 under the fair value hierarchy as they are maintained in mutual funds with readily determinable fair value and recorded in other assets.
There were no changes during the quarter ended March 28, 2020 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. On October 30, 2019, the Company entered a foreign currency exchange forward contract to mitigate the currency fluctuation risk between the Chinese renminbi and U.S. dollar. The foreign currency contract was not designated as a hedge instrument and was marked to market on a monthly basis. The notional value of the forward contracts at December 28, 2019 was $16.0 million and expires on May 5, 2020. On March 23, 2020, the Company unwound the foreign currency exchange forward contract entered on October 30, 2019 and recognized a gain of $0.2 million within Other expenses,
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net during the three months ended March 28, 2020. The fair values of the foreign currency forward contract was determined to be Level 2 under the fair value hierarchy and is valued using market exchange rates.
As of March 28, 2020 and December 28, 2019, the Company did not hold any non-financial assets or liabilities that are required to be measured at fair value on a recurring basis.
The following table presents assets measured at fair value by classification within the fair value hierarchy as of March 28, 2020:
Fair Value Measurements Using | ||||||||||||||||
(in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
Cash Equivalents | $ | $ | $ | $ | ||||||||||||
Investments in equity securities | ||||||||||||||||
Mutual funds | ||||||||||||||||
The following table presents assets measured at fair value by classification within the fair value hierarchy as of December 28, 2019:
Fair Value Measurements Using | ||||||||||||||||
(in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
Cash Equivalents | $ | $ | $ | $ | ||||||||||||
Investments in equity securities | ||||||||||||||||
Mutual funds | ||||||||||||||||
In addition to the methods and assumptions used for the financial instruments recorded at fair value as discussed above, the following methods and assumptions are used to estimate the fair value of other financial instruments that are not marked to market on a recurring basis. The Company’s other financial instruments include cash and cash equivalents, short-term investments, accounts receivable and its long-term debt. Due to their short-term maturity, the carrying amounts of cash and cash equivalents, short-term investments and accounts receivable approximate their fair values. The Company’s revolving and term loan debt facilities’ fair values approximate book value at March 28, 2020 and December 28, 2019, as the rates on these borrowings are variable in nature.
The carrying value and estimated fair values of the Company’s Euro Senior Notes, Series A and Series B and USD Senior Notes, Series A and Series B, as of March 28, 2020 and December 28, 2019 were as follows:
March 28, 2020 | December 28, 2019 | |||||||||||||||
(in thousands) | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||||||||||
Euro Senior Notes, Series A due 2023 | $ | $ | $ | $ | ||||||||||||
Euro Senior Notes, Series B due 2028 | ||||||||||||||||
USD Senior Notes, Series A due 2022 | ||||||||||||||||
USD Senior Notes, Series B due 2027 | ||||||||||||||||
USD Senior Notes, Series A due 2025 | ||||||||||||||||
USD Senior Notes, Series B due 2030 | ||||||||||||||||
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The Company recognized impairment charges of $1.9 million for the land and building and $0.3 million for a certain patent as a result of the Company’s announcement to consolidate a manufacturing facility within the Industrial segment. See Note 7, Restructuring, Impairment and Other Charges, for further discussion. The fair value of the land and building was determined to be Level 3 under the fair value hierarchy and was valued using a real estate appraisal.
10. Benefit Plans
The Company has company-sponsored defined benefit pension plans covering employees in the U.K., Germany, the Philippines, China, Japan, Mexico, Italy and France. The amount of the retirement benefits provided under the plans is based on years of service and final average pay.
The Company recognizes interest cost, expected return on plan assets, and amortization of prior service, net within Other expense (income), net in the Condensed Consolidated Statements of Net Income. The components of net periodic benefit cost for the three months ended March 28, 2020 and March 30, 2019 were as follows:
For the Three Months Ended | ||||||||
(in thousands) | March 28, 2020 | March 30, 2019 | ||||||
Components of net periodic benefit cost: | ||||||||
Service cost | $ | $ | ||||||
Interest cost | ||||||||
Expected return on plan assets | ( | ) | ( | ) | ||||
Amortization of prior service and net actuarial loss | ||||||||
Net periodic benefit cost | $ | $ | ||||||
The Company expects to make approximately $2.3 million of cash contributions to its pension plans in 2020.
The Company also sponsors certain post-employment plans in foreign countries and other statutory benefit plans. For the three months ended March 28, 2020 and March 30, 2019, the Company recorded $0.5 million and $0.2 million expense, respectively, in Cost of Sales and Other expense (income), net within the Condensed Consolidated Statements of Net Income. For three months ended March 28, 2020, the pre-tax amounts recognized in other comprehensive income (loss) as components of net periodic benefit costs for these plans were $0.2 million.
On April 7, 2020, the Company entered into a definitive agreement to purchase a group annuity contract, under which an insurance company will be required to pay and administer pension payments to certain of the Company’s UK pension plan participants, or their designated beneficiaries, who have been receiving pension payments. The purchase of this group annuity contract will reduce the Company’s outstanding pension benefit obligation by approximately $36 million, representing approximately 30 % of the total obligations of the Company’s qualified pension plans, and will be funded with pension plan assets and additional cash on hand. In connection with this transaction, the Company will record a one-time non-cash settlement charge in the second half of 2021 currently estimated between $18 million and $22 million, reflecting the accelerated recognition of a portion of unamortized actuarial losses in the plan. The actual settlement charge could differ from this estimate due to final data and plan wind-up expenses.
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11. Other Comprehensive Income (Loss)
Changes in other comprehensive (loss) income by component were as follows:
(in thousands) | Three Months Ended March 28, 2020 | Three Months Ended March 30, 2019 | ||||||||||||||||||||||
Pre-tax | Tax | Net of Tax | Pre-tax | Tax | Net of Tax | |||||||||||||||||||
Defined benefit pension plan adjustments | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||||||||||
Total change in other comprehensive income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||
The following tables set forth the changes in accumulated other comprehensive (loss) income by component for the three months ended March 28, 2020 and March 30, 2019:
(in thousands) | Pension and postretirement liability and reclassification adjustments | Foreign currency translation adjustment | Accumulated other comprehensive income (loss) | |||||||||
Balance at December 28, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Activity in the period | ( | ) | ( | ) | ||||||||
Balance at March 28, 2020 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
(in thousands) | Pension and postretirement liability and reclassification adjustments | Foreign currency translation adjustment | Accumulated other comprehensive income (loss) | |||||||||
Balance at December 29, 2018 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Activity in the period | ( | ) | ||||||||||
Balance at March 30, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Amounts reclassified from accumulated other comprehensive (loss) income to earnings for the three months ended March 28, 2020 and March 30, 2019 were as follows:
Three Months Ended | ||||||||
(in thousands) | March 28, 2020 | March 30, 2019 | ||||||
Pension and Postemployment plans: | ||||||||
Amortization of prior service and net actuarial loss | $ | $ | ||||||
The Company recognizes the amortization of prior service costs in Other (expense) income, net within the Condensed Consolidated Statements of Net Income.
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12. Income Taxes
The effective tax rate for the three months ended March 28, 2020 was 30.6 % compared to the effective tax rate for the three months ended March 30, 2019 of 20.3 %. The effective tax rate for the 2020 period is higher than the effective tax rate for the 2019 comparable period primarily due to a reduction in the forecasted income earned in lower tax jurisdictions in 2020 driven by the uncertainty resulting from the impact of COVID-19. The effective tax rate for the 2020 period is higher than the applicable U.S. statutory tax rate primarily due to the forecasted impact of non-U.S. losses and expenses with no tax benefit and the U.S. GILTI tax provisions (in the 2019 period the impact of these items was more than offset by the impact of income earned in lower tax jurisdictions).
13. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended | ||||||||
(in thousands, except per share amounts) | March 28, 2020 | March 30, 2019 | ||||||
Numerator: | ||||||||
Net income as reported | $ | $ | ||||||
Denominator: | ||||||||
Weighted average shares outstanding | ||||||||
Basic | ||||||||
Effect of dilutive securities | ||||||||
Diluted | ||||||||
Earnings Per Share: | ||||||||
Basic earnings per share | $ | $ | ||||||
Diluted earnings per share | $ | $ | ||||||
Potential shares of common stock relating to stock options excluded from the earnings per share calculation because their effect would be anti-dilutive were 153,836 and 77,047 for the three months ended March 28, 2020 and March 30, 2019, respectively.
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, 2018 to April 30, 2019 ("2018 program"). On April 26, 2019, the Company's Board of Directors authorized to a program to repurchase up to 1,000,000 shares of the Company's common stock for the period May 1, 2019 to April 30, 2020 ("2019 program") to replace its previous expired 2018 program. On April 23, 2020, the Company's Board of Directors authorized a new program to repurchase up to 1,000,000 shares of the Company's common stock for the period May 1, 2020 to April 30, 2021 (the "2020 program") to replace its previous expired 2019 program. The Company does not expect to repurchase shares in the near future due to the uncertainty of the impact and duration of COVID-19.
For the three months ended March 28, 2020 and March 30, 2019, the Company repurchased 175,110 and 79,916 shares of its common stock totaling $22.9 million and $13.6 million, respectively.
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14. Related Party Transactions
As a result of the Company’s acquisition of IXYS, the Company has equity ownership in various investments that are accounted for under the equity method. The following is a description of the investments and related party transactions.
Powersem GmbH: The Company owns 45 % of the outstanding equity of Powersem GmbH (“Powersem”), a module manufacturer based in Germany.
EB-Tech Co., Ltd.: The Company owns approximately 19 % of the outstanding equity of EB Tech Co., Ltd. (“EB Tech”), a company with expertise in radiation technology based in South Korea.
Automated Technology (Phil), Inc.: The Company owns approximately 24 % of the outstanding common shares of Automated Technology (Phil), Inc. (“ATEC”), a supplier located in the Philippines that provides assembly and test services. One member of the Company's Board of Directors serves on the Board of Directors of ATEC.
For the Three Months Ended March 28, 2020 | For the Three Months Ended March 30, 2019 | |||||||||||||||||||
(in millions) | Powersem | EB Tech | ATEC | Powersem | EB Tech | ATEC | ||||||||||||||
Sales to related party | $ | $ | $ | $ | $ | $ | ||||||||||||||
Purchase material/ service from related party | ||||||||||||||||||||
March 28, 2020 | December 28, 2019 | |||||||||||||||||||
(in millions) | Powersem | EB Tech | ATEC | Powersem | EB Tech | ATEC | ||||||||||||||
Accounts Receivable balance | $ | $ | $ | $ | $ | $ | ||||||||||||||
Accounts Payable balance | ||||||||||||||||||||
Additionally, the Company has certain cost method investments in VTOOL Ltd. and Securepush Ltd. with a total book value of $0.4 million as of March 28, 2020 and one member of the Company’s Board of Directors is currently an investor and a director of VTOOL Ltd. and Securepush Ltd.
On April 26, 2019, the Company sold its subsidiary Microwave Technology, LLC. (“MWT”) resulting in a loss on disposal of $2.6 million reflected in Other income (expense), net in the Condensed Consolidated Statements of Net Income. The operations of MWT were included in the Electronics segment. One member of the Company’s Board of Directors is an owner of a company that purchased MWT.
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15. Segment Information
The Company and its subsidiaries design, manufacture and sell components and modules for circuit protection, power control and sensing throughout the world. The Company reports its operations by the following segments: Electronics, Automotive, and Industrial. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. The CODM is the Company’s President and Chief Executive Officer (“CEO”). The CODM allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss) before interest and taxes, but does not evaluate the operating segments using discrete balance sheet information.
Sales, marketing, and research and development expenses are charged directly into each operating segment. Purchasing, logistics, customer service, finance, information technology, and human resources are shared functions that are allocated back to the three operating segments. The Company does not report inter-segment revenue because the operating segments do not record it. Certain expenses, determined by the CODM to be strategic in nature and not directly related to segments' current results, are not allocated but identified as “Other”. Additionally, the Company does not allocate interest and other income, interest expense, or taxes to operating segments. These costs are not allocated to the segments, as management excludes such costs when assessing the performance of the segments. Although the CODM uses operating income (loss) to evaluate the segments, operating costs included in one segment may benefit other segments. Except as discussed above, the accounting policies for segment reporting are the same as for the Company as a whole.
• | Electronics Segment: Consists of one of the broadest product offerings in the industry, including fuses and fuse accessories, |
positive temperature coefficient (“PTC”) resettable fuses, polymer electrostatic discharge (“ESD”) suppressors, varistors,
reed switch based magnetic sensing, gas discharge tubes; semiconductor products such as discrete transient voltage
suppressor (“TVS”) diodes, TVS diode arrays, protection and switching thyristors, metal-oxide-semiconductor field effect
transistors (“MOSFETs”) and silicon carbide diodes; and insulated gate bipolar transistors (“IGBT”) technologies.
The segment covers a broad range of end markets, including industrial and automotive electronics, electric vehicle and related infrastructure, data and telecommunications, medical devices, alternative energy, consumer electronics and white goods.
• | Automotive Segment: Consists of a wide range of circuit protection, power control and sensing technologies for global original equipment manufacturers (“OEMs”), Tier-I suppliers and parts distributors in passenger car, heavy duty truck, off-road vehicles, material handling, agricultural, construction and other commercial vehicle end markets. Passenger car fuse products include fuses and fuse accessories for internal combustion engine vehicles and hybrid and electric vehicles including blade fuses, battery cable protectors, resettable fuses, high-current fuses, and high-voltage fuses. Commercial vehicle products include fuses, switches, relays, and power distribution modules for the commercial vehicle industry. Automotive sensor products include a wide range of automotive and commercial vehicle products designed to monitor the passenger compartment occupants, safety and environment as well as the vehicle’s powertrain. |
• | Industrial Segment: Consists of power fuses, protection relays and controls and other circuit protection products for use in various industrial applications such as oil, gas, mining, alternative energy, electric vehicle infrastructure, non-residential construction, HVAC systems, elevators and other industrial equipment. |
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Segment information is summarized as follows:
Three Months Ended | ||||||||
(in thousands) | March 28, 2020 | March 30, 2019 | ||||||
Net sales | ||||||||
Electronics | $ | $ | ||||||
Automotive | ||||||||
Industrial | ||||||||
Total net sales | $ | $ | ||||||
Depreciation and amortization | ||||||||
Electronics | $ | $ | ||||||
Automotive | ||||||||
Industrial | ||||||||
Total depreciation and amortization | $ | $ | ||||||
Operating income (loss) | ||||||||
Electronics | $ | $ | ||||||
Automotive | ||||||||
Industrial | ||||||||
Other(a) | ( | ) | ( | ) | ||||
Total operating income | ||||||||
Interest expense | ||||||||
Foreign exchange loss | ||||||||
Other expense, net | ||||||||
Income before income taxes | $ | $ | ||||||
(a) Included in “Other” Operating income (loss) for the 2020 first quarter is $1.2 million of acquisition-related and integration charges related to the IXYS acquisition and other contemplated acquisitions. In addition, there were $4.0 million of restructuring, impairment and other charges, primarily related to impairment charges of $2.2 million associated with the announced consolidation of a manufacturing facility within the Industrial segment and $1.7 million of employee termination costs and other restructuring charges. See Note 7, Restructuring, Impairment and Other Charges, for further discussion.
Included in "Other" Operating income (loss) for the first quarter of 2019 is $2.4 million of acquisition integration charges primarily related to the IXYS acquisition. In addition, there were $2.7 million of restructuring charges primarily related to employee termination costs.
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The Company’s net sales by country were as follows:
Three Months Ended | ||||||||
(in thousands) | March 28, 2020 | March 30, 2019 | ||||||
Net sales | ||||||||
United States | $ | $ | ||||||
China | ||||||||
Other countries(a) | ||||||||
Total net sales | $ | $ | ||||||
The Company’s long-lived assets by country were as follows:
(in thousands) | March 28, 2020 | December 28, 2019 | ||||||
Long-lived assets | ||||||||
United States | $ | $ | ||||||
China | ||||||||
Mexico | ||||||||
Germany | ||||||||
Philippines | ||||||||
Other countries(a) | ||||||||
Total long-lived assets | $ | $ | ||||||
The Company’s additions to long-lived assets by country were as follows:
Three Months Ended | ||||||||
(in thousands) | March 28, 2020 | March 30, 2019 | ||||||
Additions to long-lived assets | ||||||||
United States | $ | $ | ||||||
China | ||||||||
Mexico | ||||||||
Germany | ||||||||
Philippines | ||||||||
Other countries(a) | ||||||||
Total additions to long-lived assets | $ | $ | ||||||
(a) | Each country included in other countries is less than |
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary Statement Regarding Forward-Looking Statements Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”).
Certain statements in this section and other parts of this Quarterly Report on Form 10-Q may constitute "forward-looking statements" within the meaning of the federal securities laws and are entitled to the safe-harbor provisions of the PSLRA. These statements include statements regarding the Company’s future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future. Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy, although not all forward-looking statements contain such terms. The Company cautions that forward-looking statements, which speak only as of the date they are made, are subject to risks, uncertainties and other factors, and actual results and outcomes may differ materially from those indicated or implied by the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, risks and uncertainties relating to general economic conditions; the severity and duration of the coronavirus disease 2019 ("COVID-19") pandemic and the measures taken in response thereto and the effects of those items on the Company’s business; product demand and market acceptance; economic conditions; the impact of competitive products and pricing; product quality problems or product recalls; capacity and supply difficulties or constraints; coal mining exposures reserves; failure of an indemnification for environmental liability; exchange rate fluctuations; commodity price fluctuations; the effect of the Company's accounting policies; labor disputes; restructuring costs in excess of expectations; pension plan asset returns less than assumed; uncertainties related to political or regulatory changes; integration of acquisitions may not be achieved in a timely manner, or at all; and other risks that may be detailed in Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q for the quarter ended March 28, 2020, the Company's Annual Report on Form 10-K for the year ended December 28, 2019, and the Company's other fillings and submissions with the Securities and Exchange Commission. The Company does not undertake any obligation to update or revise any forward-looking statements to reflect future events or circumstances, new information or otherwise.
This report, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with information provided in the consolidated financial statements and the related Notes thereto appearing in the Company's Annual Report on Form 10-K for the year ended December 28, 2019.
Management’s 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, the consolidated financial statements and the accompanying notes. Information in MD&A is intended to assist the reader in obtaining an understanding of (i) the 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 future performance. In addition, MD&A provides information about the Company’s segments and how the results of those segments impact the results of operations and financial condition as a whole.
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Executive Overview
Founded in 1927, Littelfuse is a global manufacturer of leading technologies in circuit protection, power control and sensing.
Serving over 100,000 end customers, the Company’s products are found in automotive and commercial vehicles, industrial
applications, data and telecommunications, medical devices, consumer electronics and appliances. With its broad product portfolio of fuses, semiconductors, polymers, ceramics, relays and sensors, and extensive global infrastructure, the Company’s worldwide associates partner with its customers to design, manufacture and deliver innovative, high-quality solutions for a safer, greener and increasingly connected world.
The Company maintains a network of global laboratories and engineering centers that develop new products and product enhancements, provide customer application support and test products for safety, reliability, and regulatory compliance. The Company conducts its business through three reportable segments: Electronics, Automotive, and Industrial. Within these segments, the Company designs, manufactures and sells components and modules for circuit protection, power control and sensing products throughout the world. The circuit protection products protect against electrostatic discharge, power surges, short circuits, voltage spikes and other harmful occurrences; our power control products safely and efficiently control power and improve productivity and our sensor products are used to identify and detect temperature, proximity, flow speed and fluid level in various applications.
Executive Summary
For the first quarter of 2020, the Company recognized net sales of $346.1 million compared to $405.5 million in the first quarter of 2019 representing a decrease of $59.4 million, or 14.6%. The decrease was primarily driven by lower volume in the Electronics segment due to electronics distribution partners and end customers reducing excess inventories, lower volume in the Automotive segment, the impact of COVID-19 and $3.3 million or 0.8% of unfavorable changes in foreign exchange rates, partially offset by higher volume in the Industrial segment. The Company recognized net income of $24.6 million, or $1.00 per diluted share, in the first quarter of 2020 compared to net income of $37.0 million, or $1.48 per diluted share in the first quarter of 2019. The decrease in net income was primarily due to lower operating income in the Electronics segment.
The Company continues to take actions to improve its cost structure. The Company expects to realize cost savings from the restructuring activities taken during 2019 and 2020, including the reorganization of certain manufacturing, selling and administrative functions across all segments and the consolidation of a manufacturing facility within the Industrial Segment.
Net cash provided by operating activities was $45.3 million for the three months ended March 28, 2020 as compared to $30.9 million for the three months ended March 30, 2019. The increase in net cash provided by operating activities was primarily due to lower annual incentive payments and inventory levels, partially offset by lower earnings.
During the three months ended March 28, 2020 and March 30, 2019, the Company repurchased 175,110 and 79,916 shares of its common stock totaling $22.9 million and $13.6 million, respectively.
On March 25, 2020, the company borrowed $100.0 million from its current revolving credit facility to preserve financial flexibility and enhance liquidity, given the increasing levels of uncertainty related to COVID-19. On April 3, 2020, the Company amended the existing credit agreement to effect certain changes, including, among others: (i) eliminating the $200.0 million unsecured term loan credit facility, the remaining outstanding balance of which was repaid in full on April 3, 2020 through the revolving credit facility; (ii) making certain financial and non-financial covenants less restrictive on the Company; (iii) modifying performance-based interest rate margins and undrawn fees; and (iv) extending the maturity date to April 3, 2025. The amended credit agreement also allows the Company to increase the size of the revolving credit facility or enter into one or more tranches of term loans if there is no event of default and the Company is in compliance with certain financial covenants. The current balance under the facility is $240.0 million as of April 3, 2020.
On April 7, 2020, the Company entered into a definitive agreement to purchase a group annuity contract, under which an insurance company will be required to pay and administer pension payments to certain of the Company’s UK pension plan participants, or their designated beneficiaries, who have been receiving pension payments. The purchase of this group annuity contract will reduce the Company’s outstanding pension benefit obligation by approximately $36 million, representing approximately 30% of the total obligations of the Company’s qualified pension plans, and will be funded with pension plan assets and additional cash on hand. In connection with this transaction, the Company will record a one-time non-cash settlement charge in the second half of 2021 currently estimated between $18 million and $22 million, reflecting the accelerated recognition of a portion of unamortized actuarial losses in the plan. The actual settlement charge could differ from this estimate due to final data and plan wind-up expenses.
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Impact of COVID-19 on Business
The global emergence of COVID-19 impacted the Company’s 2020 first quarter results. The Electronics segment had reduced sales volume driven by production disruption from temporary closures of manufacturing facilities in China and the Philippines as a result of government directives. The Automotive segment had reduced sales volume driven by a reduction in customer demand late in the quarter. Additionally, the Company incurred incremental costs of approximately $2.5 million primarily due to higher costs for freight and protective supplies, as well as costs related to the above temporary plant closures.
The future impacts of COVID-19 on our business are currently unknown. The Company’s priorities are to focus on our employees, customers and long-term financial health of the company. In an effort to protect the health and safety of our employees, the Company took numerous proactive, aggressive actions from the earliest signs of the outbreak in China, adopting performing temperature checks in many locations, procuring and distributing proper PPE (personal protective equipment) to employees and their families in many locations, following strict hand and respiratory hygiene, sanitization and cleaning protocols and outlining social distancing policies at our locations around the world. The Company is also limiting the number of employees attending meetings in person, reducing the number of people in our sites at any one time, implementing working from home, and suspending employee travel.
In an effort to contain COVID-19 or slow its spread, governments around the world have also enacted various measures, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. These government measures have disrupted certain of our operating locations in Asia, Europe and Mexico. All of our China manufacturing locations that were temporarily closed in February have returned operations to normal capacity levels, while certain operations in Europe, the Philippines and Mexico continue to be temporarily closed or operating at reduced capacity levels.
The Company continues to focus on our customers and to support their critical needs. We continue to work with customers to provide necessary products, many of which are considered essential, including healthcare and medical devices, transportation, communication and energy infrastructure.
The Company has taken cost containment initiatives to help offset the impact of lower demand and the business disruption created by COVID-19. During the quarter, the Company suspended annual wage increases and its 2020 annual cash incentive program. The Company also reduced salaries of the CEO and executive leadership team, and reduced cash compensation of its board of directors. The Company continues to develop and execute contingency plans to manage our business performance within this uncertain environment.
The Company anticipates that the global health crisis caused by COVID-19 will negatively impact its business activity. It is currently difficult to estimate the magnitude and duration of the COVID-19 disruption and its impact on our employees, customers, suppliers and vendors. The Company will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and other stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business and operations, including the effects on our customers, employees, and prospects, or on our financial results for the remainder of fiscal 2020.
Risks Related to Market Conditions
The Company performs its annual goodwill impairment tests as of September 30, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Since September 30, 2019, the date of the Company’s last annual review for impairment, the market value of the Company’s stock has declined. Management has considered the resulting decline in the Company’s market capitalization in performing its assessment of whether an interim impairment review was required for any reporting units. As part of this assessment, management analyzed the potential declines in value of individual reporting units based on each reporting unit’s operating results for the three months ended March 28, 2020 compared to expected results as of September 30, 2019. In addition, management considered how other key assumptions, including discount rates, expected profitability and long-term growth rates used in the last fiscal year’s impairment analysis, could be impacted by recent market conditions and economic events. Based on this interim assessment, management concluded that as of March 28, 2020, no events or changes in circumstances indicated that it was more likely than not that the fair value for any reporting unit had declined below its carrying value. A continued global economic slowdown and further business disruption due to COVID-19 could result in changes to expectations of future financial results and key valuation assumptions. These changes could result in changes to management’s estimates of the fair value of the Company’s reporting units and could
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result in a review for impairment of goodwill prior to September 29, 2020, the Company’s next annual measurement date, and a potential corresponding impairment charge.
In particular, the automotive sensors reporting unit has experienced declines in sales due to lower automotive market car build, reduced volumes and temporary customer shut-downs due to COVID-19. In addition, the semiconductors reporting unit has experienced declines in sales due to temporary plant shut-downs and lower customer demand primarily due to COVID-19. The Company continues to evaluate the impact of COVID-19 on its future long-term expectations for these units. Further negative developments having a significant impact on the estimated fair value of these reporting units could result in future goodwill impairment charges. As of the September 30, 2019 annual goodwill impairment test, the automotive sensors and semiconductors reporting units estimated fair values exceeded its book value by approximately 40% and 42%, respectively. As of March 28, 2020, $42.2 million and $462.7 million of goodwill was allocated to the automotive sensors and semiconductors reporting units, respectively. The automotive sensors reporting unit is included within the Automotive segment and the semiconductors reporting unit is included within the Electronics segment.
While the Company has not historically had significant credit risk on accounts receivable, the impact of the COVID-19 pandemic and associated economic slowdown may increase the Company’s credit risk on accounts receivable. It is possible that the Company’s customers may experience liquidity issues which may impact the timing of the collections on receivables. The Company will continue to evaluate how the ongoing pandemic may impact collectability.
Results of Operations
The following table summarizes the Company’s unaudited condensed consolidated results of operations for the periods presented. The first quarter of 2020 includes $5.2 million of non-segment charges, which included $4.0 million of restructuring, impairment and other charges primarily related to impairment charges of $2.2 million associated with the announced consolidation of a manufacturing facility in the Industrial segment and employee termination costs and other restructuring charges and $1.2 million of acquisition-related and integration charges primarily related to the IXYS acquisition and other contemplated acquisitions.
The first quarter of 2019 includes $2.4 million of acquisition integration charges primarily related to the IXYS acquisition. In addition, there were $2.7 million of restructuring charges primarily related to employee termination costs.
First Quarter | |||||||||||||||
(in thousands) | 2020 | 2019 | Change | % Change | |||||||||||
Net sales | $ | 346,096 | $ | 405,500 | $ | (59,404 | ) | (14.6 | )% | ||||||
Gross profit | 123,712 | 155,228 | (31,516 | ) | (20.3 | )% | |||||||||
Operating expenses | 78,962 | 94,555 | (15,593 | ) | (16.5 | )% | |||||||||
Operating income | 44,750 | 60,673 | (15,923 | ) | (26.2 | )% | |||||||||
Income before income taxes | 35,499 | 46,439 | (10,940 | ) | (23.6 | )% | |||||||||
Income taxes | 10,855 | 9,450 | 1,405 | 14.9 | % | ||||||||||
Net income | $ | 24,644 | $ | 36,989 | $ | (12,345 | ) | (33.4 | )% | ||||||
Net Sales
Net sales decreased $59.4 million or 14.6% for the first quarter of 2020 compared to the first quarter of 2019 primarily due to lower volume across the Electronics segment from electronics distribution partners and end customers reducing excess inventories and production, and lower volume across the Automotive segment due to a decline in global auto production driven by lower global end market demand and a reduction in customer demand due to COVID-19, disruption across the Electronics and Automotive segments due to temporary closures of manufacturing facilities resulting from government directives due to the impact of COVID-19, and $3.3 million or 0.8% of unfavorable changes in foreign exchange rates, partially offset by higher volume in the Industrial segment.
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Gross Profit
Gross profit was $123.7 million, or 35.7% of net sales, in the first quarter of 2020 compared to $155.2 million, or 38.3% of net sales, in the first quarter of 2019. The decrease in gross profit is primarily due to lower volumes across the Electronics segment, additional costs associated with higher freight, supplies and other costs associated with government-directed plant shutdowns and supply chain constraints due to the impact of COVID-19, and unfavorable price and product mix.
Operating Expenses
Total operating expenses were $79.0 million, or 22.8% of net sales, for the first quarter of 2020 compared to $94.6 million, or 23.3% of net sales, for the first quarter of 2019. The decrease in operating expenses of $15.6 million is primarily due to global cost saving initiatives across all segments, lower incentive compensation, lower sales commissions and travel expenses due to COVID-19, and lower acquisition-related and integration charges of $1.2 million, partially offset by the impairment charges of $2.2 million related to the Company’s announcement to consolidate a manufacturing facility within the Industrial segment.
Operating Income
Operating income was $44.8 million, a decrease of $15.9 million, or 26.2%, for the first quarter of 2020 compared to $60.7 million for the first quarter of 2019. The decrease in operating income is primarily due to lower gross margin across the Electronics segment, partially offset by the lower operating expenses noted above. Operating margins decreased from 15.0% in the first quarter of 2019 to 12.9% in the first quarter of 2020 driven by the factors mentioned above.
Income Before Income Taxes
Income before income taxes was $35.5 million, or 10.3% of net sales, for the first quarter of 2020 compared to $46.4 million, or 11.5% of net sales, for the first quarter of 2019. The decline in income before income taxes was primarily driven be lower operating income discussed above. In addition, income before taxes was primarily impacted by impairment charges of $2.8 million for certain other investments and a $2.6 million loss on the disposal of a business within the Electronics segment during three months ended March 28, 2019, lower foreign exchange losses of $1.7 million during the three months ended March 28, 2020 compared to the three months ended March 30, 2019 and higher interest income of $0.9 million during three months ended March 28, 2020 compared to the three months ended March 30, 2019, partially offset by unrealized investment losses of $2.3 million associated with our equity investments during the three months ended March 28, 2020 compared to unrealized gains of $0.4 million during the three months ended March 30, 2019.
Income Taxes
Income tax expense was $10.9 million, or an effective tax rate of 30.6%, for the first quarter of 2020 compared to income tax expense of $9.5 million, or an effective tax rate of 20.3%, for the first quarter of 2019. The effective tax rate for the 2020 period is higher than the effective tax rate for the 2019 comparable period primarily due to a reduction in the forecasted income earned in lower tax jurisdictions in 2020 driven by the uncertainty resulting from the impact of COVID-19. The effective tax rate for the 2020 period is higher than the applicable U.S. statutory tax rate primarily due to the forecasted impact of non-U.S. losses and expenses with no tax benefit and the U.S. GILTI tax provisions (in the 2019 period the impact of these items was more than offset by the impact of income earned in lower tax jurisdictions).
Segment Results of Operations
The Company reports its operations by the following segments: Electronics, Automotive and Industrial. Segment information is described more fully in Note 15, Segment Information, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report.
The following table is a summary of the Company’s net sales by segment:
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First Quarter | |||||||||||||||
(in thousands) | 2020 | 2019 | Change | % Change | |||||||||||
Electronics | $ | 214,189 | $ | 265,394 | $ | (51,205 | ) | (19.3 | )% | ||||||
Automotive | 104,770 | 113,483 | (8,713 | ) | (7.7 | )% | |||||||||
Industrial | 27,137 | 26,623 | 514 | 1.9 | % | ||||||||||
Total | $ | 346,096 | $ | 405,500 | $ | (59,404 | ) | (14.6 | )% | ||||||
Electronics Segment
Net sales decreased $51.2 million, or 19.3%, in the first quarter of 2020 compared to the first quarter of 2019 primarily due to lower volume across all businesses from electronics distribution partners and end customers reducing excess inventories, production disruption from temporary closures of manufacturing facilities resulting from government directives due to the impact of COVID-19, and unfavorable changes in foreign exchange rates of $1.7 million.
Automotive Segment
Net sales decreased $8.7 million, or 7.7%, in the first quarter of 2020 compared to the first quarter of 2019 due to decreased volume across all businesses from a decline in global auto production, a reduction in customer demand late in the quarter due to the impact of COVID-19, and unfavorable changes in foreign exchange rates of $1.5 million.
Industrial Segment
Net sales increased by $0.5 million, or 1.9%, in the first quarter of 2020 compared to the first quarter of 2019 primarily due to higher volume across all businesses, partially offset by unfavorable changes in foreign exchange rates of $0.1 million.
Geographic Net Sales Information
Net sales by geography represent net sales to customer or distributor locations. The following table is a summary of the Company’s net sales by geography:
First Quarter | |||||||||||||||
(in thousands) | 2020 | 2019 | Change | % Change | |||||||||||
Asia-Pacific | $ | 140,873 | $ | 172,781 | $ | (31,908 | ) | (18.5 | )% | ||||||
Americas | 120,501 | 138,034 | (17,533 | ) | (12.7 | )% | |||||||||
Europe | 84,722 | 94,685 | (9,963 | ) | (10.5 | )% | |||||||||
Total | $ | 346,096 | $ | 405,500 | $ | (59,404 | ) | (14.6 | )% | ||||||
Asia-Pacific
Net sales decreased $31.9 million, or 18.5%, in the first quarter of 2020 compared to the first quarter of 2019. The decrease in net sales was primarily due to lower volume across all businesses within the Electronics segment, lower volume in passenger car products and automotive sensor businesses within the Automotive segment, and unfavorable changes in foreign exchange rates of $0.9 million.
Americas
Net sales decreased $17.5 million, or 12.7%, in the first quarter of 2020 compared to the first quarter of 2019 primarily due to lower volume across all businesses within the Electronics segment, lower volume in automotive sensor and commercial vehicle businesses in the Automotive segment, and unfavorable changes in foreign exchange rates of $0.1 million, partially offset by higher volume across all businesses within the Industrial segment.
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Europe
Net sales decreased $10.0 million, or 10.5%, in the first quarter of 2020 compared to the first quarter of 2019. The decrease in net sales was primarily due to lower volume across all businesses within the Electronics segment, lower volume in passenger car products and commercial vehicle businesses within the Automotive segment and unfavorable changes in foreign exchange rates of $2.3 million, partially offset by higher volume in automotive sensor business within the Electronics segment.
Liquidity and Capital Resources
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.
Cash and cash equivalents were $620.6 million as of March 28, 2020, an increase of $89.4 million as compared to December 28, 2019. As of March 28, 2020, $310.1 million of the Company's $620.6 million cash and cash equivalents was held by U.S. subsidiaries.
Revolving Credit Facility/Term Loan
On March 4, 2016, the Company entered into a five-year credit agreement (“Credit Agreement”) with a group of lenders for up to $700.0 million. The Credit Agreement consisted of an unsecured revolving credit facility (“Revolving Credit Facility”) of $575.0 million and an unsecured term loan credit facility (“Term Loan”) of up to $125.0 million. In addition, the Company had the ability, from time to time, to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $150.0 million, in the aggregate, in each case in minimum increments of $25.0 million, subject to certain conditions and the agreement of participating lenders.
On October 13, 2017, the Company amended the Credit Agreement to increase the Revolving Credit Facility from $575.0 million to $700.0 million and increase the Term Loan from $125.0 million to $200.0 million and to extend the expiration date from March 4, 2021 to October 13, 2022. The Credit Agreement also included the option for the Company to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $300.0 million, in the aggregate, subject to the satisfaction of certain conditions set forth in the Credit Agreement. Term Loans could be made in up to two advances. The first advance of $125.0 million occurred on October 13, 2017 and the second advance of $75.0 million occurred on January 16, 2018. For the Term Loan, the Company was required to make quarterly principal payments of 1.25% of the original term loan ($2.5 million quarterly) through maturity, with the remaining balance due on October 13, 2022. The Company paid $2.5 million of principal payments on the term loan during the three months ended March 28, 2020.
Outstanding borrowings under the Credit Agreement bore 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 was also required to pay commitment fees on unused portions of the credit agreement ranging from 0.15% to 0.25%, based on the Consolidated Leverage Ratio, as defined in the agreement. The Credit Agreement included representations, covenants and events of default that are customary for financing transactions of this nature. The effective interest rate on outstanding borrowings under the credit facility was 2.47% at March 28, 2020.
On March 25, 2020, the company borrowed $100.0 million from its current revolving credit facility to preserve financial flexibility and enhance liquidity, given the increasing levels of uncertainty related to COVID-19.
As of March 28, 2020, the Company had no amounts outstanding in letters of credit and had available $219.8 million of borrowing capacity under the Revolving Credit Facility based on financial covenants.
On April 3, 2020, the Company amended the Credit Agreement to effect certain changes, including, among others: (i) eliminating the $200.0 million unsecured term loan credit facility, the remaining outstanding balance of which was repaid in full on April 3, 2020 through the revolving credit facility; (ii) making certain financial and non-financial covenants less restrictive on the Company; (iii) modifying performance-based interest rate margins and undrawn fees; and (iv) extending the maturity date to April 3, 2025. The amended Credit Agreement also allows the Company to increase the size of the revolving credit facility or enter into one or
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more tranches of term loans if there is no event of default and the Company is in compliance with certain financial covenants. The balance under the facility is $240.0 million as of April 3, 2020.
Further information regarding the Company’s credit agreement is provided in Note 8, Debt, of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly 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 (“Euro Senior Notes, Series A due 2023”), and €95 million in aggregate amount of 1.83% Senior Notes, Series B due December 8, 2028 (“Euro Senior Notes, Series B due 2028”) (together, the “Euro Senior Notes”). Interest on the Euro Senior Notes is payable semiannually on June 8 and December 8, commencing June 8, 2017.
On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold $125 million aggregate principal amount of senior notes in two series. On February 15, 2017, $25 million in aggregate principal amount of 3.03% Senior Notes, Series A, due February 15, 2022 (“U.S. Senior Notes, Series A due 2022”), and $100 million in aggregate principal amount of 3.74% Senior Notes, Series B, due February 15, 2027 (“U.S. Senior Notes, Series B due 2027”) (together, the “U.S. Senior Notes due 2022 and 2027”) were funded. Interest on the U.S. Senior Notes due 2022 and 2027 is payable semiannually on February 15 and August 15, commencing August 15, 2017.
On November 15, 2017, the Company entered into a Note Purchase Agreement pursuant to which the Company issued and sold $175 million in aggregate principal amount of senior notes in two series. On January 16, 2018, $50 million aggregate principal amount of 3.48% Senior Notes, Series A, due February 15, 2025 (“U.S. Senior Notes, Series A due 2025”) and $125 million in aggregate principal amount of 3.78% Senior Notes, Series B, due February 15, 2030 (“U.S. Senior Notes, Series B due 2030”) (together the “U.S. Senior Notes due 2025 and 2030” and with the Euro Senior Notes and the U.S. Senior Notes due 2022 and 2027, the “Senior Notes”) were funded. Interest on the U.S. Senior Notes due 2025 and 2030 is payable semiannually on February 15 and August 15, commencing on August 15, 2018. Further information regarding the Company’s Senior Notes is provided in Note 8, Debt, of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report.
Debt Covenants
The Company was in compliance with all covenants under the Credit Agreement and Senior Notes as of March 28, 2020 and currently expects to remain in compliance based on management’s estimates of operating and financial results for 2020. As of March 28, 2020, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions. The ultimate magnitude of COVID-19, including the extent of its impact on our financial and operational results, which could be material, will be determined by the length of time that the pandemic continues, its effect on the demand for our products, as well as the effect of governmental regulations imposed in response to the pandemic. While we cannot at this time predict the impact of the COVID-19, it could have a material negative impact on our business, financial condition, results of operations and future cash flows which could impact the Company’s ability to comply with debt covenants in the future.
Dividends
During the first quarter of 2020 the Company paid quarterly dividends of $11.7 million to the shareholders. On April 23, 2020, the Board of Directors of the Company declared a quarterly cash dividend of $0.48 per share, payable on June 4, 2020 to stockholders of record as of May 21, 2020. Future determinations regarding the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then-existing conditions, including our results of operations, payout ratio, capital requirements, financial condition, prospects and other factors that our board of directors may deem relevant.
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Cash Flow Overview
First three Months | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Net cash provided by operating activities | $ | 45,279 | $ | 30,919 | ||||
Net cash used in investing activities | (16,536 | ) | (14,244 | ) | ||||
Net cash provided by (used in) financing activities | 65,804 | (31,333 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | (5,111 | ) | 1,539 | |||||
Increase (decrease) in cash and cash equivalents | 89,436 | (13,119 | ) | |||||
Cash and cash equivalents at beginning of period | 531,139 | 489,733 | ||||||
Cash and cash equivalents at end of period | $ | 620,575 | $ | 476,614 | ||||
Cash Flow from Operating Activities
Operating cash inflows are largely attributable to sales of the Company’s products. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities.
Net cash provided by operating activities was $45.3 million for the three months ended March 28, 2020, compared to $30.9 million during the three months ended March 30, 2019. The increase in net cash provided by operating activities was primarily due to lower annual incentive payments and inventory levels, partially offset by lower earnings.
Cash Flow from Investing Activities
Net cash used in investing activities was $16.5 million for the three months ended March 28, 2020 compared to $14.2 million during the three months ended March 30, 2019. Capital expenditures were $16.6 million, representing an increase of $2.5 million compared to 2019.
Cash Flow from Financing Activities
Net cash provided by financing activities was $65.8 million for the three months ended March 28, 2020 compared to net cash used in financing activities of $31.3 million for the three months ended March 30, 2019. During the three months ended March 28, 2020, the company borrowed $100.0 million from the revolving credit facility to preserve financial flexibility and enhance liquidity, given the increasing levels of uncertainty related to COVID-19. For the three months ended March 28, 2020 and March 30, 2019, the Company repurchased 175,110 and 79,916 shares of its common stock totaling $22.9 million and $13.6 million, respectively, but made payments of $17.9 million related to settled share repurchases during the three months ended March 30, 2019. The Company made payments of $2.5 million and $5.0 million on the term loan during the three months ended March 28, 2020 and March 30, 2019, respectively. Additionally, dividends paid increased $1.1 million from $10.6 million in the three months ended March 30, 2019 to $11.7 million for the three months ended March 28, 2020.
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, 2018 to April 30, 2019 ("2018 program"). On April 26, 2019, the Company's Board of Directors authorized a program to repurchase up to 1,000,000 shares of the Company's common stock for the period May 1, 2019 to April 30, 2020 ("2019 program") to replace its previous expired 2018 program. On April 23, 2020, the Company's Board of Directors authorized a new program to repurchase up to 1,000,000 shares of the Company's common stock for the period May 1, 2020 to April 30, 2021 (the "2020 program") to replace its previous expired 2019 program. The Company does not expect to repurchase shares in the near future due to the uncertainty of the impact and duration of COVID-19.
During the three months ended March 28, 2020, the Company repurchased 175,110 and 79,916 shares of its common stock totaling $22.9 million and $13.6 million, respectively.
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Off-Balance Sheet Arrangements
As of March 28, 2020, 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.
Critical Accounting Policies and Estimates
The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the Condensed Consolidated Financial Statements, the Company uses estimates and makes judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. The assumptions, estimates, and judgments are based on historical experience, current trends, and other factors the Company believes are relevant at the time it prepares the Condensed Consolidated Financial Statements.
The significant accounting policies and critical accounting estimates are consistent with those discussed in Note 1, Summary of Significant Accounting Policies and Other Information, to the consolidated financial statements and the MD&A section of the Company’s Annual Report on Form 10-K for the year ended December 28, 2019. During the three months ended March 28, 2020, there were no significant changes in the application of critical accounting policies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 28, 2019. During the three months ended March 28, 2020, there have been no material changes in our exposure to market risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(b) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this report, management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 28, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the quarter ended March 28, 2020, our disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during the quarter ended March 28, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
The COVID-19 pandemic could have a material adverse effect on our ability to operate, results of operations, financial condition, liquidity, and capital investments.
The World Health Organization has declared the COVID-19 outbreak a pandemic, and the virus continues to spread in areas where we operate and sell our products. The COVID-19 pandemic and similar situations/circumstances in the future could have a material adverse effect on our ability to operate, results of operations, financial condition, liquidity, and capital investments. Several public health organizations have recommended, and some local governments have implemented, certain measures to slow and limit the transmission of the virus, including travel restrictions, shelter-in-place requirements and social distancing requirements. Such preventive measures, or others we may voluntarily put in place, may have a material adverse effect on our business for an indefinite period of time, such as the potential shut down of certain locations, decreased employee availability, potential border closures, disruptions to the businesses of our channel partners, and others. Our suppliers and customers may also face these and other challenges, which could lead to a disruption in our supply chain as well as decreased demand for our products. These issues may also materially affect our future access to our sources of liquidity, particularly our cash flows from operations, financial condition, capitalization, and capital investments. These disruptions may continue to occur and may result in future impairment, restructuring and other charges. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the risk factors disclosed in Part I, Item 1a. Risk Factors of our Form 10-K, including those relating to our products and services, financial performance, debt covenant compliance and debt obligations. The ultimate magnitude of COVID-19, including the extent of its impact on our financial and operational results, which could be material, will be determined by the length of time that the pandemic continues, its effect on the demand for our services, as well as the effect of governmental regulations imposed in response to the pandemic. We cannot at this time predict the impact of the COVID-19 pandemic, but it could have a material adverse effect on our business, financial condition, results of operations and/or cash flows.
Other than the item listed above, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for our year ended December 28, 2019.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities
On May 1, 2019, the Company announced that its Board of Directors authorized a program to repurchase up to 1,000,000 shares of the Company's common stock for the period May 1, 2019 to April 30, 2020 ("2019 program"). On April 29, 2020, the Company announced that its Board of Directors authorized a new program to repurchase up to 1,000,000 shares of the Company's common stock for the period May 1, 2020 to April 30, 2021 (the "2020 program") to replace its previous expired 2019 program. The Company does not expect to repurchase shares in the near future due to the uncertainty of the impact and duration of COVID-19.
During the three months ended March 28, 2020, the Company repurchased 175,110 shares of its common stock totaling $22.9 million. There are 324,890 shares yet to be purchased under the 2019 program as of March 28, 2020.
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The table below presents shares of the Company’s common stock which were acquired by the Company during three months ended March 28, 2020:
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 | ||||||||
2019 Program | ||||||||||||
December 29 through January 25 | — | $ | — | — | 500,000 | |||||||
January 26 through February 22 | — | — | — | 500,000 | ||||||||
February 23 through March 28 | 175,110 | 130.93 | 175,110 | 324,890 | ||||||||
Total | 175,110 | $ | 130.93 | 175,110 | 324,890 | |||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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10.5 | Form of Option Award Agreement (Non-Employee Director) under the Littelfuse, Inc. Long-Term Incentive Plan (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed April 24, 2020, Commission File No. 20388). ++ | |
10.6* | ||
10.7* | ||
31.1* | ||
31.2* | ||
32.1** | ||
101 | The following financial information from LITTELFUSE, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 28, 2020 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Net Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders Equity , (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements. | |
104 | The cover page from this Quarterly Report on Form 10-Q for the quarter ended March 28, 2020, formatted in Inline XBRL. | |
+ | Certain schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K promulgated by the SEC. The registrant agrees to furnish supplementary a copy of any omitted schedule or exhibit to the SEC upon request. | |
++ | Management contract or compensatory plan or arrangement. | |
* | Filed herewith. | |
** | Furnished herewith. | |
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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 March 28, 2020, to be signed on its behalf by the undersigned thereunto duly authorized.
Littelfuse, Inc. | |||
By: | /s/ Meenal A. Sethna | ||
Meenal A. Sethna | |||
Executive Vice President and Chief Financial Officer | |||
Date: April 29, 2020 | By: | /s/ Jeffrey G. Gorski | |
Jeffrey G. Gorski | |||
Vice President and Chief Accounting Officer | |||
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