TUnited StatesABLE OF CONTENTS
UNITED STATES
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark one) | |
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended | |
OR | |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES ACT OF 1934 |
For the transition period from ___ to ___ |
Commission file number 0-20388
LITTELFUSE, INC.
(Exact name of registrant as specified in its charter)
Delaware | 36-3795742 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
8755 West Higgins Road, Suite 500 | |
Chicago, Illinois | 60631 |
(Address of principal executive offices) | (ZIP Code) |
Registrant’s telephone number, including area code: 773-628-1000
Securities registered pursuant to Section 12(b) of the Act:
| ||
Title of Each Class | Name of Each Exchange | On Which Registered |
Common Stock, $0.01 par value | NASDAQ Global Select MarketSM |
Indicate by check mark 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 28, 2017,27, 2018, the registrant had outstanding22,692,713 24,966,975 shares of Common Stock, net of Treasury Shares.
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PART I | ||
Item 1. | ||
3 | ||
4 | ||
5 | ||
6 | ||
Notes to Condensed Consolidated Financial Statements (unaudited) | 7 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II | ||
Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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LITTELFUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands) | April1, 2017 | December 31, 2016 | March 31, 2018 | December 30, 2017 | ||||||||||||
(Unaudited) | ||||||||||||||||
ASSETS |
| |||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 277,979 | $ | 275,124 | $ | 412,458 | $ | 429,676 | ||||||||
Short-term investments | 32 | 3,690 | 37 | 35 | ||||||||||||
Accounts receivable, less allowances | 212,586 | 198,095 | ||||||||||||||
Trade receivables, less allowances (March 31, 2018 - $33,746; December 30, 2017 - $27,516) | 244,905 | 182,699 | ||||||||||||||
Inventories | 118,311 | 114,063 | 263,969 | 140,789 | ||||||||||||
Prepaid income taxes | 12,273 | 11,671 | ||||||||||||||
Prepaid income taxes and income taxes receivable | 3,899 | 1,689 | ||||||||||||||
Prepaid expenses and other current assets | 13,044 | 9,438 | 47,794 | 37,452 | ||||||||||||
Total current assets | 634,225 | 612,081 | 973,062 | 792,340 | ||||||||||||
Property, plant, and equipment: | ||||||||||||||||
Land | 9,645 | 9,268 | 29,575 | 9,547 | ||||||||||||
Buildings | 83,060 | 80,553 | 118,170 | 86,599 | ||||||||||||
Equipment | 453,450 | 439,542 | 555,578 | 505,838 | ||||||||||||
Accumulated depreciation and amortization | (322,213 | ) | (312,188 | ) | (366,118 | ) | (351,407 | ) | ||||||||
Net property, plant, and equipment | 223,942 | 217,175 | 337,205 | 250,577 | ||||||||||||
Intangible assets, net of amortization: | ||||||||||||||||
Patents, licenses and software | 88,147 | 83,607 | ||||||||||||||
Distribution network | 18,713 | 18,995 | ||||||||||||||
Customer relationships, trademarks and tradenames | 109,234 | 110,425 | ||||||||||||||
Intangible assets, net of amortization | 405,406 | 203,850 | ||||||||||||||
Goodwill | 428,343 | 403,544 | 840,574 | 453,414 | ||||||||||||
Investments | 11,657 | 13,933 | 31,128 | 10,993 | ||||||||||||
Deferred income taxes | 19,530 | 20,585 | 12,039 | 11,858 | ||||||||||||
Other assets | 10,255 | 10,849 | 28,096 | 17,070 | ||||||||||||
Total assets | $ | 1,544,046 | $ | 1,491,194 | $ | 2,627,510 | $ | 1,740,102 | ||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 88,360 | $ | 90,712 | $ | 120,817 | $ | 101,844 | ||||||||
Accrued payroll | 24,740 | 42,810 | 41,220 | 49,962 | ||||||||||||
Accrued expenses | 47,849 | 36,138 | 74,925 | 48,994 | ||||||||||||
Accrued severance | 1,146 | 2,785 | 1,367 | 1,459 | ||||||||||||
Accrued income taxes | 8,827 | 8,846 | 15,938 | 16,285 | ||||||||||||
Current portion of long-term debt | 6,250 | 6,250 | 10,111 | 6,250 | ||||||||||||
Total current liabilities | 177,172 | 187,541 | 264,378 | 224,794 | ||||||||||||
Long-term debt, less current portion | 464,273 | 447,892 | 743,437 | 489,361 | ||||||||||||
Deferred income taxes | 8,539 | 7,066 | 60,525 | 17,069 | ||||||||||||
Accrued post-retirement benefits | 13,926 | 13,398 | 35,817 | 18,742 | ||||||||||||
Other long-term liabilities | 24,375 | 20,366 | 81,379 | 62,580 | ||||||||||||
Shareholders’ equity: | ||||||||||||||||
Common stock, par value $0.01 per share | 228 | 228 | ||||||||||||||
Treasury stock, at cost | (36,842 | ) | (36,510 | ) | ||||||||||||
Common stock, par value $0.01 per share: 34,000,000 shares authorized; shares issued, March 31, 2018–24,936,931; December 30, 2017 –22,713,198 | 251 | 229 | ||||||||||||||
Treasury stock, at cost: 453,571 and 439,598 shares, respectively | (44,052 | ) | (41,294 | ) | ||||||||||||
Additional paid-in capital | 295,372 | 291,258 | 800,614 | 310,012 | ||||||||||||
Accumulated other comprehensive income | (68,952 | ) | (74,579 | ) | (73,742 | ) | (63,668 | ) | ||||||||
Retained earnings | 665,812 | 634,391 | 758,766 | 722,140 | ||||||||||||
Littelfuse, Inc. shareholders’ equity | 855,618 | 814,788 | 1,441,837 | 927,419 | ||||||||||||
Non-controlling interest | 143 | 143 | 137 | 137 | ||||||||||||
Total equity | 855,761 | 814,931 | 1,441,974 | 927,556 | ||||||||||||
Total liabilities and equity | $ | 1,544,046 | $ | 1,491,194 | $ | 2,627,510 | $ | 1,740,102 |
See accompanying Notes to Condensed Consolidated Financial Statements.
LITTELFUSE, INC.
CONDENSEDCONSOLIDATED STATEMENTS OF NET INCOME
(Unaudited)
For the Three Months Ended | ||||||||
(in thousands, except per share data) | April1, 2017 | April 2, 2016 | ||||||
Net sales | $ | 285,441 | $ | 219,398 | ||||
Cost of sales | 171,791 | 132,243 | ||||||
Gross profit | 113,650 | 87,155 | ||||||
Selling, general, and administrative expenses | 46,703 | 42,366 | ||||||
Research and development expenses | 12,151 | 8,565 | ||||||
Amortization of intangibles | 5,944 | 3,796 | ||||||
Total operating expenses | 64,798 | 54,727 | ||||||
Operating income | 48,852 | 32,428 | ||||||
Interest expense | 3,120 | 2,045 | ||||||
Foreign exchange (gain) loss | (1,557 | ) | 3,823 | |||||
Other expense (income), net | (139 | ) | (517 | ) | ||||
Income before income taxes | 47,428 | 27,077 | ||||||
Income taxes | 8,537 | 7,788 | ||||||
Net income | $ | 38,891 | $ | 19,289 | ||||
Income per share: | ||||||||
Basic | $ | 1.71 | $ | 0.86 | ||||
Diluted | $ | 1.69 | $ | 0.85 | ||||
Weighted-average shares and equivalentshares outstanding: | ||||||||
Basic | 22,748 | 22,438 | ||||||
Diluted | 22,989 | 22,621 |
For the Three Months Ended | ||||||||
(in thousands, except per share data) | March 31, 2018 | April 1, 2017 | ||||||
Net sales | $ | 417,813 | $ | 285,441 | ||||
Cost of sales | 268,190 | 171,791 | ||||||
Gross profit | 149,623 | 113,650 | ||||||
Selling, general, and administrative expenses | 77,514 | 46,703 | ||||||
Research and development expenses | 22,540 | 12,151 | ||||||
Amortization of intangibles | 11,998 | 5,944 | ||||||
Total operating expenses | 112,052 | 64,798 | ||||||
Operating income | 37,571 | 48,852 | ||||||
Interest expense | 5,423 | 3,120 | ||||||
Foreign exchange gain | (10,555 | ) | (1,557 | ) | ||||
Other (income) expense, net | (1,943 | ) | (139 | ) | ||||
Income before income taxes | 44,646 | 47,428 | ||||||
Income taxes | 8,617 | 8,537 | ||||||
Net income | $ | 36,029 | $ | 38,891 | ||||
Income per share: | ||||||||
Basic | $ | 1.48 | $ | 1.71 | ||||
Diluted | $ | 1.45 | $ | 1.69 | ||||
Weighted-average shares and equivalent shares outstanding: | ||||||||
Basic | 24,339 | 22,748 | ||||||
Diluted | 24,775 | 22,989 | ||||||
Cash dividends declared per common share | $ | 0.37 | $ | 0.33 |
LITTELFUSE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Three Months Ended | ||||||||
(in thousands) | April1, 2017 | April 2, 2016 | ||||||
Net income | $ | 38,891 | $ | 19,289 | ||||
Other comprehensive income (loss): | ||||||||
Pension and postemployment liability adjustments (net of tax of ($32) and ($25), respectively) | (181 | ) | 92 | |||||
Pension and postemployment reclassification adjustments | (101 | ) | 73 | |||||
Unrealized gain (loss) on investments | 947 | (1,234 | ) | |||||
Foreign currency translation adjustments | 4,962 | 11,755 | ||||||
Comprehensive income | $ | 44,518 | $ | 29,975 |
See accompanying Notes to Condensed Consolidated Financial Statements.
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME
(Unaudited)
For the Three Months Ended | ||||||||
(in thousands) | April1, 2017 | April 2, 2016 | ||||||
Operating activities | ||||||||
Net income | $ | 38,891 | $ | 19,289 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 9,128 | 7,230 | ||||||
Amortization of intangibles | 5,944 | 3,796 | ||||||
Provision for bad debts | 351 | — | ||||||
Loss on sale of product line | — | 1,391 | ||||||
Loss on sale of property, plant, and equipment | 600 | 27 | ||||||
Stock-based compensation | 3,583 | 2,204 | ||||||
Excess tax benefit on share-based compensation | — | (706 | ) | |||||
Deferred income taxes | 616 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (11,267 | ) | (10,413 | ) | ||||
Inventories | (3,296 | ) | (3,484 | ) | ||||
Accounts payable | (3,295 | ) | 3,716 | |||||
Accrued expenses (including post-retirement) | 4,140 | 3,500 | ||||||
Accrued payroll and severance | (20,221 | ) | (9,351 | ) | ||||
Accrued taxes | (220 | ) | (5,312 | ) | ||||
Prepaid expenses and other | (2,011 | ) | (2,395 | ) | ||||
Net cash provided by operating activities | 22,943 | 9,492 | ||||||
Investing activities | ||||||||
Acquisitions of businesses, net of cash acquired | (14,172 | ) | (264,098 | ) | ||||
Proceeds from maturities of short-term investments | 3,739 | — | ||||||
Decrease in entrusted loan | 655 | — | ||||||
Purchases of property, plant, and equipment | (12,377 | ) | (9,139 | ) | ||||
Proceeds from sale of property, plant, and equipment | 57 | 18 | ||||||
Net cash used in investing activities | (22,098 | ) | (273,219 | ) | ||||
Financing activities | ||||||||
Proceeds of revolving credit facility | — | 258,000 | ||||||
Proceeds of term loan | — | 125,000 | ||||||
Proceeds of senior notes payable | 125,000 | — | ||||||
Payments of term loan | (1,563 | ) | (85,000 | ) | ||||
Payments of revolving credit facility | (112,500 | ) | (90,500 | ) | ||||
Proceeds from exercise of stock options | 199 | 3,710 | ||||||
Payments of entrusted loan | (655 | ) | — | |||||
Debt issuance costs | (71 | ) | (1,700 | ) | ||||
Cash dividends paid | (7,472 | ) | (6,483 | ) | ||||
Excess tax benefit on share-based compensation | — | 706 | ||||||
Net cash provided by financing activities | 2,938 | 203,733 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (928 | ) | 4,072 | |||||
Decrease in cash and cash equivalents | 2,855 | (55,922 | ) | |||||
Cash and cash equivalents at beginning of period | 275,124 | 328,786 | ||||||
Cash and cash equivalents at end of period | $ | 277,979 | $ | 272,864 | ||||
Supplemental disclosures of non-cash investing activities: | ||||||||
Fair value of commitment to purchase non-controlling interest of Monolith | $ | 9,000 | $ | — |
For the Three Months Ended | ||||||||
(in thousands) | March 31, 2018 | April 1, 2017 | ||||||
Net income | $ | 36,029 | $ | 38,891 | ||||
Other comprehensive income (loss): | ||||||||
Pension and postemployment liability adjustments (net of tax expense (benefit) of ($60) and ($32), respectively) | (188 | ) | (181 | ) | ||||
Pension and postemployment reclassification adjustments (net of tax (benefit) expense of ($5) and $36, respectively) | 185 | (101 | ) | |||||
Unrealized (loss) gain on investments | - | 947 | ||||||
Foreign currency translation adjustments | (276 | ) | 4,962 | |||||
Comprehensive income | $ | 35,750 | $ | 44,518 |
See accompanying Notes to Condensed Consolidated Financial Statements.
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended | ||||||||
(in thousands) | March 31, 2018 | April 1, 2017 | ||||||
Operating activities | ||||||||
Net income | $ | 36,029 | $ | 38,891 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 11,614 | 9,128 | ||||||
Amortization of intangibles | 11,998 | 5,944 | ||||||
Provision for bad debts | (13 | ) | 351 | |||||
Non-cash inventory charges | 17,896 | — | ||||||
Unrealized gain on investments | (1,864 | ) | — | |||||
Loss on sale of property, plant, and equipment | 99 | 600 | ||||||
Stock-based compensation | 8,714 | 3,583 | ||||||
Deferred income taxes | 842 | 616 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (8,417 | ) | (11,267 | ) | ||||
Inventories | (269 | ) | (3,296 | ) | ||||
Accounts payable | 2,990 | (3,295 | ) | |||||
Accrued expenses (including post-retirement) | 12,573 | 4,140 | ||||||
Accrued payroll and severance | (18,607 | ) | (20,221 | ) | ||||
Accrued taxes | (1,174 | ) | (220 | ) | ||||
Prepaid expenses and other | (3,143 | ) | (2,011 | ) | ||||
Net cash provided by operating activities | 69,268 | 22,943 | ||||||
Investing activities | ||||||||
Acquisitions of businesses, net of cash acquired | (306,487 | ) | (14,172 | ) | ||||
Proceeds from maturities of short-term investments | — | 3,739 | ||||||
Decrease in entrusted loan | — | 655 | ||||||
Purchases of property, plant, and equipment | (17,909 | ) | (12,377 | ) | ||||
Proceeds from sale of property, plant, and equipment | 19 | 57 | ||||||
Net cash used in investing activities | (324,377 | ) | (22,098 | ) | ||||
Financing activities | ||||||||
Proceeds of revolving credit facility | 50,000 | — | ||||||
Proceeds of term loan | 75,000 | — | ||||||
Proceeds of senior notes payable | 175,000 | 125,000 | ||||||
Payments of term loan | (2,500 | ) | (1,563 | ) | ||||
Payments of revolving credit facility | (47,000 | ) | (112,500 | ) | ||||
Net (payments) proceeds related to stock-based award activities | (116 | ) | 199 | |||||
Proceeds (payments) from entrusted loan | — | (655 | ) | |||||
Debt issuance costs | (878 | ) | (71 | ) | ||||
Cash dividends paid | (9,198 | ) | (7,472 | ) | ||||
Net cash provided by financing activities | 240,308 | 2,938 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (2,417 | ) | (928 | ) | ||||
Increase (decrease) in cash and cash equivalents | (17,218 | ) | 2,855 | |||||
Cash and cash equivalents at beginning of year | 429,676 | 275,124 | ||||||
Cash and cash equivalents at end of year | $ | 412,458 | $ | 277,979 |
See accompanying Notes to Condensed Consolidated Financial Statements.
1. Summary of Significant Accounting Policies and Other Information
Nature of Operations
Littelfuse, Inc. and subsidiaries (the “Company”) design, manufacture, and sell circuit protection devices for useis a global leader in the automotive, electronics, and industrial markets throughout the world. The Company is one of the world’s leading suppliers of circuit protection products forwith advancing platforms in power control and sensor technologies, serving customers in the electronics, automotive, and industrial markets, with expanding platforms inmarkets. With a diverse and extensive product portfolio of fuses, semiconductors, polymers, ceramics, relays and sensors, and power control components and modules. In addition to circuit protection products and solutions, the Company offers electronic reed switchesworks with its customers to build safer, more reliable and sensors, automotive sensors for comfort and safety systems and a comprehensive line of highly reliable electromechanical and electronic switch and control devices for commercial and specialty vehicles, as well as protection relays and power distribution centersmore efficient products for the safe controlconnected world in virtually every market that uses electrical energy, ranging across consumer electronics, IT and distribution of electricity.telecommunication applications, industrial electronics, automobiles and other transportation, and heavy industrial applications. The Company has a network of global engineering centers and labs that develop new products and product enhancements, provides customer application support and test products for safety, reliability, and regulatory compliance. The Company’s devices protect products in virtually every market that uses electrical energy, from consumer electronics to automobiles to industrial equipment.
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-Q10-Q and Article 10 of Regulation S-X.S-X. Accordingly, certain information and disclosures normally included in the consolidated balance sheet,sheets, statements of net income and comprehensive income and cash flows 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-K10-K for the year ended December 31, 2016,30,2017, which should be read in conjunction with the disclosures therein.Intherein. 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.
GoodwillRevenue Recognition
Adoption
On December 31, 2017, the Company adopted new guidance on revenue from contracts with customers using the modified retrospective method. The adoption did not have a significant impact on the Company’s consolidated financial statements.
Revenue Disaggregation
The following table disaggregates the Company’s revenue by primary business units for the three months ended March 31, 2018:
(in thousands) | Electronics Segment | Automotive Segment | Industrial Segment |
Total | ||||||||||||
Electronics – Passive Products and Sensors | $ | 114,495 | $ | — | $ | — | $ | 114,495 | ||||||||
Electronics - Semiconductor | 149,916 | — | — | 149,916 | ||||||||||||
Passenger Car Products | — | 63,580 | — | 63,580 | ||||||||||||
Automotive Sensors | — | 31,323 | — | 31,323 | ||||||||||||
Commercial Vehicle Products | — | 31,228 | — | 31,228 | ||||||||||||
Industrial Products | — | — | 27,271 | 27,271 | ||||||||||||
Total | $ | 264,411 | $ | 126,131 | $ | 27,271 | $ | 417,813 |
See Note 12,Segment Information for net sales by segment and Indefinite-Lived Intangible Assetscountries.
Revenue Recognition
The Company annually tests goodwillrecognizes revenue on product sales in the period in which the Company satisfies its performance obligation and indefinite-lived intangible assetscontrol 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 impairment ontransfer of control at the first daytime of its fiscal fourth quarter orshipment as this is the point at other dates if there is an event or change in circumstances that indicateswhich title and risk of loss of the asset may be impaired. Management determinesproduct transfers to the fair valuecustomer. At the end of each period, for those shipments where title to the products and the risk of its reporting unitsloss and rewards of ownership do not transfer until the product has been received by using a discounted cash flow model (which includes forecasted five-year income statementthe customer, the Company adjusts revenues and working capital projections, a market-based weighted average cost of capitalsales for the delay between the time that the products are shipped and terminal values after five years)when they are received by the customer. The amount of revenue recorded reflects the consideration to estimate market value. In addition,which the Company compares its derived enterprise valueexpects 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 has elected the practical expedient under 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 has elected the practical expedient under ASC 606-10-32-18 to not assess whether a consolidated basiscontract 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. This is similar to the Company’s market capitalization as of its test date to ensure its derived value approximatesprior practice and therefore the market valueeffect of the Company when takennew guidance is immaterial.
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 whole.“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 and actual authorizations for the debit and recognizes these debits as a reduction of revenue.
Factors the Company considers important when performing the impairment tests, which could result in changesReturn to its estimates, include underperformance relative to historical or projected future operating results and declines in acquisitions and trading multiples. Due to the diverse end user base and non-discretionary product demand, the Company does not believe its future operating results will vary significantly relative to its historical and projected future operating results. However, it is possible that impairment charges could be recognized for the relays reporting unit if there are declines in profitability or projected future operating results due to changes in volume, market pricing, cost, or the business environment. As of the most recent annual test conducted on October 2, 2016, the Company concluded the fair value of the relays reporting unit exceeded its carrying value of invested capital and therefore, no potential goodwill impairment existed. As of the 2016 annual test date, the relays reporting unit had $41.4 million of goodwill and intangible assets and the excess of fair value over the carrying value of invested capital was 15%. As of April 1, 2017, there were no events or circumstances that indicate the Relays intangible assets were impaired.Stock
Recently Adopted Accounting StandardsThe 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 July 2015, March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11 – “Inventory2017-07 “Compensation-Retirement Benefits (Topic 330)715): SimplifyingImproving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost,” which changed the presentation of net periodic pension and post-retirement benefit cost (net benefit cost) within the Statement of Income. Under the previous guidance, net benefit cost was reported as an employee cost within operating income. The amendment required the bifurcation of net benefit cost, with the service cost component to be presented with other employee compensation costs in operating income while the other components will be reported separately outside of income from operations. ASU No.2017-07 was effective for the first quarter of 2018 with the Company adopting the new standard on December 31, 2017.
In January 2016, the FASB issued ASU No.2016-01, “Financial Instruments-Recognition and Measurement of Inventory,”Financial Assets and Financial Liabilities” which simplifiesaddressed certain aspects of the recognition, measurement, presentation and disclosure of inventory by requiring inventoryfinancial instruments. The ASU requires the Company to be measured atrecognize any changes in the lowerfair value of cost andcertain equity investments in net realizable value. The update is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.income. Previously these changes were recognized in other comprehensive income ("OCI"). The Company adopted the new standard on January 1, 2017. The adoption ofDecember 31, 2017, on a modified retrospective basis, recognizing the update did not havecumulative effect as a material impact on the Company’s consolidated financial statements.$9.8 million increase to retained earnings. As a result of the adoption of the update, inventories are stated at the lower of cost or net realizable value. Cost is principally determined using the first-in, first-out method. The Company maintains excessnew standard and obsolete allowances against inventory to reduce the carrying value to the expected net realizable value. These allowances are based upon a combination of factors including historical sales volume, market conditions, lower of cost or market analysis and expected realizablechange in fair value of our equity investments, for the inventory.three months ended March 31, 2018, the Company recognized an unrealized gain of $1.9 million in Other (income) expense, net in the Condensed Consolidated Statements of Net Income.
In March 2016, May 2014, the FASB issued ASU No. 2016-09 – “Improvements to Employee Share-Based Payment Accounting,” which amends ASC 718, “Compensation – Stock Compensation.” The update simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the Consolidated Statements of Cash Flows. The update is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted the new standard on January 1, 2017. As a result of the adoption, on a prospective basis, the Company recognized $0.5 million of excess tax benefits from stock-based compensation as a discrete item in income tax expense for the three months ended April 1, 2017. Historically, these amounts were recorded as additional paid-in capital. The Company also elected to apply the change prospectively to the Consolidated Statement of Cash Flows. As a result, on a prospective basis, share-based payments will be reported as operating activities in the Consolidated Statement of Cash Flows. The Company elected not to change its policy on accounting for forfeitures and will continue to estimate a requisite forfeiture rate. Additional amendments to the accounting for income taxes and minimum statutory withholding requirements had no impact on the results of operations.
Recently Issued Accounting Standards
In May 2014 the FASB issued ASU No. 2014-09,-09, “Revenue from Contracts with Customers” (Topic 606)606) which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition.” This ASU provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company adopted the new standard on December 31, 2017 using the modified retrospective method, however, no adjustment to retained earnings was needed. The new guidance did not have a material effect on the Company’s Condensed Consolidated Statements of Income. See the Revenue Recognition section above for further discussion.
In August, 2015, October 2016, the FASB issued ASU No. 2015-14, which postponed2016-16, "Income Taxes” (Topic 740). This ASU update requires entities to recognize the effective dateincome tax consequences of ASU No. 2014-09 to fiscal years,many intercompany asset transfers at the transaction date. The seller and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted onbuyer will immediately recognize the original effective datecurrent and deferred income tax consequences of fiscal years beginning after December 15, 2016.an intercompany transfer of an asset other than inventory. The tax consequences were previously deferred. The Company is in the process of performing its initial assessment of the potential impact on its consolidated financial statements and has not concluded on its adoption methodology. While the Company is currently assessing the impact ofadopted the new standards, the Company’s revenue is primarily generated from the sale of finished products to customers. Those sales predominantly contain a single delivery element standard on December 31, 2017 and revenue is recognized at a single point in time when ownership, risks, and rewards transfer. These are largely un-affected by the new standard. The Company does it did not expect this new guidance to have a material impact on the amount of overall sales recognized; however, the timing of sales on certain projects may be affected. The Company has not yet quantified this potential impact.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02,2016-02, "Leases" (Topic 842)842). This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Adoption will require a modified retrospective transition. The Company will adopt the standard in the first quarter of 2019. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.2016-02.
In January 2017, 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions in the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. The Company has not yet completed its assessment and therefore has not yet elected an accounting policy.
In February 2018, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other”2018-02 “Income Statement—Reporting Comprehensive Income (Topic 350). This ASU modifies220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which permits the conceptreclassification of impairment fromtax effects stranded in accumulated other comprehensive income to retained earnings as a result of the condition that exists whenTax Act. The standard also requires entities to disclose whether or not they elected to reclassify the carrying amount of goodwill exceeds its implied fair valuetax effects related to the condition that exists whenTax Act as well as their policy for releasing income tax effects from accumulated other comprehensive income. The standard allows the carrying amountoption of applying either a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculatingretrospective adoption, meaning the implied fair value of goodwill by assigning the fair value of a reporting unitstandard is applied to all periods in which the effect of its assets and liabilitiesthe Tax Act is recognized, or applying the amendments in the period of adoption, meaning an adjustment is made to shareholder’s equity as if thatof the beginning of the reporting unit had been acquiredperiod. ASU 2018-02 will be effective in a business combination. Because the update will eliminate Step 2 from the goodwill impairment test, it should reduce the cost and complexityfirst quarter of evaluating goodwill for impairment. This ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020, with2019; however early adoption is permitted for interim orand annual goodwill impairment tests performed on testing dates after January 1, 2017.periods, including the reporting period in which the Tax Act was enacted. The Company expects to adoptis currently evaluating the new standard in 2017.impact of ASU 2018-02 on the Consolidated Financial Statements.
2. Acquisitions
The Company accounts for acquisitions using the acquisition method in accordance with ASC 805, “Business Combinations,” in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition. The operating results of the acquired business are included in the Company’s consolidated financial statementsConsolidated Financial Statements from the date of the acquisition.
IXYS Corporation
On January 17, 2018, the Company acquired IXYS Corporation (“IXYS”), a global pioneer in the power semiconductor and integrated circuit markets with a focus on medium to high voltage power control semiconductors across the industrial, communications, consumer and medical markets. IXYS has a broad customer base, serving more than 3,500 customers through its direct sales force and global distribution partners. The acquisition of IXYS is expected to accelerate the Company’s growth across the power control market driven by IXYS’s extensive power semiconductor portfolio and technology expertise. With IXYS, the Company will be able to diversify and expand its presence within industrial electronics markets, leveraging the strong IXYS industrial OEM customer base. The Company also expects to increase long-term penetration of its power semiconductor portfolio in automotive markets, expanding its global content per vehicle.
Upon completion of the acquisition, at IXYS stockholders’ election and subject to proration, each share of IXYS common stock, par value $0.01 per share, owned immediately prior to the effective time was cancelled and extinguished and automatically converted into the right to receive: (i) $23.00 in cash (subject to applicable withholding tax), without interest (referred to as the cash consideration), or (ii) 0.1265 of a share of common stock, par value $0.01 per share, of Littelfuse (referred to as the stock consideration). IXYS stockholders received cash in lieu of any fractional shares of Littelfuse common stock that the IXYS stockholders would otherwise have been entitled to receive. Additionally, each outstanding option to purchase shares of IXYS common stock granted under an IXYS equity plan were assumed by Littelfuse and converted into an option to acquire (i) a number of shares of Littelfuse common stock equal to the number of shares of IXYS common stock subject to such option immediately prior to the effective time multiplied by 0.1265, rounded down to the nearest whole share, with (ii) an exercise price per share of Littelfuse common stock equal to the exercise price of such IXYS stock option immediately prior to the effective time divided by 0.1265, rounded up to the nearest whole cent.
Based on the $207.5 per share opening price of Littelfuse common stock on January 17, 2018, the consideration IXYS stockholders received in exchange of their IXYS common stock in the acquisition had a value of $814.8 million comprised of $380.5 million of cash and $434.2 million of Littelfuse stock. In addition to the consideration transferred related to IXYS common stock, the value of consideration transferred, and included in the purchase price, related to IXYS stock options that were converted to Littelfuse stock options, or cash settled, had a value of $41.7 million. As a result, total consideration was valued at $856.5 million.
The total purchase price of $856.5 million has been allocated, on a preliminary basis, to assets acquired and liabilities assumed, as of the completion of the acquisition, based on preliminary estimated fair values. The purchase price allocation is preliminary because the evaluations necessary to assess the fair values of the net assets acquired are still in process. The primary areas that are not yet finalized relate to the completion of the valuations of certain acquired income tax assets and liabilities, including the impact of the adoption of the Tax Cuts and Job Act (“Tax Act”) and certain acquired investments. As a result, these allocations are subject to change during the purchase price allocation period as the valuations are finalized.
The following table summarizes the purchase price allocation of the fair value of assets acquired and liabilities assumed in the IXYS acquisition:
(in thousands) | Purchase Price Allocation | |||
Total purchase consideration: | ||||
Cash, net of cash acquired | $ | 302,865 | ||
Cash settled stock options | 3,622 | |||
Littelfuse stock | 434,192 | |||
Converted stock options | 38,109 | |||
Total purchase consideration | $ | 778,788 | ||
Allocation of consideration to assets acquired and liabilities assumed: | ||||
Current assets, net | $ | 154,254 | ||
Property, plant, and equipment | 76,580 | |||
Intangible assets | 211,600 | |||
Goodwill | 381,599 | |||
Other non-current assets | 31,570 | |||
Other non-current liabilities | (76,815 | ) | ||
$ | 778,788 |
Included in IXYS’s current assets, net was approximately $49.1 million of receivables. All IXYS goodwill, other assets and liabilities were recorded in the Electronics segment and primarily reflected in the Americas and European geographic areas. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining IXYS’s products and technology with the Company’s existing electronics product portfolio. Goodwill resulting from the IXYS acquisition is not expected to be deductible for tax purposes.
Included in the Company’s Condensed Consolidated Statements of Net Income for the three months ended March 31, 2018 are net sales of approximately $86.3 million and a loss before income taxes of approximately $17.8 million since the January 17, 2018 acquisition of IXYS. The Company recognized approximately $5.9 million of stock compensation expense related to IXYS stock options converted to Littelfuse stock options during the three months ended March 31, 2018 of which $4.5 million was recognized immediately as it related to prior services periods.
As required by purchase accounting rules, the Company recorded a $36.9 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up is being amortized as a non-cash charge to cost of goods sold during the first and second quarters of 2018, as the acquired inventory is sold, and reflected as other non-segment costs. During the three months ended March 31, 2018, the Company recognized a charge of $17.9 million for the amortization of this fair value inventory step-up.
During the three months ended March 31, 2018, the Company incurred approximately $10.2 million of legal and professional fees related to this acquisition which were primarily recognized as selling, general, and administrative expenses. These costs were reflected as other non-segment costs.
2017 Acquisitions
U.S. Sensor
On July 7, 2017, the Company acquired the assets of U.S. Sensor Corporation (“U.S. Sensor”). The acquisition purchase price of $24.3 million, net of the finalization of an income tax gross up which was settled in the fourth quarter of 2017, was funded with available cash. The acquired business expands the Company’s existing sensor portfolio in several key electronics and industrial end markets. U.S. Sensor manufactures a variety of high quality negative temperature coefficient thermistors as well as thermistor probes and assemblies. Product lines also include thin film platinum resistance temperature detectors (“RTDs”) and RTD assemblies.
The following table summarizes the purchase price allocation of the fair value of assets acquired and liabilities assumed in the U.S. Sensor acquisition:
(in thousands) | Purchase Price Allocation | |||
Total purchase consideration: | ||||
Cash | $ | 24,340 | ||
Allocation of consideration to assets acquired and liabilities assumed: | ||||
Current assets, net | $ | 4,635 | ||
Patented and unpatented technologies | 1,090 | |||
Trademarks and tradenames | 200 | |||
Non-compete agreement | 50 | |||
Customer relationships | 2,830 | |||
Goodwill | 16,075 | |||
Current liabilities | (540 | ) | ||
$ | 24,340 |
Included in U.S. Sensor’s current assets, net was approximately $1.5 million of receivables. All U.S. Sensor goodwill, other assets and liabilities were recorded in the Electronics segment and reflected in the United States geographic area. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining U.S. Sensor’s products and technology with the Company’s existing electronics product portfolio. Goodwill for the above acquisition is expected to be deductible for tax purposes.
As required by purchase accounting rules, the Company recorded a $1.6 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up was amortized as a non-cash charge to cost of goods sold during the third quarter of 2017, as the acquired inventory was sold, and reflected as other non-segment costs.
Monolith
In December 2015, the Company invested $3.5$3.5 million in the preferred stock of Monolith Semiconductor Inc. (“Monolith”), a U.S. start-up companyCompany developing silicon carbide technology, which represented approximately 12% of the common stock of Monolith on an as-converted basis. The Company accounted for its investment in Monolith under the cost method with any changes in value recorded in other comprehensive income. The value of the Monolith investment was $3.5$3.5 million at December 31, 2016.
On February 28, 2017, pursuant to a Securities Purchase Agreement between the Company and the stockholders of Monolith (“Securities Purchase Agreement”) and conditioned on Monolith achieving a product development milestone and other provisions, the Company acquired approximately 62% of the outstanding common stock of Monolith for $15$15 million. The Securities Purchase Agreement includes provisions whereby the Company will acquire the remaining outstanding stock of Monolith (“non-controlling interest”) at a time or times based on Monolith meeting certain technical and sales targets. During the first quarter of 2018, Monolith met the next set of technical and sales targets. As a result, and pursuant to the Securities Purchase Agreement, in April 2018 the Company acquired an additional 19% of the outstanding common stock of Monolith for $5 million. Consideration for the additional investment(s)purchase of the remaining 19% outstanding common stock will range from $1.0be either $0.5 million to $10or $5 million, based on Monolith meeting the remaining technical and sales targets, and will be paid no later than June 30, 2019.
The additional investment, in the first quarter of 2017, resulted in the Company gaining control of Monolith and was accounted for as a step-acquisition with the fair value of the original investment immediately before the acquisition estimated to be approximately $3.5$3.5 million. As the fair value of the investment immediately prior to the transaction equaled the carrying value, there was no impact on the Company’s consolidated statementConsolidated Statements of net income.Net Income. As the Securities Purchase Agreement includes an obligation of the Company to mandatorily redeem the non-controlling interest for cash, the fair value of the non-controlling interest was recognized as a liability on the Company’s consolidated balance sheet.Consolidated Balance Sheets. The original investment of $3.5 million, additional cash consideration of $14.2 million (net of cash acquired), and the non-cash consideration of the fair value of the commitment to purchase the non-controlling interest of $9.0 million resulted in a purchase price of $26.7 million. Changes in the fair value of the non-controlling interest are recognized in the Company’s Consolidated Statements of Net Income.
Commencing March 1, 2017, Monolith was reflected as a consolidated subsidiary within the Company’s consolidated financial statements.Consolidated Financial Statements. Had the acquisition occurred as of January 1,2017, the impact on the Company’s consolidated results of operations would not have been material.
The following table summarizes the preliminary purchase price allocation of the fair value of assets acquired and liabilities assumed in the Monolith acquisition:
(in thousands) | Purchase Price Allocation | Purchase Price Allocation | ||||||
Total purchase consideration: | ||||||||
Original investment | $ | 3,500 | $ | 3,500 | ||||
Cash, net of cash acquired | 14,172 | 14,172 | ||||||
Fair value of commitment to purchase non-controlling interest | 9,000 | |||||||
Non-cash, fair value of commitment to purchase non-controlling interest | 9,000 | |||||||
Total purchase consideration | $ | 26,672 | $ | 26,672 | ||||
Allocation of consideration to assets acquired and liabilities assumed: | ||||||||
Current assets, net | $ | 891 | $ | 891 | ||||
Property, plant, and equipment | 789 | 789 | ||||||
Patented and unpatented technologies | 6,720 | 6,720 | ||||||
Non-compete agreement | 140 | 140 | ||||||
Goodwill | 20,641 | 20,641 | ||||||
Current liabilities | (639 | ) | (639 | ) | ||||
Other non-current liabilities | (1,870 | ) | (1,870 | ) | ||||
$ | 26,672 | $ | 26,672 |
Included in Monolith’s current assets, net was approximately $0.7 million of receivables. All Monolith goodwill, other assets and liabilities were recorded in the Electronics segment and reflected in the United States geographic area. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining Monolith’s products and technology with the Company’s existing electronics product portfolio. Goodwill for the above acquisition is not expected to be deductible for tax purposes.
ON Portfolio
On August 29, 2016, the Company acquired certain assets of select businesses (the “ON Portfolio”) of ON Semiconductor Corporation for $104.0 million. The Company funded the acquisition with available cash and proceeds from its credit facility. The acquired business, which is included in the Electronics segment, consists of a product portfolio that includes transient voltage suppression (“TVS”) diodes, switching thyristors and insulated gate bipolar transistors (“IGBTs”) for automotive ignition applications. The acquisition expands the Company’s offerings in power semiconductor applications as well as increases its presence in the automotive electronics market. The ON Portfolio products have strong synergies with the Company’s existing circuit protection business and will strengthen its channel partnerships and customer engagement.
The following table summarizes the preliminary purchase price allocation of the fair value of assets acquired and liabilities assumed in the ON Portfolio acquisition:
(in thousands) | Purchase Price Allocation | |||
Total purchase consideration: | ||||
Cash | $ | 104,000 | ||
Allocation of consideration to assets acquired and liabilities assumed: | ||||
Current assets, net | $ | 4,816 | ||
Customer relationships | 31,800 | |||
Patented and unpatented technologies | 8,800 | |||
Non-compete agreement | 2,500 | |||
Goodwill | 56,084 | |||
$ | 104,000 |
All the ON Portfolio business goodwill and other assets were recorded in the Electronics segment and are reflected in the Americas and Europe geographic areas. The customer relationships are being amortized over 13.5 years. The patented and unpatented technologies are being amortized over 6-8.5 years. The non-compete agreement is being amortized over 4 years. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining the ON Portfolio products with the Company’s existingpower semiconductor product portfolio. $7.3 million of goodwill for the above acquisition is expected to be deductible for tax purposes.
As required by purchase accounting rules, the Company recorded a $0.7 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. All of the step-up was amortized as a non-cash charge to cost of goods sold during 2016, as the acquired inventory was sold, and reflected as other non-segment costs.
Menber’s
On April 4, 2016, the Company completed the acquisition of Menber’s S.p.A. (“Menber’s”) headquartered in Legnago, Italy for $19.2 million, net of acquired cash and after settlement of a working capital adjustment. The Company funded the acquisition with cash on hand and borrowings under the Company’s revolving credit facility. The acquired business is part of the Company's commercial vehicle product business within the Automotive segment and specializes in the design, manufacturing, and selling of manual and electrical high current switches and trailer connectors for commercial vehicles. The acquisition expands the Company’s commercial vehicle products business globally.
The following table summarizes the preliminary purchase price allocation of the fair value of assets acquired and liabilities assumed in the Menber’s acquisition:
(in thousands) | Purchase PriceAllocation | |||
Total purchase consideration: | ||||
Cash, net of acquired cash | $ | 19,162 | ||
Preliminary allocation of consideration to assets acquired and liabilities assumed: | ||||
Current assets, net | $ | 12,919 | ||
Property, plant, and equipment | 1,693 | |||
Customer relationships | 3,050 | |||
Patented and unpatented technologies | 224 | |||
Trademarks and tradenames | 1,849 | |||
Goodwill | 8,091 | |||
Current liabilities | (7,220 | ) | ||
Other non-current liabilities | (1,444 | ) | ||
$ | 19,162 |
All Menber’s goodwill and other assets and liabilities were recorded in the Automotive segment and reflected in the Europe geographic area. The customer relationships are being amortized over 10 years. The patented and unpatented technologies are being amortized over 5 years. The trademarks and tradenames are being amortized over 10 years. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining Menber’s products with the Company’s existing automotive product portfolio. Goodwill for the above acquisition is not expected to be deductible for tax purposes.
As required by purchase accounting rules, the Company recorded a $0.2 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up was amortized as a non-cash charge to cost of goods sold during 2016, as the acquired inventory was sold, with the charge reflected as other non-segment costs.
PolySwitch
On March 25, 2016, the Company acquired 100% of the circuit protection business (“PolySwitch”) of TE Connectivity Ltd. for $348.3 million, net of acquired cash and after settlement of certain post-closing adjustments. At April 1, 2017, $344.5 million of the $348.3 million purchase price has been paid with the remaining consideration expected to be paid in the second quarter of 2017. The Company funded the acquisition with available cash on hand and borrowings under the Company’s revolving credit facility. The PolySwitch business, which is split between the Automotive and Electronics segments, has a leading position in polymer based resettable circuit protection devices, with a strong global presence in the automotive, battery, industrial, communications and mobile computing markets. PolySwitch has manufacturing facilities in Shanghai and Kunshan, China and Tsukuba, Japan. The acquisition allows the Company to strengthen its global circuit protection product portfolio, as well as strengthen its presence in the automotive electronics and battery end markets. The acquisition also significantly increases the Company’s presence in Japan.
The following table summarizes the purchase price allocation of the fair value of assets acquired and liabilities assumed in the PolySwitch acquisition:
(in thousands) | Purchase PriceAllocation | |||
Total purchase consideration: | ||||
Original consideration | $ | 350,000 | ||
Post closing consideration adjustment received | (1,708 | ) | ||
Acquired cash | (3,810 | ) | ||
Acquired cash to be returned to seller | 3,810 | |||
Total purchase consideration | $ | 348,292 | ||
Allocation of consideration to assets acquired and liabilities assumed: | ||||
Current assets, net | $ | 60,228 | ||
Property, plant, and equipment | 51,613 | |||
Land lease | 4,290 | |||
Patented and unpatented technologies | 56,425 | |||
Customer relationships | 39,720 | |||
Goodwill | 165,088 | |||
Other long-term assets | 11,228 | |||
Current liabilities | (35,280 | ) | ||
Other non-current liabilities | (5,020 | ) | ||
$ | 348,292 |
All PolySwitch goodwill and other assets and liabilities were recorded in the Electronics and Automotive segments and reflected in all geographic areas. The customer relationships are being amortized over 15 years. The patented and unpatented technologies are being amortized over 10 years. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining PolySwitch products with the Company’s existing automotive and electronics product portfolio. $103.8 million and $61.3 million of the goodwill for the above acquisition has been assigned to the Electronics and Automotive segments, respectively, with $64.9 million expected to be deductible for tax purposes.
As required by purchase accounting rules, the Company recorded a $6.9 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up was amortized as a non-cash charge to cost of goods sold during the second quarter of 2016, as the acquired inventory was sold, and reflected as other non-segment costs.
Pro Forma Results
The following table summarizes, on a pro forma basis, the combined results of operations of the Company and the acquired PolySwitch and the ON Portfolio businesses for the three months ended April 2, 2016IXYS as though the acquisitionsacquisition had occurred as of January 3, 2016. 1, 2017. The Company has not included pro forma results of operations for Menber’sU.S. Sensor or Monolith as these results were not material to the Company. The pro forma amounts presented are not necessarily indicative of either the actual consolidated results had the PolySwitch or ON Portfolio acquisitionsIXYS acquisition occurred as of January 3, 2016 1, 2017 or of future consolidated operating results.
(in thousands) | Three Months Ended April 2, 2016 | |||||||||||
For the Three Months Ended | ||||||||||||
(in thousands, except per share amounts) | March 31, 2018 | April 1, 2017 | ||||||||||
Net sales | $ | 268,775 | $ | 434,526 | $ | 368,813 | ||||||
Income before income taxes | 34,081 | 81,924 | 11,021 | |||||||||
Net income | 27,508 | 63,933 | 17,462 | |||||||||
Net income — basic | 1.23 | |||||||||||
Net income — diluted | 1.22 | |||||||||||
Net income per share — basic | 2.57 | 0.70 | ||||||||||
Net income per share — diluted | 2.53 | 0.69 |
Pro forma results presented above primarily reflect: (i) incremental depreciation relating to fair value adjustments to property, plant, and equipment; (ii) amortization adjustments relating to fair value estimates of intangible assets; (iii) incremental interest expense on assumed indebtedness; and (iv) additional cost of goods sold relating toreflect the capitalization of gross profit as part of purchase accounting recognized for purposes of the pro forma as if it was recognized during the Company’s first quarter of 2016. Pro forma adjustments described above have been tax affected using the Company's effective rate during the respective periods.following adjustments:
For the Three Months Ended | ||||||||
(in thousands) | March 31, 2018 | April 1, 2017 | ||||||
Amortization(a) | $ | 1,902 | $ | (6,276 | ) | |||
Depreciation | — | (94 | ) | |||||
Transaction costs(b) | 9,976 | (9,976 | ) | |||||
Amortization of inventory step-up(c) | 17,896 | (22,156 | ) | |||||
Stock compensation(d) | 4,479 | (5,013 | ) | |||||
Interest expense(e) | — | (2,582 | ) | |||||
Income tax impact of above items | (7,701 | ) | 15,374 |
(a) | The amortization adjustment for the three months ended March 31, 2018 primarily reflects the reduction of amortization expense in the period related to the Order backlog intangible asset. The Order backlog has a useful life of twelve months and will be fully amortized in the fiscal 2017 pro forma results. The amortization adjustment for the three months ended April 1, 2017 reflects incremental amortization resulting for the measurement of intangibles at their fair values. |
(b) | The transaction cost adjustments reflect the reversal of certain bank and attorney fees from the three months ended March 31, 2018 and recognition of those fees during the three months ended April 1, 2017. |
(c) | The amortization of inventory step-up adjustment reflects the reversal of the amount recognized during the three months ended March 31, 2018 and the recognition of a full quarter of the amortization during the three months end April 1, 2017. The inventory step-up is being amortized over five months as the inventory is sold. |
(d) | The stock compensation adjustment reflects the reversal of the portion of stock compensation for IXYS stock options that were converted to Littelfuse stock options and expensed immediately during the three months ended March 31, 2018. The adjustment for the three months ended April 1, 2017 reflect the incremental stock compensation for the converted stock options. |
(e) | The interest expense adjustment reflects incremental interest expense related to the financing of the transaction. |
3. Inventories
The components of inventories at April 1,March 31, 2018 and December 30, 2017 and December 31, 2016 are as follows:
(in thousands) | April 1, 2017 | December 31,2016 | March 31, 2018 | December 30, 2017 | ||||||||||||
Raw materials | $ | 33,003 | $ | 32,231 | $ | 66,259 | $ | 39,030 | ||||||||
Work in process | 24,200 | 23,354 | 96,826 | 27,454 | ||||||||||||
Finished goods | 61,108 | 58,478 | 100,884 | 74,305 | ||||||||||||
Total | $ | 118,311 | $ | 114,063 | $ | 263,969 | $ | 140,789 |
4. Goodwill and Other Intangible Assets
The amounts for goodwill and changes in the carrying value by segment for the three months ended March 31, 2018 are as follows:
(in thousands) | Electronics | Automotive | Industrial | Total | ||||||||||||
As of December 30, 2017 | $ | 278,959 | $ | 135,829 | $ | 38,626 | $ | 453,414 | ||||||||
Additions(a) | 381,599 | — | — | 381,599 | ||||||||||||
Currency translation | 2,455 | 3,195 | (89 | ) | 5,561 | |||||||||||
As of March 31, 2018 | $ | 663,013 | $ | 139,024 | $ | 38,537 | $ | 840,574 |
(a) | The additions resulted from the acquisition of IXYS. |
The components of other intangible assets at March 31, 2018 are as follows:
(in thousands, except weighted average useful life) | Weighted Average Useful Life | Gross Carrying Value |
Accumulated Amortization |
Net Book Value | ||||||||||||
Patents, licenses and software | 10.6 | $ | 193,622 | $ | 64,012 | $ | 129,610 | |||||||||
Distribution network | 12.6 | 44,473 | 33,434 | 11,039 | ||||||||||||
Customer relationships, trademarks, and tradenames | 18.1 | 314,452 | 59,591 | 254,861 | ||||||||||||
Order backlog | 1.0 | 12,400 | 2,504 | 9,896 | ||||||||||||
Total | $ | 564,947 | $ | 159,541 | $ | 405,406 |
During the three months ended March 31, 2018, the Company recorded additions to other intangible assets of $211.6 million, related to the IXYS acquisition, the components of which were as follows:
(in thousands, except weighted average useful life) | Weighted Average Useful Life |
Amount | ||||||
Patents, licenses and software | 8.0 | $ | 51,500 | |||||
Customer relationships, trademarks,and tradenames | 17.2 | 147,700 | ||||||
Order backlog | 1.0 | 12,400 | ||||||
Total | $ | 211,600 |
During the three months ended March 31, 2018 and April 1, 2017, the Company recorded amortization expense of $12.0 million and $5.9 million, respectively for intangible assets with definite lives.
Estimated annual amortization expense related to intangible assets with definite lives as of March 31, 2018 is as follows:
(in thousands) | Amount | |||
2018 | $ | 54,938 | ||
2019 | 42,005 | |||
2020 | 41,747 | |||
2021 | 39,928 | |||
2022 | 38,918 | |||
2023 and thereafter | 197,914 | |||
Total | $ | 415,450 |
45. Debt
The carrying amounts of debt at April 1,March 31, 2018 and December 30, 2017 and December 31, 2016 are as follows:
(inthousands) | April 1, 2017 | December 31, 2016 | March 31, 2018 | December 30, 2017 | ||||||||||||
Revolving credit facility | $ | — | $ | 112,500 | ||||||||||||
Term loan | 118,750 | 120,313 | ||||||||||||||
Entrusted loan | 2,903 | 3,522 | ||||||||||||||
Revolving Credit Facility | $ | 3,000 | $ | — | ||||||||||||
Term Loan | 195,000 | 122,500 | ||||||||||||||
Euro Senior Notes, Series A due 2023 | 125,616 | 122,313 | 144,041 | 139,623 | ||||||||||||
Euro Senior Notes, Series B due 2028 | 101,996 | 99,314 | 116,956 | 113,369 | ||||||||||||
USD Senior Notes, Series A due 2022 | 25,000 | — | ||||||||||||||
USD Senior Notes, Series B due 2027 | 100,000 | — | ||||||||||||||
U.S. Senior Notes, Series A due 2022 | 25,000 | 25,000 | ||||||||||||||
U.S. Senior Notes, Series B due 2027 | 100,000 | 100,000 | ||||||||||||||
U.S. Senior Notes, Series A due 2025 | 50,000 | — | ||||||||||||||
U.S. Senior Notes, Series B due 2030 | 125,000 | — | ||||||||||||||
Other | 111 | — | ||||||||||||||
Unamortized debt issuance costs | (3,742 | ) | (3,820 | ) | (5,560 | ) | (4,881 | ) | ||||||||
Total debt | 470,523 | 454,142 | 753,548 | 495,611 | ||||||||||||
Less: Current maturities | (6,250 | ) | (6,250 | ) | (10,111 | ) | (6,250 | ) | ||||||||
Total long-term debt | $ | 464,273 | $ | 447,892 | $ | 743,437 | $ | 489,361 |
Revolving Credit Facility / Term Loan
On March 4, 2016, the Company entered into a new five year-year credit agreement (“Credit Agreement”) with a group of lenders for up to $700.0$700.0 million. The new credit agreement consistsCredit Agreement consisted of an unsecured revolving credit facility (“Revolving Credit Facility”) of $575.0$575.0 million and an unsecured term loan credit facility (“Term Loan”) of up to $125.0$125.0 million. In addition, the Company hashad the ability, from time to time, to increase the size of the revolving credit facilityRevolving Credit Facility and the term loan facilityTerm Loan by up to an additional $150.0$150.0 million, in the aggregate, in each case in minimum increments of $25.0$25.0 million, subject to certain conditions and the agreement of participating lenders. For the term loan credit facility,Term Loan, the Company was required to make quarterly principal payments of $1.6 million through March 31, 2018 and $3.1 million from June 30, 2018 through December 31, 2020 with the remaining balance due on March 4, 2021.
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 includes 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 may 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 is required to make quarterly principal payments of $1.61.25% of the original term loan ($2.5 million with the second advance on January 16, 2018) through March 31, 2018 and $3.1 million from June 30, 2018 through December 31, 2020maturity, with the remaining balance due on March 4, 2021.October 13, 2022.
Outstanding borrowings under the credit agreementCredit Agreement bear interest, at the Company’s option, at either LIBOR, fixed for interest periods of one, two, three or six month-month periods, plus 1.00% to 2.00%, or at the bank’s Base Rate, as defined, plus 0.00% to 1.00%, based upon the Company’s Consolidated Leverage Ratio, as defined. The Company is also required to pay commitment fees on unused portions of the credit agreement ranging from 0.15% to 0.30%0.25%, based on the Consolidated Leverage Ratio, as defined. The credit agreement includes 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 2.48%3.13% at April 1, 2017.March 31, 2018.
As of April 1, 2017, March 31, 2018, the Company had $0.1$0.1 million outstanding in letters of credit and had available $574.9$696.9 million of borrowing capacity under the revolving credit facility.Revolving Credit Facility. At April 1, 2017, March 31, 2018, the Company was in compliance with all covenants under the credit agreement.Credit Agreement.
Senior Notes
On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold €212€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€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€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$125 million aggregate principal amount of senior notes in two series. On February 15, 2017, $25$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$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 together2027”) 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 2022 and 2027, the “Senior Notes”) were funded. Interest on the U.S. Senior Notes due 2025 and 2030will be payable semiannually on February 15 and August 15, commencing on August 15, 2017.2018.
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 April 1, 2017, March 31, 2018, the Company was in compliance with all covenants under the revolving credit facility and the Senior Notes.
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.
Entrusted Loan
During 2014, the Company entered into an entrusted loan arrangement (“Entrusted Loan”) ofChinese renminbi 110.0 million (approximately U.S. $17.9 million) between two of its China legal entities, Littelfuse Semiconductor (“Wuxi”) Company (the “lender”) and Suzhou Littelfuse OVS Ltd. (the “borrower”), utilizing Bank of America, N.A., Shanghai Branch as agent. Direct borrowing and lending between two commonly owned commercial entities was strictly forbidden at the time under China’s regulations requiring the use of a third party agent to enable loans between Chinese legal entities. As a result, the Entrusted Loan is reflected as both a long-term asset and long-term debt on the Company’s Consolidated Balance Sheets and is reflected in the investing and financing activities in its Consolidated Statements of Cash Flows. Interest expense and interest income will be recorded between the lender and borrower with no net impact on the Company’s Consolidated Statements of Income since the amounts will be offsetting. The loan interest rate per annum is 5.25%. The Entrusted Loan is used to finance the operation and working capital needs of the borrower and matures in November 2019. The balance of the Entrusted Loan wasChinese renminbi 20.0 million (approximately U.S. $2.9 million) at April 1, 2017.
56. Fair Value of Assets and Liabilities
Applicable accounting literature establishes a hierarchy for inputs used in measuringFor assets and liabilities measured at fair value that maximizes the useon a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable inputs and minimizes the use of unobservable inputs by requiring thatis used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect the most observable inputs be used when available. Applicable accounting literature defines levels within the hierarchyCompany’s assumptions about valuation based on the reliability ofbest information available in the circumstances. Depending on the inputs, the Company classifies each fair value measurement as follows:
Level 1—1—Valuations based on unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2—2—Valuations based upon quoted prices forsimilar 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—Valuationsbased3—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.
Investments in Equity Securities
Investments in equity securities listed on a national market or exchange are valued at the last sales price and are classified within Level 1 of the valuation hierarchy.
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.
There were no changes during the quarter ended April 1, 2017 March 31, 2018 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of April 1,March 31, 2018 and December 30, 2017, and December 31, 2016, 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 31, 2018:
Fair Value Measurements Using | ||||||||||||||||
(in thousands) | Quoted Prices in | Significant | Significant | Total | ||||||||||||
Investments in equity securities | $ | 14,754 | $ | — | $ | — | $ | 14,754 | ||||||||
Mutual funds | 9,852 | — | — | 9,852 |
The following table presents assets measured at fair value by classification within the fair value hierarchy as of April 1,December 30, 2017:
Fair Value Measurements Using | ||||||||||||||||
(inthousands) | Quoted Prices in | Significant | Significant | Total | ||||||||||||
Investment in Polytronics | $ | 11,660 | $ | — | $ | — | $ | 11,660 |
Fair Value Measurements Using | ||||||||||||||||
(in thousands) | Quoted Prices in | Significant | Significant | Total | ||||||||||||
Investments in equity securities | $ | 10,993 | $ | — | $ | — | $ | 10,993 | ||||||||
Mutual funds | 7,962 | — | — | 7,962 |
The following table presents assets measured at fair value by classification within the fair value hierarchy as of December 31, 2016:
Fair Value Measurements Using | ||||||||||||||||
(inthousands) | Quoted Prices in | Significant | Significant | Total | ||||||||||||
Investment in Polytronics | $ | 10,435 | $ | — | $ | — | $ | 10,435 |
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.Thebasis. 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 April 1,March 31, 2018 and December 30, 2017, and December 31, 2016, 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 April 1,September 30, 2017 and December 31, 2016 arewere as follows:
April 1, 2017 | December 31, 2016 | March 31, 2018 | December 30, 2017 | |||||||||||||||||||||||||||||
(inthousands) | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||||||||||||||||||||||
Euro Senior Notes, Series A due 2023 | $ | 125,616 | $ | 125,251 | $ | 122,313 | $ | 122,586 | $ | 144,041 | $ | 142,038 | $ | 139,623 | $ | 138,294 | ||||||||||||||||
Euro Senior Notes, Series B due 2028 | 101,996 | 101,037 | 99,314 | 99,230 | 116,956 | 113,953 | 113,369 | 111,579 | ||||||||||||||||||||||||
USD Senior Notes, Series A due 2022 | 25,000 | 24,817 | — | — | 25,000 | 24,301 | 25,000 | 24,737 | ||||||||||||||||||||||||
USD Senior Notes, Series B due 2027 | 100,000 | 99,208 | — | — | 100,000 | 96,475 | 100,000 | 99,992 | ||||||||||||||||||||||||
USD Senior Notes, Series A due 2025 | 50,000 | 48,081 | — | — | ||||||||||||||||||||||||||||
USD Senior Notes, Series B due 2030 | 125,000 | 118,303 | — | — |
67. Benefit Plans
The Company has company-sponsored defined benefit pension plans covering employees in the U.K., Germany, the Philippines, China, Japan, 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 costs, expected return on plan assets, and amortization, net within Other (income) expense, net in the Condensed Consolidated Statements of Net Income. The components of net periodic benefit cost for the three months ended March 31, 2018 and April 1, 2017 and April 2, 2016 arewere as follows:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
(inthousands) | April 1, 2017 | April 2, 2016 | ||||||||||||||
(in thousands) | March 31, 2018 | April 1, 2017 | ||||||||||||||
Components of net periodic benefit cost: | ||||||||||||||||
Service cost | $ | 408 | $ | 332 | $ | 533 | $ | 408 | ||||||||
Interest cost | 360 | 497 | 501 | 360 | ||||||||||||
Expected return on plan assets | (476 | ) | (520 | ) | (540 | ) | (476 | ) | ||||||||
Amortization of prior service (credit) | 84 | 73 | ||||||||||||||
Total cost of the plan | 376 | 382 | ||||||||||||||
Expected plan participants’ contribution | — | — | ||||||||||||||
Amortization, net | 74 | 84 | ||||||||||||||
Net periodic benefit cost | $ | 376 | $ | 382 | $ | 568 | $ | 376 |
The Company expects to make approximately $2.3 million of cash contributions to its pension plans in 2018.
8. Shareholders’ Equity
The expected return on pension assets is 4.5% and 4.9%following table sets forth the changes in 2017 and 2016, respectively.shareholders’ equity for the three months ended March 31, 2018:
(in thousands) | Littelfuse, Inc. Shareholders’ Equity | Non- controlling Interest | Total | |||||||||
Balance at December 30, 2017 | $ | 927,419 | $ | 137 | $ | 927,556 | ||||||
Net income | 36,029 | — | 36,029 | |||||||||
Other comprehensive income | (279 | ) | — | (279 | ) | |||||||
Stock-based compensation | 8,714 | — | 8,714 | |||||||||
Withheld shares on restricted share units for withholding taxes | (2,758 | ) | — | (2,758 | ) | |||||||
Stock options exercised | 9,609 | — | 9,609 | |||||||||
Issuance of common stock(a) | 472,301 | — | 472,301 | |||||||||
Cash dividends paid ($0.37 per share) | (9,198 | ) | — | (9,198 | ) | |||||||
Non-controlling interest | — | — | — | |||||||||
Balance at March 31, 2018 | $ | 1,441,837 | $ | 137 | $ | 1,441,974 |
(a) The issuance of common stock (2,092,491 shares) during the three months ended March 31, 2018 relates to the acquisition of IXYS. See Note 2,Acquisitions for further discussion.
7. Shareholders’ Equity
Accumulated Other Comprehensive Income (Loss) (“AOCI”): The following table sets forth the changes in the components of AOCIAccumulated Other Comprehensive Income (Loss) by component for the three months ended April 1, 2017:March 31, 2018:
(inthousands) | Pension and postretirement liability and reclassification adjustments(a) | Unrealized gains on investments | Foreign currency translation adjustment | Accumulated other comprehensive income (loss) | ||||||||||||
Balance at December 31, 2016 | $ | (11,983 | ) | $ | 10,769 | $ | (73,365 | ) | $ | (74,579 | ) | |||||
Activity in the period | (282 | ) | 947 | 4,962 | 5,627 | |||||||||||
Balance at April 1, 2017 | $ | (12,265 | ) | $ | 11,716 | $ | (68,403 | ) | $ | (68,952 | ) |
(in thousands) | Pension and postretirement liability and reclassification adjustments (a) | Unrealized gain/(loss) on investments | Foreign currency translation adjustment | Accumulated other comprehensive income (loss) | ||||||||||||
Balance at December 30, 2017 | $ | (10,836 | ) | $ | 9,795 | $ | (62,627 | ) | $ | (63,668 | ) | |||||
Cumulative effect adjustment (b) | — | (9,795 | ) | — | (9,795 | ) | ||||||||||
Activity in the period | (3 | ) | — | (276 | ) | (279 | ) | |||||||||
Balance at March 31, 2018 | $ | (10,839 | ) | $ | — | $ | (62,903 | ) | $ | (73,742 | ) |
(a) The balances at April 1,March 31, 2018 and December 30, 2017 and December 31, 2016 are net of taxes of $1.2$0.2 million and $1.1$1.4 million, respectively.
(b) The Company adopted ASU 2016-01 on December 31, 2018 on a modified retrospective basis, recognizing the cumulative effect as a $9.8 million increase to retained earnings. See Note 1,Summary of Significant Accounting Policies and Other Information, for further discussion.
8.
9. Income Taxes
The effective tax rate for the first quarter of 20172018 was 18.0%19.3% compared to an effective tax rate of 28.8%18.0% in the first quarter of 2016.2017. The effective tax ratesrate for both the first quarter of 2017 and the first quarter of 2016 are was lower than the then applicable 35% U.S. statutory tax rate primarily due to income earned in lower tax jurisdictions. Further,
On December 22, 2017, the effectiveU.S. enacted legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). Among other things, the Tax Act reduces the U.S. corporate federal income tax rate from 35% to 21%, adds base broadening provisions which limit deductions and address excessive international tax planning, imposes a one-time tax (the “Toll Charge”) on accumulated earnings of certain non-U.S. subsidiaries and enables repatriation of earnings of non-U.S. subsidiaries free of U.S. federal income tax. Other than the Toll Charge (which, except for the first quarter of 2017 was lower than the effective tax rate for the first quarter of 2016 primarily due to a larger amount of income earned in lower tax jurisdictions in the first quarter of 2017 comparedIXYS impact, is applicable to the first quarter of 2016.Company for 2017), the provisions will generally be applicable to the Company in 2018 and beyond.
In accordance with the guidance provided in SEC Staff Accounting Bulletin (“SAB”) No.118, in the fourth quarter of 2017 the Company recorded a charge of $47 million as a provisional reasonable estimate of the impact of the Tax Act, including $49 million for the Toll Charge net of $2 million for other net tax benefits. The Company did not adjust the provisional reasonable estimate in the first quarter of 2018. In addition, the Company recorded a preliminary estimate of $10 million for the toll charge associated with the acquisition of IXYS. This adjustment was reflected in the opening balance sheet as an increase to goodwill and other long-term liabilities. The Company is continuing to analyze the Tax Act and plans to finalize the estimate within the measurement period outlined in SAB No.118. The final charge may differ from the provisional reasonable estimate if provisions of the Tax Act, and their interaction with other provisions of the U.S. Internal Revenue Code, are interpreted differently than interpretations made by the Company in determining the estimate, whether through issuance of administrative guidance, or through further review of the Tax Act by the Company and its advisors. Aside from these interpretation issues, the final charge may differ from the provisional reasonable estimate due to refinements of accumulated non-U.S. earnings and tax pool data.
The Company recognized deferred tax liabilities of $12.0 million ($11.8 million for non-U.S. taxes and $0.2 million for U.S. state taxes) as of December 30, 2017 related to taxes on certain non-U.S. earnings which are not considered to be permanently reinvested. Some of these taxes may provide a U.S. federal income tax benefit as a foreign tax credit. However, due to uncertainty in regard to the Tax Act’s provisions, no such tax benefit was recorded as of December 30, 2017, and no such tax benefit was recorded in the first quarter of 2018. The Company will reconsider this provisional conclusion when it finalizes its preliminary reasonable estimate of the impact of the Tax Act, based upon interpretations and administrative guidance as of that time.
One of the base broadening provisions of the Tax Act is commonly referred to as the “GILTI” provisions. In accordance with guidance issued by the FASB staff, the Company has not adopted an accounting policy for GILTI. Thus, deferred taxes were computed without consideration of the possible future impact of the GILTI provisions. The Company intends to adopt an accounting policy for GILTI within the measurement period outlined in SAB 118. Although such an accounting policy has not been adopted, the Company considered GILTI when determining the current portion of income tax expense recorded for the first quarter of 2018.
Although certain administrative guidance has been issued, the appropriate application of many provisions of the Tax Act remain uncertain. The Company used its best judgement as to the application of these provisions in determining its income tax expense for the first quarter of 2018.
910. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
(inthousands, except per share amounts) | April 1, 2017 | April 2, 2016 | ||||||||||||||
(in thousands, except per share amounts) | March 31, 2018 | April 1, 2017 | ||||||||||||||
Numerator: | ||||||||||||||||
Net income as reported | $ | 38,891 | $ | 19,289 | $ | 36,029 | $ | 38,891 | ||||||||
Denominator: | ||||||||||||||||
Weighted average shares outstanding | ||||||||||||||||
Basic | 22,748 | 22,438 | 24,339 | 22,748 | ||||||||||||
Effect of dilutive securities | 241 | 183 | 436 | 241 | ||||||||||||
Diluted | 22,989 | 22,621 | 24,775 | 22,989 | ||||||||||||
Earnings Per Share: | ||||||||||||||||
Basic earnings per share | $ | 1.71 | $ | 0.86 | $ | 1.48 | $ | 1.71 | ||||||||
Diluted earnings per share | $ | 1.69 | $ | 0.85 | $ | 1.45 | $ | 1.69 |
No potential shares of common stock attributable to stock options were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the three months ended March 31, 2018 and April 1, 2017, while 21,888 shares were excludedrespectively.
11. Related Party Transactions
As a result of the Company’s acquisition of IXYS, the Company has equity ownerships 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. During the three months ended March 31, 2018, the Company recorded revenues of $0.1 million from sales of products to Powersem for use as components in their products. During the three months ended March 31, 2018, the Company purchased $1.1 million of products from Powersem. At March 31,2018, the accounts receivable balance from Powersem was $0.1 million and the accounts payable balance to Powersem was $0.3 million.
EB Tech Ltd.: The Company owns approximately 20% of the outstanding equity of EB Tech Ltd. (“EB Tech”), a company with expertise in radiation technology based in South Korea. During the three months ended March 31, 2018 EB Tech rendered processing services for the Company totaling approximately $0.1 million. As of March 31,2018, the Company’s accounts payable balance to EB Tech was immaterial.
Automated Technology, Inc.: The Company owns approximately 24% of the outstanding common shares of Automated Technology, Inc (“ATEC”), a supplier located in the Philippines that provides assembly and test services. During the three months ended April 2, 2016.March 31, 2018, ATEC rendered assembly and test services to the Company totaling approximately $2.4 million. As of March 31,2018, the Company’s accounts payable balance to ATEC was $0.8 million.
102. 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. Manufacturing, 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: |
● | Automotive |
● | Industrial |
Segment information is summarized as follows:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
(inthousands) | April 1, 2017 | April 2, 2016 | March 31, 2018 | April 1, 2017 | ||||||||||||
Net sales | ||||||||||||||||
Electronics | $ | 153,767 | $ | 98,796 | $ | 264,411 | $ | 153,767 | ||||||||
Automotive | 107,839 | 91,933 | 126,131 | 107,839 | ||||||||||||
Industrial | 23,835 | 28,669 | 27,271 | 23,835 | ||||||||||||
Total net sales | $ | 285,441 | $ | 219,398 | $ | 417,813 | $ | 285,441 | ||||||||
Depreciation and amortization | ||||||||||||||||
Electronics | $ | 8,387 | $ | 5,372 | $ | 13,678 | $ | 8,387 | ||||||||
Automotive | 5,371 | 3,266 | 5,970 | 5,371 | ||||||||||||
Industrial | 1,314 | 1,451 | 1,460 | 1,314 | ||||||||||||
Other | — | 937 | 2,504 | — | ||||||||||||
Total depreciation and amortization | $ | 15,072 | $ | 11,026 | $ | 23,612 | $ | 15,072 | ||||||||
Operating income (loss) | ||||||||||||||||
Electronics | $ | 35,206 | $ | 22,416 | $ | 53,964 | $ | 35,206 | ||||||||
Automotive | 15,065 | 17,491 | 18,390 | 15,065 | ||||||||||||
Industrial | 106 | 1,673 | 4,709 | 106 | ||||||||||||
Other(a) | (1,525 | ) | (9,152 | ) | (39,492 | ) | (1,525 | ) | ||||||||
Total operating income | 48,852 | 32,428 | 37,571 | 48,852 | ||||||||||||
Interest expense | 3,120 | 2,045 | 5,423 | 3,120 | ||||||||||||
Foreign exchange loss (gain) | (1,557 | ) | 3,823 | (10,555 | ) | (1,557 | ) | |||||||||
Other expense (income), net | (139 | ) | (517 | ) | ||||||||||||
Other income, net | (1,943 | ) | (139 | ) | ||||||||||||
Income before income taxes | $ | 47,428 | $ | 27,077 | $ | 44,646 | $ | 47,428 |
(a) For the first quarter of 2017,2018, “Other” Operating income (loss) of $1.5$39.5 million consists of $38.6 million in acquisition and integration costs associated with the Company’s 2018 acquisition of IXYS ($18.4 million included in Cost of sales (“COS”), of which $17.9 million relates to fair value inventory adjustments, $16.1 million included in Selling, general, and administrative expenses (“SG&A), $1.6 million in Research and development (“R&D”) $2.5 million in backlog amortization expense), $0.8 million in restructuring costs ($0.5 million included in COS and $0.3 million in SG&A) and $0.1 million in year acquisition and integration costs associated with the Company’s 2017 acquisitions in SG&A.
For the first quarter of 2017, “Other” Operating income (loss) of $1.5 million consists of acquisition and integration costs associated with the Company’s 2016 acquisitions (included in Cost of sales (“COS”) and Selling, general, and administrative expenses (“SG&A)).
For the first quarter of 2016, “Other” Operating income (loss) of $9.2 million consists of: (i) $1.4 million of internal reorganization costs with $1.1 million included in COS and $0.3 million included in SG&A, (ii) $6.2 million of acquisition related expenses included in SG&A, and (iii) $1.6 million of impairment and severance costs related to the planned shut-down of the Company’s Roskilde, Denmark operations with $0.2 million included in COS, $0.9 million included in amortization of intangibles, $0.3 million included in research and development, and $0.2 million included in SG&A.&A).
The Company’s net sales by country arewere as follows:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
(inthousands) | April 1, 2017 | April 2, 2016 | March 31, 2018 | April 1, 2017 | ||||||||||||
Net sales | ||||||||||||||||
United States | $ | 86,658 | $ | 85,149 | $ | 123,877 | $ | 86,658 | ||||||||
China | 74,690 | 48,509 | 106,508 | 78,219 | ||||||||||||
Other countries | 124,093 | 85,740 | ||||||||||||||
Other countries(b) | 187,428 | 120,564 | ||||||||||||||
Total net sales | $ | 285,441 | $ | 219,398 | $ | 417,813 | $ | 285,441 |
(a) Includes mainland China, Taiwan, and Hong Kong.
(b) Each country included in Other countries are less than 10% of net sales.
The Company’s long-lived assets by country, as of March 31, 2018 and April 1, 2017, and December 31, 2016, arewere as follows:
(inthousands) | April 1, 2017 | December 31, 2016 | March 31, 2018 | December 30, 2017 | ||||||||||||
Long-lived assets | ||||||||||||||||
United States | $ | 23,770 | $ | 23,731 | $ | 49,132 | $ | 23,490 | ||||||||
China | 65,073 | 65,345 | 91,676 | 86,866 | ||||||||||||
Mexico | 58,111 | 52,262 | 64,176 | 62,510 | ||||||||||||
Germany | 36,232 | 1,082 | ||||||||||||||
Philippines | 32,615 | 33,345 | 30,734 | 31,129 | ||||||||||||
Other countries | 44,373 | 42,492 | 65,255 | 45,500 | ||||||||||||
Total long-lived assets | $ | 223,942 | $ | 217,175 | $ | 337,205 | $ | 250,577 |
The Company’s additions to long-lived assets by country arewere as follows:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
(inthousands) | April 1, 2017 | April 2, 2016 | March 31, 2018 | April 1, 2017 | ||||||||||||
Additions to long-lived assets | ||||||||||||||||
United States | $ | 332 | $ | 1,618 | $ | 2,909 | $ | 332 | ||||||||
China | 2,341 | 1,046 | 5,144 | 2,392 | ||||||||||||
Mexico | 6,978 | 4,653 | 3,310 | 6,978 | ||||||||||||
Germany | 3,038 | 45 | ||||||||||||||
Philippines | 855 | 1,101 | 2,162 | 855 | ||||||||||||
Other countries | 1,871 | 721 | 1,346 | 1,775 | ||||||||||||
Total additions to long-lived assets | $ | 12,377 | $ | 9,139 | $ | 17,909 | $ | 12,377 |
ITEM2. 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 relating to product demand and market acceptance,acceptance; economic conditions,conditions; the impact of competitive products and pricing,pricing; product quality problems or product recalls,recalls; capacity and supply difficulties or constraints,constraints; coal mining exposures reserves,reserves; failure of an indemnification for environmental liability,liability; exchange rate fluctuations,fluctuations; commodity price fluctuations,fluctuations; the effect of the Company's accounting policies,policies; labor disputes,disputes; restructuring costs in excess of expectations,expectations; pension plan asset returns less than assumed, integration of acquisitions,assumed; uncertainties related to political or regulatory changes,changes; the risk that expected benefits, synergies and growth prospects of the Company’s completed acquisition of IXYS Corporation (“IXYS”) may not be achieved in a timely manner, or at all; the risk that IXYS’ business may not be successfully integrated with the Company’s; the risk that the Company and IXYS will be unable to retain and hire key personnel; and the risk that disruption from the acquisition may adversely affect the Company’s or IXYS’ business and their respective relationships with customers, suppliers or employees; and other risks which may be detailed in the Company's other Securities and Exchange Commission filings, including those set forth under Item 1A. "Risk Factors" of the Company's Annual Report on Form 10-K for the year ended December 31, 2016.30, 2017. 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 31, 2016.30, 2017.
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.
Executive Overview
Founded in 1927, Littelfuse is one of the world’s leading suppliers ofa global leader in circuit protection products forwith advancing platforms in power control and sensor technologies, serving customers in the electronics, automotive, and industrial markets, with expanding platforms in sensormarkets. With a diverse and power control componentsextensive product portfolio of fuses, semiconductors, polymers, ceramics, relays and modules. In addition to circuit protection products and solutions,sensors, the Company offers electronic reed switchesworks with its customers to build safer, more reliable and sensors, automotive sensors for comfort and safety systems and a comprehensive line of highly reliable electromechanical and electronic switch and control devices for commercial and specialty vehicles, as well as protection relays and power distribution centersmore efficient products for the safe controlconnected world in virtually every market that uses electrical energy, ranging across consumer electronics, IT and distribution of electricity. telecommunication applications, industrial electronics, automobiles and other transportation, and heavy industrial applications
The Company hascompany maintains a network of global laboratories and engineering centers and labs that develop new products and product enhancements, providesprovide customer application support and test products for safety, reliability, and regulatory compliance. The Company’s devices protect products in virtually every market that uses electrical energy, from various electronic devices to automobiles to industrial equipment.
The Company conducts its business through three reportable segments, which are defined by markets and consist ofsegments: Electronics, Automotive, and Industrial. For each of these segments, the Company designs, manufactures and sells circuit protection products that protect against electrostatic discharge, power surges, short circuits, voltage spikes and other harmful occurrences; power control products that safely and efficiently control power to mitigate equipment damage, minimize electrical hazards and improve productivity; and sensor products used to identify and detect temperature, proximity, flow speed and fluid level in various applications. The Company’s customer base includes OEMs, Tier One automotive suppliers, and distributors.
Executive Summary
TheFor the first quarter of 2018, the Company experienced strong performance improvementsrecognized net sales of $417.8 million compared to $285.4 million in the first quarter of 2017 comparedrepresenting an increase of $132.4 million, or 46.4%. The increase was primarily driven by the acquisition of IXYS along with higher volume across all three segments. Net sales for Electronics increased $110.6 million, or 72.0%, due to the first quarteracquisition of 2016. ForIXYS and U.S. Sensor and strong growth across all the first quarter of 2017,business units and geographic regions. Net sales for the Automotive segment increased $18.3 million, or 17.0% due to volume growth across all the segment’s business units and geographic regions. Net sales in the Industrial segment increased $3.4 million or 14.4% due to volume growth in the power fuse and relay businesses. The Company recognized net salesincome of $285.4$36.0 million, compared to $219.4 millionor $1.45 per diluted share, in the first quarter of 2016. The increase of $66.0 million, or 30.0%, reflects increased net sales of $55.0 million,or 56%, in the Electronics segment and $15.9 million, or 17%, in the Automotive segment, partially offset by decreased net sales of $4.8 million, or 17%, in the Industrial segment. The increased net sales in the Electronics and Automotive segments were primarily due2018 compared to the impact of prior year acquisitions. The Company recognized net income of $38.9 million, or $1.69 per diluted share in the first quarter of 2017 compared to net income of $19.3 million, or $0.85 per diluted share2017. The decrease in the first quarter of 2016. Increased net income reflects the impactsimpact of the prior year acquisitions onacquisition and integration related costs of $39.5 million associated with the current yearIXYS acquisition that were mostly offset by operating income increases across all three segments and foreign exchange gains. Additionally, the per share results reflect an increase in the weighted average diluted shares outstanding of 1.5 million as wella result of the shares issued in conjunction with the acquisition of IXYS.
Net cash provided by operating activities was $69.3 million for the three months ended March 31, 2018 as compared to $22.9 million for the three months ended April 1, 2017. The increase in net cash provided by operating activities reflected higher earnings and favorable working capital management that more than offset higher payments related to acquisition and integration costs.
On January 17, 2018, the Company completed its acquisition of IXYS for total purchase consideration of $778.8 million, net of cash acquired. IXYS is a decreaseglobal pioneer in acquisition-related costs, coupledthe power semiconductor and integrated circuit markets with a lower effective tax rate.focus on medium to high voltage power control semiconductors across the industrial, communications, consumer and medical markets. IXYS has a broad customer base, serving more than 3,500 customers through its direct salesforce and global distribution partners.
Results of Operations
The following table summarizes the Company’s consolidated results of operations for the periods presented. The first quarter of 2018 includes $39.5 million of non-segment charges. The charges related to the IXYS acquisition total $38.6 million and include $17.9 million of purchase accounting inventory charges, $11.7 million in acquisition-related and integration costs primarily related to legal, accounting and other expenses associated with the acquisition of IXYS, $4.5 million of stock compensation expense recognized immediately upon close for converted IXYS options related to prior services periods $2.5 million in backlog amortization costs and $2.1 million in other charges. In addition, there were $0.8 million of restructuring charges related to certain operations in the Electronics segment.
The first quarter of 2017 includes approximately $1.5 million of non-segment charges. These were primarily attributable to acquisition-related costs primarily related to legal and integration costs associated with the Company’s acquisitions in 2016 of the ON Portfolio and PolySwitch.
First Quarter | ||||||||||||||||
(in thousands) | 2018 | 2017 | Change | % Change | ||||||||||||
Sales | $ | 417,813 | $ | 285,441 | $ | 132,372 | 46.4 | % | ||||||||
Gross profit | 149,623 | 113,650 | 35,973 | 31.7 | % | |||||||||||
Operating expenses | 112,052 | 64,798 | 47,254 | 72.9 | % | |||||||||||
Operating income | 37,571 | 48,852 | (11,281 | ) | (23.1 | %) | ||||||||||
Other (income) expense, net | (1,943 | ) | (139 | ) | 1,804 | N.M. | ||||||||||
Income before income taxes | 44,646 | 47,428 | (2,782 | ) | (5.9 | %) | ||||||||||
Net income | 36,029 | 38,891 | (2,862 | ) | (7.4 | ) |
N.M. - Not meaningful
The first quarter of 2016 includes approximately $9.2 million of other non-segment charges. These included $6.2 million of acquisition-related costs primarily related to legal and integration costs associated with the Company’s PolySwitch acquisition, $1.6 million in impairment charges related to the closure of the Company’s manufacturing facility in Denmark, $1.0 million related to the Company’s transfer of its reed sensor manufacturing operations from the U.S. and China to the Philippines and $0.4 million related to internal legal restructuring costs.
Three Months Ended | ||||||||||||||||
(in thousands, except % change) | April 1,2017 | April 2,2016 | Change | % Change | ||||||||||||
Net sales | $ | 285,441 | $ | 219,398 | $ | 66,043 | 30% | |||||||||
Gross profit | 113,650 | 87,155 | 26,495 | 30% | ||||||||||||
Operating expenses | 64,798 | 54,727 | 10,071 | 18% | ||||||||||||
Operating income | 48,852 | 32,428 | 16,424 | 51% | ||||||||||||
Income before income taxes | 47,428 | 27,077 | 20,351 | 75% | ||||||||||||
Income taxes | 8,537 | 7,788 | 749 | 10% | ||||||||||||
Net income | 38,891 | 19,289 | 19,602 | 102% |
NetSales
Net sales increased $66.0$132.4 million, or 30%46.4%, for the first quarter of 20172018 compared to the first quarter of 2016, primarily due2017 with increases of $86.3 million and $3.1 million resulting from incremental net sales related to a $60.9 million increasefrom the prior year PolySwitch, ON Portfolio,IXYS and Menbers’ acquisitions. IncreasedU.S Sensor acquisitions, respectively. The remaining increase in net sales was driven by higher volume across all businesses in the Electronics segment of $55.0 million and Automotive segments as well as increases in the Automotive segment of $15.9 million were partially offset by a $4.8 million decreasefuse and relay businesses in the Industrial segment.
Gross Profit
Gross profit was $149.6 million, or 35.8% of net sales, in the first quarter of 2018, compared to $113.7 million, or 39.8% of net sales in the first quarter of 2017, compared2017. The increase in gross profit reflects the lower gross profit of the IXYS acquisition and volume growth and expense leverage across all segments. The decrease in gross margin is due to $87.2the purchase accounting inventory charges of $17.9 million or 39.7% of net sales inwhich negatively impacted the first quarter of 2016. Gross profit reflects the incremental net sales and associated profits related to the prior year acquisitions.2018 gross margin by 4.3 percentage points.
Operating Expenses
Total operating expense wasexpenses were $112.1 million, or 26.8% of net sales, for the first quarter of 2018 compared to $64.8 million, or 22.7% of net sales, for the first quarter of 2017 compared to $54.7 million, or 24.9% of net sales, for the first quarter of 2016.2017. The increase in operating expenses of $10.1$47.3 million is primarily due to incremental operating expenses related to the prior yearIXYS and US Sensor acquisitions including increased sellingas well as higher acquisition-related and integration costs of $20.1 million and an increase in amortization expense of intangibles. The improvement in operating expenses as a percentage$6.1 million resulting from the acquisition of net sales is due to operating efficiencies coupled with approximately $7.8 million of acquisition-related charges incurred in 2016.IXYS.
Operating Income
Operating income was $37.6 million, a decrease of $11.3 million or 23.1% for the first quarter of 2018 compared to $48.9 million for the first quarter of 2017. The decrease in operating income is primarily due to the purchase accounting inventory charges of $17.9 million along with the costs associated with the acquisition and integration of the IXYS acquisition as described above. Operating margins decreased from 17.1% in the first quarter of 2017 to 9.0% in the first quarter of 2018. The higher acquisition and integration charges negatively impacted operating margins by 9.0% in the first quarter of 2018.
Income Before Income Taxes
Income before income taxes was $44.6 million, or 17.1%10.7% of net sales, for the first quarter of 20172018 compared to $32.4 million, or 14.8% of net sales, for the first quarter of 2016. The increase in operating income is the result of the above-described increased net sales and associated margins partially offset by increased operating expenses. The improvement in operating income as a percentage of net sales reflects the impact of the prior year acquisitions costs on operating expenses.
Income Before Income Taxes
Income before income taxes was $47.4 million, or 16.6% of net sales, for the first quarter of 2017 compared to $27.1 million, or 12.3% of net sales, for the first quarter of 2016.2017. In addition to the factors impacting comparative results for operating income, income before income taxes was impacted by favorable comparative foreign exchange gains that were partially offset by increased interest expense.expense associated with the increased borrowings for the IXYS acquisition. The effect of foreign exchange rate changes on various foreign currency transactions worldwide was approximately $1.6$10.6 million of unrealized income for the first quarter of 20172018 compared to $3.8income of unrealized $1.6 million of expense for the first quarter of 2016 and2017 primarily reflectsdue to fluctuations in the euro and Philippine peso against the U.S. dollar. Interest expense was $3.1increased $2.3 million in the first quarter of 2017 as compared to $2.0 million in the first quarter of 2016,2018 primarily reflecting increased borrowings. Additionally, other income increased by $1.9 million as a result of unrealized investment gains, primarily associated with our investment in Polytronics.
Income Taxes
Income tax expense was $8.6 million, or an effective tax rate of 19.3%, for the first quarter of 2018 compared to $8.5 million, or an effective tax rate of 18.0%, for the first quarter of 2017 compared to income tax expense of $7.8 million, or an2017. The effective tax rate of 28.8%, for the first quarter of 2016.The effective tax rates for both the first quarter of 2017 and the first quarter of 2016 arewas lower than the then applicable 35% U.S. statutory tax rate primarily due to income earned in lower tax jurisdictions. Further, the effective tax rate for the first quarter of 2017 was lower than the effective tax rate for the first quarter of 2016 primarily due to a larger amount of income earned in lower tax jurisdictions in the first quarter of 2017 compared to the first quarter of 2016.
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 10,12, Segment Information, of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report.
The following table isprovides a summary of the Company’s net sales by segment:
Three Months Ended | First Quarter | |||||||||||||||||||||||||||||||
(in thousands) | April 1, 2017 | April 2, 2016 | Change | % Change | 2018 | 2017 | Change | % Change | ||||||||||||||||||||||||
Electronics | $ | 153,767 | $ | 98,796 | $ | 54,971 | 56% | $ | 264,411 | $ | 153,767 | $ | 110,644 | 72.0 | % | |||||||||||||||||
Automotive | 107,839 | 91,933 | 15,906 | 17% | 126,131 | 107,839 | 18,292 | 17.0 | % | |||||||||||||||||||||||
Industrial | 23,835 | 28,669 | (4,834 | ) | (17%) | 27,271 | 23,835 | 3,436 | 14.4 | % | ||||||||||||||||||||||
Total | $ | 285,441 | $ | 219,398 | $ | 66,043 | 30% | |||||||||||||||||||||||||
Electronics | $ | 417,813 | $ | 285,441 | $ | 132,372 | 46.4 | % |
Electronics Segment
The Electronics segment net sales increased $55.0$110.6 million, or 56%72.0%, in the first quarter of 20172018 compared to the first quarter of 2016 primarily2017 due to $41.5 million of incremental net sales related to the PolySwitchIXYS and ON PortfolioU.S. Sensor acquisitions inof $86.3 million and $3.1 million, respectively, higher volume across all businesses driven by the prior year. Excluding the impactstrong electronics cycle and favorable foreign exchange impacts of the acquisitions, the increased Electronics segment net sales were primarily the result of increased net sales of passive and semiconductor products.$5.3 million.
Automotive Segment
The Automotive segment net sales increased $15.9$18.3 million, or 17%17.0%, in the first quarter of 20172018 compared to the first quarter of 2016 primarily2017 due to $19.3 million of incremental net sales related toincreased volume across all businesses with the PolySwitch and Menber’s acquisitionscommercial vehicle business having the most growth as well as favorable changes in the prior year. The segment also experienced unfavorable foreign exchange impactsrates of $1.7 million, primarly related to net sales denominated in euros and Chinese renminbi. Excluding the impact of prior year acquisitions and foreign currency, slight increases in net sales of passenger car products and commercial vehicle products were offset by a decrease in sensor net sales.$7.4 million.
Industrial Segment
The Industrial segment net sales decreased $4.8increased $3.4 million, or 17%14.4%, in the first quarter of 20172018 compared to the first quarter of 20162017 primarily due to the divestiture of two non-core product lines, onehigher volume in the first quarter of 2016power fuse and the other in the fourth quarter of 2016, and decreased net salesrelay operations partially offset by lower volume in the custom products operations.business.
GeographicNetSales 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:
Three Months Ended | First Quarter | |||||||||||||||||||||||||||||||
(in millions) | April 2,2017 | April 1, 2016 | Change | % Change | ||||||||||||||||||||||||||||
(in thousands) | 2018 | 2017 | Change | % Change | ||||||||||||||||||||||||||||
Americas | $ | 98,025 | $ | 99,823 | $ | (1,798 | ) | (2%) | $ | 138,729 | $ | 98,025 | $ | 40,704 | 41.5 | % | ||||||||||||||||
Europe | 58,905 | 42,813 | 16,092 | 38% | 99,812 | 58,905 | 40,907 | 69.4 | % | |||||||||||||||||||||||
Asia-Pacific | 128,511 | 76,762 | 51,749 | 67% | 179,272 | 128,511 | 50,761 | 39.5 | % | |||||||||||||||||||||||
Total | $ | 285,441 | $ | 219,398 | $ | 66,043 | 30% | $ | 417,813 | $ | 285,441 | $ | 132,372 | 46.4 | % |
Americas
Net sales in the Americas decreased $1.8increased $40.7 million, or 2%41.5%, in the first quarter of 20172018 compared to the first quarter of 2016. Increased net2017 driven by incremental sales resulting from IXYS and U.S. Sensor acquisitions and increased volume across all businesses in 2016 were more than offset by lower net sales of the Electronics, Automotive and Industrial segment’s custom products and the Automotive segment’s sensor products.segments.
Europe
European net sales increased $16.1$40.9 million, or 38%69.4%, in the first quarter of 20172018 compared to the first quarter of 20162017. The increase in net sales was primarily due to a $15.0 million increaseincremental sales from prior year acquisitions partially offset by $1.7 millionthe IXYS acquisition and higher volumes across all businesses in unfavorablethe Electronics and Automotive segments and the relay business in the Industrial segment as well as favorable foreign currency effects primarily results from sales denominated in euros.of $9.5 million.
Asia-Pacific
Asia-Pacific net sales increased $51.7$50.8 million, or 67%39.5%, in the first quarter of 20172018 compared to the first quarter of 2016,2017 primarily due to $38.3 million in incremental net sales from current year and prior year acquisitions. The Asia-Pacific net sales increase also reflects increasedacquisitions and higher net sales in all of the Electronics segment’s and Automotive segment’s business units.segments’ businesses as well as favorable foreign currency effects of $3.1 million.
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.
Revolving Credit Facility/Term Loan
On March 4, 2016, the Company entered into a new five-year credit agreement with a group of lenders for up to $700.0 million. The new credit agreement consists of an unsecured revolving credit facility of $575.0 million and an unsecured term loan credit facility of up to $125.0 million. In addition, the Company has the ability, from time to time, to increase the size of the revolving credit facility and the term loan facility by up to an additional $150.0 million, in the aggregate, in each case in minimum increments of $25.0 million, subject to certain conditions and the agreement of participating lenders. For the term loan credit facility, the Company is required to make quarterly principal payments of $1.6 million through March 31, 2018 and $3.1 million from June 30, 2018 through December 31, 2020 with the remaining balance due on March 4, 2021.
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 includes 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 may 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 is required to make quarterly principal payments of 1.25% of the original term loan ($2.5 million with the second advance on January 16, 2018) through maturity, with the remaining balance due on October 13, 2022.
Outstanding borrowings under the credit agreementCredit Agreement bear interest, at the Company’s option, at either LIBOR, fixed for interest periods of one, two, three or six monthsix-month periods, plus 1.00% to 2.00%, or at the bank’s Base Rate, as defined, plus 0.00% to 1.00%, based upon the Company’s Consolidated Leverage Ratio, as defined. The Company is also required to pay commitment fees on unused portions of the credit agreement ranging from 0.15% to 0.30%0.25%, based on the Consolidated Leverage Ratio, as defined. The credit agreement includes 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 2.48%3.13% at April 1, 2017.March 31, 2018. As of April 1, 2017,March 31, 2018, the Company had $0.1 million outstanding in letters of credit and had available $574.9$696.9 million of borrowing capacity under the revolving credit facility.Revolving Credit Facility. At March 31, 2018, the Company was in compliance with all covenants under the Credit Agreement. Further information regarding the Company’s credit agreement is provided in Note 4,5, 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, and €95 million in aggregate amount of 1.83% Senior Notes, Series B due December 8, 2028 (together, the “Euro Senior Notes”). Interest on the Euro Senior Notes is payable semiannually on June 8 and December 8, commencing June 8, 2017.
On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold $125 million aggregate principal amount of senior notes in two series. On February 15, 2017, $25 million in aggregate principal amount of 3.03% Senior Notes, Series A, due February 15, 2022, and $100 million in aggregate principal amount of 3.74% Senior Notes, Series B, due February 15, 2027 (together, the “U.S. Senior Notes,” and together with the Euro Senior Notes, the “Senior Notes”) were funded. Interest on the U.S. Senior Notes will be payable semiannually on February 15 and August 15, commencing August 15, 2017. Further information regarding the Company’s Senior Notes is provided in Note 4,5, Debt, of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report.
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 2022 and 2027, the “Senior Notes”) were funded. Interest on the U.S. Senior Notes due 2025 and 2030 will be payable on February 15 and August 15, commencing on August 15, 2018.
Cash Flow Overview
For the Three Months Ended | First Quarter | |||||||||||||||
(in thousands) | April 1,2017 | April 2, 2016 | ||||||||||||||
(in thousands) | 2017 | 2016 | ||||||||||||||
Net cash provided by operating activities | $ | 22,943 | $ | 9,492 | $ | 69,268 | $ | 22,943 | ||||||||
Net cash used in investing activities | (22,098 | ) | (273,219 | ) | (324,377 | ) | (22,098 | ) | ||||||||
Net cash provided by financing activities | 2,938 | 203,733 | 240,308 | 2,938 | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (928 | ) | 4,072 | (2,417 | ) | (928 | ) | |||||||||
Decrease in cash and cash equivalents | 2,855 | (55,922 | ) | |||||||||||||
Increase (decrease) in cash and cash equivalents | (17,218 | ) | 2,855 | |||||||||||||
Cash and cash equivalents at beginning of period | 275,124 | 328,786 | 429,676 | 275,124 | ||||||||||||
Cash and cash equivalents at end of period | $ | 277,979 | $ | 272,864 | $ | 412,458 | $ | 277,979 |
The following describes the Company’s cash flows for the three months ended March 31, 2018 and April 1, 2017.
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 $22.9$69.3 million for the first three months of 2017 reflecting $38.92018, compared to $22.9 million in net income and $20.2 million in non-cash adjustments (primarily $15.1 million in depreciation and amortization) offset by $36.2 million in net changes to various operating assets and liabilities.
Changes in operating assets and liabilities forduring the first three months of 2017 (including short-term and long-term items) that impacted cash flows negatively consisted of increases in accounts receivable ($11.3 million), inventory ($3.3 million), prepaid and other assets ($2.0 million), accrued payroll and severance ($20.2 million), accounts payable ($3.3 million) and accrued and deferred taxes ($0.2 million).ended April 1, 2017. The increase in accounts receivablenet cash provided by operating activities was dueprimarily driven by higher earnings and favorable working capital management that more than offset higher payments related to increased net sales in the first quarter. The decrease in accrued payrollacquisition and severance was due primarily to payouts for the 2016 management incentive plan which occurred in the first quarter.integration costs.
Cash Flow from Investing Activities
Net cash used in investing activities was $324.4 million for the three months ended March 31, 2018, compared to $22.1 million and primarily related toduring the three months ended April 1, 2017. Net cash used for the acquisition of IXYS was $306.5 million for the Monolith business ($14.2 million),three months ended March 31, 2018 as compared to net of cash acquired, and capital expenditures ($12.4 million) both of which were partially offset by proceeds from maturities of short-term investments ($3.7 million) and a decrease in the entrusted loan ($0.7 million). The decrease in cash used in investing activities is due to cash used infor the acquisition of PolySwitcha majority stake in Monolith of $14.2 million for the first quarterthree months ended April 1, 2017. Capital expenditures were $17.9 million, representing an increase of 2016.$5.5 million compared to 2017.
Cash Flow from Financing Activities
Net cash provided by financing activities was $240.3 million for the three months ended 2018 compared to $2.9 million and included $10.3for the three months ended 2017. The Company had $300.0 million in netof proceeds on borrowings and $0.2 million from the exercisecredit facility, term loan and senior notes payable and $49.5 million of stock options including tax benefits both of which are partially offset by dividends paid of $7.5 million and debt issuance costs related topayments on the new credit agreement of $0.1 million. The decrease in cash provided by financing activities is due to the Company entering into the new credit agreement and term loan and credit facility in the first quarter of 2016.2018 as compared to $125.0 million of proceeds from the senior notes payable and $114.1 million of payments on the term loan and credit facility in the first quarter of 2017. Additionally, dividends paid increased $1.7 million from $7.5 million in 2017 to $9.2 million for the three months ended March 31, 2018.
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, 20162017 to April 30, 20172018 (“Share Repurchase Program”). The Company did not repurchase any shares of its common stock during fiscal 20162017 or the first quarter of 2017.2018. The Share Repurchase Program expired on April 30, 20172018 with no shares repurchased. TheIn April 2018, 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, 20172018 to April 30, 2018.2019.
Off-Balance Sheet Arrangements
As of April 1, 2017,March 31, 2018, 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.
RecentCritical Accounting PronouncementsPolicies and Estimates
The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In May 2014,connection with the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606) which supersedes the revenue recognition requirements in ASC 605, "Revenue Recognition." This ASU provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The guidance permits two implementation approaches, one requiring retrospective applicationpreparation of the new standardCondensed 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 restatementthose discussed in Note 1, Summary of prior yearsSignificant Accounting Policies and one requiring prospective application ofOther Information, to the new standard with disclosure of results under old standards. In August, 2015, the FASB issued ASU No. 2015-14, which postponed the effective date of ASU No. 2014-09 to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016. The Company is in the process of performing its initial assessment of the potential impact on its consolidated financial statements and has not concluded on its adoption methodology. While the Company is currently assessing the impactMD&A section of the new standards,Company’s Annual Report on Form 10-K for the Company’s revenue is primarily generated fromyear ended December 30, 2017. During the salethree months ended March 31, 2018, there were no significant changes in the application of finished products to customers. Sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks, and rewards transfer. These are largely un-affected by the new standard. The Company does not expect this new guidance to have a material impact on the amount of overall sales recognized; however, the timing of sales on certain projects may be affected. The Company has not yet quantified this potential impact.critical accounting policies.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Adoption will require a modified retrospective transition. The Company will adopt the standard in the first quarter of 2019. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.2016-02.
In January 2017,2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions in the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. The Company has not yet completed its assessment and therefore has not yet elected an accounting policy.
In February 2018, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other”2018-02 “Income Statement—Reporting Comprehensive Income (Topic 350). This ASU modifies220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which permits the conceptreclassification of impairment fromtax effects stranded in accumulated other comprehensive income to retained earnings as a result of the condition that exists whenTax Act. The standard also requires entities to disclose whether or not they elected to reclassify the carrying amount of goodwill exceeds its implied fair valuetax effects related to the condition that exists whenTax Act as well as their policy for releasing income tax effects from accumulated other comprehensive income. The standard allows the carrying amountoption of applying either a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculatingretrospective adoption, meaning the implied fair value of goodwill by assigning the fair value of a reporting unitstandard is applied to all periods in which the effect of its assets and liabilitiesthe Tax Act is recognized, or applying the amendments in the period of adoption, meaning an adjustment is made to shareholder’s equity as if thatof the beginning of the reporting unit had been acquiredperiod. ASU 2018-02 will be effective in a business combination. Because the update will eliminate Step 2 from the goodwill impairment test, it should reduce the cost and complexityfirst quarter of evaluating goodwill for impairment. This ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020, with2019; however early adoption is permitted for interim orand annual goodwill impairment tests performed on testing dates after January 1, 2017.periods, including the reporting period in which the Tax Act was enacted. The Company expects to adoptis currently evaluating the new standard in 2017.
Critical Accounting Policies and Estimates
The Company’s Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In connection with the preparationimpact of the 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 basedASU 2018-02 on historical experience, current trends, and other factors the Company believes are relevant at the time it prepares the Consolidated Financial Statements.
The significant accounting policies and critical accounting estimates are consistent with those discussed in Note 1, Summary
ITEM3. 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 31, 2016.30, 2017. During the three months ended April 1, 2017,March 31, 2018, there have been no material changes in our exposure to market risk.
ITEMITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e)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 April 1, 2017.March 31, 2018. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the quarter ended April 1, 2017,March 31, 2018, our disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
ThereThe Company acquired IXYS Corporation on January 17, 2018. IXYS Corporation operated with a different internal control environment than that of Littelfuse, Inc. The Company’s evaluation of IXYS’ internal controls over financial reporting and integration of IXYS into the Company’s internal control structure is ongoing. Otherwise, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-1513a-15(f) and 15d-1515d-15(f) under the Exchange Act that occurred during the quarter ended April 1, 2017March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
During the three months ended April 1, 2017,March 31, 2018, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for our year ended December 31, 2016.30, 2017.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
None.
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10.1* | ||
10.2* | ||
10.3* | ||
10.4* | ||
| 31.1* | Certification of David W. Heinzmann, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2* | Certification of Meenal A. Sethna, 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. |
| 101.INS* | XBRL Instance Document |
| 101.SCH* | XBRL Taxonomy Extension Schema Document |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF* | XBRL Taxonomy Definition Linkbase Document |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
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+ | Certain schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K promulgated by the SEC. The registrant agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. | |
| * | Filed herewith. |
| ** | Furnished herewith. |
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 April 1, 2017, to be signed on its behalf by the undersigned thereunto duly authorized.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this reportMarch 31, 2018, to be signed on its behalf by the undersigned thereunto duly authorized.
| Littelfuse, Inc. |
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| By: | /s/ Meenal A. Sethna | |
Meenal A. Sethna | |||
Executive Vice President and Chief Financial Officer | |||
Date: May 2, 2018 | |||
By: | /s/ Jeffrey G. Gorski | ||
Jeffrey G. Gorski | |||
Vice President and Chief Accounting Officer |
Date: May 3, 201732
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