Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.02M
4: EX-10.10 Material Contract HTML 38K
5: EX-10.11 Material Contract HTML 44K
2: EX-10.8 Material Contract HTML 39K
3: EX-10.9 Material Contract HTML 44K
6: EX-31.1 Certification -- §302 - SOA'02 HTML 28K
7: EX-31.2 Certification -- §302 - SOA'02 HTML 29K
8: EX-32.1 Certification -- §906 - SOA'02 HTML 25K
15: R1 Cover Page HTML 77K
16: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 130K
17: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 34K
(Parentheticals)
18: R4 Condensed Consolidated Statements of Net (Loss) HTML 98K
Income (Unaudited)
19: R5 Condensed Consolidated Statements of Comprehensive HTML 43K
(Loss) Income (Unaudited)
20: R6 Condensed Consolidated Statements of Cash Flows HTML 110K
(Unaudited)
21: R7 Condensed Consolidated Statements of Stockholders' HTML 80K
Equity (Unaudited)
22: R8 Condensed Consolidated Statements of Stockholders' HTML 25K
Equity (Unaudited) (Parentheticals)
23: R9 Summary of Significant Accounting Policies and HTML 151K
Other Information
24: R10 Inventories HTML 36K
25: R11 Property, Plant, and Equipment HTML 38K
26: R12 Goodwill and Other Intangible Assets HTML 92K
27: R13 Accrued Liabilities HTML 42K
28: R14 Restructuring, Impairment and Other Charges HTML 113K
29: R15 Debt HTML 63K
30: R16 Fair Value of Assets and Liabilities HTML 102K
31: R17 Benefit Plans HTML 58K
32: R18 Other Comprehensive (Loss) Income HTML 115K
33: R19 Income Taxes HTML 27K
34: R20 Earnings Per Share HTML 61K
35: R21 Related Party Transactions HTML 76K
36: R22 Segment Information HTML 170K
37: R23 Summary of Significant Accounting Policies and HTML 156K
Other Information (Policies)
38: R24 Summary of Significant Accounting Policies and HTML 132K
Other Information (Tables)
39: R25 Inventories (Tables) HTML 37K
40: R26 Property, Plant, and Equipment (Tables) HTML 37K
41: R27 Goodwill and Other Intangible Assets (Tables) HTML 94K
42: R28 Accrued Liabilities (Tables) HTML 41K
43: R29 Restructuring, Impairment and Other Charges HTML 110K
(Tables)
44: R30 Debt (Tables) HTML 53K
45: R31 Fair Value of Assets and Liabilities (Tables) HTML 93K
46: R32 Benefit Plans (Tables) HTML 49K
47: R33 Other Comprehensive (Loss) Income (Tables) HTML 118K
48: R34 Earnings Per Share (Tables) HTML 58K
49: R35 Related Party Transactions (Tables) HTML 69K
50: R36 Segment Information (Tables) HTML 162K
51: R37 Summary of Significant Accounting Policies and HTML 24K
Other Information (Details Textual)
52: R38 Summary of Significant Accounting Policies and HTML 72K
Other Information - Revenue Disaggregation
(Details)
53: R39 Inventories - Components of Inventories (Details) HTML 33K
54: R40 Property, Plant, and Equipment (Details) HTML 41K
55: R41 Goodwill and Other Intangible Assets - Amounts for HTML 41K
Goodwill and Changes in Carrying Value by
Operating Segment (Details)
56: R42 Goodwill and Other Intangible Assets - Details of HTML 41K
Other Intangible Assets and Related Future
Amortization Expense (Details)
57: R43 Goodwill and Other Intangible Assets - Estimated HTML 38K
Amortization Expense Related to Intangible Assets
with Definite Lives (Details)
58: R44 Goodwill and Other Intangible Assets - Narrative HTML 37K
(Details)
59: R45 Accrued Liabilities (Details) HTML 45K
60: R46 Restructuring, Impairment and Other Charges HTML 61K
(Details)
61: R47 Debt - Carrying Amounts of Long-term Debt HTML 55K
(Details)
62: R48 Debt - Narrative (Details) HTML 153K
63: R49 Fair Value of Assets and Liabilities - Assets HTML 38K
Measured at Fair Value (Details)
64: R50 Fair Value of Assets and Liabilities - Carrying HTML 47K
Value and Estimated Fair Value of Senior Notes
(Details)
65: R51 Fair Value of Assets and Liabilities - Narrative HTML 44K
(Details)
66: R52 Fair Value of Assets and Liabilities - Impairment HTML 35K
of Assets (Details)
67: R53 Benefit Plans - Benefit Plan Expenses (Details) HTML 39K
68: R54 Benefit Plans - Narrative (Details) HTML 57K
69: R55 Other Comprehensive (Loss) Income - Schedule of HTML 48K
Components of Comprehensive Income (Loss)
(Details)
70: R56 Other Comprehensive (Loss) Income - Schedule of HTML 49K
Accumulated Other Comprehensive Income (Loss)
(Details)
71: R57 Other Comprehensive (Loss) Income - HTML 30K
Reclassification out of Accumulated Other
Comprehensive Income (Details)
72: R58 Income Taxes (Details Textual) HTML 25K
73: R59 Earnings Per Share - Computation of Basic and HTML 54K
Diluted Earnings Per Share (Details)
74: R60 Earnings Per Share - Narrative (Details) HTML 40K
75: R61 Related Party Transactions (Details) HTML 55K
76: R62 Segment Information - Segment Information HTML 70K
(Details)
77: R63 Segment Information - Narrative (Details) HTML 40K
78: R64 Segment Information - Revenues and Long-lived HTML 51K
Assets by Geographical Area (Details)
80: XML IDEA XML File -- Filing Summary XML 145K
14: XML XBRL Instance -- lfus-20200627_htm XML 3.46M
79: EXCEL IDEA Workbook of Financial Reports XLSX 96K
10: EX-101.CAL XBRL Calculations -- lfus-20200627_cal XML 221K
11: EX-101.DEF XBRL Definitions -- lfus-20200627_def XML 530K
12: EX-101.LAB XBRL Labels -- lfus-20200627_lab XML 1.31M
13: EX-101.PRE XBRL Presentations -- lfus-20200627_pre XML 826K
9: EX-101.SCH XBRL Schema -- lfus-20200627 XSD 135K
81: JSON XBRL Instance as JSON Data -- MetaLinks 353± 503K
82: ZIP XBRL Zipped Folder -- 0000889331-20-000045-xbrl Zip 321K
(Exact name of registrant as specified in its charter)
iDelaware
i36-3795742
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i8755 West Higgins Road
iSuite
500
iChicago
iIllinois
i60631
(Address
of principal executive offices)
(ZIP Code)
Registrant’s telephone number, including area code: i773-i628-1000
Securities registered pursuant to Section 12(b) of
the Act:
Title of Each Class
Trading Symbol
Name of exchange on which registered
iCommon
Stock, $0.01 par value
iLFUS
iNASDAQ
Global Select Market
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes [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). iYes [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): iLarge accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company i☐ Emerging
growth company i☐
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 i☐ No [X]
As of July 24, 2020, the registrant had outstanding i24,341,584
shares of Common Stock, net of Treasury Shares.
Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 27, 2020 (unaudited) and June 29, 2019 (unaudited)
Notes to Condensed Consolidated Financial Statements
1. iSummary
of Significant Accounting Policies and Other Information
Nature of Operations
Littelfuse, Inc. and subsidiaries (the “Company”) is a global manufacturer of leading technologies in circuit protection, power control and sensing. Serving over i100,000 end customers, the
Company’s products are found in automotive and commercial vehicles, industrial applications, data and telecommunications, medical devices, consumer electronics and appliances. With its broad product portfolio of fuses, semiconductors, polymers, ceramics, relays and sensors, and extensive global infrastructure, the Company’s worldwide associates partner with its customers to design, manufacture and deliver innovative, high-quality solutions for a safer, greener and increasingly connected world.
i
Basis
of Presentation
The Company’s accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and disclosures normally included in the consolidated balance sheets, statements of net (loss) income and comprehensive (loss) income, statements of cash flows, and statement of stockholders' equity prepared in conformity with U.S. GAAP have been condensed or omitted as permitted by such rules and regulations, although the Company believes that the disclosures made are
adequate to make the information not misleading. They have been prepared in accordance with accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019 which should be read in conjunction with the disclosures therein. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Operating results for interim periods are not necessarily indicative of annual operating results.
i
Revenue
Recognition
Revenue Disaggregation
i
The following tables disaggregate the Company’s revenue by primary business units for the three and six months ended June 27, 2020 and June 29, 2019:
See
Note 14, Segment Information for net sales by segment and countries.
Revenue Recognition
The Company recognizes revenue on product sales in the period in which the Company satisfies its performance obligation and control of the product is transferred to the customer. The Company’s sales arrangements with customers are predominately short term in nature and generally provide for transfer of control at the time of shipment as this is the point at which title and risk of loss of the product transfers
to the customer. At the end of each period, for those shipments where title to the products and the risk of loss and rewards of ownership do not transfer until the product has been received by the customer, the Company adjusts revenues and cost of sales for the delay between the time that the products are shipped and when they are received by the customer. The amount of revenue recorded reflects the consideration to which the Company expects to be entitled in exchange for goods and may include adjustments for customer allowance, rebates and price adjustments. The Company’s distribution channels are primarily through direct sales and independent third-party distributors.
The
Company elected the practical expedient under Accounting Standards Codification ("ASC") 340-40-25-4 to expense commissions when incurred as the amortization period of the commission asset the Company would have otherwise recognized is less than one year.
Revenue and Billing
The Company generally accepts orders from customers through receipt of purchase orders or electronic data interchange based on written sales agreements and purchasing contracts. Contract
pricing and selling agreement terms are based on market factors, costs, and competition. Pricing is often negotiated as an adjustment (premium or discount) from the Company’s published price lists. The customer is invoiced when the Company’s products are shipped to them in accordance with the terms of the sales agreement. As the Company’s standard payment terms are less than one year, the Company elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. The
Company also elected the practical expedient provided in ASC 606-10-25-18B to treat all product shipping and handling activities as fulfillment activities, and therefore recognize the gross revenue associated with the contract, inclusive of any shipping and handling revenue.
Ship and Debit Program
Some of the terms of the Company’s sales agreements and normal business conditions provide customers (distributors) the ability to receive price adjustments on products previously shipped and invoiced. This practice is common in the industry and is referred to as a “ship and debit” program. This program allows the distributor
to debit the Company for the difference between the distributors’ contracted price and a lower price for specific transactions. Under certain circumstances (usually in a competitive situation or large volume opportunity), a distributor will request authorization for pricing allowances to reduce its price. When the Company approves such a reduction, the distributor is authorized to “debit” its account for the difference between the contracted price and the lower approved price. The Company establishes reserves for this program based on historic activity, electronic distributor inventory levels and actual authorizations for the debit and recognizes these debits as a reduction of revenue.
The Company has a return to stock policy whereby certain customers, with prior authorization from Littelfuse management, can return previously purchased goods for full or partial credit. The Company establishes an estimated allowance for these returns based on historic activity. Sales revenue and cost of sales are reduced to anticipate estimated returns.
Volume Rebates
The
Company offers volume based sales incentives to certain customers to encourage greater product sales. If customers achieve their specific quarterly or annual sales targets, they are entitled to rebates. The Company estimates the projected amount of rebates that will be achieved by the customer and recognizes this estimated cost as a reduction to revenue as products are sold.
i
RecentlyAdoptedAccounting Standards
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." The standard modifies the measurement approach for credit losses on financial instruments, including trade receivables, from an incurred loss method to a current expected credit loss method ("CECL"). The standard requires the measurement of expected credit losses to be based on relevant information, including historical experiences, current conditions and a forecast that is supportable. The Company adopted the new standard on December 29, 2019. The adoption of the standard did not have a material effect on our Condensed Consolidated Financial
Statements.
In August 2018, the FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurement." ASU 2018-13 modifies the disclosure requirements in Topic 820: "Fair Value Measurement," based on the FASB Concepts Statement, "Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements," including consideration of costs and benefits. The new standard removes certain disclosures, modifies other disclosures and adds additional disclosures related to fair value measurement. The Company adopted the new standard on December 29, 2019. The adoption of ASU 2018- 13 did not have a material impact on our Condensed Consolidated
Financial Statements.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic: 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)." ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The
Company adopted the new standard on December 29, 2019. The adoption of ASU 2018-15 did not have a material impact on our Condensed Consolidated Financial Statements.
In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The objective of this is to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting
due to the cessation of the London Interbank Offered Rate (LIBOR). The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect a material effect from the adoption of this guidance on its Condensed Consolidated Financial Statements.
The
Company recorded depreciation expense of $i13.9 million and $i12.6 million for the three months ended June 27, 2020 and June 29,
2019, respectively, and $i27.7 million and $i25.7 million for six months ended June 27, 2020 and June 29, 2019, respectively.
4.
iGoodwill and Other Intangible Assets
i
The amounts for goodwill and changes in the carrying value by segment for the six months ended June 27,
2020 are as follows:
The
Company tests its goodwill annually for impairment on the first day of its fiscal fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. For the three months ended June 27, 2020, the Company recorded a non-cash charge of $i33.8 million to recognize the impairment of goodwill in the automotive sensors reporting unit
within the Automotive segment. The goodwill impairment charge was due to reductions in the estimated fair value for the automotive sensors reporting unit based on lower expectations for future revenue, profitability and cash flows as compared to the expectations of the 2019 annual goodwill impairment test. These lower future expectations were driven by projected extended declines in end market demand due to the COVID-19 pandemic. In addition, during the second quarter of 2020, certain customers notified the Company of their decision to delay future programs along with a customer canceling their existing program. The goodwill impairment charge was determined using Level 3 inputs, including discounted cash flow analysis and comparable marketplace fair value data. As of June 27, 2020, the automotive sensors reporting unit had $i9.1 million
of remaining goodwill.
Customer
relationships, trademarks, and tradenames
i360,534
i106,618
i253,916
Total
$
i544,586
$
i223,339
$
i321,247
/
During
the three months ended June 27, 2020 and June 29, 2019, the Company recorded amortization expense of $i9.8 million and $i10.0
million, respectively. During six months ended June 27, 2020, the Company recorded amortization expense of $i19.8 million and $i20.2
million, respectively.
During the six months ended June 27, 2020, the Company recognized a $i0.3 million non-cash impairment charge on a certain patent triggered by the Company’s announcement to consolidate a manufacturing facility within the Industrial
segment.
i
Estimated annual amortization expense related to intangible assets with definite lives as of June 27, 2020 is as follows:
Employee-related
liabilities consist primarily of payroll, sales commissions, bonus, employee benefit accruals and workers’ compensation. Bonus accruals include amounts earned pursuant to the Company’s primary employee incentive compensation plans. Other accrued liabilities include miscellaneous operating accruals and other client-related liabilities.
For
the three and six months ended June 27, 2020, the Company recorded total restructuring charges of $i1.8 million and $i3.5
million, for employee termination costs and other restructuring charges. These charges primarily related to the reorganization of certain manufacturing, selling and administrative functions across all segments and the previously announced consolidation of a manufacturing facility within the Industrial segment. The Company also recognized $i33.8 million and $i36.1
million of impairment charges for the three and six months ended June 27, 2020, respectively, which included a $i33.8 million goodwill impairment charge associated with the automotive sensors reporting unit within the Automotive segment in the second quarter of 2020 and $i2.2 million
related to the land and building associated with the Company’s previously announced consolidation of a manufacturing facility within the Industrial segment in the first quarter of 2020. The impairment charges of the land and
building were included in selling, general and administrative expenses. See Note 4, Goodwill and Other Intangible Assets for further discussion regarding the goodwill impairment charge.
2019
For
the three and six months ended June 29, 2019, the Company recorded total restructuring charges of i5.7 million, and i8.4
million, respectively, for employee termination costs and other restructuring charges. These charges primarily related to reorganization of operations and selling, general and administrative functions as well as integration of IXYS within the Electronics segment and the reorganization of operations in the commercial vehicle products and automotive sensors businesses within the Automotive segment.
The restructuring reserves as of June 27, 2020 and December 28, 2019 are $i4.5
million and $i2.7 million, respectively. The restructuring reserves are included within accrued liabilities in the Condensed Consolidated Balance Sheets. The Company anticipates the remaining payments associated with employee terminations will primarily be completed by March 2021.
On March 4, 2016, the Company entered into a five-year credit agreement (“Credit Agreement”) with a group of lenders for up to $i700.0 million. The Credit Agreement consisted of an unsecured revolving credit facility (“Revolving Credit Facility”) of $i575.0
million and an unsecured term loan credit facility (“Term Loan”) of up to $i125.0 million. In addition, the Company had the ability, from time to time, to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $i150.0
million, in the aggregate, in each case in minimum increments of $i25.0 million, subject to certain conditions and the agreement of participating lenders.
On October 13, 2017, the Company amended the Credit Agreement to increase the Revolving Credit Facility from $i575.0
million to $i700.0 million and increase the Term Loan from $i125.0 million to $i200.0
million and to extend the expiration date from March 4, 2021 to October 13, 2022. The Credit Agreement also included the option for the Company to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $i300.0 million, in the aggregate, subject to the satisfaction of certain conditions set
forth in the Credit Agreement. Term Loans could be made in up to itwo advances. The first advance of $i125.0 million occurred on October
13, 2017 and the second advance of $i75.0 million occurred on January 16, 2018. For the Term Loan, the Company was required to make quarterly principal payments of i1.25%
of the original term loan ($i2.5 million quarterly) through maturity, with the remaining balance due on October 13, 2022. The Company paid $i2.5
million and $i5.0 million of principal payments on the term loan during the three and six months ended June 27, 2020, respectively.
On March 25, 2020, the company borrowed $i100.0 million
from the revolving credit facility to preserve financial flexibility and enhance liquidity, given the increasing levels of uncertainty related to coronavirus disease 2019 ("COVID-19").
On April 3, 2020, the Company amended the Credit Agreement to effect certain changes, including, among others: (i) eliminating the $i200.0 million
unsecured term loan credit facility, the remaining outstanding balance ($i140.0 million) of which was repaid in full on April 3, 2020 through the revolving credit facility; (ii) making certain financial and non-financial covenants less restrictive on the Company; (iii) modifying performance-based interest rate margins and undrawn fees; and (iv) extending the maturity date to April 3, 2025.
The amended Credit Agreement also allows the Company to increase the size of the revolving credit facility or enter into one or more tranches of term loans if there is no event of default and the Company is in compliance with certain financial covenants.
Outstanding borrowings under the amended Credit Agreement bears interest, at the Company’s option, at either LIBOR, fixed for interest periods of one, two, three or six-month periods, plus i1.25%
to i2.00%, or at the bank’s Base Rate, as defined, plus i0.25% to i1.00%,
based upon the Company’s Consolidated Leverage Ratio, as defined. The Company was also required to pay commitment fees on unused portions of the credit agreement ranging from i0.125% to i0.20%,
based on the Consolidated Leverage Ratio, as defined in the agreement. The amended Credit Agreement included representations, covenants and events of default that are customary for financing transactions of this nature. The effective interest rate on outstanding borrowings under the credit facility was i1.70% at June 27, 2020.
As of June 27, 2020, the
Company had ino amount outstanding in letters of credit and had available $i148.6 million of borrowing capacity
under the Revolving Credit Facility based on financial covenants. At June 27, 2020, the Company was in compliance with all covenants under the Credit Agreement.
Senior Notes
On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold €i212
million aggregate principal amount of senior notes in itwo series. The funding date for the Euro denominated senior notes occurred on December 8, 2016 for €i117
million in aggregate amount of i1.14% Senior Notes, Series A, due December 8, 2023 (“Euro Senior Notes, Series A due 2023”), and €i95
million in aggregate amount of i1.83% 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 $i125 million aggregate principal amount of senior notes in itwo
series. On February 15, 2017, $i25 million in aggregate principal amount of i3.03% Senior Notes, Series A, due February
15, 2022 (“U.S. Senior Notes, Series A due 2022”), and $i100 million in aggregate principal amount of i3.74% Senior Notes, Series B, due February
15, 2027 (“U.S. Senior Notes, Series B due 2027”) (together, the “U.S. Senior Notes due 2022 and 2027”) were funded. Interest on the U.S. Senior Notes due 2022 and 2027 is payable semiannually on February 15 and August 15, commencing August 15, 2017.
On November 15, 2017, the Company entered into a Note Purchase Agreement pursuant to which the Company issued and sold $i175
million in aggregate principal amount of senior notes in itwo series. On January 16, 2018, $i50 million aggregate principal amount of i3.48%
Senior Notes, Series A, due February 15, 2025 (“U.S. Senior Notes, Series A due 2025”) and $i125 million in aggregate principal amount of i3.78%
Senior Notes, Series B, due February 15, 2030 (“U.S. Senior Notes, Series B due 2030”) (together the “U.S. Senior Notes due 2025 and 2030” and with the Euro Senior Notes and the U.S. Senior Notes due 2022 and 2027, the “Senior Notes”) were funded. Interest on the U.S. Senior Notes due 2025 and 2030 is payable semiannually on February 15 and August 15, commencing on August 15, 2018.
The Senior Notes have not been registered under the Securities Act, or applicable state securities laws. The Senior Notes are general unsecured senior obligations and rank equal in right of payment with all existing and future unsecured unsubordinated indebtedness of the Company.
The
Senior Notes are subject to certain customary covenants, including limitations on the Company’s ability, with certain exceptions, to engage in mergers, consolidations, asset sales and transactions with affiliates, to engage in any business that would substantially change the general business of the Company, and to incur liens. In addition, the Company is required to satisfy certain financial covenants and tests relating to, among other matters, interest coverage and leverage. At June 27, 2020, the Company was in compliance with all covenants under 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.
Interest paid on all Company debt was $i3.4
million and $i3.5 million for the three months ended June 27, 2020 and June 29, 2019, respectively, and $i10.8 million
and $i11.5 million for the six months ended June 27, 2020 and June 29, 2019, respectively.
8. iFair
Value of Assets and Liabilities
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, the Company classifies each fair value measurement as follows:
Level 1—Valuations based on unadjusted quoted prices for identical
assets or liabilities in active markets;
Level 2—Valuations based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and
Level 3—Valuations based upon one or more significant unobservable inputs.
Following is a description of the valuation methodologies used for instruments measured at fair value and their classification in the valuation hierarchy.
Cash Equivalents
Cash equivalents
primarily consist of money market funds, which are held with an institution with sound credit rating and are highly liquid. The Company classified cash equivalents as Level 1 and are valued at cost which approximates fair value.
Investments in Equity Securities
Investments in equity securities listed on a national market or exchange are valued at the last sales price and classified within Level 1 of the valuation hierarchy and recorded in investments and other assets.
The Company has certain convertible debt and convertible preferred stock investments that
are accounted for under the cost method reflected in other assets in the Condensed Consolidated Balance Sheets. During the six months ended June 29, 2019, the Company recorded impairment charges of $i2.8 million in Other expense (income), net in the Condensed Consolidated Statements of Net (Loss) Income to adjust these certain investments to their estimated fair value. As of June 27,
2020 and December 28, 2019, the balances of these investments were $ii0.4/
million. The fair value of these investments are measured on a nonrecurring basis using Level 3 inputs under the fair value hierarchy. The Company's accounting and finance management determines the valuation policies and procedures for Level 3 fair value measurements and is responsible for the development and determination of unobservable inputs.
Mutual Funds
The Company has a non-qualified Supplemental Retirement and Savings Plan which provides additional retirement benefits for certain management employees and named executive officers by allowing participants to defer a portion of their annual compensation. The
Company maintains accounts for participants through which participants make investment elections. The marketable securities are classified as Level 1 under the fair value hierarchy as they are maintained in mutual funds with readily determinable fair value and recorded in other assets.
There were no changes during the quarter ended June 27, 2020 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. On October 30, 2019, the Company entered a foreign currency exchange forward contract
to mitigate the currency fluctuation risk between the Chinese renminbi and U.S. dollar. The foreign currency contract was not designated as a hedge instrument and was marked to market on a monthly basis. The notional value of the forward contracts at December 28, 2019 was $i16.0 million and expired on May
5, 2020. On March 23, 2020, the Company unwound the foreign currency exchange forward contract entered on October 30, 2019 and recognized a gain of $i0.2 million within Other expenses, net during the six months ended June
27, 2020. The fair value of the foreign currency forward contract was valued using market exchange rates and classified as a Level 2 input under the fair value hierarchy.
As of June 27, 2020 and December 28, 2019, the
Company did not hold any non-financial assets or liabilities that are required to be measured at fair value on a recurring basis.
i
The following table presents assets measured at fair value by classification within the fair value hierarchy as of June 27, 2020:
Fair
Value Measurements Using
(in thousands)
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total
Cash Equivalents
$
i148,409
$
i—
$
i—
$
i148,409
Investments
in equity securities
i12,899
i—
i—
i12,899
Mutual
funds
i10,650
i—
i—
i10,650
The
following table presents assets measured at fair value by classification within the fair value hierarchy as of December 28, 2019:
Fair Value Measurements Using
(in
thousands)
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total
Cash Equivalents
$
i118,999
$
i—
$
i—
$
i118,999
Investments
in equity securities
i12,969
i—
i—
i12,969
Mutual
funds
i10,464
i—
i—
i10,464
/
In
addition to the methods and assumptions used for the financial instruments recorded at fair value as discussed above, the following methods and assumptions are used to estimate the fair value of other financial instruments that are not marked to market on a recurring basis. The Company’s other financial instruments include cash and cash equivalents, short-term investments, accounts receivable and its long-term debt. Due to their short-term maturity, the carrying amounts of cash and cash equivalents, short-term investments and accounts receivable approximate their fair values. The Company’s revolving and term loan debt facilities’ fair values approximate book value at June 27, 2020 and December 28, 2019,
as the rates on these borrowings are variable in nature.
i
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 June 27, 2020 and December 28, 2019 were as follows:
The
Company recognized impairment charges of $i1.9 million for the land and building and $i0.3 million for a certain patent as a result of the
Company’s announcement to consolidate a manufacturing facility within the Industrial segment during the first quarter of 2020. See Note 6, Restructuring, Impairment and Other Charges, for further discussion. The fair value of the land and building was valued using a real estate appraisal and classified as a Level 3 input under the fair value hierarchy.
The
fair value as of the measurement date, net book value as of June 27, 2020 and related the goodwill impairment charge for assets measured at fair value on nonrecurring basis subsequent to initial recognition during three months ended June 27, 2020 were as follows:
See
Note 4, Goodwill and Other Intangible Assets for further discussion regarding goodwill impairment charges.
9. iBenefit Plans
The
Company has company-sponsored defined benefit pension plans covering employees in the U.K., Germany, the Philippines, China, Japan, Mexico, Italy and France. The amount of the retirement benefits provided under the plans is based on years of service and final average pay.
The Company recognizes interest cost, expected return on plan assets, and amortization of prior service, net within Other expense (income), net in the Condensed Consolidated Statements of Net (Loss) Income. iThe
components of net periodic benefit cost for the three and six months ended June 27, 2020 and June 29, 2019 were as follows:
Amortization
of prior service and net actuarial loss
i264
i62
i409
i124
Net
periodic benefit cost
$
i940
$
i568
$
i1,634
$
i1,124
The
Company expects to make approximately $i2.3 million of cash contributions to its pension plans in 2020.
The Company also sponsors certain post-employment plans in foreign countries and other statutory benefit plans. The Company
recorded $i0.5 million and $i0.2 million expense for the three months ended June
27, 2020 and June 29, 2019, respectively, and $i1.0 million and $i0.4 million expense
for the six months ended June 27, 2020 and June 29, 2019, respectively, in Cost of Sales and Other expense (income), net within the Condensed Consolidated Statements of Net (Loss) Income. For three and six months ended June 27, 2020, the pre-tax amounts recognized in other comprehensive (loss) income as components of net periodic benefit costs for these plans were $i0.2
million and $i0.4 million.
On April 7, 2020, the Company entered into a definitive agreement to purchase a group annuity contract,
under which an insurance company will be required to pay and administer pension payments to certain of the Company’s U.K. pension plan participants, or their designated beneficiaries, who have been receiving pension payments. The purchase of this group annuity contract will reduce the Company’s outstanding pension benefit obligation by approximately $i36
million, representing approximately i30% of the total obligations of the Company’s qualified pension plans, and will be funded with pension plan assets and additional cash on hand. In connection with this transaction, the Company will record a one-time non-cash settlement charge in the second
half of 2021 currently estimated between $i18 million and $i22
million, reflecting the accelerated recognition of unamortized actuarial losses in the plan. The actual settlement charge could differ from this estimate due to final data and plan wind-up expenses. Due to the signing of the group annuity contract being a significant change in the U.K. pension plan, the liabilities of the plan were remeasured as of April 6, 2020 resulting in an increase of $i13.4 million
(£i10.9 million) to both the net pension liability and unamortized actuarial loss within other comprehensive (loss) income during the second quarter. Additionally, the Company made a cash contribution of $i10.4 million
(£i8.4 million) under this agreement during the second quarter.
Due
to the signing of the group annuity contract being a significant change in the U.K. pension plan, the liabilities of the plan were remeasured as of April 6, 2020 resulting in an increase of $i13.4 million to unamortized actuarial loss within other comprehensive (loss) income. See Note 9, Benefits Plans for further discussion.
The
following tables set forth the changes in accumulated other comprehensive (loss) income by component for the six months ended June 27, 2020 and June 29, 2019:
(in thousands)
Pension and postretirement liability
and reclassification adjustments
Amounts reclassified from accumulated other comprehensive (loss) income to earnings for the three and six months ended June 27, 2020 and June 29, 2019 were as follows:
Amortization of prior service and net actuarial loss
$
i429
$
i62
$
i774
$
i124
/
The
Company recognizes the amortization of prior service costs in Other (expense) income, net within the Condensed Consolidated Statements of Net (Loss) Income.
11. iIncome Taxes
The effective tax rate for the three and six
months ended June 27, 2020 was i15.1% and i37.2% respectively, compared to the effective tax rate for
the three and six months ended June 29, 2019 of i18.2% and i19.2%. The effective tax rate for the second
quarter of 2020 (which is based upon a pre-tax loss) is lower than the effective tax rate for the comparable 2019 period (which is based upon pre-tax income), primarily due to the goodwill impairment charge of $i33.8 million recorded in the second quarter of 2020, the substantial majority of which did not result in a tax benefit.
The effective tax rate for the first six months of 2020 is higher than the effective tax rate for the comparable 2019 period primarily due to the impact of the goodwill
impairment charge of $i33.8 million as well as a reduction in the forecasted income earned in lower tax jurisdictions in 2020 driven by the uncertainty resulting from the impact of COVID-19. The effective tax rate for the first six months of 2020 is higher than the applicable U.S. statutory tax rate primarily due to the impact of the goodwill impairment charge of $i33.8
million as well as the forecasted impact of non-U.S. losses and expenses with no tax benefit, and the U.S. global intangible low-taxed income provisions ("GILTI") (in the 2019 comparable period the impact of these items was more than offset by the impact of income earned in lower tax jurisdictions).
12. iEarnings Per Share
i
The
following table sets forth the computation of basic and diluted earnings per share:
Potential
shares of common stock relating to stock options excluded from the earnings per share calculation because their effect would be anti-dilutive were i328,624 and i167,599
for the three months ended June 27, 2020 and June 29, 2019, respectively, and i212,290 and i121,326
for the six months ended June 27, 2020 and June 29, 2019, respectively.
The Company’s Board of Directors authorized the repurchase of up to i1,000,000
shares of the Company’s common stock under a program for the period May 1, 2018 to April 30, 2019 ("2018 program"). On April 26, 2019, the Company's Board of Directors authorized to a program to repurchase up to i1,000,000
shares of the Company's common stock for the period May 1, 2019 to April 30, 2020 ("2019 program") to replace its previous expired 2018 program. On April 23, 2020, the Company's Board of Directors authorized a new program to repurchase up to i1,000,000
shares of the Company's common stock for the period May 1, 2020 to April 30, 2021 (the "2020 program") to replace its previous expired 2019 program. The Company has suspended share repurchases for the near-term due to the uncertainty of the impact and duration of COVID-19 and to focus on other capital allocation priorities.
The Company did inot
repurchase any shares of its common stock for the three months ended June 27, 2020. During the three months ended June 29, 2019, the Company repurchased i188,214 shares of its common stock totaling $i32.0
million. For the six months ended June 27, 2020 and June 29, 2019, the Company repurchased i175,110 and i268,130
shares of its common stock totaling $i22.9 million and $i45.5 million, respectively.
13.
iRelated Party Transactions
As a result of the Company’s acquisition of IXYS, the Company has equity ownership in various investments that are accounted for under the equity method. The following is a description of the investments and related party transactions.
Powersem
GmbH:The Company owns i45% of the outstanding equity of Powersem GmbH (“Powersem”), a module manufacturer based in Germany.
EB-Tech Co., Ltd.:The Company owns approximately i19%
of the outstanding equity of EB Tech Co., Ltd. (“EB Tech”), a company with expertise in radiation technology based in South Korea.
Automated Technology (Phil), Inc.: The Company owns approximately i24% of the outstanding common shares of Automated Technology (Phil), Inc. (“ATEC”), a supplier located in the Philippines that provides assembly and test services. One
member of the Company's Board of Directors serves on the Board of Directors of ATEC.
Additionally,
the Company has certain cost method investments in VTOOL Ltd. and Securepush Ltd. with a total book value of $i0.4 million as of June 27, 2020 and one member of the Company’s Board of Directors is currently an investor and a director of VTOOL Ltd. and Securepush Ltd.
On April
26, 2019, the Company sold its subsidiary Microwave Technology, LLC. (“MWT”) resulting in a loss on disposal of $i2.6 million reflected in Other income (expense), net in the Condensed Consolidated Statements of Net (Loss) Income. The
operations of MWT were included in the Electronics segment. One member of the Company’s Board of Directors is an owner of a company that purchased MWT.
14. iSegment Information
The
Company and its subsidiaries design, manufacture and sell components and modules for circuit protection, power control and sensing throughout the world. The Company reports its operations by the following segments: Electronics, Automotive, and Industrial. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. The CODM is the Company’s President and Chief Executive Officer (“CEO”). The CODM allocates resources to and assesses the performance of each
operating segment using information about its revenue and operating income (loss) before interest and taxes, but does not evaluate the operating segments using discrete balance sheet information.
Sales, marketing, and research and development expenses are charged directly into each operating segment. Purchasing, logistics, customer service, finance, information technology, and human resources are shared functions that are allocated back to the ithree operating segments. The
Company does not report inter-segment revenue because the operating segments do not record it. Certain expenses, determined by the CODM to be strategic in nature and not directly related to segments' current results, are not allocated but identified as “Other”. Additionally, the Company does not allocate interest and other income, interest expense, or taxes to operating segments. These costs are not allocated to the segments, as management excludes such costs when assessing the performance of the segments. Although the CODM uses operating income (loss) to evaluate the segments, operating costs included in one segment may benefit other segments. Except as discussed above, the accounting policies for segment reporting are the same as for the Company as a whole.
•Electronics
Segment: Consists of one of the broadest product offerings in the industry, including fuses and fuse accessories, positive temperature coefficient (“PTC”) resettable fuses, polymer electrostatic discharge (“ESD”) suppressors, varistors, reed switch based magnetic sensing, gas discharge tubes; semiconductor products such as discrete transient voltage suppressor (“TVS”) diodes, TVS diode arrays, protection and switching thyristors, metal-oxide-semiconductor field effect transistors (“MOSFETs”) and silicon carbide diodes; and insulated gate bipolar transistors (“IGBT”) technologies. The segment covers a broad range of end markets, including industrial and automotive electronics, electric vehicle and related infrastructure, data and telecommunications, medical devices, alternative energy, consumer electronics and white goods.
•Automotive
Segment: Consists of a wide range of circuit protection, power control and sensing technologies for global original equipment manufacturers (“OEMs”), Tier-I suppliers and parts distributors in passenger car, heavy duty truck, off-road vehicles, material handling, agricultural, construction and other commercial vehicle end markets. Passenger car fuse products include fuses and fuse accessories for internal combustion engine vehicles and hybrid and electric vehicles including blade fuses, battery cable protectors, resettable fuses, high-current fuses, and high-voltage fuses. Commercial vehicle products include fuses, switches, relays, and power distribution modules for the commercial vehicle industry. Automotive sensor products include a wide range of automotive and commercial vehicle products designed to monitor the passenger compartment occupants, safety and environment as well as the vehicle’s powertrain.
•Industrial
Segment: Consists of power fuses, protection relays and controls and other circuit protection products for use in various industrial applications such as oil, gas, mining, alternative energy, electric vehicle infrastructure, non-residential construction, HVAC systems, elevators and other industrial equipment.
(a)
Included in “Other” Operating (loss) income for the 2020 second quarter is $i0.1 million ($i1.3
million year-to-date) of acquisition-related and integration charges related to the IXYS acquisition and other contemplated acquisitions. In addition, there was $i35.6 million ($i39.6
million year-to-date) of restructuring, impairment and other charges, primarily related to the goodwill impairment charge of $i33.8 million recorded in the second quarter associated with the automotive sensors reporting unit within the Automotive segment, $i1.8
million ($i3.5 million year-to-date) of employee termination costs, and other restructuring charges and impairment charges of $i2.2 million recorded in the first quarter
associated with the announced consolidation of a manufacturing facility within the Industrial segment. See Note 4, Goodwill and Other Intangible Assets and Note 6, Restructuring, Impairment and Other Charges, for further discussion.
/
Included in "Other" Operating income (loss) for the second quarter of 2019 is $i1.5
million ($i3.8 million year-to-date) of acquisition integration charges primarily related to the IXYS acquisition. In addition, there were $i5.7
million ($i8.4 million year-to-date) of restructuring charges primarily related to employee termination costs.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary
Statement Regarding Forward-Looking Statements Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”).
Certain statements in this section and other parts of this Quarterly Report on Form 10-Q may constitute "forward-looking statements" within the meaning of the federal securities laws and are entitled to the safe-harbor provisions of the PSLRA. These statements include statements regarding the Company’s future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future. Such statements can be identified by the use of forward-looking terminology such as "believes,""expects,""may,""estimates,""will,""should,""plans" or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by discussions of strategy, although not all forward-looking statements contain such terms. The Company cautions that forward-looking statements, which speak only as of the date they are made, are subject to risks, uncertainties and other factors, and actual results and outcomes may differ materially from those indicated or implied by the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, risks and uncertainties relating to general economic conditions; the severity and duration of the coronavirus disease 2019 ("COVID-19") pandemic and the measures taken in response thereto and the effects of those items on the Company’s business;
product demand and market acceptance; economic conditions; the impact of competitive products and pricing; product quality problems or product recalls; capacity and supply difficulties or constraints; coal mining exposures reserves; failure of an indemnification for environmental liability; exchange rate fluctuations; commodity price fluctuations; the effect of the Company's accounting policies; labor disputes; restructuring costs in excess of expectations; pension plan asset returns less than assumed; uncertainties related to political or regulatory changes; integration of acquisitions may not be achieved in a timely manner, or at all; and other risks that may be detailed in Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q for the quarter ended June 27, 2020, the
Company's Annual Report on Form 10-K for the year ended December 28, 2019, and the Company's other filings and submissions with the Securities and Exchange Commission. The Company does not undertake any obligation to update or revise any forward-looking statements to reflect future events or circumstances, new information or otherwise.
This report, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with information provided in the consolidated financial statements and the related Notes thereto appearing in the
Company's Annual Report on Form 10-K for the year ended December 28, 2019.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide information that is supplemental to, and should be read together with, the consolidated financial statements and the accompanying notes. Information in MD&A is intended to assist the reader in obtaining an understanding of (i) the consolidated financial statements, (ii) the changes in certain key items within those financial statements from year-to-year, (iii) the primary factors that contributed to those changes, and (iv) any changes in known trends or uncertainties that we are aware of and that may have a material effect on future performance. In addition, MD&A provides information about the
Company’s segments and how the results of those segments impact the results of operations and financial condition as a whole.
Founded in 1927, Littelfuse is a global manufacturer of leading technologies in circuit protection, power control and sensing.
Serving over 100,000 end customers, the Company’s products are found in automotive and commercial vehicles, industrial
applications, data and telecommunications, medical devices, consumer electronics and appliances. With its broad product portfolio of fuses, semiconductors, polymers, ceramics, relays and sensors, and extensive global infrastructure, the Company’s worldwide associates partner with its customers to design, manufacture and deliver innovative,
high-quality solutions for a safer, greener and increasingly connected world.
The Company maintains a network of global laboratories and engineering centers that develop new products and product enhancements, provide customer application support and test products for safety, reliability, and regulatory compliance. The Company conducts its business through three reportable segments: Electronics, Automotive, and Industrial. Within these segments, the Company designs, manufactures and sells components and modules for circuit protection, power control and sensing products throughout the world. The circuit protection products protect against electrostatic
discharge, power surges, short circuits, voltage spikes and other harmful occurrences; our power control products safely and efficiently control power and improve productivity and our sensor products are used to identify and detect temperature, proximity, flow speed and fluid level in various applications.
Executive Summary
For the second quarter of 2020, the Company recognized net sales of $307.3 million compared to $397.9 million in the second quarter of 2019 representing a decrease of $90.5 million, or 22.8%. The decrease was primarily driven by lower volume across all of the segments due to the impact of
COVID-19, a decline in global auto production, and $2.3 million or 0.6% of unfavorable changes in foreign exchange rates. The Company recognized a net loss of $9.0 million, or $0.37 per diluted share, in the second quarter of 2020 compared to net income of $43.8 million, or $1.75 per diluted share in the second quarter of 2019. The net loss was primarily due to a non-cash goodwill impairment charge of $33.8 million related to the automotive sensors reporting unit within the Automotive segment and lower operating income across all the segments.
The Company continues to take actions to improve its cost structure. The Company expects to
realize cost savings from the restructuring activities taken during 2019 and 2020, including the reorganization of certain manufacturing, selling and administrative functions across all segments and the consolidation of a manufacturing facility within the Industrial Segment.
Net cash provided by operating activities was $101.3 million for the six months ended June 27, 2020 as compared to $80.1 million for the six months ended June 29, 2019. The increase in net cash provided by operating activities was primarily due to lower annual incentive payments and favorable changes in net working capital driven by the timing of collections of accounts receivable and changes in accounts payable partially offset by lower earnings largely due to the impact of COVID-19.
On
March 25, 2020, the company borrowed $100.0 million from its current revolving credit facility to preserve financial flexibility and enhance liquidity, given the increasing levels of uncertainty related to COVID-19. On April 3, 2020, the Company amended the existing credit agreement to effect certain changes, including, among others: (i) eliminating the $200.0 million unsecured term loan credit facility, the remaining outstanding balance ($140.0 million) of which was repaid in full on April 3, 2020 through the revolving credit facility; (ii) making certain financial and non-financial covenants less restrictive on the
Company; (iii) modifying performance-based interest rate margins and undrawn fees; and (iv) extending the maturity date to April 3, 2025. The amended credit agreement also allows the Company to increase the size of the revolving credit facility or enter into one or more tranches of term loans if there is no event of default and the Company is in compliance with certain financial covenants.
On April 7, 2020, the Company entered into a definitive agreement to purchase a group annuity contract,
under which an insurance company will be required to pay and administer pension payments to certain of the Company’s UK pension plan participants, or their designated beneficiaries, who have been receiving pension payments. The purchase of this group annuity contract will reduce the Company’s outstanding pension benefit obligation by approximately $36 million, representing approximately 30% of the total obligations of the Company’s qualified pension plans, and will be funded with pension plan assets and additional cash on hand. In connection with this transaction, the
Company will record a one-time non-cash settlement charge in the second half of 2021 currently estimated between $18 million and $22 million, reflecting the accelerated recognition of a portion of unamortized actuarial losses in the plan. The actual settlement charge could differ from this estimate due to final data and plan wind-up expenses.
COVID-19
continued to negatively impact the Company’s 2020 second quarter financial results. During the second quarter, sales volumes across all of the Company's segments were reduced driven by production disruptions from temporary closures of manufacturing facilities in the Philippines, Mexico and Italy as a result of government directives. Furthermore, sales volumes in the Automotive segment were significantly impacted by lower global end market demand across passenger vehicle end markets. The Company incurred incremental costs of approximately $5.1 million and $7.6 million during the three and six months ended June 27, 2020, respectively, primarily due to costs related to
the above temporary plant closures, higher costs for freight and protective supplies, partially offset by certain international government subsidies and COVID-19 relief programs.
The Company’s priorities continue to be first, on our associates, their families and the communities in which we operate; second, our customers; and third, long-term financial health of the company. In an effort to protect the health and safety of our employees, the Company has enacted numerous proactive, aggressive actions at its facilities globally, and implemented a number of safety procedures including hygiene and disinfection protocols, social distancing and wearing
personal protective equipment ("PPE"). The Company expects these actions will continue for the foreseeable future.
In an effort to contain COVID-19 and slow its spread, governments around the world enacted various measures, including orders to close all businesses not deemed “essential”, isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. These government measures disrupted certain of our operating locations in many countries around the world. our operations that were closed or running at limited levels during the second quarter returned to normal or nearly normal capacity levels during June, and all of our manufacturing facilities are currently operating.
The
Company continues to work with customers to meet production requirements for their products, many of which are considered essential, including healthcare and medical devices, transportation, communication and energy infrastructure.
The Company took cost containment initiatives to help offset the impact of lower demand and the business disruption created by COVID-19. During the first quarter, the Company suspended annual wage increases and its 2020 annual cash incentive program. The Company also reduced salaries of the CEO and executive leadership team, and reduced cash compensation of its board of directors during the second quarter.
The Company continues to develop and execute contingency plans to manage our business performance within this uncertain environment.
The Company anticipates that the global health crisis caused by COVID-19 will negatively impact its business activity for the foreseeable future. It is currently difficult to estimate the magnitude of the COVID-19 disruption, if future disruptions will occur due to a resurgence in COVID-19 cases and its impact on our employees, customers, suppliers and vendors. The Company will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in
the best interests of our employees, customers, partners, suppliers, and other stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business and operations, including the effects on our customers, employees, and prospects, or on our financial results for the remainder of fiscal 2020.
Goodwill Impairment Assessment
The Company performs its annual goodwill impairment tests on or about September 30, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. As part of its interim review for indicators of impairment, management
analyzed potential changes in the value of individual reporting units with goodwill based on each reporting unit’s operating results for the six months ended June 27, 2020 compared to expected results. In addition, management considered how other key assumptions, including discount rates and expected long-term growth rates, used in last fiscal year’s impairment analysis, could be impacted by changes in market conditions and economic events.
Management considered trends in these factors when performing its assessment of whether an interim impairment review was required for any reporting unit. For the three months ended June 27, 2020, the Company recorded a non-cash charge of $33.8 million to recognize
the impairment of goodwill in the automotive sensors reporting unit within the Automotive segment. The goodwill impairment charge was due to reductions in the estimated fair value for the automotive sensors reporting unit based on lower expectations for future revenue, profitability and cash flows as compared to the expectations of the 2019 annual goodwill impairment test. These lower future expectations were driven by projected extended declines in end market demand due to the COVID-19 pandemic. In addition, during the second quarter of 2020, certain customers notified the Company of their decision to delay future programs along with a customer canceling an existing program. The goodwill impairment charge was
determined using Level 3 inputs, including discounted cash flow analysis and comparable marketplace fair value data As of June 27, 2020, the automotive sensors reporting unit had $9.1 million of remaining goodwill.
In addition, the semiconductors reporting unit has experienced declines in net sales due to temporary plant shut-downs and lower customer demand primarily due to COVID-19. The Company continues to evaluate the impact of COVID-19 on its long-term expectations for this unit. Further negative developments having a significant impact on the estimated fair value of this reporting unit could result in future goodwill impairment charges. As of the September
30, 2019 annual goodwill impairment test, the semiconductors reporting unit estimated fair value exceeded its book value by approximately 42%. As of June 27, 2020, $467.1 million of goodwill was allocated to the semiconductors reporting unit. The semiconductors reporting unit is included within the Electronics segment.
Based on the June 27, 2020 interim assessment, management concluded that other than the goodwill impairment recognized in the automotive sensors reporting unit, no events or changes in circumstances indicated that it was more likely than not that the fair value for any reporting unit had declined below its carrying value. Nevertheless, a continued global economic slowdown and further business disruption due to COVID-19 could result in changes to expectations of future financial
results and key valuation assumptions. These changes could result in changes to management’s estimates of the fair value of the Company’s reporting units and could result in a review for impairment of goodwill prior to September 29, 2020, the Company’s next annual measurement date, and a potential corresponding impairment charge.
Risks Related to Market Conditions
While the Company has not historically or currently as of June 27, 2020 had significant credit risk on
its accounts receivable, the impact of the COVID-19 pandemic and associated economic slowdown may increase the Company’s credit risk on accounts receivable. It is possible that the Company’s customers may experience liquidity issues which may impact the timing of the collections on receivables. The Company will continue to evaluate how the ongoing pandemic may impact collectability.
Results of Operations
The
following table summarizes the Company’s unaudited condensed consolidated results of operations for the periods presented. The second quarter of 2020 includes $0.1 million ($1.3 million year-to-date) of acquisition-related and integration charges related to the IXYS acquisition and other contemplated acquisitions. In addition, there were $35.6 million ($39.6 million year-to-date) of restructuring, impairment and other charges, primarily related to the goodwill impairment charge of $33.8 million recorded in the second quarter associated with the automotive sensors reporting unit within the Automotive segment, $1.8 million ($3.5 million year-to-date) of employee termination costs, and other restructuring charges and impairment charges of $2.2 million recorded in the first quarter associated with the announced consolidation of a manufacturing facility within the Industrial segment.
The
second quarter of 2019 includes $1.5 million ($3.8 million year-to-date) of acquisition integration charges primarily related to the IXYS acquisition. In addition, there were $5.7 million ($8.4 million year-to-date) of restructuring charges primarily related to employee termination costs.
Net sales decreased $90.5 million or 22.8% for the second quarter of 2020 compared to the second quarter of 2019 primarily due to lower volume across all segments due to temporary closures of manufacturing facilities resulting from government directives due to the impact of COVID-19 and lower volume across the Automotive segment due to a decline in global auto production driven by lower global end market demand, and $2.3 million or 0.6% of unfavorable changes in foreign exchange rates.
Net sales decreased $149.9 million or 18.7% for the first six months of 2020 compared to the first six months of 2019 primarily due to lower volume driven by the disruption across the Electronics and Automotive segments due to temporary closures of manufacturing
facilities resulting from government directives due to the impact of COVID-19, lower volume across the Electronics segment from electronics distribution partners and end customers reducing excess inventories and production, and lower volume across the Automotive segment due to a decline in global auto production driven by lower global end market demand, and $5.6 million or 0.7% of unfavorable changes in foreign exchange rates.
Gross Profit
Gross profit was $99.1 million, or 32.2% of net sales, in the second quarter of 2020 compared to $141.8 million, or 35.6% of net sales, for the second quarter of 2019. The decrease in gross profit is primarily due to lower volume across all segments, additional costs associated with government-directed plant shutdowns and supply chain constraints, higher freight,
supplies and other costs due to the impact of COVID-19.
Gross profit was $222.8 million, or 34.1% of net sales, in the first six months of 2020 compared to $297.0 million, or 37.0% of net sales, for the first six months of 2019. The decrease in gross profit reflected lower volume across all segments. The decrease in gross margin is primarily due to lower volumes across the Electronics segment, additional costs associated with government-directed plant shutdowns and supply chain constraints, higher freight, supplies and other costs due to the impact of COVID-19, and unfavorable price and product mix.
Operating Expenses
Total operating expenses were $111.0 million, or 36.1% of net sales, for the second quarter of 2020 compared to $89.2 million,
or 22.4% of net sales, for the second quarter of 2019. The increase in operating expenses of $21.9 million is primarily due to the goodwill impairment charge of $33.8 million, or 11.0% of net sales, in the automotive sensors reporting unit within the Automotive segment, partially offset by lower incentive compensation, lower research and development expenses of $8.1 million, lower sales commissions and travel expenses due to COVID-19, and lower acquisition-related and integration charges of $1.4 million.
Total operating expenses were $190.0 million, or 29.1% of net sales, for the first six months of 2020 compared to $183.7 million, or 22.9% of net sales, for the first six months of 2019. The increase in operating expenses of $6.3 million is primarily due to the goodwill impairment charge of $33.8 million, or 5.2% of net sales, in the automotive sensors reporting unit within the Automotive
segment and impairment charges of $2.2 million related to the Company’s first quarter announcement to consolidate a manufacturing facility within the Industrial segment, partially offset by lower incentive compensation, lower research and development expenses of $14.9 million, lower sales commissions and travel expenses due to COVID-19, and lower acquisition-related and integration charges of $2.5 million.
Operating (Loss) Income
Operating loss was $12.0 million, a decrease of $64.6 million, or 122.7%, for the second quarter of 2020 compared to operating income $52.6 million for the second quarter of 2019. The decrease is primarily due to lower gross margin across all of the segments and higher operating expenses noted
above. Operating margins decreased from 13.2% in the second quarter of 2019 to (3.9)% in the second quarter of 2020 driven by the factors mentioned above. The goodwill impairment charge of $33.8 million negatively impacted the operating margin by 11.0% for the second quarter of 2020.
Operating income was $32.8 million, a decrease of $80.5 million, or 71.1%, for the first six months of 2020 compared to $113.3 million for the first six months of 2019. The decrease in operating income is primarily due to lower gross margin across all segments and higher operating expenses noted above. Operating margins decreased from 14.1% in the first six months of 2019 to 5.0% in the first six months of 2020 driven by the factors mentioned above. The goodwill impairment charge of $33.8 million negatively impacted the operating margin by 5.2% for the first six months of 2020.
Loss before income taxes was $10.6 million, or (3.4)% of net sales, for the second quarter of 2020 compared to income before income tax of $53.6 million, or 13.5% of net sales, for the second quarter of 2019. In addition to the factors impacting comparative results for operating (loss) income discussed above, loss before income taxes was primarily impacted by $1.8 million increase in coal mining reserves, lower interest income of $0.9 million, higher interest expense and higher pension non-service costs, partially offset by higher foreign exchange gains of $2.4 million and unrealized investment gains of $1.7 million associated with our equity investments during the three months ended June 27, 2020 compared to the three months ended June
29, 2019.
Income before income taxes was $24.9 million, or 3.8% of net sales, for the first six months of 2020 compared to $100.0 million, or 12.4% of net sales, for the first six months of 2019. In addition to the factors impacting comparative results for operating income discussed above, income before income taxes was impacted by foreign exchange gains of $3.4 million during the six months ended June 27, 2020 compared to foreign exchange losses of $0.7 million during the six months ended June 29, 2019, impairment charges of $3.1 million for certain other investments and a $2.6 million loss on the disposal of a business within the Electronics segment during the six months ended June 29, 2019, partially offset by a $1.5 million increase
in coal mining reserve and $1.0 million decreases in unrealized investment gains associated with our equity investments.
Income Taxes
Income tax benefit for the second quarter of 2020 was $1.6 million, or an effective tax rate of 15.1%, compared to income tax expense of $9.8 million, or an effective tax rate of 18.2%, for the second quarter of 2019. The effective tax rate for the second quarter of 2020 (which is based upon a pre-tax loss) is lower than the effective tax rate for the comparable 2019 period (which is based upon pre-tax income), primarily due to the goodwill impairment charge of $33.8 million recorded in the second quarter of 2020, the substantial majority of which did not result in a tax benefit.
Income
tax expense for the first six months of 2020 was $9.3 million, or an effective tax rate of 37.2%, compared to income tax expense of $19.2 million, or an effective tax rate of 19.2%, for the first six months of 2019. The effective tax rate for the first six months of 2020 is higher than the effective tax rate for the comparable 2019 period primarily due to the impact of the goodwill impairment charge of $33.8 million, the substantial majority of which did not result in a tax benefit, as well as a reduction in the forecasted income earned in lower tax jurisdictions in 2020 driven by the uncertainty resulting from the impact of COVID-19. The effective tax rate for the first six months of 2020 is higher than the applicable U.S. statutory tax rate primarily due to the impact of the goodwill impairment charge of $33.8 million as well as the forecasted impact of non-U.S. losses and expenses with no tax benefit and the U.S. global intangible low-taxed income tax provisions (in
the 2019 comparable period the impact of these items was more than offset by the impact of income earned in lower tax jurisdictions).
Segment Results of Operations
The Company reports its operations by the following segments: Electronics, Automotive and Industrial. Segment information is described more fully in Note 14, Segment Information, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report.
The
following table is a summary of the Company’s net sales by segment:
Net sales decreased $36.3 million, or 14.0%, in the second quarter of 2020 compared to the second quarter of 2019 primarily due to lower volume in the semiconductor and electronics products businesses driven by the production disruption due to temporary closures of manufacturing facilities resulting from government directives due to the impact of COVID-19, and unfavorable changes in foreign exchange rates of $1.2 million.
Net sales decreased $87.5 million, or 16.7%, in the first six months of 2020 compared to the first six months of 2019 primarily due to lower volume in the semiconductor and electronics products businesses driven by the production disruption due to temporary closures of manufacturing facilities resulting
from government directives due to the impact of COVID-19, lower volume from electronics distribution partners and end customers reducing excess inventories, and unfavorable changes in foreign exchange rates of $2.9 million.
Automotive Segment
Net sales decreased $46.7 million, or 42.9%, in the second quarter of 2020 compared to the second quarter of 2019 due to decreased volume across all businesses driven by the production disruption due to temporary closures of manufacturing facilities resulting from government directives due to the impact of COVID-19, a decline in global auto production driven by lower global end market demand, and unfavorable changes in foreign exchange rates of $0.9 million.
Net sales decreased $55.4 million,
or 24.9%, in the first six months of 2020 compared to the first six months of 2019 due to decreased volume across all businesses driven by the production disruption due to temporary closures of manufacturing facilities resulting from government directives due to the impact of COVID-19, a decline in global auto production driven by lower global end market demand, and unfavorable changes in foreign exchange rates of $2.5 million.
Industrial Segment
Net sales decreased by $7.6 million, or 25.6%, in the second quarter of 2020 compared to the second quarter of 2019 primarily due to decreased volume across all businesses driven by the production disruption due to temporary closures of manufacturing facilities resulting from government directives due to the impact of COVID-19 and unfavorable changes in foreign
exchange rates of $0.2 million.
Net sales decreased by $7.1 million, or 12.6%, in the first six months of 2020 compared to the first six months of 2019 primarily due to decreased volume across all businesses driven by the production disruption due to temporary closures of manufacturing facilities resulting from government directives due to the impact of COVID-19 in the second quarter of 2020, and by unfavorable changes in foreign exchange rates of $0.2 million.
Geographic Net Sales Information
Net sales by geography represent net sales to customer or distributor locations. The following table is a summary of the Company’s net sales by geography:
Second
Quarter
First Six Months
(in thousands)
2020
2019
Change
% Change
2020
2019
Change
% Change
Asia-Pacific
$
155,737
$
172,895
$
(17,158)
(9.9)
%
$
296,610
$
345,676
$
(49,066)
(14.2)
%
Americas
89,651
135,894
(46,243)
(34.0)
%
210,152
273,928
(63,776)
(23.3)
%
Europe
61,949
89,090
(27,141)
(30.5)
%
146,671
183,775
(37,104)
(20.2)
%
Total
$
307,337
$
397,879
$
(90,542)
(22.8)
%
$
653,433
$
803,379
$
(149,946)
(18.7)
%
Asia-Pacific
Net
sales decreased $17.2 million, or 9.9%, in the second quarter of 2020 compared to the second quarter of 2019. The decrease in net sales was primarily due to lower volume across all businesses within the Electronics segment, lower volume in passenger car products businesses within the Automotive segment, and unfavorable changes in foreign exchange rates of $1.1 million.
Net sales decreased $49.1 million, or 14.2%, in the first six months of 2020 compared to the first six months of 2019. The decrease
in net sales was primarily due to lower volume across all businesses within the Electronics and Automotive segments and unfavorable changes in foreign exchange rates of $2.0 million.
Americas
Net sales decreased $46.2 million, or 34.0%, in the second quarter of 2020 compared to the second quarter of 2019 primarily due to lower volume across all segments due to temporary closures of manufacturing facilities resulting from government directives due to the impact of COVID-19, lower volume across the Automotive segment due to a decline in global auto production driven by lower global end market demand, and unfavorable changes in foreign exchange rates of $0.1 million.
Net sales decreased $63.8 million, or 23.3%, in the first six months of 2020 compared
to the first six months of 2019 primarily due to lower volume across all segments driven by the production disruption due to temporary closures of manufacturing facilities resulting from government directives due to the impact of COVID-19, lower volume across the Electronics segment from electronics distribution partners and end customers reducing excess inventories and production, lower volume in all businesses within the Automotive segment and unfavorable changes in foreign exchange rates of $0.3 million.
Europe
Net sales decreased $27.1 million, or 30.5%, in the second quarter of 2020 compared to the second quarter of 2019. The decrease in net sales was primarily due to lower volume in the semiconductor business within the Electronics segment, lower volume in all businesses
within the Automotive segment, and unfavorable changes in foreign exchange rates of $1.1 million.
Net sales decreased $37.1 million, or 20.2%, in the first six months of 2020 compared to the first six months of 2019. The decrease in net sales was primarily due to lower volume in the semiconductor business within the Electronics segment, lower volume in all businesses within the Automotive segment and unfavorable changes in foreign exchange rates of $3.3 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.
On March 4, 2016, the Company entered into a five-year credit agreement (“Credit Agreement”) with a group of lenders for up to $700.0 million. The Credit Agreement consisted of an unsecured revolving credit facility (“Revolving Credit Facility”) of $575.0 million and an unsecured term
loan credit facility (“Term Loan”) of up to $125.0 million. In addition, the Company had the ability, from time to time, to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $150.0 million, in the aggregate, in each case in minimum increments of $25.0 million, subject to certain conditions and the agreement of participating lenders.
On October 13, 2017, the Company amended the Credit Agreement to increase the Revolving Credit Facility from $575.0 million to $700.0 million and increase the Term Loan from $125.0 million to $200.0 million and to extend the expiration date from March 4, 2021
to October 13, 2022. The Credit Agreement also included the option for the Company to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $300.0 million, in the aggregate, subject to the satisfaction of certain conditions set forth in the Credit Agreement. Term Loans could be made in up to two advances. The first advance of $125.0 million occurred on October 13, 2017 and the second advance of $75.0 million occurred on January 16, 2018. For the Term Loan, the Company was required to make quarterly principal payments of 1.25% of the original term loan ($2.5 million quarterly) through maturity, with the remaining balance
due on October 13, 2022. The Company paid $2.5 million and $5.0 million of principal payments on the term loan during the three and six months ended June 27, 2020, respectively.
On March 25, 2020, the
company borrowed $100.0 million from its current revolving credit facility to preserve financial flexibility and enhance liquidity, given the increasing levels of uncertainty related to COVID-19.
On April 3, 2020, the Company amended the Credit Agreement to effect certain changes, including, among others: (i) eliminating the $200.0 million unsecured term loan credit facility, the remaining outstanding balance ($140.0 million) of which was repaid in full on April 3, 2020 through the revolving credit facility; (ii) making certain financial and non-financial covenants less restrictive on the Company; (iii) modifying performance-based
interest rate margins and undrawn fees; and (iv) extending the maturity date to April 3, 2025. The amended Credit Agreement also allows the Company to increase the size of the revolving credit facility or enter into one or more tranches of term loans if there is no event of default and the Company is in compliance with certain financial covenants.
Outstanding borrowings under the amended Credit Agreement bears interest, at the Company’s option, at either LIBOR, fixed for interest periods of one, two, three or six-month periods, plus 1.25% to 2.00%, or at the bank’s Base Rate, as defined,
plus 0.25% to 1.00%, based upon the Company’s Consolidated Leverage Ratio, as defined. The Company was also required to pay commitment fees on unused portions of the credit agreement ranging from 0.13% to 0.20%, based on the Consolidated Leverage Ratio, as defined in the agreement. The amended Credit Agreement included representations, covenants and events of default that are customary for financing transactions of this nature. The effective interest rate on outstanding borrowings under the credit facility was 1.70% at June 27, 2020.
As of June 27, 2020, the
Company had no amounts outstanding in letters of credit and had available $148.6 million of borrowing capacity under the Revolving Credit Facility based on financial covenants.
Further information regarding the Company’s credit agreement is provided in Note 7, Debt, of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report.
Senior Notes
On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the
Company issued and sold €212 million aggregate principal amount of senior notes in two series. The funding date for the Euro denominated senior notes occurred on December 8, 2016 for €117 million in aggregate amount of 1.14% Senior Notes, Series A, due December 8, 2023 (“Euro Senior Notes, Series A due 2023”), and €95 million in aggregate amount of 1.83% Senior Notes, Series B due December 8, 2028 (“Euro Senior Notes, Series B due 2028”) (together, the “Euro Senior Notes”). Interest on the Euro Senior Notes is payable semiannually on June 8 and December 8, commencing June 8, 2017.
On December 8, 2016, the
Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold $125 million aggregate principal amount of senior notes in two series. On February 15, 2017, $25 million in aggregate principal amount of 3.03% Senior Notes, Series A, due February 15, 2022 (“U.S. Senior Notes, Series A due 2022”), and $100 million in aggregate principal amount of 3.74% Senior Notes, Series B, due February 15, 2027 (“U.S. Senior Notes, Series B due 2027”) (together, the “U.S. Senior Notes due 2022 and 2027”) were funded. Interest on the U.S. Senior Notes due 2022 and 2027 is payable semiannually on February 15 and August 15, commencing August 15, 2017.
On
November 15, 2017, the Company entered into a Note Purchase Agreement pursuant to which the Company issued and sold $175 million in aggregate principal amount of senior notes in two series. On January 16, 2018, $50 million aggregate principal amount of 3.48% Senior Notes, Series A, due February 15, 2025 (“U.S. Senior Notes, Series A due 2025”) and $125 million in aggregate principal amount of 3.78% Senior Notes, Series B, due February 15, 2030 (“U.S. Senior Notes, Series B due 2030”) (together the “U.S. Senior Notes due 2025 and 2030” and with the Euro Senior Notes and the U.S. Senior
Notes due 2022 and 2027, the “Senior Notes”) were funded. Interest on the U.S. Senior Notes due 2025 and 2030 is payable semiannually on February 15 and August 15, commencing on August 15, 2018. Further information regarding the Company’s Senior Notes is provided in Note 7, Debt, of the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report.
Debt Covenants
The Company was in compliance with all covenants under the Credit Agreement and Senior Notes as of June 27,
2020 and currently expects to remain in compliance based on management’s estimates of operating and financial results for 2020. As of June 27, 2020, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions. The ultimate magnitude of COVID-19, including the extent of its impact on our financial and operational results, which could be material, will be determined by the length of time that the
pandemic continues, its effect on the demand for our products, as well as the effect of governmental regulations imposed in response to the pandemic. While we cannot at this time predict the impact of the COVID-19, it could have a material negative impact on our business, financial condition, results of operations and future cash flows which could impact the Company’s ability to comply with debt covenants in the future.
Dividends
During the second quarter of 2020 the Company paid quarterly dividends of $11.7 million to the shareholders. On July
22, 2020, the Board of Directors of the Company declared a quarterly cash dividend of $0.48 per share, payable on September 3, 2020 to stockholders of record as of August 20, 2020. Future determinations regarding the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then-existing conditions, including our results of operations, payout ratio, capital requirements, financial condition, prospects and other factors that our board of directors may deem relevant.
Cash Flow Overview
First
Six Months
(in thousands)
2020
2019
Net cash provided by operating activities
$
101,286
$
80,092
Net cash used in investing activities
(29,390)
(19,812)
Net
cash provided by (used in) financing activities
50,526
(75,624)
Effect of exchange rate changes on cash and cash equivalents
(1,694)
392
Increase (decrease) in cash and cash equivalents
120,728
(14,952)
Cash
and cash equivalents at beginning of period
531,139
489,733
Cash and cash equivalents at end of period
$
651,867
$
474,781
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 $101.3 million for the six months ended June 27, 2020, compared to $80.1 million during the six months ended June 29, 2019. The increase in net cash provided by operating activities was primarily due to lower annual incentive payments and favorable changes in net working capital driven by the timing of collections of accounts receivable and changes in accounts payable partially offset by lower earnings largely due to the impact of
COVID-19.
Cash Flow from Investing Activities
Net cash used in investing activities was $29.4 million for the six months ended June 27, 2020 compared to $19.8 million during the six months ended June 29, 2019. Capital expenditures were $29.5 million, representing an increase of $4.2 million compared to 2019. During the six months ended June 29, 2019, the Company received proceeds of $6.4 million from the sale of a property within the Industrial segment.
Cash Flow from Financing
Activities
Net cash provided by financing activities was $50.5 million for the six months ended June 27, 2020 compared to net cash used in financing activities of $75.6 million for the six months ended June 29, 2019. During the six months ended June 27, 2020, the company borrowed $100.0 million from its revolving credit facility to preserve financial flexibility and enhance liquidity, given the increasing levels of uncertainty related to COVID-19. On April 3, 2020, the Company amended the Credit Agreement to eliminate
the $200.0 million unsecured term loan credit facility, with the remaining outstanding balance of $140.0 million repaid in full on April 3, 2020 through a new borrowing of $140.0 million under the recently amended revolving credit facility. The Company made principal payments of $5.0 million and $7.5 million on the term loan during the six months ended June 27, 2020 and June 29, 2019, respectively. For the six months ended June 27, 2020 and June 29, 2019, the Company repurchased 175,110 and 268,130 shares of its common stock totaling $22.9 million and $45.5
million, respectively, but made payments of $49.9 million related to settled share repurchases during the six months ended June 29, 2019. Additionally, dividends paid
increased $2.1 million from $21.3 million in the six months ended June 29, 2019 to $23.4 million for the six months ended June 27, 2020.
Share
Repurchase Program
The Company’s Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company’s common stock under a program for the period May 1, 2018 to April 30, 2019 ("2018 program"). On April 26, 2019, the Company's Board of Directors authorized a program to repurchase up to 1,000,000 shares of the Company's common stock for the period May
1, 2019 to April 30, 2020 ("2019 program") to replace its previous expired 2018 program. On April 23, 2020, the Company's Board of Directors authorized a new program to repurchase up to 1,000,000 shares of the Company's common stock for the period May 1, 2020 to April 30, 2021 (the "2020 program") to replace its previous expired 2019 program. The 2019 program expired on April 30, 2020 with 324,890 of authorized repurchases remaining. The Company has suspended
share repurchases for the near-term due to the uncertainty of the impact and duration of COVID-19 and to focus on other capital allocation priorities.
The Company did not repurchase shares of its common stock during the three months ended June 27, 2020, and for the three months ended June 29, 2019, the Company repurchased 188,214 shares of its common stock totaling $32.0 million. For the six months ended June 27, 2020 and June 29, 2019, the Company
repurchased 175,110 and 268,130 shares of its common stock totaling $22.9 million and $45.5 million, respectively.
Off-Balance Sheet Arrangements
As of June 27, 2020, the Company did not have any off-balance sheet arrangements, as defined under SEC rules. Specifically, the Company was not liable for guarantees of indebtedness owed by third parties, the Company
was not directly liable for the debt of any unconsolidated entity and the Company did not have any retained or contingent interest in assets. The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.
Critical Accounting Policies and Estimates
The Company’s Condensed Consolidated Financial
Statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the Condensed Consolidated Financial Statements, the Company uses estimates and makes judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. The assumptions, estimates, and judgments are based on historical experience, current trends, and other factors the Company believes are relevant at the time it prepares the Condensed Consolidated Financial Statements.
The significant accounting policies and critical accounting estimates are consistent with those discussed in Note 1, Summary of Significant Accounting Policies and Other Information,
to the consolidated financial statements and the MD&A section of the Company’s Annual Report on Form 10-K for the year ended December 28, 2019. During the six months ended June 27, 2020, there were no significant changes in the application of critical accounting policies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 28,
2019. During the six months ended June 27, 2020, there have been no material changes in our exposure to market risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(b) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules
and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this report, management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures
as of June 27, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the quarter ended June 27, 2020, our disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during the quarter ended June 27, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART
II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
The COVID-19 pandemic could have a material adverse effect on our ability to operate, results of operations, financial condition, liquidity, and capital investments.
The World Health Organization has declared the
COVID-19 outbreak a pandemic, and the virus continues to spread in areas where we operate and sell our products. The COVID-19 pandemic and similar situations/circumstances in the future could have a material adverse effect on our ability to operate, results of operations, financial condition, liquidity, and capital investments. Several public health organizations have recommended, and some local governments have implemented, certain measures to slow and limit the transmission of the virus, including travel restrictions, shelter-in-place requirements and social distancing requirements. Such preventive measures, or others we may voluntarily put in place, may have a material adverse effect on our business for an indefinite period of time, such as the potential shut down of certain locations, decreased employee availability, potential border closures, disruptions to the businesses of our channel partners, and others. Our suppliers and customers may also face these and other
challenges, which could lead to a disruption in our supply chain as well as decreased demand for our products. These issues may also materially affect our future access to our sources of liquidity, particularly our cash flows from operations, financial condition, capitalization, and capital investments. These disruptions may continue to occur and may result in future impairment, restructuring and other charges. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the risk factors disclosed in Part I, Item 1a. Risk Factors of our Form 10-K, including those relating toour products and services, financial performance, debt covenant compliance and debt obligations. The ultimate magnitude of COVID-19,
including the extent of its impact on our financial and operational results, which could be material, will be determined by the length of time that the pandemic continues, its effect on the demand for our services, as well as the effect of governmental regulations imposed in response to the pandemic. We cannot at this time predict the impact of the COVID-19 pandemic, but it could have a material adverse effect on our business, financial condition, results of operations and/or cash flows.
Other than the item listed above, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for our year ended December 28, 2019.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities
On May 1, 2019, the Company announced that its Board of Directors authorized a program to repurchase up to 1,000,000 shares of the Company's common stock for the period May 1, 2019 to April
30, 2020 ("2019 program"). On April 29, 2020, the Company announced that its Board of Directors authorized a new program to repurchase up to 1,000,000 shares of the
Company's common stock for the period May 1, 2020 to April 30, 2021 (the "2020 program") to replace its previous expired
2019 program. There were 324,890 shares authorized to be repurchased under the 2019 program when it expired.
The Company did not repurchase shares of its common stock during the three months ended June 27, 2020. There are 1,000,000 shares available to be repurchased as of June 27, 2020 under the 2020 program.
The following financial information from LITTELFUSE, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 27, 2020 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Net (Loss) Income, (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income, (iv) the Consolidated Statements of Changes in Stockholders Equity , (v) the Condensed Consolidated Statements of Cash Flows, and (vi)
Notes to the Condensed Consolidated Financial Statements.
104
The cover page from this Quarterly Report on Form 10-Q for the quarter ended June 27, 2020, formatted in Inline XBRL.
+
Certain schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K promulgated by the SEC. The registrant agrees to furnish supplementary a copy
of any omitted schedule or exhibit to the SEC upon request.
++
Management contract or compensatory plan or arrangement.
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 June 27, 2020, to be signed on its behalf by the undersigned thereunto duly authorized.
