Littelfuse Struggles With Weak Demand

Circuit protection product manufacturer Littelfuse (NASDAQ: LFUS) reported its first-quarter results before the market opened on May 1. Revenue and adjusted earnings declined, dragged down by currency, excess channel inventory, slumping auto production, and generally soft demand. While the second quarter will be ugly as well, Littelfuse expects improvements in the second half of the year.

Littelfuse's first-quarter results: The raw numbers

Metric Q1 2019 Q1 2018 Year-Over-Year Change
Revenue $405.5 million $417.8 million (2.9%)
Net income $37 million $36 million 2.7%
GAAP earnings per share $1.48 $1.45 2.1%
Non-GAAP earnings per share $1.96 $2.39 (18%)

Data source: Littelfuse.

What happened with Littelfuse this quarter?

  • Excluding the impact of acquisitions and currency, organic revenue declined 4% year over year. That's down from 4% growth in the fourth quarter of 2018.
  • Electronics revenue was flat from the prior-year period, and down 4% organically.
  • Automotive revenue fell 10% year over year, and declined 7% organically.
  • Industrial revenue was down 2% from the prior-year period, and up 4% organically.
  • Electronics operating income dropped 9.1% year over year to $49.0 million, automotive operating income plunged 28.2% year over year to $13.2 million, and industrial operating income fell 25.6% year over year to $3.5 million.
  • Littelfuse bought back nearly 80,000 shares during the first quarter under its share repurchase authorization. That authorization, which expired on April 30, has been replaced with a new 1 million share authorization effective through April 30, 2020.
  • Cash flow from operations was $30.9 million, while free cash flow was $16.8 million.
Seven Littelfuse fuses

Image source: Littelfuse.

What management had to say

CEO Dave Heinzmann was optimistic about a stronger second half, despite near-term headwinds, during the earnings call: "With ongoing softness in global auto production and excess channel inventories in electronics, we anticipate soft demand to persist. We continue to expect improving conditions in the second half of the year."

CFO Meenal Sethna discussed the challenges in the electronics segment:

The volume and leverage drop have the greatest margin impact within our electronics segment. Excess inventory reductions at our channel partners was the main driver of volume decline. This volume impact more than offset benefits from the IXYS cost synergies that we had started to drive in the first quarter last year.

Sethna also talked about the company's plan to reduce its footprint: "We also announced the closure of one of our automotive sensor manufacturing plants in Europe. A more streamlined manufacturing footprint is one of the many actions we're taking to drive margin expansion across our auto-sensor business."

Looking forward

Littelfuse provided the following guidance for the second quarter:

  • Revenue between $409 million and $421 million, down from $459.2 million in the prior-year period.
  • Non-GAAP earnings per share between $2.00 and $2.14, down from $2.68 in the year-ago quarter. This guidance includes a negative $0.25 impact from currency, mark-to-market comparisons, and timing of stock compensation expense.
  • Adjusted effective tax rate between 18% and 19%.

Littelfuse expects its business to improve in the second half as elevated channel inventory levels come down. These inventory issues may bleed into the third quarter, according to Heinzmann, but the situation is expected to look better as the second half of the year progresses.

After years of robust revenue growth, Littelfuse hit a major speed bump in the first quarter. The second quarter won't look any better, but the company should have a clearer view of second-half demand when it reports again in a few months.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool recommends Littelfuse. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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