SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ----------- ----------- Commission file number 0-20388 LITTELFUSE, INC. ---------------- (Exact name of registrant as specified in its charter) DELAWARE 36-3795742 - ------------------------------------ ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 800 EAST NORTHWEST HIGHWAY DES PLAINES, ILLINOIS 60016 - --------------------------------------- -------------- (Address of principal executive offices) (Zip Code) (847) 824-1188 -------------- Registrant's telephone number, including area code: Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of October 1, 2005, 22,323,791 shares of common stock, $.01 par value, of the Registrant were outstanding.
TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of October 1, 2005 and January 1, 2005 (unaudited)........................................................... 1 Condensed Consolidated Statements of Income for the periods ended October 1, 2005 and October 2, 2004 (unaudited)....................................... 2 Condensed Consolidated Statements of Cash Flows for the periods ended October 1, 2005 and October 2, 2004 (unaudited)............................ 3 Notes to the Condensed Consolidated Financial Statements (unaudited)....... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk................. 13 Item 4. Controls and Procedures.................................................... 14 PART II - OTHER INFORMATION Item 5. Unregistered Sales of Equity Securities and Use of Proceeds................. 15 Item 6. Exhibits................................................................... 15 </TABLE>
LITTELFUSE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, unaudited) <TABLE> <CAPTION> OCTOBER 1, 2005 January 1, 2005 --------------- --------------- <S> <C> <C> ASSETS: Cash and cash equivalents................................ $ 34,333 $ 28,583 Receivables.............................................. 83,375 77,726 Inventories.............................................. 69,246 79,080 Deferred income taxes.................................... 23,320 17,056 Other current assets..................................... 7,830 6,804 ---------- ----------- Total current assets..................................... 218,104 209,249 Property, plant, and equipment, net...................... 136,785 136,465 Intangible assets, net................................... 17,085 19,052 Goodwill................................................. 55,135 55,249 Investments.............................................. 5,479 4,886 Other assets............................................. 410 408 ---------- ----------- Total assets $ 432,998 $ 425,309 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities excluding current portion of long-term debt.................................... $ 74,527 $ 82,196 Current portion of long-term debt........................ 38,486 32,958 ---------- ----------- Total current liabilities................................ 113,013 115,154 Long-term debt........................................... 1,757 1,364 Deferred income taxes.................................... 12,281 8,573 Accrued post-retirement benefits......................... 17,111 20,417 Other long-term liabilities.............................. 6,051 7,081 Minority interest........................................ 928 2,636 Shareholders' equity..................................... 281,857 270,084 ---------- ----------- Total liabilities and shareholders' equity............... $ 432,998 $ 425,309 ========== =========== Common shares issued and outstanding of 22,323,791 and 22,549,595, at October 1, 2005, and January 1, 2005, respectively </TABLE> 1
LITTELFUSE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data, unaudited) <TABLE> <CAPTION> For the Three Months Ended For the Nine Months Ended -------------------------- -------------------------- OCTOBER 1, October 2, OCTOBER 1, October 2, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net sales ................................................ $ 131,050 $ 135,926 $ 376,605 $ 376,103 Cost of sales ............................................ 90,634 86,565 258,843 242,758 --------- --------- --------- --------- Gross profit ............................................. 40,416 49,361 117,762 133,345 Selling, general and administrative expenses ............. 26,982 26,181 79,531 70,296 Research and development expenses ........................ 4,620 4,324 14,063 11,661 Amortization of intangibles .............................. 496 480 1,590 1,289 --------- --------- --------- --------- Operating income ......................................... 8,318 18,376 22,578 50,099 Interest expense ......................................... 598 387 1,657 1,305 Other income ............................................. (2,989) 303 (3,221) (158) --------- --------- --------- --------- Income before minority interest and income taxes ......... 10,709 17,686 24,142 48,952 Minority interest ........................................ 25 75 27 135 Income taxes ............................................. 4,358 6,361 9,093 17,617 --------- --------- --------- --------- Net income ............................................... $ 6,326 $ 11,250 $ 15,022 $ 31,200 ========= ========= ========= ========= Net income per share: Basic ................................................. $ 0.28 $ 0.50 $ 0.67 $ 1.41 ========= ========= ========= ========= Diluted ............................................... $ 0.28 $ 0.49 $ 0.66 $ 1.38 ========= ========= ========= ========= Weighted average shares and equivalent shares outstanding: Basic ................................................. 22,441 22,350 22,449 22,189 ========= ========= ========= ========= Diluted ............................................... 22,626 22,844 22,671 22,594 ========= ========= ========= ========= </TABLE> 2
LITTELFUSE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited) <TABLE> <CAPTION> For the Three Months Ended For the Nine Months Ended -------------------------- -------------------------- OCTOBER 1, October 2, OCTOBER 1, October 2, 2005 2004 2005 2004 ---------- ---------- --------- ------------ <S> <C> <C> <C> <C> Operating activities: Net income ............................................ $ 6,326 $ 11,250 $ 15,022 $ 31,200 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ...................................... 7,547 5,828 21,699 17,644 Amortization ...................................... 496 480 1,590 1,289 Provision for bad debts ........................... 1,139 (92) 2,428 945 Changes in operating assets and liabilities: Accounts receivable ............................... (3,757) (506) (11,481) (15,361) Inventories ....................................... 1,894 (6,834) 6,845 (8,067) Accounts payable and accrued expenses ............. 681 1,817 (8,553) 3,596 Prepaid expenses and other ........................ 796 11,683 (218) 11,442 -------- -------- -------- -------- Net cash provided by operating activities ............. 15,122 23,626 27,332 42,688 Cash used in investing activities: Purchases of property, plant, and equipment ........... (4,979) (7,343) (21,943) (16,394) Acquisitions, net of cash acquired .................... (398) (2,512) (1,417) (35,319) Sale of property, plant and equipment ................. -- 2,684 -- 2,684 -------- -------- -------- -------- Net cash used in investing activities ................. (5,377) (7,171) (23,360) (49,029) Cash provided by (used in) financing activities: Proceeds from long-term debt ...................... 19,729 700 46,680 32,700 Payments of long-term debt ........................ (23,901) (19,603) (40,114) (22,650) Proceeds from repayment of notes receivable, common stock ................................. -- -- 3,533 -- Proceeds from exercise of stock options ........... 3,075 2,026 3,750 10,335 Purchase of treasury stock ........................ (6,761) (5,604) (9,960) (5,604) -------- -------- -------- -------- Net cash provided by (used in) financing activities ... (7,858) (22,481) 3,889 14,781 Effect of exchange rate changes on cash ............... (201) (1,033) (2,111) (3,243) -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents ...... 1,686 (7,059) 5,750 5,197 34,384 Cash and cash equivalents at beginning of period ...... 32,647 23,895 28,583 22,128 -------- -------- -------- -------- Cash and cash equivalents at end of period ............ $ 34,333 $ 27,325 $ 34,333 $ 27,325 ======== ======== ======== ======== </TABLE> 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OCTOBER 1, 2005 1. BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the period ended October 1, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the Company's consolidated financial statements and the notes thereto incorporated by reference in the Company's Annual Report on Form 10-K for the year ended January 1, 2005. 2. BUSINESS SEGMENT INFORMATION The Company designs, manufactures and sells circuit protection devices throughout the world. The Company has three reportable geographic segments: Americas, Europe and Asia-Pacific. The circuit protection market in these geographical segments is categorized into three major product areas: electronic, automotive and electrical. The Company evaluates the performance of each geographic segment based on its sales and net income or loss. The Company accounts for intersegment sales as if the sales were to third parties. The Company's reportable segments are the geographical regions where the revenue is earned and expenses are incurred. The Company has subsidiaries in Americas, Europe and Asia-Pacific. Revenues from no single customer amounted to 10% or more of the Company's total revenues for the quarter ended October 1, 2005. Information concerning the operations in these geographic segments for the periods ended October 1, 2005, and October 2, 2004, is as follows (in thousands): <TABLE> <CAPTION> Three Months Three Months Nine Months Nine months Ended Ended Ended Ended October 1, 2005 October 2, 2004 October 1, 2005 October 2, 2004 --------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> NET SALES * Americas $ 50,640 $ 55,537 $ 147,300 $ 185,379 Europe 37,562 41,549 114,637 90,091 Asia-Pacific 42,848 38,840 114,668 100,633 --------- --------- --------- --------- Consolidated total $ 131,050 $ 135,926 $ 376,605 $ 376,103 INTERSEGMENT SALES * Americas $ 39,600 $ 47,781 $ 120,372 $ 86,037 Europe 18,334 13,973 43,860 44,395 Asia-Pacific 22,550 8,269 48,695 21,891 --------- --------- --------- --------- Combined total 80,484 70,023 212,927 152,323 Eliminations (80,484) (70,023) (212,927) (152,323) --------- --------- --------- --------- Consolidated total $ -- $ -- $ -- $ -- INTEREST EXPENSE * Americas $ 564 $ 385 $ 1,556 $ 1,299 Europe 22 2 64 6 Asia-Pacific 12 -- 37 -- --------- --------- --------- --------- Consolidated total $ 598 $ 387 $ 1,657 $ 1,305 </TABLE> 4
<TABLE> <S> <C> <C> <C> <C> DEPRECIATION AND AMORTIZATION * Americas $ 4,687 $ 3,663 $ 13,357 $ 13,525 Europe 2,703 2,139 8,236 4,207 Asia-Pacific 653 506 1,696 1,201 --------- --------- --------- --------- Consolidated total $ 8,043 $ 6,308 $ 23,289 $ 18,933 OTHER (INCOME) EXPENSE * Americas $ (3,142) $ 219 $ (2,924) $ (311) Europe 356 290 341 (145) Asia-Pacific (203) (206) (638) 298 --------- --------- --------- --------- Consolidated total $ (2,989) $ 303 $ (3,221) $ (158) INCOME TAXES * Americas $ 2,508 $ 4,130 $ 3,463 $ 11,306 Europe 409 832 2,186 2,556 Asia-Pacific 1,441 1,399 3,444 3,755 --------- --------- --------- --------- Consolidated total $ 4,358 $ 6,361 $ 9,093 $ 17,617 NET INCOME (LOSS) * Americas $ 2,655 $ 6,759 $ 4,960 $ 19,036 Europe (2,855) 254 (3,285) 341 Asia-Pacific 6,526 4,237 13,347 11,823 --------- --------- --------- --------- Consolidated total $ 6,326 $ 11,250 $ 15,022 $ 31,200 NET SALES Electronic $ 80,875 $ 90,312 $ 228,518 $ 248,278 Automotive 29,868 27,488 90,967 85,714 Electrical 20,307 18,126 57,120 42,111 --------- --------- --------- --------- Consolidated total $ 131,050 $ 135,926 $ 376,605 $ 376,103 </TABLE> * Certain prior year amounts have been reclassified to conform to the current year presentation. IDENTIFIABLE ASSETS <TABLE> <CAPTION> October 1, January 1, 2005 2005 ----------- ----------- <S> <C> <C> Americas $ 328,637 $ 344,277 Europe 230,364 264,523 Asia-Pacific 86,445 64,828 ----------- ----------- Combined total 645,446 673,628 Eliminations (212,448) (248,319) ------------ ------------ Consolidated total $ 432,998 $ 425,309 =========== =========== </TABLE> 5
3. INVENTORIES The components of inventories are as follows (in thousands): <TABLE> <CAPTION> October 1, January 1, 2005 2005 ------------ ----------- <S> <C> <C> Raw material $ 12,866 $ 16,723 Work in process 23,213 23,780 Finished goods 33,167 38,577 ------------ ----------- Total $ 69,246 $ 79,080 ============ =========== </TABLE> 4. LONG-TERM OBLIGATIONS Total debt, including the current portion, at the end of the third quarter 2005 totaled $40.2 million and consisted of the following: (1) credit revolver borrowings totaling $34.5 million and (2) foreign revolver borrowings totaling $5.7 million. Of this indebtedness, $38.5 million is considered to be current liabilities. The Company has a $50.0 million, three-year revolving bank credit agreement that expires on August 26, 2006. The bank credit agreement is subject to a maximum indebtedness calculation and other financial covenants. At October 1, 2005, the Company had available $15.5 million of borrowing capability under the revolving bank credit agreement. The revolving bank credit agreement has a floating interest rate of LIBOR plus 0.875% or prime. The Company also had $5.8 million in letters of credit outstanding at October 1, 2005. 5. PER SHARE DATA Net income per share amounts for the three months ended October 1, 2005, and October 2, 2004, are based on the weighted average number of common and common equivalent shares outstanding during the periods as follows (in thousands, except per share data): <TABLE> <CAPTION> Three months ended Nine months ended ------------------------ ------------------------ October 1, October 2, October 1, October 2, 2005 2004 2005 2004 <S> <C> <C> <C> <C> Net income $ 6,326 $ 11,250 $ 15,022 $ 31,200 ========= ========= ========= ========= Average shares outstanding - Basic 22,441 22,350 22,449 22,189 Net effect of dilutive stock options and restricted shares - Diluted 185 494 222 405 --------- --------- --------- --------- Average shares outstanding - Diluted 22,626 22,844 22,671 22,594 ========= ========= ========= ========= Net income per share - Basic $ 0.28 $ 0.50 $ 0.67 $ 1.41 ========== ========== ========== ========== - Diluted $ 0.28 $ 0.49 $ 0.66 $ 1.38 ========== ========== ========== ========== </TABLE> Options to purchase 538,600 and 347,500 shares of common stock were outstanding at October 1, 2005, and October 2, 2004 respectively, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. The Company issued 133,650 and 168,630 shares of common stock resulting from the exercising of stock options for the three and nine months ended October 1, 2005, respectively. 6
6. HEINRICH ACQUISITION On May 6, 2004, the Company acquired 82% of the common stock of Heinrich Industrie AG ("Heinrich") for Euro 39.5 million (approximately $47.1 million) in cash and acquisition costs of approximately $1.8 million. The Company purchased the controlling interest in Heinrich from its two largest shareholders and initiated a tender offer for the remaining shares of the publicly held company. The Company funded the acquisition with $17.5 million in cash and $32.0 million of borrowings on an existing revolving line of credit. Subsequent to May 6, 2004, the Company purchased additional shares of Heinrich stock for approximately $8.7 million, bringing the total ownership to 97.2% as of October 1, 2005. The Heinrich squeeze out was registered with the German courts during the third quarter of 2005. It is expected that Littelfuse will acquire the remaining 2.8% of Heinrich shares outstanding before the end of 2005. Heinrich is the holding company for the Wickmann Group of circuit protection products, which has three business units: electronic, automotive and electrical. Littelfuse has continued to operate Heinrich in such business units subsequent to the acquisition. The Heinrich acquisition expands the Company's product offering and strengthens the Company's position in the circuit protection industry. The acquisition was accounted for using the purchase method of accounting and the operations of Heinrich are included in the Company's operations from the date of acquisition. The following table sets forth the purchase price allocation for the acquisition of Heinrich in accordance with the purchase method of accounting with adjustments to record the acquired assets and liabilities of Heinrich at their estimated fair market or net realizable values. <TABLE> <CAPTION> Purchase price allocation (in thousands) - ----------------------------------------- <S> <C> Current assets $ 39,824 Property, plant and equipment 35,826 Patents, licenses and software 3,396 Distribution network 5,135 Trademarks and tradenames 788 Goodwill 12,590 Other assets 5,282 Current liabilities (30,778) Purchase accounting liabilities (12,220) Other long-term liabilities (16,580) Minority interest (1,602) ------------- $ 41,661 ============= </TABLE> All goodwill and intangible assets are recorded in the European segment. Trademarks and tradenames have an average estimated useful life of five years. The distribution network has an average estimated useful life of nine years. Patents and licenses have an average estimated useful life of four years. Software has a useful life of three years. The weighted average estimated useful life for intangible assets is approximately seven years. Purchase accounting liabilities are estimated to be $12.2 million and are primarily for redundancy costs to be paid through 2006 related to manufacturing operations and selling, general and administrative functions. The Company began formulating its plan to incur these costs as of the acquisition date. As of October 1, 2005, $6.3 million has been paid related to these liabilities. A summary of the purchase accounting liability activity is as follows: Purchase accounting liability (in thousands) -------------------------------------------- Balance, May 6, 2004 $ 7,281 Payments (92) ------------- Balance, January 1, 2005 $ 7,189 Increases 4,939 Payments (6,214) Other additions 283 ------------- Balance, October 1, 2005 $ 6,197 ============= 7
Increases in the purchase accounting reserve pertain to additional liabilities anticipated at the acquisition date and recognized in conjunction with the registration of the domination agreement and related requirement to purchase remaining shares from minority shareholders. These additional liabilities are primarily for redundancy costs to be paid through 2006 related to manufacturing operations and selling, general and administrative functions. The following unaudited pro forma consolidated financial information for the Company has been prepared assuming the acquisition had occurred at the beginning of fiscal 2004. <TABLE> <CAPTION> Nine Months Ended ----------------- October 2, 2004 (unaudited) <S> <C> Net sales $408,799 Operating income 49,990 Net income 31,380 Diluted income per share $ 1.39 </TABLE> These unaudited pro forma results are presented for comparative purposes only. The pro forma results are not necessarily indicative of what actual results would have been had the Heinrich acquisition been completed as of the beginning of the respective period, or of future results. 7. RESTRUCTURING CHARGES During the third quarter of 2005 the Company recorded $1.6 million related to the downsizing of the European segment's Ireland operation. These charges are primarily for redundancy costs to be paid through 2006 related to the manufacturing operations and are recorded as part of cost of sales. Employees affected by this downsizing include technical, production, administrative and support employees. During the first half of 2005 and during the third quarter of 2005 payments of $0.1 million and $0.9 million, respectively, have been made for Ireland restructuring charges. The total expected cost related to European restructuring is approximately $5.5 million. 8. DERIVATIVES AND HEDGING On June 11, 2002, the Company entered into cross-currency rate swaps, with a notional amount of $11.6 million, as a cash flow hedge of the variability of Yen cash flows attributable to the USD/JPY exchange rate risk on forecasted intercompany sales of inventory to a Japanese subsidiary. The cross-currency rate swaps convert $11.6 million of the Company's fixed rate 6.16% U.S. Dollar debt to fixed rate 3.13% Japanese Yen debt. At the inception of the hedge, both the foreign currency swap and the intercompany sales subject to the hedge were denominated in Japanese Yen. The swap agreements were accounted for as a cash flow hedge and reported at fair value. The cross-currency rate swaps expired on September 6, 2005 and a $0.3 million gain was recorded on the consolidated income statement in the third quarter of 2005. For the period from June 1, 2004, to September 30, 2005, Heinrich Industrie AG purchased Euro forward contracts that hedge the variability of U.S. Dollar cash attributable to the exchange rate risk on forecasted intercompany sales to U.S. and Asian subsidiaries. These forward contracts guarantee the rate at which the U.S. Dollar cash flows will be converted to Euro in the future. These forward contracts expired on September 30, 2005. The gains since the date of the Heinrich acquisition were recognized in the income statement and were immaterial. Derivative financial instruments involve, to a varying degree, elements of market and credit risk not recognized in the consolidated financial statements. The market risk associated with these instruments resulting from interest rate 8
movements is expected to offset the market risk of the underlying transactions being hedged. The counterparties to the agreements relating to the Company's cross currency rate instruments consist of major international financial institutions with high credit ratings. The Company does not believe that there is significant risk of non-performance by these counterparties because the Company monitors the credit ratings of such counterparties, and limits the financial exposure and amount of agreements entered into with any one financial institution. While the notional amount of the derivative financial instruments provide one measure of the volume of these transactions, they do not represent the amount of the Company's exposure to credit risk. The amounts potentially subject to credit risk (arising from the possible inability of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties' obligations under the contracts exceed the obligations of the Company to the counterparty. 9. PENSIONS The components of net periodic benefit cost for the three months ended October 1, 2005, compared with the three months ended October 2, 2004, were (in thousands): <TABLE> <CAPTION> Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended ------------------- ----------------- ------------------ ------------------- U.S. Pension Benefits Foreign Plans ---------------------------------------- ---------------------------------------- 2005 2004 2005 2004 2005 2004 2005 2004 --------- --------- ------- ------- ------- ------- ------ ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Service cost $ 775 $ 690 $ 2,325 $ 2,070 $ 329 $ 281 $ 987 $ 843 Interest cost 883 875 2,649 2,625 537 372 1,611 1,116 Expected return on plan assets (912) (912) (2,736) (2,736) (457) (384) (1,371) (1,152) Amortization of prior service cost 3 3 9 9 (3) (3) (9) (9) Amortization of transition asset -- -- -- -- (31) (23) (93) (69) Amortization of net loss 68 40 204 120 47 52 141 156 -------- -------- ------- ------- ------- -------- ------- ------- Total cost of the plan 817 696 2,451 2,088 422 295 1,266 885 Expected plan participants' contribution -- -- -- -- (107) (52) (321) (156) ------- ------- ------- ------- ------- ------- ------- ------- Net periodic benefit cost $ 817 $ 696 $ 2,451 $ 2,088 $ 315 $ 243 $ 945 $ 729 ------- ------- ------- ------- ------- ------- ------- ------- </TABLE> The expected rate of return on pension assets is 8.50% and 8.75% in 2005 and 2004, respectively. 10. COMPREHENSIVE INCOME Total comprehensive income for the three months ended October 1, 2005, and October 2, 2004, was approximately $9.8 million and $13.9 million, respectively, and the nine months ended October 1, 2005, and October 2, 2004, was approximately $13.8 million and $32.9 million, respectively. The adjustment for comprehensive income consists of deferred gains and losses from foreign currency translation adjustments and qualified cash flow hedges and unrealized gains and losses on available-for-sale securities for the three and nine months ended October 1, 2005, and October 2, 2004. 11. INCOME TAXES The effective tax rate for the third quarter of 2005 was 41% compared to an effective tax rate of 36% in the third quarter of last year. The current quarter effective tax rate was unfavorably impacted by charges related to the expected repatriation of earnings from lower tax jurisdictions and limited tax shield from Ireland plant restructuring charges. 12. STOCK-BASED COMPENSATION The following table discloses the Company's pro forma net income and diluted net income per share had the valuation methods under SFAS 123 been used for the Company's stock option grants. The table also discloses the weighted average assumptions used in estimating the fair value using the Black-Scholes option pricing model. (in thousands, except per share amounts) <TABLE> <CAPTION> Three months ended Nine months ended ------------------------ ------------------------- October 1, October 2, October 1, October 2, ---------- ---------- ---------- ---------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net income as reported $ 6,326 $ 11,250 $ 15,022 $ 31,200 Stock option compensation expense under fair value method, net of tax (720) (719) (2,191) (2,031) -------- --------- --------- -------- Pro forma net income $ 5,606 $ 10,531 $ 12,831 $ 29,169 Basic net income per share: As reported $ 0.28 $ 0.50 $ 0.67 $ 1.41 Pro forma $ 0.25 $ 0.47 $ 0.56 $ 1.29 Diluted net income per share: As reported $ 0.28 $ 0.49 $ 0.66 $ 1.38 Pro forma $ 0.25 $ 0.46 $ 0.56 $ 1.29 Risk-free interest rate 4.66% 4.14% 4.66% 4.14% Expected dividend yield 0% 0% 0% 0% Expected stock price volatility 38.6% 44.0% 38.6% 44.0% Expected life of options 7 years 7 years 7 years 7 years </TABLE> 9
These pro forma amounts may not be representative of future disclosures because the estimated fair value of the options is amortized to expense over the vesting period and additional options may be granted in the future. 13. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123R, "Share-Based Payment," replacing SFAS No. 123 and superseding Accounting Principles Board (APB) Opinion No. 25. SFAS 123R requires public companies to recognize compensation expense for the cost of awards of equity compensation. This compensation cost will be measured as the fair value of the award estimated using an option-pricing model on the grant date. Statement 123R is effective for registrants no later than the beginning of the first fiscal year after December 15, 2005. As permitted by Statement 123, the Company currently accounts for share-based payments to employees in accordance with APB No. 25, "Accounting for Stock Issued to Employees," using the intrinsic value method. The Company expects to adopt Statement 123R at the beginning of fiscal year 2006. The Company is currently evaluating the various transition provisions under provisions under SFAS 123R. The adoption of Statement 123R is expected to result in increased compensation expense in future periods. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations SALES BY GEOGRAPHY AND MARKET* (Dollars in millions) <TABLE> <CAPTION> THIRD QUARTER YEAR-TO-DATE --------------------------- ------------------------------ 2005 2004 % CHANGE 2005 2004 % CHANGE ----- ----- -------- -------- ------- -------- <S> <C> <C> <C> <C> <C> <C> GEOGRAPHY - --------- Americas ............ $ 51.3 $ 57.1 -10% $150.9 $166.0 -9% Europe .............. 31.9 34.6 -8% 98.3 86.4 14% Asia Pacific ........ 47.8 44.2 8% 127.4 123.7 3% ------ ------ ---- ------ ------ ---- TOTAL $131.0 $135.9 -4% $376.6 $376.1 0% ====== ====== ===== ====== ====== ==== <CAPTION> THIRD QUARTER YEAR-TO-DATE --------------------------- ------------------------------ 2005 2004 % CHANGE 2005 2004 % CHANGE ----- ----- -------- -------- ------- -------- <S> <C> <C> <C> <C> <C> <C> MARKET - ------ Electronics ......... 80.8 90.9 -11% $228.5 $249.6 -9% Automotive .......... 29.9 27.4 9% 91.0 84.9 7% Electrical .......... 20.3 17.6 15% 57.1 41.6 37% ------ ------ ----- ------ ------ ---- TOTAL $131.0 $135.9 -4% $376.6 $376.1 0% ====== ====== ===== ====== ====== ==== </TABLE> * Certain prior year amounts have been reclassified to conform to the current year presentation. Sales by geography represent sales to customer or distributor locations. 10
Results of Operations Third Quarter, 2005 Sales decreased $4.9 million or 4% to $131.0 million in the third quarter of 2005, compared to $135.9 million in the third quarter of 2004 due to lower sales in the Americas and Europe partially offset by increased sales in Asia Pacific. On a geographic basis, sales in the Americas decreased $5.8 million or 10% in the third quarter of 2005, compared to the third quarter of last year. The Americas decline was due primarily to lower electronic distributor sales compared to the prior year, which was the peak quarter for last year's build up in distributor inventories, as well as weaker sales to telecom OEM accounts. This was partially offset by stronger electrical and automotive sales in North America compared to the prior year quarter. The electrical increase was due to new business wins, price realization and favorable market trends. The automotive increase reflected stronger new vehicle launches and improving aftermarket sales. Europe sales decreased $2.7 million or 8% in the third quarter of 2005 compared to the third quarter of 2004 primarily due to lower sales to telecom OEM accounts and electronic distributors. Asia-Pacific sales increased $3.6 million or 8% compared to the prior year third quarter due primarily to increases in Taiwan, Southeast Asia and Korea reflecting strength in digital consumer end markets. Gross profit was $40.4 million or 30.8% of sales for the third quarter of 2005, compared to $49.4 million or 36.3% of sales in the same quarter last year. The decrease in gross margin was mainly attributable to reduced operating leverage from lower production rates and a $1.6 million restructuring charge related to downsizing of the Ireland operation. Total operating expense was $32.1 million or 24.5% of sales for the third quarter of 2005 compared to $31.0 million or 22.8% of sales for the same quarter in the prior year. The increase in operating expense reflects additional research and development spending to support the Company's solution selling strategy and a $1.0 million charge related to receivables from Delphi Corporation partially offset by lower bonus expense in the current year quarter. Operating income was $8.3 million or 6.3% of sales for the third quarter of 2005 compared to $18.4 million or 13.5% of sales for the same quarter of last year reflecting the lower sales, reduced operating leverage and increased costs discussed above. Interest expense was $0.6 million in the third quarter of this year compared to $0.4 million in the third quarter of last year. Other income was $3.0 million for the third quarter of 2005 compared to other expense of $0.3 million in the third quarter of last year. The increase in other income was mainly due to favorable currency effects compared to the prior year quarter and a gain of $1.4 million in the current year quarter related to the sale of a 40% interest in a wafer fabrication facility in Swindon, England. Income before minority interest and income taxes was $10.7 million for the third quarter 2005 compared to $17.7 million for the third quarter of 2004. Income taxes were $4.4 million with an effective tax rate of 41% for the third quarter of 2005 compared to $6.4 million with an effective tax rate of 36% in the third quarter of last year. The current quarter effective tax rate was unfavorably impacted by charges related to the expected repatriation of earnings from lower tax jurisdictions and limited tax shield from Ireland plant restructuring charges. Net income for the third quarter 2005 was $6.3 million or $0.28 per diluted share compared to $11.3 million or $0.49 per diluted share for the same quarter of last year. Nine Months, 2005 Sales for the first nine months of 2005 increased $0.5 million from the first nine months of last year to $376.6 million. A decrease in current year base business sales was largely offset by recording a full year of Heinrich during 2005. On a geographic basis, sales in the Americas decreased $15.1 million or 9% in the first nine months of 2005 compared to the prior year due primarily to lower electronic distributor and telecom OEM sales partially offset by increased automotive and electrical sales. Europe sales increased $11.9 million or 14% in the first nine months of 2005 compared to the prior year mainly due to recognizing a full year of sales from the Heinrich acquisition in the current year and favorable currency effects of $3.1 million partially offset by lower electronic distributor and 11
telecom OEM sales. Asia-Pacific sales increased $3.7 million or 3% for the first nine months of 2005 compared to the same period in the prior year due to favorable currency effects of $2.7 million and strength in digital consumer end markets. Gross profit was $117.8 million or 31.3% of sales for the first nine months of 2005 compared to $133.3 million or 35.5% of sales for the first nine months of last year. The decrease in gross margin for the first nine months as compared to the prior year was primarily due to reduced operating leverage from lower sales, restructuring charges related to Ireland plant downsizing activities and the addition of lower margin Heinrich sales. Total operating expense was $95.2 million or 25.3% of sales for the first nine months of 2005 compared to $83.2 million or 22.1% of sales last year. The increase in operating expenses was largely due to the additional expenses related to a recognizing a full year of Heinrich, additions to sales and engineering staffs to support the Company's solution selling strategy and charges related to staff reductions. Operating income for the first nine months of 2005 was $22.6 million or 6.0% of sales compared to $50.1 million or 13.3% of sales for the prior year reflecting sales and margin declines discussed above. Interest expense was $1.7 million for the first nine months of 2005 compared to $1.3 million last year. Other income was $3.2 million for the first nine months of 2005 compared to $0.2 million for the same period last year. The increase in other income was mainly due to favorable currency effects and a gain of $1.4 million in the current period related to the sale of a 40% interest in a wafer fabrication facility in Swindon, England. Income before minority interest and income taxes was $24.1 million for the first nine months of 2005 compared to $49.0 million for the first nine months of last year. Income taxes were $9.1 million the first nine months of 2005 compared to $17.6 million for the first nine months of last year. The effective tax rate was 38% for the first nine months of 2005 compared to an effective tax rate of 36% for the first nine months of 2004. The current year effective tax rate was unfavorably impacted by charges related to the expected repatriation of earnings from lower tax jurisdictions and limited tax shield from Ireland plant restructuring charges. Net income for the first nine months of 2005 decreased to $15.0 million from $31.2 million for the same period last year. Earnings per share for the first nine months of 2005 decreased to $0.66 per diluted share compared to $1.38 per diluted share last year. Liquidity and Capital Resources Assuming no material adverse changes in market conditions or interest rates, management expects that the Company will have sufficient cash from operations to support both its operations and its current debt obligations for the foreseeable future. Littelfuse started the 2005 year with $28.6 million of cash and cash equivalents. Net cash provided by operations was $27.3 million for the first nine months. Net cash provided by operations includes net income of $15.0 million, depreciation of $21.7 million and amortization of $1.6 million in addition to various working capital and other items. Accounts receivable increased $9.0 million due primarily to changes in payment terms for certain customers. Inventory decreased $6.8 million due primarily to improved inventory management and lower plant production due to lower sales. Accounts payable, accrued expenses, prepaid expenses and other items unfavorably impacted net cash provided by operations by $8.8 million due primarily to payment of management bonuses and restructuring charges that were previously accrued. Net cash used in investing activities included $21.9 million in net purchases of property, plant and equipment and $1.4 million of acquisition related expenditures. In addition, net cash provided by financing activities included stock option exercises of $3.8 million along with net proceeds of long-term debt of $6.5 million, notes receivable payback of $3.5 million and the offsetting purchase of treasury stock for $10.0 million. The effects of exchange rate changes decreased cash by $2.1 million. The net cash provided by operations less investing and financing activities plus the effects of exchange rate changes resulted in a $5.8 million net increase in cash. This left the Company with a cash balance of $34.3 million at October 1, 2005. The ratio of current assets to current liabilities was 1.9 to 1 at the end of the third quarter of 2005 compared to 1.5 to 1 at the end of the third quarter of 2004. The days sales in receivables was approximately 60 days at the end of the 12
third quarter of 2005, compared to 57 days at the end of fiscal 2004 and 57 days at the end of the third quarter 2004. The increase in days sales in receivables from the third quarter of the prior year was due primarily to changes in payment terms for certain customers. The days inventory outstanding was approximately 73 days at the end of the third quarter of 2005 compared to 92 days at the end of 2004 and 86 days at end of the third quarter of 2004. The decrease in days inventory outstanding resulted primarily from improved inventory management. The Company's capital expenditures, net of cash from asset sales, were $5.0 million for the third quarter of 2005 compared to $7.3 million for the third quarter of 2004 and $21.9 million for the nine months of 2005 compared to $16.4 million for nine months of 2004. Most of the spending in 2005 relates to manufacturing process improvements, new product introductions and capacity expansion. Total debt, including the current portion, at the end of the third quarter 2005 totaled $40.2 million and consisted of the following: (1) credit revolver borrowings totaling $34.5 million and (2) foreign revolver borrowings totaling $5.7 million. Of this indebtedness, $38.5 million is considered to be current liabilities. The Company has a $50.0 million, three-year revolving bank credit agreement that expires on August 26, 2006. The bank credit agreement is subject to a maximum indebtedness calculation and other financial covenants. At October 1, 2005, the Company had available $15.5 million of borrowing capability under the revolving bank credit agreement. The revolving bank credit agreement has a floating interest rate of LIBOR plus 0.875% or prime. The Company also had $5.8 million in letters of credit outstanding at October 1, 2005. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995 The statements in this section and in the other sections of this report which are not historical facts contained in this report are intended to be forward-looking statements that involve risks and uncertainties, including, but not limited to, product demand and market acceptance, the effect of economic conditions, the impact of competitive products and pricing, the integration of acquisitions, product development and patent protection, commercialization and technological difficulties, capacity and supply constraints or difficulties, exchange rate fluctuations, actual purchases under agreements, the effect of the Company's accounting policies, labor disputes, restructuring costs in excess of expectations, costs related to former coal mining activities, pension plan asset returns less than expected, and other risks which may be detailed in the Company's Securities and Exchange Commission filings. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual results and outcomes may differ materially from those indicated or implied in the forward-looking statements. This report should be read in conjunction with information provided in the financial statements appearing in the Company's Annual Report on Form 10-K for the year ended January 1, 2005. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risk from changes in foreign exchange rates, commodities and, to a lesser extent, interest rates. Management believes that the Company's exposure to these risks is immaterial and not significant enough to warrant disclosure of quantitative information regarding market risk. The Company had $40.2 million of long-term debt outstanding at October 1, 2005, primarily in the form of lines of credit. None of the Company's long-term debt is at fixed rates. A portion of the Company's operations consists of manufacturing and sales activities in foreign countries. The Company has foreign manufacturing facilities in Mexico, England, Ireland, China, Germany and the Philippines. Substantially all sales in Europe are denominated in Euro, U.S. Dollar and British Pound Sterling, and substantially all sales in the Asia-Pacific region are denominated in U.S. Dollar, Japanese Yen and South Korean Won. The Company's identifiable foreign exchange exposures result from the purchase and sale of products from affiliates, repayment of intercompany trade and loan amounts and translation of local currency amounts in consolidation of financial results. Changes in foreign currency exchange rates or weak economic conditions in the foreign countries in which it manufactures and distributes products could affect the Company's sales, accounts receivable values and financial results. The Company uses netting and offsetting intercompany account management techniques to reduce known foreign currency exposures deemed to be material. The Company utilizes derivative instruments as hedges of specific foreign currency cash flows when appropriate. 13
On June 11, 2002, the Company entered into cross-currency rate swaps, with a notional amount of $11.6 million, as a cash flow hedge of the variability of Yen cash flows attributable to the USD/JPY exchange rate risk on forecasted intercompany sales of inventory to a Japanese subsidiary. The cross-currency rate swaps convert $11.6 million of the Company's fixed rate 6.16% U.S. Dollar debt to fixed rate 3.13% Japanese Yen debt. At the inception of the hedge, both the foreign currency swap and the intercompany sales subject to the hedge were denominated in Japanese Yen. The swap agreements were accounted for as a cash flow hedge and reported at fair value. The cross-currency rate swaps expired on September 6, 2005 and a $0.3 million gain was recorded on the consolidated income statement in the third quarter of 2005. For the period from June 1, 2004, to September 30, 2005, Heinrich Industrie AG purchased Euro forward contracts that hedge the variability of U.S. Dollar cash attributable to the exchange rate risk on forecasted intercompany sales to U.S. and Asian subsidiaries. These forward contracts guarantee the rate at which the U.S. Dollar cash flows will be converted to Euro in the future. These forward contracts expired on September 30, 2005. The gains since the date of the Heinrich acquisition were recognized in the income statement and were immaterial. A risk management policy has been implemented by the Company that establishes the procedures and controls over derivative financial instruments. Under the policy, the Company does not use derivative financial instruments for trading purposes and the use of such instruments is subject to the approval of senior officers. Typically, the use of such derivative instruments is limited to hedging activities related to specific foreign currency cash flows. The Company's exposure related to such transactions is, in the aggregate, not material to the Company's financial position, results of operations and cash flows. The Company uses various metals in the production of its products, including zinc, copper and silver. The Company's earnings are exposed to fluctuations in the prices of these commodities. The Company does not currently use derivative financial instruments to mitigate this commodity price risk. Outlook Delphi Corporation, a significant customer of the Company, filed bankruptcy on October 8, 2005. Delphi accounts receivable affected by the bankruptcy are approximately $3.0 million. The Company recorded a $1.0 million reserve against this balance in the third quarter of 2005 and is actively monitoring this situation and assessing any further financial impact this may have. Item 4. Controls and Procedures As of October 1, 2005, the Chief Executive Officer and Chief Financial Officer of the Company evaluated the effectiveness of the disclosure controls and procedures of the Company and concluded that these disclosure controls and procedures are effective to ensure that material information relating to the Company and its consolidated subsidiaries has been made known to them by the employees of the Company and its consolidated subsidiaries during the period preceding the filing of this Report. There were no significant changes in the Company's internal controls during the period covered by this Report that could materially affect these controls or could reasonably be expected to materially affect the Company's internal control reporting, disclosures and procedures subsequent to the last day they were evaluated by the Company's Chief Executive Officer and Chief Financial Officer. The Company's management believes that the material weaknesses discussed in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2005 relating to the approval process over journal entries and lack of adequate controls over the accounting for foreign currency translations have been eliminated. 14
PART II - OTHER INFORMATION Item 5: Unregistered Sales of Equity Securities and Use of Proceeds (c) The table below provides information with respect to purchases by the Company of shares of its common stock during each fiscal month of the third quarter of fiscal 2005: ISSUER PURCHASES OF EQUITY SECURITIES <TABLE> <CAPTION> Total Number of Shares Purchased as Part of Publicly Maximum Number of Shares Total Number of Shares Average Price Announced Plans or that May Yet Be Purchased Period Purchased Paid per Share Programs Under the Plans or Programs <S> <C> <C> <C> <C> July 2005 - - - 1,000,000 August 2005 - - - 1,000,000 September 2005 244,500 - - 755,500 Total 244,500 - - 755,500 </TABLE> The Company's Board of Directors authorized the repurchase of up to 1,000,000 shares under a program for the period May 1, 2005 to April 30, 2006. Item 6: Exhibits Exhibit Description ------- ----------- 31.1 Certification of Gordon Hunter, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Philip G. Franklin, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter ended October 1, 2005, to be signed on its behalf by the undersigned thereunto duly authorized. LITTELFUSE, INC. Date: November 10, 2005 By /s/ Philip G. Franklin --------------------------------------- Philip G. Franklin Vice President, Operations Support and Chief Financial Officer (As duly authorized officer and as the principal financial and accounting officer) 15