ITEM 1. BUSINESS.
GENERAL
Littelfuse, Inc., was incorporated under the laws of the State of Delaware in 1991. References herein to the “Company,” “we,” “our” or “Littelfuse” refer to Littelfuse, Inc. and its subsidiaries. References herein to “2017”, “fiscal 2017” or “fiscal year 2017” refer to the fiscal year ended December 30, 2017. References herein to “2016”, “fiscal 2016” or “fiscal year 2016” refer to the fiscal year ended December 31, 2016. References herein to “2015”, “fiscal 2015” or “fiscal year 2015” refer to the fiscal year ended January 2, 2016. The Company operates on a 52-53 week fiscal year (4-4-5 basis) ending on the Saturday closest to December 31. Therefore, the financial results of certain fiscal years and the associated 14 week quarters will not be exactly comparable to the prior and subsequent 52 week fiscal years and the associated quarters having only 13 weeks. As a result of using this convention, each of fiscal 2017 and fiscal 2016 contained 52 weeks, whereas fiscal 2015 contained 53 weeks.
OVERVIEW
Founded in 1927, Littelfuse is a global leader in circuit protection products with advancing platforms in power control and sensor technologies, serving customers in the electronics, automotive, and industrial markets. With a diverse and extensive product portfolio of fuses, semiconductors, polymers, ceramics, relays and sensors, the Company works with its customers to build safer, more reliable and more efficient products for the connected world in virtually every market that uses electrical energy, ranging across consumer electronics, IT and telecommunication applications, industrial electronics, automobiles and other transportation, and heavy industrial applications
The company maintains a network of global laboratories and engineering centers that develop new products and product enhancements, provide customer application support and test products for safety, reliability, and regulatory compliance.
Segments
The Company conducts its business through three reportable segments: Electronics, Automotive, and Industrial. For each of these segments, the Company designs, manufactures and sells circuit protection products that protect against electrostatic discharge, power surges, short circuits, voltage spikes and other harmful occurrences; power control products that safely and efficiently control power to mitigate equipment damage, minimize electrical hazards and improve productivity; and sensor products used to identify and detect temperature, proximity, flow speed and fluid level in various applications. For segment and geographical information and consolidated net sales and operating income see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 12, Segment Information, of the Notes to Consolidated Financial Statements included in this Annual Report.
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Electronics Segment: Consists of one of the broadest product offerings in the industry, including fuses and fuse accessories, positive temperature coefficient (“PTC”) resettable fuses, polymer electrostatic discharge (“ESD”) suppressors, varistors, gas discharge tubes; semiconductor and power semiconductor products such as discrete transient voltage suppressor (“TVS”) diodes, TVS diode arrays, protection and switching thyristors, silicon carbide, metal-oxide-semiconductor field-effect transistors (“MOSFETs”) and silicon carbide diodes; and insulated gate bipolar transistors (“IGBT”) technologies. The segment covers a broad range of end markets, including consumer electronics, automotive electronics, IT and telecommunications equipment, medical devices, lighting products, and white goods.
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Automotive Segment: Consists of a wide range of circuit protection, power control and sensing technologies for global original equipment manufacturers (“OEMs”), Tier-I suppliers and parts distributors in the automotive, commercial vehicle, and agricultural and construction equipment industries. Passenger car fuse products include fuses and fuse accessories, including blade fuses, battery cable protectors, varistors, high-current fuses, and high-voltage fuses for hybrid and electric vehicles. Commercial vehicle products include fuses, switches, relays, and power distribution modules for the commercial vehicle industry. Automotive sensor products include a wide range of automotive and commercial vehicle products designed to monitor the passenger compartment occupants and environment as well as the vehicle’s powertrain, emissions, speed and suspension.
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Industrial Segment: Consists of power fuses, protection relays and controls and other circuit protection products for use in heavy industrial applications such as mining, oil and gas, energy storage, construction, HVAC systems, elevator and other industrial equipment.
Strategy
In December 2016, the Company announced its updated strategic plan. Building upon its achievements from its previous five-year plan and leveraging the global mega trends of safety, energy efficiency and the connected world, the Company is targeting accelerated annual organic growth of 5-7 percent and annual growth from strategic acquisitions of 5-7 percent. The Company’s strategic goals include the continuing growth of its circuit protection platform, accelerating growth in its power control platform and doubling its sensor platform over the next four years. The Company expects to do this through content and share gains, targeting underpenetrated geographies and markets, leveraging innovation and capitalizing on growth opportunities where technologies and applications are converging across its segments, while continuing to acquire and integrate businesses that fit its strategic focus areas.
Recent Acquisitions
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IXYS Corporation: On January 17, 2018, the Company acquired IXYS Corporation “IXYS”, a global pioneer in the power semiconductor and integrated circuit markets with a focus on medium to high voltage power control semiconductors across the industrial, communications, consumer and medical markets. IXYS has a broad customer base, serving more than 3,500 customers through its direct sales force and global distribution partners. The purchase price for IXYS was approximately $856.5 million, which included consideration of cash, Littelfuse common stock, and the value of converted, or cash settled IXYS equity awards. For the twelve months ended December 30, 2017, IXYS generated net sales of approximately $340 million. IXYS’ operations will be included in the Electronics segment.
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U.S. Sensor: On July 7, 2017, the Company acquired the assets of U.S. Sensor Corporation (“U.S. Sensor”) for $24.3 million. U.S. Sensor manufactures a variety of high quality negative temperature coefficient thermistors probes and assemblies. The acquisition expands the Company’s existing sensor portfolio in several key electronics and industrial end markets. The operations of U.S. Sensor are included in the Electronics segment.
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Monolith Semiconductor Inc.: On February 28, 2017, pursuant to a Securities Purchase Agreement between the Company and the stockholders of Monolith Semiconductor Inc. (“Monolith”), a U.S. start-up Company developing silicon carbide technology, the Company increased its investment in Monolith by acquiring approximately 62% of the outstanding common stock of Monolith for $15.0 million. The agreement includes provisions whereby the Company will acquire the remaining outstanding stock of Monolith at a time or times based on Monolith meeting certain technical and sales targets. The operations of Monolith are included in the Electronics segment.
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ON Portfolio: On August 29, 2016, the Company acquired certain assets of select businesses (the “ON Portfolio”) of ON Semiconductor Corporation for $104.0 million. The acquired business, which is included in the Electronics segment, consists of a product portfolio that includes transient voltage suppression (“TVS”) diodes, switching thyristors, and IGBTs for automotive ignition applications. The acquisition expands the Company’s offerings in power semiconductor applications as well as increases its presence in the automotive electronics market. The ON Portfolio products have strong synergies with the Company’s existing circuit protection business, will strengthen its channel partnerships and customer engagement, and expand its power semiconductor portfolio.
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Menber’s: On April 4, 2016, the Company completed the acquisition of Menber’s S.p.A. (“Menber’s”) headquartered in Legnago, Italy for $19.2 million (net of cash acquired and after settlement of a working capital adjustment). The acquired business is part of the Company's commercial vehicle product business within the Automotive segment and specializes in the design, manufacturing, and selling of manual and electrical high current switches and trailer connectors for commercial vehicles. The transaction expands the Company’s commercial vehicle products business globally.
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PolySwitch: On March 25, 2016, the Company acquired 100% of the circuit protection business (“PolySwitch”) of TE Connectivity Ltd. for $348.3 million (net of cash acquired and after settlement of certain post-closing adjustments). The PolySwitch business, which is split between the Automotive and Electronics segments, has a leading position in polymer based resettable circuit protection devices, with a strong global presence in the automotive, battery, industrial, communications and mobile computing markets. PolySwitch has manufacturing facilities in Shanghai and Kunshan, China, and Tsukuba, Japan. The acquisition allows the Company to strengthen its global circuit protection product portfolio, as well as expands its presence in the automotive electronics and battery end markets. The acquisition also significantly increases the Company’s presence in Japan.
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Sigmar: On October 1, 2015, the Company acquired 100% of Sigmar S.r.l. (“Sigmar”) for $6.5 million (net of cash acquired and including estimated additional net payments of up to $0.9 million, a portion of which was subject to the achievement of certain milestones). Located in Ozegna, Italy, Sigmar is a leading global manufacturer of water-in-fuel sensors and also manufactures selective catalytic reduction (“SCR”) quality sensors and diesel fuel heaters for automotive and commercial vehicle applications. The acquisition further expanded the Company’s automotive sensor product line offerings within its Automotive segment.
Sales and Operations
The Company operates in three geographic regions: the Americas, Europe, and Asia-Pacific. The Company manufactures products and sells to customers in all three regions.
Net sales by segment for the periods indicated are as follows:
Net sales in the Company’s three geographic regions, based upon the shipped-to destination, are as follows:
The Company’s products are sold worldwide through distributors, a direct sales force and manufacturers’ representatives in certain regions. For the fiscal year 2017, approximately 69% of the Company’s net sales were to customers outside the United States (“U.S.”), including approximately 26% to China.
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 most manufacturing sites certified under ISO 9001:2000. In addition, several of the Littelfuse manufacturing sites are also certified under TS 16949 and ISO 14001.
Additional information regarding the Company’s sales by geographic area and long-lived assets in different geographic areas is in Note 12, Segment Information, of the Notes to Consolidated Financial Statements included in this Annual Report.
BUSINESS ENVIRONMENT
Electronics Segment
The Company designs, develops and manufactures a wide range of components and modules that provide circuit protection, power control and sensing for a multitude of electronic and industrial electronics applications. Circuit protection technologies in the Electronics Segment are designed to protect against harmful occurrences like voltage spikes, short circuits, power surges and electrostatic discharge. Products include a vast array of fuses and other circuit protection technologies used in a variety of electronic products including consumer electronics, automotive electronics, IT and telecommunications equipment, medical devices, lighting products, and white goods.
The Company also offers a wide range of power control products used to convert and regulate energy and safely and efficiently control power across a broad spectrum of applications including industrial and automotive power systems, motor drives and power conversion applications. Products include a comprehensive portfolio of semiconductor components including thyristors, rectifiers and fast recovery diodes, IGBTs and wide band gap devices. The acquisition of IXYS is expected to accelerate the Company’s growth across the power control market driven by IXYS’s extensive power semiconductor portfolio in medium and high power applications and technology expertise. With IXYS, the Company will be able to diversify and expand its presence within industrial electronics markets, leveraging the strong IXYS industrial OEM customer base. The Company also expects to increase long-term penetration of its power semiconductor portfolio in automotive markets, expanding its global content per vehicle.
Another strategic area of focus in the Electronics Segment is the Company’s continued investment in silicon carbide, a promising semiconductor material that enables more efficient power conversion than traditional silicon-based devices. The Company increased its investment in Monolith during 2017 and introduced its first silicon carbide products to the market.
As products become increasingly sophisticated, smarter and more connected, the need for complex sensor technologies continues to grow. Sensors products in the Electronics Segment are used in a wide variety of applications including appliances, security systems, medical equipment, and consumer and industrial controls. With the acquisition of U.S. Sensor, the Company has added temperature sensors to its existing portfolio.
Automotive Segment
The Company is a primary supplier of fuses and circuit protection technologies to global automotive OEMs, through sales made to Tier One automotive suppliers, main-fuse box, and wire harness manufacturers that incorporate the fuses into their products, as well as 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.
Circuit protection needs in the automotive space are expected to generate additional content-per-vehicle with the increased electrification of vehicles, as well as the continued development and market penetration of hybrid and electric vehicles.
Over the past several years, the Company has expanded the Automotive segment into the commercial vehicle market with various acquisitions, also expanding the Company’s portfolio of power control products. Additional products in this market include: power distribution modules, low and high current switches, solenoids and relays, electronic switches, battery management products, ignition key switches, and trailer connectors. Custom and market products are sold directly to a mix of OEMs, Tier One suppliers, aftermarket channels, as well as through general distribution.
The Company continues to expand its automotive sensor business and products and expects this market to provide meaningful growth opportunities over the long-term. Products sold into the market include a wide range of automotive and commercial vehicle sensors designed to monitor the passenger compartment occupants and environment as well as the vehicle’s powertrain, emissions, speed and suspension. A majority of the Company’s automotive sensor sales are made to Tier One suppliers.
Industrial Segment
The Company manufactures and sells a broad range of low-voltage and medium-voltage circuit protection products to electrical distributors and their customers in the construction, OEM and industrial maintenance, repair and operating supplies (“MRO”) markets. The Company also designs and manufactures protection relays for the global mining, oil and gas, and general industrial markets as well as portable custom electrical equipment for the mining industry in Canada. The Company sees growth opportunity by expanding both the geographic markets and distributors it serves as well as continuing to invest in new product development.
Power fuses are used to protect circuits in various types of industrial equipment and in industrial and commercial buildings. Protection relays are used to protect personnel and equipment in harsh environments such as mining, oil and gas, and industrial environments 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.
Littelfuse custom-engineered electrical equipment is designed and built for use in harsh or demanding environments such as mines, where standard industrial electrical gear will not meet customer needs for reliability and durability.
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, product design, and development (“R&D”) and engineering facilities in Champaign and Mt. Prospect, Illinois; Fremont, California; Rapid City, South Dakota; Canada; mainland China; Japan; Italy; the Philippines; Taiwan, China; Lithuania; Germany; and Mexico. The Company maintains 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, marketing, and product management personnel with input from customers. The entire product development process usually ranges from a few months to 24 months based on the complexity of development, with continuous efforts to reduce the development cycle. During fiscal years 2017, 2016, and 2015, the Company expended $50.5 million, $42.2 million, and $30.8 million, respectively, on R&D.
PATENTS, TRADEMARKS, AND OTHER INTELLECTUAL PROPERTY
The Company generally relies on patents, trademarks, licenses, and nondisclosure agreements to protect its 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.
The Company owns a large portfolio of patents worldwide and new products are continually being developed to replace older products. The Company regularly applies for patent protection on such new products. While, 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.
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). Thermoplastic molded component requirements 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, gold, raw silicon, solder, and various gases. The Company uses a single 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 other raw materials are purchased from a number of readily available outside sources.
MARKETING
The Company’s sales and marketing staff maintains relationships with major OEMs and global distributors. The Company’s sales, marketing and engineering personnel also interact directly with OEM engineers to ensure appropriate sensor design, circuit protection and reliability within the OEM’s parameters. 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 Segment
The majority of the Electronics segment’s products are sold through distribution, including global distributors such as Arrow Electronics, Inc., Future Electronics and TTI, Inc, with most of the remainder sold directly to OEMs. In the Americas, the Company maintains a direct sales staff and utilizes manufacturers’ representatives to sell its electronics products in the U.S. and to call on major U.S. and international OEMs and distributors. In Canada, the Company utilizes manufacturers’ representatives and distributors. In Europe and Asia-Pacific regions, the Company also maintains a direct sales staff and utilizes distributors.
Automotive Segment
The Company maintains a direct sales force to service all the major automotive and commercial vehicle OEMs, system suppliers, and Tier One suppliers in the U.S. The Company also has manufacturers’ representatives that sell the Company’s products to aftermarket fuse retailers and commercial vehicle product OEMs.
In Europe, the Company uses both a direct sales force and manufacturers’ representatives to service its OEMs, major system suppliers and aftermarket distribution customers. In the Asia-Pacific region, the Company uses both a direct sales force and distributors to supply to major OEM system suppliers and Tier One suppliers.
Industrial Segment
The Company markets and sells its power fuses and protection relays through manufacturers’ representatives across North America. These representatives sell power fuse products through an electrical and industrial distribution network comprised of over 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.
CUSTOMERS
The Company sells to over 6,700 customers and distributors worldwide. Sales to Arrow Electronics, Inc., which were reported in our Electronics, Automotive and Industrial segments were 10.6% of consolidated net sales in 2017 but less than 10% in 2016 and 2015. No other single customer accounted for more than 10% of net sales during any of the last three years. During fiscal 2017, 2016, and 2015, net sales to customers outside the U.S. accounted for approximately 69%, 66%, and 60%, respectively, of the Company’s total net sales.
COMPETITION
The Company’s products compete with similar products of other manufacturers, some of which may have substantially greater financial resources than the Company. In the electronics market, the Company’s competitors include Eaton Corporation, Bel Fuse Inc., Bourns Inc., EPCOS, ON Semiconductor Corporation, STMicroelectronics NV, Semtech Corporation, and Vishay Intertechnology Inc. In the automotive market, the Company’s competitors include Eaton Corporation, Pacific Engineering, MTA, CTS Corporation, Amphenol Corporation, Sensata Technologies Holding NV, and TE Connectivity Ltd. In the industrial market, the Company’s major competitors include Eaton Corporation, GE Multilin, and Mersen. 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 December 30, 2017 was approximately $243.7 million, compared to $110.3 million at December 31, 2016 with the increase primarily driven by the Electronics segment. Substantially all of the orders currently in backlog are scheduled for delivery in 2018.
EMPLOYEES
As of December 30, 2017, the Company employed approximately 10,700 employees worldwide. Approximately 20% of the Company's total workforce was employed under collective bargaining agreements at December 30, 2017. In Mexico, the Company has two separate collective bargaining agreements, one for 1,500 employees in Piedras Negras, expiring January 31, 2020 and the second for 650 employees in Matamoros, expiring January 1, 2020. Overall, the Company has historically maintained satisfactory employee relations and considers employee relations to be good.
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 a chemical engineer to monitor regulatory matters and believes that it is currently in compliance in all material respects with applicable environmental laws and regulations.
Littelfuse GmbH, which was acquired by the Company in May 2004, is responsible for maintaining closed coal mines from legacy operations. 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 accrual is reviewed annually and calculated based upon the cost of remediating the shafts. Further information regarding the coal mine liability accrual is provided in Note 1, Summary of Significant Accounting Policies and Other Information, of the Notes to Consolidated Financial Statements included in this Annual Report.
ITEM 1A.
ITEM 1A. RISK FACTORS.
The Company’s business, financial condition, and results of operations are subject to various risks and uncertainties, including the risk factors it has identified below. Any of the following risk factors could materially and adversely affect the Company’s business, financial condition, or results of operations. These factors are not necessarily listed in order of importance.
The Company’s industry is subject to intense competitive pressures.
The Company operates in markets that are highly competitive. The Company competes on the basis of price, quality, service, and / or brand name across the industries and markets it serves. Competitive pressures could affect the prices the Company is able to charge its customers or the demand for its products.
The Company may not always be able to compete on price, particularly when compared to manufacturers with lower cost structures. Some of the Company’s competitors have substantially greater sales, financial and manufacturing resources and may have greater access to capital than the Company. As other companies enter its markets or develop new products, competition may further intensify. The Company’s failure to compete effectively could materially adversely affect its business, financial condition, and results of operations.
The Company engages in strategic acquisitions and may not realize the anticipated benefits of the acquisitions and / or may encounter difficulties in integrating these businesses.
The Company seeks to grow through strategic acquisitions. In the past, the Company has acquired a number of businesses or companies and additional product lines and assets. The Company intends to continue to expand and diversify its operations with additional future acquisitions.
An acquired business, technology, service or product could under-perform relative to the Company’s expectations and the price paid for it, or not perform in accordance with the Company’s anticipated timetable. This could cause the Company’s financial results to differ from expectations in any given fiscal period, or over the long term. The success of these transactions also depends on the Company’s ability to integrate the assets, operations, and personnel associated with these acquisitions. The Company may encounter difficulties in integrating acquisitions with the Company’s operations and may not realize the degree or timing of the benefits that are anticipated from an acquisition.
The Company may also discover liabilities or deficiencies associated with the companies or assets it acquires that were not identified in advance, which may result in significant unanticipated costs. The effectiveness of the Company’s due diligence review and its ability to evaluate the results of such due diligence are dependent upon the accuracy and completeness of statements and disclosures made or actions taken by the companies acquired or their representatives, as well as the limited amount of time in which acquisitions are executed. In addition, the Company may fail to accurately forecast the financial impact of an acquisition transaction, including tax and accounting charges. Acquisitions may also result in recording of significant additional expenses to the results of operations and recording of substantial intangible assets on the balance sheet upon closing. Any of these factors may adversely affect the Company’s financial condition or results of operations.
Reorganization activities may lead to additional costs and material adverse effects.
In the past, the Company has taken actions to restructure and optimize its production and manufacturing capabilities and efficiencies through relocations, consolidations, plant closings or asset sales. In the future, the Company may take additional restructuring actions including the consolidating, closing or selling of additional facilities. These actions could result in impairment charges and various charges for such items as idle capacity, disposition costs and severance costs, in addition to normal or attendant risks and uncertainties. The Company may be unsuccessful in any of its current or future efforts to restructure or consolidate its business. 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 the Company’s business, financial condition or results of operations.
The Company may be unable to manufacture and deliver products in a manner that is responsive to its customers’ needs.
The end markets for the Company’s 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 its existing products obsolete and unmarketable before it can recover any or all of its research, development, and commercialization expenses on capital investments. Furthermore, the life cycles of its products may change and are difficult to estimate.
The Company’s future success will depend upon its ability to manufacture and deliver products in a manner that is responsive to its customers’ needs. The Company 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 its customers. The Company invests heavily in research and development without knowing that it will recover these costs. The Company’s competitors may develop products or technologies that will render its products non-competitive or obsolete. If it cannot develop and market new products or product enhancements in a timely and cost-effective manner, its business, financial condition, and results of operations could be materially adversely affected.
The Company’s ability to manage currency or commodity price fluctuations or supply shortages is limited.
As a resource-intensive manufacturing operation, the Company is exposed to a variety of market and asset risks, including the effects of changes in commodity prices, foreign currency exchange rates, and interest rates. The Company has multiple sources of supply for the majority of its commodity requirements. However, significant shortages that disrupt the supply of raw materials or result in price increases could affect prices the Company charges its customers, its product costs, and the competitive position of its products and services. The Company monitors and manages these exposures as an integral part of its overall risk management program, which recognizes the unpredictability of markets and seeks to reduce the potentially adverse effects on its results. Nevertheless, changes in currency exchange rates, commodity prices and interest rates cannot always be predicted. In addition, because of intense price competition and the Company’s high level of fixed costs, it 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 the Company’s results of operations and financial condition. In addition, significant portions of its revenues and earnings are exposed to changes in foreign currency rates. As it operates in multiple foreign currencies, changes in those currencies relative to the U.S. dollar will impact its revenues and expenses. The impact of possible currency devaluation in countries experiencing high inflation rates or significant exchange fluctuations can impact the Company’s results and financial guidance. For additional discussion of interest rate, currency or commodity price risk, see Item 7A, Quantitative and Qualitative Disclosures about Market Risks.
The Company’s effective tax rate could materially increase as a consequence of various factors, including interpretations and administrative guidance in regard to the Tax Act (defined below), U.S. and/or international tax legislation, mix of the Company’s earnings by jurisdiction, and U.S. and foreign jurisdictional tax audits.
On December 22, 2017, the U.S. enacted legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). Among other things, the Tax Act reduces the U.S. corporate federal income tax rate from 35% to 21%, adds base broadening provisions which limit deductions and address tax efficient international structures, imposes a one-time tax (the “Toll Charge”) on accumulated earnings of certain non-U.S. subsidiaries and enables repatriation of earnings of non-U.S. subsidiaries free of U.S. federal income tax. Other than the Toll Charge (which is applicable to the Company for 2017), the provisions will generally be applicable to the Company in 2018 and beyond. In accordance with the guidance provided in SEC Staff Accounting Bulletin (“SAB”) No. 118, in the fourth quarter of 2017 the Company recorded a charge of $47 million as a provisional reasonable estimate of the impact of the Tax Act, including $49 million for the Toll Charge net of $2 million for other net tax benefits. The Company is continuing to analyze the Tax Act and plans to finalize the estimate within the measurement period outlined in SAB No.118. The final charge may differ from the provisional reasonable estimate (and such difference may be material) if provisions of the Tax Act, and their interaction with other provisions of the U.S. Internal Revenue Code, are interpreted differently than interpretations made by the Company in determining the estimate, whether through issuance of administrative guidance, or through further review of the Tax Act by the Company and its advisors. Depending upon future interpretations and administrative guidance in respect of the Tax Act’s base broadening provisions, the Tax Act could have a material adverse effect on the Company’s effective tax rate and cash flows.
The Company is subject to taxes in the U.S. and numerous non-U.S. jurisdictions. Therefore, it is subject to changes in tax laws in each of these jurisdictions and such changes could have a material adverse affect on the Company’s effective tax rate and cash flows. As a U.S. Company with significant non-U.S. operations (generally taxed at rates that are lower than the U.S. statutory rate), it is particularly susceptible to changes in U.S. tax rules. In addition, certain non-U.S. jurisdictions are considering tax legislation based upon recommendations made by the Organization for Economic Co-operation and Development in connection with its Base Erosion and Profit Shifting study. The outcome of these legislative developments could have a material adverse effect on the Company’s effective tax rate and cash flows.
The tax rates applicable in the jurisdictions within which the Company operates vary widely. Therefore, the Company’s effective tax rate may be adversely affected by changes in the mix of its earnings by jurisdiction.
The Company is also subject to examination of its tax returns by the U.S. Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for income taxes. However, there can be no assurance as to the outcome of these examinations.
A decline in expected profitability of the Company or individual reporting units of the Company could results in the impairment of assets, including goodwill and other long-lived assets.
The Company holds material amounts of goodwill and other long-lived assets on its balance sheet. A decline in expected profitability, particularly if there is a decline in the global economy, could call into question the recoverability of the Company’s related goodwill and other long-lived tangible and intangible assets and require the write down or write off of these assets. Such an occurrence has had and could continue to have a material adverse effect on the Company’s consolidated results of operations, financial position and cash flows.
A significant fluctuation between the U.S. dollar and other currencies could adversely impact the Company's revenue and earnings.
Although the Company's financial results are reported in U.S. dollars, the majority of the Company’s operations consist of manufacturing and sales activities in foreign countries. The Company’s most significant net long exposure is to the euro. The Company’s most significant net short exposures are to the Chinese renminbi, Mexican peso, and Philippine peso. Changes in foreign exchange rates and in particular, an increase in the value of the U.S. dollar against foreign currencies, could have an adverse effect on profitability and financial condition
The Company’s revenues may vary significantly from period to period.
The Company’s revenues may vary significantly from one accounting period to another due to a variety of factors including:
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changes in customers’ buying decisions;
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changes in demand for its products;
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changes in its distributor inventory stocking;
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the Company’s product mix;
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the Company’s effectiveness in managing manufacturing processes;
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costs and timing of its component purchases;
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the effectiveness of its inventory control;
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the degree to which it is able to utilize its available manufacturing capacity;
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the Company’s ability to meet delivery schedules;
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general economic and industry conditions;
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local conditions and events that may affect its production volumes, such as labor conditions and political instability; and
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seasonality of certain product lines.
The bankruptcy or insolvency of a major customer could adversely affect the Company.
The bankruptcy or insolvency of a major customer could result in lower sales revenue and cause a material adverse effect on the Company’s 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 the Company’s products, which likely would cause a decrease in sales revenue and have a substantial adverse impact on the Company’s business, financial condition and results of operations.
The Company is exposed to political, economic, and other risks that arise from operating a multinational business.
The Company has significant operating activities in numerous countries around the globe that contribute significantly to its revenues and earnings. Serving a global customer base and remaining competitive in the global marketplace requires the Company to place its production in countries outside the U.S., including emerging markets, to capitalize on market opportunities and maintain a cost-efficient structure. In addition, the Company sources a significant amount of raw materials and other components from third-party suppliers in low-cost countries. The Company’s operating activities are subject to a number of risks generally associated with multi-national 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 the Company’s ability to enforce legal rights and remedies.
Any of these factors could have a material adverse effect on the Company’s business, financial condition and results of operations.
Disruptions in the Company’s manufacturing, supply or distribution chain could result in an adverse impact on results of operations.
The Company sources materials and sell product through various international network channels. A disruption could occur within the Company’s manufacturing, distribution or supply chain network. This could include damage or destruction due to various causes including natural disasters or political instability which would cause one or more of these network channels to become non-operational. This could adversely affect the Company’s ability to manufacture or deliver its products in a timely manner, impair its ability to meet customer demand for products and result in lost sales or damage to its reputation. Such a disruption could have a material adverse effect upon the Company’s business, financial condition or results of operations.
The inability to maintain access to capital markets may adversely affect the Company’s business and financial results.
The Company’s ability to invest in its 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 the Company is unable to access the capital markets or bank credit facilities, it could experience a material adverse effect on its business, financial condition, and results of operations.
Fixed costs may reduce operating results if sales fall below expectations.
The Company’s expense levels are based, in part, on its expectations for future sales. Many of the Company’s expenses, particularly those relating to capital equipment and manufacturing overhead, are relatively fixed. The Company might be unable to reduce spending quickly enough to compensate for reductions in sales. Accordingly, shortfalls in sales could materially and adversely affect the Company’s operating results.
The volatility of the Company’s stock price could affect the value of an investment in the Company’s stock and future financial position.
The market price of the Company’s stock can fluctuate widely. Between December 31, 2016 and December 30, 2017, the closing sale price of the Company’s common stock ranged between a low of $146.94 and a high of $215.00. The volatility of the stock price may be related to any number of factors, such as volatility in the financial markets, general macroeconomic conditions, industry conditions, analysts’ expectations concerning the Company’s results of operations, or the volatility of its revenues as discussed above under “The Company’s Revenues May Vary Significantly from Period to Period.” The historic market price of the Company’s common stock may not be indicative of future market prices. The Company may not be able to sustain or increase the value of its common stock. Declines in the market price of the Company’s stock could adversely affect the Company’s 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 the Company’s common stock.
The Company is exposed to, and may be adversely affected by, potential security breaches or other disruptions to its information technology systems and data security.
The Company relies on its information technology systems and networks in connection with many of its business activities. Some of these networks and systems are managed by third-party service providers and are not under the Company’s direct control. The Company’s operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to its business, customers, dealers, suppliers, employees, and other sensitive matters. As with most companies, the Company has experienced cyber-attacks, attempts to breach its systems, and other similar incidents, none of which have been material. Any future cyber incidents could, however, materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively sensitive information; compromise personally identifiable information regarding customers or employees; and jeopardize the security of the Company’s facilities. A cyber incident could be caused by malicious outsiders using sophisticated methods to circumvent firewalls, encryption, and other security defenses. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, the Company may be unable to anticipate these techniques or to implement adequate preventative measures. Information technology security threats, including security breaches, computer malware, and other cyber-attacks are increasing in both frequency and sophistication and could create financial liability, subject the Company to legal or regulatory sanctions or damage the Company’s reputation with customers, dealers, suppliers, and other stakeholders. The Company continuously seeks to maintain a robust program of information security and controls, but the impact of a material information technology event could have a material adverse effect on the Company’s competitive position, reputation, results of operations, financial condition, and cash flows.
The Company’s business may be interrupted by labor disputes or other interruptions of supplies.
A work stoppage could occur at certain of the Company’s facilities, most likely as a result of disputes under collective bargaining agreements or in connection with negotiations of new collective bargaining agreements. In addition, the Company 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 its suppliers. A significant work stoppage, or an interruption or shortage of supplies for any reason, if protracted, could substantially adversely affect the Company’s business, financial condition, and results of operations. The transfer of the Company’s manufacturing operations and changes in its distribution model could disrupt operations for a limited time.
Failure to attract and retain qualified personnel could affect the Company’s business results.
The Company’s success, both generally and in connection with mergers and acquisitions, depends on the Company’s ability to attract, retain, and motivate a highly-skilled and diverse management team and workforce. Failure to ensure that the Company has the depth and breadth of personnel with the necessary skill set and experience could impede its ability to deliver growth objectives and execute the Company’s strategy. Competition for qualified employees among companies that rely heavily upon engineering and technology is at times intense, and the loss of qualified employees could hinder the Company’s ability to conduct research activities successfully and develop marketable products.
Environmental liabilities could adversely impact the Company’s financial position.
Foreign, federal, state and local laws and regulations impose various restrictions and controls on the discharge of materials, chemicals and gases used in the Company’s manufacturing processes or in its finished goods. These environmental regulations have required the Company to expend a portion of its resources and capital on relevant compliance programs. Under these laws and regulations, the Company could be held financially responsible for remedial measures if its current or former properties are contaminated or if it sends waste to a landfill or recycling facility that becomes contaminated, even if the Company did not cause the contamination. The Company may be subject to additional common law claims if it releases 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 the Company to significant liabilities and could have a material adverse effect on its business, financial condition or results of operations.
In the conduct of manufacturing operations, the Company has handled and does 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, the Company operates or owns 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 the Company under environmental laws and regulations.
The Company is responsible for the maintenance of discontinued coal mining operations in Germany. The risk of environmental remediation exists and the Company is in the process of remediating the mines considered to be the most at risk.
Customer demands and new regulations related to conflict-free minerals may force the Company to incur additional expenses.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires disclosure of use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries and efforts to prevent the use of such minerals. In the semiconductor industry, these minerals are most commonly found in metals. As there may be only a limited number of suppliers offering “conflict free” metals, the Company cannot be certain that it will be able to obtain necessary metals in sufficient quantities or at competitive prices. Also, the Company may face challenges with its customers and suppliers if it is unable to sufficiently verify that the metals used in its products are “conflict free.”
The Company may not be successful protecting its patents and trademarks.
The Company considers its intellectual property, including patents, trade names, and trademarks, to be of significant value to its business as a whole. The Company’s products are manufactured, marketed, and sold under a portfolio of patents, trademarks, licenses, and other forms of intellectual property, some of which expire or are allowed to lapse at various dates in the future. The Company develops and acquires new intellectual property on an ongoing basis and consider all of its intellectual property to be valuable. The Company's policy is to file applications and obtain patents for the great majority of its novel and innovative new products including product modifications and improvements. Based on the broad scope of its product lines, the Company believes that the loss or expiration of any single intellectual property right would not have a material adverse effect upon its business, financial condition or results of operations; however, multiple losses or expirations could have a material adverse effect upon the Company’s business, financial condition or results of operations.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
ITEM 2. PROPERTIES.
The Company’s operations are located in approximately 50 owned or leased facilities worldwide, totaling approximately 2.8 million square feet. The Company’s owned facilities include approximately 1.8 million square feet and the Company’s leased facilities include approximately 1.0 million square feet. The Company’s corporate headquarters is located in the U.S. in Chicago, Illinois.
The Company’s primary North American manufacturing facilities include: (i) Saskatoon, Canada and Rapid City, South Dakota which manufacture products for the Industrial segment, (ii) Melchor Muzquiz and Matamoros, Mexico which manufacture products primarily for the Automotive segment, and (iii) Piedras Negras, Mexico, which primarily manufactures products for the Automotive segment as well as the Industrial segment.
The Company’s primary European manufacturing facilities include Kaunas, Lithuania, and Legnago and Ozegna, Italy, all of which manufacture products for the Automotive segment.
The Company’s primary Asia-Pacific manufacturing facilities include: (i) Lipa City, Philippines, (ii) Inashiki, Japan, and (iii) Suzhou, Wuxi, Kunshan, Dongguan, and Shanghai, China, which manufacture products for the Electronics segment as well as the Automotive segment.
The Company also has engineering and research and development, sales, and distribution centers located in Asia, North America, and Europe.
The Company believes its facilities are adequate to meet its requirements for the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings, other than routine litigation incidental to its business.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Shares of the Company’s common stock are traded under the symbol “LFUS” on the NASDAQ Global Select MarketSM.
The table below provides information with respect to the Company’s quarterly stock prices and cash dividends declared and paid for each quarter during fiscal 2017 and 2016:
Number of Holders
As of February 16, 2018, there were 79 holders of record of the Company’s common stock.
Dividend Policy
The Company expects that its practice of paying quarterly dividends on its common stock will continue, although 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 certain financial ratios. However, the Company expects to continue paying cash dividends on a quarterly basis for the foreseeable future.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities by us or affiliates during the three months ended December 30, 2017.
Purchases of Equity Securities
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, 2017 to April 30, 2018. The Company did not repurchase any shares of its common stock during fiscal 2017 and 1,000,000 shares may yet be purchased under the program as of December 30, 2017.
The table below presents shares of the Company’s common stock which were acquired by the Company during the three months ended December 30, 2017:
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 Exchange 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 A. O. Smith Corp.; AAON, Inc.; American Superconductor Corp.; AMETEK, Inc.; Amphenol Corp.; Arrow Electronics, Inc.; Avnet, Inc.; AVX Corp.; Capstone Turbine Corp.; CTS Corp.; General Cable Corp.; Hubbell Inc. Class B; Jabil Circuit, Inc.; KEMET Corp.; Littelfuse, Inc.; Methode Electronics, Inc.; Plexus Corp.; Powerwave Technologies, Inc.; Regal-Beloit Corp.; 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 29, 2012 and reinvestment of all dividends is assumed. In the case of the Company, a $100 investment made on December 29, 2012 is assumed. Returns for the Company’s fiscal years presented above are as of the last day of the respective fiscal year which was, December 28, 2013, December 27, 2014, January 2, 2016, December 31, 2016, and December 30, 2017 for the fiscal years 2013, 2014, 2015, 2016, and 2017, respectively.
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 Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, for the respective years presented:
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of Littelfuse’s financial condition and results of operations should be read together with the Consolidated Financial Statements and notes to those statements included in Item 8 of Part II of this Annual Report on Form 10-K.
Business
For a description of the Company’s business, segments and product offerings, see Item 1, Business.
2017 EXECUTIVE OVERVIEW
Net sales increased by $165.4 million, or 15.7%, in 2017 compared to 2016. The increase in net sales was primarily driven by the acquisitions of ON Portfolio, PolySwitch, and U.S. Sensor, higher volume and growth across each of the Electronics segment reporting units and volume growth in the Automotive segment driven by increases in passenger car and commercial vehicle businesses.
For the year ended December 30, 2017, the Company recognized net income of $119.5 million, or $5.21 per diluted share compared to net income of $104.5 million, or $4.60 per diluted share for the year ended December 31, 2016. Net income increased due to the impacts of the acquisitions and volume increases, higher gross profit largely driven by a favorable mix within the Electronics segment, a $14.8 million impairment to goodwill and other intangible assets impairment charge recorded in the Custom Products reporting unit in 2016 partially offset by higher income tax expense primarily driven by the enactment of the Tax Cuts and Jobs Act in December 2017.
Net cash provided by operating activities was $269.2 million for the year ended December 30, 2017 as compared to $180.1 million for the year ended December 31, 2016. The increase in net cash provided by operating activities reflected higher earnings, lower cash taxes, lower acquisition-related and integration payments and the impact of working capital changes largely driven by collections efficiency and lower vendor prepayments.
On January 17, 2018, the Company acquired IXYS Corporation “IXYS”, a global pioneer in the power semiconductor and integrated circuit markets with a focus on medium to high voltage power control semiconductors across the industrial, communications, consumer and medical markets. IXYS has a broad customer base, serving more than 3,500 customers through its direct sales force and global distribution partners. The purchase price for IXYS was approximately $856.5 million, which included consideration of cash, Littelfuse common stock, and the value of converted or cash settled IXYS equity awards. For the twelve months ended December 30, 2017, IXYS generated net sales of approximately $340 million. IXYS’ operations will be included in the Electronics segment.
On July 7, 2017, the Company acquired the assets of U.S. Sensor for $24.3 million. The acquired business, which is included in the Electronics segment expands the Company’s existing sensor portfolio in several key electronics and industrial end markets. U.S. Sensor manufactures a variety of high quality negative temperature coefficient thermistors as well as thermistor probes and assemblies. Product lines also include thin film platinum resistance temperature detectors (“RTDs”) and RTD assemblies.
On February 28, 2017, pursuant to a Securities Purchase Agreement between the Company and the stockholders of Monolith, a U.S. start-up Company developing silicon carbide technology, and conditioned on Monolith achieving a product development milestone and other provisions, the Company acquired approximately 62% of the outstanding common stock of Monolith for $15 million. This was in addition to the Company’s initial investment of $3.5 million in the preferred stock of Monolith Semiconductor in December 2015. Monolith operations are included in the Electronics segment.
On October 13, 2017, the Company amended its existing credit agreement to increase the unsecured revolving credit facility from $575.0 million to $700.0 million, increase the unsecured term loan credit facility from $125.0 million to $200.0 million and to extend the expiration date from March 4, 2021 to October 13, 2022. The credit agreement also includes the option for the Company to increase the size of the revolving credit facility and the term loan facility by up to an additional $300.0 million, in the aggregate, subject to the satisfaction of certain conditions set forth in the credit agreement. Additionally, on November 15, 2017, the Company entered into a note purchase agreement pursuant to which the Company issued and sold $175 million in aggregate principal amount of senior notes. On January 16, 2018, $50 million in aggregate principal amount of 3.48% Senior Notes, Series A, due February 15, 2025 and $125 million in aggregate principal amount of 3.78% Senior Notes, Series B, due February 15, 2030 were funded.
OUTLOOK
Vision and Strategy
The Company works with its customers to design and develop technologies that help them build safer, more reliable and more efficient products for the connected world in virtually every market that uses electrical energy, ranging across consumer electronics, IT and telecommunication applications, industrial electronics, automobiles and other transportation, and heavy industrial applications. Built upon that framework, the Company’s strategy is centered on growing its core circuit protection business, accelerating its growth in power control, and doubling its sensor platform.
The Company’s strategic plan is focused on maximizing shareholder value by driving profitable sales growth, earnings per share growth, strong cash flow generation, and maintaining a balanced approach to capital allocation. The Company pursues the following major strategic initiatives, which are summarized below, along with more specific areas of focus.
The Company’s strategy is to generate profitable sales growth. In order to accomplish this, The Company is focusing on accelerating organic growth by increasing its content and share gains, enhancing technology efforts to drive innovation, capitalizing on cross segment opportunities, and gaining traction in underpenetrated geographies and markets. The Company will continue to make targeted strategic acquisitions that align to its strategy and financial targets to support new business, products, markets, and technologies while leveraging existing customers.
Management believes that sustaining profitability through a combination of profitable organic growth and acquisitions is critical to the Company’s competitiveness, while enhancing value the Company delivers to its customers. In addition, the Company continues to implement initiatives across all platforms to enhance productivity while managing its cost structure, including integration of operations and streamlining administrative and support activities to drive operating margins.
The Company seeks to deploy its capital using a balanced approach. Priorities for capital deployment, over time, include investments to drive increased organic growth, targeted acquisitions that align to the Company’s strategic and financial metrics and returning capital to shareholders through dividends and periodic share repurchases.
The Company uses several key indicators to gauge progress toward achieving these objectives. These indicators include organic sales growth, operating margins, cash flow from operations and capital expenditures. The Company targets long-term sales double digit sales growth, split between 5-7% annual organic sales growth and 5-7% annual growth from strategic acquisitions, while targeting operating margins between 17% and 19% and double-digit earnings per share growth. Cash flow from operations less capital expenditures is targeted to approximate net income but in any given year can be significantly impacted by the timing of non-recurring or infrequent expenditures.
Significant Accounting Policies and Critical Estimates
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s most critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations, and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The Company has identified the following as its most critical accounting policies and judgments. Although management believes that its estimates and assumptions are reasonable, they are based upon information available when they are made, and therefore, actual results may differ from these estimates under different assumptions or conditions. The Company has reviewed these critical accounting policies and related disclosures with the Audit Committee of its Board of Directors. Significant accounting policies are more fully described in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report.
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 persuasive evidence of an arrangement exists, products are shipped (FOB origin) to the customer in accordance with the terms of the sale, the risk of loss has been transferred, collectability 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 sales 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 and 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 and 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.
Return to Stock: The Company has a return to stock policy whereby a customer, with previous authorization from management, can return previously purchased goods for full or partial credit. The Company establishes an estimated allowance for these returns based on historic activity. Sales revenue and cost of sales are reduced to anticipate estimated returns.
Volume Rebates: The Company offers 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 collectability 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. During 2017, the Company was required to step up the value of inventory acquired in business combinations to its selling prices less the cost to sell under business combination accounting. This step-up was approximately $1.6 million for the U.S. Sensor acquisition in 2017.
Goodwill
The Company’s methodology for allocating the purchase price of acquisitions is based on established valuation techniques that reflect the consideration of a number of factors, including valuations performed by third-party appraisers when appropriate. Goodwill is measured as the excess of the cost of an acquired entity over the fair value assigned to identifiable assets acquired and liabilities assumed. Based on its current organization structure, the Company has seven reporting units for which cash flows are determinable and to which goodwill has be allocated. Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative excess fair value of each reporting unit.
The Company annually tests goodwill for impairment on the first day of its fiscal fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company also performs an interim review for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit. As part of its interim reviews, management analyzes potential changes in the value of individual reporting units based on each reporting unit’s operating results for the period compared to expected results as of the prior year’s annual impairment test. In addition, management considers how other key assumptions, including discount rates and expected long-term growth rates, used in the last annual impairment test, could be impacted by changes in market conditions and economic events. Based on the interim assessments, management concluded that no events or changes in circumstances indicated that it was more likely than not that the fair value for any reporting unit had declined below its carrying value
Quantitative Assessment for Impairment
For the seven reporting units with goodwill, the Company compared the estimated fair value of each reporting unit to its carrying value. If the carrying value of a reporting unit exceeded the estimated fair value, the difference between the estimated fair value and carrying value is recorded as the amount of the goodwill impairment charge. The results of the goodwill impairment test as of October 1, 2017 indicated that the estimated fair values for each of the seven reporting units with goodwill exceeded their respective carrying values. Accordingly, there were no goodwill impairment charges recorded as part of the Company’s 2017 annual goodwill impairment test.
As part of its impairment test for these reporting units, the Company engaged a third-party appraisal firm to assist in the Company’s determination of the estimated fair values. This determination included estimating the fair value of each reporting unit using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected operating results, economic projections, anticipated future cash flows, discount rates and the allocation of shared or corporate items. The market approach estimates fair values using comparable marketplace fair value data from within a comparable industry grouping. The Company weighted both the income and market approach equally to estimate the concluded fair value of each reporting unit. The determination of fair value requires the Company to make significant estimates and assumptions, which primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization and capital expenditures.
Goodwill Impairment Assumptions
Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on the fair value of the reporting units. Future declines in the overall market value of the Company’s equity may also result in a conclusion that the fair value of one or more reporting units has declined below its carrying value.
One measure of the sensitivity of the amount of goodwill impairment charges to key assumptions is the amount by which each reporting unit “passed” (fair value exceeds the carrying value”) the goodwill impairment test. All seven of the reporting units passed the goodwill impairment test, with fair values that exceeded the carrying values by between 25% and 314% of their respective estimated fair values. As of the most recent annual test conducted on October 1, 2017, the Company noted that the excess of fair value over the carrying value, was 161%, 314%, 247%, 218%, 100%, 25%, and 248% for its reporting units: Electronics (non-silicon), Electronics (silicon), Passenger Car, Commercial Vehicle Products, Sensors, Relays, and Power Fuse, respectively. Relatively small changes in the Company’s key assumptions would not have resulted in any reporting units failing the goodwill impairment test.
Generally, changes in estimates of expected future cash flows would have a similar effect on the estimated fair value of the reporting unit. That is, a 1.0% decrease in estimated annual future cash flows would decrease the estimated fair value of the reporting unit by approximately 1.0%. The estimated long-term net sales growth rate can have a significant impact on the estimated future cash flows, and therefore, the fair value of each reporting unit. A 1.0% decrease in the long-term net sales growth rate would have resulted in no reporting units failing the goodwill impairment test. Of the other key assumptions that impact the estimated fair values, most reporting units have the greatest sensitivity to changes in the estimated discount rate. The estimated discount rate was 9.6% for all reporting units except for Relays which had a discount rate of 10.1%. A 1.0% increase in the estimated discount rates would have resulted in no reporting units failing the annual goodwill impairment test. The Company believes that its estimates of future cash flows and discount rates are reasonable, but future changes in the underlying assumptions could differ due to the inherent uncertainty in making such estimates. Additionally, price deterioration or lower volume could have a significant impact on the fair values of the reporting units.
Long-Lived Assets
The Company evaluates the recoverability of other long-lived assets, including property, plant and equipment and certain identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Factors which could trigger an impairment review include significant underperformance relative to historical or projected operating results, significant changes in the manner of use of the assets or the strategy for the overall business, a significant decrease in the market value of the assets or significant negative industry or economic trends. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying value of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying value over its fair value. During the year ended December 30, 2017, the Company recognized non-cash impairment charges of $2.9 million related to certain machinery and equipment in the Electronics and Automotive segments due to changes in the expected use of these certain assets. During the year ended December 31, 2016, the Company recognized non-cash impairment charges totaling $6.0 million, of which $2.2 million related to the impairment of certain customer relationship intangible assets in the Custom Products reporting unit within the Industrial segment and $3.8 million related to the impairment of the Custom Products tradename. The impairment of the customer relationship intangible assets resulted from lower expectations of future revenue to be derived from those relationships while the tradename impairment resulted from lower expectations of future cash flows of the Custom Products reporting unit.
Environmental Liabilities
Environmental liabilities are accrued based on estimates of the probability of potential future environmental exposure. Costs 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. The Company evaluates its reserve for coal mine remediation annually utilizing a third party expert.
Pension and Supplemental Executive Retirement Plan
The Company records annual income and expense amounts relating to its pension and postretirement benefits plans based on calculations which include various actuarial assumptions including discount rates, expected long-term rates of return and compensation increases. The Company reviews its actuarial assumptions on an annual basis as of the fiscal year-end balance sheet date (or more frequently if a significant event requiring remeasurement occurs) and modifies the assumption based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the Consolidated Balance Sheets, but are generally amortized into operating earnings over future periods, with the deferred amount recorded in accumulated other comprehensive income (loss). The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. The Company maintains several pension plans in international locations. The expected returns on plan assets and discount rates are determined based on each plan’s investment approach, local interest rates and plan participant profiles. The discount rates for the Company’s defined benefit plans primarily in Europe and the Asia-Pacific regions at December 30, 2017 and December 31, 2016 were 3.1% and 2.6%, respectively. During 2015, the Company settled its U.S. defined benefit pension plan as described in Note 8, Benefit Plans, of the Notes to Consolidated Financial Statements included in this Annual Report.
A 50 basis point change in the discount rates at December 30, 2017 would have the following effect on the projected benefit obligation:
Equity-based Compensation
Equity-based compensation expense is recorded for stock-option awards and restricted share units 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 initiated a quarterly cash dividend in 2010 and expects to continue making cash dividend payments in the foreseeable future.
Total equity-based compensation expense for all equity compensation plans was $17.3 million, $12.8 million, and $10.7 million in 2017, 2016, and 2015, respectively. Further information regarding this expense is provided in Note 9, Shareholders’ Equity, of the Notes to Consolidated Financial Statements included in this Annual 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. U.S. state and non-U.S. income taxes are provided on the portion of foreign income that is expected to be remitted to the U.S. and be taxable (and non-U.S. income taxes are provided on the portion of non-U.S. income that is expected to be remitted to an upper-tier non-U.S. entity).
Deferred income taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in those non-U.S. subsidiaries for which such excess is considered to be permanently reinvested in those operations. The Company recognized deferred tax liabilities of $12.0 million ($11.8 million for non-U.S. taxes and $0.2 million for U.S. state taxes) as of December 30, 2017 related to taxes on certain non-U.S. earnings which are not considered to be permanently reinvested. Management regularly evaluates whether foreign earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company’s non-U.S. subsidiaries. Changes in economic and business conditions, foreign or U.S. tax laws (such as the Tax Act), or the Company’s financial situation could result in changes to these judgments and the need to record additional tax liabilities.
In accordance with the guidance provided in SEC SAB No. 118, in the fourth quarter of 2017 the Company recorded a charge of $47 million as a provisional reasonable estimate of the impact of the Tax Act, including $49 million for the Toll Charge net of $2 million for other net tax benefits. The Company is continuing to analyze the Tax Act and plans to finalize the estimate within the measurement period outlined in SAB No.118. The final charge may differ from the provisional reasonable estimate if provisions of the Tax Act, and their interaction with other provisions of the U.S. Internal Revenue Code, are interpreted differently than interpretations made by the Company in determining the estimate, whether through issuance of administrative guidance, or through further review of the Tax Act by the Company and its advisors. Aside from these interpretation issues, the final charge may differ from the provisional reasonable estimate due to refinements of accumulated non-U.S. earnings and tax pool data.
The Company 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 50% likelihood of being realized upon ultimate settlement.
Further information regarding income taxes, including a detailed reconciliation of current year activity, is provided in Note 10, Income Taxes, of the Notes to Consolidated Financial Statements included in this Annual Report.
Off-Balance Sheet Arrangements
Other than non-cancellable operating lease commitments, the Company does not have off-balance sheet arrangements, financings or special purpose entities.
Financial Review
In the financial review that follows, the Company discusses its consolidated results of operations, financial position, cash flows and certain other information. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and related notes that begin on page.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 30, 2017 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2016
The following table summarizes the Company’s consolidated results of operations for periods presented. The fiscal year 2017 includes approximately $10.3 million of non-segment charges. These included acquisition-related and integration costs related to legal, accounting and other expenses associated with completed or pending acquisitions of approximately $8.0 million, including $1.6 million of purchase accounting inventory charges related to the Company’s 2017 acquisition of U.S. Sensor as described in Note 2, Acquisitions and Dispositions, of the Notes to the Consolidated Financial Statements included in this Annual Report, and $2.2 million of charges related to restructuring and production transfers in the Company’s Asia operations.
The fiscal year 2016 includes approximately $50.0 million of non-segment charges. These included $14.8 million of charges related to the impairment of the Custom Products reporting unit, $21.4 million of acquisition and integration costs associated with the Company’s 2016 acquisitions, primarily PolySwitch, $7.8 million of non-cash fair value step-up inventory charges relating to the Company’s 2016 acquisitions, primarily PolySwitch, as described in Note 2, Acquisitions and Dispositions, of the Notes to Consolidated Financial Statements included in this Annual Report, $1.9 million in charges related to the closure of the Company’s manufacturing facility in Denmark, $1.6 million related to the Company’s transfer of its reed sensor manufacturing operations from the U.S. and China to the Philippines, and $2.5 million related to restructuring costs.
Fiscal year 2017 also included approximately $2.4 million in foreign currency expenses primarily attributable to changes in the value of the euro, Philippine peso and Chinese renminbi against the U.S. dollar, while fiscal year 2016 also included approximately $0.5 million in foreign currency expenses primarily attributable to changes in the value of the euro, Philippine peso and Chinese renminbi against the U.S. dollar.
Sales
Net sales for 2017 of $1,221.5 million increased $165.4 million, or 15.7%, compared to the prior year, resulting from the prior year acquisitions of PolySwitch, ON Portfolio, and Menber’s and $5.4 million from the current year U.S. Sensor acquisition. The remaining increase in net sales was primarily due to higher volume across all product lines in the Electronics segment and passenger car and commercial vehicle businesses within the Automotive segment partially offset by the divestitures of two non-core product lines within the Industrial segment in 2016.
Gross Profit
Gross profit was $506.5 million, or 41.5% of sales, in 2017, compared to $413.1 million, or 39.1% of sales, in 2016. The increase in gross profit and gross margin reflects the incremental net sales and improved leverage in expenses and profits related to the prior year acquisitions, primarily in the Electronics segment.
Operating Expenses
Total operating expenses were $288.0 million, or 23.6% of net sales, for 2017 compared to $282.5 million, or 26.7% of net sales, for 2016. The increase in operating expenses of $5.5 million was primarily due to acquisitions, higher selling costs, higher research and development costs of $8.3 million and an increase of $5.4 million in amortization expense of intangible assets due to the acquisitions, partially offset by the $14.8 million of goodwill and other intangible asset impairment charges recognized in 2016 and lower acquisition-related expenses and integration costs of $13.4 million. Selling, general and administrative expenses increased by $6.7 million to $212.8 million, but decreased from 19.5% to 17.4% as a percentage of net sales for 2017 compared to 2016 primarily as a result of lower acquisition-related expenses and integration costs of $13.4 million and cost control initiatives partially offset by the acquisitions.
Operating Income
Operating income for 2017 was $218.5 million, an increase of $87.9 million or 67.3% compared to $130.6 million for 2016. The increase in operating income was the result of acquisitions and higher volume in the Electronics segment. Operating margins increased from 12.4% to 17.9% for 2017 due to the acquisitions, improvement in gross margins primarily driven by the Electronics segment, lower acquisition and integration related costs, the prior year goodwill and other intangible asset impairment charge and operational efficiencies. Also, the prior year goodwill and other intangible asset impairment charge reduced the operating margin by 1.4% in 2016.
Income Before Income Taxes
Income before income taxes for 2017 was $204.0 million, or 16.7% of net sales compared to $123.3 million, or 11.7% of net sales, for 2016. Income before income taxes was impacted by an increase in operating income described above, partially offset by higher interest expense of $4.8 million reflecting increased borrowings and unfavorable changes in foreign exchange rates of $1.9 million primarily as a result of fluctuations in the Chinese renminbi and Philippine peso against the U.S. dollar partially offset by fluctuations in the Euro against U.S. dollar.
Income Taxes
Income tax expense for 2017 was $84.5 million, or an effective tax rate of 41.4% compared to income tax expense of $18.8 million, or an effective tax rate of 15.2%, for 2016. The increase in 2017 reflects a fourth quarter charge of $47 million as a provisional reasonable estimate of the impact of the Tax Act, including $49 million for the Toll Charge net of $2 million for other net tax benefits. The Company is continuing to analyze the Tax Act and plans to finalize the estimate within the measurement period outlined in SAB No.118. The final charge may differ from the provisional reasonable estimate if provisions of the Tax Act, and their interaction with other provisions of the U.S. Internal Revenue Code, are interpreted differently than interpretations made by the Company in determining the estimate, whether through issuance of administrative guidance, or through further review of the Tax Act by the Company and its advisors. Aside from these interpretation issues, the final charge may differ from the provisional reasonable estimate due to refinements of accumulated non-U.S. earnings and tax pool data. Excluding the impact of the Tax Act, the effective tax rates for 2017 and 2016 are lower than the U.S. statutory tax rate primarily due to income earned in lower tax jurisdictions partially offset by the impact of taxes on unremitted earnings, and, with respect to 2016, a one-time deduction with respect to the stock of one of the Company’s affiliates, partially offset by the impact of the impairment of goodwill for which no tax benefit was recorded.
Segment Information
The Company reports its operations by the following segments: Electronics, Automotive and Industrial. Segment information is described more fully in Note 12, Segment Information, of the Notes to Consolidated Financial Statements included in this Annual Report.
The following table is a summary of the Company’s net sales by segment:
Electronics Segment
The Electronics segment net sales increased $126.7 million, or 23.7%, in 2017 compared to 2016 primarily due to the PolySwitch, and ON Portfolio acquisitions in 2016, and the U.S Sensor acquisition in 2017 along with higher volume across the passives, sensors and semiconductor product lines.
Automotive Segment
Net sales in the Automotive segment increased $38.0 million, or 9.2%, in 2017 compared to 2016 primarily due to the incremental net sales associated with the PolySwitch and Menber’s acquisitions in 2016, higher volume in passenger car and commercial vehicle products and favorable foreign exchange impacts of $1.9 million, partially offset by lower volume in automotive sensor products.
Industrial Segment
The Industrial segment net sales increased $0.6 million, or 0.6%, in 2017 compared to 2016 primarily due higher volume across all product lines, partially offset by the divestiture of two non-core product lines, one in the fourth quarter of 2016 and the other in the first quarter of 2016.
Geographic Sales Information
Sales by geography represent sales to customer or distributor locations. The following table is a summary of the Company’s net sales by geography:
Americas
Net sales in the Americas increased $25.4 million, or 6.2%, in 2017 compared to 2016 resulting from acquisitions and higher volume in the passive and semiconductor product lines in the Electronics segment and the passenger car and commercial vehicle businesses in the Automotive segment that were partially offset by lower volume in sensor products in the Automotive segment and the divestiture of a non-core product line in the Industrial segment.
Europe
European net sales increased $43.6 million, or 21.8%, in 2017 compared to 2016. The increase in net sales was primarily due to acquisitions and increased net sales across all product lines in the Electronics segment and the passenger car and commercial vehicle products businesses in the Automotive segment.
Asia-Pacific
Asia-Pacific net sales increased $96.3 million, or 21.7%, in 2017 compared to 2016, primarily due to incremental net sales from prior year acquisitions and increased volume across all product lines in the Electronics segment.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2016 AS COMPARED TO THE YEAR ENDED JANUARY 2, 2016
The following table summarizes the Company’s consolidated results of operations for periods presented. The fiscal year 2016 includes approximately $50.0 million of non-segment charges. These included $14.8 million of charges related to the impairment of the Custom Products reporting unit, $21.4 million of acquisition and integration costs associated with the Company’s 2016 acquisitions, primarily PolySwitch, $7.8 million of non-cash fair value step-up inventory charges relating to the Company’s 2016 acquisitions, primarily PolySwitch, as described in Note 2, Acquisitions and Dispositions, of the Notes to Consolidated Financial Statements included in this Annual Report, $1.9 million in charges related to the closure of the Company’s manufacturing facility in Denmark, $1.6 million related to the Company’s transfer of its reed sensor manufacturing operations from the U.S. and China to the Philippines, and $2.5 million related to restructuring costs.
Fiscal year 2015 includes approximately $45.2 million of other non-segment charges. These included $5.2 million related to the Company’s transfer of its reed sensor manufacturing operations from the U.S. and China to the Philippines, $3.6 million related to restructuring, $4.6 million related to acquisition costs and $31.9 million of expense related to the planned termination of the U.S. pension as described in Note 8, Benefit Plans, of the Notes to Consolidated Financial Statements included in this Annual Report.
Fiscal year 2016 also included approximately $0.5 million in foreign currency expenses primarily attributable to changes in the value of the euro, Philippine peso and Chinese renminbi against the U.S. dollar, while fiscal year 2015 also included $1.5 million in foreign currency gains primarily attributable to changes in the value of both the euro and Philippine peso against the U.S. dollar.
Sales
Net sales for 2016 of $1,056.2 million increased $188.3 million, or 21.7%, compared to the prior year, reflecting $170.2 million of incremental revenues from businesses acquired over the previous two years as well as organic growth in the Electronics and Automotive segments, partially offset by lower sales from the Industrial segment due to weaker end markets. The Company also experienced $7.3 million in unfavorable foreign currency effects in 2016 compared to 2015 primarily resulting from sales denominated in Chinese renminbi.
The increase in sales in 2016 reflects a $75.2 million, or 22%, increase in Automotive segment sales and a $129.7 million, or 32%, increase in Electronics segment sales, partially offset by a $16.6 million, or 14%, decrease in Industrial segment sales.
Gross Profit
Gross profit was $413.1 million, or 39.1% of sales, in 2016, compared to $330.5 million, or 38.1% of sales, in 2015. Gross profit for 2016 was negatively impacted by $10.8 million of charges primarily related to the inventory step-up from the acquisition of PolySwitch and to a lesser extent the ON Portfolio and Menber’s acquisitions. Gross profit for 2015 was negatively impacted by $5.2 million of charges related to the transfer of the Company’s reed switch production from the U.S. and China to the Philippines.
Operating Expenses
Total operating expense was $282.5 million, or 26.7% of net sales, for 2016 compared to $226.3 million, or 26.1% of net sales, for 2015. Operating expense in 2016 included $39.1 million of charges primarily consisting of acquisition and integration costs of $21.4 million and $14.8 million of charges related to the impairment of the Custom Products reporting unit. Operating expense in 2015 included $39.9 million of charges, primarily related to the U.S. pension settlement of $31.9 million and restructuring and acquisition costs of $8.0 million.
Operating Income
Operating income was $130.6 million, or 12.4% of net sales, in 2016 compared to $104.2 million, or 12.0% of net sales, in the prior year. The increase in operating income in the current year was due primarily to higher revenue as well as the factors affecting operating expenses discussed above.
Interest expense was $8.6 million in 2016 compared to $4.1 million in 2015 and is primarily related to the Company’s increased borrowing to fund acquisitions.
Foreign exchange (gain) loss was $0.5 million of loss in 2016 compared to $1.5 million of gain in 2015. The fluctuation in foreign exchange was primarily attributable to changes in the value of the euro, Philippine peso and Chinese renminbi against the U.S. dollar in 2016 and 2015.
Other Expense (Income), Net
Other expense (income), net, consisting of interest income, royalties and non-operating income was $1.7 million of income in 2016 compared to $5.4 million of income in 2015. The year-over-year decrease in income primarily reflects lower interest income in 2016.
Income Taxes
Income tax expense was $18.8 million with an effective tax rate of 15.2% in 2016 compared to income tax expense of $26.1 million with an effective tax rate of 24.4% in 2015. The effective tax rates for these periods are lower than the U.S. statutory tax rate primarily due to income earned in lower tax jurisdictions and, with respect to the 2016 period, a one-time deduction with respect to the stock of one of the Company’s affiliates partially offset by the impact of the impairment of goodwill for which no tax benefit was recorded and taxes on unremitted earnings, and, with respect to the 2015 period, the impact of a pension settlement partially offset by the impact from the restructuring of the legal ownership of the Company’s Mexican manufacturing operations.
Segment Information
The Company reports its operations by the following segments: Electronics, Automotive and Industrial. Segment information is described more fully in Note 12, Segment Information, of the Notes to Consolidated Financial Statements included in this Annual Report.
The following table is a summary of the Company’s net sales by segment:
Electronics Segment
The Electronics segment, which accounted for approximately 51% of total sales in 2016, has produced modest organic revenue growth over the last few years. In 2016, sales increased $129.7 million, or 32%, compared to the prior year, reflecting $110.0 million of sales from businesses acquired in 2016 as well as organic growth in sensor products and to a lesser extent passive and semiconductor products. Operating margins also improved in 2016 compared to 2015 due to better leverage from the higher sales, as well as favorable product and regional mix.
Fourth quarter 2016 sales were unseasonably strong due to higher demand in some markets, along with an earlier than usual Chinese New Year. The book-to-bill ratio of 1.05 at the end of the fourth quarter is primarily due to stronger than normal seasonal trends.
Automotive Segment
The Automotive segment, which accounted for approximately 39% of total sales in 2016, has been the Company’s fastest growing business over the last few years. In 2016, sales increased $75.2 million, or 22%, compared to the prior year, reflecting $60.2 million of incremental sales from businesses acquired in 2016 and the fourth quarter of 2015 as well as organic growth related to sensor and passenger car products. These increases in sales were partially offset by lower sales of legacy commercial vehicle products, reflecting weakness in the North American heavy truck, construction, and agricultural end markets.
The segment realized growth in fuse content which was driven by more sophisticated electronics in vehicles and sales of high-current products, especially the Masterfuse® line. Also contributing to segment performance was the automotive sensor business which experienced strong growth in sales and a significant improvement in margins. Sales in China were strong due to the Chinese government’s tax incentives for smaller cars driving higher growth in the China car industry.
Industrial Segment
The Industrial segment, which accounted for approximately 10% of total sales in 2016, experienced a sales decrease of 14% over the prior year with declines across all businesses. The Company also divested certain non-core product lines during 2016. See Note 2, Acquisitions and Dispositions of the Notes to the Consolidated Financial Statements included in this Annual Report, for additional information. The Company’s power fuse business has benefited from a strong U.S. solar market in recent years; however, this market slowed in the second half of 2016. Sales in the protection relay business continued to be impacted by weakness in the heavy industrial and oil and gas markets, as those customers have restricted their capital spending. In the custom products business, the Company continued to see a decline in the potash market, which has resulted in the aforementioned impairment charge in the third quarter of 2016. It is possible that the Company could recognize impairment charges for the Relays reporting unit if there are declines in profitability or projected future operating results due to changes in volume, market pricing, cost, or the business environment.
Geographic Sales Information
Sales by geography represent sales to customer or distributor locations. The following table is a summary of the Company’s net sales by geography:
Americas
Sales in the Americas increased $9.9 million, or 2%, in 2016 compared to 2015, primarily due to acquisitions and increased demand for Electronics products, partially offset by lower Industrial sales. Electronics sales increased $23.3 million, or 20%, primarily due to acquisitions as well as increased sales for passive and sensor products. Industrial sales decreased $14.0 million, or 13%, resulting from decreases in demand for power fuses, custom products, and relay products.
Europe
European sales increased $47.6 million, or 31%, in 2016 compared to 2015 primarily due to acquisitions and increased demand for Automotive and Electronics products, partially offset by lower Industrial sales. Automotive sales increased $26.8 million, or 27%, in 2016 primarily due to acquisitions and increased sales for sensor products. Electronics sales increased $22.4 million, or 46%, primarily due to acquisitions as well as increased sales for the passive and sensor products. Industrial sales decreased $1.5 million, or 24%, in 2016 primarily from lower sales of fuse and relay products.
Asia-Pacific
Asia-Pacific sales increased $130.8 million, or 42%, in 2016 compared to 2015, primarily due to acquisitions and increased demand for Automotive and Electronics products offset by lower Industrial sales and changes in foreign exchange rates of $5.4 million. Electronics sales increased $84.0 million, or 35%, primarily due to acquisitions as well as increased sales for passive and sensor products partially offset by $2.3 million due to changes in foreign exchange rates. Automotive sales increased $47.8 million, or 72%, primarily due to acquisitions as well as increased sales for passenger car and sensor products, partially offset by $3.3 million of changes in foreign exchange rates. Industrial sales decreased $1.2 million, or 13%.
Liquidity and Capital Resources
Cash and cash equivalents were $429.7 million as of December 30, 2017, an increase of $154.6 million as compared to December 31, 2016.
As of December 30, 2017, $309.5 million of the $429.7 million of the Company’s cash and cash equivalents was held by non-U.S. subsidiaries. Of the $309.5 million, at least $160 million can be repatriated with minimal tax consequences. With respect to the remaining $149.5 million, the Company has recognized deferred tax liabilities of $12.0 million as of December 30, 2017 (including $11.8 million for non-U.S. taxes and $0.2 million for U.S. state taxes) on approximately $118 million of the non-U.S. cash balance because the amounts are not considered to be permanently reinvested. In addition, repatriation of some non-U.S. cash balances is further restricted by local laws. Management regularly evaluates whether non-U.S. earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company and its non-U.S. subsidiaries. Changes in economic and business conditions, tax laws, or the Company’s financial situation could result in changes to these judgments and the need to record additional tax liabilities.
The Company has historically supported its liquidity needs through cash flows from operations. Management expects that the Company’s (i) current level of cash, cash equivalents, and marketable securities, (ii) current and forecasted cash flows from operations, (iii) availability under existing funding arrangements, and (iv) access to capital in the capital markets will provide sufficient funds to support the Company’s operations, capital expenditures, investments, and debt obligations on both a short-term and long-term basis.
Revolving Credit Facility/Term Loan
On March 4, 2016, the Company entered into a five-year credit agreement (“Credit Agreement”) with a group of lenders for up to $700.0 million. The Credit Agreement consisted of an unsecured revolving credit facility (“Revolving Credit Facility”) of $575.0 million and an unsecured term loan credit facility (“Term Loan”) of up to $125.0 million. In addition, the Company had the ability, from time to time, to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $150.0 million, in the aggregate, in each case in minimum increments of $25.0 million, subject to certain conditions and the agreement of participating lenders. For the Term Loan, the Company was required to make quarterly principal payments of $1.6 million through March 31, 2018 and $3.1 million from June 30, 2018 through December 31, 2020 with the remaining balance due on March 4, 2021.
On October 13, 2017, the Company amended the Credit Agreement to increase the Revolving Credit Facility from $575.0 million to $700.0 million and increase the Term Loan from $125.0 million to $200.0 million and to extend the expiration date from March 4, 2021 to October 13, 2022. The Credit Agreement also includes the option for the Company to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $300.0 million, in the aggregate, subject to the satisfaction of certain conditions set forth in the Credit Agreement. Term Loans may be made in up to two advances. The first advance of $125.0 million occurred on October 13, 2017 and the second advance of $75.0 million occurred on January 16, 2018. For the Term Loan, the Company is required to make quarterly principal payments of 1.25% of the original term loan ($1.6 million as of December 30, 2017 increasing to $2.5 million with the second advance on January 16, 2018) through maturity, with the remaining balance due on October 13, 2022
Outstanding borrowings under the Credit Agreement bear interest, at the Company’s option, at either LIBOR, fixed for interest periods of one, two, three or six-month periods, plus 1.00% to 2.00%, or at the bank’s Base Rate, as defined, plus 0.00% to 1.00%, based upon the Company’s Consolidated Leverage Ratio, as defined. The Company is also required to pay commitment fees on unused portions of the credit agreement ranging from 0.15% to 0.25%, based on the Consolidated Leverage Ratio, as defined. The credit agreement includes representations, covenants and events of default that are customary for financing transactions of this nature. The effective interest rate on outstanding borrowings under the credit facility was 3.07% at December 30, 2017.
Senior Notes
On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold €212 million aggregate principal amount of senior notes in two series. The funding date for the Euro denominated senior notes occurred on December 8, 2016 for €117 million in aggregate amount of 1.14% Senior Notes, Series A, due December 8, 2023 (“Euro Senior Notes, Series A due 2023”), and €95 million in aggregate amount of 1.83% Senior Notes, Series B due December 8, 2028 (“Euro Senior Notes, Series B due 2028”) (together, the “Euro Senior Notes”). Interest on the Euro Senior Notes is payable semiannually on June 8 and December 8, commencing June 8, 2017.
On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold $125 million aggregate principal amount of senior notes in two series. On February 15, 2017, $25 million in aggregate principal amount of 3.03% Senior Notes, Series A, due February 15, 2022 (“U.S. Senior Notes, Series A due 2022”), and $100 million in aggregate principal amount of 3.74% Senior Notes, Series B, due February 15, 2027 (“U.S. Senior Notes, Series B due 2027”) (together, the “U.S. Senior Notes due 2022 and 2027”) were funded. Interest on the U.S. Senior Notes due 2022 and 2027 is payable semiannually on February 15 and August 15, commencing August 15, 2017.
On November 15, 2017, the Company entered into a Note Purchase Agreement pursuant to which the Company issued and sold $175 million in aggregate principal amount of senior notes in two series. On January 16, 2018, $50 million aggregate principal amount of 3.48% Senior Notes, Series A, due February 15, 2025 (“U.S. Senior Notes, Series A due 2025”) and $125 million in aggregate principal amount of 3.78% Senior Notes, Series B, due February 15, 2030 (“U.S. Senior Notes, Series A due 2030”) (together the “U.S. Senior Notes due 2025 and 2030” and with the Euro Senior Notes and the U.S. Senior Notes 2022 and 2027, the “Senior Notes”) were funded. Interest on the U.S. Senior Notes due 2025 and 2030 will be payable on February 15 and August 15, commencing on August 15, 2018.
The Company was in compliance with its debt covenants as of December 30, 2017, and expects to remain in compliance based on management’s estimates of operating and financial results for 2017 and the foreseeable future. As of December 30, 2017, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions.
Acquisitions
During the year ended December 30, 2017, the Company paid $38.5 million, net of cash acquired, for the acquisitions of U.S Sensor and Monolith. The Company financed the cash portion of the acquisition with a combination of cash on hand and borrowings under the credit facility.
During the year ended December 31, 2016, the Company paid $417.1 million of total purchase prices, net of cash acquired, for the acquisitions of the ON Portfolio, Menber’s and PolySwitch. The Company financed the cash portion of these acquisitions with a combination of cash on hand and borrowings under the credit facility.
During the year ended January 2, 2016, the Company paid $4.6 million, net of cash acquired, substantially all for the acquisition of Sigmar. The Company financed the cash portion of the acquisition with cash on hand.
Cash Flow Overview
Operating cash inflows are largely attributable to sales of the Company’s products. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities.
The following describes the Company’s cash flows for the twelve months ended December 30, 2017 and December 31, 2016
Cash flows from Operating Activities
Net cash provided by operating activities was $269.2 million for 2017, compared to $180.1 million during 2016. The increase in net cash provided by operating activities was primarily driven by higher earnings, lower cash taxes, reduced acquisition and integration payments and the timing of supplier and customer payments.
Cash flows from Investing Activities
Net cash used in investing activities was $96.1 million for 2017, compared to $511.2 million during 2016. Net cash used for acquisitions of $38.5 million in 2017 related to the acquisition of a majority stake in Monolith for $14.2 million and the acquisition of U.S. Sensor for $24.3 million. Net cash used for acquisitions of $471.1 million for 2016 primarily related to the acquisitions of PolySwitch for $344.5 million, the ON Portfolio for $104.0 million and Menber’s for $19.2 million. Capital expenditures were $65.9 million, representing an increase of $19.7 million compared to 2016.
Cash flows from Financing Activities
Net cash used in financing activities was $24.6 million for 2017 compared to net cash provided by financing activities of $284.2 million for 2016. The Company had $149.4 million of proceeds from the credit facility and senior notes payable and $134.7 million of payments on the term loan and credit facility in 2017 as compared to $718.4 million of proceeds from the credit facility and term loan and $421.2 million of payments on the term loan and credit facility. Additionally, dividends paid increased $3.8 million from $27.9 million in 2016 to $31.7 million for 2017.
The following describes the Company’s cash flows for the twelve months ended December 31, 2016 and January 2, 2016
Cash flows from Operating Activities
Net cash provided by operating activities increased $14.3 million in 2016 compared to 2015. Cash provided by operating activities in 2016 included $104.5 million in net income, $83.0 million in non-cash adjustments (primarily $53.1 million in depreciation and amortization) and $7.4 million of unfavorable changes in operating assets and liabilities.
Changes in operating assets and liabilities (including short-term and long-term items) that negatively impacted cash flows in 2016 consisted of changes in accounts receivable ($25.2 million), accrued taxes ($18.1 million) and prepaid expenses and other ($0.3 million). The increase in accounts receivable reflects increased sales in 2016 compared to the prior year. Positively impacting cash flows were changes in inventory ($8.5 million), accrued expenses including post-retirement ($2.3 million), accounts payable ($19.2 million) and accrued payroll and severance ($6.1 million).
Cash flows from Investing Activities
Net cash used in investing activities increased $467.1 million in 2016 compared to 2015 primarily due to the acquisitions of PolySwitch ($344.5 million, net of cash acquired), the ON portfolio business ($104.0 million), and Menber’s ($19.2 million).
Cash flows from Financing Activities
Net cash provided by financing activities increased $351.9 million in 2016 compared to 2015. The increase was primarily due to an increase in net proceeds from debt of $314.8 million in 2016 compared to 2015. In March the company replaced its credit agreement with a new agreement and in December the company received proceeds from the issuance of senior notes. Also contributing to the increase in comparative periods was the use of cash for the share repurchase in 2015 of $31.3 million. Information regarding the company’s debt is provided in Note 6, Debt, of the Notes to Consolidated Financial Statements included in this Annual Report.
Capital Resources
The Company expends capital to support its operating and strategic plans. Such expenditures include strategic acquisitions, investments to maintain capital assets, develop new products or improve existing products, and to enhance capacity or productivity. Many of the associated projects have long lead-times and require commitments in advance of actual spending.
Share Repurchase Program
The Company’s Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company’s common stock under a program for the period May 1, 2017 to April 30, 2018. The Company did not repurchase any shares of its common stock during fiscal 2017 and the full 1,000,000 shares may yet be purchased under the program as of December 30, 2017.
Contractual Obligations and Commitments
The following table summarizes outstanding contractual obligations and commitments as of December 30, 2017:
(a)
Excludes offsetting issuance costs of $4.9 million. Euro denominated debt amounts are converted based on the Euro to U.S. Dollar spot rate at year end. Excludes funding of $50 million and $125 million from the U.S Senior Notes, Series A due 2025 and U.S. Senior Notes, Series A due 2030, respectively, as these occurred subsequent to December 30, 2017. For more information see Note 6, Debt, of the Notes to the Consolidated Financial Statements.
(b)
Amounts represent estimated contractual interest payments on outstanding debt. Rates in effect as of December 30, 2017 are used for variable rate debt. For more information see Note 6, Debt, of the Notes to the Consolidated Financial Statements.
(c)
For more information see Note 5, Lease Commitments, of the Notes to the Consolidated Financial Statements.
(d)
The Income Tax Obligation represents the current federal and state income tax expense for 2017 including the preliminary estimate of $49 million for the Toll Charge, partially offset by $13 million of foreign tax credits. The Company will elect to pay the 2017 current federal income tax over the eight-year period as prescribed by the Tax Act. For more information see Note 10, Income Taxes, of the Notes to the Consolidated Financial Statements.
(e)
Purchase obligations include commitments for capital expenditures not recognized in the Company’s Consolidated Balance Sheets.
In addition to the above contractual obligations and commitments, the Company had the following obligations at December 30, 2017:
The Company has Company-sponsored defined benefit pension plans covering employees at various non-U.S. subsidiaries including the U.K., Germany, the Philippines, China, Japan, Mexico, Italy and France. At December 30, 2017, the Company had a net unfunded status of $19.1 million. The Company expects to make approximately $1.4 million of contributions to the plans in 2018. For additional information, see Note 8, Benefit Plans, of the Notes to the Consolidated Financial Statements.
The Company has a non-qualified Supplemental Retirement and Savings Plan which provides additional retirement benefits for certain management employees and named executive officers by allowing participants to defer a portion of their annual compensation. As of December 30, 2017, there was $8.0 million of accrued compensation benefits included in Other long-term liabilities. For additional information, see Note 8, Benefit Plans, of the Notes to the Consolidated Financial Statements.
As of December 30, 2017, the Company recognized various accruals related to employee compensation including its annual incentive program that are expected to be paid in 2018.
Due to the uncertainty with respect to the cash outflows, the preceding table excludes unrecognized tax benefits of $7.7 million. The Company does not expect to make significant payments of these liabilities within the next year. For additional information, see Note 10, Income Taxes, of the Notes to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
As of December 30, 2017, the Company did not have any off-balance sheet arrangements, as defined under SEC rules. Specifically, the Company was not liable for guarantees of indebtedness owed by third parties, the Company was not directly liable for the debt of any unconsolidated entity and the Company did not have any retained or contingent interest in assets. The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.
Recent Accounting Pronouncements
Recently issued accounting standards and their estimated effect on the Company’s Consolidated Financial Statements are described in Note 1, Summary of Significant Accounting Policies and Other Information, of the Notes to the Consolidated Financial Statements.
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 commodity prices.
Interest Rates
The Company had $122.5 million in debt outstanding at December 30, 2017 related to the unsecured revolving credit facility and term loan. Because 100% of this debt has variable interest rates, the Company is subject to future interest rate fluctuations in relation to these borrowings which could potentially have a negative impact on cash flows of the Company. A prospective increase of 100 basis points in the interest rate applicable to the Company’s outstanding borrowings under its credit facility would result in an increase of approximately $1.2 million in annual interest expense. The Company is not party to any currency exchange or interest rate protection agreements as of December 30, 2017.
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 the U.S., Mexico, Canada, China, Italy, Lithuania, Japan and the Philippines. During 2017, sales to customers outside the U.S. were approximately 69% of total net sales. During 2016, sales to customers outside the U.S. were approximately 66% 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 renminbi or Taiwanese dollars.
The company’s foreign exchange exposures result primarily from inter-company loans, external borrowings, sale of products in foreign currencies, foreign currency denominated purchases, employee-related and other costs of running operations in foreign countries. The company’s most significant net long exposures are to the Philippine peso and the euro. The company’s most significant net short exposures are to the Chinese renminbi, Mexican peso, and Philippine peso. Changes in foreign exchange rates could affect the company’s sales, costs, balance sheet values and earnings.
At December 30, 2017, the net value of the Company’s assets with exposure to foreign currency risk was approximately $298 million, with the largest exposure being U.S. Dollar denominated inter-company loans with a Philippine peso functional currency subsidiary. The reduction in earnings from a hypothetical instantaneous 10% adverse change in quoted foreign currency spot rates applied to foreign currency sensitive asset instruments would be $30 million at December 30, 2017. At December 30, 2017, the net value of the Company’s liabilities with exposure to foreign currency risk was $204 million, with the largest exposure being U.S. Dollar denominated inter-company loans with a euro functional currency subsidiary. The reduction in earnings from a hypothetical instantaneous 10% adverse change in quoted foreign currency spot rates applied to foreign currency sensitive liability instruments would be $20 million at December 30, 2017. As a result of the mix in currencies impacting the hypothetical 10% changes, the movements in some instruments would offset movements in other instruments reducing the hypothetical exposure to the Company.
Commodity Prices
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, zinc, gold, and silver, where at current prices and volumes, a 10% price change would affect annual pre-tax profit by approximately $3.9 million for copper, $1.5 million for zinc, $0.2 million for gold, $0.8 million for silver, and $0.6 million for tin.
The cost of oil has fluctuated dramatically over the past several years. Consequently, there is a risk that a return to high prices for oil and electricity in 2018 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 may take various actions from time to time to mitigate any negative impacts of these exposures.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Littelfuse, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Littelfuse, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 30, 2017 and December 31, 2016, the related consolidated statements of net income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 30, 2017, and the related notes and schedule (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2017 and December 31, 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 30, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 23, 2018, expressed an unqualified opinion on those financial statements.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2014.
Chicago, Illinois
February 23, 2018
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Littelfuse, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Littelfuse, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 30, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 30, 2017, and our report dated February 23, 2018 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’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 Management’s Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and limitations of internal control over financial reporting
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.
/s/ GRANT THORNTON LLP
Chicago, Illinois
February 23, 2018
CONSOLIDATED BALANCE SHEETS
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF NET INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF EQUITY
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies and Other Information
Nature of Operations
Littelfuse, Inc. and subsidiaries (the “Company”) is a global leader in circuit protection products with advancing platforms in power control and sensor technologies, serving customers in the electronics, automotive, and industrial markets. With a diverse and extensive product portfolio of fuses, semiconductors, polymers, ceramics, relays and sensors, the Company works with its customers to build safer, more reliable and more efficient products for the connected world in virtually every market that uses electrical energy, ranging across consumer electronics, IT and telecommunication applications, industrial electronics, automobiles and other transportation, and heavy industrial applications. The Company has a network of global engineering centers and labs that develop new products and product enhancements, provides customer application support and test products for safety, reliability, and regulatory compliance.
Fiscal Year
References herein to “2017”, “fiscal 2017” or “fiscal year 2017” refer to the fiscal year ended December 30, 2017. References herein to “2016”, “fiscal 2016” or “fiscal year 2016” refer to the fiscal year ended December 31, 2016. References herein to “2015”, “fiscal 2015” or “fiscal year 2015” refer to the fiscal year ended January 2, 2016. The Company operates on a 52-53 week fiscal year (4-4-5 basis) ending on the Saturday closest to December 31. Therefore, the financial results of certain fiscal years and the associated 14 week quarters will not be exactly comparable to the prior and subsequent 52 week fiscal years and the associated quarters having only 13 weeks. As a result of using this convention, each of fiscal 2017 and fiscal 2016 contained 52 weeks whereas fiscal 2015 contained 53 weeks.
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, sales 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 an original maturity of three months or less when purchased, are considered to be cash equivalents.
Short-Term and Long-Term Investments
As of December 30, 2017, the Company had an investment in Polytronics Technology Corporation Ltd. (“Polytronics”). The Company’s Polytronics shares held at the end of fiscal 2017 and 2016 represent approximately 7.2% of total Polytronics shares outstanding. The Polytronics investment is classified as available-for-sale and is carried at fair value with the unrealized gains and losses reported as a component of “Accumulated Other Comprehensive Income (Loss).” The fair value of the Polytronics investment was €9.2 million (approximately $11.0 million) at December 30, 2017 and €10.0 million (approximately $10.4 million) at December 31, 2016. Included in 2017 and 2016, other comprehensive income are unrealized losses of $1.0 million and $0.8 million, respectively, due to changes 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 Company has certain investment securities that are 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. Short-term investments, which are primarily certificates of deposits, are carried at cost which approximates fair value.
The Company has investments related to its non-qualified Supplemental Retirement and Savings Plan. The Company maintains accounts for participants through which participants make investment elections. The investment securities are subject to the claims of the Company’s creditors. The investment securities are all mutual funds with readily determinable fair values and are classified as trading securities. The investment securities are measured at fair value with unrealized gains and losses recognized in earnings. As of December 30, 2017, there was $8.0 million of marketable securities related to the plan included in Other assets on the Consolidated Balance Sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Trade Receivables
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.
Inventories
Inventories are stated at the lower of cost or net realizable value, which approximates current replacement cost. Cost is principally determined using the first-in, first-out method. 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. Leasehold improvements are depreciated over the lesser of their useful life or the lease term. Maintenance and repair costs are charged to expense as incurred. Major overhauls that extend the useful lives of existing assets are capitalized.
Goodwill
The Company annually tests goodwill for impairment on the first day of its fiscal fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
The Company compares each reporting unit’s fair value, estimated based on comparable company market valuations and expected future discounted cash flows to be generated by the reporting unit, to its carrying value. For the seven reporting units with goodwill, the Company compared the estimated fair value of each reporting unit to its carrying value. The results of the goodwill impairment test as of October 1, 2017 indicated that the estimated fair values for each of the seven reporting units exceeded their respective carrying values. As of the most recent annual test conducted on October 1, 2017, the Company noted that the excess of fair value over the carrying value, was 161%, 314%, 247%, 218%, 100%, 25%, and 248% for its reporting units; Electronics (non-silicon), Electronics (silicon), Passenger Car, Commercial Vehicle Products, Sensors, Relays, and Power Fuse, respectively. Relatively small changes in the Company’s key assumptions would not have resulted in any reporting units failing the goodwill impairment test. See Note 4, Goodwill and Other Intangible Assets, for additional information.
The Company also performs an interim review for indicators of impairment each quarter to assess whether an interim impairment review is required for any reporting unit. As part of its interim reviews, management analyzes potential changes in the value of individual reporting units based on each reporting unit’s operating results for the period compared to expected results as of the prior year’s annual impairment test. In addition, management considers how other key assumptions, including discount rates and expected long-term growth rates, used in the last annual impairment test, could be impacted by changes in market conditions and economic events. Based on the interim assessments as of December 30, 2017, management concluded that no events or changes in circumstances indicated that it was more likely than not that the fair value for any reporting unit had declined below its carrying value.
Long-Lived Assets
Customer relationships, 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 five to 17 years. The distribution networks are amortized on either a straight-line or accelerated basis over estimated useful lives that have a range of three to 20 years.
The Company assesses potential impairments to its long-lived assets if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair value based upon the most recent information available. Estimated fair market value is generally measured by discounting estimated future cash flows. Long-lived assets, other than goodwill and other intangible assets, that are held for sale are recorded at the lower of carrying value or the fair market value less the estimated cost to sell.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2016, the Company recognized non-cash impairment charges totaling $6.0 million, of which $2.2 million related to the impairment of certain customer relationship intangible assets in the customs reporting unit within the Industrial segment and $3.8 million related to the impairment of the Custom Products tradename. The impairment of the customer relationship intangible assets resulted from lower expectations of future revenue to be derived from those relationships while the tradename impairment resulted from lower expectations of future cash flows of the customs reporting unit.
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
The Company records annual income and expense amounts relating to its pension and post-retirement benefits plans based on calculations which include various actuarial assumptions including discount rates, expected long-term rates of return and compensation increases. The Company reviews its actuarial assumptions on an annual basis as of the fiscal year-end balance sheet date (or more frequently if a significant event requiring remeasurement occurs) and modifies the assumption based on current rates and trends when it is appropriate to do so. The effects of modifications are recognized immediately on the Consolidated Balance Sheets, but are generally amortized into operating earnings over future periods, with the deferred amount recorded in accumulated other comprehensive income (loss). The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience, market conditions and input from its actuaries and investment advisors.
Revenue Recognition
The Company recognizes revenue on product sales in the period in which the sales process is complete. This generally occurs when persuasive evidence of an arrangement exists, products are shipped (FOB origin) to the customer in accordance with the terms of the sale, the risk of loss has been transferred, collectability 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 and Billing
The Company generally 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 and 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.
Return to Stock
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 collectability 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. Accounts receivable balances that are deemed to be uncollectible, are written off against the reserve on a case-by-case basis. 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 $2.9 million in both 2017 and 2016 and $2.3 million in 2015, respectively, 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 is classified as revenue. Costs incurred for shipping and handling of $10.9 million $9.1 million, and $7.0 million in 2017, 2016, and 2015, respectively, are classified in selling, general, and administrative expenses.
Foreign Currency Translation / Remeasurement
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 gain or loss from remeasurement recognized in the income statement was a loss of $2.4 million in 2017, a loss of $0.5 million in 2016, and a gain of $1.5 million in 2015. Adjustments from the translation process are recognized in “Shareholders’ equity” as a component of “Accumulated other comprehensive income.”
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 operating cash flows. See Note 9, Shareholders’ Equity, for additional information on stock-based compensation.
Coal Mining Liability
Included in other long-term liabilities is an accrual related to former coal mining operations at Littelfuse GmbH (formerly known as Heinrich Industries, AG) for the amounts of €0.9 million ($1.1 million) and €1.4 million ($1.5 million) at December 30, 2017 and December 31, 2016, respectively. Management, in conjunction with an independent third-party, performs an annual evaluation of the former coal mining operations in order to develop an estimate of the probable future obligations in regard to remediating the dangers (such as a shaft collapse) of abandoned coal mine shafts in the former coal mining operations. Management accrues for costs associated with such remediation efforts based on management's best estimate when such costs are probable and reasonably able to be estimated. The ultimate determination can only be done after respective investigations because the concrete conditions are mostly unknown at this time. The accrual is not discounted as management cannot reasonably estimate when such remediation efforts will take place.
Other Expense (Income), Net
Other expense (income), net generally consists of interest income, royalties, and non-operating income.
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 enacted 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. U.S. state and non-U.S. income taxes are provided on the portion of non-U.S. income that is expected to be remitted to the U.S. and be taxable (and non-U.S. income taxes are provided on the portion of non-U.S. income that is expected to be remitted to an upper-tier non-U.S. entity). Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred U.S. income taxes and non-U.S. taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in those non-U.S. subsidiaries for which such excess is considered to be permanently reinvested in those operations. Management regularly evaluates whether non-U.S. earnings are expected to be permanently reinvested. This evaluation requires judgment about the future operating and liquidity needs of the Company’s foreign subsidiaries. Changes in economic and business conditions, non-U.S. or U.S. tax laws, or the Company’s financial situation could result in changes to these judgments and the need to record additional tax liabilities.
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 50% likelihood of being realized upon ultimate settlement.
On December 22, 2017, the U.S. enacted legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). Among other things, the Tax Act reduces the U.S. corporate federal income tax rate from 35% to 21%, adds base broadening provisions which limit deductions and address excessive international tax planning, imposes a one-time tax (the “Toll Charge”) on accumulated earnings of certain non-U.S. subsidiaries and enables repatriation of earnings of non-U.S. subsidiaries free of U.S. federal income tax. Other than the Toll Charge (which is applicable to the Company for 2017), the provisions will generally be applicable to the Company in 2018 and beyond.
In accordance with the guidance provided in SEC Staff Accounting Bulletin (“SAB”) No. 118, in the fourth quarter of 2017 the Company recorded a charge of $47 million as a provisional reasonable estimate of the impact of the Tax Act, including $49 million for the Toll Charge net of $2 million for other net tax benefits. The Company is continuing to analyze the Tax Act and plans to finalize the estimate within the measurement period outlined in SAB No.118. The final charge may differ from the provisional reasonable estimate if provisions of the Tax Act, and their interaction with other provisions of the U.S. Internal Revenue Code, are interpreted differently than interpretations made by the Company in determining the estimate, whether through issuance of administrative guidance, or through further review of the Tax Act by the Company and its advisors. Aside from these interpretation issues, the final charge may differ from the provisional reasonable estimate due to refinements of accumulated non-U.S. earnings and tax pool data.
One of the base broadening provisions of the Tax Act is commonly referred to as the global intangible low-taxed income “GILTI” provisions. In accordance with guidance issued by the FASB staff, the Company has not adopted an accounting policy for GILTI. Thus, the U.S. balance sheet tax accounts, notably deferred taxes, were computed without consideration of the possible future impact of the GILTI provisions. The Company intends to adopt an accounting policy for GILTI within the measurement period outlined in SAB 118.
Fair Value Measurements
Certain assets and liabilities are required to be recorded at fair value on a recurring basis. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company records the fair value of its available-for-sale securities and pension plan assets on a recurring basis. Assets measured at fair value on a nonrecurring basis include long-lived assets held and used, long-lived assets held for sale, goodwill and other intangible assets. The fair value of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The three-tier value hierarchy, which prioritizes valuation methodologies based on the reliability of the inputs, is:
Level 1 - Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2 - Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.
Reclassifications
Certain reclassifications of prior year amounts for Trade receivables, net and Prepaid expenses and other current assets were made to conform to the 2017 presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Adopted Accounting Standards
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-11 - “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which simplifies the measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. The update is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted the new standard on January 1, 2017. The adoption of the update did not have a material impact on the Company’s consolidated financial position and results of operations. As a result of the adoption of the update, inventories are stated at the lower of cost or net realizable value. Cost is principally determined using the first-in, first-out method. The Company maintains 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.
In March 2016, the FASB issued ASU No. 2016-09 - “Improvements to Employee Share-Based Payment Accounting,” which amends ASC 718, “Compensation - Stock Compensation.” The update simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the Consolidated Statements of Cash Flows. The update is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted the new standard on January 1, 2017. As a result of the adoption, on a prospective basis, the Company recognized $2.0 million of excess tax benefits from stock-based compensation as a discrete item in income tax expense for the year ended December 30, 2017. Historically, these amounts were recorded as additional paid-in capital. The Company also elected to apply the change prospectively to the Consolidated Statements of Cash Flows. As a result, on a prospective basis, share-based payments will be reported as operating activities in the Consolidated Statements of Cash Flows. The Company elected not to change its policy on accounting for forfeitures and will continue to estimate a requisite forfeiture rate. Additional amendments to the accounting for income taxes and minimum statutory withholding requirements had no impact on the results of operations.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other” (Topic 350). This ASU modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because the update will eliminate Step 2 from the goodwill impairment test, it should reduce the cost and complexity of evaluating goodwill for impairment. This ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020, with early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The ASU did not impact the Company in 2017.
Recently Issued Accounting Standards
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes” (Topic 740). This ASU update requires entities to recognize the income tax consequences of many intercompany asset transfers at the transaction date. The seller and buyer will immediately recognize the current and deferred income tax consequences of an intercompany transfer of an asset other than inventory. The tax consequences were previously deferred. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Adoption will require a modified retrospective transition, and is not expected to have a material impact.
In March 2016, the FASB issued ASU No. 2016-09 - “Improvements to Employee Share-Based Payment Accounting,” which amends ASC 718, “Compensation - Stock Compensation.” The update simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the Consolidated Statements of Cash Flows. The update is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted the new standard on January 1, 2017. As a result of the adoption, on a prospective basis, the Company recognized $2.0 million of excess tax benefits from stock-based compensation as a discrete item in income tax expense for the year ended December 30, 2017. Historically, these amounts were recorded as additional paid-in capital. The Company also elected to apply the change prospectively to the Consolidated Statements of Cash Flows. As a result, on a prospective basis, share-based payments will be reported as operating activities in the Consolidated Statements of Cash Flows. The Company elected not to change its policy on accounting for forfeitures and will continue to estimate a requisite forfeiture rate. Additional amendments to the accounting for income taxes and minimum statutory withholding requirements had no impact on the results of operations.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Recognition and Measurement of Financial Assets and Financial Liabilities” which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The ASU will require the Company to recognize any changes in the fair value of certain equity investments in net income. These changes are currently recognized in other comprehensive income ("OCI"). This guidance is effective for interim and fiscal years beginning after December 15, 2017.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Adoption will require a modified retrospective transition, and the Company plans to adopt the standard in the first quarter of 2019. The Company is currently evaluating the impact of ASU 2016-02.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition.” This ASU provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. In August, 2015, the FASB issued ASU No. 2015-14, which postponed the effective date of ASU No. 2014-09 to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016. The Company is in the process of finalizing its assessment and the documentation of its evaluation of the new standard. The majority of the Company’s revenue arrangements generally consist of a single performance obligation to transfer promised finished goods. Based on the Company’s evaluation process completed and review of its contracts with customers, the timing and amount of revenue recognized based on ASU 2015-14 is consistent with its revenue recognition policy under previous guidance. The Company adopted the new standard effective December 31, 2017, using the modified retrospective approach, and will expand its consolidated financial statement disclosures in order to comply with the ASU. The Company has determined the adoption of ASU 2015-14 will not have a material impact on its results of operations, cash flows, or financial position.
2. Acquisitions and Dispositions
The Company accounts for acquisitions using the acquisition method in accordance with ASC 805, “Business Combinations,” in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition. The operating results of the acquired business are included in the Company’s Consolidated Financial Statements from the date of the acquisition.
Subsequent Event
IXYS Corporation
On January 17, 2018, the Company acquired IXYS Corporation (“IXYS”), a global pioneer in the power semiconductor and integrated circuit markets with a focus on medium to high voltage power control semiconductors across the industrial, communications, consumer and medical markets. IXYS has a broad customer base, serving more than 3,500 customers through its direct sales force and global distribution partners. The acquisition of IXYS is expected to accelerate the Company’s growth across the power control market driven by IXYS’s extensive power semiconductor portfolio and technology expertise. With IXYS, the Company will be able to diversify and expand its presence within industrial electronics markets, leveraging the strong IXYS industrial OEM customer base. The Company also expects to increase long-term penetration of its power semiconductor portfolio in automotive markets, expanding its global content per vehicle.
The Company has commenced the determination of the purchase price allocation. Upon completion of the acquisition, at IXYS stockholders’ election and subject to proration, each share of IXYS common stock, par value $0.01 per share, owned immediately prior to the effective time were cancelled and extinguished and automatically converted into the right to receive: (i) $23.00 in cash (subject to applicable withholding tax), without interest (referred to as the cash consideration), or (ii) 0.1265 of a share of common stock, par value $0.01 per share, of Littelfuse (referred to as the stock consideration and together with the cash consideration, the merger consideration). IXYS stockholders received cash in lieu of any fractional shares of Littelfuse common stock that the IXYS stockholders would otherwise have been entitled to receive. Additionally, each outstanding option to purchase shares of IXYS common stock granted under an IXYS equity plan were assumed by Littelfuse and converted into an option to acquire (i) a number of shares of Littelfuse common stock equal to the number of shares of IXYS common stock subject to such option immediately prior to the effective time multiplied by 0.1265, rounded down to the nearest whole share, with (ii) an exercise price per share of Littelfuse common stock equal to the exercise price of such IXYS stock option immediately prior to the effective time divided by 0.1265, rounded up to the nearest whole cent.
Based on the $207.5 per share opening price of Littelfuse common stock on January 17, 2018, the consideration IXYS stockholders received in exchange of their IXYS common stock in the acquisition had a value of approximately $814.8 million comprised of $380.5 million of cash and $434.2 million of Littelfuse stock. In addition to the consideration transferred related to IXYS common stock, the value of consideration transferred, and included in the purchase price, related to IXYS stock options that were converted to Littelfuse stock options, or cash settled, had a value of approximately $41.7 million. As a result, total consideration is valued at approximately $856.5 million. The Company is in the process of estimating the purchase price allocation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2017 Acquisitions
U.S. Sensor
On July 7, 2017, the Company acquired the assets of U.S. Sensor Corporation (“U.S. Sensor”). The acquisition purchase price of $24.3 million, net of the finalization of an income tax gross up which was settled in the fourth quarter of 2017, was funded with available cash. The acquired business expands the Company’s existing sensor portfolio in several key electronics and industrial end markets. U.S. Sensor manufactures a variety of high quality negative temperature coefficient thermistors as well as thermistor probes and assemblies. Product lines also include thin film platinum resistance temperature detectors (“RTDs”) and RTD assemblies.
The following table summarizes the purchase price allocation of the fair value of assets acquired and liabilities assumed in the U.S. Sensor acquisition:
Included in U.S. Sensor’s current assets, net was approximately $1.5 million of receivables. All U.S. Sensor goodwill, other assets and liabilities were recorded in the Electronics segment and reflected in the United States geographic area. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining U.S. Sensor’s products and technology with the Company’s existing electronics product portfolio. Goodwill for the above acquisition is expected to be deductible for tax purposes.
As required by purchase accounting rules, the Company recorded a $1.6 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up was amortized as a non-cash charge to cost of goods sold during the third quarter of 2017, as the acquired inventory was sold, and reflected as other non-segment costs.
Monolith
In December 2015, the Company invested $3.5 million in the preferred stock of Monolith Semiconductor Inc. (“Monolith”), a U.S. start-up Company developing silicon carbide technology, which represented approximately 12% of the common stock of Monolith on an as-converted basis. The Company accounted for its investment in Monolith under the cost method with any changes in value recorded in other comprehensive income. The value of the Monolith investment was $3.5 million at December 31, 2016.
On February 28, 2017, pursuant to a Securities Purchase Agreement between the Company and the stockholders of Monolith and conditioned on Monolith achieving a product development milestone and other provisions, the Company acquired approximately 62% of the outstanding common stock of Monolith for $15 million. The Securities Purchase Agreement includes provisions whereby the Company will acquire the remaining outstanding stock of Monolith (“non-controlling interest”) at a time or times based on Monolith meeting certain technical and sales targets. Consideration for the additional investment(s) will range from $1.0 million to $10 million and will be paid no later than June 30, 2019.
The additional investment resulted in the Company gaining control of Monolith and was accounted for as a step-acquisition with the fair value of the original investment immediately before the acquisition estimated to be approximately $3.5 million. As the fair value of the investment immediately prior to the transaction equaled the carrying value, there was no impact on the Company’s Consolidated Statements of Net Income. As the Securities Purchase Agreement includes an obligation of the Company to mandatorily redeem the non-controlling interest for cash, the fair value of the non-controlling interest was recognized as a liability on the Company’s Consolidated Balance Sheets. Changes in the fair value of the non-controlling interest are recognized in the Company’s Consolidated Statements of Net Income.
Commencing March 1, 2017, Monolith was reflected as a consolidated subsidiary within the Company’s Consolidated Financial Statements. Had the acquisition occurred as of January 1, 2017, the impact on the Company’s consolidated results of operations would not have been material.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the purchase price allocation of the fair value of assets acquired and liabilities assumed in the Monolith acquisition:
Included in Monolith’s current assets, net was approximately $0.7 million of receivables. All Monolith goodwill, other assets and liabilities were recorded in the Electronics segment and reflected in the United States geographic area. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining Monolith’s products and technology with the Company’s existing electronics product portfolio. Goodwill for the above acquisition is not expected to be deductible for tax purposes.
2016 Acquisitions
ON Portfolio
On August 29, 2016, the Company acquired certain assets of select businesses (the “ON Portfolio”) of ON Semiconductor Corporation for $104.0 million. The Company funded the acquisition with available cash and proceeds from its credit facility. The acquired business, which is included in the Electronics segment, consists of a product portfolio that includes transient voltage suppression (“TVS”) diodes, switching thyristors and insulated gate bipolar transistors (“IGBTs”) for automotive ignition applications. The acquisition expands the Company’s offerings in power semiconductor applications as well as increases its presence in the automotive electronics market. The ON Portfolio products have strong synergies with the Company’s existing circuit protection business and will strengthen its channel partnerships and customer engagement.
The following table summarizes the purchase price allocation of the fair value of assets acquired and liabilities assumed in the ON Portfolio acquisition:
All the ON Portfolio business goodwill and other assets were recorded in the Electronics segment and are reflected in the Americas and Europe geographic areas. The customer relationships are being amortized over 13.5 years. The patented and unpatented technologies are being amortized over 6-8.5 years. The non-compete agreement is being amortized over 4 years. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining the ON Portfolio products with the Company’s existing power semiconductor product portfolio. $7.3 million of goodwill for the above acquisition is expected to be deductible for tax purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As required by purchase accounting rules, the Company recorded a $0.7 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. All of the step-up was amortized as a non-cash charge to cost of goods sold during 2016, as the acquired inventory was sold, and reflected as other non-segment costs.
Included in the Company’s Consolidated Statements of Net Income for the year ended December 31, 2016 are net sales of approximately $21.8 million since the August 29, 2016 acquisition of the ON Portfolio business.
Menber’s
On April 4, 2016, the Company completed the acquisition of Menber’s S.p.A. (“Menber’s”) headquartered in Legnago, Italy for $19.2 million, net of acquired cash and after settlement of a working capital adjustment. The Company funded the acquisition with cash on hand and borrowings under the Company’s revolving credit facility. The acquired business is part of the Company's commercial vehicle product business within the Automotive segment and specializes in the design, manufacturing, and selling of manual and electrical high current switches and trailer connectors for commercial vehicles. The acquisition expands the Company’s commercial vehicle products business globally.
The following table summarizes the preliminary purchase price allocation of the fair value of assets acquired and liabilities assumed in the Menber’s acquisition:
All Menber’s goodwill and other assets and liabilities were recorded in the Automotive segment and reflected in the Europe geographic area. The customer relationships are being amortized over 10 years. The patented and unpatented technologies are being amortized over 5 years. The trademarks and tradenames are being amortized over 10 years. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining Menber’s products with the Company’s existing automotive product portfolio. Goodwill for the above acquisition is not expected to be deductible for tax purposes.
As required by purchase accounting rules, the Company recorded a $0.2 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up was amortized as a non-cash charge to cost of goods sold during 2016, as the acquired inventory was sold, with the charge reflected as other non-segment costs.
Included in the Company’s Consolidated Statements of Net Income for the year ended December 31, 2016 are net sales of approximately $17.3 million since the April 4, 2016 acquisition of Menber’s.
PolySwitch
On March 25, 2016, the Company acquired 100% of the circuit protection business (“PolySwitch”) of TE Connectivity Ltd. for $348.3 million, net of acquired cash and after settlement of certain post-closing adjustments. The Company funded the acquisition with available cash on hand and borrowings under the Company’s revolving credit facility. The PolySwitch business, which is split between the Automotive and Electronics segments, has a leading position in polymer based resettable circuit protection devices, with a strong global presence in the automotive, battery, industrial, communications and mobile computing markets. PolySwitch has manufacturing facilities in Shanghai and Kunshan, China and Tsukuba, Japan. The acquisition allows the Company to strengthen its global circuit protection product portfolio, as well as strengthen its presence in the automotive electronics and battery end markets. The acquisition also significantly increases the Company’s presence in Japan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the purchase price allocation of the fair value of assets acquired and liabilities assumed in the PolySwitch acquisition:
All PolySwitch goodwill and other assets and liabilities were recorded in the Electronics and Automotive segments and reflected in all geographic areas. The customer relationships are being amortized over 15 years. The patented and unpatented technologies are being amortized over 10 years. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining PolySwitch products with the Company’s existing automotive and electronics product portfolio. $103.8 million and $61.3 million of the goodwill for the above acquisition has been assigned to the Electronics and Automotive segments, respectively, with $64.9 million expected to be deductible for tax purposes.
As required by purchase accounting rules, the Company recorded a $6.9 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up was amortized as a non-cash charge to cost of goods sold during the second quarter of 2016, as the acquired inventory was sold, and reflected as other non-segment costs.
Included in the Company’s Consolidated Statements of Net Income for the year ended December 31, 2016 are net sales of approximately $126.5 million since the March 25, 2016 acquisition of PolySwitch.
2016 Dispositions
During the first quarter of 2016, the Company sold its tangible and intangible assets relating to a marine product line that it acquired as part of its acquisition of Selco A/S in 2011. In connection with this sale, the Company recorded a loss on sale of the product line of $1.4 million reflected within selling, general, and administrative expenses for the year ended December 31, 2016. This loss was recognized as an “other” charge for segment reporting purposes.
2015 Acquisitions
Sigmar S.r.l
On October 1, 2015, the Company acquired 100% of Sigmar S.r.l. (“Sigmar”). The total purchase price for Sigmar was $6.5 million, net of cash acquired and including estimated additional net payments of up to $0.9 million, a portion of which is subject to the achievement of certain milestones.
Located in Ozegna, Italy, Sigmar is a leading global manufacturer of water-in-fuel sensors and also manufactures selective catalytic reduction (“SCR”) quality sensors and diesel fuel heaters for automotive and commercial vehicle applications. The acquisition further expanded the Company’s automotive sensor product line offerings within its Automotive segment. The Company funded the acquisition with available cash.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the purchase price allocation of the fair value of assets acquired and liabilities assumed in the Sigmar acquisition:
All Sigmar goodwill and other assets and liabilities were recorded in the Automotive segment and reflected in the Europe geographic area. The patents are being amortized over 10 years. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining Sigmar’s products with the Company’s existing automotive product offerings. Goodwill for the above acquisition is not expected to be deductible for tax purposes.
Pro Forma Results
The following table summarizes, on a pro forma basis, the combined results of operations of the Company and the acquired PolySwitch and the ON Portfolio businesses as though the acquisitions had occurred as of December 28, 2014. The Company has not included pro forma results of operations for Menber’s or Sigmar as these results were not material to the Company. The pro forma amounts presented are not necessarily indicative of either the actual consolidated results had the PolySwitch or ON Portfolio acquisitions occurred as of December 28, 2014 or of future consolidated operating results.
Pro forma results presented above primarily reflect: (i) incremental depreciation relating to fair value adjustments to property, plant, and equipment; (ii) amortization adjustments relating to fair value estimates of intangible assets; (iii) incremental interest expense on assumed indebtedness; and (iv) additional cost of goods sold relating to the capitalization of gross profit as part of purchase accounting recognized for purposes of the pro forma as if it was recognized during the Company’s first quarter of 2015. Pro forma adjustments described above have been tax affected using the Company's effective rate during the respective periods.
The historical PolySwitch and ON Portfolio business results for the years ended December 31, 2016 and January 2, 2016 do not include a provision for income taxes. Income tax expense for the historical PolySwitch business was only provided at the end of the business’s fiscal year ended September 25, 2015. Income tax expense for the historical ON Portfolio business was not provided on a standalone basis.
3. Inventories
The components of inventories at December 30, 2017 and December 31, 2016 are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Goodwill and Other Intangible Assets
The amounts for goodwill and changes in the carrying value by segment are as follows:
(a)
The 2016 additions resulted primarily from the acquisitions of PolySwitch, ON and Menber’s.
(b)
The 2016 impairments in the Industrial segment was due to the $8.8 million impairment of Custom Products reporting unit goodwill.
(c)
Adjustments in 2016 reflect the impact of changes in foreign exchange rates.
(d)
The 2017 additions resulted from the acquisitions of U.S. Sensor and Monolith.
(e) Adjustments in 2017 reflect adjustments to reclass goodwill by segment as well as the impact of changes in foreign exchange rates. The impact of the reclassification was an increase in goodwill to the Electronics segment of $21.6 million and a decrease of goodwill of $16.8 million and $4.8 million to the Automotive segment and the Industrial segment, respectively.
Due to negative events in the potash market in 2016, management revisited its long-term projections and conducted a step one goodwill impairment analysis for its Custom Products reporting unit in the third quarter of 2016. The reporting unit failed the step one test and management conducted a step two analysis. The fair value of the unit was estimated using the expected present value of future cash flows over a seven-year forecast period and appraisal of certain assets. As a result, the Company recognized a charge for goodwill impairment of $8.8 million as it wrote off the entire goodwill balance.
The components of other intangible assets at December 30, 2017 and December 31, 2016 are as follows:
During the year ended December 31, 2016, the Company recognized non-cash impairment charges totaling $6.0 million, of which $2.2 million related to the impairment of certain customer relationship intangible assets in the Custom Products reporting unit within the Industrial segment and $3.8 million related to the impairment of the Custom Products tradename. The impairment of the customer relationship intangible assets resulted from lower expectations of future revenue to be derived from those relationships while the tradename impairment resulted from lower expectations of future cash flows of the Custom Products reporting unit.
During the years ended December 30, 2017 and December 31, 2016, the Company recorded additions to other intangible assets of $11.0 million and $144.4 million, respectively, for acquisitions during those years, the components of which were as follows:
For intangible assets with definite lives, the Company recorded amortization expense of $24.7 million, $19.3 million, and $11.9 million in 2017, 2016, and 2015, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated amortization expense related to intangible assets with definite lives at December 30, 2017 is as follows:
5. 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 $11.6 million, $12.6 million, and $11.1 million in 2017, 2016, and 2015, respectively.
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 December 30, 2017, all operating leases outstanding were with third parties. The Company did not have any capital leases as of December 30, 2017.
Future minimum payments for all non-cancellable operating leases with initial terms of one year or more at December 30, 2017 are as follows:
6. Debt
The carrying amounts of debt at December 30, 2017 and December 31, 2016 are as follows:
Revolving Credit Facility / Term Loan
On March 4, 2016, the Company entered into a five-year credit agreement (“Credit Agreement”) with a group of lenders for up to $700.0 million. The Credit Agreement consisted of an unsecured revolving credit facility (“Revolving Credit Facility”) of $575.0 million and an unsecured term loan credit facility (“Term Loan”) of up to $125.0 million. In addition, the Company had the ability, from time to time, to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $150.0 million, in the aggregate, in each case in minimum increments of $25.0 million, subject to certain conditions and the agreement of participating lenders. For the Term Loan, the Company was required to make quarterly principal payments of $1.6 million through March 31, 2018 and $3.1 million from June 30, 2018 through December 31, 2020 with the remaining balance due on March 4, 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 13, 2017, the Company amended the Credit Agreement to increase the Revolving Credit Facility from $575.0 million to $700.0 million and increase the Term Loan from $125.0 million to $200.0 million and to extend the expiration date from March 4, 2021 to October 13, 2022. The Credit Agreement also includes the option for the Company to increase the size of the Revolving Credit Facility and the Term Loan by up to an additional $300.0 million, in the aggregate, subject to the satisfaction of certain conditions set forth in the Credit Agreement. Term Loans may be made in up to two advances. The first advance of $125.0 million occurred on October 13, 2017 and the second advance of $75.0 million occurred on January 16, 2018. For the Term Loan, the Company is required to make quarterly principal payments of 1.25% of the original term loan ($1.6 million as of December 30, 2017 increasing to $2.5 million with the second advance on January 16, 2018) through maturity, with the remaining balance due on October 13, 2022.
Outstanding borrowings under the Credit Agreement bear interest, at the Company’s option, at either LIBOR, fixed for interest periods of one, two, three or six-month periods, plus 1.00% to 2.00%, or at the bank’s Base Rate, as defined, plus 0.00% to 1.00%, based upon the Company’s Consolidated Leverage Ratio, as defined. The Company is also required to pay commitment fees on unused portions of the credit agreement ranging from 0.15% to 0.25%, based on the Consolidated Leverage Ratio, as defined. The credit agreement includes representations, covenants and events of default that are customary for financing transactions of this nature. The effective interest rate on outstanding borrowings under the credit facility was 3.07% at December 30, 2017.
As of December 30, 2017, the Company had $0.1 million outstanding in letters of credit and had available $699.9 million of borrowing capacity under the Revolving Credit Facility. At December 30, 2017, the Company was in compliance with all covenants under the Credit Agreement.
Senior Notes
On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold €212 million aggregate principal amount of senior notes in two series. The funding date for the Euro denominated senior notes occurred on December 8, 2016 for €117 million in aggregate amount of 1.14% Senior Notes, Series A, due December 8, 2023 (“Euro Senior Notes, Series A due 2023”), and €95 million in aggregate amount of 1.83% Senior Notes, Series B due December 8, 2028 (“Euro Senior Notes, Series B due 2028”) (together, the “Euro Senior Notes”). Interest on the Euro Senior Notes is payable semiannually on June 8 and December 8, commencing June 8, 2017.
On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold $125 million aggregate principal amount of senior notes in two series. On February 15, 2017, $25 million in aggregate principal amount of 3.03% Senior Notes, Series A, due February 15, 2022 (“U.S. Senior Notes, Series A due 2022”), and $100 million in aggregate principal amount of 3.74% Senior Notes, Series B, due February 15, 2027 (“U.S. Senior Notes, Series B due 2027”) (together, the “U.S. Senior Notes due 2022 and 2027”) were funded. Interest on the U.S. Senior Notes due 2022 and 2027 is payable semiannually on February 15 and August 15, commencing August 15, 2017.
On November 15, 2017, the Company entered into a Note Purchase Agreement pursuant to which the Company issued and sold $175 million in aggregate principal amount of senior notes in two series. On January 16, 2018, $50 million aggregate principal amount of 3.48% Senior Notes, Series A, due February 15, 2025 (“U.S. Senior Notes, Series A due 2025”) and $125 million in aggregate principal amount of 3.78% Senior Notes, Series B, due February 15, 2030 (“U.S. Senior Notes, Series A due 2030”) (together the “U.S. Senior Notes due 2025 and 2030” and with the Euro Senior Notes and the U.S. Senior Notes 2022 and 2027, the “Senior Notes”) were funded. Interest on the U.S. Senior Notes due 2025 and 2030 will be payable on February 15 and August 15, commencing on August 15, 2018.
The Senior Notes have not been registered under the Securities Act, or applicable state securities laws. The Senior Notes are general unsecured senior obligations and rank equal in right of payment with all existing and future unsecured unsubordinated indebtedness of the Company.
The Senior Notes are subject to certain customary covenants, including limitations on the Company’s ability, with certain exceptions, to engage in mergers, consolidations, asset sales and transactions with affiliates, to engage in any business that would substantially change the general business of the Company, and to incur liens. In addition, the Company is required to satisfy certain financial covenants and tests relating to, among other matters, interest coverage and leverage. At December 30, 2017, the Company was in compliance with all covenants under the Senior Notes.
The Company may redeem the Senior Notes upon the satisfaction of certain conditions and the payment of a make-whole amount to noteholders, and are required to offer to repurchase the Senior Notes at par following certain events, including a change of control.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Issuance Costs
The Company incurred debt issuance costs of $1.6 million in relation to the Credit Agreement which, along with the remaining balance of debt issuance costs of the previous credit facility, are being amortized over the life of the Credit Agreement. The Company additionally incurred aggregate debt issuance costs of $2.6 million in relation to the Senior Notes which are being amortized over the respective lives of the Series A and B notes.
Entrusted Loan
During 2014, the Company entered into an entrusted loan arrangement (“Entrusted Loan”) of Chinese renminbi 110.0 million (approximately U.S. $17.9 million) between two of its China legal entities, Littelfuse Semiconductor (“Wuxi”) Company (the “lender”) and Suzhou Littelfuse OVS Ltd. (the “borrower”), utilizing Bank of America, N.A., Shanghai Branch as agent. Direct borrowing and lending between two commonly owned commercial entities was strictly forbidden at the time under China’s regulations requiring the use of a third-party agent to enable loans between Chinese legal entities. As a result, the Entrusted Loan is reflected as both a long-term asset and long-term debt on the Company’s Consolidated Balance Sheets and is reflected in the investing and financing activities in its Consolidated Statements of Cash Flows. Interest expense and interest income will be recorded between the lender and borrower with no net impact on the Company’s Consolidated Statements of Income since the amounts will be offsetting. The loan interest rate per annum is 5.25%. The Entrusted Loan is used to finance the operation and working capital needs of the borrower and matures in November 2019. The balance of the Entrusted Loan was paid off as of September 30, 2017.
Interest paid on all Company debt was approximately $13.4 million, $8.6 million, and $4.1 million in 2017, 2016, and 2015, respectively.
Debt Maturities
Scheduled maturities of the Company’s long-term debt for each of the five years succeeding December 30, 2017 and thereafter are summarized as follows:
7. Fair Value of Assets and Liabilities
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, the Company classifies each fair value measurement as follows:
Level 1-Valuations based on unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2-Valuations based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and
Level 3-Valuations based upon one or more significant unobservable inputs.
Following is a description of the valuation methodologies used for instruments measured at fair value and their classification in the valuation hierarchy.
Investments
Investments in equity securities listed on a national market or exchange are valued at the last sales price and classified within Level 1 of the valuation hierarchy. Such securities are further detailed in Note 1, Summary of Significant Accounting Policies and Other Information.
Defined Benefit Plan Assets / Non-qualified Supplemental Retirement and Savings Plan Investments
See Note 8, Benefit Plans for description of valuation methodologies and investment balances for defined benefit plan assets and investments related to the Company’s Non-Qualified Supplemental Retirement and Savings Plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents assets measured at fair value by classification within the fair value hierarchy as of December 30, 2017:
The following table presents assets measured at fair value by classification within the fair value hierarchy as of December 31, 2016:
There were no changes during 2017 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of December 30, 2017 and December 31, 2016, the Company held no non-financial assets or liabilities that are required to be measured at fair value on a recurring basis.
In addition to the methods and assumptions used for the financial instruments recorded at fair value as discussed above, the following methods and assumptions are used to estimate the fair value of other financial instruments that are not marked to market on a recurring basis. The Company’s other financial instruments include cash and cash equivalents, short-term investments, accounts receivable and its long-term debt. Due to their short-term maturity, the carrying amounts of cash and cash equivalents, short-term investments and accounts receivable approximate their fair values. The Company’s revolving and term loan debt facilities’ fair values approximate book value at December 30, 2017 and December 31, 2016, as the rates on these borrowings are variable in nature.
The carrying value and estimated fair values of the Company’s Euro Senior Notes, Series A and Series B and U.S. Senior Notes, Series A and Series B, as of December 30, 2017 and December 31, 2016 were as follows:
The fair value as of the measurement date, net book value as of the end of the year and related impairment charge for assets measured at fair value on a nonrecurring basis subsequent to initial recognition during the years ended December 31, 2016 were as follows:
During the year ended December 31, 2016, the goodwill related to the Custom Products reporting unit was written down to its implied fair value of zero. In addition, the company recorded a $6.0 million impairment charge, including $3.8 million related to the Custom Products trade name and $2.2 million for the customer relationship intangible assets. After recording the impairment charges, there was no remaining value related to the customer relationship intangible assets while $0.7 million remaining net book value related to the tradename.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The company’s accounting and finance management determines the valuation policies and procedures for Level 3 fair value measurements and is responsible for the development and determination of unobservable inputs. The following table presents the fair value, valuation techniques and related unobservable inputs for these Level 3 measurements for the year ended December 31, 2016:
8. Benefit Plans
The Company has Company-sponsored defined benefit pension plans covering employees in the U.K., Germany, the Philippines, China, Japan, Mexico, Italy and France. The amount of the retirement benefits provided under the plans is based on years of service and final average pay.
PolySwitch Acquisition
During 2016, as a result of the PolySwitch acquisition, past service liabilities were assumed by the Company in mainland China, France, Germany, Japan, Mexico, and Taiwan (China), together with a small amount of plan assets in Taiwan (China).
Littelfuse Inc. Retirement Plan Termination
The company received approval from the IRS on April 14, 2015 on its Application for Determination for Terminating Plan to terminate the U.S. defined benefit pension plan, the Littelfuse Inc. Retirement Plan, effective July 30, 2014. All plan liabilities were settled (either via lump sum payout or purchase of a group annuity contract) in the third quarter of 2015. A cash contribution of $9.1 million was made to the U.S. defined benefit plan’s trust in the third quarter of 2015 to fully fund the plan on a buyout basis, and the eventual settlement of the plan’s liabilities triggered a settlement charge of $30.2 million in the third quarter of 2015. In the fourth quarter of 2015 there was an adjustment to the price of the annuity contract which resulted in a refund of premium to the company of $0.3 million. This refund of premium, effectively a re-measurement gain, was recognized in the fourth quarter of 2015 as a dollar-for-dollar adjustment to the $30.2 million earnings charge recognized in the third quarter of 2015, resulting in a final settlement loss of $29.9 million for the fiscal year ended January 2, 2016.
During 2016, there were two further adjustments to the price of the annuity contract. Their combined effect resulted in a further refund of premium to the company of $0.3 million. This refund of premium was considered additional actual return on the assets during 2016, followed by a negative employer contribution of that same amount in the asset reconciliation table below.
Benefit plan related information is as follows for the years 2017 and 2016:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts recognized in the Consolidated Balance Sheets as of December 30, 2017 and December 31, 2016 consist of the following:
Amounts recognized in accumulated other comprehensive income (loss), pre-tax as of December 30, 2017 and December 31, 2016 consist of:
The estimated net actuarial loss (gain) which will be amortized from accumulated other comprehensive income (loss) into benefit cost in 2018 is approximately $0.3 million.
The components of pension expense for the years 2017, 2016, and 2015 are as follows:
Weighted average assumptions used to determine net periodic benefit cost for the years 2017, 2016, and 2015 are as follows:
The accumulated benefit obligation for the foreign plans was $60.5 million and $51.3 million at December 30, 2017 and December 31, 2016, respectively.
The following table provides a summary of under-funded or unfunded pension benefit plans with projected benefit obligations in excess of plan assets as of December 30, 2017 and December 31, 2016:
The following table provides a summary of under-funded or unfunded pension benefit plans with accumulated benefit obligations in excess of plan assets as of December 30, 2017 and December 31, 2016:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted average assumptions used to determine benefit obligations as of December 30, 2017, December 31, 2016 and January 2, 2016 are as follows:
Expected benefit payments to be paid to participants for the fiscal year ending are as follows:
The Company expects to make approximately $1.4 million of contributions to the plans in 2018.
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 4.5% on 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:
The Company segregated its plan assets by the following major categories and level for determining their fair value as of December 30, 2017 and December 31, 2016. All plan assets that are valued using the net asset value per share (“NAV”) practical expedient have not been included within the fair value hierarchy but are separately disclosed.
Cash and cash equivalents - Carrying value approximates fair value. As such these assets were classified as Level 1. The Company also invests in certain short-term investments which are valued using the amortized cost method and at NAV.
Equity - The values of individual equity securities were based on quoted prices in active markets. As such, these assets are classified as Level 1. Additionally, the Company invests in certain equity funds that are valued at calculated NAV.
Fixed income - Fixed income securities are typically priced based on a last trade basis and are exchange-traded. Accordingly, the Company classified fixed income securities as Level 1. The Company also invests in certain fixed income funds which are valued at NAV.
For any Level 2 plan assets, management reviews significant investments on a periodic basis including investigation of unusual fluctuations in price or returns and obtaining an understanding of the pricing methodology to assess the reliability of third-party pricing estimates.
The valuation methodologies described above may generate a fair value calculation that may not be indicative of net realizable value or future fair values. While the Company believes the valuation methodologies used are appropriate, the use of different methodologies or assumptions in calculating fair value could result in different amounts. The Company invests in various assets in which valuation is determined by NAV. The Company believes that the NAV is representative of fair value at the reporting date, as there are no significant restrictions on redemption of these investments or other reasons to indicate that the investment would be redeemed at an amount different than the NAV.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the Company’s pension plan assets measured at fair value by classification within the fair value hierarchy as of December 30, 2017:
The following table presents the Company’s pension plan assets measured at fair value by classification within the fair value hierarchy as of December 31, 2016:
Defined Contribution Plan
The Company also maintains a 401(k) savings plan covering substantially all U.S. employees. The Company matches 100% of the employee’s annual contributions for the first 4% of the employee’s eligible compensation. The Company may provide an additional discretionary match to participants and made discretionary matches of 2% of the employee’s eligible compensation for each of the years ended December 30, 2017, December 31, 2016 and January 2, 2016. Employees are immediately vested in their contributions plus actual earnings thereon, as well as the Company contributions. Company matching contributions amounted to $3.5 million, $3.2 million, and $2.8 million in 2017, 2016, and 2015, respectively.
Non-qualified Supplemental Retirement and Savings Plan
The Company has a non-qualified Supplemental Retirement and Savings Plan which provides additional retirement benefits for certain management employees and named executive officers by allowing participants to defer a portion of their annual compensation. The Company maintains accounts for participants through which participants make investment elections. The investments are subject to the claims of the Company’s creditors and the Company is responsible for the payment of all benefits under the plan from its general assets. As of December 30, 2017, there was $8.0 million of marketable securities related to the plan included in Other assets and $8.0 million of accrued compensation included in Other long-term liabilities. The marketable securities are classified as Level 1 under the fair value hierarchy as they are maintained in mutual funds with readily determinable fair value. The Company made matching contributions to the plan of $0.3 million in 2017.
9. 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 to employees and directors. As of December 30, 2017, there were 1.3 million shares available for issuance of future awards under the Company’s equity-based compensation plans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock options 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 generally vest over three to four years.
The following table provides a reconciliation of outstanding stock options for the fiscal year ended December 30, 2017.
The following table provides a reconciliation of non-vested restricted share and share unit awards for the fiscal year ended December 30, 2017.
The total intrinsic value of options exercised during 2017, 2016, and 2015 was $2.2 million, $13.3 million, and $5.0 million, respectively. The total fair value of shares vested was $15.0 million, $10.7 million, and $8.1 million for 2017, 2016, and 2015, respectively. The total amount of share-based liabilities paid was $0.9 million, $0.6 million and $0.4 million for 2017, 2016, and 2015, respectively.
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 December 30, 2017, the unrecognized compensation cost for options, restricted shares and performance shares was $15.9 million before tax, and will be recognized over a weighted-average period of 1.9 years. Compensation cost included as a component of selling, general, and administrative expense for all equity compensation plans discussed above was $17.3 million, $12.8 million, and $10.7 million for 2017, 2016, and 2015, respectively. The total income tax benefit recognized in the Consolidated Statements of Net Income was $6.0 million, $4.4 million and $3.7 million for 2017, 2016, and 2015, respectively.
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. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive Income (Loss) (“AOCI”): The following table sets forth the changes in the components of AOCI by component for fiscal years 2017, 2016, and 2015:
(a) Net of tax of $1.4 million, $1.1 million, and $0.7 million at December 30, 2017; December 31, 2016; and January 2, 2016, respectively.
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.
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, 2017 to April 30, 2018. The Company did not repurchase any shares of its common stock during fiscal 2017 under the stock repurchase program.
10. Income Taxes
On December 22, 2017, the U.S. enacted legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). Among other things, the Tax Act reduces the U.S. corporate federal income tax rate from 35% to 21%, adds base broadening provisions which limit deductions and address excessive international tax planning, imposes a one-time tax (the “Toll Charge”) on accumulated earnings of certain non-U.S. subsidiaries and enables repatriation of earnings of non-U.S. subsidiaries free of U.S. federal income tax. Other than the Toll Charge (which is applicable to the Company for 2017), the provisions will generally be applicable to the Company in 2018 and beyond.
In accordance with the guidance provided in SEC Staff Accounting Bulletin (“SAB”) No. 118, in the fourth quarter of 2017 the Company recorded a charge of $47 million as a provisional reasonable estimate of the impact of the Tax Act, including $49 million for the Toll Charge net of $2 million for other net tax benefits. The Company is continuing to analyze the Tax Act and plans to finalize the estimate within the measurement period outlined in SAB No. 118. The final charge may differ from the provisional reasonable estimate if provisions of the Tax Act, and their interaction with other provisions of the U.S. Internal Revenue Code, are interpreted differently than interpretations made by the Company in determining the estimate, whether through issuance of administrative guidance, or through further review of the Tax Act by the Company and its advisors. Aside from these interpretation issues, the final charge may differ from the provisional reasonable estimate due to refinements of accumulated non-U.S. earnings and tax pool data.
One of the base broadening provisions of the Tax Act is commonly referred to as the “GILTI” provisions. In accordance with guidance issued by the FASB staff, the Company has not adopted an accounting policy for GILTI. Thus, the U.S. balance sheet tax accounts, notably deferred taxes, were computed without consideration of the possible future impact of the GILTI provisions. The Company intends to adopt an accounting policy for GILTI within the measurement period outlined in SAB 118.
Domestic and foreign income (loss) before income taxes is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal, state and foreign income tax expense (benefit) consists of the following:
The current federal and state income tax expense for 2017 includes the preliminary estimate of $49 million for the Toll Charge as discussed above, partially offset by $13 million of foreign tax credits. The Company will elect to pay the 2017 current federal income tax over the eight-year period prescribed by the Tax Act. The long-term portion of the 2017 current federal income tax (approximately $32 million) is recorded in the Other long-term liabilities on the Consolidated Balance Sheets as of December 30, 2017.
The current federal tax benefit for 2016 includes an estimated $3 million benefit as a result of the carry-back of the 2016 U.S. federal net operating loss to the 2014 tax year.
The current federal tax benefit for 2015 includes an $11.7 million benefit reclassified from accumulated other comprehensive income as a result of the company’s termination of the U.S. defined benefit pension plan as described in Note 8, Benefit Plans.
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:
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 December 30, 2017 and December 31, 2016, are as follows:
The deferred tax asset valuation allowance is related to a U.S. capital loss carryover (which expire in 2018) and tax attributes of certain non-US subsidiaries which are not expected to be realized. The remaining net operating losses either have no expiration date or are expected to be utilized prior to expiration (which begin expiring in 2021). The Company paid income taxes of $31.8 million, $35.6 million, and $23.3 million in 2017, 2016, and 2015, respectively, and received income tax refunds of $13.7 million in 2017.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in those non-U.S. subsidiaries for which such excess is considered to be permanently reinvested in those operations. As of December 30, 2017, unremitted earnings of the Company’s non-U.S. subsidiaries was approximately $680 million. The Company recognized deferred tax liabilities of $12.0 million ($11.8 million for non-U.S. taxes and $0.2 million for U.S. state taxes) as of December 30, 2017 and $1.8 million as of December 31, 2016, related to taxes on certain non-U.S. earnings which are not considered to be permanently reinvested. Some of these taxes may provide a U.S. federal income tax benefit as a foreign tax credit. However, due to uncertainty in regard to the Tax Act’s provisions, no such tax benefit was recorded. The Company will reconsider this provisional conclusion when it finalizes its preliminary reasonable estimate of the impact of the Tax Act, based upon interpretations and administrative guidance as of that time.
The Company has three subsidiaries in China which benefit from lowered income tax rates due to “tax holidays” which apply for three-year periods, subject to extension. One such tax holiday expires in 2018, and the Company expects to be granted an extension. Such tax holidays contributed $5.7 million in tax benefits, or $0.25 per diluted share, during 2017, with similar amounts expected in future years while such tax holidays are in effect.
A reconciliation of the beginning and ending amount of unrecognized tax benefits as of December 30, 2017, December 31, 2016, and January 2, 2016 is as follows:
The company recognizes accrued interest and penalties associated with uncertain tax positions as part of income tax expense. The company recognized interest expense of $0.9 million, $0.9 million, and $0.2 million in 2017, 2016, and 2015, respectively. Accrued interest was $3.3 million, $2.4 million, and $1.5 million as of December 30, 2017, December 31, 2016, and January 2, 2016, respectively.
The amount of unrecognized tax benefits at December 30, 2017 was $7.7 million. This total represents the net amount of tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The company does not expect any material decrease in unrecognized tax benefits in the next 12 months. 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 2014 onward although the company has been audited for 2014 (during 2016) and the audit concluded with no additional tax due. In late 2017, the U.S. Internal Revenue Service began an examination of the Company’s federal income tax returns for 2015 and 2016 (with certain aspects of 2014 also subject to review as a consequence of a carryback of tax attributes from 2016). Foreign and U.S. state statute of limitations generally range from three to seven years. The German tax authority is currently conducting its examination for tax years 2011 through 2014. Other non-U.S. tax examinations occur from time to time, including one which is currently in process in Italy. The company does not expect to recognize a significant amount of additional tax expense as a result of concluding any of these examinations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Potential shares of common stock attributable to stock options excluded from the earnings per share calculation because their effect would be anti-dilutive were 37,443 shares, 53,448 shares, and 113,130 shares in 2017, 2016, and 2015, respectively.
On January 17, 2018, the Company acquired IXYS through a combination of cash, Littelfuse common stock, and the value of converted, or cash settled IXYS equity awards. The Company issued approximately 2.1 million shares of Littelfuse common stock and converted IXYS equity awards into approximately 0.5 million Littelfuse equity awards.
12. Segment Information
The Company and its subsidiaries design, manufacture and sell components and modules for circuit protection, power control and sensing throughout the world. The Company reports its operations by the following segments: Electronics, Automotive, and Industrial. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. The CODM is the Company’s President and Chief Executive Officer (“CEO”). The CODM allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss) before interest and taxes, but does not evaluate the operating segments using discrete balance sheet information.
Sales, marketing, and research and development expenses are charged directly into each operating segment. Manufacturing, purchasing, logistics, customer service, finance, information technology, and human resources are shared functions that are allocated back to the three operating segments. The Company does not report inter-segment revenue because the operating segments do not record it. Certain expenses, determined by the CODM to be strategic in nature and not directly related to segments current results, are not allocated but identified as “Other”. Additionally, the Company does not allocate interest and other income, interest expense, or taxes to operating segments. These costs are not allocated to the segments, as management excludes such costs when assessing the performance of the segments. Although the CODM uses operating income (loss) to evaluate the segments, operating costs included in one segment may benefit other segments. Except as discussed above, the accounting policies for segment reporting are the same as for the Company as a whole.
●
Electronics Segment: Consists of one of the broadest product offerings in the industry, including fuses and fuse accessories, positive temperature coefficient (“PTC”) resettable fuses, polymer electrostatic discharge (“ESD”) suppressors, varistors, gas discharge tubes; semiconductor and power semiconductor products such as discrete transient voltage suppressor (“TVS”) diodes, TVS diode arrays, protection and switching thyristors, silicon carbide, metal-oxide-semiconductor field-effect transistors (“MOSFETs”) and silicon carbide diodes; and insulated gate bipolar transistors (“IGBT”) technologies. The segment covers a broad range of end markets, including consumer electronics, automotive electronics, IT and telecommunications equipment, medical devices, lighting products, and white goods.
●
Automotive Segment: Consists of a wide range of circuit protection, power control and sensing technologies for global original equipment manufacturers (“OEMs”), Tier-I suppliers and parts distributors in the automotive, commercial vehicle, and agricultural and construction equipment industries. Passenger car fuse products include fuses and fuse accessories, including blade fuses, battery cable protectors, varistors, high-current fuses, and high-voltage fuses for hybrid and electric vehicles. Commercial vehicle products include fuses, switches, relays, and power distribution modules for the commercial vehicle industry. Automotive sensor products include a wide range of automotive and commercial vehicle sensors designed to monitor the passenger compartment occupants and environment as well as the vehicle’s powertrain, emissions, speed and suspension.
●
Industrial Segment: Consists of power fuses, protection relays and controls and other circuit protection products for use in heavy industrial applications such as mining, oil and gas, energy storage, construction, HVAC systems, elevator and other industrial equipment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has provided this segment information for all comparable prior periods. Segment information is summarized as follows:
(a) Included in “Other” Operating income (loss) for 2017 are costs related to the acquisition and integration costs associated with the Company’s completed and pending acquisitions ($8.0 million in Cost of sales (“COS”) and Selling, general, and administrative expenses (“SG&A”) and charges related to restructuring and production transfers in the Company’s Asia operations ($2.2 million in SG&A).
Included in “Other” Operating income (loss) for 2016 are costs related to the impairment of the Custom Products reporting unit ($14.8 million), acquisition and integration costs associated with the Company’s 2016 acquisitions ($29.2 million in COS and SG&A), transfer of the Company’s reed switch manufacturing operations from its Lake Mills, Wisconsin and Suzhou, China locations to the Philippines ($1.6 million in COS), impairment and severance costs related to the closure of the Company’s manufacturing facility in Denmark ($1.9 million in SG&A), and restructuring costs ($2.5 million in SG&A and Research and development expenses).
Included in “Other” Operating income (loss) for 2015 are costs related to the transfer of the Company’s reed switch manufacturing operations from its Lake Mills, Wisconsin and Suzhou, China locations to the Philippines ($5.2 million in COS), acquisition related fees ($4.6 million included in SG&A), pension settlement and other costs ($31.9 million in SG&A), and restructuring costs ($3.6 million in SG&A).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s significant net sales, long-lived assets and additions to long-lived assets by country for the fiscal years ended 2017, 2016, and 2015 are as follows:
For the year ended December 30, 2017, approximately 69% of the Company’s net sales were to customers outside the United States (exports and foreign operations) including 26% to China (including Hong Kong). Sales to Arrow Electronics, Inc., which were included in the Electronics, Automotive, and Industrial segments, were 10.6% of consolidated net sales in 2017 but less than 10% for 2016 and 2015. No other single customer accounted for more than 10% of net sales during the last three years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Selected Quarterly Financial Data (Unaudited)
The quarterly periods for 2017 are for the 13-weeks ended December 30, 2017, September 30, 2017, July 1, 2017, and April 1, 2017, respectively. The quarterly periods for 2016 are for the 13-weeks ended December 31, 2016, October 1, 2016, July 2, 2016, and April 2, 2016, respectively.
(a) In the fourth quarter of 2017, the Company recorded an estimated one-time tax charge of $49 million for the enactment of the Tax Cuts and Jobs Act for deemed repatriation of unremitted earnings of foreign subsidiaries, $1.4 million in acquisition and integration costs and $0.7 million in restructuring and production costs related to the transfer of Asian operations.
(b) In the third quarter of 2017, the Company recorded $4.8 million in acquisition and integration costs and $1.5 million in restructuring and production costs related to the transfer of Asian operations.
(c)
In the second quarter of 2017, the Company recorded $0.3 million in acquisition and integration costs.
(d) In the first quarter of 2017, the Company $1.5 million in acquisition and integration costs
(e) In the fourth quarter of 2016, the Company recorded ($0.1) million gain related to the Company’s transfer of its reed sensor manufacturing operations from the U.S. and China to the Philippines, $1.2 million of restructuring costs, $3.2 million in acquisition and integration costs and $0.3 million in non-cash inventory charges related to the 2016 acquisitions.
(f)
In the third quarter of 2016, the Company recorded $0.9 million of restructuring costs, $5.9 million in acquisition and integration costs, $14.8 million of charges related to the impairment of the Custom Products reporting unit and $0.5 million in non-cash inventory charges as noted above.
(g) In the second quarter of 2016, the Company recorded $0.7 million related to the reed sensor manufacturing transfer as noted above, $0.1 million of restructuring costs, $6.1 million in acquisition and integration costs, $0.3 million in charges related to the closure of the manufacturing facility in Denmark and $6.9 million in non-cash inventory charges as noted above.
(h) In the first quarter of 2016, the Company recorded $1.0 million related to the reed sensor manufacturing transfer as noted above, $0.4 million of restructuring costs, $6.2 million in acquisition and integration costs, and $1.6 million in charges related to the closure of the manufacturing facility in Denmark.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Company recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Company is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 15d-15(b), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to SEC Rule 13a-15 as of the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 30, 2017.
Management’s Report on Internal Control over Financial Reporting
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 public accounting firm on the effectiveness of the Company’s internal control over financial reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). The Company’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. A material weakness is a deficiency, or a combination of deficiencies, in the internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statement will not be prevented or detected on a timely basis.
The Company’s management, including the its Principal Executive Officer and Principal Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 30, 2017, based upon the updated framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 1992 and updated in May 2013. Based on this assessment, the Company’s management concluded that, as of December 30, 2017, the Company’s internal control over financial reporting was effective.
Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the 12 months or fiscal quarter ended December 30, 2017, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Except as set forth below, the information required by this item will be contained in the Company’s 2017 Proxy Statement and is incorporated herein by reference.
Information concerning directors and nominees for director is set forth in the section titled “Proposal No. 1 Election of Directors” in the Company’s proxy statement and is incorporated herein by reference.
Information concerning the Company’s Audit Committee and Audit Committee financial expert is set forth in the section titled “Director Independence; Financial Experts” in its proxy statement and is incorporated herein by reference.
Information concerning the procedures by which security holders may recommend nominees to the Company’s Board of Directors is set forth in the section titled “Director Candidates” in the Company’s proxy statement and is incorporated herein by reference.
Information concerning compliance with Section 16 of the Securities Exchange Act of 1934 is set forth in the section titled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s proxy statement and is incorporated herein by reference.
Executive Officers of the Registrant.
The executive officers of the Company are as follows:
David W. Heinzmann has served as the President and Chief Executive Officer and a member of the Board of Directors since January 2017. He previously served as the Company’s Chief Operating Officer, since 2014. Mr. Heinzmann began his career at Littelfuse in 1985 as a manufacturing engineer and has held positions of increasing responsibility since that time. From 2004 through 2007, he served as Vice President and General Manager, Automotive segment, and then as Vice President, Global Operations until 2014. Mr. Heinzmann has served on the board of directors of Pulse Electronics Corporation, since 2014. Mr. Heinzmann holds a BS in mechanical engineering from Missouri University of Science and Technology.
Meenal A. Sethna, Executive Vice President and Chief Financial Officer since March, 2016, leads the company’s finance, accounting, internal audit, investor relations and information technology functions. Ms. Sethna joined the company in 2015 as Senior Vice President of Finance. Prior to joining Littelfuse, Ms. Sethna spent four years at Illinois Tool Works Inc. as Vice President and Corporate Controller. Previous to that, she worked at Motorola Inc., most recently as Vice President, Finance. She began her career at Baxter International, holding a variety of finance roles during her tenure. Ms. Sethna is a graduate of the Kellogg School of Management at Northwestern University and the University of Illinois-Urbana, and is a Certified Public Accountant in Illinois.
Ryan K. Stafford, Executive Vice President, Chief Legal and Human Resources Officer and Corporate Secretary, leads the company’s legal, compliance, human resources and corporate marketing and communications functions. Mr. Stafford joined the company’s executive team as its first general counsel in January 2007. Prior to joining the company, Mr. Stafford served in a number of roles at Tyco International Ltd., including Vice President of China Operations and Vice President & General Counsel for its Engineered Products & Services Business Segment. Prior to that he was with the law firm Sulloway & Hollis P.L.L.C.
Matthew J. Cole, Senior Vice President and General Manager, Industrial Business Unit, joined Littelfuse in July 2015 and is responsible for the electrical fuse, protection relay and custom electrical products businesses. Mr. Cole has more than 20 years of experience in general management, strategy development, mergers and acquisitions, and operations. Prior to joining Littelfuse, he was Vice President and General Manager of AMETEK’s Advanced Measurement Technology division, a global leader in electronic instruments and electromechanical devices. His career also includes positions in general management, marketing and operations at Danaher and Allied Signal/Honeywell.
Ian Highley, Senior Vice President and General Manager, Semiconductor Products and Chief Technology Officer, is responsible for the marketing, sales, product development and strategic planning efforts of the company’s semiconductor products in addition to being responsible for the company’s overall R&D and technology efforts. Mr. Highley joined the company in 2002 as Product Line Director, Semiconductor Products. Mr. Highley served as General Manager Semiconductor Products from August 2008 to May 2012 and Vice President and General Manager, Semiconductor Products from May 2012 to January 2015. Mr. Highley was promoted to his current position in January 2015.
Deepak Nayar, Senior Vice President and General Manager, Electronics Business Unit, is responsible for marketing, sales, product development and customer relationships of the Electronics Business Unit. Mr. Nayar joined the company in 2005 as Business Line Director of the Electronics Business Unit. In July 2007, Mr. Nayar was promoted to Vice President, Global Sales, Electronics Business Unit, before he was promoted to his current position in 2011. Prior to joining the company, Mr. Nayar served as Worldwide Sales Director of Tyco Electronics Power Components Division from 1999 to 2005. Before that, Mr. Nayar served as Director of Business Development, Raychem Electronics OEM Group from 1997 to 1999.
Michael P. Rutz, Senior Vice President, Global Operations, is responsible for the company’s sourcing, supplier development, supply chain, quality and manufacturing engineering services. From February 2014 to January 2015, Mr. Rutz was Vice President of Supply Chain and Operational Excellence. From August 2011 to February 2014, Mr. Rutz was Senior Vice President Global Supply Chain at WMS Industries Inc., a Chicago-based manufacturer of equipment and software for the gaming industry. Prior to that, Mr. Rutz served for 16 years in various positions of increasing responsibility, at Motorola Solutions, Inc., most recently as Vice President of Networks Supply Chain from 2009 until August 2011.
Code of Ethics
The company has adopted a Code of Conduct (Code of Ethics) that applies to all of the Company’s employees including the Company’s Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and persons performing similar functions. It has posted the text of the Code of Conduct on its website at http://investor.littelfuse.com/governance.cfm and intends to disclose on such website any amendments to, or waivers from the Code of Conduct. The company’s website is not incorporated by reference into this Annual Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning compensation of the Company’s executive officers and directors for the year ended December 30, 2017, is set forth in the sections titled “Compensation Discussion & Analysis,” “Compensation Tables” and “Director Compensation” in the Company’s proxy statement and is incorporated herein by reference, except the section titled “Compensation Committee Report” is hereby “furnished” and not “filed” with this Annual Report on Form 10-K.
Information concerning compensation committee interlocks is set forth in the section titled “Compensation Committee Interlocks and Insider Participation” in the Company’s proxy statement and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information concerning the security ownership of certain beneficial owners, the Company’s directors and executive officers as of March 1, 2018, is set forth in the section titled “Ownership of Littelfuse, Inc. Common Stock” in the Company’s proxy statement and is incorporated herein by reference.
Information concerning the Company’s equity compensation plan is set forth in the section titled “Compensation Plan Information” in the Company’s proxy statement and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Information concerning the independence of the Company’s directors, certain relationships and related transactions during 2017 and the Company’s policies with respect to such transactions is set forth in the sections titled “Proposal No. 1 Election of Directors” and “Certain Relationships and Related Transactions” in the Company’s proxy statement and is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Information concerning principal accountant fees and services is set forth in the section titled “Audit Related Matters” in the Company’s proxy statement and 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:
(i)
Reports of Independent Registered Public Accounting Firms (pages 34-35).
(ii)
Consolidated Balance Sheets as of December 30, 2017 and December 31, 2016 (page 36).
(iii)
Consolidated Statements of Net Income for the years ended December 30, 2017, December 31, 2016 and January 2, 2016 (page 37).
(iv)
Consolidated Statements of Comprehensive Income for the years ended December 30, 2017, December 31, 2016 and January 2, 2016 (page 37).
(v)
Consolidated Statements of Cash Flows for the years ended December 30, 2017, December 31, 2016 and January 2, 2016 (page 38).
(vi)
Consolidated Statements of Equity for the years ended December 30, 2017, December 31, 2016 and January 2, 2016 (page 39).
(vii)
Notes to Consolidated Financial Statements (pages 40-68).
(2)
The following Financial Statement Schedule is submitted herewith for the periods indicated therein.
(i)
Schedule II - Valuation and Qualifying Accounts and Reserves (page 74).
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.
(3)
Exhibits. See Exhibit Index on pages 76-82.
Item 16. FORM 10-K SUMMARY
None.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(a)
Includes provision for doubtful accounts, sales returns and sales discounts granted to customers.
(b)
Represents uncollectible accounts written off, net of recoveries and credits issued to customers and the write-off of certain deferred tax assets that previously had full valuation allowances.
(c)
Represents business acquisitions, U.S. and non-U.S. subsidiary tax attributes and foreign currency 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 23, 2018
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 on February 23, 2018 and in the capacities indicated.
/s/ Gordon Hunter
Chairman of the Board of Directors
Gordon Hunter
/s/ David W. Heinzmann
Director, President and Chief Executive Officer
David W. Heinzmann
(Principal Executive Officer)
/s/ Tzau-Jin Chung
Director
Tzau-Jin Chung
/s/ Cary T. Fu
Director
Cary T. Fu
/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/ Nathan Zommer
Director
Nathan Zommer
/s/ Meenal A. Sethna
Executive Vice President and Chief Financial Officer
Meenal A. Sethna
(Principal Financial Officer)
/s/ Jeffrey G. Gorski
Corporate Controller and Chief Accounting Officer
Jeffrey G. Gorski
(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:
2.1+
Stock Purchase Agreement, dated as of April 15, 2013, by and among Littelfuse, Inc. and Key Safety Systems, Inc.
8-K
2.1
04/15/2013
0-20388
2.2+
Stock and Asset Purchase Agreement, dated November 7, 2015, by and between Littelfuse, Inc. and TE Connectivity Ltd.
8-K
2.1
11/12/2015
0-20388
2.3+
Agreement and Plan of Merger, dated August 25, 2017, as amended by Amendment No. 1, dated December 4, 2017, by and among IXYS Corporation, Littelfuse, Inc., Iron Merger Co., Inc., and IXYS Merger Co., LLC.
S-4/A
Annex A
12/11/2017
333-22114
3.1
Certificate of Incorporation dated November 25, 1991, as amended April 25, 1997.
10-K
3.1
02/27/2017
0-20388
3.2
Certificate of Designations of Series A Preferred Stock.
8-K
4.2
12/01/1995
0-20388
3.3
Bylaws, as amended and restated October 24, 2014.
10-Q
3.1
10/31/2014
0-20388
10.1
Form of Non-Qualified Stock Option Agreement under the 1993 Stock Plan for Employees and Directors of Littelfuse, Inc. for employees.++
8-K
99.1
11/12/2004
0-20388
10.2
Form of Non-Qualified Stock Option Agreement under the 1993 Stock Plan for Employees and Directors of Littelfuse, Inc., for non-employee directors. ++
10-K
10.24
03/17/2005
0-20388
10.3
Form of Non-Qualified Stock Option Agreement under the Littelfuse, Inc. Equity Incentive Compensation Plan. ++
8-K
99.4
05/11/2006
0-20388
10.4
Form of Non-Qualified Stock Option Agreement under the Littelfuse, Inc. Outside Directors Stock Option Plan.++
8-K
99.6
05/11/2006
0-20388
10.5
Amended and Restated Employment Agreement dated as of December 31, 2007, between Littelfuse, Inc. and Gordon Hunter .++
10-K
10.1
02/27/2008
0-20388
10.6
Littelfuse, Inc. Retirement Plan as Amended and Restated, effective January 1, 2008 .++
10-K
10.13
02/27/2008
0-20388
10.7
Form of Stock Option Award Agreement under the Littelfuse, Inc. Outside Directors' Equity Plan.++
8-K
99.3
05/01/2008
0-20388
10.8
Form of Restricted Stock Unit Award Agreement under the Littelfuse, Inc. Outside Directors' Equity Plan.++
8-K
99.4
05/01/2008
0-20388
10.9
Amended and Restated, Littelfuse, Inc. Deferred Compensation Plan for Non-Employee Directors.++
10-K
10.4
02/27/2008
0-20388
10.10
Form of Restricted Stock Award Agreement under the Littelfuse, Inc. Equity Incentive Compensation Plan .++
8-K
10.1
04/28/2009
0-20388
10.11
Form of Stock Option Award Agreement under the Littelfuse, Inc. Equity Incentive Compensation Plan .++
8-K
10.2
04/28/2009
0-20388
10.12
First Amendment to the Amended and Restated Littelfuse, Inc. Retirement Plan, effective March 25, 2009.++
10-K
10.30
02/26/2010
0-20388
10.13
Littelfuse, Inc. Long-Term Incentive Plan, effective February 3, 2010.++
8-K
10.1
05/05/2010
0-20388
10.14
Form of Restricted Stock Unit Award Agreement (Outside Director) under the Littelfuse, Inc. Long-Term Incentive Plan.++
S-8
4.4
05/19/2010
0-20388
10.15
Form of Stock Option Award Agreement under the Littelfuse, Inc. Long-Term Incentive Plan.++
S-8
4.6
05/19/2010
0-20388
10.16
First Amendment to the Littelfuse, Inc. Long-Term Incentive Plan, effective July 27, 2012.++
10-K
10.36
02/27/2013
0-20388
10.17
Credit Agreement, dated as of May 31, 2013, among Littelfuse, Inc., as borrower, JPMorgan Chase Bank, N.A. as Agent, Bank of America, N.A., as Syndication Agent, Wells Fargo Bank, National Association and PNC Bank, National Association, as Co-Documentation Agents, J.P. Morgan Securities LLC, as Sole Bookrunner and Joint Lead Arranger, and Merrill, Lynch, Pierce, Fenner & Smith Incorporated, as Joint Lead Arranger.
8-K
10.1
06/05/2013
0-20388
10.18
Master Increasing Lender Supplement, dated as of January 30, 2014, among Littelfuse, Inc., as borrower, JPMorgan Chase Bank, N.A. as Administrative Agent, and each of the banks, financial institutions and other institutional lenders listed on the respective signature pages thereof.
8-K
10.1
02/04/2014
0-20388
10.19
Littelfuse, Inc. Annual Incentive Plan, effective January 1, 2014. ++
DEF14A
A
03/17/2014
0-20388
10.20
Amended and Restated Employment Agreement, effective as of January 1, 2014, between Littelfuse Europe GmbH and Dieter Roeder .++
10-Q
10.2
05/02/2014
0-20388
10.21
Change of Control Agreement effective as of February 10, 2014, between Littelfuse, Inc. and Michael Rutz.++
10-Q
10.1
05/02/2014
0-20388
10.22
Termination Amendment to the Littelfuse, Inc. Retirement Plan, effective July 31, 2014. ++
10-Q
10.1
10/31/2014
0-20388
10.23
Change of Control Agreement effective as of January 1, 2015, between Littelfuse, Inc. and Gordon Hunter.++
8-K
10.1
12/22/2014
0-20388
10.24
Change of Control Agreement effective as of January 1, 2015, between Littelfuse, Inc. and Philip G. Franklin.++
8-K
10.2
12/22/2014
0-20388
10.25
Change of Control Agreement effective as of January 1, 2015, between Littelfuse, Inc. and Dieter Roeder.++
8-K
10.4
12/22/2014
0-20388
10.26
Change of Control Agreement effective as of January 1, 2015, between Littelfuse, Inc. and Ryan K. Stafford.++
8-K
10.5
12/22/2014
0-20388
10.27
Change of Control Agreement effective as of January 1, 2015, between Littelfuse, Inc. and Ian Highley.++
10-K
10.11
02/24/2015
0-20388
10.28
Change of Control Agreement effective as of January 1, 2015, between Littelfuse, Inc. and Deepak Nayar.++
10-K
10.12
02/24/2015
0-20388
10.29
Amendment No. 1, dated as of May 2, 2014, to Credit Agreement, dated as of May 30, 2013, by and among Littelfuse, Inc., as borrower, JPMorgan Chase Bank, N.A. as Agent, and each of the banks, financial institutions listed on the respective signature pages thereof.
10-K
10.47
02/24/2015
0-20388
10.30
Amendment No. 2, dated as of January 14, 2015, to Credit Agreement, dated as of May 31, 2013, by and among Littelfuse, Inc., as borrower, JPMorgan Chase Bank, N.A. as Agent, and each of the banks, financial institutions listed on the respective signature pages thereof.
10-K
10.48
02/24/2015
0-20388
10.31
Form of Restricted Stock Unit Award Agreement (Executive) under the Littelfuse, Inc. Long-Term Incentive Plan.++
10-Q
10.2
07/31/2015
0-20388
10.32
Form of Restricted Stock Unit Award Agreement (Tier II Management) under the Littelfuse, Inc. Long-Term Incentive Plan.++
10-Q
10.3
07/31/2015
0-20388
10.33
Amendment No. 3, dated as of May 4, 2015, to Credit Agreement, dated as of May 31, 2013, by and among Littelfuse, Inc., as borrower, JPMorgan Chase Bank, N.A., as Agent, and each of the banks, financial institutions listed on the respective signature pages thereof.
10-Q
10.1
07/31/2015
0-20388
10.34
Change of Control Agreement effective as of February 1, 2016, between Littelfuse, Inc. and Meenal A. Sethna. ++
8-K
10.1
02/03/2016
0-20388
10.35
Change of Control Agreement effective as of May 26, 2015 between Littelfuse, Inc. and Matt Cole.++
10-K
10.13
03/01/2016
0-20388
10.36
Credit Agreement, dated as of March 4, 2016 among Littelfuse, Inc. and Certain Subsidiaries as borrowers, Guarantors party thereto, Bank of America, N.A. as Agent, Swing Line Lender and L/C Issuer and JPMorgan Chase Bank, N.A. as Syndication Agent, BMO Harris Bank, N.A., PNC Bank, National Association and Wells Fargo Bank, National Association as Co-Documentation Agents, Merril, Lynch, Pierce, Fenner & Smith Incorporated, as Sole Bookrunner and Joint Lead Arranger and JPMorgan Chase Bank, N.A., as Joint Lead Arranger.
8-K
10.1
03/10/2016
0-20388
10.37
Form of Stock Option Award Agreement (Executive) under the Littelfuse, Inc. Long-Term Incentive Plan. ++
10-Q
10.3
05/06/2016
0-20388
10.38
Form of Stock Option Award Agreement (Outside Director - 2016 Grant) under the Littelfuse, Inc. Long-Term Incentive Plan. ++
10-Q
10.4
05/06/2016
0-20388
10.39
Form of Restricted Stock Unit Award Agreement (Executive) under the Littelfuse, Inc. Long-Term Incentive Plan. ++
10-Q
10.5
05/06/2016
0-20388
10.40
Form of Restricted Stock Unit Award Agreement (Tier II Management) under the Littelfuse, Inc. Long-Term Incentive Plan. ++
10-Q
10.6
05/06/2016
0-20388
10.41
Form of Restricted Stock Unit Award Agreement (Outside Director - 2016 Grant) under the Littelfuse, Inc. Long-Term Incentive Plan. ++
10-Q
10.7
05/06/2016
0-20388
10.42
Form of Restricted Stock Unit Award Agreement (Executive) under the Littelfuse Inc. Long-Term Incentive Plan. ++
8-K
10.1
07/26/2016
0-20388
10.43
Executive Retirement Agreement entered into between Littelfuse, Inc. and Gordon Hunter, effective January 1, 2017. ++
8-K
10.1
11/16/2016
0-20388
10.44
Letter Agreement entered into between Littelfuse, Inc. and David W. Heinzmann. Effective January 1, 2017. ++
8-K
10.2
11/16/2016
0-20388
10.45
Change of Control Agreement effective as of January 1, 2017, between Littelfuse, Inc. and David W. Heinzmann. ++
8-K
10.3
11/16/2016
0-20388
10.46
Littelfuse, Inc. 3.03% Senior Note, Series A, due February 15, 2022, and 3.74% Senior Note, Series B, due February 15, 2027 Note Purchase Agreement.
8-K
10.1
12/09/2016
0-20388
10.47
Littelfuse, Netherland C.V. 1.14% Senior Note, Series A, due December 8, 2023, and 1.83% Senior Note, Series B, due December 8, 2028 Note Purchase Agreement.
8-K
10.2
12/09/2016
0-20388
10.48
Subsidiary Guaranty Agreement, dated December 8, 2016.
8-K
10.4
12/09/2016
0-20388
10.49
Subsidiary Guaranty Agreement, dated as of February 15, 2017.
8-K
10.2
2/15/2017
0-20388
10.50
Restated Littelfuse, Inc. Supplemental Retirement and Savings Plan, effective January 1, 2017. ++
10-K
10.50
02/27/2017
0-20388
10.51
Amended and Restated Littelfuse, Inc. 401(k) Retirement and Savings Plan, effective January 1, 2017.++
10-K
10.51
02/27/2017
0-20388
10.52
Amended and Restated Littelfuse, Inc. Long-Term Incentive Plan. ++
8-K
10.1
05/01/2017
0-20388
10.53
Form of 2017 Restricted Stock Unit Award Agreement. ++
8-K
10.2
05/01/2017
0-20388
10.54
Form of 2017 Stock Option Award Agreement. ++
8-K
10.3
05/01/2017
0-20388
10.55
Amended and Restated Employment Agreement, effective as of April 18, 2017, between Littelfuse, Inc. and Dieter Roeder. ++
10-Q
10.1
08/02/2017
0-20388
10.56
Employment offer letter between Littelfuse, Inc. and Jeffrey Gorski, dated June 28, 2017. ++
8-K
10.1
08/14/2017
0-20388
10.57
Form of Change of Control Agreement (J. Gorski). ++
8-K
10.2
08/14/2017
0-20388
10.58
First Amendment to Credit Agreement, dated as of November 1, 2016, among Littelfuse, Inc., certain subsidiaries of the company, as designated borrowers, certain subsidiaries of the company, as guarantors, the lenders party thereto and Bank of America, N.A., as agent.
8-K
10.1
10/16/2017
0-20388
10.59
Second Amendment to Credit Agreement, dated as of October 13. 2017, among Littelfuse, Inc., certain subsidiaries of the company, as designated borrowers, certain subsidiaries of the company, as guarantors, the lenders party thereto and Bank of America, N.A., as agent.
8-K
10.2
10/16/2017
0-20388
10.60
Joinder Agreement, dated as of October 13, 2017, by and between Iron Merger Co., Inc. and Bank of America, N.A., as agent.
8-K
10.3
10/16/2017
0-20388
10.61
Joinder Agreement, dated as of October 13, 2017, by and between IXYS Merger Co., LLC and Bank of America, N.A., as agent.
8-K
10.4
10/16/2017
0-20388
10.62
U.S. Subsidiary Guarantor Supplement, dated as of October 13, 2017, made by Iron Merger Co., Inc. in favor of the note purchasers and the other holders.
8-K
10.5
10/16/2017
0-20388
10.63
U.S. Subsidiary Guarantor Supplement, dated as of October 13, 2017, made by IXYS Merger Co., LLC in favor of the note purchasers and the other holders.
8-K
10.6
10/16/2017
0-20388
10.64
Cross Border Subsidiary Guarantor Supplement, dated as of October 13, 2017, made by Iron Merger Co., Inc. in favor of the note purchasers and the other holders.
8-K
10.7
10/16/2017
0-20388
10.65
Cross Border Subsidiary Guarantor Supplement, dated as of October 13, 2017, made by IXYS Merger Co., LLC in favor of the note purchasers and the other holders.
8-K
10.8
10/16/2017
0-20388
10.66
Note Purchase Agreement, dated November 15, 2017, among Littelfuse, Inc. and note purchasers listed on the signature pages thereto.
8-K
10.1
11/15/2017
0-20388
10.67
Form of 3.78% Senior Note, Series B, due February 15, 2030.
8-K
4.2
11/15/2017
0-20388
10.68
Form of 3.48% Senior Note, Series A, due February 15, 2025,
8-K
4.1
11/15/2017
0-20388
10.69
Subsidiary Guaranty Agreement, dated as of January 16, 2018, made by LFUS LLC, Littelfuse Commercial Vehicle, LLC, Iron Merger Co., Inc., IXYS Merger Co., LLC and SymCom, Inc. in favor of the note purchasers and the other holders.
8-K
10.2
01/18/2018
0-20388
10.70
Seventh Amended and Restated Employment Agreement, dated as of August 25, 2017, by and between IXYS Corporation and Nathan Zommer. ++
8-K
10.3
01/18/2018
0-20388
10.71
Littelfuse, Inc. Executive Severance Policy. ++
8-K
10.4
01/18/2018
0-20388
10.72
Form of Tier I Change of Control Agreement.++
8-K
10.1
01/23/2018
0-20388
10.73*
First Amendment to Littelfuse Deferred Compensation Plan for Non-Employee Directors, effective as of January 1, 2008.++
10.74*
Second Amendment to the Littelfuse Deferred Compensation Plan for Non-Employee Directors, effective as of October 25, 2013.++
10.75*
First Amendment to the Littelfuse, Inc. 401(K) Retirement and Savings Plan, effective January 1, 2018.++
10.76*
Altra In-Plan Roth Rollover Amendment to the Littelfuse, Inc. 401(K) Retirement and Savings Plan, effective as of February 1, 2018.++
10.77*
Summary of Non-Employee Director Compensation.++
10.78
Form of Indemnity Agreement by and between Nathan Zommer and IXYS Corporation,++
10-K
10.3
06/12/2008
000-26124
10.79
IXYS Corporation 1999 Equity Incentive Plan, as amended.++
S-8
4.3
01/19/2018
333-221147
10.80
IXYS Corporation 2009 Equity Incentive Plan++
S-8
4.4
01/19/2018
333-221147
10.81
IXYS Corporation 2011 Equity Incentive Plan++
S-8
4.5
01/19/2018
333-221147
10.82
IXYS Corporation 2013 Equity Incentive Plan++
S-8
4.6
01/19/2018
333-221147
10.83
IXYS Corporation 2016 Equity Incentive Plan++
S-8
4.7
01/19/2018
333-221147
10.84
Zilog, Inc. 2002 Omnibus Stock Incentive Plan++
S-8
4.8
01/19/2018
333-221147
10.85
Zilog, Inc. 2004 Omnibus Stock Incentive Plan++
S-8
4.9
01/19/2018
333-221147
10.86
Form of Stock Option Agreement for the IXYS Corporation 1999 Equity Incentive Plan++
10-Q
10.3
11/09/2004
000-26124
10.87
Form of Stock Option Agreement for the IXYS Corporation 1999 Equity Incentive Plan with net exercise provision.++
10-K
10.23
06/22/2006
000-26124
10.88
Form of Stock Option Agreement for the IXYS Corporation 1999 Equity Incentive Plan for non-employee directors++
10-K
10.24
06/22/2006
000-26124
10.89
Notice of Stock Option Grant and Agreement for the IXYS Corporation 2009 Equity Incentive Plan++
10-Q
10.4
08/10/2009
000-26124
10.90
Form of Nonqualified Stock Option Agreement for Stock Options pursuant to the Zilog, Inc. 2002 Omnibus Stock Incentive Plan++
10-K
10.26
06/11/2010
000-26124
10.91
Form of Nonqualified Stock Option Agreement for Stock Options pursuant to the Zilog, Inc. 2004 Omnibus Stock Incentive Plan++
10-K
10.28
06/11/2010
000-26124
10.92
Notice of Stock Option Grant and Agreement for IXYS Corporation 2011 Equity Incentive Plan++
10-Q
10.2
08/05/2011
000-26124
10.93
Notice of Stock Option Grant and Agreement for IXYS Corporation 2013 Equity Incentive Plan++
10-Q
10.6
08/09/2013
000-26124
10.94
Notice of Stock Option Grant and Agreement for IXYS Corporation 2016 Equity Incentive Plan++
10-Q
10.1
11/03/2016
000-26124
21.1*
Subsidiaries.
23.1*
Consent of Independent Registered Public Accounting Firm.
31.1*
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+++
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema Document.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
* Filed with this Report.
+ Exhibits and schedules omitted pursuant to Item 601(b)(2) of Regulation S-K. Littelfuse agrees to furnish a supplemental copy of an omitted exhibit or schedule to the SEC upon request.
++ Management contract or compensatory plan or arrangement.
+++ Furnished with this Report.