UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 1, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission file number 0-20388
LITTELFUSE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3795742
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
800 EAST NORTHWEST HIGHWAY
DES PLAINES, ILLINOIS 60016
(Address of principal executive offices) (Zip Code)
(847) 824-1188
Registrant's telephone number, including area code:
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of July 1, 2006, 22,335,039 shares of common stock, $.01 par value, of
the Registrant were outstanding.
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of July 1, 2006 and
December 31, 2005 (unaudited)................................... 1
Condensed Consolidated Statements of Income for the periods
ended July 1, 2006 and July 2, 2005 (unaudited)................. 2
Condensed Consolidated Statements of Cash Flows for the periods
ended July 1, 2006 and July 2, 2005 (unaudited)................. 3
Notes to the Condensed Consolidated Financial Statements
(unaudited)..................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 16
Item 4. Controls and Procedures......................................... 17
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 18
Item 4. Submission of Matters to a Vote of Security Holders............. 18
Item 6. Exhibits........................................................ 20
LITTELFUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
JULY 1, 2006 December 31, 2005
------------ -----------------
ASSETS:
Cash and cash equivalents ................................. $ 34,780 $ 21,947
Receivables ............................................... 96,498 80,303
Inventories ............................................... 65,831 63,423
Deferred income taxes ..................................... 12,946 11,927
Assets held for sale (Efen) ............................... -- 17,633
Other current assets ...................................... 11,406 7,936
-------- --------
Total current assets ...................................... 221,461 203,169
Property, plant, and equipment, net ....................... 131,692 125,493
Intangible assets, net .................................... 19,177 14,742
Goodwill .................................................. 69,038 54,440
Investments ............................................... 5,328 5,590
Long-term deferred tax asset .............................. 6,653 --
Other assets .............................................. 856 497
-------- --------
Total assets ........................................... $454,205 $403,931
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable .......................................... $ 24,798 $ 20,457
Accrued payroll ........................................... 16,430 20,128
Accrued expenses .......................................... 14,140 8,141
Accrued severance ......................................... 26,048 7,866
Accrued income tax ........................................ 21,507 9,920
Liabilities held for sale (Efen) .......................... -- 6,722
Current portion of long-term debt ......................... 24,524 26,682
-------- --------
Total current liabilities ................................. 127,447 99,916
Long-term debt ............................................ 1,605 --
Deferred income taxes ..................................... -- 1,879
Accrued post-retirement benefits .......................... 23,407 19,268
Other long-term liabilities ............................... 5,412 5,658
Minority interest ......................................... 143 144
Shareholders' equity ...................................... 296,191 277,066
-------- --------
Total liabilities and shareholders' equity ................ $454,205 $403,931
======== ========
Common shares issued and outstanding
of 22,335,039 and 22,229,288,
at July 1, 2006, and December 31, 2005, respectively
1
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data, unaudited)
For the Three For the Six
Months Ended Months Ended
------------------- --------------------
JULY 1, July 2, JULY 1, July 2,
2006 2005 2006 2005
-------- -------- -------- ---------
Net sales ............................................................ $137,941 $115,693 $263,552 $229,450
Cost of sales ........................................................ 106,652 80,576 187,463 157,112
-------- -------- -------- --------
Gross profit ......................................................... 31,289 35,117 76,089 72,338
Selling, general and administrative expenses ......................... 28,599 23,538 54,421 48,999
Research and development expenses .................................... 4,790 4,246 9,465 8,525
Amortization of intangibles .......................................... 591 434 1,111 1,065
-------- -------- -------- --------
Total operating expense .............................................. 33,980 28,218 64,997 58,589
Operating income (loss) .............................................. (2,691) 6,899 11,092 13,749
Interest expense ..................................................... 359 568 772 1,041
Other income ......................................................... (939) (96) (1,510) (227)
-------- -------- -------- --------
Earnings (loss) from continuing operations before minority interest
and income taxes .................................................. (2,111) 6,427 11,830 12,935
Minority interest .................................................... -- (5) -- 2
Income taxes (benefit) ............................................... (2,560) 2,118 2,598 4,333
-------- -------- -------- --------
Earnings from continuing operations .................................. 449 4,314 9,232 8,600
Discontinued operations (net of tax) ................................. -- (57) 588 96
-------- -------- -------- --------
Net income ........................................................... $ 449 $ 4,257 $ 9,820 $ 8,696
======== ======== ======== ========
Net income per share:
Basic:
Continuing operations ............................................. $ 0.02 $ 0.19 $ 0.41 $ 0.38
======== ======== ======== ========
Discontinued operations ........................................... $ -- $ -- $ 0.03 $ 0.01
======== ======== ======== ========
Net income ........................................................ $ 0.02 $ 0.19 $ 0.44 $ 0.39
======== ======== ======== ========
Diluted:
Continuing operations ............................................. $ 0.02 $ 0.19 $ 0.41 $ 0.38
======== ======== ======== ========
Discontinued operations ........................................... $ -- $ -- $ 0.03 $ --
======== ======== ======== ========
Net income ........................................................ $ 0.02 $ 0.19 $ 0.44 $ 0.38
======== ======== ======== ========
Weighted average shares and equivalent shares outstanding:
Basic ............................................................ 22,328 22,423 22,293 22,453
======== ======== ======== ========
Diluted .......................................................... 22,693 22,613 22,612 22,681
======== ======== ======== ========
2
LITTELFUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
For the Three For the Six
Months Ended Months Ended
------------------- -------------------
JULY 1, July 2, JULY 1, July 2,
2006 2005 2006 2005
-------- -------- -------- --------
Operating activities:
Net income .................................................... $ 449 $ 4,257 $ 9,820 $ 8,696
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ............................................... 8,688 7,511 14,900 14,152
Amortization ............................................... 591 463 1,111 1,094
Stock-based compensation ................................... 1,251 -- 2,704 --
Changes in operating assets and liabilities:
Accounts receivable ........................................ (6,847) (4,908) (10,622) (6,435)
Inventories ................................................ 4,055 4,006 496 4,951
Accounts payable and accrued expenses ...................... 17,741 (1,971) 20,518 (9,234)
Prepaid expenses and other ................................. (197) 2,759 802 (1,014)
-------- -------- -------- --------
Net cash provided by operating activities ..................... 25,731 12,117 39,729 12,210
Cash used in investing activities:
Purchases of property, plant, and equipment ................ (4,797) (8,266) (9,400) (16,964)
Acquisitions of businesses ................................. (28,825) (991) (31,526) (1,019)
Sale of Efen ............................................... 2,146 -- 11,574 --
-------- -------- -------- --------
Net cash used in investing activities ......................... (31,476) (9,257) (29,352) (17,983)
Cash provided by financing activities:
Proceeds from long-term debt ............................... 16,500 11,895 22,858 26,951
Payments of long-term debt ................................. (8,924) (11,000) (25,298) (16,213)
Proceeds from repayment of notes receivable, common stock .. -- 12 7 3,533
Proceeds from exercise of stock options .................... 1,516 214 3,350 675
Purchase of treasury stock ................................. -- -- -- (3,199)
-------- -------- -------- --------
Net cash provided by financing activities ..................... 9,092 1,121 917 11,747
Effect of exchange rate changes on cash ....................... 983 (724) 1,539 (1,910)
-------- -------- -------- --------
Increase in cash and cash equivalents ......................... 4,330 3,257 12,833 4,064
Cash and cash equivalents at beginning of period .............. 30,450 29,390 21,947 28,583
-------- -------- -------- --------
Cash and cash equivalents at end of period .................... $ 34,780 $ 32,647 $ 34,780 $ 32,647
======== ======== ======== ========
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 1, 2006
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, Ireland severance, the Witten building write down
and the Teccor net operating loss tax benefit, considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended July 1, 2006 are not necessarily indicative of the results that may be
expected for the year ending December 30, 2006. For further information, refer
to the Company's consolidated financial statements and the notes thereto
incorporated by reference in the Company's Annual Report on Form 10-K for the
year ended December 31, 2005.
2. BUSINESS SEGMENT INFORMATION
The Company designs, manufactures and sells circuit protection devices
throughout the world. The Company has three reportable geographic segments:
Americas, Europe and Asia-Pacific. The circuit protection market in these
geographical segments is categorized into three major product areas: electronic,
automotive and electrical.
The Company evaluates the performance of each geographic segment based on its
sales and net income or loss. The Company accounts for intersegment sales as if
the sales were to third parties. The Company's reportable segments are the
geographical regions where the revenue is earned and expenses are incurred. The
Company has subsidiaries in Americas, Europe and Asia-Pacific.
Sales to Hong Kong were 14% and 15% of consolidated sales for the three and six
months ended July 1, 2006, respectively. No other foreign country sales exceeded
10% for the three and six months ended July 1, 2006. Sales to Arrow Pemco Group
were 11% and 12% of consolidated sales for the three and six months ended July
1, 2006, respectively. Sales to no other single customer amounted to 10% or more
of the Company's total revenues for the three and six months ended July 1, 2006.
Information concerning the operations in these geographic segments for the three
and six months ended July 1, 2006, and July 2, 2005, is as follows (in
thousands):
Three Months Three Months Six Months Six months
Ended Ended Ended Ended
July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005
------------ ------------ ------------ ------------
NET SALES
Americas $ 57,536 $ 51,119 $ 111,830 $ 99,585
Europe 29,398 17,999 57,477 50,290
Asia-Pacific 51,007 46,575 94,245 79,575
-------- -------- --------- ---------
Consolidated total $137,941 $115,693 $ 263,552 $ 229,450
INTERSEGMENT SALES
Americas $ 53,942 $ 42,079 $ 96,554 $ 80,772
Europe 20,287 12,506 42,056 25,526
Asia-Pacific 24,050 16,343 48,786 26,145
-------- -------- --------- ---------
Combined total 98,279 70,928 187,396 132,443
Eliminations (98,279) (70,928) (187,396) (132,443)
-------- -------- --------- ---------
Consolidated total $ -- $ -- $ -- $ --
4
INTEREST EXPENSE
Americas $ 329 $ 531 $ 703 $ 992
Europe 15 12 45 24
Asia-Pacific 15 25 24 25
-------- -------- --------- ---------
Consolidated total $ 359 $ 568 $ 772 $ 1,041
DEPRECIATION AND AMORTIZATION
Americas $ 3,921 $ 4,379 $ 7,636 $ 8,845
Europe 4,574 3,067 6,371 5,358
Asia-Pacific 784 528 2,004 1,043
-------- -------- --------- ---------
Consolidated total $ 9,279 $ 7,974 $ 16,011 $ 15,246
OTHER (INCOME) EXPENSE
Americas $ (763) $ 270 $ (835) $ 182
Europe 129 (1) (332) (11)
Asia-Pacific (305) (365) (343) (398)
-------- -------- --------- ---------
Consolidated total $ (939) $ (96) $ (1,510) $ (227)
INCOME TAXES
Americas $ (2,135) $ 823 $ 1,092 $ 954
Europe (1,515) 674 (704) 1,601
Asia-Pacific 1,090 621 2,210 1,778
-------- -------- --------- ---------
Consolidated total $ (2,560) $ 2,118 $ 2,598 $ 4,333
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS*
Americas $ 12,011 $ 2,060 $ 16,024 $ 2,305
Europe (16,442) (1,500) (16,875) (526)
Asia-Pacific 4,880 3,754 10,083 6,821
-------- -------- --------- ---------
Consolidated total $ 449 $ 4,314 $ 9,232 $ 8,600
NET INCOME (LOSS) *
Americas $ 12,011 $ 2,060 $ 16,024 $ 2,305
Europe (16,442) (1,557) (16,287) (430)
Asia-Pacific 4,880 3,754 10,083 6,821
-------- -------- --------- ---------
Consolidated total $ 449 $ 4,257 $ 9,820 $ 8,696
NET SALES *
Electronic $ 94,817 $ 75,001 $ 178,743 $ 147,820
Automotive 31,555 29,935 62,581 60,847
Electrical 11,569 10,757 22,228 20,783
-------- -------- --------- ---------
Consolidated total $137,941 $115,693 $ 263,552 $ 229,450
IDENTIFIABLE ASSETS* July 1, December 31,
2006 2005
--------- ------------
Americas $ 349,588 $ 280,964
Europe 165,445 208,192
Asia-Pacific 138,702 90,233
--------- ---------
Combined total 653,735 579,389
Goodwill and intangibles 88,215 69,182
Eliminations (287,745) (244,640)
--------- ---------
Consolidated total $ 454,205 $ 403,931
========= =========
* Certain prior year amounts have been reclassified to conform to the current
year presentation.
5
3. INVENTORIES
The components of inventories are as follows (in thousands):
July 1, December 31,
2006 2005
------- ------------
Raw material $15,051 $13,010
Work in process 20,646 18,996
Finished goods 30,134 31,417
------- -------
Total $65,831 $63,423
======= =======
4. LONG-TERM OBLIGATIONS
Total debt at the end of the second quarter 2006 totaled $26.1 million and
consisted of the following: (1) credit revolver borrowings totaling $20.0
million and (2) foreign revolver borrowings totaling $6.1 million.
The Company has an unsecured domestic financing arrangement consisting of a
credit agreement with banks that provides a $50.0 million revolving credit
facility that expires on August 26, 2006. The revolving credit facility is
subject to a maximum indebtedness calculation and other financial covenants. At
July 1, 2006, the Company had available $30.0 million of borrowing capability
under the revolving credit facility at an interest rate of LIBOR plus 0.875%
(5.98% as of July 1, 2006). The Company entered into a new credit arrangement on
July 21, 2006, which replaced this financing agreement. The new credit
arrangement is discussed below. The Company also had $6.0 million in letters of
credit outstanding at July 1, 2006
The Company also has an unsecured bank line of credit that provides a Yen 0.9
billion, an equivalent of $7.8 million, revolving credit facility at an interest
rate of TIBOR plus 0.875% (1.2% as of July 1, 2006). The revolving line of
credit becomes due on August 26, 2006. At July 1, 2006, the Company had an
equivalent $3.9 million outstanding on the Yen facility. The Company intends to
renew this line of credit upon maturity.
The Company also has an unsecured bank line of credit that provides a Taiwanese
Dollar 30.0 million, an equivalent of $0.9 million, revolving credit facility at
an interest rate of two-years Time Deposit plus 0.145% (2.3% as of July 1,
2006). The revolving line of credit becomes due on August 11, 2006. At July 1,
2006, the Company had an equivalent $0.6 million outstanding on the Taiwanese
Dollar facility. The Company intends to renew this line of credit upon maturity.
The Company also has various other fixed rate loans totaling $1.6 million with
maturity dates between March 2008 and January 2011.
On July 21, 2006, the Company entered into a Credit Agreement among the Company,
each lender from time to time party thereto, and Bank of America, N.A., as Agent
(the "Credit Agreement"). The Credit Agreement provides a revolving credit
facility with a commitment for up to $75 million, with a potential increase of
up to $125 million upon request of the Company and agreement of the lenders.
Borrowings will bear interest at floating rates which may vary depending on the
type of loan and the Company's consolidated leverage ratio. The Credit Agreement
matures in July 2011. The Credit Agreement replaces the Company's previous $50
million Credit Agreement dated August 26, 2003, which has been terminated.
5. IMPAIRMENT OF LONG-LIVED ASSET
During the second quarter of 2006, the Company wrote down the carrying value of
its property located in Witten, Germany, by $2.7 million. This charge was
reported as part of selling, general and administrative expenses in the European
segment of the Company's financial results. The assets are also reported as part
of the European segment. This write down was based upon an offer the Company
received and accepted during the second quarter of 2006 for the sale of the
property. The property consists of land and several buildings currently used for
manufacturing and administrative offices.
6
6. PER SHARE DATA
Net income per share amounts for the three and six months ended July 1, 2006,
and July 2, 2005, are based on the weighted average number of common and common
equivalent shares outstanding during the periods as follows (in thousands,
except per share data):
Three months ended Six months ended
------------------ -----------------
July 1, July 2, July 1, July 2,
2006 2005 2006 2005
------- ------- ------- -------
Net income $ 449 $ 4,257 $ 9,820 $ 8,696
======= ======= ======= =======
Average shares outstanding - Basic 22,328 22,423 22,293 22,453
Net effect of dilutive stock options
and restricted shares
- Diluted 365 190 319 228
------- ------- ------- -------
Average shares outstanding
- Diluted 22,693 22,613 22,612 22,681
======= ======= ======= =======
Net income per share
- Basic $ 0.02 $ 0.19 $ 0.44 $ 0.39
======= ======= ======= =======
- Diluted $ 0.02 $ 0.19 $ 0.44 $ 0.38
======= ======= ======= =======
Options to purchase 704,929 and 538,600 shares of common stock were outstanding
at July 1, 2006, and July 2, 2005 respectively, but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares and, therefore,
the effect would be anti-dilutive. During the first six months of 2006 the
Company issued 92,640 shares of common stock resulting from the exercise of
stock options.
7. ACQUISITIONS
On May 6, 2004, the Company acquired 82% of the common stock of Heinrich
Industrie AG ("Heinrich") for Euro 39.5 million (approximately $47.1 million) in
cash and acquisition costs of approximately $1.8 million. Subsequent to May 6,
2004, the Company purchased additional shares of Heinrich stock for
approximately $8.7 million, bringing the total ownership to 97.2% as of January
1, 2005. During 2005 the Company acquired the remaining outstanding shares for
approximately $3.7 million, bringing the total ownership to 100% as of December
31, 2005.
Purchase accounting liabilities in connection with the Heinrich acquisition were
estimated to be $11.5 million and are primarily for redundancy costs to be paid
through 2006 related to manufacturing operations and selling, general and
administrative functions. The Company began formulating its plan to incur these
costs as of the acquisition date. Additions to the Heinrich purchase accounting
liability during 2005 relate to redundancy costs recognized after 100% ownership
was achieved. As of July 1, 2006, $9.6 million has been paid related to these
liabilities.
A summary of the purchase accounting liability activity is as follows:
Purchase accounting liability (in thousands)
Balance, May 6, 2004 $ 7,281
Payments (85)
-------
Balance, January 1, 2005 7,196
Additions 4,179
Payments (8,685)
-------
Balance, December 31, 2005 2,690
Payments (136)
-------
Balance, April 1, 2006 2,554
7
Payments (658)
-------
Balance, July 1, 2006 $ 1,896
=======
Increases in the purchase accounting reserve pertain to additional liabilities
anticipated at the acquisition date and recognized in conjunction with the
registration of the domination agreement and related requirement to purchase
remaining shares from minority shareholders. These additional liabilities are
primarily for redundancy costs to be paid through 2006 related to manufacturing
operations and selling, general and administrative functions.
On February 3, 2006, the Company acquired SurgX Corporation ("SurgX") for $2.5
million. All of the assets of SurgX were classified as patents in the Americas
segment with an average useful life of seven years. Proforma financial
information is not presented due to amounts not being materially different than
actual results.
On May 30, 2006, the Company acquired all of the common stock of Concord
Semiconductor ("Concord") for $23.8 million in cash and acquisition costs of
approximately $0.2 million. The Company funded the acquisition with $14.0
million in cash and $10.0 million of borrowings on an existing revolving line of
credit.
Littelfuse has continued to operate Concord's electronics business subsequent to
the acquisition. The Concord acquisition expands the Company's product offering
and strengthens the Company's position in the circuit protection industry.
The acquisition was accounted for using the purchase method of accounting and
the operations of Concord are included in the Company's operations from the date
of acquisition. The following table sets forth the purchase price allocation for
the acquisition of Concord in accordance with the purchase method of accounting
with adjustments to record the acquired assets and liabilities of concord at
their estimated fair market or net realizable values.
Purchase price allocation (in thousands)
Current assets $ 9,873
Property, plant and equipment 9,101
Patents and licenses 264
Goodwill 13,096
Current liabilities (5,884)
Other long-term liabilities (2,426)
-------
$24,024
=======
All goodwill and intangible assets are recorded in the Asian segment. Patents
and licenses have an average estimated useful life of approximately four years.
The fair values are estimates and subject to revision as the Company completes
its fair value analysis. Proforma financial information is not presented due to
amounts not being materially different than actual results.
On June 26, 2006, the Company acquired Catalina Performance Accessories, Inc.
("Catalina") for $4.5 million. The Company acquired $0.4 million of accounts
receivable, $0.5 million of inventory and a $3.6 million customer list. The
customer list was reported in the Americas segment with a useful life of ten
years. Proforma financial information is not presented due to amounts not being
materially different than actual results.
8. RESTRUCTURING CHARGES
During the first quarter of 2006, the Company recorded a $2.1 million charge
related to the downsizing of the European segment's Heinrich operations. These
charges are primarily for redundancy costs to be paid through 2007.
Manufacturing related charges of $0.9 million are recorded as part of cost of
sales and non-manufacturing related charges of $1.2 million are recorded as part
of selling, general and administrative expenses. Employees affected by this
downsizing include technical, production, administrative and support employees.
In the second quarter of 2006 additional expense was recognized primarily as
part of selling, general and administrative expenses. A summary of activity of
this liability is as follows:
Heinrich restructuring (in thousands)
Balance, December 31, 2005 $ --
Additions 2,080
------
Balance, April 1, 2006 2,080
Additions 518
8
Payments (693)
------
Balance, July 1, 2006 $1,905
======
During 2005, the Company announced a downsizing of its European segment's
Ireland operation and outsourcing of more of its varistor manufacturing to lower
cost Asian subcontractors. A liability of $4.9 million was recorded as part of
cost of sales related to redundancy costs for the manufacturing operation
associated with this downsizing. This restructuring impacts approximately 35
associates in various production and support related roles. In the second
quarter of 2006, an additional $17.1 million, consisting of $20.0 million of
accrued severance less a government rebate of $2.9 million recorded as a current
asset, was recorded as part of cost of sales related to the closure of the
entire facility. This portion of the restructuring impacts approximately 131
employees. Restructuring charges are based upon each associate's current salary
and length of service with the Company. A summary of activity of this liability
is as follows:
Ireland restructuring (in thousands)
Balance, October 1, 2005 $ 4,900
Payments (897)
-------
Balance, December 31, 2005 $ 4,003
Payments (858)
-------
Balance, April 1, 2006 3,145
Additions 20,019
Payments (1,609)
-------
Balance, July 1, 2006 $21,555
=======
9. DISCONTINUED OPERATIONS
In February 2006, the Company sold the Efen product line that consists of
production and sales facilities in Uebigau and Eltville, Germany and Kaposvar,
Hungary. The Company obtained Efen as part of its acquisition of Heinrich in May
2004. Results of operations for Efen have been reclassified and presented as
discontinued operations for 2006 and 2005.
Efen's operating results are summarized as follows (in thousands):
For the Three Months Ended For the Six Months Ended
--------------------------- ---------------------------
July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005
------------ ------------ ------------ ------------
Net sales $-- $8,174 $3,789 $16,106
Income before taxes -- 143 773 498
Income taxes -- 200 324 402
--- ------ ------ -------
Net income (loss) $-- $ (57) $ 449 $ 96
--- ------ ------ -------
The Efen product line was sold for Euro 9.5 million (approximately $11.6
million). In connection with the sale a pretax loss of approximately $0.0
million, resulting in an after tax gain of $0.1 million after recognizing a tax
benefit on the sale of $0.1 million.
10. PENSIONS
The components of net periodic benefit cost for the three and six months ended
July 1, 2006, compared with the three and six months ended July 2, 2005, were
(in thousands):
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
------------------ ----------------- ------------------ ----------------
U.S. Pension Benefits Foreign Plans
-------------------------------------- -------------------------------------
2006 2005 2006 2005 2006 2005 2006 2005
----- ----- ------- ------- ----- ----- ----- -----
Service cost $ 798 $ 815 $ 1,596 $ 1,630 $ 361 $ 303 $ 722 $ 606
Interest cost 950 916 1,900 1,832 495 493 990 986
Expected return on plan
assets (1,037) (932) (2,074) (1,864) (496) (420) (992) (840)
9
Amortization of prior
service cost 2 3 4 6 (3) (3) (6) (6)
Amortization of transition
asset -- -- -- -- (27) (28) (54) (56)
Amortization of net (gain)
loss 14 102 28 204 74 43 148 86
----- ----- ------- ------- ----- ----- ----- -----
Total cost of the plan 727 904 1,454 1,808 404 388 808 776
Expected plan participants'
contribution -- -- -- -- (89) (98) (178) (196)
----- ----- ------- ------- ----- ----- ----- -----
Net periodic benefit cost $ 727 $ 904 $ 1,454 $ 1,808 $ 315 $ 290 $ 630 $ 580
----- ----- ------- ------- ----- ----- ----- -----
The expected rate of return on pension assets is 8.50% and 8.50% in 2006 and
2005, respectively.
11. COMPREHENSIVE INCOME
Total comprehensive income for the three months ended July 1, 2006, and July 2,
2005, was approximately $1.7 million and $3.2 million, respectively, and for the
six months ended July 1, 2006, and July 2, 2005, was approximately $14.0 million
and $4.0 million, respectively. The adjustment for comprehensive income consists
of deferred gains and losses from foreign currency translation adjustments and
losses on available-for-sale securities for the three and six months ended July
1, 2006 and deferred gains and losses from foreign currency translation
adjustments and qualified cash flow hedges and unrealized gains and losses on
available-for-sale securities for the three and six months ended July 2, 2005.
Foreign currency translation adjustment accounts for $4.8 million and $(4.1)
million of the difference between other comprehensive income and net income
through July 1, 2006 and July 2, 2005, respectively.
12. INCOME TAXES
Income taxes for the three and six months ended July 1, 2006 include a $2.8
million benefit related to the recognition of certain previous years net
operating losses from the Teccor acquisition.
13. STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123(R), "Share-Based Payment" ("SFAS
123(R)"). SFAS 123(R) requires public companies to recognize compensation
expense for the cost of awards of equity compensation using a fair value method.
The Company adopted SFAS 123(R) on January 1, 2006 (i.e., the first quarter of
2006) using the modified prospective method. The Company recognized the
compensation cost of all share-based awards as an expense on a straight-line
basis over the vesting period of the award. Under SFAS 123(R), benefits of tax
deductions in excess of recognized compensation expense are now reported as a
financing cash flow, rather than an operating cash flow as prescribed under the
prior accounting rules. Prior to October 1, 2005, the Company applied Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
("APB 25") to account for its stock-based compensation plans. Under APB 25, no
compensation expense was recognized for non-qualified stock option awards as
long as the exercise price of the awards on the date of grant was equal to the
current market price of the Company's stock. However, the Company did recognize
compensation expense in connection with the issuance of restricted stock. The
adoption of SFAS 123(R) primarily resulted in compensation expense being
recorded for stock options.
The following table shows total stock-based compensation expense included in the
Condensed Consolidated Statements of Income:
(In thousands, except per share amounts)
Three months ended Six months ended
July 1, 2006 July 1, 2006
------------------ ----------------
Pre-tax stock-based compensation $ 1,251 $ 2,704
Income tax (475) (1,027)
------- -------
Stock-based compensation expense, net $ 776 $ 1,677
Basic earnings per share impact $ 0.03 $ 0.08
Diluted earnings per share impact $ 0.03 $ 0.07
Results for fiscal 2005 have not been restated to reflect the adoption of SFAS
123(R). The following table discloses the Company's pro forma net income and
diluted net income per share for the three and six months ended July 2,
10
2005, had the valuation methods under SFAS 123(R) been used for the Company's
stock option grants. The table also discloses the weighted average assumptions
used in estimating the fair value using the Black-Scholes option pricing model.
(in thousands, except per share amounts)
Three months ended Six months ended
July 2, 2005 July 2, 2005
------------------ ----------------
Net income as reported $ 4,257 $ 8,696
Stock option compensation expense under fair
value method, net of tax (731) (1,471)
--------- ---------
Pro forma net income $ 3,526 $ 7,225
Basic net income per share
As reported $ 0.19 $ 0.39
Pro forma $ 0.16 $ 0.32
Diluted net income per share
As reported $ 0.19 $ 0.38
Pro forma $ 0.16 $ 0.32
Assumptions:
Expected dividend yield 0% 0%
Expected stock price volatility 39.7% 39.7%
Risk-free interest rate 3.97% 3.97%
Expected life of option (years) 7 7
During the six-month period ended July 1, 2006, options on 192,000 shares with a
strike price equal to the market price on the date of the grant, were awarded to
employees and directors. These options expire seven years after the grant date,
and vest ratably over four and five years for employees and directors,
respectively. The Company used the Black-Scholes option valuation model to
determine the fair value of awards granted during the six month period ended
July 1, 2006. The weighted average fair value of and related assumptions for
options granted were as follows:
Three months ended Six months ended
July 1, 2006 July 1, 2006
------------------ ----------------
Weighted average fair value of options granted
at fair value of underlying stock $14.06 $14.06
Assumptions:
Expected dividend yield 0% 0%
Expected stock price volatility 39.0% 39.0%
Risk-free interest rate 4.96% 4.96%
Expected life of option (years) 4.8 4.8
Forfeitures are estimated at a rate that would yield 10% over the life of the
awards.
11
The Company has stock option plans authorizing the granting of both incentive
and nonqualified options and other stock rights of common stock to employees
and directors. The stock options issued prior to 2002 vest over a five-year
period and are exercisable over a 10 year period commencing from the date of
vesting. The Company changed its policy in 2002 whereby the stock options vest
over a five-year period and are exercisable over a 10 year period commencing
from the date of the grant. This change was not made to stock options already
granted. The Company also has a performance share agreement in which a target
amount of performance share awards are granted based on the Company attaining
certain financial performance goals relating to return on net tangible assets
and earnings before interest, taxes, depreciation and amortization. These shares
vest over a three-year period commencing from the date of issuance. A
reconciliation of outstanding stock options and performance shares for the
period ending July 1, 2006, are shown below:
RECONCILIATION OF STOCK OPTIONS OUTSTANDING
Aggregate
Weighted Weighted Average Intrinsic
Shares Under Average Remaining Value
Option Exercise Price Contractual Life ($ Thousands)
------------ -------------- ---------------- -------------
Outstanding December 31, 2005 1,820,010 $27.82 7.7 4,470
Granted 192,000 34.27 -- --
Forfeited (5,650) 33.19 -- --
Exercised (92,640) 21.62 -- 930
Outstanding July 1, 2006 1,913,720 28.75 7.9 12,274
Exercisable July 1, 2006 1,075,570 27.16 7.9 8,510
RECONCILIATION OF PERFORMANCE SHARES OUTSTANDING
Weighted Aggregate
Average Grant- Projected Intrinsic
Stock Performance Date Fair Performance Share Value
Price Shares Value Award Ratio ($ Thousands)
------- ----------- -------------- ----------------- ------------
Outstanding December 31, 2005 $27.25 45,500 $27.95 42.2% 523
Granted -- 26,000 34.33 100% --
Forfeited -- -- -- -- --
Vested -- -- -- -- --
Outstanding July 1, 2006 34.38 71,500 30.27 63.2% 1,554
At July 1, 2006, the unrecognized compensation cost for options and performance
shares was $13.8 million before tax, and will be recognized over a weighted
average period of 3.5 years.
14. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 ("FIN48"), Accounting for Uncertainty in Income Taxes,
which is an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48
clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. We will implement this interpretation in the fiscal year
starting December 31, 2006. We cannot reasonably estimate the impact of this
interpretation at this time.
15. SUBSEQUENT EVENTS
On July 21, 2006, the Company entered into a Credit Agreement among the Company,
each lender from time to time party thereto, and Bank of America, N.A., as Agent
(the "Credit Agreement"). The Credit Agreement provides a revolving credit
facility with a commitment for up to $75 million, with a potential increase of
up to $125 million upon request of the Company and agreement of the lenders.
Borrowings will bear interest at floating rates which may vary depending on the
type of loan and the Company's consolidated leverage ratio. The Credit Agreement
matures in July 2011. The Credit Agreement replaces the Company's previous $50
million Credit Agreement dated August 26, 2003, which has been terminated.
On August 1, 2006 the Company acquired the gas discharge tube (GDT) assets of
SRC Devices, Inc. ("SRC"), for $6 million in cash, subject to post-closing
purchase price adjustments. The Company plans to move production of the GDT
product line from the SRC manufacturing facility in Mexico to its existing
operation in Suzhou, China.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net Sales by Geography and Market*
(in millions)
SECOND QUARTER YEAR-TO-DATE
-------------------------- --------------------------
2006 2005 % CHANGE 2006 2005 % CHANGE
------ ------ -------- ------ ------ --------
GEOGRAPHY
AMERICAS $ 57.9 $ 49.4 17% $112.5 $ 99.6 13%
EUROPE 29.0 24.3 19% 56.8 51.4 11%
ASIA-PACIFIC 51.0 42.0 21% 94.3 78.4 20%
------ ------ --- ------ ------ ---
TOTAL $137.9 $115.7 19% $263.6 $229.4 15%
====== ====== === ====== ====== ===
SECOND QUARTER YEAR-TO-DATE
-------------------------- --------------------------
2006 2005 % CHANGE 2006 2005 % CHANGE
------ ------ -------- ------ ------ --------
MARKET
ELECTRONICS $ 94.8 $ 75.0 27% $178.8 $147.8 21%
AUTOMOTIVE 31.6 29.8 6% 62.6 60.7 3%
ELECTRICAL 11.5 10.9 6% 22.2 20.9 6%
------ ------ --- ------ ------ ---
TOTAL $137.9 $115.7 19% $263.6 $229.4 15%
====== ====== === ====== ====== ===
* Certain prior year amounts have been reclassified to conform to the current
year presentation. Sales by geography represent sales to customer or
distributor locations.
Results of Operations
Second Quarter, 2006
Sales increased $22.3 million or 19% to $137.9 million in the second quarter of
2006, compared to $115.7 million in the second quarter of 2005 due improved
sales across all geographic segments. The Concord Semiconductor acquisition
added $1.6 million of sales to the second quarter of 2006.
On a geographic basis, sales in the Americas increased $8.6 million or 17% in
the second quarter of 2006, compared to the second quarter of last year. The
electronics business was the largest contributor to the sales increase
reflecting strong demand from North American distributors driven by improvement
in the markets for telecommunications and general electronics. The electrical
business also contributed to growth in the Americas due to continued improvement
in industrial manufacturing and realization of price increases. Automotive sales
in the Americas declined primarily due to the weak domestic automotive market
and continued price erosion. Europe sales increased $4.7 million or 19% in the
second quarter of 2006 compared to the second quarter of 2005. The increase in
European sales was primarily due to increased sales to electronics distributors
and to a lesser extent improvement in automotive sales. Asia-Pacific sales
increased $9.0 million or 21% compared to the prior year second quarter. The
increase in Asia-Pacific sales was mainly due to strong demand for digital
consumer and telecommunications products throughout the region. Increases in
automotive sales also contributed to the Asia-Pacific growth reflecting share
gain in the growing Asian markets outside of Japan. Exchange rates had no effect
on sales in the second quarter of 2006 compared to the prior year.
Gross profit was $31.3 million or 22.7% of sales for the second quarter of 2006,
compared to $35.1 million or 30.4% of sales in the same quarter last year. The
second quarter 2006 gross margin declined compared to the prior year due to
$17.1 million of restructuring charges related to the closure of the Ireland
facility and higher commodity prices partially offset by improved operating
leverage from higher sales and manufacturing cost reductions.
13
Total operating expense was $34.0 million or 24.6% of sales for the second
quarter of 2006 compared to $28.2 million or 24.4% of sales for the same quarter
in the prior year. The increase in operating expense reflects additional
research and development spending to support the Company's solution selling
strategy, stock-based compensation expense of $1.3 million, higher bonus expense
and $2.8 million for the write down of Heinrich real estate in Germany.
Operating income (loss) was ($2.7) million or (2.0%) of sales for the second
quarter of 2006 compared to $6.9 million or 6.0% of sales for the same quarter
of last year. The decline in operating income compared to the prior year was due
to Ireland restructuring charges, the Heinrich real estate write-down, higher
commodity prices and the inclusion of stock-based compensation expense partially
offset by improvements due to increased sales, improved operating leverage and
cost reductions.
Interest expense was $0.4 million in the second quarter of 2006 compared to $0.6
million in the second quarter of the prior year reflecting a lower average debt
balance in 2006 compared to the prior year quarter. Other income was $0.9
million for the second quarter of 2006 compared to other income of $0.1 million
in the second quarter of last year due to higher interest income and favorable
changes in exchange rates.
Earnings (loss) from continuing operations before minority interest and income
taxes was ($2.1) million for the second quarter 2006 compared to $6.4 million
for the second quarter of 2005. Income taxes were a benefit of $2.6 million for
the second quarter of 2006 compared to $2.1 million of expense in the second
quarter of last year. Income taxes in the current year quarter include a $2.8
million benefit related to the recognition of certain previous years net
operating losses from the Teccor acquisition partially offset by $0.9 million of
charges.
Net income for the second quarter of 2006 was $0.4 million or $0.02 per diluted
share compared to $4.3 million or $0.19 per diluted share for the same quarter
of last year due to the factors discussed above.
Six Months, 2006
Sales for the first six months of 2006 increased 15% to $263.6 million from
$229.4 million for the first six months of last year. On a geographic basis,
sales in the Americas increased $12.9 million or 13% in the first six months of
2006 compared to the prior year due primarily to increased North American
distributor sales reflecting improvement in the markets for telecommunications
and general electronics. Europe sales increased $5.4 million or 11% in the first
six months of 2006 compared to the prior year largely due to increased
electronics demand and to a lesser extent increased automotive sales.
Asia-Pacific sales increased $15.9 million or 20% for the first six months of
2006 compared to the same period in the prior year primarily due to increased
electronics sales throughout the region driven largely by improvements in the
markets for digital consumer and telecommunications products. Increases in
automotive sales also contributed to the Asia-Pacific growth reflecting share
gain in the growing Asian markets outside of Japan. Changes in exchanges rates
had the effect of decreasing sales by $3.0 million for the first six months of
2006 compared to the prior year.
Gross profit was $76.1 million or 28.9% of sales for the first six months of
2006 compared to $72.3 million or 31.5% of sales for the first six months of
last year. The 2006 gross margin percentage declined compared to the prior year
due to Ireland restructuring charges and higher commodity prices partially
offset by improved operating leverage from higher sales and manufacturing cost
reductions.
Total operating expense was $65.0 million or 24.7% of sales for the first six
months of 2006 compared to $58.6 million or 25.5% of sales last year. The
increase in operating expense reflects additional research and development
spending of $0.9 million to support the Company's solution selling strategy,
stock-based compensation expense of $2.7 million, higher bonus expense and a
$2.8 million write-down in 2006 of Heinrich real estate in Germany.
Operating income for the first six months of 2006 was $11.1 million or 4.2% of
sales compared to $13.7 million or 6.0% of sales for the prior year. The decline
in operating income compared to the prior year was due to Ireland restructuring
charges, the Heinrich real estate write-down, higher commodity prices and the
inclusion of stock-based compensation expense partially offset by improvements
due to increased sales, improved operating leverage and cost reductions.
14
Interest expense was $0.8 million for the first six months of 2006 compared to
$1.0 million last year due to lower average debt levels. Other income was $1.5
million for the first six months of 2006 compared to $0.2 million for the same
period last year due primarily to increases in interest income and favorable
exchange rates.
Earnings (loss) from continuing operations before minority interest and income
taxes was $11.8 million for the first six months of 2006 compared to $12.9
million the first six months of last year. Income taxes were $2.6 million for
the first six months of 2006 compared to $4.3 million for the first six months
of last year. Income taxes for the first six months of 2006 include a $2.8
million benefit related to the recognition of certain previous years net
operating losses from the Teccor acquisition partially offset by $0.9 million of
charges.
Net income for the first six months of 2006 was $9.8 million compared to $8.7
million for the same period last year. Earnings per share for the first six
months of 2006 was $0.44 per diluted share compared to $0.38 per diluted share
last year.
Liquidity and Capital Resources
Assuming no material adverse changes in market conditions or interest rates,
management expects that the Company will have sufficient cash from operations to
support both its operations and its current debt obligations for the foreseeable
future.
The EFEN business, which is presented as a discontinued operation, did not
contribute significantly to cash from operations for the first or second
quarters of 2006 or 2005.
Littelfuse started the 2006 year with $21.9 million of cash and cash
equivalents. Net cash provided by operations was $39.7 million for the first six
months. Net cash provided by operations includes net income of $9.8 million,
stock based compensation of $2.7 million, depreciation of $14.9 million and
amortization of $1.1 million in addition to various working capital and other
items. Accounts receivable increased $10.6 million due primarily to the increase
in sales during the current year quarter. Inventory, excluding inventory
increases as a result of 2006 acquisitions, decreased $0.5 million due to higher
sales and leveraged inventory controls resulting from warehouse consolidations.
Accounts payable, accrued expenses, prepaid expenses and other items contributed
$21.3 million to cash flow, primarily due to the recognition of restructuring
liabilities, partially offset by the payment of management bonuses and
restructuring charges that were previously accrued. Net cash used in investing
activities included $9.4 million in net purchases of property, plant and
equipment, $24.0 million for the purchase of Concord, $4.5 million for the
purchase of Catalina, and $3.0 million of acquisition activity primarily for the
purchase of SurgX, partially offset by $11.6 million received from the sale of
Efen. In addition, net cash provided by financing activities included net
payments of debt of $2.4 million offset by stock option exercises of $3.4
million. The effects of exchange rate changes increased cash by $1.5 million.
The net cash provided by operations and financing activities less investing
activities plus the effects of exchange rate changes resulted in a $12.8 million
net increase in cash. This left the Company with a cash balance of $34.8 million
at July 1, 2006.
The ratio of current assets to current liabilities was 1.7 to 1 at the end of
the second quarter of 2006 compared to 1.9 to 1 at the end of the second quarter
of 2005. The days sales in receivables was approximately 64 days at the end of
the second quarter of 2006, compared to 63 days at the end of fiscal 2005 and 60
days at the end of the second quarter of 2005. The increase in days sales in
receivables from the second quarter of the prior year was due primarily to
changes in payment terms for certain customers and the unfavorable effects of
the Delphi bankruptcy. The days inventory outstanding was approximately 56 days
at the end of the second quarter of 2006 compared to 75 days at the end of 2005
and 77 days at end of the second quarter of 2005.
The Company's capital expenditures, net of cash from asset sales, were $4.8
million for the second quarter of 2006 compared to $8.3 million for the second
quarter of 2005. Most of the spending in 2006 relates to manufacturing process
improvements, new product introductions and capacity expansion.
Total debt at the end of the second quarter 2006 totaled $26.1 million and
consisted of the following: (1) credit revolver borrowings totaling $20.0
million and (2) foreign revolver borrowings totaling $6.1 million.
15
The Company has an unsecured domestic financing arrangement consisting of a
credit agreement with banks that provides a $50.0 million revolving credit
facility that expires on August 26, 2006. The revolving credit facility is
subject to a maximum indebtedness calculation and other financial covenants. At
July 1, 2006, the Company had available $30.0 million of borrowing capability
under the revolving credit facility at an interest rate of LIBOR plus 0.875%
(5.98% as of July 1, 2006). The Company entered into a new credit arrangement on
July 21, 2006, which replaced this financing agreement. The new credit
arrangement is discussed below. The Company also had $6.0 million in letters of
credit outstanding at July 1, 2006.
The Company also has an unsecured bank line of credit that provides a Yen 0.9
billion, an equivalent of $7.8 million, revolving credit facility at an interest
rate of TIBOR plus 0.875% (1.2% as of July 1, 2006). The revolving line of
credit becomes due on August 26, 2006. At July 1, 2006, the Company had an
equivalent $3.9 million outstanding on the Yen facility. The Company intends to
renew this line of credit upon maturity.
The Company also has an unsecured bank line of credit that provides a Taiwanese
Dollar 30.0 million, an equivalent of $0.9 million, revolving credit facility at
an interest rate of two-years Time Deposit plus 0.145% (2.3% as of July 1,
2006). The revolving line of credit becomes due on August 11, 2006. At July 1,
2006, the Company had an equivalent $0.6 million outstanding on the Taiwanese
Dollar facility. The Company renewed this line of credit upon maturity.
The Company also has various other fixed rate loans totaling $1.6 million with
maturity dates between March 2008 and January 2011.
On July 21, 2006, the Company entered into a Credit Agreement among the Company,
each lender from time to time party thereto, and Bank of America, N.A., as Agent
(the "Credit Agreement"). The Credit Agreement provides a revolving credit
facility with a commitment for up to $75 million, with a potential increase of
up to $125 million upon request of the Company and agreement of the lenders.
Borrowings will bear interest at floating rates which may vary depending on the
type of loan and the Company's consolidated leverage ratio. The Credit Agreement
matures in July 2011. The Credit Agreement replaces the Company's previous $50
million Credit Agreement dated August 26, 2003, which has been terminated.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
The statements in this section and in the other sections of this report which
are not historical facts contained in this report are intended to be
forward-looking statements that involve risks and uncertainties, including, but
not limited to, product demand and market acceptance risks, the effect of
economic conditions, the impact of competitive products and pricing, the
integration of acquisitions, product development and patent protection,
commercialization and technological difficulties, capacity and supply
constraints or difficulties, the impact of changes in commodity prices, exchange
rate fluctuations, actual purchases under agreements, the effect of the
Company's accounting policies, labor disputes, restructuring costs in excess of
expectations, costs related to former coal mining activities, pension plan asset
returns less than expected, and other risks which may be detailed in the
Company's Securities and Exchange Commission filings. Should one or more of
these risks or uncertainties materialize or should the underlying assumptions
prove incorrect, actual results and outcomes may differ materially from those
indicated or implied in the forward-looking statements. This report should be
read in conjunction with information provided in the financial statements
appearing in the Company's Annual Report on Form 10-K for the year ended
December 31, 2005.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in foreign exchange rates,
commodities and, to a lesser extent, interest rates. Management believes that
the Company's exposure to foreign exchange rates and interest rates is
immaterial and not significant enough to warrant disclosure of quantitative
information regarding market risk.
The Company had $24.5 million of debt outstanding at July 1, 2006 in the form of
lines of credit with variable rates of interest. Approximately $1.6 million of
the Company's debt is at fixed rates.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign countries. The Company has foreign manufacturing
facilities in Mexico, England, Ireland, China, Germany and the Philippines.
Substantially all sales in Europe are denominated in Euro, U.S. Dollar and
British Pound Sterling, and substantially all sales in the Asia-Pacific region
are denominated in U.S. Dollar, Japanese Yen and South Korean Won.
The Company's identifiable foreign exchange exposures result from the purchase
and sale of products from affiliates, repayment of intercompany trade and loan
amounts and translation of local currency amounts in consolidation of financial
results. Changes in foreign currency exchange rates or weak economic conditions
in the foreign countries in which it manufactures and distributes products could
affect the Company's sales, accounts receivable values and financial results.
The Company uses netting and offsetting intercompany account management
16
techniques to reduce known foreign currency exposures deemed to be material. The
Company utilizes derivative instruments as hedges of specific foreign currency
cash flows when appropriate.
A risk management policy has been implemented by the Company that establishes
the procedures and controls over derivative financial instruments. Under the
policy, the Company does not use derivative financial instruments for trading
purposes and the use of such instruments is subject to the approval of senior
officers. Typically, the use of such derivative instruments is limited to
hedging activities related to specific foreign currency cash flows. The
Company's exposure related to such transactions is, in the aggregate, not
material to the Company's financial position, results of operations and cash
flows.
The Company uses various metals in the production of its products, including
zinc, copper and silver. The Company's earnings are exposed to fluctuations in
the prices of these commodities. The Company does not currently use derivative
financial instruments to mitigate this commodity price risk. A 10% increase in
the price of zinc and copper would reduce pre-tax profit by approximately $1.0
million and $1.1 million, respectively.
Outlook
Delphi Corporation, a significant customer of the Company, filed bankruptcy on
October 8, 2005. Delphi accounts receivable affected by the bankruptcy were
approximately $3.0 million. The Company recorded a $1.0 million reserve against
this balance in third quarter of 2005. During the second quarter of 2006, the
Company sold this accounts receivable to an external party for approximately
$2.0 million.
Item 4. Controls and Procedures
As of July 1, 2006, the Chief Executive Officer and Chief Financial Officer of
the Company evaluated the effectiveness of the disclosure controls and
procedures of the Company and concluded that these disclosure controls and
procedures are effective to ensure that material information relating to the
Company and its consolidated subsidiaries has been made known to them by the
employees of the Company and its consolidated subsidiaries during the period
preceding the filing of this Report. There were no significant changes in the
Company's internal controls during the period covered by this Report that could
materially affect these controls or could reasonably be expected to materially
affect the Company's internal control reporting, disclosures and procedures
subsequent to the last day they were evaluated by the Company's Chief Executive
Officer and Chief Financial Officer.
17
PART II - OTHER INFORMATION
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
(c) The table below provides information with respect to purchases by the
Company of shares of its common stock during each fiscal month of the
second quarter of fiscal 2006:
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number Average Total Number of Shares Maximum Number of Shares
of Shares Price Paid Purchased as Part of Publicly that May Yet Be Purchased Under
Period Purchased per Share Announced Plans or Programs the Plans or Programs
------ ------------ ---------- ----------------------------- -------------------------------
April 2006 -- -- -- 643,500
May 2006 -- -- -- 1,000,000
June 2006 -- -- -- 1,000,000
--- --- --- ---------
Total -- -- -- 1,000,000
=== === === =========
The Company's Board of Directors authorized the repurchase of up to 1,000,000
shares under a program for the period May 1, 2006 to April 30, 2007.
Item 4: Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of Littelfuse, Inc. was held on May
5, 2006.
(b) John P. Driscoll, Anthony Grillo, Gordon Hunter, Bruce A. Karsh, John
E. Major and Ronald L. Schubel were reelected as directors at the
meeting.
(c) The following votes were taken in connection with the election of
directors at the meeting:
Director Votes For Votes Withheld Abstentions Broker Non-Votes
-------- --------- -------------- ----------- ----------------
John P. Driscoll 20,859,647 682,078 -- --
Anthony Grillo 19,141,530 2,400,195 -- --
Gordon Hunter 20,227,329 1,314,396 -- --
Bruce A. Karsh 19,640,991 1,900,734 -- --
John E. Major 19,046,255 2,495,470 -- --
Ronald L. Schubel 20,352,195 1,189,530 -- --
The proposal to ratify the Board of Director's appointment of Ernst &Young
LLP as the Company's independent registered public accounting firm for the
fiscal year of the Company ending December 30, 2006 was approved. The following
votes were taken in connection with this proposal:
18
Proposal Votes For Votes Against Votes Withheld Abstentions Broker Non-Votes
-------- ---------- ------------- -------------- ----------- ----------------
Ratification of the 21,430,195 99,761 -- -- --
Board of Director's
appointment of Ernst &
Young LLP as independent
registered public
accounting firm for
fiscal 2006
The proposal to approve the establishment of the Littelfuse, Inc. Equity
Incentive Compensation Plan, effective as of March 1, 2006, which would
supersede and replace the Stock Plan for Employees and Directors of Littelfuse,
Inc., adopted effective December 16, 1991, and the 1993 Stock Plan for Employees
and Directors of Littelfuse, Inc., adopted effective February 12, 1993 (the
"Prior Plans"), except that the Prior Plans shall remain in effect with respect
to awards granted under such Prior Plans until such awards have been exercised,
forfeited, canceled, expired or otherwise terminated in accordance with the
terms of such awards, was approved. The following votes were taken in connection
with this proposal:
Proposal Votes For Votes Against Votes Withheld Abstentions Broker Non-Votes
-------- ---------- ------------- -------------- ----------- ----------------
Equity Incentive
Compensation Plan 17,585,091 2,996,761 -- -- --
The proposal to approve the establishment of the Littelfuse, Inc. Outside
Directors' Stock Option Plan, effective as of March 1, 2006, which would
supersede and replace the Stock Plan for New Directors of Littelfuse, Inc., and,
to the extent such plans provided for grants to outside directors, the Prior
Plans, except that the Prior Plans shall remain in effect with respect to awards
granted under such Prior Plans until such awards have been exercised, forfeited,
canceled, expired or otherwise terminated in accordance with the terms of such
awards, was approved. The following votes were taken in connection with this
proposal:
Proposal Votes For Votes Against Votes Withheld Abstentions Broker Non-Votes
-------- ---------- ------------- -------------- ----------- ----------------
Outside Directors'
Stock Option Plan 18,196,399 2,384,964 -- -- --
(d) Not applicable
19
Item 6: Exhibits
Exhibit Description
------- -----------
3(II) By Laws of Littelfuse, Inc., as amended to date (incorporated herein
by reference to Exhibit 3(II) to the Company's Current Report on Form
8-K/A dated May 5, 2006)
10.1 G. Hunter Employment Agreement (incorporated herein by
reference to Exhibit 99.1 to the Company's Current Report on Form 8-K
dated May 1, 2006)
10.2 Littelfuse, Inc. Equity Incentive Compensation Plan (incorporated
herein by reference to Exhibit A to the Company's Proxy Statement for
Annual Meeting of Stockholders to be held on May 5, 2006)
10.3 Littelfuse, Inc. Outside Directors' Stock Option Plan (incorporated
herein by reference to Exhibit B to the Company's Proxy Statement for
Annual Meeting of Stockholders to be held on May 5, 2006)
10.4 Form of Non-Qualified Stock Option Agreement under the Littelfuse,
Inc. Equity Incentive Compensation Plan (incorporated herein by
reference to Exhibit 99.4 to the Company's Current Report on Form 8-K
dated May 5, 2006)
10.5 Form of Performance Share Agreement under the Littelfuse, Inc. Equity
Incentive Compensation Plan (incorporated herein by reference to
Exhibit 99.5 to the Company's Current Report on Form 8-K dated May 5,
2006)
10.6 Form of Non-Qualified Stock Option Agreement under the Littelfuse,
Inc. Outside Directors' Stock Option Plan (incorporated herein by
reference to Exhibit 99.6 to the Company's Current Report on Form 8-K
dated May 5, 2006)
31.1 Certification of Gordon Hunter, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Philip G. Franklin, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter
ended July 1, 2006, to be signed on its behalf by the undersigned thereunto duly
authorized.
LITTELFUSE, INC.
Date: August 10, 2006 By /s/ Philip G. Franklin
-------------------------------------
Philip G. Franklin
Vice President, Operations Support
and Chief Financial Officer
(As duly authorized officer and as
the principal financial and
accounting officer)
20