QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 01, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 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 of incorporation or organization)
(I.R.S. Employer Identification No.)
8755 West Higgins Road
Suite 500
Chicago
Illinois
60631
(Address of principal executive offices)
(ZIP Code)
Registrant’s telephone number, including area code: 773-628-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of exchange on which registered
Common Stock, $0.01 par value
LFUS
NASDAQ
Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes [ ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No [X]
As of July 28, 2023, the registrant had outstanding 24,891,509 shares of Common Stock, net of Treasury Shares.
Notes to Condensed Consolidated Financial Statements
1. Summary of Significant Accounting Policies and Other Information
Nature of Operations
Founded in 1927, Littelfuse is a diversified, industrial technology manufacturing company empowering a sustainable, connected, and safer world. Across more than 20 countries, and with approximately 18,000 global associates, the Company partners with customers to design and deliver innovative, reliable solutions. Serving over 100,000 end customers, the Company’s products are found in a variety of industrial, transportation and electronics end markets – everywhere, every day.
Basis of Presentation
The Company’s accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and disclosures normally included in the consolidated balance sheets, statements of net income and comprehensive income, statements of cash flows, and statements of stockholders' equity prepared in conformity with U.S. GAAP have been condensed or omitted as permitted by such rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. They have been prepared in accordance with accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which should be read in conjunction with the disclosures therein. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Operating results for interim periods are not necessarily indicative of annual operating results.
Revenue Recognition
Revenue Disaggregation
The following tables disaggregate the Company’s revenue by primary business units for the three and six months ended July 1, 2023 and July 2, 2022:
See Note 15, Segment Information for net sales by segment and countries.
Revenue Recognition
The Company recognizes revenue on product sales in the period in which the Company satisfies its performance obligation and control of the product is transferred to the customer. The Company’s sales arrangements with customers are predominately short term in nature and generally provide for transfer of control at the time of shipment as this is the point at which title and risk of loss of the product transfers to the customer. At the end of each period, for those shipments where title to the products and the risk of loss and rewards of ownership do not transfer until the product has been received by the customer, the Company adjusts revenues and cost of sales for the delay between the time that the products are shipped and when they are received by the customer. The amount of revenue recorded reflects the consideration to which the Company expects to be entitled in exchange for goods and may include adjustments for customer allowance, rebates and price adjustments. The Company’s distribution channels are primarily through direct sales and independent third-party distributors.
The Company elected the practical expedient under Accounting Standards Codification ("ASC") 340-40-25-4 to expense commissions when incurred as the amortization period of the commission asset the Company would have otherwise recognized is less than one year.
Revenue and Billing
The Company generally accepts orders from customers through receipt of purchase orders or electronic data interchange based on written sales agreements and purchasing contracts. Contract pricing and selling agreement terms are based on market factors, costs, and competition. Pricing is often negotiated as an adjustment (premium or discount) from the Company’s published price lists. The customer is invoiced when the Company’s products are shipped to them in accordance with the terms of the sales agreement. As the Company’s standard payment terms are less than one year, the Company elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component. The Company also elected the practical expedient provided in ASC 606-10-25-18B to treat all product shipping and handling activities as fulfillment activities, and therefore recognize the gross revenue associated with the contract, inclusive of any shipping and handling revenue.
Ship and Debit Program
Some of the terms of the Company’s sales agreements and normal business conditions provide customers (distributors) the ability to receive price adjustments on products previously shipped and invoiced. This practice is common in the industry and is referred to as a “ship and debit” program. This program allows the distributor to debit the Company for the difference between the distributors’ contracted price and a lower price for specific transactions. Under certain circumstances (usually in a competitive situation or large volume opportunity), a distributor will request authorization for pricing allowances to reduce its
price. When the Company approves such a reduction, the distributor is authorized to “debit” its account for the difference between the contracted price and the lower approved price. The Company establishes reserves for this program based on historical activity, distributor inventory levels 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 certain customers, with prior authorization from Littelfuse management, can return previously purchased goods for full or partial credit. The Company establishes an estimated allowance for these returns based on historical activity. Sales revenue and cost of sales are reduced to anticipate estimated returns.
Volume Rebates
The Company offers volume based sales incentives to certain customers to encourage greater product sales. If customers achieve their specific quarterly or annual sales targets, they are entitled to rebates. The Company estimates the projected amount of rebates that will be achieved by the customer and recognizes this estimated cost as a reduction to revenue as products are sold.
Cash, Cash Equivalents, and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash at July 1, 2023 and December 31, 2022 reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statement of Cash Flows.
(in thousands)
July 1, 2023
December 31, 2022
Cash and cash equivalents
$
480,743
$
562,588
Restricted cash included in prepaid expenses and other current assets
771
802
Restricted cash included in other long-term assets
1,580
1,549
Total cash, cash equivalents, and restricted cash
$
483,094
$
564,939
Recently Issued Accounting Standards
In March 2023, the Financial Accounting Standards Board ("FASB") issued ASU No. 2023-01, "Leases (Topic 842): Common Control Arrangements". The standard requires that leasehold improvements associated with common control leases be: 1) Amortized by the lessee over the useful life of the leasehold improvements to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset (the leased asset) through a lease. However, if the lessor obtained the right to control the use of the underlying asset through a lease with another entity not within the same common control group, the amortization period may not exceed the amortization period of the common control group. 2) Accounted for as a transfer between entities under common control through an adjustment to equity (or net assets for not-for-profit entities) if, and when, the lessee no longer controls the use of the underlying asset. Additionally, those leasehold improvements are subject to the impairment guidance in Topic 360, Property, Plant, and Equipment. This standard is effective on January 1, 2024. The Company does not expect any material effect on the Company's Condensed Consolidated Financial Statements.
2. Acquisitions
The Company accounts for acquisitions using the acquisition method in accordance with ASC 805, “Business Combinations,” in which assets acquired and liabilities assumed are recorded at fair value as of the date of acquisition. The operating results of the acquired business are included in the Company’s Condensed Consolidated Financial Statements from the date of the acquisition.
Western Automation
On February 3, 2023, the Company completed the acquisition of Western Automation Research and Development Limited (“Western Automation”) for approximately $162 million in cash. Headquartered in Galway, Ireland, Western Automation is a designer and manufacturer of electrical shock protection devices used across a broad range of high-growth end markets,
including e-Mobility off-board charging infrastructure, industrial safety and renewables. At the time the Company and Western Automation entered into the definitive agreement, Western Automation had annualized sales of approximately $25 million. The business is reported within the Company’s Industrial segment.
The acquisition was funded with cash on hand. The total purchase consideration of $158.3 million, net of cash, has been allocated, on a preliminary basis, to assets acquired and liabilities assumed, as of the completion of the acquisition, based on preliminary estimated fair values. The purchase price allocation is preliminary because the evaluations necessary to assess the fair values of the net assets acquired are still in process. The primary area not yet finalized relates to the completion of the valuation of certain acquired income tax assets and liabilities. As a result, these allocations are subject to change during the purchase price allocation period as the valuations are finalized.
The following table summarizes the preliminary purchase price allocation of the fair value of assets acquired and liabilities assumed in the Western Automation acquisition:
(in thousands)
Purchase Price Allocation
Total purchase consideration:
Cash, net of cash acquired
$
158,260
Allocation of consideration to assets acquired and liabilities assumed:
Trade receivables, net
3,389
Inventories
3,678
Other current assets
718
Property, plant, and equipment
1,328
Intangible assets
68,000
Goodwill
94,823
Other non-current assets
573
Current liabilities
(5,251)
Other non-current liabilities
(8,998)
$
158,260
All Western Automation assets and liabilities were recorded in the Industrial segment and are primarily reflected in the Europe geographic area. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining Western Automation’s products and technology with the Company’s existing Industrial products portfolio. Goodwill resulting from the Western Automation acquisition is not expected to be deductible for tax purposes.
Included in the Company’s Condensed Consolidated Statements of Net Income for the three and six months ended July 1, 2023 are net sales of approximately $4.8 million and $7.5 million respectively, and an income before income taxes of $0.3 million and $0.2 million, respectively, since the February 3, 2023 acquisition of Western Automation.
During the six months ended July 1, 2023, the Company incurred approximately $1.4 million of legal and professional fees related to the Western Automation acquisition recognized as Selling, general, and administrative expenses. These costs were reflected as other non-segment costs.
C&K Switches
On July 19, 2022, the Company completed the previously announced acquisition of C&K Switches (“C&K”) for $540 million in cash. Founded in 1928, C&K is a leading designer and manufacturer of high-performance electromechanical switches and interconnect solutions with a strong global presence across a broad range of end markets, including industrial, transportation, datacom, and aerospace. At the time the Company and C&K entered into the definitive agreement, C&K had annualized sales of over $200 million. The business is reported as part of the electronics-passive products and sensors business within the Company's Electronics segment.
The acquisition was funded through a combination of cash on hand and debt. The total purchase consideration of $523.0 million, net of cash acquired, has been allocated, on a preliminary basis, to assets acquired and liabilities assumed, as of the completion of the acquisition, based on preliminary estimated fair values. The purchase price allocation is preliminary because the evaluations necessary to assess the fair values of the net assets acquired are still in process. The primary area not
yet finalized relates to the completion of the valuation of certain acquired income tax assets and liabilities. As a result, these allocations are subject to change during the purchase price allocation period as the valuations are finalized.
The following table summarizes the preliminary purchase price allocation of the fair value of assets acquired and liabilities assumed in the C&K acquisition:
(in thousands)
Purchase Price Allocation
Total purchase consideration:
Cash, net of cash acquired
$
523,014
Allocation of consideration to assets acquired and liabilities assumed:
Trade receivables, net
20,967
Inventories
42,968
Other current assets
2,932
Property, plant, and equipment
32,791
Intangible assets
254,700
Goodwill
274,124
Other non-current assets
14,797
Current liabilities
(47,687)
Long-term debt
(9,626)
Other non-current liabilities
(62,952)
$
523,014
All C&K goodwill, other assets and liabilities were recorded in the Electronics segment and are reflected in the Americas, Europe and Asia-Pacific geographic areas. The goodwill resulting from this acquisition consists largely of the Company’s expected future product sales and synergies from combining C&K’s products and technology with the Company’s existing Electronics products portfolio. Goodwill resulting from the C&K acquisition is not expected to be deductible for tax purposes.
During the three months ended July 1, 2023, the Company recorded measurement period adjustments to increase other non-current liabilities of $4.2 million associated with uncertain tax positions, income taxes payable of $0.2 million, and reduce accrued liabilities of $0.3 million and deferred tax liabilities of $0.2 million. As a result of these adjustments, goodwill was increased by $3.9 million.
As required by purchase accounting rules, the Company recorded a $10.8 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 sales during the third and fourth quarter of 2022 as the acquired inventory was sold and reflected as other non-segment costs.
Embed
On April 12, 2022, the Company acquired Embed Ltd. (“Embed”). Founded in 2005, Embed is a proven provider of embedded software and firmware developed for a broad range of applications serving transportation end markets, primarily including commercial vehicle electrification and eMobility. The business is included in the commercial vehicle business within the Company's Transportation segment. The acquisition was funded with the Company’s cash on hand. The total purchase consideration was $9.2 million, net of cash.
Pro Forma Results
The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company and Western Automation as though the acquisition had occurred as of January 2, 2022, and C&K as though the acquisition had occurred as of December 27, 2020, and Carling business acquired on November 30, 2021 as though the acquisition had occurred as of December 29, 2019. The Company has not included pro forma results of operations for Embed as its operations were not material to the Company. The pro forma amounts presented are not necessarily indicative of either the actual consolidated results had the Western Automation acquisition occurred as of January 2, 2022, and had the C&K acquisition occurred as of December 27, 2020 and had Carling acquisition occurred as of December 29, 2019 or of future consolidated operating results.
Pro forma results presented above primarily reflect the following adjustments:
For the Three Months Ended
For the Six Months Ended
(in thousands)
July 1, 2023
July 2, 2022
July 1, 2023
July 2, 2022
Amortization (a)
$
—
$
(3,709)
$
(479)
$
(7,439)
Depreciation
—
805
—
1,528
Transaction costs (b)
30
2,264
1,427
4,243
Amortization of inventory step-up (c)
—
—
—
4,769
Interest expense (d)
—
123
—
317
Income tax expense of above items
(3)
(55)
(118)
(1,250)
(a) The amortization adjustment for the six months ended July 1, 2023 and three and six months ended July 2, 2022 primarily reflects incremental amortization resulting from the measurement of intangibles at their fair values.
(b) The transaction cost adjustments reflect the reversal of certain legal and professional fees from the three and six months ended July 1, 2023 and three and six months ended July 2, 2022, and recognition of those fees during the three and six months ended July 1, 2023.
(c) The amortization of inventory step-up adjustment reflects the reversal of the amount recognized related to the Carling acquisition during the three months ended April 2, 2022. The inventory step-up was amortized over four months as the inventory was sold.
(d) The interest expense adjustment reflects incremental interest expense related to the financing of the C&K acquisition.
3. Inventories
The components of inventories at July 1, 2023 and December 31, 2022 are as follows:
The components of net property, plant, and equipment at July 1, 2023 and December 31, 2022 are as follows:
(in thousands)
July 1, 2023
December 31, 2022
Land and land improvements
$
21,970
$
22,089
Building and building improvements
193,254
191,733
Machinery and equipment
838,909
812,540
Accumulated depreciation
(572,566)
(545,252)
Total
$
481,567
$
481,110
The Company recorded depreciation expense of $18.0 million and $15.7 million for the three months ended July 1, 2023 and July 2, 2022, respectively, and $35.6 million and $31.3 million for the six months ended July 1, 2023 and July 2, 2022, respectively.
5. Goodwill and Other Intangible Assets
Changes in the carrying value of goodwill by segment for the six months ended July 1, 2023 are as follows:
(in thousands)
Electronics
Transportation
Industrial
Total
Net book value of goodwill as of December 31, 2022
Gross goodwill as of December 31, 2022
$
909,167
$
234,793
$
84,889
$
1,228,849
Accumulated impairment losses as of December 31, 2022
—
(33,401)
(8,526)
(41,927)
Total
909,167
201,392
76,363
1,186,922
Changes during 2023:
Additions (a)
3,879
—
94,823
98,702
Currency translation
3,384
365
(185)
3,564
Net book value of goodwill as of July 1, 2023
Gross goodwill as of July 1, 2023
916,430
235,281
179,719
1,331,430
Accumulated impairment losses as of July 1, 2023
—
(33,524)
$
(8,718)
(42,242)
Total
$
916,430
$
201,757
$
171,001
$
1,289,188
(a) The additions resulted from the acquisitions of Western Automation and measurement period adjustment related to the C&K acquisition.
The components of other intangible assets as of July 1, 2023 and December 31, 2022 are as follows:
As of July 1, 2023
(in thousands)
Gross Carrying Value
Accumulated Amortization
Net Book
Value
Land use rights
$
17,275
$
2,470
$
14,805
Patents, licenses, and software
271,310
151,514
119,796
Distribution network
43,089
43,089
—
Customer relationships, trademarks, and tradenames
Customer relationships, trademarks, and tradenames
623,721
165,563
458,158
Total
$
942,995
$
349,025
$
593,970
During the three months ended July 1, 2023 and July 2, 2022, the Company recorded amortization expense of $16.9 million and $11.6 million, respectively. During the six months ended July 1, 2023 and July 2, 2022, the Company recorded amortization expense of 33.8 million and $24.3 million, respectively.
During the six months ended July 1, 2023, the Company recorded additions to intangible assets of $68.0 million, related to the Western Automation acquisition, the components of which were as follows:
(in thousands)
Weighted Average Useful Life
Amount
Patents, licenses, and software
6.7
$
11,500
Customer relationships, trademarks, and tradenames
14.7
56,500
Total
$
68,000
Estimated annual amortization expense related to intangible assets with definite lives as of July 1, 2023 is as follows:
(in thousands)
Amount
2023
$
65,730
2024
62,859
2025
62,536
2026
51,576
2027
49,529
2028 and thereafter
369,854
Total
$
662,084
6. Accrued Liabilities
The components of accrued liabilities as of July 1, 2023 and December 31, 2022 are as follows:
Employee-related liabilities consist primarily of payroll, sales commissions, bonus, employee benefit accruals and workers’ compensation. Bonus accruals include amounts earned pursuant to the Company’s primary employee incentive compensation plans. Other accrued liabilities include miscellaneous operating accruals and other client-related liabilities.
7. Restructuring, Impairment, and Other Charges
The Company recorded restructuring, impairment, and other charges for the three and six months ended July 1, 2023 and July 2, 2022 as follows:
Three months ended July 1, 2023
Six months ended July 1, 2023
(in thousands)
Electronics
Transportation
Industrial
Total
Electronics
Transportation
Industrial
Total
Employee terminations
$
987
$
351
$
277
$
1,615
$
1,659
$
933
$
594
$
3,186
Other restructuring charges
250
412
654
1,316
257
684
654
1,595
Total restructuring charges
1,237
763
931
2,931
1,916
1,617
1,248
4,781
Impairment
—
3,870
54
3,924
—
3,870
54
3,924
Total
$
1,237
$
4,633
$
985
$
6,855
$
1,916
$
5,487
$
1,302
$
8,705
Three months ended July 2, 2022
Six months ended July 2, 2022
(in thousands)
Electronics
Transportation
Industrial
Total
Electronics
Transportation
Industrial
Total
Employee terminations
$
201
$
423
$
—
$
624
$
406
$
423
$
—
$
829
Other restructuring charges
3
7
—
10
3
20
—
23
Total
$
204
$
430
$
—
$
634
$
409
$
443
$
—
$
852
2023
For the three and six months ended July 1, 2023, the Company recorded total restructuring charges of $2.9 million and $4.8 million, respectively, primarily for employee termination costs. These charges primarily related to the reorganization of certain selling and administrative functions within the Electronics segment due to the C&K acquisition and the reorganization of certain manufacturing, selling and administrative functions within the Transportation segment’s commercial vehicle business. In addition, during the second quarter of 2023, the Company recognized a $3.9 million impairment charge related to the land and building of a property in the commercial vehicle business within the Transportation segment that the Company made the decision to donate.
2022
For the three and six months ended July 2, 2022, the Company recorded total restructuring charges of $0.6 million and $0.9 million, respectively. primarily for employee termination costs. These charges are primarily related to the reorganization of certain manufacturing, selling, and administrative functions within the Electronics segment.
The restructuring liability as of July 1, 2023 and December 31, 2022 is $1.7 million and $2.4 million, respectively. The restructuring liability is included within accrued liabilities in the Condensed Consolidated Balance Sheets. The Company anticipates the remaining payments associated with employee terminations will primarily be completed in fiscal year 2023.
The carrying amounts of debt at July 1, 2023 and December 31, 2022 are as follows:
(in thousands)
July 1, 2023
December 31, 2022
Revolving Credit Facility
$
100,000
$
100,000
Term Loan
292,500
296,250
Euro Senior Notes, Series A due 2023
127,220
124,716
Euro Senior Notes, Series B due 2028
103,298
101,265
U.S. Senior Notes, Series B due 2027
100,000
100,000
U.S. Senior Notes, Series A due 2025
50,000
50,000
U.S. Senior Notes, Series B due 2030
125,000
125,000
U.S. Senior Notes, due 2032
100,000
100,000
Other
7,942
9,113
Unamortized debt issuance costs
(4,302)
(4,847)
Total debt
1,001,658
1,001,497
Less: Current maturities
(137,435)
(134,874)
Total long-term debt
$
864,223
$
866,623
Revolving Credit Facility and Term Loan
On June 30, 2022, the Company amended and restated its Credit Agreement, dated as of April 3, 2020 (the “Credit Agreement”) to effect certain changes, including, among other changes: (i) adding a $300 million unsecured term loan credit facility; (ii) making certain financial and non-financial covenants less restrictive on the Company and its subsidiaries; (iii) replacing LIBOR-based interest rate benchmarks and modifying performance-based interest rate margins; and (iv) extending the maturity date to June 30, 2027 (the “Maturity Date”). Pursuant to the Credit Agreement, the Company may, from time to time, increase the size of the revolving credit facility or enter into one or more tranches of term loans in minimum increments of $25 million if there is no event of default and the Company is in compliance with certain financial covenants.
Loans made under the available credit facility pursuant to the Credit Agreement ("the Credit Facility") bear interest at the Company’s option, at either Secured Overnight Financing Rate ("SOFR"), fixed for interest periods of one, two, three or six-month periods, plus 1.00% to 1.75%, plus a SOFR adjustment of 0.10% or at the bank’s Base Rate, as defined in the Credit Agreement, plus —% to 0.75%, based upon the Company’s Consolidated Leverage Ratio, as defined in the Credit Agreement. The Company is also required to pay commitment fees on unused portions of the Credit Facility ranging from 0.10% to 0.175%, based on the Consolidated Leverage Ratio, as defined in the Credit Agreement. The Credit Agreement includes representations, covenants and events of default that are customary for financing transactions of this nature.
Under the Credit Agreement, revolving loans may be borrowed, repaid and reborrowed until the Maturity Date, at which time all amounts borrowed must be repaid. The Company borrowed $300.0 million under a term loan on June 30, 2022. The principal balance of the term loans must be repaid in quarterly installments on the last day of each calendar quarter in the amount of $1.9 million commencing September 30, 2022, through June 30, 2024, and in the amount of $3.8 million commencing September 30, 2024, through March 31, 2027, with the remaining outstanding principal balance payable in full on the Maturity Date. Accrued interest on the loans is payable in arrears on each interest payment date applicable thereto and at such other times as may be specified in the Credit Agreement. Subject to certain conditions, (i) the Company may terminate or reduce the Aggregate Revolving Commitments, as defined in the Credit Agreement, in whole or in part, and (ii) the Company may prepay the revolving loans or the term loans at any time, without premium or penalty. During the three and six months ended July 1, 2023, the Company made payments of $1.9 million and $3.8 million on its term loan, respectively. The revolving loan and term loan balance under the Credit Facility was $100.0 million and $292.5 million, respectively, as of July 1, 2023.
On May 12, 2022, the Company entered into an interest rate swap agreement to manage interest rate risk exposure, effectively converting the interest rate on the Company's SOFR based floating-rate loans to a fixed-rate. The interest rate swap, with a notional value of $200 million, was designated as a cash flow hedge against the variability of cash flows associated with the Company's SOFR based loans scheduled to mature on June 30, 2027.
As of July 1, 2023, the effective interest rate on revolving loan and term loan outstanding borrowings was 6.45%.
As of July 1, 2023, the Company had $0.2 million outstanding letters of credit under the Credit Facility and had $599.8 million of borrowing capacity available under the revolving Credit Facility. As of July 1, 2023, 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”) were funded. During the first quarter of 2022, the Company paid off $25 million of U.S. Senior Notes, Series A due on February 15, 2022. Interest on the U.S. Senior Notes due 2027 is payable semiannually on February 15 and August 15, commencing August 15, 2017.
On November 15, 2017, the Company entered into a Note Purchase Agreement pursuant to which the Company issued and sold $175 million in aggregate principal amount of senior notes in two series. On January 16, 2018, $50 million aggregate principal amount of 3.48% Senior Notes, Series A, due February 15, 2025 (“U.S. Senior Notes, Series A due 2025”) and $125 million in aggregate principal amount of 3.78% Senior Notes, Series B, due February 15, 2030 (“U.S. Senior Notes, Series B due 2030”) (together, the “U.S. Senior Notes due 2025 and 2030”) were funded. Interest on the U.S. Senior Notes due 2025 and 2030 is payable semiannually on February 15 and August 15, commencing on August 15, 2018.
On May 18, 2022, the above note purchase agreements were amended to, among other things, update certain terms, including financial covenants to be consistent with the terms of the restated Credit Agreement and the 2022 Purchase Agreement, as defined below.
On May 18, 2022, the Company entered into a Note Purchase Agreement (“2022 Purchase Agreement”) pursuant to which the Company issued and funded on July 18, 2022 $100 million in aggregate principal amount of 4.33% Senior Notes, due June 30, 2032 (“U.S. Senior Notes, due 2032”) (together with the U.S. Senior Notes due 2025 and 2030, the Euro Senior Notes and the U.S. Senior Notes due 2022 and 2027, the “Senior Notes”). Interest on the U.S. Senior Notes due 2032 is payable semiannually on June 30 and December 30, commencing on December 30, 2022.
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 July 1, 2023, the Company was in compliance with all covenants under the Senior Notes.
The Company may redeem the Senior Notes upon the satisfaction of certain conditions and the payment of a make-whole amount to noteholders and are required to offer to repurchase the Senior Notes at par following certain events, including a change of control.
Interest paid on all Company debt was $10.3 million and $2.3 million for the three months ended July 1, 2023 and July 2, 2022, respectively, and $21.3 million and $8.4 million for the six months ended July 1, 2023 and July 2, 2022, respectively.
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
.
There were no transfers in or out of Level 1, Level 2 and Level 3 during the period.
Following is a description of the valuation methodologies used for instruments measured at fair value and their classification in the valuation hierarchy.
Cash Equivalents
Cash equivalents primarily consist of money market funds, which are held with an institution with sound credit rating and are highly liquid. The Company classified cash equivalents as Level 1 and are valued at cost which approximates fair value.
Investments in Equity Securities
Investments in equity securities listed on a national market or exchange are valued at the last sales price and classified within Level 1 of the valuation hierarchy and recorded in Investments and Other long-term assets.
Derivatives Designated as Hedging Instruments
On May 12, 2022, the Company entered into an interest rate swap agreement to manage interest rate risk exposure, effectively converting the interest rate on the Company's SOFR based floating-rate loans to a fixed-rate. The interest rate swap, with a notional value of $200 million, was designated as a cash flow hedge against the variability of cash flows associated with the Company's SOFR based loans scheduled to mature on June 30, 2027. The fair value of the interest rate swap was valued using an independent third-party valuation model. Pursuant to this model, changes in fair value of derivatives that are designated as cash flow hedges are deferred in accumulated other comprehensive loss until the underlying transactions are recognized in earnings. The primary inputs into the valuation of the interest rate swap are interest yield curves, interest rate volatility, credit risk, credit spreads and other market information. The interest rate swap is classified within Level 2 of the fair value hierarchy, since all significant inputs are corroborated by market observable data.
The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. The Company seeks to minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings and monitoring the total value of positions with individual counterparties. In the event of a default by one of our counterparties, the Company may not receive payments provided for under the terms of our derivatives.
Derivatives Not Designated as Hedging Instruments
On July 14, 2022, the Company entered into a foreign currency exchange forward contract to mitigate the currency fluctuation risk between the Euro and U.S. dollar on its Euro denominated Senior Notes, Series A due 2023. The notional value of the forward contract at July 1, 2023 was €117.0 million and expires on December 7, 2023. The foreign currency contract was not designated as a hedge instrument and is marked to market on a monthly basis. As a result, changes in fair value are reported in Foreign exchange (gain) loss in the Condensed Consolidated Statements of Operations. The fair value of the foreign currency forward contract was valued using market exchange rates by a third party and classified as a Level 2 input under the fair value hierarchy.
As of July 1, 2023 and December 31, 2022, the fair values of our derivative financial instrument and their classifications on the Condensed Consolidated Balance Sheets were as follows:
The pre-tax (gains) losses recognized on derivative financial instruments in the Condensed Consolidated Statements of Operations for the three and six months ended July 1, 2023 and July 2, 2022 were as follows:
Three Months Ended
Six Months Ended
(in thousands)
Classification of (Gain) Loss Recognized in the Condensed Consolidated Statements of Operations
July 1, 2023
July 2, 2022
July 1, 2023
July 2, 2022
Derivatives designated as cash flow hedges
Interest rate swap agreement
Interest expense, net
$
(1,119)
$
21
$
(2,094)
$
21
Derivatives Not Designated as Hedging Instruments
Foreign exchange forward contract
Foreign exchange (gain) loss
$
(264)
$
—
$
(1,083)
$
—
The pre-tax (gains) losses recognized on derivative financial instruments in the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 1, 2023 and July 2, 2022 was as follows:
Three Months Ended
Six Months Ended
(in thousands)
July 1, 2023
July 2, 2022
July 1, 2023
July 2, 2022
Derivatives designated as cash flow hedges
Interest rate swap agreement
$
(4,096)
$
712
$
(783)
$
712
The pre-tax gain of $4.8 million from accumulated other comprehensive loss to earnings is expected to be recognized during the next twelve months.
Mutual Funds
The Company has a non-qualified Supplemental Retirement and Savings Plan which provides additional retirement benefits for certain management employees and named executive officers by allowing participants to defer a portion of their annual compensation. The Company maintains accounts for participants through which participants make investment elections. The marketable securities are classified as Level 1 under the fair value hierarchy as they are maintained in mutual funds with readily determinable fair value and recorded in Other long-term assets.
There were no changes during the quarter ended July 1, 2023 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of July 1, 2023 and December 31, 2022, the Company did not hold any non-financial assets or liabilities that are required to be measured at fair value on a recurring basis.
The following table presents assets measured at fair value by classification within the fair value hierarchy as of July 1, 2023:
Fair Value Measurements Using
(in thousands)
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total
Cash equivalents
$
246,566
$
—
$
—
$
246,566
Investments in equity securities
11,573
—
—
11,573
Mutual funds
18,513
—
—
18,513
Total
$
276,652
$
—
$
—
$
276,652
The following table presents assets measured at fair value by classification within the fair value hierarchy as of December 31, 2022:
Fair Value Measurements Using
(in thousands)
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total
Cash equivalents
$
304,101
$
—
$
—
$
304,101
Investments in equity securities
10,653
—
—
10,653
Mutual funds
14,094
—
—
14,094
Total
$
328,848
$
—
$
—
$
328,848
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 July 1, 2023 and December 31, 2022, as the rates on these borrowings are variable in nature.
The carrying value and estimated fair values of the Company’s Euro Senior Notes, Series A and Series B and USD Senior Notes, Series A and Series B, as of July 1, 2023 and December 31, 2022 were as follows:
July 1, 2023
December 31, 2022
(in thousands)
Carrying Value
Estimated Fair Value
Carrying Value
Estimated Fair Value
Euro Senior Notes, Series A due 2023
$
127,220
$
125,507
$
124,716
$
122,270
Euro Senior Notes, Series B due 2028
103,298
89,941
101,265
87,119
USD Senior Notes, Series B due 2027
100,000
93,334
100,000
93,764
USD Senior Notes, Series A due 2025
50,000
48,128
50,000
48,145
USD Senior Notes, Series B due 2030
125,000
111,735
125,000
112,028
USD Senior Notes, due 2032
100,000
89,879
100,000
90,131
10. Benefit Plans
The Company has Company-sponsored and mandatory defined benefit pension plans covering employees in the United Kingdom ("U.K."), Germany, the Philippines, China, Japan, Mexico, Italy and France. The amount of the retirement benefits provided under the plans is generally based on years of service and final average pay.
The Company recognizes interest cost, expected return on plan assets, and amortization of prior service, net within Other (income) expense, net in the Condensed Consolidated Statements of Net Income. The components of net periodic benefit cost for the three and six months ended July 1, 2023 and July 2, 2022 were as follows:
For the Three Months Ended
For the Six Months Ended
(in thousands)
July 1, 2023
July 2, 2022
July 1, 2023
July 2, 2022
Components of net periodic benefit cost:
Service cost
$
695
$
750
$
1,387
$
1,518
Interest cost
952
628
1,889
1,272
Expected return on plan assets
(470)
(380)
(939)
(783)
Amortization of prior service and net actuarial loss
11
96
22
197
Net periodic benefit cost
$
1,188
$
1,094
$
2,359
$
2,204
The Company expects to make approximately $2.0 million of contributions to the plans and pay $1.9 million of benefits directly in 2023.
The Company also sponsors certain post-employment plans in foreign countries and other statutory benefit plans. The Company recorded expense of $0.4 million and $0.5 million for the three months ended July 1, 2023 and July 2, 2022, respectively, and of $0.8 million and $0.5 million for the six months ended July 1, 2023 and July 2, 2022, respectively, in Cost of Sales and Other (income) expense, net within the Condensed Consolidated Statements of Net Income. The pre-tax amounts recognized in other comprehensive income (loss) as components of net periodic benefit costs for these plans were nominal and $0.1 million for the three months ended July 1, 2023 and July 2, 2022, respectively, and nominal and $0.2 million for the six months ended July 1, 2023 and July 2, 2022, respectively.
11. Other Comprehensive (Loss) Income
Changes in other comprehensive (loss) income by component were as follows:
(in thousands)
Three Months Ended July 1, 2023
Three Months Ended July 2, 2022
Pre-tax
Tax
Net of Tax
Pre-tax
Tax
Net of Tax
Defined benefit pension plan and other adjustments
$
(146)
$
(13)
$
(159)
$
722
$
(83)
$
639
Cash flow hedge
4,096
(983)
3,113
(712)
171
(541)
Foreign currency translation adjustments (a)
(17,865)
—
(17,865)
(32,167)
720
(31,447)
Total change in other comprehensive (loss) income
$
(13,915)
$
(996)
$
(14,911)
$
(32,157)
$
808
$
(31,349)
(in thousands)
Six Months Ended July 1, 2023
Six Months Ended July 2, 2022
Pre-tax
Tax
Net of Tax
Pre-tax
Tax
Net of Tax
Defined benefit pension plan adjustments
$
(122)
$
(31)
$
(153)
1,045
(96)
$
949
Cash flow hedge
783
(188)
595
(712)
171
(541)
Foreign currency translation adjustments (a)
(1,797)
(273)
(2,070)
$
(35,382)
$
1,422
$
(33,960)
Total change in other comprehensive (loss) income
$
(1,136)
$
(492)
$
(1,628)
$
(35,049)
$
1,497
$
(33,552)
(a) The tax shown above within the foreign currency translation adjustments is the U.S. tax associated with the foreign currency translation adjustments of earnings of non-U.S. subsidiaries which have been previously taxed in the U.S. and are not permanently reinvested.
The following tables set forth the changes in accumulated other comprehensive loss by component for the six months ended July 1, 2023 and July 2, 2022:
Defined benefit pension plan and other adjustments
Cash flow hedge
Foreign currency translation adjustment
Accumulated other comprehensive loss
Balance at December 31, 2022
$
(2,193)
$
6,596
$
(100,167)
$
(95,764)
Activity in the period
(153)
595
(2,070)
(1,628)
Balance at July 1, 2023
$
(2,346)
$
7,191
$
(102,237)
$
(97,392)
(in thousands)
Defined benefit pension plan and other adjustments
Cash flow hedge
Foreign currency translation adjustment
Accumulated other comprehensive loss
Balance at January 1, 2022
$
(11,928)
$
—
$
(61,535)
$
(73,463)
Activity in the period
949
(541)
(33,960)
(33,552)
Balance at July 2, 2022
$
(10,979)
$
(541)
$
(95,495)
$
(107,015)
Amounts reclassified from accumulated other comprehensive loss to earnings for the three and six months ended July 1, 2023 and July 2, 2022 were as follows:
Three Months Ended
Six Months Ended
(in thousands)
July 1, 2023
July 2, 2022
July 1, 2023
July 2, 2022
Pension and Postemployment plans:
Amortization of prior service and net actuarial (gain) loss
$
(11)
$
198
$
(22)
$
395
The Company recognizes the amortization of prior service costs in Other (income) expense, net within the Condensed Consolidated Statements of Net Income.
12. Income Taxes
The effective tax rate for the three and six months ended July 1, 2023 was 18.0% and 18.3%, respectively, compared to the effective tax rate for the three and six months ended July 2, 2022 of 20.6% and 16.1%, respectively. The effective tax rate for the second quarter of 2023 is lower than the effective tax rate for the comparable 2022 period, primarily due to the impact of foreign exchange losses with no related tax benefit in the 2022 period.
The effective tax rate for the first six months of 2023 is higher than the effective tax rate for the comparable 2022 period, primarily due to the impact of a one-time deduction in the first quarter of 2022 that resulted in a net benefit of $7.2 million from the dissolution of one of the Company’s affiliates. The effective tax rates for both periods were lower than the applicable U.S. statutory tax rate primarily due to income earned in lower tax jurisdictions, while for the 2022 period, the effective tax rate was also lower due to the impact of the one-time deduction previously noted.
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended
Six Months Ended
(in thousands, except per share amounts)
July 1, 2023
July 2, 2022
July 1, 2023
July 2, 2022
Numerator:
Net income as reported
$
70,071
$
87,016
$
158,816
$
204,534
Denominator:
Weighted average shares outstanding
Basic
24,839
24,734
24,810
24,712
Effect of dilutive securities
256
251
268
274
Diluted
25,095
24,985
25,078
24,986
Earnings Per Share:
Basic earnings per share
$
2.82
$
3.52
$
6.40
$
8.28
Diluted earnings per share
$
2.79
$
3.48
$
6.33
$
8.19
Potential shares of common stock relating to stock options and restricted share units excluded from the earnings per share calculation because their effect would be anti-dilutive were 110,598 and 88,130 for the three months ended July 1, 2023 and July 2, 2022, respectively, and 102,283 and 72,970 for the six months ended July 1, 2023 and July 2, 2022, respectively.
Share Repurchase Program
On April 28, 2021, the Company announced that the Board of Directors authorized a new three year program to repurchase up to $300.0 million in the aggregate of shares of the Company’s common stock for the period May 1, 2021 to April 30, 2024 to replace its previous 2020 program.
The Company did not repurchase shares of its common stock for the three and six months ended July 1, 2023, and July 2, 2022.
14. Related Party Transactions
The Company has equity ownership in various investments that are accounted for under the equity method. The following is a description of the investments and related party transactions.
Powersem GmbH: The Company owns 45% of the outstanding equity of Powersem GmbH (“Powersem”), a module manufacturer based in Germany.
EB-Tech Co., Ltd.: The Company owns approximately 19% of the outstanding equity of EB Tech Co., Ltd. (“EB Tech”), a company with expertise in radiation technology based in South Korea.
Automated Technology (Phil), Inc.: The Company owns approximately 24% of the outstanding common shares of Automated Technology (Phil), Inc. (“ATEC”), a supplier located in the Philippines that provides assembly and test services. One member of the Company's Board of Directors serves on the Board of Directors of ATEC.
The Company and its subsidiaries design, manufacture and sell component, modules and subassemblies to empower the long-term structural themes of sustainability, connectivity and safety. The Company reports its operations by the following segments: Electronics, Transportation, and Industrial. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. The CODM is the Company’s President and Chief Executive Officer (“CEO”). The CODM allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss) before interest and taxes, but does not evaluate the operating segments using discrete balance sheet information.
Sales, marketing, and research and development expenses are charged directly into each operating segment. Purchasing, logistics, customer service, finance, information technology, and human resources are shared functions that are allocated back to the 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, electromechanical switches and interconnect solutions, polymer electrostatic discharge (“ESD”) suppressors, varistors, reed switch based magnetic sensing, gas discharge tubes; semiconductor products such as discrete transient voltage suppressor (“TVS”) diodes, TVS diode arrays, protection and switching thyristors, silicon and silicon carbide metal-oxide-semiconductor field effect transistors (“MOSFETs”) and diodes; and insulated gate bipolar transistors (“IGBT”) technologies. The segment covers a broad range of end markets, including industrial motor drives and power conversion, automotive electronics, electric vehicle and related charging infrastructure, aerospace, power supplies, data centers and telecommunications, medical devices, alternative energy and energy storage, building and home automation, appliances, and mobile electronics.
•Transportation Segment: Consists of a wide range of circuit protection, power control and sensing technologies for global original equipment manufacturers (“OEMs”), Tier-one suppliers and parts and aftermarket distributors in passenger vehicle, heavy-duty truck and bus, off-road and recreational vehicles, material handling equipment, agricultural machinery, construction equipment and other commercial vehicle end markets. Passenger vehicle products are used in internal combustion engine, hybrid and electric vehicles including blade fuses, battery cable protectors, resettable fuses, high-current fuses, high-voltage fuses, and sensor products designed to monitor the occupant’s safety and environment as well as the vehicle’s powertrain. Commercial vehicle products include fuses, switches, circuit breakers, relays, and power distribution modules and units used in applications serving a number of end markets, including heavy-duty truck and bus, construction, agriculture, material handling and marine.
•Industrial Segment: Consists of industrial circuit protection (industrial fuses), industrial controls (protection relays, contactors, transformers, residual current devices, ground fault circuit interrupters, residual current monitors, and arc fault detection devices) and temperature sensors for use in various applications such as renewable energy and energy storage systems, industrial safety, factory automation, electric vehicle infrastructure, HVAC systems, non-residential construction, MRO, and mining.
Segment information is summarized as follows:
Three Months Ended
Six Months Ended
(in thousands)
July 1, 2023
July 2, 2022
July 1, 2023
July 2, 2022
Net sales
Electronics
$
350,147
$
358,176
$
708,740
$
723,997
Transportation
172,048
182,027
338,689
366,531
Industrial
89,802
78,233
174,350
151,238
Total net sales
$
611,997
$
618,436
$
1,221,779
$
1,241,766
Depreciation and amortization
Electronics
$
19,808
$
14,511
$
39,596
29,904
Transportation
11,063
10,628
22,354
21,372
Industrial
4,021
2,181
7,424
4,342
Total depreciation and amortization
$
34,892
$
27,320
$
69,374
$
55,618
Operating income
Electronics
$
79,844
$
105,958
$
170,006
$
226,535
Transportation
7,789
18,309
16,321
44,617
Industrial
15,108
15,285
32,249
27,790
Other (a)
(10,688)
(5,388)
(15,882)
(14,188)
Total operating income
92,053
134,164
202,694
284,754
Interest expense
10,056
4,368
19,702
8,670
Foreign exchange (gain) loss
(1,404)
14,124
(3,079)
21,860
Other (income) expense, net
(2,050)
6,060
(8,283)
10,487
Income before income taxes
$
85,451
$
109,612
$
194,354
$
243,737
(a) Included in “Other” Operating income for the second quarter of 2023 was $3.9 million ($7.2 million year-to-date) of legal and professional fees and other integration expenses related to completed and contemplated acquisitions, and $2.9 million ($4.8 million year-to-date) of restructuring charges, primarily related to employee termination costs. In addition, during the second quarter of 2023, the Company recognized a $3.9 million impairment charge related to the land and building in the commercial vehicle business within the Transportation segment. See Note 7, Restructuring, Impairment, and Other Charges, for further discussion.
Included in “Other” Operating income for the second quarter of 2022 was $4.8 million ($8.6 million year-to-date) of legal and professional fees and other integration expenses related to the acquisition of C&K and other integration expenses related to completed and contemplated acquisitions, and $0.6 million ($0.8 million year-to-date) of restructuring, impairment and other charges, primarily related to employee termination costs, and $4.8 million year-to-date of purchase accounting inventory step-up charges. See Note 7, Restructuring, Impairment, and Other Charges, for further discussion.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”).
Certain statements in this section and other parts of this Quarterly Report on Form 10-Q may constitute "forward-looking statements" within the meaning of the federal securities laws and are entitled to the safe-harbor provisions of the PSLRA. These statements include statements regarding the Company’s future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future. Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy, although not all forward-looking statements contain such terms. The Company cautions that forward-looking statements, which speak only as of the date they are made, are subject to risks, uncertainties and other factors, and actual results and outcomes may differ materially from those indicated or implied by the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, risks and uncertainties relating to general economic conditions; the severity and duration of the coronavirus disease 2019 ("COVID-19") pandemic and the measures taken in response thereto and the effects of those items on the Company’s business; product demand and market acceptance; economic conditions; the impact of competitive products and pricing; product quality problems or product recalls; capacity and supply difficulties or constraints; coal mining exposures reserves; cybersecurity matters; failure of an indemnification for environmental liability; exchange rate fluctuations; commodity price fluctuations; the effect of the Company's accounting policies; labor disputes; restructuring costs in excess of expectations; pension plan asset returns less than assumed; uncertainties related to political or regulatory changes; integration of acquisitions may not be achieved in a timely manner, or at all; and other risks that may be detailed in Item 1A. "Risk Factors" of the Company's Annual Report on Form 10-K for the year ended December 31, 2022, and the Company's other filings and submissions with the Securities and Exchange Commission. The Company does not undertake any obligation to update or revise any forward-looking statements to reflect future events or circumstances, new information or otherwise.
This report, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with information provided in the consolidated financial statements and the related Notes thereto appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide information that is supplemental to, and should be read together with, the consolidated financial statements and the accompanying notes. Information in MD&A is intended to assist the reader in obtaining an understanding of (i) the consolidated financial statements, (ii) the changes in certain key items within those financial statements from year-to-year, (iii) the primary factors that contributed to those changes, and (iv) any changes in known trends or uncertainties that the Company is aware of and that may have a material effect on future performance. In addition, MD&A provides information about the Company’s segments and how the results of those segments impact the results of operations and financial condition as a whole.
Founded in 1927, Littelfuse is a diversified, industrial technology manufacturing company empowering a sustainable, connected, and safer world. Across more than 20 countries, and with approximately 18,000 global associates, we partner with customers to design and deliver innovative, reliable solutions. Serving over 100,000 end customers, our products are found in a variety of industrial, transportation and electronics end markets – everywhere, every day.
The Company maintains a network of global laboratories and engineering centers that develop new products and product enhancements, provide customer application support and test products for safety, reliability, and regulatory compliance. The Company conducts its business through three reportable segments: Electronics, Transportation, and Industrial. Within these segments, the Company designs, manufactures and sells components and modules empowering a sustainable, connected, and safer world. Our products protect against electrostatic discharge, power surges, short circuits, voltage spikes and other harmful occurrences, safely and efficiently control power and improve productivity and are used to identify and detect temperature, proximity, flow speed and fluid level in various applications.
Executive Summary
For the second quarter of 2023, the Company recognized net sales of $612.0 million, a decrease of $6.4 million, or 1.0% as compared to $618.4 million in the second quarter of 2022 including $0.5 million or 0.1% of unfavorable changes in foreign exchange rates. The decrease in net sales was due to lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment that more than offset $40.0 million or 6.5% and $4.8 million or 0.8% of incremental net sales from the C&K and Western Automation acquisitions, respectively, and higher volume in the Industrial segment. The Company recognized net income of $70.1 million, or $2.79 per diluted share, in the second quarter of 2023 compared to $87.0 million, or $3.48 per diluted share in the second quarter of 2022. The decrease in net income was primarily due to a decrease in operating income in the Electronics and Transportation segments driven by lower volume.
On June 28, 2023, the Company entered into a definitive purchase agreement to acquire a 200mm wafer fab located in Dortmund, Germany (“Dortmund Fab”) from Elmos Semiconductor SE. The acquisition of the Dortmund Fab is expected to close in early fiscal year 2025. The total purchase price for the fab is approximately 93 million Euro, of which approximately 37 million Euro will be paid after regulatory approvals and approximately 56 million Euro will be paid at closing. The transaction is not expected to have a material impact on the Company’s fiscal year 2023 or 2024 financial results and will be reported in the Electronics-Semiconductor business within the Company’s Electronics segment.
On February 3, 2023, the Company acquired Western Automation Research and Development Limited (“Western Automation”) for approximately $162 million in cash. Headquartered in Galway, Ireland, Western Automation is a designer and manufacturer of electrical shock protection devices used across a broad range of high-growth end markets, including e-Mobility off-board charging infrastructure, industrial safety and renewables. Western Automation has annualized sales of approximately $25 million and will be reported within the company’s Industrial segment. The company does not expect the acquisition to have a material impact to its 2023 financial results. The Company financed the transaction with cash on hand.
Net cash provided by operating activities was $151.6 million for the six months ended July 1, 2023 compared to $165.3 million for the six months ended July 2, 2022. The decrease in net cash provided by operating activities was primarily due to lower cash earnings, partially offset by reductions in working capital.
Risks Related to Market Conditions
The Company continues to operate in a challenging macro environment, including but not limited to, supply chain disruptions, varying regional dynamics, and some pockets of end market softness. The ongoing war in Ukraine has had a modest impact on the Company, as the Company suspended sales into and purchases from Russia. The Company does not have any direct operations in Ukraine or Russia.
Results of Operations
The following table summarizes the Company’s unaudited condensed consolidated results of operations for the periods presented. The second quarter of 2023 includes $3.9 million ($7.2 million year-to-date) of legal and professional fees and other integration expenses related to completed and contemplated acquisitions, and $2.9 million ($4.8 million year-to-date) of restructuring charges, primarily related to employee termination costs. In addition, during the second quarter of 2023, the Company recognized a $3.9 million impairment charge related to the land and building in the commercial vehicle business within the Transportation segment. See Note 7, Restructuring, Impairment, and Other Charges, for further discussion.
The second quarter of 2022 includes $4.8 million ($8.6 million year-to-date) of legal and professional fees primarily related to the acquisition of C&K and other integration expenses related to completed and contemplated acquisitions, and $0.6 million ($0.8 million year-to-date) of restructuring, impairment and other charges, primarily related to employee termination costs, and $4.8 million year-to-date of purchase accounting inventory step-up charges. See Note 7, Restructuring, Impairment, and Other Charges, for further discussion.
Second Quarter
First Six Months
(in thousands)
2023
2022
Change
% Change
2023
2022
Change
% Change
Net sales
$
611,997
$
618,436
$
(6,439)
(1.0)
%
$
1,221,779
$
1,241,766
$
(19,987)
(1.6)
%
Cost of sales
377,165
355,465
21,700
6.1
%
741,990
720,199
21,791
3.0
%
Gross profit
234,832
262,971
(28,139)
(10.7)
%
479,789
521,567
(41,778)
(8.0)
%
Operating expenses
142,779
128,807
13,972
10.8
%
277,095
236,813
40,282
17.0
%
Operating income
92,053
134,164
(42,111)
(31.4)
%
202,694
284,754
(82,060)
(28.8)
%
Income before income taxes
85,451
109,612
(24,161)
(22.0)
%
194,354
243,737
(49,383)
(20.3)
%
Income taxes
15,380
22,596
(7,216)
(31.9)
%
35,538
39,203
(3,665)
(9.3)
%
Net income
$
70,071
$
87,016
$
(16,945)
(19.5)
%
$
158,816
$
204,534
$
(45,718)
(22.4)
%
Net Sales
Net sales decreased $6.4 million, or 1.0%, for the second quarter of 2023 compared to the second quarter of 2022 including $0.5 million or 0.1% of unfavorable changes in foreign exchange rates. The sales decrease was due to lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment that more than offset $40.0 million or 6.5% and $4.8 million or 0.8% of incremental net sales associated with the C&K and Western Automation acquisitions included in the Electronics and Industrial segments, respectively, and higher volume from the Industrial segment.
Net sales decreased $20.0 million, or 1.6%, for the first six months of 2023 compared to the first six months of 2022, including $10.4 million or 0.8% of unfavorable changes in foreign exchange rates. The sales decrease was primarily due to lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment that more than offset $82.5 million or 6.6% and $7.5 million or 0.6% incremental net sales associated with the C&K and Western Automation acquisitions included in the Electronics and Industrial segments, respectively, and higher volume from the Industrial segment.
Cost of Sales
Cost of sales was $377.2 million, or 61.6% of net sales, in the second quarter of 2023, compared to $355.5 million, or 57.5% of net sales, in the second quarter of 2022. As a percent of net sales, cost of sales increased 4.1% driven by lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment.
Cost of sales was $742.0 million, or 60.7% of net sales, in the first six months of 2023, compared to $720.2 million, or 58.0% of net sales, in the first six months of 2022. As a percent of net sales, cost of sales increased 2.7% driven by lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment, partially offset by volume leverage, and favorable product mix from the Industrial segment.
Gross Profit
Gross profit was $234.8 million, or 38.4% of net sales, in the second quarter of 2023 compared to $263.0 million, or 42.5% of net sales, for the second quarter of 2022. The $28.1 million decrease in gross profit was primarily due to lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment, partially offset by the acquisition of C&K within Electronics segment.
Gross profit was $479.8 million, or 39.3% of net sales, in the first six months of 2023 compared to $521.6 million, or 42.0% of net sales, for the first six months of 2022. The $41.8 million decrease in gross profit was primarily due to lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment, partially offset by the acquisition of C&K within Electronics segment, and volume leverage and favorable product mix from the Industrial segment and $4.8 million or 0.4% of purchase accounting inventory charges recorded during the first six months of 2022.
Operating expenses were $142.8 million, or 23.3% of net sales, for the second quarter of 2023 compared to $128.8 million, or 20.8% of net sales, for the second quarter of 2022. The increase in operating expenses of $14.0 million was primarily due to higher restructuring, impairment, and other charges of $6.2 million, including a $3.9 million impairment charge related to the land and building in the commercial vehicle business within the Transportation segment, and higher amortization, selling, general, and administrative, and research and development expenses of $5.3 million, $1.5 million, and $1.0 million, respectively mainly due to the C&K and Western Automation acquisitions. This increase in operating expenses was partially offset by lower variable incentive compensation expense.
Operating expenses were $277.1 million, or 22.7% of net sales, for the first six months of 2023 compared to $236.8 million, or 19.1%of net sales, for the first six months of 2022. The increase in operating expenses of $40.3 million was primarily due to higher selling, general, and administrative expenses of $14.3 million, higher amortization expense of $9.4 million and research and development expenses of $8.7 million mainly due to the C&K and Western Automation acquisitions, and higher restructuring, impairment, and other charges of $7.9 million, including a $3.9 million impairment charge related to the land and building in the commercial vehicle business within the Transportation segment. This increase in operating expenses was partially offset by lower variable incentive compensation expense.
Operating Income
Operating income was $92.1 million, representing a decrease of $42.1 million, or 31.4%, for the second quarter of 2023 compared to $134.2 million for the second quarter of 2022. The decrease in operating income was due to lower gross profit from the Electronics and Transportation segments and higher operating expenses as noted above. Operating margins decreased from 21.7% in the second quarter of 2022 to 15.0% in the second quarter of 2023 driven by lower volume in the Electronics and Transportation segments and the higher operating expenses mentioned above.
Operating income was $202.7 million, representing a decrease of $82.1 million, or 28.8%, for the first six months of 2023 compared to $284.8 million for the first six months of 2022. The decrease in operating income was due to lower gross profit from the Electronics and Transportation segments and higher operating expenses as noted above. Operating margins decreased from 22.9% in the first six months of 2022 to 16.6% in the first six months of 2023 driven by lower volume in the Electronics and Transportation segments and the higher operating expenses mentioned above.
Income Before Income Taxes
Income before income taxes was $85.5 million, or 14.0% of net sales, for the second quarter of 2023 compared to $109.6 million, or 17.7% of net sales, for the second quarter of 2022. In addition to the factors impacting comparative results for operating income discussed above, income before income taxes was primarily impacted by foreign exchange gains of $1.4 million in the second quarter of 2023 compared to foreign exchange losses of $14.1 million during the second quarter of 2022 and lower unrealized losses of $6.7 million compared to the second quarter of 2022 related to one of the Company's equity investments.
Income before income taxes was $194.4 million, or 15.9% of net sales, for the first six months of 2023 compared to $243.7 million, or 19.6% of net sales, for the first six months of 2022. In addition to the factors impacting comparative results for operating income discussed above, income before income taxes was primarily impacted by foreign exchange gains of $3.1 million during the six months ended July 1, 2023 compared to foreign exchange losses of $21.9 million during the six months ended July 2, 2022, unrealized gains of $0.7 million during the six months ended July 1, 2023 compared to unrealized losses of $12.5 million during the six months ended July 2, 2022 related to one of the Company's equity investments.
Income Taxes
Income tax expense for the second quarter of 2023 was $15.4 million, or an effective tax rate of 18.0%, compared to $22.6 million, or an effective tax rate of 20.6%, for the second quarter of 2022. The effective tax rate for the second quarter of 2023 is lower than the effective tax rate for the comparable 2022 period, primarily due to the impact of foreignexchangelosseswithnorelatedtaxbenefitinthe2022period.
Income tax expense for the first six months of 2023 was $35.5 million, or an effective tax rate of 18.3%, compared to $39.2 million, or an effective tax rate of 16.1%, for the first six months of 2022. The effective tax rate for the first six months of 2023 is higher than the effective tax rate for the comparable 2022 period, primarily due to the impact of a one-time deduction in the first quarter of 2022 that resulted in a net benefit of $7.2 million from the dissolution of one of the Company’s affiliates. The effective tax rates for both periods were lower than the applicable U.S. statutory tax rate primarily due to income earned in
lower tax jurisdictions, while for the 2022 period, the effective tax rate was also lower due to the impact of the one-time deduction previously noted.
Segment Results of Operations
The Company reports its operations by the following segments: Electronics, Transportation and Industrial. Segment information is described more fully in Note 15, Segment Information, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report.
The following table is a summary of the Company’s net sales by segment:
Second Quarter
First Six Months
(in thousands)
2023
2022
Change
% Change
2023
2022
Change
% Change
Electronics
$
350,147
$
358,176
$
(8,029)
(2.2)
%
$
708,740
$
723,997
$
(15,257)
(2.1)
%
Transportation
172,048
182,027
(9,979)
(5.5)
%
338,689
366,531
(27,842)
(7.6)
%
Industrial
89,802
78,233
11,569
14.8
%
174,350
151,238
23,112
15.3
%
Total
$
611,997
$
618,436
$
(6,439)
(1.0)
%
$
1,221,779
$
1,241,766
$
(19,987)
(1.6)
%
Electronics Segment
Net sales decreased $8.0 million, or 2.2%, in the second quarter of 2023 compared to the second quarter of 2022 and included unfavorable changes in foreign exchange rates of $0.1 million. The sales decrease was mainly due to lower volume from the Electronics products business driven by inventory rebalancing at certain distributors and reduced demand across certain electronics markets, including consumer facing and personal electronics, and telecom, which more than offset the incremental net sales of $40.0 million from the C&K acquisition and $1.4 million of higher volume from the semiconductor business driven by increased demand predominantly in our industrial and medical end markets.
Net sales decreased $15.3 million, or 2.1%, in the first six months of 2023 compared to the first six months quarter of 2022 and included unfavorable changes in foreign exchange rates of $4.9 million. The sales decrease was mainly due to lower volume from the Electronics products business driven by inventory rebalancing at certain distributors and reduced demand across certain electronics markets, including consumer facing and personal electronics, and telecom, which more than offset the incremental net sales of $82.5 million from the C&K acquisition and $15.5 million of higher volume from the semiconductor business driven by increased demand predominantly in our industrial and medical end markets.
Transportation Segment
Net sales decreased $10.0 million, or 5.5%, in the second quarter of 2023 compared to the second quarter of 2022 and included unfavorable changes in foreign exchange rates of $0.2 million. The sale decrease was mainly from the commercial vehicle business which had net sales decline of $15.7 million driven by reduced demand largely due to inventory rebalancing at certain distributors and customers, and some demand reduction in commercial vehicle end markets, partially offset by an increase of $6.1 million from the passenger car products business driven by global car build growth, as well as the ongoing electronification and electrification of vehicles.
Net sales decreased $27.8 million, or 7.6%, in the first six months of 2023 compared to the first six months of 2022 and included unfavorable changes in foreign exchange rates of $4.9 million. The commercial vehicle business net sales declined $25.4 million driven by reduced demand largely due to inventory rebalancing at certain distributors and customers, and some demand reduction in commercial vehicle end markets, partially offset by an increase of $3.3 million from the passenger car products business driven by the ongoing electronification and electrification of vehicles. The automotive sensors business had net sales declines of $5.7 million primarily due to lower demand in China.
Industrial Segment
Net sales increased by $11.6 million, or 14.8%, in the second quarter of 2023 compared to the second quarter of 2022, which included unfavorable changes in foreign exchange rates of $0.2 million. The sales increase was primarily due to higher growth across various markets including construction/MRO, renewables and industrial safety end markets, and the acquisition of Western Automation which contributed net sales of $4.8 million.
Net sales increased by $23.1 million, or 15.3%, in the first six months of 2023 compared to the first six months of 2022, which included unfavorable changes in foreign exchange rates of $0.6 million. The sales increase was primarily due to higher volume in the construction/MRO, renewables, and industrial safety end markets, and the acquisition of Western Automation which contributed net sales of $7.5 million.
Geographic Net Sales Information
Net sales by geography represent net sales to customer or distributor locations. The following table is a summary of the Company’s net sales by geography:
Second Quarter
First Six Months
(in thousands)
2023
2022
Change
% Change
2023
2022
Change
% Change
Asia-Pacific
$
229,691
$
252,809
$
(23,118)
(9.1)
%
$
457,703
$
513,027
$
(55,324)
(10.8)
%
Americas
227,896
247,591
(19,695)
(8.0)
%
461,750
484,821
(23,071)
(4.8)
%
Europe
154,410
118,036
36,374
30.8
%
302,326
243,918
58,408
23.9
%
Total
$
611,997
$
618,436
$
(6,439)
(1.0)
%
$
1,221,779
$
1,241,766
$
(19,987)
(1.6)
%
Asia-Pacific
Net sales decreased $23.1 million, or 9.1%, in the second quarter of 2023 compared to the second quarter of 2022 and included unfavorable changes in foreign exchange rates of $2.7 million. The decrease in net sales was primarily due to lower net sales across all businesses within the Electronics segment and lower net sales from the commercial vehicle business within the Transportation segments, partially offset by incremental sales from the acquisition of C&K.
Net sales decreased $55.3 million, or 10.8%, in the first six months of 2023 compared to the first six months of 2022 and included unfavorable changes in foreign exchange rates of $6.6 million. The decrease in net sales was primarily due to lower net sales from electronics products business within the Electronics segment and lower net sales from the commercial vehicle and automotive sensors businesses within the Transportation segments, partially offset by incremental sales from the acquisition of C&K.
Americas
Net sales decreased $19.7 million, or 8.0%, in the second quarter of 2023 compared to the second quarter of 2022 and included unfavorable changes in foreign exchange rates of $0.1 million. The decrease in net sales was primarily due to lower volume from the Electronics products business within the Electronics segment and lower volume from the commercial vehicle business within the Transportation segment, partially offset by incremental sales from C&K acquisition within the Electronics segment, and higher sales within the Industrial segment compared to the second quarter of 2022.
Net sales decreased $23.1 million, or 4.8%, in the first six months of 2023 compared to the first six months of 2022 and included unfavorable changes in foreign exchange rates of $0.4 million. The decrease in net sales was primarily due to lower volume from the Electronics products business within the Electronics segment and lower sales across all businesses within the Transportation segment, partially offset by incremental sales from C&K acquisition within the Electronics segment and higher sales within the Industrial segment compared to the first six months of 2022.
Europe
Net sales increased $36.4 million, or 30.8%, in the second quarter of 2023 compared to the second quarter of 2022 and included favorable changes in foreign exchange rates of $2.3 million. The increase in net sales was primarily due to incremental sales from the acquisition of C&K, increased volume from the semiconductor business within the Electronics segment and the passenger car products business within the Transportation segment, and incremental sales from the Western Automation acquisition included within the Industrial segment compared to the second quarter of 2022.
Net sales increased $58.4 million, or 23.9%, in the first six months of 2023 compared to the first six months of 2022 and included unfavorable changes in foreign exchange rates of $3.4 million. The increase in net sales was primarily due to incremental sales from the acquisition of C&K, increased volume from the semiconductor business within the Electronics
segment, and incremental sales from the Western Automation acquisition included within the Industrial segment compared to the first six months of 2022, partially offset by lower net sales from the Electronics products business within the Electronics segment.
Liquidity and Capital Resources
The Company has historically supported its liquidity needs through cash flows from operations. Management expects that the Company’s (i) current level of cash, cash equivalents, and marketable securities, (ii) current and forecasted cash flows from operations, (iii) availability under existing funding arrangements, and (iv) access to capital in the capital markets will provide sufficient funds to support the Company’s operations, capital expenditures, investments, and debt obligations on both a short-term and long-term basis.
Cash and cash equivalents were $480.7 million as of July 1, 2023, a decrease of $81.8 million as compared to December 31, 2022. As of July 1, 2023, $127.4 million of the Company's $480.7 million cash and cash equivalents was held by U.S. subsidiaries.
Revolving Credit Facility and Term Loan
On June 30, 2022, the Company amended and restated its Credit Agreement, dated as of April 3, 2020 (the “Credit Agreement”) to effect certain changes, including, among other changes: (i) adding a $300 million unsecured term loan credit facility; (ii) making certain financial and non-financial covenants less restrictive on the Company and its subsidiaries; (iii) replacing LIBOR-based interest rate benchmarks and modifying performance-based interest rate margins; and (iv) extending the maturity date to June 30, 2027 (the “Maturity Date”). Pursuant to the Credit Agreement, the Company may, from time to time, increase the size of the revolving credit facility or enter into one or more tranches of term loans in minimum increments of $25 million if there is no event of default and the Company is in compliance with certain financial covenants.
Loans made under the available credit facility pursuant to the Credit Agreement ("the Credit Facility") bear interest at the Company’s option, at either Secured Overnight Financing Rate ("SOFR"), fixed for interest periods of one, two, three or six-month periods, plus 1.00% to 1.75%, plus a SOFR adjustment of 0.10% or at the bank’s Base Rate, as defined in the Credit Agreement, plus 0.00% to 0.75%, based upon the Company’s Consolidated Leverage Ratio, as defined in the Credit Agreement. The Company is also required to pay commitment fees on unused portions of the Credit Facility ranging from 0.10% to 0.175%, based on the Consolidated Leverage Ratio, as defined in the Credit Agreement. The Credit Agreement includes representations, covenants and events of default that are customary for financing transactions of this nature.
Under the Credit Agreement, revolving loans may be borrowed, repaid and reborrowed until the Maturity Date, at which time all amounts borrowed must be repaid. The Company borrowed $300.0 million under a term loan on June 30, 2022. The principal balance of the term loans must be repaid in quarterly installments on the last day of each calendar quarter in the amount of $1.9 million commencing September 30, 2022, through June 30, 2024, and in the amount of $3.8 million commencing September 30, 2024, through March 31, 2027, with the remaining outstanding principal balance payable in full on the Maturity Date. Accrued interest on the loans is payable in arrears on each interest payment date applicable thereto and at such other times as may be specified in the Credit Agreement. Subject to certain conditions, (i) the Company may terminate or reduce the Aggregate Revolving Commitments, as defined in the Credit Agreement, in whole or in part, and (ii) the Company may prepay the revolving loans or the term loans at any time, without premium or penalty. During the three and six months ended July 1, 2023, the Company made payments of $1.9 million and $3.8 million on its term loan, respectively. The revolving loan and term loan balance under the Credit Facility was $100.0 million and $292.5 million, respectively, as of July 1, 2023.
On May 12, 2022, the Company entered into an interest rate swap agreement to manage interest rate risk exposure, effectively converting the interest rate on the Company's SOFR based floating-rate loans to a fixed-rate. The interest rate swap, with a notional value of $200 million, was designated as a cash flow hedge against the variability of cash flows associated with the Company's SOFR based loans scheduled to mature on June 30, 2027.
As of July 1, 2023, the effective interest rate on revolving loan and term loan outstanding borrowings was 6.45%.
As of July 1, 2023, the Company had $0.2 million outstanding letters of credit under the Credit Facility and had $599.8 million of borrowing capacity available under the revolving Credit Facility. As of July 1, 2023, 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”) were funded. During the first quarter of 2022, the Company paid off $25 million of U.S. Senior Notes, Series A due on February 15, 2022. Interest on the U.S. Senior Notes due 2027 is payable semiannually on February 15 and August 15, commencing August 15, 2017.
On November 15, 2017, the Company entered into a Note Purchase Agreement pursuant to which the Company issued and sold $175 million in aggregate principal amount of senior notes in two series. On January 16, 2018, $50 million aggregate principal amount of 3.48% Senior Notes, Series A, due February 15, 2025 (“U.S. Senior Notes, Series A due 2025”) and $125 million in aggregate principal amount of 3.78% Senior Notes, Series B, due February 15, 2030 (“U.S. Senior Notes, Series B due 2030”) (together, the “U.S. Senior Notes due 2025 and 2030”) were funded. Interest on the U.S. Senior Notes due 2025 and 2030 is payable semiannually on February 15 and August 15, commencing on August 15, 2018.
On May 18, 2022, the above note purchase agreements were amended to, among other things, update certain terms, including financial covenants to be consistent with the terms of the restated Credit Agreement and the 2022 Purchase Agreement, as defined below.
On May 18, 2022, the Company entered into a Note Purchase Agreement (“2022 Purchase Agreement”) pursuant to which the Company issued and funded on July 18, 2022 $100 million in aggregate principal amount of 4.33% Senior Notes, due June 30, 2032 (“U.S. Senior Notes, due 2032”) (together with the U.S. Senior Notes due 2025 and 2030, the Euro Senior Notes and the U.S. Senior Notes due 2022 and 2027, the “Senior Notes”). Interest on the U.S. Senior Notes due 2032 is payable semiannually on June 30 and December 30, commencing on December 30, 2022.
Debt Covenants
The Company was in compliance with all covenants under the Credit Agreement and Senior Notes as of July 1, 2023 and currently expects to remain in compliance based on management’s estimates of operating and financial results for 2023. As of July 1, 2023, 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
On June 28, 2023, the Company entered into a definitive purchase agreement to acquire a 200mm wafer fab located in Dortmund, Germany (“Dortmund Fab”) from Elmos Semiconductor SE. The acquisition of the Dortmund Fab is expected to close in early fiscal year 2025. The total purchase price for the fab is approximately 93 million Euro, of which approximately 37 million Euro will be paid after regulatory approvals and approximately 56 million Euro will be paid at closing. The transaction is not expected to have a material impact on the Company’s fiscal year 2023 or 2024 financial results and will be reported in the Electronics-Semiconductor business within the Company’s Electronics segment.
On February 3, 2023, the Company acquired Western Automation for approximately $162 million in cash. Headquartered in Galway, Ireland, Western Automation is a designer and manufacturer of electrical shock protection devices used across a broad range of high-growth end markets, including e-Mobility off-board charging infrastructure, industrial safety and renewables. At the time the Company and Western Automation entered into the definitive agreement, Western Automation had annualized sales of approximately $25 million. The business is reported within the Company’s Industrial segment. The Company financed the transaction with cash on hand.
Dividends
During the second quarter of 2023 the Company paid quarterly dividends of $14.9 million to the shareholders. On August 1, 2023, the Company announced the declaration of a quarterly cash dividend of $0.65 per share, a 8% increase from the first quarter, payable on September 7, 2023 to stockholders of record as of August 24, 2023.
Net cash (used in) provided by financing activities
(32,686)
245,017
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(1,772)
(15,511)
(Decrease) increase in cash, cash equivalents, and restricted cash
(81,845)
329,461
Cash, cash equivalents, and restricted cash at beginning of period
564,939
482,836
Cash, cash equivalents, and restricted cash at end of period
$
483,094
$
812,297
Cash Flow from Operating Activities
Operating cash inflows are largely attributable to sales of the Company’s products. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities.
Net cash provided by operating activities was $151.6 million for the six months ended July 1, 2023 compared to $165.3 million for the six months ended July 2, 2022. The decrease in net cash provided by operating activities was primarily due to lower cash earnings, partially offset by reductions in working capital.
Cash Flow from Investing Activities
Net cash used in investing activities was $199.0 million for the six months ended July 1, 2023 compared to $65.4 million during the six months ended July 2, 2022. Net cash paid for acquisitions was $158.3 million and $9.8 million during the six months ended July 1, 2023 and July 2, 2022, respectively. Capital expenditures were $41.5 million, representing a decrease of $14.7 million compared to six months ended July 2, 2022. During the six months ended July 1, 2023 and July 2, 2022, the Company received proceeds of $0.7 million from the sale of a property within the Electronics segment, and $0.5 million from the sale of a property within the Transportation segment, respectively.
Cash Flow from Financing Activities
Net cash used in financing activities was $32.7 million for the six months ended July 1, 2023 compared to net cash provided by financing activities of $245.0 million for the six months ended July 2, 2022. On June 30, 2022, the Company amended its Credit Agreement and borrowed $300.0 million through a term loan. During the six months ended July 1, 2023, the Company made payments of $3.8 million on the term loan. During the six months ended July 2, 2022, the Company paid $25.0 million of U.S. Senior Notes, Series A due on February 15, 2022. Additionally, the Company paid dividends of $29.8 million and $26.2 million in the six months ended July 1, 2023 and July 2, 2022, respectively.
Share Repurchase Program
On April 28, 2021, the Company announced that the Board of Directors authorized a new three-year program to repurchase up to $300 million in the aggregate of shares of the Company’s common stock for the period May 1, 2021 to April 30, 2024 to replace its previous 2020 program.
The Company did not repurchase shares of its common stock for the three and six months ended July 1, 2023, and July 2, 2022.
Off-Balance Sheet Arrangements
As of July 1, 2023, 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.
The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the Condensed Consolidated Financial Statements, the Company uses estimates and makes judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. The assumptions, estimates, and judgments are based on historical experience, current trends, and other factors the Company believes are relevant at the time it prepares the Condensed Consolidated Financial Statements.
The significant accounting policies and critical accounting estimates are consistent with those discussed in Note 1, Summary of Significant Accounting Policies and Other Information, to the consolidated financial statements and the MD&A section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. During the six months ended July 1, 2023, there were no significant changes in the application of critical accounting policies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of the Company's Annual Report on Form 10-K for the year ended December 31, 2022. During the six months ended July 1, 2023, there have been no material changes in the Company's exposure to market risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(b) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this report, management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of July 1, 2023. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the quarter ended July 1, 2023, the Company's disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
There were no other changes in the Company's internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during the quarter ended July 1, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
There have been no material changes in the Company's risk factors from those disclosed in the Company's Annual Report on Form 10-K for its year ended December 31, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On April 28, 2021, the Company announced that the Board of Directors authorized a new three year program to repurchase up to $300.0 million in the aggregate of shares of the Company’s common stock for the period May 1, 2021 to April 30, 2024 to replace its previous 2020 program.
The Company did not repurchase shares of its common stock for the three months ended July 1, 2023 and July 2, 2022.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None of the Company’s directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the Company’s fiscal quarter ended July 1, 2023.
The following financial information from LITTELFUSE, Inc.'s Quarterly Report on Form 10-Q for the quarter ended July 1, 2023 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Net Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders' Equity , (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements.
104
The cover page from this Quarterly Report on Form 10-Q for the quarter ended July 1, 2023, formatted in Inline XBRL.
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, 2023, to be signed on its behalf by the undersigned thereunto duly authorized.
Littelfuse, Inc.
By:
/s/ Meenal A. Sethna
Meenal A. Sethna
Executive Vice President and Chief Financial Officer
Date: August 2, 2023
By:
/s/ Jeffrey G. Gorski
Jeffrey G. Gorski
Senior Vice President and Chief Accounting Officer
