ITEM 1. BUSINESS.
GENERAL
Littelfuse, Inc. and its subsidiaries (the “company” or “Littelfuse”) is the world’s leading supplier of circuit protection products for the electronics industry, providing the broadest line of circuit protection solutions to worldwide customers. In the electronics market, the company supplies leading manufacturers such as Alcatel-Lucent, Celestica, Delta, Flextronics, Foxconn, Hewlett-Packard, Huawei, IBM, Intel, Jabil, LG, Motorola, Nokia, Panasonic, Quanta, Samsung, Sanmina-SCI, Seagate, Siemens and Sony.
The company is also the leading provider of circuit protection for the automotive industry and the third largest producer of electrical fuses in North America. In the automotive market, the company’s end customers include major automotive manufacturers in North America, Europe and Asia such as BMW, Chrysler, Ford Motor Company, General Motors, Hyundai Group, and Volkswagen. The company also supplies wiring harness manufacturers and auto parts suppliers worldwide, including Advance Auto Parts, Continental, Delphi, Lear, Leoni, Pep Boys, Sumitomo, Valeo, Wal-Mart, and Yazaki. In the electrical market, the company supplies representative customers such as Abbott, Acuity Brands, Dow Chemical, DuPont, GE, General Motors, Heinz, International Paper, John Deere, Marconi, Merck, Poland Springs, Procter & Gamble, Rockwell, United Technologies and 3M. Through the company’s electrical business, the company supplies industrial ground fault circuit protection in mining and other large industrial operations to customers such as Potash Corporation, Mosaic, Agrium, and Cameco. See “Business Environment: Circuit Protection Market”.
Net sales by business unit segment for the periods indicated are as follows (in thousands):
The company operates in three geographic territories: the Americas; Europe; and Asia-Pacific. The company manufactures products and sells to customers in all three territories. There has been and continues to be a shift in the company’s revenues, and consequently manufacturing, to the Asia-Pacific region.
Net sales in our three geographic territories, based upon the shipped to destination, are as follows (in thousands):
The company’s products are sold worldwide through a direct sales force and manufacturers’ representatives. For the year ended January 2, 2010, approximately 67.5% of the company’s net sales were to customers outside the United States (exports and foreign operations), including 20.3% in Hong Kong.
The company manufactures many of its products on fully integrated manufacturing and assembly equipment. The company maintains product quality through a Global Quality Management System with all manufacturing sites certified under ISO 9001:2000. In addition, several of the Littelfuse manufacturing sites are also certified under TS 16949 and ISO 14001.
References herein to “2007” or “fiscal 2007” refer to the fiscal year ended December 29, 2007. References herein to “2008” or “fiscal 2008” refer to the fiscal year ended December 27, 2008. References herein to “2009” or “fiscal 2009” refer to the fiscal year ended January 2, 2010. The company operates on a “4-4-5” fiscal calendar that normally keeps the number of weeks constant during the quarter. As a result of using this convention, fiscal year 2009 contains 53 weeks whereas fiscal 2008 and fiscal 2007 contained 52 weeks.
The company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge through the “Investors” section of the company’s Internet website (http://www.littelfuse.com), as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”), accessible via a link to the website maintained by the SEC. Except as otherwise provided herein, such information is not incorporated by reference into this Annual Report on Form 10-K.
BUSINESS ENVIRONMENT: CIRCUIT PROTECTION MARKET
Electronic Products
Electronic circuit protection products are used to protect circuits in a multitude of electronic systems. The company’s product offering includes a complete line of overcurrent and overvoltage solutions, including (i) fuses and protectors, (ii) positive temperature coefficient (“PTC”) resettable fuses, (iii) varistors, (iv) polymer electrostatic discharge (“ESD”) suppressors, (v) discrete transient voltage suppression (“TVS”) diodes, TVS diode arrays and protection thyristors, (vi) gas discharge tubes, (vii) power switching components and (viii) fuseholders, blocks and related accessories.
Electronic fuses and protectors are devices that contain an element that melts in an overcurrent condition. Electronic miniature and subminiature fuses are designed to provide circuit protection in the limited space requirements of electronic equipment. The company’s fuses are used in a wide variety of electronic products, including wireless telephones, consumer electronics, computers, modems and telecommunications equipment. The company markets these products under the trademarked brand names PICO(R) II and NANO2(R) SMF.
Resettable fuses are PTC polymer devices that limit the current when an overcurrent condition exists and then reset themselves once the overcurrent condition has cleared. The company’s product line offers both radial leaded and surface mount products.
Varistors are ceramic-based high-energy absorption devices that provide transient overvoltage and surge suppression for automotive, telecommunication, consumer electronics and industrial applications. The company’s product line offers both radial leaded and multilayer surface mount products.
Polymer ESD suppressors are polymer-based devices that protect an electronic system from failure due to rapid transfer of electrostatic charge to the circuit. The company’s PulseGuard(R) line of ESD suppressors is used in PC and PC peripherals, digital consumer electronics and wireless applications.
Discrete diodes, diode arrays and protection thyristors are fast switching silicon semiconductor structures. Discrete diodes protect a wide variety of applications from overvoltage transients such as ESD, inductive load switching or lightning, while diode arrays are used primarily as ESD suppressors. Protection thyristors are commonly used to protect telecommunications circuits from overvoltage transients such as those resulting from lightning. Applications include telephones, modems, data transmission lines and alarm systems. The company markets these products under the following trademarked brand names: TECCOR(R), SIDACtor(R) and Battrax(R).
Gas discharge tubes are very low capacitance devices designed to suppress any transient voltage event that is greater than the breakover voltage of the device. These devices are primarily used in telecom interface and conversion equipment applications as protection from overvoltage transients such as lightning.
Power switching components are used to regulate energy to various type loads most commonly found in industrial and home equipment. These components are easily activated from simple control circuits or interfaced to computers for more complex load control. Typical applications include heating, cooling, battery chargers and lighting.
In addition to the above products, the company is also a supplier of fuse holders (including OMNI-BLOK(R)), fuse blocks and fuse clips primarily to customers that purchase circuit protection devices from the company.
Automotive Products
Fuses are extensively used in automobiles, trucks, buses and off-road equipment to protect electrical circuits and the wires that supply electrical power to operate lights, heating, air conditioning, radios, windows and other controls. Currently, a typical automobile contains 30 to 100 fuses, depending upon the options installed. The fuse content per vehicle is expected to continue to grow as more electronic features are included in automobiles. The company also supplies fuses for the protection of electric and hybrid vehicles.
The company is a primary supplier of automotive fuses to United States, Asian and European automotive original equipment manufacturers (“OEM”), automotive component parts manufacturers and automotive parts distributors. The company also sells its fuses in the replacement parts market, with its products being sold through merchandisers, discount stores and service stations, as well as under private label by national firms. The company invented and owns most of the U.S. patents related to the blade-type fuse, which is the standard and most commonly used fuse in the automotive industry. The company’s automotive fuse products are marketed under trademarked brand names, including ATO(R), MINI(R), MAXI(TM), MIDI(R), MEGA(TM), MasterFuse(R), JCASE(R) and CablePro(TM).
A majority of the company’s automotive fuse sales are made to main-fuse box and wire harness manufacturers that incorporate the fuses into their products. The remaining automotive fuse sales are made directly to automotive manufacturers, retailers who sell automotive parts and accessories and distributors who in turn sell most of their products to wholesalers, service stations and non-automotive OEMs.
Electrical Products
The company entered the electrical market in 1983 and manufactures and sells a broad range of low-voltage and medium-voltage circuit protection products as well as protection relays to electrical distributors and their customers in the construction, OEM and industrial maintenance, repair and operating supplies (“MRO”) markets.
Power fuses are used to protect circuits in various types of industrial equipment and in industrial and commercial buildings. They are rated and listed under one of many Underwriters Laboratories’ fuse classifications. Major applications for power fuses include protection from over-load and short-circuit currents in motor branch circuits, heating and cooling systems, control systems, lighting circuits and electrical distribution networks.
The company’s POWR-GARD(R) product line features the Indicator(TM) series power fuse used in both the OEM and MRO markets. The Indicator(TM) technology provides visual blown fuse indication at a glance, reducing maintenance and downtime on production equipment. The Indicator(TM) product offering is widely used in motor protection and industrial control panel applications.
Protection relays are used to protect personnel and equipment in industrial environments and commercial buildings from excessive currents, over voltages and electrical shock hazards called ground-faults. Major applications for protection relays include protection of motor, transformer and power line distribution circuits. Ground fault relays are used to protect personnel and equipment in wet environments such as underground mining or water treatment applications where there is a greater risk for electricity to come in contact with water and create a shock hazard.
PRODUCT DESIGN AND DEVELOPMENT
The company employs scientific, engineering and other personnel to continually improve its existing product lines and to develop new products at its research and engineering facilities in Champaign and Chicago, Illinois, Canada, China, Germany, the Philippines, and Mexico. The Product & Development Technology departments maintain a staff of engineers, chemists, material scientists and technicians whose primary responsibility is to design and develop new products.
Proposals for the development of new products are initiated primarily by sales and marketing personnel with input from customers. The entire product development process usually ranges from a few months to 18 months based on the complexity of development, with continuous efforts to reduce the development cycle. During fiscal years 2009, 2008 and 2007, the company expended $18.1 million, $24.1 million and $21.7 million, respectively, on research, product design and development (“R&D”). During 2009, the company continued moving R&D operations to lower cost locations closer to its customers. R&D operations are now in Canada, China, Germany, the Philippines, and Mexico as well as the United States.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
The company generally relies on patent and trademark laws and license and nondisclosure agreements to protect intellectual property and proprietary products. In cases where it is deemed necessary by management, key employees are required to sign an agreement that they will maintain the confidentiality of the company’s proprietary information and trade secrets.
As of January 2, 2010, the company owned 204 patents in North America, 106 patents in the European Union and 59 patents in other foreign countries. The company has also registered trademark protection for certain of its brand names and logos. The 204 North American patents are in the following product categories: 141
electronics; 45 automotive; and 18 electrical. Patents and licenses are amortized over a period of 4-12 years, with a weighted average life of 11.9 years. Distribution networks are amortized over a period of 4-20 years, with a weighted average life of 14.6 years. Trademarks and tradenames are amortized over a period of 5-20 years, with a weighted average life of 14.7 years. The company recorded amortization expense of $5.0 million, $3.9 million, and $3.3 million in 2009, 2008, and 2007, respectively, related to intangible assets.
New products are continually being developed to replace older products. The company regularly applies for patent protection on such new products. Although, in the aggregate, the company’s patents are important in the operation of its businesses, the company believes that the loss by expiration or otherwise of any one patent or group of patents would not materially affect its business.
License royalties amounted to $0.1 million, $0.2 million and $0.3 million for fiscal 2009, 2008 and 2007, respectively, and are included in other expense (income), net on the Consolidated Statements of Income.
MANUFACTURING
The company performs the majority of its own fabrication, stamps some of the metal components used in its fuses, holders and switches from raw metal stock and makes its own contacts and springs. In addition, the company fabricates silicon wafers for certain applications and performs its own plating (silver, nickel, zinc, tin and oxides). All thermoplastic molded component requirements used for such products as the ATO(R), MINI(R) and MAXI(TM) fuse product lines are met through the company’s in-house molding capabilities.
After components are stamped, molded, plated and readied for assembly, final assembly is accomplished on fully automatic and semi-automatic assembly machines. Quality assurance and operations personnel, using techniques such as statistical process control, perform tests, checks and measurements during the production process to maintain the highest levels of product quality and customer satisfaction.
The principal raw materials for the company’s products include copper and copper alloys, heat resistant plastics, zinc, melamine, glass, silver, raw silicon, solder and various gases. The company uses a sole source for several heat resistant plastics and for zinc, but believes that suitable alternative heat resistant plastics and zinc are available from other sources at comparable prices. All of the other raw materials are purchased from a number of readily available outside sources.
A computer-aided design and manufacturing system (CAD/CAM) expedites product development and machine design and our laboratories test new products, prototype concepts and production run samples. The company participates in “just-in-time” delivery programs with many of its major suppliers and actively promotes the building of strong cooperative relationships with its suppliers by utilizing early supplier involvement techniques and engaging them in pre-engineering product and process development.
MARKETING
The company’s domestic sales and marketing staff of over 35 people maintain relationships with major OEMs and distributors. The company’s sales, marketing and engineering personnel interact directly with OEM engineers to ensure appropriate circuit protection and reliability within the parameters of the OEM’s circuit design. Internationally, the company maintains a sales and marketing staff of over 100 people with sales offices in the Netherlands, the U.K., Germany, Spain, Italy, Singapore, Taiwan, Japan, Brazil, Hong Kong, Korea, China and India. The company also markets its products indirectly through a worldwide organization of over 60 manufacturers’ representatives and distributes through an extensive network of electronics, automotive and electrical distributors.
Electronics
The company uses manufacturers’ representatives to sell its electronics products domestically and to call on major domestic and international OEMs and distributors. The company sells approximately 20 percent of its domestic products directly to OEMs, with the remainder sold through distributors nationwide.
In the Asia-Pacific region, the company maintains a direct sales staff and utilizes distributors in Japan, Singapore, Korea, Taiwan, China, Malaysia, Thailand, Hong Kong, India, Indonesia, Philippines, New Zealand and Australia. In Europe, the company maintains a direct sales force and utilizes manufacturers’ representatives and distributors to support a wide array of customers.
Automotive
The company maintains a direct sales force to service all the major automotive OEMs and system suppliers domestically. Approximately 23 manufacturers’ representatives sell the company’s products to aftermarket fuse retailers such as O’Reilly Auto Parts and Pep Boys. In Europe, the company uses both a direct sales force and manufacturers’ representatives to distribute its products to OEMs, major system suppliers and aftermarket distributors. In the Asia-Pacific region, the company uses both a direct sales force and distributors to supply to major OEMs and system suppliers.
Electrical
The company markets and sells its power fuses and protection relays through approximately 42 manufacturers’ representatives across North America. These representatives sell power fuse products through an electrical and industrial distribution network comprised of approximately 2,500 distributor buying locations. These distributors have customers that include electrical contractors, municipalities, utilities and factories (including both MRO and OEM).
The company’s field sales force (including regional sales managers and application engineers) and manufacturers’ representatives call on both distributors and end-users (consulting engineers, municipalities, utilities and OEMs) in an effort to educate these customers on the capabilities and characteristics of the company’s products.
BUSINESS SEGMENT INFORMATION
The company has three operating business unit segments: Electronics; Automotive; and Electrical. For information with respect to the company’s operations in its three reportable business unit segments for the fiscal year ended January 2, 2010, see Business Unit Segment Information included as part of “Item 8. Financial Statements and Supplementary Data”, which is incorporated herein by reference.
CUSTOMERS
The company sells to approximately 4,000 direct customers worldwide. No single customer accounted for more than 10% of net sales during the last three years. During fiscal 2009, 2008 and 2007, net sales to customers outside the United States (exports and foreign operations) accounted for approximately 67.5%, 62.0% and 61.9%, respectively, of the company’s total net sales.
COMPETITION
The company’s products compete with similar products of other manufacturers, some of which have substantially greater financial resources than the company. In the electronics market, the company’s competitors include AVX, Bel Fuse, Bourns, Cooper Industries, EPCOS, On Semiconductor, STMicroelectronics and Tyco Electronics. In the automotive market, the company’s competitors include Cooper Industries, Pacific
Engineering (a private company in Japan) and MTA (a private company in Italy). In the electrical market, the company’s major competitors include Cooper Industries and Ferraz Shawmut. The company believes that it competes on the basis of innovative products, the breadth of its product line, the quality and design of its products and the responsiveness of its customer service in addition to price.
BACKLOG
The backlog of unfilled orders at January 2, 2010, was approximately $59.0 million, compared to $53.9 million at December 27, 2008. Substantially all of the orders currently in backlog are scheduled for delivery in 2010.
EMPLOYEES
As of January 2, 2010, the company employed approximately 5,500 employees. Approximately 810 employees in Mexico and 65 employees in Germany are covered by collective bargaining agreements. The Mexico agreements consist of two separate collective bargaining agreements one for approximately 160 employees in Matamoros and one covering approximately 650 in Piedras Negras. The Matamoros agreement expires February 28, 2012. The Piedras Negras agreement expires January 31, 2012.
In Germany the company has two separate collective bargaining agreements, one for 61 associates in Dünsen, expiring Dec 31, 2010, and the second for 4 associates in Essen, expiring March 31, 2012.
Previously in 2009 a collective bargaining agreement covered approximately 30 employees at the company’s Des Plaines facility. These expired on March 31, 2009 and currently no U.S. based employees are subject to a collective bargaining agreement.
Overall, the company has historically maintained satisfactory employee relations, and many of its employees have long service with the company.
ENVIRONMENTAL REGULATION
The company is subject to numerous foreign, federal, state and local regulations relating to air and water quality, the disposal of hazardous waste materials, safety and health. Compliance with applicable environmental regulations has not significantly changed the company’s competitive position, capital spending or earnings in the past and the company does not presently anticipate that compliance with such regulations will change its competitive position, capital spending or earnings for the foreseeable future.
The company employs an environmental engineer to monitor regulatory matters and believes that it is currently in compliance in all material respects with applicable environmental laws and regulations, except with respect to its facilities located in Ireland and Irving, Texas. The Ireland facility was acquired in October 1999 in connection with the acquisition from Harris Corporation of its suppression products division. Certain containment actions have been ongoing and full disclosure with appropriate agencies in Ireland has been initiated. The company received an indemnity from Harris Corporation with respect to these matters. The Irving, Texas facility lease was assumed in July 2003 in connection with the acquisition of Teccor Electronics, Inc. The company is taking the appropriate measures to bring this facility into compliance with Texas environmental laws, and the company also received an indemnity from Invensys plc with respect to this matter.
Littelfuse GmbH, which was acquired by the company in May 2004, is responsible for maintaining closed coal mines from legacy acquisitions. The company is compliant with German regulations pertaining to the maintenance of the mines and has an accrual related to certain of these coal mine shafts based on an engineering study estimating the cost of remediating the dangers (such as a shaft collapse) of certain of these closed coal
mine shafts in Germany. The reserve is calculated based upon the cost of remediating the shafts that the study deems most risky. Further information regarding the coal mine liability reserve is provided in Note 10 of the Notes to Consolidated Financial Statements included in this report.
ITEM 1A.
ITEM 1A. RISK FACTORS.
Our business, financial condition and results of operations are subject to various risks and uncertainties, including the risk factors we have identified below. These factors are not necessarily listed in order of importance. We may amend or supplement the risk factors from time to time by other reports that we file with the SEC in the future.
Our industry is subject to intense competitive pressures.
We operate in markets that are highly competitive. We compete on the basis of price, quality, service and/or brand name across the industries and markets we serve. Competitive pressures could affect the prices we are able to charge our customers or the demand for our products.
We may not always be able to compete on price, particularly when compared to manufacturers with lower cost structures. Some of our competitors have substantially greater sales, financial and manufacturing resources and may have greater access to capital than Littelfuse. As other companies enter our markets or develop new products, competition may intensify further. Our failure to compete effectively could materially adversely affect our business, financial condition and results of operations.
We may be unable to manufacture and deliver products in a manner that is responsive to our customers’ needs.
The end markets for our products are characterized by technological change, frequent new product introductions and enhancements, changes in customer requirements and emerging industry standards. The introduction of products embodying new technologies and the emergence of new industry standards could render our existing products obsolete and unmarketable before we can recover any or all of our research, development and commercialization expenses on capital investments. Furthermore, the life cycles of our products may change and are difficult to estimate.
Our future success will depend upon our ability to manufacture and deliver products in a manner that is responsive to our customers’ needs. We will need to develop and introduce new products and product enhancements on a timely basis that keep pace with technological developments and emerging industry standards and address increasingly sophisticated requirements of our customers. We invest heavily in research and development without knowing that we will recover these costs. Our competitors may develop products or technologies that will render our products non-competitive or obsolete. If we cannot develop and market new products or product enhancements in a timely and cost-effective manner, our business, financial condition and results of operations could be materially adversely affected.
Our business may be interrupted by labor disputes or other interruptions of supplies.
A work stoppage could occur at certain of our facilities, most likely as a result of disputes under collective bargaining agreements or in connection with negotiations of new collective bargaining agreements. In addition, we may experience a shortage of supplies for various reasons, such as financial distress, work stoppages, natural disasters or production difficulties that may affect one of our suppliers. A significant work stoppage, or an interruption or shortage of supplies for any reason, if protracted, could substantially adversely affect our business, financial condition and results of operations. The transfer of our manufacturing operations and changes in our distribution model could disrupt operations for a limited time.
Our revenues may vary significantly from period to period.
Our revenues may vary significantly from one accounting period to another due to a variety of factors including:
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changes in our customers’ buying decisions;
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changes in demand for our products;
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our product mix;
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our effectiveness in managing manufacturing processes;
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costs and timing of our component purchases;
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the effectiveness of our inventory control;
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the degree to which we are able to utilize our available manufacturing capacity;
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our ability to meet delivery schedules;
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general economic and industry conditions; and
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local conditions and events that may affect our production volumes, such as labor conditions and political instability.
The bankruptcy or insolvency of a major customer could adversely affect us.
Certain of our major customers, such as those in the automotive industry and to a lesser extent the electronics industry, are suffering financial hardships due to current economic conditions. The bankruptcy or insolvency of a major customer could result in lower sales revenue and cause a material adverse effect on our business, financial condition and results of operations. In addition, the bankruptcy or insolvency of a major U.S. auto manufacturer or significant supplier likely could lead to substantial disruptions in the automotive supply base, resulting in lower demand for our products, which likely would cause a decrease in sales revenue and have a substantial adverse impact on our business, financial condition and results of operations.
Our ability to manage currency or commodity price fluctuations or shortages is limited.
As a resource-intensive manufacturing operation, we are exposed to a variety of market and asset risks, including the effects of changes in foreign currency exchange rates, commodity prices and interest rates. We have multiple sources of supply for the majority of our commodity requirements. However, significant shortages that disrupt the supply of raw materials or result in price increases could affect prices we charge our customers, our product costs, and the competitive position of our products and services. We monitor and manage these exposures as an integral part of our overall risk management program, which recognizes the unpredictability of markets and seeks to reduce the potentially adverse effects on our results. Nevertheless, changes in currency exchange rates, commodity prices and interest rates cannot always be predicted. In addition, because of intense price competition and our high level of fixed costs, we may not be able to address such changes even if they are foreseeable. Substantial changes in these rates and prices could have a material adverse effect on our results of operations and financial condition. For additional discussion of interest rate, currency or commodity price risk, see “Item 7A. Quantitative and Qualitative Disclosures about Market Risks”.
Operations and supply sources located outside the United States, particularly in emerging markets, are subject to greater risks.
Our operating activities outside the United States contribute significantly to our revenues and earnings. Serving a global customer base and remaining competitive in the global market place required the company to place our production in countries outside the United States, including emerging markets, to capitalize on market opportunities and maintain a cost-efficient structure. In addition, we source a significant amount of raw materials and other components from third-party suppliers in low-cost countries. Our international operating
activities are subject to a number of risks generally associated with international operations, including risks relating to the following:
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general economic conditions;
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currency fluctuations and exchange restrictions;
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import and export duties and restrictions;
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the imposition of tariffs and other import or export barriers;
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compliance with regulations governing import and export activities;
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current and changing regulatory requirements;
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political and economic instability;
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potentially adverse income tax consequences;
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transportation delays and interruptions;
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labor unrest;
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natural disasters;
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terrorist activities;
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public health concerns;
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difficulties in staffing and managing multi-national operations; and
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limitations on our ability to enforce legal rights and remedies.
Any of these factors could have a material adverse effect on our business, financial condition and results of operations.
We are in the process of relocating our manufacturing operations and changing our distribution and customer service model.
We are a company that, from time to time, seeks to optimize its manufacturing capabilities and efficiencies through restructurings, consolidations, plant closings or asset sales. We may make further specific determinations to consolidate, close or sell additional facilities. Possible adverse consequences related to such actions may include various charges for such items as idle capacity, disposition costs, severance costs, impairments of goodwill and possibly an immediate loss of revenues, in addition to normal or attendant risks and uncertainties. We may be unsuccessful in any of our current or future efforts to restructure or consolidate our business. Our plans to minimize or eliminate any loss of revenues during restructuring or consolidation may not be achieved. These activities may have a material adverse effect upon our business, financial condition or results of operations.
We engage in acquisitions and may encounter difficulties in integrating these businesses.
We are a company that, from time to time, seeks to grow through strategic acquisitions. We have in the past acquired a number of businesses or companies and additional product lines and assets. We intend to continue to expand and diversify our operations with additional acquisitions. The success of these transactions depends on our ability to integrate the assets and personnel acquired in these acquisitions. We may encounter difficulties in integrating acquisitions with our operations and may not realize the degree or timing of the benefits that we anticipated from an acquisition.
Environmental liabilities could adversely impact our financial position.
Federal, state and local laws and regulations impose various restrictions and controls on the discharge of materials, chemicals and gases used in our manufacturing processes or in our finished goods. These environmental regulations have required us to expend a portion of our resources and capital on relevant compliance programs. Under these laws and regulations, we could be held financially responsible for remedial measures if our current or former properties are contaminated or if we send waste to a landfill or recycling
facility that becomes contaminated, even if we did not cause the contamination. We may be subject to additional common law claims if we release substances that damage or harm third parties. In addition, future changes in environmental laws or regulations may require additional investments in capital equipment or the implementation of additional compliance programs. Any failure to comply with new or existing environmental laws or regulations could subject us to significant liabilities and could have material adverse effects on our business, financial condition or results of operations.
In the conduct of our manufacturing operations, we have handled and do handle materials that are considered hazardous, toxic or volatile under federal, state and local laws. The risk of accidental release of such materials cannot be completely eliminated. In addition, we operate or own facilities located on or near real property that was formerly owned and operated by others. Certain of these properties were used in ways that involved hazardous materials. Contaminants may migrate from, within or through these properties. These releases or migrations may give rise to claims. Where third parties are responsible for contamination, the third parties may not have funds, or not make funds available when needed, to pay remediation costs imposed upon us under environmental laws and regulations.
We derive a substantial portion of our revenues from customers in the automotive, consumer electronics and communications industries, and we are susceptible to trends and factors affecting those industries as well as the success of our customers’ products.
Net sales to the automotive, consumer electronics and communications industries represent a substantial portion of our revenues. Factors negatively affecting these industries and the demand for products also negatively affect our business, financial condition or results of operations. Any adverse occurrence, including industry slowdown, recession, political instability, costly or constraining regulations, armed hostilities, terrorism, excessive inflation, prolonged disruptions in one or more of our customers’ production schedules or labor disturbances, that results in significant decline in the volume of sales in these industries, or in an overall downturn in the business and operations of our customers in these industries, could materially adversely affect our business, financial condition or results of operations. For example, the automotive industry as well as the consumer electronics market is highly cyclical in nature and sensitive to changes in general economic conditions, consumer preferences and interest rates. In addition, the global automotive and electronic industries have overall manufacturing capacity far exceeding demand. To the extent that demand for certain of our customers’ products declines, the demand for our products may decline. Reduced demand relating to general economic conditions, consumer preferences, interest rates or industry over-capacity may have a material adverse effect upon our business, financial condition or results of operations.
The inability to maintain access to capital markets may adversely affect our business and financial results.
Our ability to invest in our businesses, make strategic acquisitions and refinance maturing debt obligations may require access to the capital markets and sufficient bank credit lines to support short-term borrowings. If we are unable to access the capital markets or bank credit facilities, we could experience a material adverse affect on our business, financial condition and results of operations.
Fixed costs may reduce operating results if our sales fall below expectations.
Our expense levels are based, in part, on our expectations for future sales. Many of our expenses, particularly those relating to capital equipment and manufacturing overhead, are relatively fixed. We might be unable to reduce spending quickly enough to compensate for reductions in sales. Accordingly, shortfalls in sales could materially and adversely affect our operating results.
The volatility of our stock price could affect the value of an investment in our stock and our future financial position.
The market price of our stock has fluctuated widely. Between December 28, 2008 and January 2, 2010, the closing sale price of our common stock ranged between a low of $8.87 and a high of $32.94, experiencing greater volatility over that time than the broader markets. The volatility of our stock price may be related to any number of factors, such as general economic conditions, industry conditions, analysts’ expectations concerning our results of operations, or the volatility of our revenues as discussed above under “Our Revenues May Vary Significantly from Period to Period.” The historic market price of our common stock may not be indicative of future market prices. We may not be able to sustain or increase the value of our common stock. Declines in the market price of our stock could adversely affect our ability to retain personnel with stock incentives, to acquire businesses or assets in exchange for stock and/or to conduct future financing activities with or involving our common stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
ITEM 2. PROPERTIES.
LITTELFUSE FACILITIES
The company’s operations are located in 33 owned or leased facilities worldwide, representing an aggregate of 2,002,468 square feet. The U.S. corporate headquarters was relocated to Chicago, Illinois in 2009. Formerly it was located in Des Plaines, Illinois along with the company’s largest manufacturing facility, which was closed in 2009. The company also has North American manufacturing facilities in Saskatoon, Canada, Irving, Texas Piedras Negras, Mexico and Matamoros, Mexico. The European headquarters and primary European distribution center is in the Netherlands, along with a manufacturing plant in Dünsen, Germany. As previously announced, the manufacturing facilities in Irivng, Texas, Matamoros, Mexico and Dünsen, Germany are expected to close in 2010. The Netherlands distribution center is expected to be sold in 2010. The company is currently marketing for sale its Des Plaines, Illinois, Elk Grove Village, Illinois and Dundalk, Ireland facilities, which closed on or before January 2, 2010. Asia-Pacific operations include sales and distribution centers located in Singapore, Taiwan, Japan, China and Korea, with manufacturing plants in China, Taiwan and the Philippines. The company does not believe that it will encounter any difficulty in renewing its existing leases upon the expiration of their current terms. Management believes that the company’s facilities are adequate to meet its requirements for the foreseeable future.
The following table provides certain information concerning the company’s facilities at January 2, 2010 and the use of these facilities during fiscal 2009:
Properties with lease expirations in 2010 renew at various times throughout the year. The company does not anticipate any material impact as a result of such expirations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The company is not a party to any legal proceedings that it believes will have a material adverse effect upon the conduct of its business or its financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to the company’s stockholders during the fourth quarter of fiscal 2009.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Shares of the company’s common stock are traded under the symbol “LFUS” on the Nasdaq Global Select Market. As of February 19, 2010, there were 136 holders of record of the company’s common stock.
Stock Performance Graph
The following stock performance graph and related information shall not be deemed “soliciting
material” or “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Act of 1934, each as amended, except to the extent that the company specifically incorporates it by reference into such filing.
The following stock performance graph compares the five-year cumulative total return on Littelfuse common stock to the five-year cumulative total returns on the Russell 2000 Index and the Dow Jones Electrical Components and Equipment Industry Group Index. The company believes that the Russell 2000 Index and the Dow Jones Electrical Components and Equipment Industry Group Index represent a broad market index and peer industry group for total return performance comparison. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.
The Dow Jones Electrical Components and Equipment Industry Group Index includes the common stock of American Superconductor Corp.; Amphenol Corp.; Anaren Microwave, Inc.; Arrow Electronics, Inc.; Avnet, Inc.; AVX Corp.; Benchmark Electronics, Inc.; C&D Technologies, Inc.; Capstone Turbine Corp.; Commscope, Inc.; CTS Corp.; Emerson; Fuelcell Energy, Inc.; General Cable Corp.; Hubbell Inc. Class B; Jabil Circuit, Inc.; KEMET Corp.; Littelfuse, Inc.; Methode Electronics, Inc.; Molex, Inc. and Molex, Inc. Class A; Park Electrochemical Corp.; Plexus Corp.; Plug Power, Inc.; Power-One, Inc.; Powerwave Technologies, Inc.; Regal-Beloit Corp.; Sanmina Corp.; SPX Corp.; Technitrol, Inc.; Thomas & Betts Corp.; Three-Five Systems, Inc.; Valence Technology, Inc.; Vicor Corp.; and Vishay Intertechnology, Inc.
In the case of the Russell 2000 Index and the Dow Jones Electrical Components and Equipment Industry Group Index, a $100 investment made on December 31, 2004 and reinvestment of all dividends is assumed. In the case of the company, a $100 investment made on December 31, 2004 is assumed (the company paid no dividends in 2005, 2006, 2007, 2008, or 2009). Returns are at December 31 of each year, with the exception of 2006, 2007, 2008 and 2009 for the company, which are at December 30, 2006, December 29, 2007, December 27, 2008 and January 2, 2010, respectively, which in each case was the last day of the company’s respective fiscal year.
The company has not paid any cash dividends in its history. Future dividend policy will be determined by the Board of Directors based upon its evaluation of earnings, cash availability and general business prospects. Currently, there are restrictions on the payment of dividends contained in the company’s credit agreements that relate to the maintenance of a minimum net worth and certain financial ratios.
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, 2009 to April 30, 2010. The company did not repurchase any shares of its common stock during the fourth quarter of fiscal 2009.
The table below provides information with respect to the company’s quarterly stock prices during fiscal 2009 and 2008:
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The information presented below provides selected financial data of the company during the past five fiscal years and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes to Consolidated Financial Statements set forth in Item 7
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Littelfuse, Inc. and its subsidiaries (the “company” or “Littelfuse”) design, manufacture, and sell circuit protection devices for use in the electronics, automotive and electrical markets throughout the world. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide the reader with information that will assist in understanding the company’s Consolidated Financial Statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect the Consolidated Financial Statements. The discussion also provides information about the financial results of the various business segments to provide a better understanding of how those segments and their results affect the financial condition and results of operations of Littelfuse as a whole.
Business Segment Information
U.S. Generally Accepted Accounting Principals (GAAP) dictates annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. Within U.S. GAAP, 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.
The company reports its operations by three business unit segments: Electronics; Automotive; and Electrical. The following table is a summary of the company’s operating segments’ net sales by business unit and geography (in thousands):
*
Sales are defined based upon shipped to destination.
Business unit segment information is described more fully in Note 15 of the Notes to Consolidated Financial Statements. The following discussion provides an analysis of the information contained in the Consolidated Financial Statements and accompanying notes beginning on page 39 at January 2, 2010 and December 27, 2008, and for the three fiscal years ended January 2, 2010, December 27, 2008 and December 29, 2007.
Results of Operations - 2009 Compared with 2008
Net sales decreased in the current year to $430.1 million compared to $530.9 million in 2008. These results reflected sales declines in the Automotive segment of $28.4 million or 22% to $98.5 million, along with a decrease in sales in the Electronics segment of $79.5 million or 23% to $263.0 million, partially offset by an increase in sales in the Electrical segment of $7.1 million or 12% to $68.6 million. The Electrical segment sales included a full year of sales ($23.7 million) in 2009 from the acquisition of Startco Engineering Ltd. (“Startco”), which was acquired in the fourth quarter of 2008.
The decrease in automotive sales was due primarily to the continued weak passenger car and truck markets across all geographies, resulting in sharp declines in global vehicle production, as OEMs took extended plant shutdowns. The negative impact from declines in volume was further impacted by unfavorable currency effects of $2.6 million in 2009, mainly due to the weaker euro, which experienced a lower annual average translation rate of 1.396 in 2009 compared to 1.475 in 2008.
The decrease in electronics sales primarily reflected continued weak demand as consumers continued to lose confidence in the economy and cut back on spending, particularly in the consumer electronics market. In addition, many customers in Asia, particularly contract manufacturers and original design manufacturers, had extensive plant shutdowns, and electronics distributors reduced inventories in response to weak demand. During the second half of 2009, demand for some consumer electronic items began to improve resulting in increased demand for the company’s products. The negative impact from declines in volume was further impacted by net
unfavorable currency effects of $1.5 million largely due to the weakness of the euro and Korean won, partially offset by the favorable impact of a stronger Japanese yen.
The increase in electrical sales was due to incremental sales recorded in 2009 of $23.7 million from Startco, acquired at the beginning of the fourth quarter of 2008, as compared to $3.9 million in sales recorded in 2008. The base electrical business, which excludes Startco, declined 22% in 2009 as compared to 2008 due primarily to weakness in the non-residential construction and MRO markets.
On a geographic basis, sales in the Americas decreased $35.7 million or 18% in 2009 compared to 2008 due to decreased automotive sales of $15.9 million and lower electronics sales of $25.9 million, partially offset by increased electrical sales of $6.1 million, which included Startco. Automotive and electronics sales declined due to the impact of the global recession and inventory de-stocking throughout the supply chain. The electrical sales increase was due to incremental sales from the company’s Startco acquisition.
Europe sales decreased $35.2 million or 30% in 2009 compared to 2008 due to decreased automotive sales of $17.5 million and lower electronics sales of $17.7 million due to the impact of the global recession and inventory de-stocking throughout the supply chain. Current year results included unfavorable currency effects of $3.4 million reflecting a weaker euro in 2009.
Asia-Pacific sales decreased $29.9 million or 14% in 2009 compared to the prior year mainly due to lower electronics sales of $36.0 million, which was partially offset by higher automotive sales of $5.1 million and electrical sales $1.0 million, The weaker electronics sales reflected the impact of the global recession and inventory de-stocking throughout the supply chain. The increase in automotive sales reflected strong growth in the China market and gains in market share. Current year results included unfavorable currency translation effects of $0.7 million primarily due to a sharp decline in the Korean won partially offset by a favorable impact of a stronger Japanese Yen.
Gross profit was $125.4 million or 29.1% of sales in 2009, compared to $143.7 million or 27.1% of sales in 2008. The increase in gross profit margin percentage in 2009 primarily resulted from cost savings related to manufacturing plant consolidations and reductions in operating expenses. Higher restructuring and other costs related to plant transfer activities and a pension settlement charge of $5.7 million during 2008 also contributed to the margin improvement change in 2009.
The company recorded approximately $4.2 million of restructuring charges in cost of sales in 2009 due primarily to the reorganization of the company’s European and Asian operations. The European restructuring charges included the transfer of its manufacturing operations from Dünsen, Germany to Piedras Negras, Mexico. The Asian restructuring included the planned closure of a manufacturing facility in Taiwan. The 2009 restructuring charges to cost of sales were approximately $4.6 million lower than restructuring charges to cost of sales for 2008.
The company continues to focus heavily on Research and Development (R&D) to develop new solutions for customers and expand product offerings. During 2009, the company continued moving R&D operations to lower cost locations closer to its customers. R&D operations are now in Canada, China, Germany, the Philippines, and Mexico as well as the United States.
Total operating expense was $111.7 million or 26.0% of net sales for 2009 compared to $135.2 million or 25.5% of net sales for 2008. The reduction in operating expenses primarily reflects cost savings initiatives implemented in late 2008 and early 2009 including headcount reductions, consolidation of Asian and European sites and transfer of certain activities to low-cost Asian locations.
Operating income was $13.7 million or 3.2% of net sales in 2009 compared to $8.5 million or 1.6% of net sales in the prior year. The increase in operating income in the current year was due primarily to the cost reductions and lower restructuring charges described above partially offset by lower sales.
Interest expense decreased to $2.4 million in 2009 compared to $3.4 million for 2008 primarily due to a $1.1 million loss on an interest rate swap transaction recognized in 2008.
Other expense (income), net, consisting of interest income, royalties, non-operating income and foreign currency items, was $0.5 million of expense in 2009 compared to $5.6 million of income in 2008. The decrease primarily reflected an unfavorable net change of approximately $3.8 million in foreign currency translation effects (primarily due to the weakening of the Korean won against the U.S. dollar) and a $1.1 million refund received in 2008 related to a recovery of Japanese output taxes paid in 2007.
Income before income taxes was $10.8 million in 2009 compared to $10.6 million in 2008. Income tax expense was $1.4 million in 2009 compared to $2.6 million in 2008. The 2009 effective income tax rate was 13.2% compared to 24.5% in 2008. The decrease in the 2009 effective tax rate reflects the mix of income earned in lower tax jurisdictions in 2009 as well as the release of $2.6 million of contingent income tax reserves due to the lapsing of statute of limitations and the close-out of open audit years by local tax authorities.
Results of Operations - 2008 Compared with 2007
Net sales decreased slightly in 2008 to $530.9 million compared to $536.1 million in 2007. These results reflected sales declines in the Automotive segment of $8.2 million or 6% to $126.9 million, along with a decrease in sales in the Electronics segment of $6.4 million or 2% to $342.5 million, largely offset by an increase in sales in the Electrical segment of $9.4 million or 18% to $61.5 million.
The decrease in automotive sales was due primarily to the weakened passenger car market across all geographies, resulting in sharp declines in global car production, particularly in the fourth quarter of 2008, as OEMs took extended plant shutdowns. The negative impact from declines in volume were partially offset by favorable currency effects of $5.0 million, mainly due to the strong the euro, which experienced a higher annual average translation rate of 1.475 in 2008 compared to 1.369 in 2007.
The decrease in electronics sales primarily reflected weaker demand as consumers continued to lose confidence in the economy and cut back on spending, particularly in the fourth quarter of 2008. In addition, many customers in Asia, particularly contract manufacturers and original design manufacturers, had extensive plant shutdowns, and electronics distributors reduced inventories in response to weak demand and the uncertain outlook for 2009. The negative impact from declines in volume were partially offset by net favorable currency effects of $1.8 million, largely due to the strength of the euro and to a lesser extent the yen, partially offset by the negative impact from sales denominated in Korean won, which experienced a drop of more than 13% in the annual average translation rate in 2008 compared to 2007.
The increase in electrical sales was due in part to new OEM business and price increases over the prior year and improvements in the industrial market. In addition, current year sales include $3.9 million from Startco Engineering Ltd. (“Startco”), acquired at the beginning of the fourth quarter of 2008, and $1.3 million from Shock Block Corporation (“Shock Block”), acquired during the first quarter of 2008.
On a geographic basis, sales in the Americas decreased $2.5 million or 1% in 2008 compared to 2007 due to decreased automotive sales of $8.4 million and lower electronics sales of $3.5 million, partially offset by increased electrical sales of $9.4 million. Automotive and electronics sales declined sharply in the fourth quarter of 2008 as economic concerns led to a deterioration in consumer confidence and reduced spending. As a result,
the automotive OEMs sharply cut production rates and shut down assembly lines for much of December and electronics distributors reduced inventories. The electrical sales increase was due primarily to price increases over the prior year and sales from newly-acquired companies.
Europe sales remained steady in 2008 compared to 2007, reflecting a modest increase of $0.4 million. 2008 results reflected favorable currency effects of $9.6 million offset by lower automotive sales due to a sharp decline in fourth quarter car production, which was down 22% year-over-year, and lower electronics sales due to decreased demand from electronics distributors.
Asia-Pacific sales decreased $3.1 million or 1% in 2008 compared to the prior year mainly due to lower electronics sales, which reflected weakness across all major end markets, from consumer products to IT infrastructure spending for telecom equipment. This decrease was partially offset by higher automotive sales, which reflected continued share gain in the growing Asian markets outside of Japan. Current year results included unfavorable currency translation effects of $3.1 million primarily due to a sharp decline in the Korean won.
Gross profit was $143.7 million or 27.1% of sales in 2008 compared to $171.5 million or 32.0% of sales in 2007. The decline in gross profit margin percentage in 2008 reflected a $5.7 million non-cash charge related to settlement of the Ireland pension plan. The decrease also reflected a $3.2 million charge related to impairment of certain manufacturing assets in China along with higher costs for transportation, materials and utilities driven primarily by the increase in the price of oil and commodity metals for much of 2008. Higher costs related to plant transfer activities also contributed to the margin decline.
The company also recorded approximately $8.8 million of restructuring charges in cost of sales in the current year, primarily due to the closure of the Matamoros, Mexico manufacturing facility, along with severance and retention expense at the Irving, Texas, Des Plaines, Illinois and Swindon, U.K. facilities, compared to $7.6 million of restructuring charges in the prior year primarily related to the closure of the Des Plaines, Illinois manufacturing facility, along with severance and retention expense in Ireland and Germany.
Total operating expense was $135.2 million or 25.5% of net sales for 2008 compared to $120.2 million or 22.4% of net sales for 2007. Fiscal year 2007 included an $8.0 million gain on the sale of property in Ireland. In addition, selling, general and administrative expenses increased $3.9 million to $107.2 million in 2008 from $103.3 million in 2007 due primarily to currency effects. Research and development costs increased $2.4 million to $24.1 million in 2008 compared to $21.7 million in 2007 due to increased spending on new product development for the electronics and automotive markets.
Operating income was $8.5 million or 1.6% of net sales in 2008 compared to $51.3 million or 9.6% of net sales in the prior year. The decrease in operating income in the current year was due primarily to the special charges described above, reduced operating leverage and higher costs due to transfer-related activities and higher commodity prices.
Interest expense increased to $3.4 million in 2008 compared to $1.6 million for 2007 primarily due to a $1.1 million loss on an interest rate swap transaction recognized in 2008, as well as increased costs due to higher long-term debt resulting from the $80.0 million term loan agreement the company entered into on September 29, 2008. Other expense (income), net, consisting of interest income, royalties, non-operating income and foreign currency items, was $5.6 million in 2008 compared to $1.5 million in the prior year. The increase reflected a net improvement of approximately $3.9 million in foreign currency translation effects (primarily due to the strengthening of the US dollar against the Korean won, Philippine peso and euro) and a $1.1 million refund received in 2008 related to an exemption from Japanese output taxes paid in 2007, partially offset by a
$2.8 million non-cash charge related to marking down the company’s available-for-sale investment in Polytronics to its lower market value, as the loss was deemed “other than temporary”.
Income before income taxes was $10.6 million in 2008 compared to $51.3 million in 2007. Income tax expense was $2.6 million in 2008 compared to $14.5 million in the prior year. The 2008 effective income tax rate was 24.5% compared to 28.2% in 2007. The decrease in the 2008 effective tax rate reflects the mix of income earned in lower tax jurisdictions partially offset by a $1.1 million unfavorable impact from recognizing an other-than-temporary loss on the company’s available-for-sale investment in Polytronics, for which no tax benefit is available on the capital loss.
Liquidity and Capital Resources
The company historically has financed capital expenditures through cash flows from operations. Despite the recent adverse changes in market conditions, management expects that cash flows from operations and available lines of credit will be sufficient to support both the company’s operations and its debt obligations for the foreseeable future.
Term Loan
On September 29, 2008, the company entered into a Loan Agreement with various lenders that provides the company with a five-year term loan facility of up to $80.0 million for the purposes of (i) refinancing certain existing indebtedness; (ii) funding working capital needs; and (iii) funding capital expenditures and other lawful corporate purposes, including permitted acquisitions. The Loan Agreement also contains an expansion feature, pursuant to which the company may from time to time request incremental loans in an aggregate principal amount not to exceed $40.0 million. The company had $57.0 million outstanding at January 2, 2010. Further information regarding this arrangement is provided in Note 6 of the Notes to Consolidated Financial Statements included in this report.
The Loan Agreement requires the company to meet certain financial tests, including a consolidated leverage ratio and a consolidated interest coverage ratio. The Loan Agreement also contains additional affirmative and negative covenants which, among other things, impose certain limitations on the company’s ability to merge with other companies, create liens on its property, incur additional indebtedness, enter into transactions with affiliates except on an arm’s length basis, dispose of property, or issue dividends or make distributions. At January 2, 2010, and for the year then ended, the company was in compliance with these covenants. The new Loan Agreement does not impact the existing debt covenants in the revolving credit facility described below.
Revolving Credit Facilities
On January 28, 2009, the company entered into an unsecured financing arrangement with a Canadian bank that provided a CAD 10.0 million (equivalent to approximately $9.5 million at January 2, 2010) revolving credit facility, for capital expenditures and general working capital, which expires on July 21, 2011. This facility consists of prime-based loans and overdrafts, bankers acceptances and U.S. base rate loans and overdrafts, and is guaranteed by the company. At January 2, 2010, the company had approximately CAD 6.5 million (equivalent to approximately $6.2 million) outstanding under the revolving credit facility. As of January 2 2010, the company had approximately CAD 3.5 million (equivalent to approximately $3.3 million) available under the revolving credit facility at an interest rate of bankers acceptance rate plus 1.62% (2.10% as of January 2, 2010).
This agreement contains covenants that, among other matters, impose limitations on future mergers, sales of assets, and changes in control, as defined in the agreement. In addition, the company is required to satisfy certain financial covenants and tests relating to, among other matters, interest coverage, working capital, leverage and net worth. As of the fiscal year ended 2009, the company was in compliance with all covenants.
The company has an unsecured domestic financing arrangement consisting of a credit agreement with banks that provides a $75.0 million revolving credit facility, with a potential increase of up to $125.0 million upon request of the company and agreement with the lenders, which expires on July 21, 2011. At January 2, 2010, the company had available the full $75.0 million of borrowing capacity under the revolving credit facility at an interest rate of LIBOR plus 0.875% (1.11% as of January 2, 2010).
The domestic bank credit agreement contains covenants that, among other matters, impose limitations on the incurrence of additional indebtedness, future mergers, sales of assets, payment of dividends, and changes in control, as defined in the agreement. In addition, the company is required to satisfy certain financial covenants and tests relating to, among other matters, interest coverage, working capital, leverage and net worth. At January 2, 2010, and for the year then ended, the company was in compliance with these covenants.
Other Obligations
The company had an unsecured bank line of credit in Japan that provided a 700 million yen revolving credit facility at an interest rate of TIBOR plus 0.625%. The revolving line of credit was due on July 21, 2011. The line of credit was closed on July 14, 2009. The company had no outstanding borrowings on the yen facility at the time of the closing.
The company had an unsecured bank line of credit in Taiwan that provided a 35.0 million Taiwanese dollar revolving credit facility at an interest rate of two-years time deposit plus 0.145%. The revolving line of credit was due on August 18, 2009. The company also had a foreign fixed rate mortgage loan outstanding totaling approximately 32.0 million Taiwanese dollars with maturity dates through August 2013. The company chose to repay the outstanding balances on both debt instruments in June 2008, resulting in uses of cash totaling the equivalent of $1.7 million. As a result, the line of credit was closed on June 28, 2008.
The company also had $2.3 million available in letters of credit at January 2, 2010. No amounts were drawn under these letters of credit at January 2, 2010.
The company started 2009 with $70.9 million of cash. Net cash provided by operating activities in 2009 was approximately $29.6 million in the year and included $9.4 million in net income and $41.1 million in non-cash adjustments (primarily $36.6 million in depreciation and amortization), partially offset by $20.9 million of changes in operating assets and liabilities.
Changes in various operating assets and liabilities (including short-term and long-term items) that negatively impacted cash flows in 2009 consisted of decreases in accrued payroll and severance ($9.0 million), net decreases in accounts payable and accrued expenses ($7.9 million), increases in accounts receivable ($15.6 million), decreases in accrued taxes ($3.3 million), and increases in prepaid expenses and other current assets ($0.6 million), partially offset by decreases in inventory ($15.5 million). Days sales outstanding in accounts receivable increased to 61 days at year-end 2009, compared to 53 days at year-end 2008 and 58 days at year-end 2007. DSO in 2008 was unusually low due to the sharp drop-off in sales at the end of the year. The DSO levels for 2007 and 2009 of 59 and 61 days respectively, are more typical of what is expected going forward. Days inventory outstanding was 62 days at year-end 2009, compared to 72 days at year-end 2008 and 58 days at year-end 2007. The decrease in days inventory outstanding in 2009 resulted from lean initiatives and other inventory reduction efforts during 2009.
Net cash used in investing activities in 2009 was approximately $14.8 million and included $15.5 million in purchases of property, plant and equipment (primarily related to the company’s plant expansion and new facilities in the Asia-Pacific region, along with manufacturing process improvements, new facilities and product introductions in Mexico) and a $0.9 million payment of a holdback obligation related to the acquisition of
Shock Block, acquired during the first quarter of 2008, partially offset by $1.7 million in cash receipts from the sale of property, plant and equipment and the sale of an investment.
Net cash used in financing activities in 2009 was approximately $16.2 million, which included $17.7 million in net payments of debt and $1.5 million in cash proceeds from the exercise of stock options. The net payments from debt include $48.0 million in gross payments under the company’s term loan discussed above. Further information regarding the company’s debt is provided in Note 6 of the Notes to Consolidated Financial Statements included in this report.
The effect of exchange rate changes increased cash by $0.8 million in 2009. The net cash provided by operating activities less net cash used in financing and investing activities plus the effect of exchange rate changes, resulted in a $0.6 million decrease in cash and cash equivalents in 2009. This left the company with a cash balance of $70.4 million at the end of 2009.
The ratio of current assets to current liabilities was 3.2 to 1 at year-end 2009, compared to 3.1 to 1 at year-end 2008 and 2.4 to 1 at year-end 2007. The change in the current ratio at the end of the 2009 compared to the prior year reflected increased current assets in 2009, primarily related to higher accounts receivable balances and the reclassification of assets held for sale from property, plant and equipment, offset by a decrease in inventory balances. The carrying amounts of total debt decreased $16.8 million in 2009, compared to an increase of $66.7 million in 2008 and a decrease of $12.8 million in 2007, due to the $80 million loan agreement the company executed in 2008. The ratio of long-term debt to equity was 0.13 to 1 at year-end 2009, compared to 0.22 to 1 at year-end 2008 and 0.0 to 1 at year-end 2007. Further information regarding the company’s debt is provided in Note 6 of the Notes to Consolidated Financial Statements included in this report.
The company started 2008 with $64.9 million of cash. Net cash provided by operating activities in 2008 was approximately $40.6 million in the year and included $8.0 million in net income and $44.8 million in non-cash adjustments (primarily $32.2 million in depreciation and amortization, $6.0 million related to impairment of assets / investments and $5.7 million related to the Ireland pension settlement), partially offset by $12.2 million in changes to operating assets and liabilities. Further information regarding the impairments is provided in Notes 5 and 11, and information regarding the pension settlement is provided in Note 12, of the Notes to Consolidated Financial Statements included in this report.
Changes in various operating assets and liabilities (including short-term and long-term items) that negatively impacted cash flows in 2008 consisted of decreases in accrued payroll and severance ($15.7 million), net decreases in accrued expenses ($6.6 million), increases in inventories ($6.6 million) and increases in prepaid expenses and other current assets ($6.4 million), partially offset by decreases in accounts receivable ($23.1 million).
The company’s capital expenditures were $15.5 million in 2009, $51.3 million in 2008 and $40.5 million in 2007. Higher capital expenditures in the prior two years were primarily related to facilities and equipment to support the manufacturing transfers to Asia and Mexico. The company expects capital expenditures in 2010 will be approximately $16 to $19 million with the largest part related to the completion of facility moves, capacity expansion and new product development.
The company’s Board of Directors has authorized the company to repurchase up to 1 million shares of its common stock, from time to time, depending on market conditions. The company repurchased 218,000 common shares for $6.6 million in 2008, and 500,000 common shares for $16.4 million in 2007. The company did not repurchase any common shares during 2009. As of January 2, 2010, the company is authorized to purchase up to 1,000,000 shares of its common stock.
Contractual Obligations and Commitments
The following table summarizes contractual obligations and commitments as of January 2, 2010:
*
Included in “operating lease payments” is future rental expense related to office space for the company’s new U.S. corporate headquarters located in Chicago, Illinois. The company relocated during the first quarter of 2009. The lease commenced in January 2009 and expires December 2024. Refer to Note 16 of the Notes to Consolidated Financial Statements for more information.
Off-Balance Sheet Arrangements
As of January 2, 2010, the company did not have any off-balance sheet arrangements, as defined under the U.S. Securities and Exchange Commission 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; and 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. In 2009, the company entered into derivative financial instruments. Further information regarding these arrangements is provided in Note 7 of the Notes to Consolidated Financial Statements included in this report.
Recent Accounting Pronouncements
In February 2007, the FASB issued guidance titled “The Fair Value Option for Financial Assets and Financial Liabilities”. The guidance permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. The guidance is expected to expand the use of fair value measurement, but does not eliminate disclosure requirements included in other accounting standards. The guidance is effective for fiscal years beginning after November 15, 2007. The adoption of this accounting guidance did not have a material impact on the company’s Consolidated Financial Statements.
In December 2007, the FASB issued accounting guidance titled “Noncontrolling Interests in Consolidated Financial Statements”. The accounting guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with earlier adoption prohibited. The accounting guidance requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net earnings attributable to the noncontrolling interest will be included in consolidated net income on the face of the Consolidated Statements of Income. The accounting guidance also amends certain other consolidation procedures and includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. As a result of the adoption of the accounting guidance, the company reclassified its immaterial noncontrolling interest from “Other long-term liabilities” to “Total equity” as of December 27, 2008 and December 29, 2007, to conform to the presentation at January 2, 2010.
In December 2007, the FASB revised existing guidance with respect to accounting for business combinations. The new business combination accounting guidance retains the underlying concepts of previous business combination accounting guidance in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but the new business combination accounting guidance changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs generally will be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination generally will be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. The new business combination accounting guidance is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. The new business combination guidance amends existing income tax accounting guidance such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of the new business combination accounting guidance would also apply the provisions of the new business combination accounting guidance. The adoption of the new business combination accounting guidance resulted in a change to the company’s treatment of certain uncertain tax positions in fiscal 2009.
In March 2008, the FASB issued accounting guidance titled “Disclosures about Derivative Instruments and Hedging Activities”. The new standard requires enhanced disclosure about a company’s derivatives and hedging to help investors understand their impact on a company’s financial position, financial performance and cash flows. The new accounting guidance is effective for periods beginning after November 15, 2008. The adoption of the expanded disclosure requirements related to the company’s derivative and hedging activities resulted in additional disclosures as reflected in Note 7.
In June 2008, the FASB issued guidance titled “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. The guidance states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption, a company is required to retrospectively adjust its earnings per share data presentation to conform with the guidance provisions. The guidance is effective for fiscal years beginning after December 15, 2008. The company adopted the new guidance on December 28, 2008, which resulted in expanded disclosures as reflected in Note 17.
In April 2009, the FASB issued guidance titled “Interim Disclosures about Fair Value of Financial Instruments”. The guidance amends existing guidance to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. This statement also amends existing guidance to require those disclosures in all interim financial statements. The new accounting guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of the new accounting guidance resulted in additional disclosures included in the company’s quarterly filings.
In May 2009, the FASB issued guidance titled “Subsequent Events”. The new accounting guidance sets forth the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, circumstances under which an entity should recognize events or transactions that may occur for potential recognition and disclosure in the financial statements, and disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of the new accounting guidance resulted in additional disclosures regarding the date through which management has evaluated subsequent events. The company
evaluated subsequent events through February 26, 2010, the date its financial statements were filed with the SEC.
In June 2009, the FASB issued authoritative guidance that eliminates the qualifying special purpose entity concept, changes the requirements for derecognizing financial assets and requires enhanced disclosures about transfers of financial assets. The guidance also revises earlier guidance for determining whether an entity is a variable interest entity, requires a new approach for determining who should consolidate a variable interest entity, changes when it is necessary to reassess who should consolidate a variable interest entity, and requires enhanced disclosures related to an enterprise’s involvement in variable interest entities. The guidance is effective for the first annual reporting period that begins after November 15, 2009. The company does not believe the adoption of the new accounting guidance will have a material impact on its Consolidated Financial Statements.
In June 2009, the FASB issued guidance titled “The FASB Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“the codification standard”). The codification standard is effective for fiscal years, and interim periods, ending after September 15, 2009. The codification standard is intended to improve financial reporting by identifying the FASB Accounting Standards Codification and rules and interpretive releases of the SEC under authority of federal securities laws as the sole sources of authoritative accounting principles to be used in preparing financial statements that are presented in conformity with accounting principles generally accepted in the United States of America for SEC registrants. The company adopted the codification standard on September 26, 2009. The adoption of the codification standard did not have a material impact on the company’s consolidated financial position or results of operations.
In October 2009, the FASB issued authoritative guidance that amends earlier guidance addressing the accounting for contractual arrangements in which an entity provides multiple products or services (deliverables) to a customer. The amendments address the unit of accounting for arrangements involving multiple deliverables and how arrangement consideration should be allocated to the separate units of accounting, when applicable, by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific nor third-party evidence is available. The amendments also require that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The guidance is effective for fiscal years beginning on or after June 15, 2010, with earlier application permitted. The company does not believe the accounting guidance will have a material impact on its Consolidated Financial Statements.
In October 2009, the FASB issued authoritative guidance that amends earlier guidance for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of guidance for recognizing revenue from the sale of software, but would be accounted for in accordance with other authoritative guidance. The guidance is effective for fiscal years beginning on or after June 15, 2010, with earlier application permitted. The company does not believe the accounting guidance will have a material impact on its Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Certain of the accounting policies as discussed below require the application of significant judgment by management in selecting the appropriate estimates and assumptions for calculating amounts to record in the financial statements. Actual results could differ from those estimates and assumptions, impacting the reported results of operations and financial position. Significant accounting policies are more fully described in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report. Certain accounting policies,
however, are considered to be critical in that they are most important to the depiction of the company’s financial condition and results of operations and their application requires management’s subjective judgment in making estimates about the effect of matters that are inherently uncertain. The company believes the following accounting policies are the most critical to aid in fully understanding and evaluating its reported financial results, as they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. The company has reviewed these critical accounting policies and related disclosures with the Audit Committee of its Board of Directors.
Net Sales
Revenue Recognition: The company recognizes revenue on product sales in the period in which the sales process is complete. This generally occurs when products are shipped (FOB origin) to the customer in accordance with the terms of the sale, the risk of loss has been transferred, collectibility is reasonably assured and the pricing is fixed and determinable. 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 company’s distribution channels are primarily through direct sales and independent third party distributors.
Revenue & Billing: The company accepts orders from customers based on long term purchasing contracts and written sales agreements. Contract pricing and selling agreement terms are based on market factors, costs, and competition. Pricing normally is 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.
Returns & Credits: 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 to reduce its price to its buyer. If the company approves such a reduction, the distributor is authorized to “debit” its account for the difference between the contracted price and the lower approved price. The company establishes reserves for this program based on historic activity and actual authorizations for the debit and recognizes these debits as a reduction of revenue.
The company has a return to stock policy whereby a customer with previous 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.
The company properly meets all of the criteria for recognizing revenue when the right of return exists. Specifically, the company meets those requirements because:
1.
The company’s selling price is fixed or determinable at the date of the sale.
2.
The company has policies and procedures to accept only credit worthy customers with the ability to pay the company.
3.
The company’s customers are obligated to pay the company under the contract and the obligation is not contingent on the resale of the product. (All “ship and debit” and “returns to stock” require specific circumstances and authorization.)
4.
The risk ownership transfers to the company’s customers upon shipment and is not changed in the event of theft, physical destruction or damage of the product.
5.
The company bills at the ship date and establishes a reserve to reduce revenue from the in transit time until the product is delivered for FOB destination sales.
6.
The company’s customers acquiring the product for resale have economic substance apart from that provided by Littelfuse. All distributors are independent of the company.
7.
The company does not have any obligations for future performance to bring about resale of the product by its customers.
8.
The company can reasonably estimate the amount of future returns.
Volume Rebates: The company offers incentives to certain customers to achieve specific quarterly or annual sales targets. If customers achieve their sales targets, they are entitled to rebates. The company estimates the future cost of these rebates and recognizes this estimated cost as a reduction to revenue as products are sold.
Allowance for Doubtful Accounts: The company evaluates the collectibility of its trade receivables based on a combination of factors. The company regularly analyzes its significant customer accounts and, when the company becomes aware of a specific customer’s inability to meet its financial obligations, the company records a specific reserve for bad debt to reduce the related receivable to the amount the company reasonably believes is collectible. The company also records allowances for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer, macroeconomic considerations and past experience. Historically, the allowance for doubtful accounts has been adequate to cover bad debts. If circumstances related to specific customers change, the estimates of the recoverability of receivables could be further adjusted.
Inventory
The company performs regular detailed assessments of inventory, which include a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing, shelf life and quality issues. Based on the analysis, the company records adjustments to inventory for excess quantities, obsolescence or impairment when appropriate to reflect inventory at net realizable value. Historically, inventory reserves have been adequate to reflect inventory at net realizable values.
Goodwill and Other Intangible Assets
The company annually tests goodwill for impairment on the first day of its fiscal fourth quarter or at an interim date if there is an event or change in circumstances that indicates the asset may be impaired. Management determines the fair value of each of its business unit segments by using a discounted cash flow model (which includes forecasted five-year income statement and working capital projections, a market-based weighted average cost of capital and terminal values after five years) to estimate market value. In addition, the company compares its derived enterprise value on a consolidated basis to the company’s market capitalization as of its test date to ensure its derived value approximates the market value of the company when taken as a whole. The company has defined its reportable segments as its reporting units for goodwill accounting.
As of the most recent annual test conducted on September 27, 2009, the company concluded the fair value of each of the reporting units exceeded its carrying value of invested capital and therefore, no goodwill impairment existed. Specifically, the company noted that its headroom, defined as the excess of fair value over the carrying value of invested capital, was 35%, 30% and 38% for its electronics, automotive and electrical reporting units, respectively, at September 27, 2009. Certain key assumptions used in the annual test included a discount rate of 14.5% and a long-term growth rate of 3% for all three business units.
In addition, the company performed a sensitivity test at September 27, 2009 that showed a 100 basis point increase in its discount rate or a 100 basis point decrease in the long-term growth rate for each reporting unit would not have changed the company’s conclusion that no goodwill impairment existed at September 27, 2009.
The company will continue to perform a goodwill impairment test as required on an annual basis and on an interim basis, if certain conditions exist. Factors the company considers important, which could result in changes to its estimates, include underperformance relative to historical or projected future operating results and declines in acquisitions and trading multiples. Due to the diverse end user base and non-discretionary product demand, the company does not believe its future operating results will vary significantly relative to its historical and projected future operating results.
Long-Lived Assets
The company evaluates long-lived asset groups on an ongoing basis. Long-lived asset groups are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the related asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted cash flows expected to be generated by the asset group. If it is determined to be impaired, the impairment recognized is measured by the amount by which the carrying value of the asset exceeds its fair value. The company’s estimates of future cash flows from such assets could be impacted if it underperforms relative to historical or projected future operating results.
Environmental Liabilities
Environmental liabilities are accrued based on estimates of the probability of potential future environmental exposure. Expenses related to on-going maintenance of environmental sites are expensed as incurred. If actual or estimated probable future losses exceed the company’s recorded liability for such claims, it would record additional charges as other expense during the period in which the actual loss or change in estimate occurred.
Pension and Supplemental Executive Retirement Plan
Littelfuse has a number of company-sponsored defined benefit plans primarily in North America, Europe and the Asia-Pacific region. The company recognizes the full unfunded status of the plan on the balance sheet. Actuarial gains and losses and prior service costs and credits are recognized as a component of accumulated other comprehensive income. Accounting for pensions requires estimating the future benefit cost and recognizing the cost over the employee’s expected period of employment with the company. Certain assumptions are required in the calculation of pension costs and obligations. These assumptions include the discount rate, salary scales and the expected long-term rate of return on plan assets. The discount rate is intended to represent the rate at which pension benefit obligations could be settled by purchase of an annuity contract. These assumptions are subject to change based on stock and bond market returns and other economic factors. Actual results that differ from the company’s assumptions are accumulated and amortized over future periods and therefore, generally affect its recognized expense and accrued liability in such future periods. While the company believes that its assumptions are appropriate given current economic conditions and its actual experience, significant differences in results or significant changes in the company’s assumptions may materially affect its pension obligations and related future expense. Further information regarding these plans is provided in Note 12 of the Notes to Consolidated Financial Statements included in this report.
Stock-based Compensation
Stock-based compensation expense is recorded for stock-option grants, restricted stock and performance-based restricted stock awards based upon the fair values of the awards. The fair value of stock option awards is estimated at the grant date using the Black-Scholes option pricing model, which includes assumptions for volatility, expected term, risk-free interest rate and dividend yield. Expected volatility is based on implied volatilities from traded options on Littelfuse stock, historical volatility of Littelfuse stock and other factors. Historical data is used to estimate employee termination experience and the expected term of the options. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The company has not paid any cash dividends in its history.
The performance-based restricted stock awards granted prior to 2008 vest in thirds over a three-year period (following the three-year performance period), and are paid annually as they vest, one half in the company’s common stock and one half in cash. The performance-based restricted stock awards granted in 2008 vest after a three-year performance period and are paid completely in the company’s common stock at the end of the performance period. The fair value of performance-based restricted stock awards that are paid in common stock is measured at the market price on the grant date, and the fair value of the portion paid in cash is measured at the current market price of a share.
The number of shares issued is based on the company attaining certain financial performance goals relating to return on net tangible assets (“RONTA”) for performance-based restricted stock awards granted prior to 2008, or return on net assets (“RONA”) for performance-based restricted stock granted in 2008 and 2009, as well as earnings before interest, taxes, depreciation and amortization (“EBITDA”) during the three-year performance period after the grant date. Stock-based compensation expense for performance-based restricted stock awards is based on the fair values and the company’s current estimate of the probable number of shares to be issued (based on the probable outcome at the end of the performance period). As the company’s estimate of the probable outcome changes in future periods, stock-based compensation expense is adjusted accordingly.
Total stock-based compensation expense was $5.5 million, $5.1 million and $5.0 million in 2009, 2008, and 2007, respectively. Further information regarding this expense is provided in Note 13 of the Notes to Consolidated Financial Statements included in this report.
Income Taxes
The company accounts for income taxes using the liability method. Deferred taxes are recognized for the future effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. The company recognizes deferred taxes for temporary differences, operating loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Federal and state income taxes are provided on the portion of foreign income that is expected to be remitted to the U.S. and be taxable.
The company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Further information regarding income taxes, including a detailed reconciliation of current year activity, is provided in Note 14 of the Notes to Consolidated Financial Statements included in this report.
Outlook
The company’s automotive and electronics markets weakened significantly beginning in the fourth quarter of 2008. The electrical market lagged and began to weaken in 2009. Excluding Startco, acquired in late 2008, electrical sales were down 22% for 2009 in line with automotive and electronics, due to the decline in non-residential construction. During the second half of 2009, the company began to experience an up-tick in demand across all segments. Sales for the fourth quarter of 2009 of $127.9 million represented a 10% sequential increase over the 2009 third quarter.
The company also began benefiting from its plan initiated in 2005 to reduce and consolidate its manufacturing operations to low cost locations in China, the Philippines and Mexico. This plan is expected to be completed by the end of 2010. In addition to its plant restructuring, the company has also executed a plan to reduce operating expenses year over year.
With the significantly improved expense profile and guarded optimistic expectations for year over year revenue growth, pre tax operating margins should improve significantly in 2010.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The company is exposed to market risk from changes in interest rates, foreign exchange rates and commodities.
Interest Rates
The company had $63.2 million in debt outstanding at January 2, 2010, primarily related to the term loan, which is described above in Item 7 under Liquidity and Capital Resources. In order to reduce interest rate risk and effectively manage its exposure to fluctuations in the adjustable interest rate of the loan, the company entered into a one-year interest rate swap transaction with JPMorgan Chase Bank, N.A. on October 29, 2008. The interest rate swap was for a notional amount of $65 million and allowed the company to pay a fixed annual rate of 2.85% on the notional amount and required JPMorgan Chase Bank, N.A. to pay a floating rate tied to the one-month U.S. dollar LIBOR. The interest rate swap expired on October 29, 2009. While the remaining portion of this debt has a variable interest rate, the company’s interest expense is not materially sensitive to changes in interest rate levels since debt levels and potential interest expense increases are insignificant relative to earnings.
Foreign Exchange Rates
The majority of the company’s operations consist of manufacturing and sales activities in foreign countries. The company has manufacturing facilities in Mexico, Canada, Germany, China, Taiwan and the Philippines. During 2009, sales to customers outside the U.S. were 67.5% of total net sales. Substantially all sales in Europe are denominated in euros and substantially all sales in the Asia-Pacific region are denominated in U.S. dollars, Japanese yen, Korean won, Chinese yuan and Taiwanese dollars.
The company’s foreign exchange exposures result primarily from sale of products in foreign currencies, foreign currency denominated purchases, employee-related and other costs of running operations in foreign countries and translation of balance sheet accounts denominated in foreign currencies. The company’s most significant long exposure is to the euro, with lesser long exposures to the Canadian dollar, Japanese yen and Korean won. The company’s most significant short exposures are to the Mexican peso, Philippine peso and Chinese yuan. Changes in foreign exchange rates could affect the company’s sales, costs, balance sheet values and earnings. The company uses netting and offsetting intercompany account management techniques to reduce known foreign currency exposures where possible and also, from time to time, utilizes derivative instruments to hedge certain foreign currency exposures deemed to be material.
During 2009, the company entered into a forward contract to purchases Mexican Peso. The purpose of the contract was to hedge approximately 60% of the company’s forecasted Mexican peso exposure included within a U.S. dollar functional currency entity. See Note 7 for additional disclosure.
Commodities
The company uses various metals in the manufacturing of its products, including copper, zinc, tin, gold and silver. Prices of these commodities can and do fluctuate significantly, which can impact the company’s earnings. The most significant of these exposures is to copper and zinc, where at current prices and volumes, a
10% price change in copper would affect pretax profit by approximately $1.4 million. A 10% change in zinc would affect pretax profit by approximately $0.5 million.
The cost of oil fluctuated dramatically over the past several years. Consequently, there is a risk that a return to high prices for oil and electricity in 2010 could have a significant impact on the company’s transportation and utility expenses.
While the company is exposed to significant changes in certain commodity prices and foreign currency exchange rates, the company actively monitors these exposures and takes various actions to mitigate any negative impacts of these exposures.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Littelfuse, Inc.
We have audited the accompanying consolidated balance sheets of Littelfuse, Inc. and subsidiaries (Company) as of January 2, 2010, and December 27, 2008, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended January 2, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Littelfuse, Inc. and subsidiaries at January 2, 2010 and December 27, 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 2, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As described in Note 1 of the notes to the consolidated financial statements, effective December 28, 2008, the Company adopted new rules regarding the accounting for noncontrolling interests. As described in Note 17 of the notes to the consolidated financial statements, effective December 28, 2008, the Company adopted the two-class method of computing earnings per share.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Littelfuse, Inc. and subsidiaries’ internal control over financial reporting as of January 2, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2010, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 26, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Littelfuse, Inc.
We have audited Littelfuse, Inc.’s internal control over financial reporting as of January 2, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Littelfuse, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Form 10-K. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Littelfuse, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 2, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Littelfuse, Inc. and subsidiaries as of January 2, 2010, and December 27, 2008, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended January 2, 2010, and our report dated February 26, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 26, 2010
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes.
CONSOLIDATED STATEMENTS OF EQUITY
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Other Information
Nature of Operations: Littelfuse, Inc. and its subsidiaries (the “company”) design, manufacture, and sell circuit protection devices for use in the automotive, electronic and electrical markets throughout the world.
Fiscal Year: The company’s fiscal year ended January 2, 2010 contained 53 weeks and fiscal years ended December 27, 2008, and December 29, 2007 contained 52 weeks each.
Basis of Presentation: The Consolidated Financial Statements include the accounts of Littelfuse, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The company’s Consolidated Financial Statements were prepared in accordance with generally accepted accounting principles in the United States of America and include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries and majority-owned subsidiaries over which the company exercises control.
Use of Estimates: The process of preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses and the accompanying notes. The company evaluates and updates its assumptions and estimates on an ongoing basis and may employ outside experts to assist in its evaluation, as considered necessary. Actual results could differ from those estimates.
Cash Equivalents: All highly liquid investments, with a maturity of three months or less when purchased, are considered to be cash equivalents.
Investments: The company has determined that all of its investment securities are to be classified as available-for-sale. Available-for-sale securities are carried at fair value with the unrealized gains and losses reported as a component of “Accumulated Other Comprehensive Income (Loss).” Realized gains and losses and declines in unrealized value judged to be other-than-temporary on available-for-sale securities are included in other expense (income), net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.
Fair Value of Financial Instruments: The company’s financial instruments include cash and cash equivalents, accounts receivable, investments, derivative instruments and long-term debt. The carrying values of such financial instruments approximate their estimated fair values.
Accounts Receivable: The company performs credit evaluations of customers’ financial condition and generally does not require collateral. Credit losses are provided for in the financial statements based upon specific knowledge of a customer’s inability to meet its financial obligations to the company. Historically, credit losses have consistently been within management’s expectations and have not been a material amount. A receivable is considered past due if payments have not been received within agreed upon invoice terms. Write-offs are recorded at the time a customer receivable is deemed uncollectible.
The company also maintains allowances against accounts receivable for the settlement of rebates and sales discounts to customers. These allowances are based upon specific customer sales and sales discounts as well as actual historical experience.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Other Information, continued
Inventories: Inventories are stated at the lower of cost or market (first in, first out method), which approximates current replacement cost. The company maintains excess and obsolete allowances against inventory to reduce the carrying value to the expected net realizable value. These allowances are based upon a combination of factors including historical sales volume, market conditions, lower of cost or market analysis and expected realizable value of the inventory.
Property, Plant and Equipment: Land, buildings, and equipment are carried at cost. Depreciation is calculated using the straight-line method with useful lives of 21 years for buildings, seven to nine years for equipment, seven years for furniture and fixtures, five years for tooling and three years for computer equipment.
Goodwill: The company annually tests goodwill for impairment on the first day of its fiscal fourth quarter or at an interim date if there is an event or change in circumstances that indicates the asset may be impaired. Management determines the fair value of each of its business unit segments by using a discounted cash flow model (which includes forecasted five-year income statement and working capital projections, a market-based weighted average cost of capital and terminal values after five years) to estimate market value. In addition, the company compares its derived enterprise value on a consolidated basis to the company’s market capitalization as of its test date to ensure its derived value approximates the market value of the company when taken as a whole. The company has defined its reportable segments as its reporting units for goodwill accounting.
As of the most recent annual test conducted on September 27, 2009, the company concluded the fair value of each of the reporting units exceeded its carrying value of invested capital and therefore, no goodwill impairment existed. Specifically, the company noted that its headroom, defined as the excess of fair value over the carrying value of invested capital, was 35%, 30% and 38% for its electronics, automotive and electrical reporting units, respectively, at September 27, 2009. Certain key assumptions used in the annual test included a discount rate of 14.5% and a long-term growth rate of 3% for all three business units.
In addition, the company performed a sensitivity test at September 27, 2009 that showed a 100 basis point increase in its discount rate or a 100 basis point decrease in the long-term growth rate for each reporting unit would not have changed the company’s conclusion that no goodwill impairment existed at September 27, 2009.
The company will continue to perform a goodwill impairment test as required on an annual basis and on an interim basis, if certain conditions exist. Factors the company considers important, which could result in changes to its estimates, include underperformance relative to historical or projected future operating results and declines in acquisitions and trading multiples. Due to the diverse end user base and non-discretionary product demand, the company does not believe its future operating results will vary significantly relative to its historical and projected future operating results.
Other Intangible Assets: Trademarks and tradenames are amortized using the straight-line method over estimated useful lives that have a range of five to 20 years. Patents, licenses and software are amortized using the straight-line method or an accelerated method over estimated useful lives that have a range of four to 12 years. The distribution networks are amortized on either a straight-line or accelerated basis over estimated useful lives that have a range of four to 20 years. Other intangible assets are also tested for impairment when there is a significant event that may cause the asset to be impaired.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Other Information, continued
Environmental Liabilities: Environmental liabilities are accrued based on engineering studies estimating the cost of remediating sites. Expenses related to on-going maintenance of environmental sites are expensed as incurred. If actual or estimated probable future losses exceed the company’s recorded liability for such claims, the company would record additional charges during the period in which the actual loss or change in estimate occurred.
Pension and Other Post-retirement Benefits: Accounting for pensions requires estimating the future benefit cost and recognizing the cost over the employee’s expected period of employment with the company. Certain assumptions are required in the calculation of pension costs and obligations. These assumptions include the discount rate, salary scales and the expected long-term rate of return on plan assets. The discount rate is intended to represent the rate at which pension benefit obligations could be settled by purchase of an annuity contract. These assumptions are subject to change based on stock and bond market returns and other economic factors. Actual results that differ from the company’s assumptions are accumulated and amortized over future periods and therefore generally affect its recognized expense and accrued liability in such future periods. While the company believes that its assumptions are appropriate given current economic conditions and its actual experience, significant differences in results or significant changes in the company’s assumptions may materially affect its pension obligations and related future expense. On April 1, 2009, the company elected to freeze its U.S. benefit plan. As a result of the freeze decision, the company remeasured its pension plan assets and obligations which resulted in a decrease in the net obligation at that date. See Note 12 for additional information.
Reclassifications: Certain items in the 2008 and 2007 financial statements have been reclassified to conform to the 2009 presentation.
Revenue Recognition: The company recognizes revenue on product sales in the period in which the sales process is complete. This generally occurs when products are shipped (FOB origin) to the customer in accordance with the terms of the sale, the risk of loss has been transferred, collectibility is reasonably assured and the pricing is fixed and determinable. 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 company’s distribution channels are primarily through direct sales and independent third party distributors.
Revenue & Billing: The company accepts orders from customers based on long term purchasing contracts and written sales agreements. Contract pricing and selling agreement terms are based on market factors, costs, and competition. Pricing normally is 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Other Information, continued
Returns & Credits: 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 to reduce its price to its buyer. If the company approves such a reduction, the distributor is authorized to “debit” its account for the difference between the contracted price and the lower approved price. The company establishes reserves for this program based on historic activity and actual authorizations for the debit and recognizes these debits as a reduction of revenue.
The company has a return to stock policy whereby a customer 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.
The company properly meets all of the criteria for recognizing revenue when the right of return exists. Specifically, the company meets those requirements because:
1.
The company’s selling price is fixed or determinable at the date of the sale.
2.
The company has policies and procedures to accept only credit worthy customers with the ability to pay the company.
3.
The company’s customers are obligated to pay the company under the contract and the obligation is not contingent on the resale of the product. (All “ship and debit” and “returns to stock” require specific circumstances and authorization.)
4.
The risk ownership transfers to the company’s customers upon shipment and is not changed in the event of theft, physical destruction or damage of the product.
5.
The company bills at the ship date and establishes a reserve to reduce revenue from the in transit time until the product is delivered for FOB destination sales.
6.
The company’s customers acquiring the product for resale have economic substance apart from that provided by Littelfuse, and all distributors are independent of the company.
7.
The company does not have any obligations for future performance to bring about resale of the product by its customers.
8.
The company can reasonably estimate the amount of future returns.
Volume Rebates: The company offers incentives to certain customers to achieve specific quarterly or annual sales targets. If customers achieve their sales targets, they are entitled to rebates. The company estimates the future cost of these rebates and recognizes this estimated cost as a reduction to revenue as products are sold.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Other Information, continued
Allowance for Doubtful Accounts: The company evaluates the collectibility of its trade receivables based on a combination of factors. The company regularly analyzes its significant customer accounts and, when the company becomes aware of a specific customer’s inability to meet its financial obligations, the company records a specific reserve for bad debt to reduce the related receivable to the amount the company reasonably believes is collectible. The company also records allowances for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer,macroeconomic considerations and past experience. Historically, the allowance for doubtful accounts has been adequate to cover bad debts. If circumstances related to specific customers change, the estimates of the recoverability of receivables could be further adjusted. However, due to the company’s diverse customer base and lack of credit concentration, the company does not believe its estimates would be materially impacted by changes in its assumptions.
Advertising Costs: The company expenses advertising costs as incurred, which amounted to $1.1 million in 2009, $2.3 million in 2008, and $1.8 million in 2007, and are included as a component of selling, general and administrative expenses.
Shipping and Handling Fees and Costs: Amounts billed to customers related to shipping and handling are classified as revenue. Costs incurred for shipping and handling of $5.0 million, $6.5 million, and $5.7 million in 2009, 2008, and 2007, respectively, are classified in selling, general and administrative expenses.
Restructuring Costs: The company incurred severance charges and plant closure expenses as part of the company’s on-going cost reduction efforts. These charges are included in cost of sales, selling, general and administrative expenses, or research and development expenses depending on the personnel being included in the charge. See Note 9 for additional information on restructuring costs.
Foreign Currency Translation: The company’s foreign subsidiaries use the local currency or the U.S. dollar as their functional currency, as appropriate. Assets and liabilities are translated using exchange rates at the balance sheet date, and revenues and expenses are translated at weighted average rates. The amount of foreign currency conversion recognized in the income statement related to currency translation was $0.4 million of loss in 2009 and $2.3 million and $2.9 million of gains in 2008 and 2007, respectively and is included as a component of other expense (income), net. Adjustments from the translation process are recognized in “Shareholders’ Equity” as a component of “Accumulated Other Comprehensive Income (Loss)”.
Stock-based Compensation: The company recognizes compensation expense for the cost of awards of equity compensation using a fair value method. Benefits of tax deductions in excess of recognized compensation expense are reported as a financing cash flow.
On certain occasions, the company has granted stock options for a fixed number of shares with an exercise price below that of the underlying stock on the date of the grant and recognizes compensation expense accordingly. This compensation expense has not been material. See Note 13 for additional information on stock-based compensation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Other Information, continued
Income Taxes: The company accounts for income taxes using the liability method. Deferred taxes are recognized for the future effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. The company recognizes deferred taxes for temporary differences, operating loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Federal and state income taxes are provided on the portion of foreign income that is expected to be remitted to the U.S. and be taxable.
Accounting Pronouncements: In February 2007, the FASB issued guidance titled “The Fair Value Option for Financial Assets and Financial Liabilities”. The guidance permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. The guidance is expected to expand the use of fair value measurement, but does not eliminate disclosure requirements included in other accounting standards. The guidance is effective for fiscal years beginning after November 15, 2007. The adoption of this accounting guidance did not have a material impact on the company’s Consolidated Financial Statements.
In December 2007, the FASB issued accounting guidance titled “Noncontrolling Interests in Consolidated Financial Statements”. The accounting guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with earlier adoption prohibited. The accounting guidance requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net earnings attributable to the noncontrolling interest will be included in consolidated net income on the face of the Consolidated Statements of Income. The accounting guidance also amends certain other consolidation procedures and includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. As a result of the adoption of the accounting guidance, the company reclassified its immaterial noncontrolling interest from “Other long-term liabilities” to “Total equity” as of December 27, 2008 and December 29, 2007 to conform to the presentation at January 2, 2010.
In December 2007, the FASB revised existing guidance with respect to accounting for business combinations. The new business combination accounting guidance retains the underlying concepts of previous business combination accounting guidance in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but the new business combination accounting guidance changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs generally will be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination generally will be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. The new business combination accounting guidance is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. The new business combination guidance amends existing income tax accounting guidance such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Other Information, continued
prior to the effective date of the new business combination accounting guidance would also apply the provisions of the new business combination accounting guidance. The adoption of the new business combination accounting guidance resulted in a change to the company’s treatment of certain uncertain tax positions in fiscal 2009.
In March 2008, the FASB issued accounting guidance titled “Disclosures about Derivative Instruments and Hedging Activities”. The new standard requires enhanced disclosure about a company’s derivatives and hedging to help investors understand their impact on a company’s financial position, financial performance and cash flows. The new accounting guidance is effective for periods beginning after November 15, 2008. The adoption of the expanded disclosure requirements related to the company’s derivative and hedging activities resulted in additional disclosures as reflected in Note 7.
In June 2008, the FASB issued guidance titled “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. The guidance states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption, a company is required to retrospectively adjust its earnings per share data presentation to conform with the guidance provisions. The guidance is effective for fiscal years beginning after December 15, 2008. The company adopted the new guidance on December 28, 2008, which resulted in expanded disclosures as reflected in Note 17.
In April 2009, the FASB issued guidance titled “Interim Disclosures about Fair Value of Financial Instruments”. The guidance amends existing guidance to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. This statement also amends existing guidance to require those disclosures in all interim financial statements. The new accounting guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of the new accounting guidance resulted in additional disclosures included in the company’s quarterly filings.
In May 2009, the FASB issued guidance titled “Subsequent Events”. The new accounting guidance sets forth the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, circumstances under which an entity should recognize events or transactions that may occur for potential recognition and disclosure in the financial statements, and disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of the new accounting guidance resulted in additional disclosures regarding the date through which management has evaluated subsequent events. The company evaluated subsequent events through February 26, 2010, the date its financial statements were filed with the SEC.
In June 2009, the FASB issued authoritative guidance that eliminates the qualifying special purpose entity concept, changes the requirements for derecognizing financial assets and requires enhanced disclosures about transfers of financial assets. The guidance also revises earlier guidance for determining whether an entity is a variable interest entity, requires a new approach for determining who should consolidate a variable interest entity, changes when it is necessary to reassess who should consolidate a variable interest entity, and requires enhanced disclosures related to an enterprise’s involvement in variable interest entities. The guidance is effective for the first annual reporting period that begins after November 15, 2009. The company does not
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Other Information, continued
believe the adoption of the new accounting guidance will have a material impact on its Consolidated Financial Statements.
In June 2009, the FASB issued guidance titled “The FASB Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“the codification standard”). The codification standard is effective for fiscal years, and interim periods, ending after September 15, 2009. The codification standard is intended to improve financial reporting by identifying the FASB Accounting Standards Codification and rules and interpretive releases of the SEC under authority of federal securities laws as the sole sources of authoritative accounting principles to be used in preparing financial statements that are presented in conformity with accounting principles generally accepted in the United States of America for SEC registrants. The company adopted the codification standard on September 26, 2009. The adoption of the codification standard did not have a material impact on the company’s consolidated financial position or results of operations.
In October 2009, the FASB issued authoritative guidance that amends earlier guidance addressing the accounting for contractual arrangements in which an entity provides multiple products or services (deliverables) to a customer. The amendments address the unit of accounting for arrangements involving multiple deliverables and how arrangement consideration should be allocated to the separate units of accounting, when applicable, by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific nor third-party evidence is available. The amendments also require that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The guidance is effective for fiscal years beginning on or after June 15, 2010, with earlier application permitted. The company does not believe the accounting guidance will have a material impact on its Consolidated Financial Statements.
In October 2009, the FASB issued authoritative guidance that amends earlier guidance for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and nonsoftware components that function together to deliver the tangible product’s essential functionality are no longer within the scope of guidance for recognizing revenue from the sale of software, but would be accounted for in accordance with other authoritative guidance. The guidance is effective for fiscal years beginning on or after June 15, 2010, with earlier application permitted. The company does not believe the accounting guidance will have a material impact on its Consolidated Financial Statements.
2. Acquisition of Business
On February 29, 2008, the company acquired Shock Block Corporation (“Shock Block”), a leading manufacturer in ground fault technology located in Dallas, Texas, for $9.2 million less a holdback of $0.9 million subject to the fulfillment of certain contractual obligations by the seller. From February 29, 2008 and thereafter, the results of operations of Shock Block are included in the company’s Consolidated Statements of Income. The company primarily acquired customer lists and intellectual property rights, including trademarks and tradenames. The customer lists were assigned a useful life of seven years. The company funded the acquisition with cash and has continued to operate Shock Block’s electrical business subsequent to the acquisition. The Shock Block acquisition expands the company’s portfolio of protection products for commercial and industrial applications and strengthens the company’s position in the circuit protection industry.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisition of Business, continued
The acquisition was accounted for using the purchase method of accounting and the operations of Shock Block are included in the company’s consolidated results from the date of the acquisition. The following table sets forth the preliminary purchase price allocations for Shock Block’s net assets in accordance with the purchase method of accounting with adjustments to record the acquired net assets at their estimated fair market or net realizable values.
All Shock Block goodwill and other assets are recorded in the Electrical business unit segment and reflected in the Americas geographical area. Pro forma financial information is not presented due to amounts not being materially different than actual results. Goodwill for the above acquisition is not expected to be deductible for tax purposes.
On September 17, 2008, the company announced that it had signed a definitive agreement to acquire the stock of Startco Engineering Ltd. (“Startco”), a leading manufacturer in ground-fault protection products and custom-power distribution centers located in Saskatchewan, Canada. On September 30, 2008, the company completed the purchase of Startco for approximately $37.7 million. From September 30, 2008 and thereafter, the results of operations of Startco are included in the company’s Consolidated Statements of Income. The company funded the acquisition with proceeds from the Loan Agreement discussed in Note 6.
The Startco acquisition strengthens the company’s position in the industrial ground-fault protection business and provides industrial power distribution design and manufacturing capabilities that strengthen the company’s position within the growing mining industry. The acquisition was accounted for using the purchase method of accounting and the operations of Startco are included in the company’s consolidated results from the date of the acquisition.
The following table sets forth the purchase price allocation for Startco’s net assets in accordance with the purchase method of accounting with adjustments to record the acquired net assets at their estimated fair market or net realizable values.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisition of Business, continued
All Startco goodwill and other assets and liabilities were recorded in the Electrical business unit segment and reflected in the Americas geographical area. These estimates were subject to revision after the company completed its fair value analysis, which occurred during the first quarter of 2009 and resulted in an allocation of $18.0 million to identifiable intangible assets, including $5.3 million in patents and product designs, $5.5 million in trademarks and tradenames and $7.2 million in customer lists and backlog. The patents and product designs are both being amortized over 12 years. Customer lists are being amortized over 15 years. Backlog is being amortized over 3 years. Trademarks and tradenames have indefinite lives and are not being amortized. Goodwill for the above acquisition is not expected to be deductible for tax purposes.
Pro forma financial information is not presented for Startco or in the aggregate for the aforementioned acquisitions due to amounts not being materially different than actual results.
3. Inventories
The components of inventories at January 2, 2010 and December 27, 2008 are as follows (in thousands):
4. Goodwill and Other Intangible Assets
The amounts for goodwill and changes in the carrying value by operating segment are as follows at January 2, 2010 and December 27, 2008 (in thousands):
The company recorded amortization expense of $5.0 million, $3.9 million, and $3.3 million in 2009, 2008, and 2007, respectively. The details of other intangible assets and related future amortization expense of existing intangible assets at January 2, 2010 and December 27, 2008 are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Goodwill and Other Intangible Assets, continued
(a)
Increase to gross carrying value for patents, licenses and software and customer lists, trademarks and tradenames in 2009 are related to the Startco acquisition purchase price allocation discussed in Note 2. Other changes are primarily due to the impact of changes in exchange rates.
(b)
Tradenames with indefinite lives.
Estimated amortization expense related to intangible assets with definite lives at January 2, 2010 is as follows (in thousands):
5. Investments
Included in investments are shares of Polytronics Technology Corporation Ltd. (“Polytronics”), a Taiwanese company. In addition, the company had an immaterial investment in Sumi Motherson, an Indian company, that was sold during the quarter ended September 26, 2009 for 0.1 million (approximately $0.2 million). Both of these investments were acquired as part of the Littelfuse GmbH (formerly known as Heinrich Industries, AG) acquisition. The company’s Polytronics shares held at the end of fiscal 2009 and 2008 represent approximately 8.0% of total Polytronics shares outstanding for both years. The fair value of the Polytronics investment was 8.2 million (approximately $11.7 million) at January 2, 2010 and 2.1 million (approximately $2.9 million) at December 27, 2008. Included in 2009 other comprehensive income was an unrealized gain of $8.7 million, due to the increase in fair market value of the Polytronics investment. The remaining movement year over year was due to the impact of changes in exchange rates.
The investment in Polytronics stock had traded significantly below its acquisition cost of 4.1 million (approximately $4.3 million) from June 2008 through December 27, 2008 and had not traded above cost during that time period. As such, management concluded as of December 27, 2008 that it was more likely than not the loss was “other than temporary”. The cost basis of the security was adjusted down to the fair value as of the measurement date with a resulting charge to earnings. Consequently, the company recorded a realized loss on investment of 2.0 million (approximately $2.8 million) to other expense (income), net for the fiscal year ended December 27, 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Debt
The carrying amounts of long-term debt at January 2, 2010 and December 27, 2008 are as follows:
Term Loan
On September 29, 2008, the company entered into a Loan Agreement with various lenders that provides the company with a five-year term loan facility of up to $80.0 million for the purposes of (i) refinancing certain existing indebtedness; (ii) funding working capital needs; and (iii) funding capital expenditures and other lawful corporate purposes, including permitted acquisitions. The Loan Agreement also contains an expansion feature, pursuant to which the company may from time to time request incremental loans in an aggregate principal amount not to exceed $40.0 million. The company had $57.0 million outstanding on the term loan at January 2, 2010.
At the company’s option, any loan under the Loan Agreement bears interest at a rate equal to the applicable rate, as determined in accordance with the pricing grid set forth in the Loan Agreement, plus one of the following indexes: (i) LIBOR or (ii) the Base Rate (defined as the higher of (a) the prime rate publicly announced from time to time by the Agent under the Loan Agreement and (b) the federal funds rate plus 0.50%). Overdue amounts bear a fee of 2.0% per annum above the applicable rate. The actual interest rate paid on the term loan was approximately 2.2% at January 2, 2010.
The Loan Agreement requires the company to meet certain financial tests, including a consolidated leverage ratio and a consolidated interest coverage ratio. The Loan Agreement also contains additional affirmative and negative covenants which, among other things, impose certain limitations on the company’s ability to merge with other companies, create liens on its property, incur additional indebtedness, enter into transactions with affiliates except on an arm’s length basis, dispose of property, or issue dividends or make distributions. At January 2, 2010, and for the year then ended, the company was in compliance with these covenants. The new Loan Agreement does not impact the existing debt covenants in the revolving credit facility described below.
Revolving Credit Facility
On January 28, 2009, the company entered into an unsecured financing arrangement with a Canadian bank that provided a CAD 10.0 million (equivalent to approximately $9.5 million at January 2, 2010) revolving credit facility, for capital expenditures and general working capital, which expires on July 21, 2011. This facility consists of prime-based loans and overdrafts, bankers acceptances and U.S. base rate loans and overdrafts, and is guaranteed by the company. At January 2, 2010, the company had approximately CAD 6.5 million (equivalent to approximately $6.2 million) outstanding under the revolving credit facility. At January 2, 2010, the company had approximately CAD 3.5 million (equivalent to approximately $3.3 million) available under the revolving credit facility at an interest rate of bankers acceptance rate plus 1.62% (2.10% as of January 2, 2010).This agreement contains covenants that, among other matters, impose limitations on future mergers, sales of assets, and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Debt, continued
changes in control, as defined in the agreement. In addition, the company is required to satisfy certain financial covenants and tests relating to, among other matters, interest coverage, working capital, leverage and net worth. At January 2, 2010, the company was in compliance with all covenants
The company has an unsecured domestic financing arrangement consisting of a credit agreement with banks that provides a $75.0 million revolving credit facility, with a potential increase of up to $125.0 million upon request of the company and agreement with the lenders, which expires on July 21, 2011. At January 2, 2010, the company had available the full $75.0 million of borrowing capacity under the revolving credit facility at an interest rate of LIBOR plus 0.875% (1.11% as of January 2, 2010). The company also had $2.3 million and $2.8 million available in letters of credit at January 2, 2010 and December 27, 2008, respectively. No amounts were outstanding under these letters of credit at fiscal year end 2009 and 2008.
The domestic bank credit agreement contains covenants that, among other matters, impose limitations on the incurrence of additional indebtedness, future mergers, sales of assets, payment of dividends, and changes in control, as defined in the agreement. In addition, the company is required to satisfy certain financial covenants and tests relating to, among other matters, interest coverage, working capital, leverage and net worth. At January 2, 2010, and for the year then ended, the company was in compliance with these covenants.
Other Obligations
The company had an unsecured bank line of credit in Japan that provided a 700 million yen revolving credit facility at an interest rate of TIBOR plus 0.625%. The revolving line of credit was due on July 21, 2011. The line of credit was closed on July 14, 2009. The company had no outstanding borrowings on the yen facility at the time of the closing.
The company had an unsecured bank line of credit in Taiwan that provided a 35.0 million Taiwanese dollar revolving credit facility at an interest rate of two-years time deposit plus 0.145%. The revolving line of credit was due on August 18, 2009. The company also had a foreign fixed rate mortgage loan outstanding totaling approximately 32.0 million Taiwanese dollars with maturity dates through August 2013. The company chose to repay the outstanding balances on both debt instruments in June 2008, resulting in uses of cash totaling the equivalent of $1.7 million. As a result, the line of credit was closed on June 28, 2008.
Interest paid on debt was approximately $2.3 million in 2009, $3.4 million in 2008, and $1.4 million in 2007. Aggregate maturities of obligations at January 2, 2010, are as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Financial Instruments and Risk Management
Occasionally, the company uses financial instruments to manage its exposures to movements in commodity prices, foreign exchange and interest rates. The use of these financial instruments modifies the company’s exposure to these risks with the goal of reducing the risk or cost to the company. The company does not use derivatives for trading purposes and is not a party to leveraged derivative contracts.
The company recognizes all derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets. The fair value is based upon either market quotes for actively traded instruments or independent bids for non-exchange traded instruments. The company formally documents its hedge relationships, including identifying the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivatives that are designated as hedges of specific assets, liabilities, firm commitments or forecasted transactions to the hedged risk. On the date the derivative is entered into, the company designates the derivative as a fair value hedge, cash flow hedge or a net investment hedge, and accounts for the derivative in accordance with its designation. The company also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer likely to occur, the company discontinues hedge accounting, and any deferred gains or losses are recorded in the respective measurement period. The company currently does not have any fair value or net investment hedge instruments.
The company is exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings.
Cash Flow Hedges
A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is designated as a cash flow hedge. The effective portion of the change in the fair value of a derivative that is designated as a cash flow hedge is recorded in other comprehensive income (loss). When the impact of the hedged item is recognized in the income statement, the gain or loss included in other comprehensive income (loss) is reported on the same line in the Consolidated Statements of Income as the hedged item. The company did not discontinue any cash flow hedges during for the year-ended January 2, 2010.
Cash Flow Hedge - Commodity Risk Management
In June 2008, the company entered into an immaterial one-year swap agreement to manage its exposure to fluctuations in the cost of zinc, which is used extensively in the manufacturing process of certain products. Amounts included in other comprehensive income (loss) are reclassified into cost of sales in the period in which the hedged transaction is recognized in earnings. The company’s zinc swap agreement expired in June 2009.
Cash Flow Hedge - Currency Risk Management
In January 2009, the company entered into a series of weekly forward contracts to buy Mexican pesos to manage its exposure to fluctuations in the cost of this currency through December 28, 2009. The company uses Mexican pesos to fund payroll and operating expenses at one of the company’s Mexico manufacturing facilities. The operations of the Mexico facility are accounted for within an entity where the U.S. dollar is the functional
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Financial Instruments and Risk Management, continued
currency. In September 2009, the company extended the arrangement through June 28, 2010. Amounts included in other comprehensive income (loss) are reclassified into cost of sales in the period in which the hedged transaction is recognized in earnings. As of January 2, 2010, the notional amount of the company’s peso forward contracts was approximately $3.3 million.
Non-Hedge Derivatives
Interest Rate Swap Transaction
On October 29, 2008, the company entered into a one-year interest rate swap transaction with JPMorgan Chase Bank, N.A. to manage its exposure to fluctuations in the adjustable interest rate of the Loan Agreement. The swap agreement is for a notional amount of $65.0 million and requires the company to pay a fixed annual rate of 2.85% and JPMorgan Chase Bank, to pay a floating rate tied to the one-month U.S. dollar LIBOR. Upon inception of the transaction, the company did not elect hedge accounting treatment as the interest rate swap was short-term in nature and was not deemed a material transaction. All changes in fair value were reflected immediately in the Consolidated Statements of Income. The company’s interest rate swap agreement expired in October 2009.
Fair Value of Derivative Instruments
The fair values of derivative financial instruments recognized in the Consolidated Balance Sheets of the company are as follows (in thousands):
Net Derivative Gain or Loss
The effect of cash flow hedge derivative instruments on the Consolidated Statements of Income and Other Comprehensive Income (Loss) is as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Financial Instruments and Risk Management, continued
Derivative Transactions
At January 2, 2010 and December 27, 2008, accumulated other comprehensive income (loss) included $0.1 million and $0.4 million in unrealized losses, respectively, for derivatives, net of income taxes.
8. Fair Value of Financial Assets and Liabilities
In determining fair value, the company uses various valuation approaches within the fair value measurement framework. Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability.
Applicable accounting literature establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Applicable accounting literature defines levels within the hierarchy based on the reliability of inputs as follows:
Level 1-Valuations based on unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2-Valuations based on quoted prices for similar assets or liabilities or identical assets or liabilities in less active markets, such as dealer or broker markets; and
Level 3-Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable, such as pricing models, discounted cash flow models and similar techniques not based on market, exchange, dealer or broker-traded transactions.
Following is a description of the valuation methodologies used for instruments measured at fair value and their classification in the valuation hierarchy.
Available-for-sale securities
Equity securities listed on a national market or exchange are valued at the last sales price. Such securities are classified within Level 1 of the valuation hierarchy.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Fair Value of Financial Assets and Liabilities, continued
Derivative instruments
The fair value of commodity derivatives are valued based on quoted futures prices for the underlying commodity and are categorized as Level 2. The fair values of interest rate and foreign exchange rate derivatives are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets and are categorized as Level 2.
The company does not have any financial assets or liabilities measured at fair value on a recurring basis categorized as Level 3, and there were no transfers in or out of Level 3 during the year ended January 2, 2010. There were no changes during the year ended January 2, 2010, to the company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of January 2, 2010, the company held no non-financial assets or liabilities that are required to be measured at fair value on a recurring basis.
The following table presents assets and (liabilities) measured at fair value by classification within the fair value hierarchy as of January 2, 2010 (in thousands):
The following table presents assets and (liabilities) measured at fair value by classification within the fair value hierarchy as of December 27, 2008 (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Fair Value of Financial Assets and Liabilities, continued
The company’s other financial instruments include cash and cash equivalents, accounts receivable and long-term debt. Due to their short-term maturity, the carrying amounts of cash and cash equivalents and accounts receivable approximate their fair values. The company’s long-term debt fair value approximates book value at January 2, 2010 and December 27, 2008, respectively, as the long-term debt variable interest rates fluctuate along with market interest rates.
9. Restructuring
During 2006, the company announced the closing of its Ireland facility, resulting in restructuring charges of $17.1 million consisting of $20.0 million of accrued severance less a statutory rebate of $2.9 million recorded as a current asset, which were recorded as part of cost of sales. This restructuring, which impacted approximately 131 associates, is part of the company’s strategy to expand operations in Asia-Pacific region in order to be closer to current and potential customers and take advantage of lower manufacturing costs. The restructuring charges were based upon each associate’s salary and length of service with the company. The additions in 2008 and 2009 primarily relate to retention costs that were incurred during the transition period. These costs will be paid through 2010. All charges related to the closure of the Ireland facility were recorded in “Other Operating Income (Loss)” for business unit segment reporting purposes. The remaining $0.2 million are expected to be paid in 2010. The total costs expected to be incurred was $26.1 million. The company has incurred $26.1 million through January 2, 2010. A summary of activity of this liability is as follows:
During December 2006, the company announced the closure of its Irving, Texas facility and the transfer of its semiconductor wafer manufacturing from Irving, Texas to Wuxi, China in a phased transition from 2007 to 2010. A liability of $1.9 million was recorded related to redundancy costs for the manufacturing operation associated with this downsizing. This charge was recorded as part of cost of sales and included in “Other Operating Income (Loss)” for business unit segment reporting purposes. The additions in 2008 and 2009 primarily relate to retention costs that were incurred during the transition period. This restructuring impacted approximately 180 associates in various production and support related roles and will be paid over the period 2007 to 2010. The total cost expected to be incurred is $8.6 million. The company has incurred $7.9 million through January 2, 2010. A summary of activity of this liability is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Restructuring, continued
During March 2007, the company announced the closure of its Des Plaines and Elk Grove, Illinois facilities and the transfer of its manufacturing from Des Plaines, Illinois to the Philippines and Mexico in a phased transition from 2007 to 2009. A liability of $3.5 million was recorded related to redundancy costs for the manufacturing and distribution operations associated with this restructuring. Manufacturing related charges of $3.0 million were recorded as part of cost of sales and non-manufacturing related charges of $0.5 million were recorded as part of selling, general and administrative expenses. All charges related to this downsizing were recorded in “Other Operating Income (Loss)” for business unit segment reporting purposes. The additions in 2008 and 2009 primarily relate to retention costs that were incurred during the transition period. This restructuring impacted approximately 307 associates in various production and support related roles and the costs relating to the restructuring was paid over the period 2007 to 2009.
During December 2008, the company announced a reduction in workforce at its Des Plaines, Illinois corporate headquarters in a phased transition from 2008 to 2009. A liability of $0.9 million was recorded associated with this downsizing. Manufacturing related charges of $0.3 million were recorded as part of cost of sales and non-manufacturing related charges of $0.6 million were recorded as part of selling, general and administrative expenses. All charges related to this downsizing were recorded in “Other Operating Income (Loss)” for business unit segment reporting purposes. During the second quarter of 2009, an additional $1.1 million liability was recorded related to severance and retention costs at the Des Plaines facility. The remaining additions in 2009 primarily relate to retention costs that will be incurred over the remaining closure period. This restructuring impacted 39 associates in various production and support related roles and the costs relating to the restructuring was paid in 2009.
The total cost expected to be incurred for both the Des Plaines and Elk Grove, Illinois related restructuring programs is $10.5 million. The company has incurred $10.1 million through January 2, 2010. A summary of activity of this liability is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Restructuring, continued
During March 2008, the company announced the closure of its Matamoros, Mexico facility and the transfer of its semiconductor assembly and test operation from Matamoros, Mexico to its Wuxi, China facility and various subcontractors in the Asia-Pacific region in a phased transition over two years. A total liability of $4.4 million was recorded related to redundancy costs for the manufacturing operations associated with this downsizing, of which $0.4 million related to associates located at the company’s Irving, Texas facility and which are reflected in corresponding restructuring liability above. This charge was recorded as part of cost of sales and included in “Other Operating Income (Loss)” for business unit segment reporting purposes. The total cost expected to be incurred was $4.9 million. The total cost incurred through 2009 was $4.9 million. The additions in 2008 and 2009 primarily relate to retention costs that were incurred during the transition period. This restructuring impacts approximately 950 associates in various production and support related roles and will be paid through 2010.
A summary of activity of this liability is as follows:
During September 2008, the company announced the closure of its Swindon, U.K. facility, resulting in restructuring charges of $0.8 million, consisting of $0.3 million that was recorded as part of cost of sales and $0.5 million that was recorded as part of research and development expenses. These charges, which impact 10 associates, were primarily for redundancy costs and will be paid through 2010. Restructuring charges are based upon each associate’s current salary and length of service with the company. All charges related to the closure of the Swindon facility were recorded in “Other Operating Income (Loss)” for business unit segment reporting purposes. The total cost expected to be incurred through 2009 is $1.3 million. The company has incurred $1.3 million through January 2, 2010. A summary of activity of this liability is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Restructuring, continued
During May 2009, the company announced the restructuring of its European organization. The restructuring included the transfer of its manufacturing operations from Dünsen, Germany to Piedras, Mexico and the closure of its distribution facility in Utrecht, Netherlands. The Dünsen closure will impact approximately 58 production employees. The Utrecht closure will impact approximately 37 employees primarily in customer service and administrative roles. The announced restructuring for both of the locations is expected to be completed by the first quarter of 2010. The charges recorded for severance and retention and asset impairments were approximately $2.3 million in Utrecht, Netherlands (reflected in selling, general and administrative expenses) and approximately $3.2 million in Dünsen, Germany (reflected within cost of sales). All charges related to the closure of the Dünsen and Utrecht facilities were recorded in “Other Operating Income (Loss)” for business unit segment reporting purposes. The remaining additions in 2009 primarily relate to retention costs that were incurred during the transition period.
During the third quarter of 2009, the company received a purchase quotation for the Utrecht asset group that was below management’s previous fair value estimate of the Utrecht asset group. As a result, the company performed a long-lived asset impairment test for the Utrecht asset group during the third quarter of 2009, noting that the future undiscounted cash flows of the Utrecht asset group did not exceed book value. Management then compared the Utrecht asset group fair value to the Utrecht asset group book value, noting book value exceeded fair value. Therefore, management concluded that an impairment charge of $0.8 million to selling, general and administrative expenses was required in the third quarter of 2009, to reduce the Utrecht asset group book value to fair value.
The total cost related to the European restructuring program expected to be incurred through fiscal year 2010 is $5.5 million. The company has incurred $5.5 million in costs, including asset impairment charges, through January 2, 2010. A summary of the activity of this liability is as follows:
During May 2009, the company also announced a restructuring of its Asian operations. The restructuring includes closure of a manufacturing facility in Taiwan and a consolidation of its Asian sales offices. The closure of the Taiwan facility and Asian sales offices will impact approximately 184 employees. The announced restructuring for both of the locations is expected to be completed by the first quarter of 2011. The charge recorded for this restructuring totaled $0.9 million and were related to severance and retention costs with $0.4 million and $0.5 million included within cost of sales and selling, general and administrative expenses, respectively. All charges related to the closure and the consolidation of the Asian facilities were recorded in “Other Operating Income (Loss)” for business unit segment reporting purposes. The remaining additions in 2009 primarily relate to retention costs that were incurred during the transition period. The total cost expected to be incurred through 2011 is $1.5 million. The company has incurred $1.5 million through January 2, 2010 related to the Asian restructuring program. A summary of activity of this liability is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Restructuring, continued
10. Coal Mine Liability
Included in other long-term liabilities is an accrual related to a former coal mining operation at Littelfuse GmbH (formerly known as Heinrich Industries, AG) for the amounts of 3.8 million ($5.4 million) and 3.7 million ($5.2 million) at January 2, 2010 and December 27, 2008, respectively. The accrual, which is not discounted, is based on an engineering study estimating the cost of remediating the dangers (such as a shaft collapse) of abandoned coal mine shafts in Germany.
11. Asset Impairments
During 2009, the company recorded a charge of approximately $0.8 million within general and administrative expenses related to asset impairments. The impairment charge was associated with the closure of the company’s distribution facility located in Utrecht, Netherlands. The charge was recognized as an “other” charge for segment reporting purposes. During 2008, the company recorded a charge of approximately $3.2 million within cost of sales related to asset impairments incurred primarily in China. The charge was associated mainly with the discontinuation of equipment used to manufacture gas discharge tubes as the company had determined to utilize a third party manufacturer for its production beginning in 2009. The charge was recognized in the Electronics reporting segment. During 2007, the company recorded a charge of approximately $0.8 million within cost of sales related to asset impairments incurred primarily in China and Germany.
12. Benefit Plans
The company has a company-sponsored defined benefit pension plan covering substantially all of its North American employees. The amount of the retirement benefit is based on years of service and final average pay. The plan also provides post-retirement medical benefits to retirees and their spouses if the retiree has reached age 62 and has provided at least ten years of service prior to retirement. Such benefits generally cease once the retiree attains age 65. The company also has company-sponsored defined benefit pension plans covering employees in the U.K., Germany, Japan, Taiwan and the Netherlands. The amount of the retirement benefits provided under the plans is based on years of service and final average pay. Liabilities resulting from the plan that covers employees in the Netherlands are settled annually through the purchase of insurance contracts. Separate from the foreign pension data presented below, net periodic expense for the plan covering the Netherlands employees was $0.2 million, $0.2 million, and $0.1 million in 2009, 2008, and 2007, respectively.
The company’s contributions are made in amounts sufficient to satisfy legal requirements. The company is not required to make a minimum funding contribution in accordance with the Employee Retirement Income Securities Act of 1974 (“ERISA”) for fiscal year 2010.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Benefit Plans, continued
Total pension expense was $1.4 million, $9.8 million, and $6.7 million in 2009, 2008, and 2007, respectively. The decrease in pension expense for 2009 was due to the amendment and resulting freeze to the U.S. pension plan as noted below the following table. The increase in pension expense in 2008 was primarily due to the settlement of the Ireland plan and the resulting settlement loss.
Benefit plan related information is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Benefit Plans, continued
On March 26, 2009, the company amended its U.S.-based Amended and Restated Littelfuse, Inc. Retirement Plan (the “Pension Plan”), freezing benefit accruals effective April 1, 2009. The amendment provides that participants in the Pension Plan will not receive credit, other than for vesting purposes, for eligible earnings paid or for any months of service worked after the effective date. All accrued benefits under the Pension Plan as of the effective date will remain intact, and service credits for vesting and retirement eligibility will continue in accordance with the terms of the Pension Plan. As a result of the formal decision to freeze the Pension Plan benefit accruals, the company re-measured its Pension Plan assets and obligations at April 1, 2009, which resulted in a decrease of the Pension Plan obligation of $10.5 million, with a corresponding adjustment to other comprehensive income (loss), net of income taxes, on that date.
Amounts recognized in accumulated other comprehensive income (loss), pre-tax consist of:
The estimated net actuarial loss (gain) which will be amortized from accumulated other comprehensive income (loss) into benefit cost in 2010 is less than $0.1 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Benefit Plans, continued
Weighted average assumptions used to determine net periodic benefit cost for the years 2009, 2008 and 2007 are as follows:
The accumulated benefit obligation for the U.S. defined benefits plans was $58.8 million and $63.0 million at January 2, 2010 and December 27, 2008, respectively. The accumulated benefit obligation for the foreign plan was $11.5 million and $12.9 million at January 2, 2010 and December 27, 2008, respectively.
Weighted average assumptions used to determine benefit obligations at year-end 2009, 2008 and 2007 are as follows:
Expected benefit payments to be paid to participants for the fiscal year ending are as follows (in thousands):
Defined Benefit Plan Assets
Based upon analysis of the target asset allocation and historical returns by type of investment, the company has assumed that the expected long-term rate of return will be 8.5% on domestic plan assets and 3.6% on foreign plan assets. Assets are invested to maximize long-term return taking into consideration timing of settlement of the retirement liabilities and liquidity needs for benefits payments. Pension plan assets were invested as follows, and were not materially different from the target asset allocation:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Benefit Plans, continued
The following table presents the company’s U.S. pension plan assets measured at fair value by classification within the fair value hierarchy as of January 2, 2010 (in thousands):
Defined Contribution Plans
The company also maintains a 401(k) savings plan covering substantially all U.S. employees. The company matches 50% of the employee’s annual contributions for the first 4% of the employee’s gross wages. Employees vest in the company contributions after two years of service. Company matching contributions amounted to $0.4 million, $0.6 million and $0.6 million in each of the years 2009, 2008 and 2007, respectively.
On January 1, 2010, the company adopted a non-qualified Supplemental Retirement and Savings Plan. The company will provide additional retirement benefits for certain management employees and named executive officers by allowing participants to contribute up to 90% of their annual compensation with matching contributions of 4% and 5% of the participants annual compensation in excess of the IRS compensation limits.
The company previously provided additional retirement benefits for certain key executives through its unfunded defined contribution Supplemental Executive Retirement Plan (“SERP”). The company amended the SERP during 2009 to freeze contributions and set the annual interest rate credited to the accounts until distributed at the 5-year Treasury constant maturity rate. The charge to expense for the SERP plan amounted to $0.3 million, $0.4 million and $0.3 million in each of the years 2009, 2008 and 2007, respectively.
13. Shareholders’ Equity
Equity Plans: The company has equity-based compensation plans authorizing the granting of stock options, restricted shares, restricted share units, performance shares, and other stock rights of up to 5,925,000 shares of common stock to employees and directors.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Shareholders’ Equity, continued
Stock options granted prior to 2002 vest over a five-year period and are exercisable over a ten-year period commencing from the date of vesting. The stock options granted in 2002 through February 2005 vest over a five-year period and are exercisable over a ten-year period commencing from the date of the grant. Stock options granted after February 2005 vest over a three, four or five-year period and are exercisable over either a seven or ten-year period commencing from the date of the grant. Restricted shares and share units granted by the company vest over three to four years.
The company also has performance share agreements under its equity-based compensation plans pursuant to which a target amount of performance share awards have been granted based on the company attaining certain financial performance goals relating to return on net tangible assets (for performance shares granted prior to 2008) or return on net assets (for performance shares granted in 2008 and 2009) and earnings before interest, taxes, depreciation and amortization over a three-year performance period. The performance-based restricted stock awards granted prior to 2008 vest in thirds over a three-year period (following the three-year performance period). When vested, half of the stock awards is paid in cash and half will be settled through the issuance of the company’s common stock. The performance-based restricted stock awards granted in 2008 and 2009 vest after a three-year performance period and are satisfied completely by the issuance of the company’s common stock at the end of the performance period. The fair value of the performance-based restricted stock awards that are settled in common stock is measured at the market price on the grant date, and the fair value of the portion paid in cash is measured at the current market price of a share.
The following table provides a reconciliation of outstanding stock options for the fiscal year ended January 2, 2010.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Shareholders’ Equity, continued
The following table provides a reconciliation of nonvested restricted share and share unit awards for the twelve month period ending January 2, 2010.
The total intrinsic value of options exercised during 2009, 2008, and 2007 was $0.2 million, $0.5 million, and $2.9 million, respectively.
The following table provides a reconciliation of nonvested performance share awards (including only awards to be settled by the issuance of the company’s common stock) for the twelve month period ending January 2, 2010.
The company recognizes compensation cost of all share-based awards as an expense on a straight-line basis over the vesting period of the awards. At January 2, 2010, the unrecognized compensation cost for options, restricted shares and performance shares was $7.4 million before tax, and will be recognized over a weighted-average period of 2.3 years. Compensation cost included as a component of selling, general and administrative expense for all equity compensation plans discussed above was $5.5 million, $5.1 million and $5.0 million for 2009, 2008 and 2007, respectively. The total income tax benefit recognized in the Consolidated Statements of Income was $2.1 million, $2.1 million and $1.9 million for 2009, 2008 and 2007, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Shareholders’ Equity, continued
The company uses the Black-Scholes option valuation model to determine the fair value of awards granted. The weighted average fair value of and related assumptions for options granted are as follows:
Expected volatilities are based on the historical volatility of the company’s stock price. The expected life of options is based on historical data for options granted by the company and the SEC simplified method. The risk-free rates are based on yields available at the time of grant on U.S. Treasury bonds with maturities consistent with the expected life assumption.
Accumulated Other Comprehensive Income (Loss): The components of accumulated other comprehensive income (loss) at the end of the fiscal years 2009, 2008 and 2007 are as follows (in thousands):
Preferred Stock: The Board of Directors may authorize the issuance of preferred stock from time to time in one or more series with such designations, preferences, qualifications, limitations, restrictions, and optional or other special rights as the Board may fix by resolution.
14. Income Taxes
A reconciliation of the beginning and ending amount of unrecognized tax benefits as of January 2, 2010 and December 27, 2008 is as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Income Taxes, continued
The amount of unrecognized tax benefits at January 2, 2010 was approximately $0.5 million. Of this total, approximately $0.5 million represents the amount of tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The company reasonably expects an approximate $0.2 million decrease in unrecognized tax benefits in the next 12 months due to settlements or lapse of tax statutes of limitations. None of the positions included in unrecognized tax benefits are related to tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. The U.S. federal statute of limitations remains open for 2006 onward. Foreign and U.S. state statute of limitations generally range from three to six years. The company is currently under examination in Germany for tax years 2005 through 2007 and in the U.S. for tax years 2006 through 2008. The company does not expect to recognize a material amount of additional tax expenses as a result of concluding either audit
The company recognizes accrued interest and penalties associated with uncertain tax positions as part of income tax expense. As of January 2, 2010, the company had approximately $0.2 million of accrued interest and penalties. Substantially all of this total represents the amount of interest and penalties that, if recognized, would favorably affect the effective tax rate in future periods.
Domestic and foreign income (loss) before income taxes is as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Income Taxes, continued
A reconciliation between income taxes computed on income before income taxes at the federal statutory rate and the provision for income taxes is provided below (in thousands):
Deferred income taxes are provided for the tax effects of temporary differences between the financial reporting bases and the tax bases of the company’s assets and liabilities. Significant components of the company’s deferred tax assets and liabilities at January 2, 2010 and December 27, 2008 are as follows (in thousands):
The deferred tax asset valuation allowance is related to deferred tax assets from foreign net operating losses and a U.S capital loss. The remaining domestic and foreign net operating losses either have no expiration date or are expected to be utilized prior to expiration. The foreign tax credit carryforwards begin to expire in 2015. The company paid income taxes of approximately $9.9 million, $8.8 million and $16.7 million in 2009, 2008 and 2007, respectively. U.S. income taxes were not provided for on a cumulative total of approximately $31.0 million of undistributed earnings for certain non-U.S. subsidiaries as of January 2, 2010, and accordingly, no deferred tax liability has been established relative to these earnings. The determination of the deferred tax liability associated with the distribution of these earnings is not practicable. The company has two subsidiaries in China and one subsidiary in the Philippines on “tax holidays”. The “tax holidays” expire in China in two years and within three years in the Philippines.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Business Unit Segment Information
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 company reports its operations by the following business unit segments: Electronics; Automotive; and Electrical.
•
Electronics. Provides circuit protection components and expertise to leading global manufacturers of a wide range of electronic products including mobile phones, computers, LCD TVs, telecommunications equipment, medical devices, lighting products and white goods. The Electronics business segment has the broadest product offering in the industry including fuses and protectors, positive temperature coefficient (“PTC”) resettable fuses, varistors, polymer electrostatic discharge (“ESD”) suppressors, discreet transient voltage suppression (“TVS”) diodes, TVS diode arrays and protection thyristors, gas discharge tubes, power switching components and fuseholders, blocks and related accessories.
•
Automotive. Provides circuit protection products to the worldwide automotive original equipment manufacturers (“OEM”) and parts distributors of passenger automobiles, trucks, buses and off-road equipment. The company also sells its fuses in the automotive replacement parts market. Products include blade fuses, high current fuses, battery cable protectors and varistors.
•
Electrical. Provides circuit protection products and hazard assessments for industrial and commercial customers. Products include power fuses and other circuit protection devices that are used in commercial and industrial buildings and large equipment such as HVAC systems, elevators and machine tools.
Each of the operating segments is directly responsible for sales, marketing and research and development. Manufacturing, purchasing, logistics, customer service, finance, information technology and human resources are shared functions that are allocated back to the three operating segments. The CEO allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss), but does not evaluate the operating segments using discrete asset information.
Sales, marketing and research and development expenses are charged directly into each operating segment. All other functions are shared by the operating segments and expenses for these shared functions are allocated to the operating segments and included in the operating results reported below. The company does not report inter-segment revenue because the operating segments do not record it. The company does not allocate interest and other income, interest expense, or taxes to operating segments. Although the CEO uses operating income 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Business Unit Segment Information, continued
The company has provided this business unit segment information for all comparable prior periods. Segment information is summarized as follows (in thousands):
*
Included in “Other” Operating income (loss) for 2009 are severance and asset impairment charges related to restructuring activities in the U.S. ($1.6 million), Europe ($5.5 million) and Asia-Pacific ($1.5 million) locations (see Note 9). Included in “Other” Operating income (loss) for 2008 are special items such as restructuring charges related to the closure of the company’s Matamoros, Mexico facility ($4.4 million - see Note 9) and Ireland pension settlement charge ($5.7 million - see Note 12). Included in “Other” Operating income (loss) for 2007 is the gain on sale of property in Ireland ($8.0 million), partially offset by restructuring charges related to the closure of the company’s Des Plaines, Illinois facility ($3.5 million - see Note 9) and related write-down of manufacturing assets ($1.9 million).
The company’s revenues and long-lived assets (total net property, plant and equipment, intangible assets, goodwill and investments) by geographical area for the fiscal years ended 2009, 2008 and 2007 are as follows (in thousands):
For the year ended January 2, 2010, approximately 67.5% of the company’s net sales were to customers outside the United States (exports and foreign operations) including 20.3% in Hong Kong. No single customer accounted for more than 10% of net sales during the last three years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Lease Commitments
The company leases certain office and warehouse space as well as certain machinery and equipment under non-cancellable operating leases. Rent expense under these leases was approximately $7.1 million in 2009, $6.0 million in 2008, and $4.4 million in 2007.
Rent expense is recognized on a straight-line basis over the term of the leases. The difference between straight-line basis rent and the amount paid has been recorded as accrued lease obligations. The company also has leases that have lease renewal provisions. As of January 2, 2010, all operating leases outstanding were with third parties. The company did not have any capital leases as of January 2, 2010.
In February 2008, the company entered into an agreement to lease office space for its U.S. headquarters, which will be located in Chicago, Illinois. The lease, with a stated commencement date of January 1, 2009, expires December 31, 2024 and contains two five-year renewal options. In addition, the lease contains leasehold improvement incentives and rent abatement for the first year of the lease. The company recognizes rental expense for this lease on a straight-line basis over the term of the lease, including base rent and all considerations received. Annual rental expense under this lease is approximately $1.4 million.
In September 2009, the company entered into an agreement to lease office space for its Technical Center which will be located in Champaign, Illinois. The lease, with a stated commencement date of March 1, 2010, expires February 28, 2025 and contains two five-year renewal options. The company will recognize rental expense for this lease on a straight-line basis over the term of the lease. Annual rental expense under this lease will be approximately $0.2 million.
Future minimum payments for all non-cancelable operating leases with initial terms of one year or more at January 2, 2010, are as follows (in thousands):
17. Earnings Per Share
In June 2008, the FASB issued authoritative guidance titled “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. The guidance states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption, a company is required to retrospectively adjust its earnings per share data presentation to conform with the guidance provisions. The guidance is effective for fiscal years beginning after December 15, 2008. The company adopted the new guidance on December 28, 2008.
The company’s unvested share-based payment awards, such as certain performance shares, restricted shares and restricted share units that contain nonforfeitable rights to dividends, meet the criteria of a participating security as defined by the guidance. The adoption has changed the methodology of computing the company’s earnings
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Earnings Per Share continued
per share to the two-class method from the treasury stock method. This change has not affected previously reported earnings per share, consolidated net earnings or net cash flows from operations. Under the two-class method, earnings are allocated between common stock and participating securities. The guidance provides that the presentation of basic and diluted earnings per share is required only for each class of common stock and not for participating securities. As such, the company will present basic and diluted earnings per share for its one class of common stock.
The two-class method includes an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period. The company’s reported net earnings is reduced by the amount allocated to participating securities to arrive at the earnings allocated to common stock shareholders for purposes of calculating earnings per share.
The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock or the two-class method. The company has determined the two-class method to be the more dilutive. As such, the earnings allocated to common stock shareholders in the basic earnings per share calculation is adjusted for the reallocation of undistributed earnings to participating securities as prescribed by the guidance to arrive at the earnings allocated to common stock shareholders for calculating the diluted earnings per share.
The following table sets forth the computation of basic and diluted earnings per share under the two-class method:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Selected Quarterly Financial Data (Unaudited)
The following potential shares of common stock attributable to stock options were excluded from the earnings per share calculation because their effect would be anti-dilutive: 1,812,414 in 2009; 1,322,540 in 2008; and 906,215 in 2007.
The quarterly periods listed in the table below for 2009 are for the 14-weeks ending January 2, 2010 and the 13-weeks ending September 26, 2009, June 27, 2009 and March 28, 2009, respectively. The quarterly periods for 2008 are for the 13-weeks ending December 27, 2008, September 27, 2008, June 28, 2008 and March 29, 2008, respectively.
(In thousands, except per share data)
a -
In the third quarter of 2009, the company recorded a $1.7 million charge related to severance and asset impairments in Europe and Asia. In addition, the company realized an income tax benefit from the release of $2.6 million in contingent income tax reserves due to the lapsing of statutes of limitations.
b-
In the second quarter of 2009, the company recorded a $7.3 million charge related to severance charges and asset write-offs for the U.S., Europe and Asia.
c -
In the fourth quarter of 2008, the company recorded a $3.2 million charge related to the write-down of manufacturing assets and a $2.8 million charge from marking down the company’s investment in Polytronics to its lower market value.
d -
In the third quarter of 2008, the company recorded a $5.7 million non-cash charge related to settlement of the Ireland pension plan.
e -
In the first quarter of 2008, the company recorded a $4.4 million restructuring charge related to the closure of its Matamoros, Mexico facility and the corresponding transfer of manufacturing operations to its Wuxi, China facility.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES.
Section 404 of the Sarbanes-Oxley Act of 2002 requires management to include in this Annual Report on Form 10-K a report on management’s assessment of the effectiveness of the company’s internal control over financial reporting, as well as an attestation report from the company’s independent registered accounting firm on the effectiveness of the company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The management of Littelfuse is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Littelfuse’s internal control system was designed to provide reasonable assurance to its management and the Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Littelfuse’s management assessed the effectiveness of the company’s internal control over financial reporting as of January 2, 2010, based upon the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, the company’s management concluded that, as of January 2, 2010, the company’s internal control over financial reporting is effective.
Littelfuse’s independent registered public accounting firm, Ernst & Young LLP, has audited the effectiveness of the company’s internal control over financial reporting as of January 2, 2010. Their report appears on page 38 hereof.
Changes in Internal Control over Financial Reporting
There was no change in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
Disclosure Controls and Procedures
The company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of January 2, 2010, the Chief Executive Officer and Chief Financial Officer of the company evaluated the effectiveness of the disclosure controls and procedures of the company and concluded that these disclosure controls and procedures were effective.
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Executive Officers of the Registrant
The executive officers of the company are as follows:
Officers of Littelfuse are elected by the Board of Directors and serve at the discretion of the Board.
Gordon Hunter was elected as the Chairman of the Board of Directors of the company and President and Chief Executive Officer effective January 1, 2005. Mr. Hunter served as Chief Operating Officer of the company from November 2003 to January 2005. Mr. Hunter has been a member of the Board of Directors of the company since June 2002, where he has served as Chairman of the Technology Committee. Prior to joining Littelfuse, Mr. Hunter was employed with Intel Corporation, where he was Vice President, Intel Communications Group, and General Manager, Optical Products Group, responsible for managing the access and optical communications business segments, from 2002 to 2003. Mr. Hunter was CEO for Calmar Optcom during 2001. From 1997 to 2002, he also served as a Vice President for Raychem Corporation. His experience includes 20 years with Raychem Corporation in the United States and Europe, with responsibilities in sales, marketing, engineering and general management.
Philip G. Franklin, Vice President, Operations Support, Chief Financial Officer and Treasurer, joined the company in 1998 and is responsible for finance and accounting, investor relations, mergers and acquisitions and information systems. Prior to Littelfuse, Mr. Franklin was Vice President and Chief Financial Officer for OmniQuip International, a private equity sponsored roll-up in the construction equipment industry, which he helped take public. Before that, Mr. Franklin served as Chief Financial Officer for both Monarch Marking Systems, a subsidiary of Pitney Bowes, and Hill Refrigeration, a company controlled by Sam Zell. Earlier in his career, he worked in a variety of finance and general management positions at FMC Corporation.
Dal Ferbert, Vice President and General Manager, Electrical Business Unit, is responsible for the management of daily operations, sales, marketing and strategic planning efforts of the Electrical Business Unit (POWR-GARD Products). Mr. Ferbert joined the company in 1976 as a member of the electronic distributor sales team. From 1980 to 1989 he served in the Materials Management Department as a buyer and then Purchasing Manager. In 1990, he was promoted to National Sales Manager of the Electrical Business Unit and then promoted to his current position in 2004.
Executive Officers of the Registrant, continued
Dieter Roeder, Vice President and General Manager, Automotive Business Unit, is responsible for marketing, sales, product development and customer relationships for all automotive business units. Mr. Roeder joined the company in 2005 leading the Automotive Business Unit’s European sales team, based in Germany, before he was promoted to his current position in August 2007. Prior to joining the company, Mr. Roeder served as Director of Business Development Europe for TDS Automotive from 2002 to 2005. Before that, Mr. Roeder spent ten years with Raychem GmbH (later Tyco Electronics) where he had various sales and marketing responsibilities within the European automotive industry.
Chen-Ming Wang, Vice President and General Manager, Electronics Business Unit, is responsible for marketing, sales, product development and customer relationships of the Electronic Business Unit. He is also responsible for leading the company’s overall operations, strategy and new business development in Asia. He is located in Taiwan. Mr. Wang has multinational experience in the electronics business, including the U.S., Mexico, Malaysia, China and Taiwan. Mr. Wang joined the management team in November 2009, prior to which he was vice president of Lite-On Technology Corporation. Lite-On Tech Corporation, a leading Taiwanese provider of consumer electrical products with over $7 billion in worldwide revenues, is where Mr. Wang started his career in 1991, holding various operation, sales and business development responsibilities.
David W. Heinzmann, Vice President, Global Operations, is responsible for Littelfuse’s manufacturing and supply chain groups for all three of the company’s business units. Mr. Heinzmann began his career at the company in 1985 and possesses a broad range of experience within the organization. He has held positions as a Manufacturing Manager, Quality Manager, Plant Manager and Product Development Manager. Mr. Heinzmann also served as Director of Global Operations of the Electronics Business Unit from early 2000 through 2003. He served as Vice President and General Manager, Automotive Business Unit, from 2004 through August 2007 and then was promoted to his current position.
Ryan K. Stafford, General Counsel and Vice President, Human Resources, is responsible for the company’s legal, compliance, internal audit and human resources functions. Mr. Stafford joined the company’s management team in January 2007. Prior to joining the company, Mr. Stafford served as Vice President of China Operations for Tyco Engineered Products & Services from 2005 to 2006 and Vice President and General Counsel of it from 2001 to 2005. He served as Associate General Counsel for Grinnell Corporation from 1998 to 2001. Prior to that he was with the law firm Sulloway & Hollis P.L.L.C.
Paul Dickinson, Vice President and General Manager, Semiconductor Products, is responsible for the marketing, sales, product development and strategic planning efforts of the company’s semiconductor products. Mr. Dickinson joined the company in 1993 and has held a broad range of positions with responsibility for corporate and international accounting and finance. Most recently, Mr. Dickinson served as Vice President, Corporate Development and Treasurer from 2005 through 2008, with responsibility for corporate acquisition, strategy, treasury, tax and finance functions. Mr. Dickinson was promoted to his current position in August 2008.
Mary S. Muchoney has served as Corporate Secretary since 1991, after joining Littelfuse in 1977. She is responsible for providing all secretarial and administrative functions for the President and Littelfuse Board of Directors. Ms. Muchoney is a member of the Society of Corporate Secretaries & Governance Professionals, as well as honorary member of the Society’s Silver Quill Society.
The information set forth under “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement is incorporated herein by reference. The company maintains a code of conduct, which applies to all associates, executive officers and directors. The company’s code of conduct meets the requirements of a “code of ethics” as defined by Item 406 of Regulation S-K and applies to our chief executive officer, chief financial officer and chief accounting officer as well as all other executive officers and associates. The code of conduct is available for public viewing on the company’s web site at www.littelfuse.com under the heading “Investors - Corporate Governance”.
If the company makes substantive amendments to the code of conduct or grants any waiver to its chief executive officer, chief financial officer or persons performing similar functions, Littelfuse will disclose the nature of such amendment or waiver on its website or in a Current Report on Form 8-K in accordance with applicable rules and regulations. The information contained on or connected to the company’s website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report Littelfuse files or furnishes with the SEC. There have been no material changes to the procedures by which security holders may recommend nominees to the company’s Board of Directors in 2009.
The information set forth under “Election of Directors - Compensation of Directors” and “Executive Compensation” in the Proxy Statement is incorporated herein by reference, except the section captioned “Compensation Committee Report” is hereby “furnished” and not “filed” with this Annual Report on Form 10-K.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information set forth under “Ownership of Littelfuse, Inc. Common Stock” and “Compensation Plan Information” in the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information set forth under “Certain Relationships and Related Transactions” and “Election of Directors” in the Proxy Statement is incorporated herein by reference.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information set forth under “Audit and Non-Audit Fees” in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)
Financial Statements and Schedules
(1)
The following Financial Statements are filed as a part of this report:
(2)
The following Financial Statement Schedule is submitted herewith for the periods indicated therein.
(i)
Schedule II - Valuation and Qualifying Accounts and Reserves (page 83).
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands of USD)
(1)
Includes provision for doubtful accounts, sales returns, and sales discounts granted to customers.
(2)
Represents uncollectible accounts written off, net of recoveries and credits issued to customers.
(3)
Represents translation adjustments.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 26, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ Gordon Hunter
Chairman of the Board of Directors, President and
Gordon Hunter
Chief Executive Officer (Principal Executive Officer)
/s/ Tzau-Jin Chung
Director
Tzau-Jin Chung
/s/ John P. Driscoll
Director
John P. Driscoll
/s/ Anthony Grillo
Director
Anthony Grillo
/s/ John E. Major
Director
John E. Major
/s/ William P. Noglows
Director
William P. Noglows
/s/ Ronald L. Schubel
Director
Ronald L. Schubel
/s/ Philip G. Franklin
Vice President, Operations Support, Chief Financial Officer and Treasurer
Philip G. Franklin
(Principal Financial and Principal Accounting Officer)
EXHIBIT INDEX
The following documents listed below that have been previously filed with the SEC (1934 Act File No. 0-20388) are incorporated herein by reference:
Exhibits 10.1 through 10.34 are management contracts or compensatory plans or arrangements.