Notes to Condensed Consolidated Financial Statements
1. Summary of Significant Accounting Policies and Other Information
Nature of Operations
Founded in 1927, Littelfuse is an industrial technology manufacturing company empowering a sustainable, connected, and safer world. Across more than 15 countries, and with 17,000 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 statement 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 January 1, 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 2, 2022 and June 26, 2021:
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| | | Three Months Ended July 2, 2022 | | Six Months Ended July 2, 2022 |
| (in thousands) | | Electronics
Segment | | Transportation
Segment | | Industrial
Segment | |
Total | | Electronics
Segment | | Transportation
Segment | | Industrial
Segment | |
Total |
| Electronics – Passive Products and Sensors | | $ | 162,313 | | | $ | — | | | $ | — | | | $ | 162,313 | | | $ | 332,256 | | | $ | — | | | $ | — | | | $ | 332,256 | |
| Electronics – Semiconductor | | 195,863 | | | — | | | — | | | 195,863 | | | 391,741 | | | — | | | — | | | 391,741 | |
| Passenger Car Products | | — | | | 59,778 | | | — | | | 59,778 | | | — | | | 124,272 | | | — | | | 124,272 | |
| Automotive Sensors | | — | | | 23,201 | | | — | | | 23,201 | | | — | | | 49,338 | | | — | | | 49,338 | |
| Commercial Vehicle Products | | — | | | 99,048 | | | — | | | 99,048 | | | — | | | 192,921 | | | — | | | 192,921 | |
| Industrial Products | | — | | | — | | | 78,233 | | | 78,233 | | | — | | | — | | | 151,238 | | | 151,238 | |
| Total | | $ | 358,176 | | | $ | 182,027 | | | $ | 78,233 | | | $ | 618,436 | | | $ | 723,997 | | | $ | 366,531 | | | $ | 151,238 | | | $ | 1,241,766 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 26, 2021 | | Six Months Ended June 26, 2021 |
| (in thousands) | | Electronics
Segment | | Transportation
Segment | | Industrial
Segment | | Total | | Electronics
Segment | | Transportation
Segment | | Industrial
Segment | | Total |
| Electronics – Passive Products and Sensors | | $ | 155,276 | | | $ | — | | | $ | — | | | $ | 155,276 | | | $ | 287,713 | | | $ | — | | | $ | — | | | $ | 287,713 | |
| Electronics – Semiconductor | | 170,071 | | | — | | | — | | | 170,071 | | | 324,169 | | | — | | | — | | | 324,169 | |
| Passenger Car Products | | — | | | 68,048 | | | — | | | 68,048 | | | — | | | 135,949 | | | — | | | 135,949 | |
| Automotive Sensors | | — | | | 26,685 | | | — | | | 26,685 | | | — | | | 54,969 | | | — | | | 54,969 | |
| Commercial Vehicle Products | | — | | | 38,585 | | | — | | | 38,585 | | | — | | | 70,929 | | | — | | | 70,929 | |
| Industrial Products | | | | | | 64,823 | | | 64,823 | | | | | | | 113,553 | | | 113,553 | |
| Total | | $ | 325,347 | | | $ | 133,318 | | | $ | 64,823 | | | $ | 523,488 | | | $ | 611,882 | | | $ | 261,847 | | | $ | 113,553 | | | $ | 987,282 | |
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
historic activity, electronic 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 historic 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 2, 2022 and January 1, 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 2, 2022 | | January 1, 2022 |
| Cash and cash equivalents | | $ | 809,122 | | | $ | 478,473 | |
| Restricted cash included in prepaid expenses and other current assets | | 1,653 | | | 2,718 | |
| Restricted cash included in other long-term assets | | 1,522 | | | $ | 1,645 | |
| Total cash, cash equivalents and restricted cash | | $ | 812,297 | | | $ | 482,836 | |
Recently Adopted Accounting Standards
In November 2021, the Financial Accounting Standards Board ("FASB") issued ASU No. 2021-10, "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance". The standard, requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy: 1) Information about the nature of the transactions and the related accounting policy used to account for the transactions; 2) The line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item; 3) Significant terms and conditions of the transactions, including commitments and contingencies. The guidance is effective for fiscal years beginning after December 15, 2021 with early adoption permitted. The adoption of ASU 2021-10 did not have a material impact on the Company's Condensed Consolidated Financial Statements.
In October 2021, the FASB issued ASU No. 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers". The standard requires an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The guidance is effective for fiscal years beginning after December 15, 2022 with early adoption permitted. The adoption of ASU 2021-08 did not have a material impact 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 Consolidated Financial Statements from the date of the acquisition.
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. 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.
Carling Technologies
On November 30, 2021, the Company completed the previously announced acquisition of Carling Technologies, Inc. (“Carling”), pursuant to the Stock Purchase Agreement, dated as of October 19, 2021. Founded in 1920, Carling has a leading position in switching and circuit protection technologies with a strong global presence in commercial vehicle, marine and datacom/telecom infrastructure markets. At the time of acquisition, Carling had annualized sales of approximately $170 million. The operations of Carling are included in the commercial vehicle business within the Company's Transportation segment. The purchase price for Carling Technologies was approximately $315.5 million subject to a working capital adjustment.
The acquisition was funded with cash on hand. The total purchase consideration of $314.1 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 Carling acquisition:
| | | | | |
| (in thousands) | Purchase Price
Allocation |
| Total purchase consideration: | |
| Cash, net of cash acquired | $ | 314,094 | |
| Allocation of consideration to assets acquired and liabilities assumed: | |
| Trade receivables, net | 26,129 | |
| Inventories | 56,657 | |
| Other current assets | 3,454 | |
| Property, plant, and equipment | 57,329 | |
| Intangible assets | 126,390 | |
| Goodwill | 97,917 | |
| Other non-current assets | 4,007 | |
| Current liabilities | (21,495) | |
| Other non-current liabilities | (36,294) | |
| | $ | 314,094 | |
All Carling goodwill, other assets and liabilities were recorded in the Transportation 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 Carling’s products and technology with the Company’s existing commercial vehicle products portfolio. Goodwill resulting from the Carling acquisition is not expected to be deductible for tax purposes.
During the six months ended July 2, 2022, the Company paid $0.5 million related to final working capital adjustment and made measurement period adjustments to reduce the fair value of property, plant and equipment of $7.0 million, inventories of $0.8 million, net accounts receivable of $0.6 million and an increase in intangible assets attributable to customer relationships intangible assets of $0.5 million. As a result of these adjustments along with a corresponding reduction of deferred tax liabilities of $1.7 million, goodwill was increased by $5.6 million.
As required by purchase accounting rules, the Company recorded a $6.4 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 fourth quarter of 2021 and first quarter of 2022, as the acquired inventory was sold, and reflected as other non-segment costs. The Company recognized a non-cash charge of $4.8 million to cost of sales during the six months ended July 2, 2022.
Hartland Controls
On January 28, 2021, the Company acquired Hartland Controls ("Hartland"), a manufacturer and leading supplier of electrical components used primarily in heating, ventilation, air conditioning (HVAC) and other industrial and control systems applications with annualized sales of approximately $70 million. The purchase price for Hartland was $111.0 million and the operations of Hartland are included in the Industrial segment.
The total purchase consideration of $108.5 million, net of cash, cash equivalents, and restricted cash has been allocated to assets acquired and liabilities assumed, as of the completion of the acquisition, based on estimated fair values. As of July 2, 2022, the Company had restricted cash of $1.7 million in an escrow account for general indemnification purposes.
The following table summarizes the final purchase price allocation of the fair value of assets acquired and liabilities assumed in the Hartland acquisition:
| | | | | |
| (in thousands) | Purchase Price
Allocation |
| Total purchase consideration: | |
| Cash, net of cash acquired, and restricted cash | $ | 108,516 | |
| Allocation of consideration to assets acquired and liabilities assumed: | |
| Trade receivables, net | 12,915 | |
| Inventories | 35,808 | |
| Other current assets | 2,224 | |
| Property, plant, and equipment | 6,296 | |
| Intangible assets | 39,660 | |
| Goodwill | 38,502 | |
| Other non-current assets | 3,782 | |
| Current liabilities | (24,861) | |
| Other non-current liabilities | (5,810) | |
| | $ | 108,516 | |
All Hartland goodwill, other assets and liabilities were recorded in the Industrial segment and are primarily reflected in the Americas 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 Hartland’s products and technology with the Company’s existing industrial products portfolio. Goodwill resulting from the Hartland acquisition is not expected to be deductible for tax purposes.
The Company recorded a $6.8 million step-up of inventory to its fair value as of the acquisition date. The step-up was amortized as a non-cash charge to cost of sales during the first and second quarters of 2021, as the acquired inventory was sold, and is reflected as other non-segment costs. During the three and six months ended June 26, 2021, the Company recognized a charge of $3.3 million and 6.8 million, respectively, for the amortization of this fair value inventory step-up.
During the three and six months ended June 26, 2021, the Company incurred approximately $0.1 million and $0.8 million, respectively, of legal and professional fees related to this acquisition recognized as Selling, general, and administrative expenses. These costs were reflected as other non-segment costs.
Pro Forma Results
The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company, Hartland and Carling as though the acquisitions 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 Hartland and Carling acquisitions occurred as of December 29, 2019 or of future consolidated operating results.
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| | | For the Three Months Ended | | For the Six Months Ended |
| (in thousands, except per share amounts) | | July 2, 2022 | | June 26, 2021 | | July 2, 2022 | | June 26, 2021 |
| Net sales | | $ | 618,436 | | | $ | 568,328 | | | $ | 1,241,766 | | | $ | 1,085,727 | |
| Income before income taxes | | 109,612 | | | 98,748 | | | 248,506 | | | 177,343 | |
| Net income | | 87,016 | | | 84,927 | | | 208,254 | | | 147,500 | |
| Net income per share — basic | | 3.52 | | | 3.45 | | | 8.43 | | | 6.01 | |
| Net income per share — diluted | | 3.48 | | | 3.41 | | | 8.33 | | | 5.93 | |
Pro forma results presented above primarily reflect the following adjustments:
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| | | For the Three Months Ended | | For the Six Months Ended |
| (in thousands) | | July 2, 2022 | | June 26, 2021 | | July 2, 2022 | | June 26, 2021 |
Amortization(a) | | $ | — | | | $ | (2,318) | | | $ | — | | | $ | (4,949) | |
| Depreciation | | — | | | (28) | | | — | | | (71) | |
Transaction costs(b) | | — | | | 128 | | | — | | | 835 | |
Amortization of inventory step-up(c) | | — | | | 3,319 | | | 4,769 | | | 6,808 | |
| Income tax benefit of above items | | — | | | (208) | | | (1,049) | | | (517) | |
(a)The amortization adjustment for the three and six months ended June 26, 2021 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 June 26, 2021.
(c)The amortization of inventory step-up adjustment reflects the reversal of the amount recognized during the six months ended July 2, 2022, and three and six months ended June 26, 2021. The inventory step-up was amortized over four months as the inventory was sold.
3. Inventories
The components of inventories at July 2, 2022 and January 1, 2022 are as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | July 2, 2022 | | January 1, 2022 |
| Raw materials | | $ | 209,540 | | | $ | 168,409 | |
| Work in process | | 124,751 | | | 117,506 | |
| Finished goods | | 198,894 | | | 195,656 | |
| Inventory reserves | | (36,978) | | | (35,900) | |
| Total | | $ | 496,207 | | | $ | 445,671 | |
4. Property, Plant, and Equipment
The components of net property, plant, and equipment at July 2, 2022 and January 1, 2022 are as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | July 2, 2022 | | January 1, 2022 |
| Land and land improvements | | $ | 21,852 | | | $ | 23,470 | |
| Building and building improvements | | 174,931 | | | 151,297 | |
| Machinery and equipment | | 762,894 | | | 779,559 | |
| | | | |
| Accumulated depreciation | | (523,994) | | | (516,437) | |
| Total | | $ | 435,683 | | | $ | 437,889 | |
The Company recorded depreciation expense of $15.7 million and $13.6 million for the three months ended July 2, 2022 and June 26, 2021, respectively, and $31.3 million and $27.3 million for the six months ended July 2, 2022 and June 26, 2021, respectively.
5. Goodwill and Other Intangible Assets
Changes in the carrying value of goodwill by segment for the six months ended July 2, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Electronics | | Transportation | | Industrial | | Total |
| Net book value of goodwill as of January 1, 2022 | | | | | | | | |
| Gross goodwill as of January 1, 2022 | | $ | 660,245 | | | $ | 228,555 | | | $ | 86,232 | | | $ | 975,032 | |
| Accumulated impairment losses as of January 1, 2022 | | — | | | (36,177) | | | (9,065) | | | (45,242) | |
| Total | | 660,245 | | | 192,378 | | | 77,167 | | | 929,790 | |
| Changes during 2022 | | | | | | | | |
Additions(a) | | — | | | 14,427 | | | — | | | 14,427 | |
| | | | | | | | |
| Currency translation | | (23,903) | | | (5,578) | | | (378) | | | (29,859) | |
Net book value of goodwill as of July 2, 2022 | | | | | | | | |
Gross goodwill as of July 2, 2022 | | 636,342 | | | 235,068 | | | 85,761 | | | 957,171 | |
Accumulated impairment losses as of July 2, 2022 | | — | | | (33,841) | | | $ | (8,972) | | | (42,813) | |
| Total | | $ | 636,342 | | | $ | 201,227 | | | $ | 76,789 | | | $ | 914,358 | |
(a) The additions resulted from the acquisition of Embed and Carling.
The components of other intangible assets as of July 2, 2022 and January 1, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | |
| | | As of July 2, 2022 |
| (in thousands) | | | Gross
Carrying
Value | | Accumulated Amortization | | Net Book Value |
| Land use rights | | | $ | 18,974 | | | $ | 1,892 | | | $ | 17,082 | |
| Patents, licenses and software | | | 177,174 | | | 114,658 | | | 62,516 | |
| Distribution network | | | 41,575 | | | 39,834 | | | 1,741 | |
| Customer relationships, trademarks, and tradenames | | | 458,150 | | | 164,896 | | | 293,254 | |
| | | | | | | |
| Total | | | $ | 695,873 | | | $ | 321,280 | | | $ | 374,593 | |
| | | | | | | | | | | | | | | | | |
| | As of January 1, 2022 |
| (in thousands) | Gross
Carrying
Value | | Accumulated Amortization | | Net Book Value |
| Land use rights | $ | 19,542 | | | $ | 1,906 | | | $ | 17,636 | |
| Patents, licenses and software | 164,556 | | | 101,307 | | | 63,249 | |
| Distribution network | 43,361 | | | 40,591 | | | 2,770 | |
| Customer relationships, trademarks, and tradenames | 487,710 | | | 164,239 | | | 323,471 | |
| Total | $ | 715,169 | | | $ | 308,043 | | | $ | 407,126 | |
During the three months ended July 2, 2022 and June 26, 2021, the Company recorded amortization expense of $11.6 million and $10.6 million, respectively. During the six months ended July 2, 2022 and June 26, 2021, the Company recorded amortization expense of $24.3 million and $21.2 million, respectively.
Estimated annual amortization expense related to intangible assets with definite lives as of July 2, 2022 is as follows:
| | | | | |
(in thousands) | Amount |
| 2022 | $ | 48,574 | |
| 2023 | 44,664 | |
| 2024 | 41,320 | |
| 2025 | 38,567 | |
| 2026 | 33,571 | |
| 2027 and thereafter | 192,213 | |
| Total | $ | 398,909 | |
6. Accrued Liabilities
The components of accrued liabilities as of July 2, 2022 and January 1, 2022 are as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | July 2, 2022 | | January 1, 2022 |
| Employee-related liabilities | | $ | 64,857 | | | $ | 92,018 | |
| Professional services | | 12,008 | | | 4,299 | |
| Operating lease liability | | 9,177 | | | 9,018 | |
| Other non-income taxes | | 6,492 | | | 4,280 | |
| Interest | | 4,197 | | | 4,402 | |
| Restructuring liability | | 3,020 | | | 2,944 | |
| Current post-retirement benefits liability | | 1,248 | | | 1,248 | |
| Deferred revenue | | 686 | | | 1,105 | |
| | | | |
| Other | | 35,692 | | | 40,375 | |
| Total | | $ | 137,377 | | | $ | 159,689 | |
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 2, 2022 and June 26, 2021 as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 restructuring charges | 204 | | | 430 | | | — | | | 634 | | | 409 | | | 443 | | | — | | | 852 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total | $ | 204 | | | $ | 430 | | | $ | — | | | $ | 634 | | | $ | 409 | | | $ | 443 | | | $ | — | | | $ | 852 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 26, 2021 | | Six months ended June 26, 2021 |
| (in thousands) | Electronics | | Transportation | | Industrial | | Total | | Electronics | | Transportation | | Industrial | | Total |
| Employee terminations | $ | 295 | | | $ | 416 | | | $ | 6 | | | $ | 717 | | | $ | 552 | | | $ | 416 | | | $ | 169 | | | $ | 1,137 | |
| Other restructuring charges | — | | | 72 | | | — | | | 72 | | | — | | | 89 | | | — | | | 89 | |
| Total restructuring charges | 295 | | | 488 | | | 6 | | | 789 | | | 552 | | | 505 | | | 169 | | | 1,226 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total | $ | 295 | | | $ | 488 | | | $ | 6 | | | $ | 789 | | | $ | 552 | | | $ | 505 | | | $ | 169 | | | $ | 1,226 | |
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 Transportation and Electronics segments.
2021
For the three and six months ended June 26, 2021, the Company recorded total restructuring charges of $0.8 million and $1.2 million, respectively, primarily for employee termination costs. These charges primarily related to the reorganization of certain manufacturing, selling and administrative functions within the Transportation and Electronics segments.
The restructuring liability as of July 2, 2022 and January 1, 2022 is $3.0 million and $2.9 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 2022.
8. Debt
The carrying amounts of debt at July 2, 2022 and January 1, 2022 are as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | July 2, 2022 | | January 1, 2022 |
| Revolving Credit Facility | | $ | 100,000 | | | $ | 100,000 | |
| Term Loan | | 300,000 | | | — | |
| Euro Senior Notes, Series A due 2023 | | 122,533 | | | 132,444 | |
| Euro Senior Notes, Series B due 2028 | | 99,494 | | | 107,540 | |
| U.S. Senior Notes, Series A due 2022 | | — | | | 25,000 | |
| 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 | |
| | | | |
| Unamortized debt issuance costs | | (4,958) | | | (3,087) | |
| Total debt | | 892,069 | | | 636,897 | |
| Less: Current maturities | | (7,500) | | | (25,000) | |
| Total long-term debt | | $ | 884,569 | | | $ | 611,897 | |
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.
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. The revolving loan and term loan balance under the Credit Facility was $100.0 million and $300.0 million, respectively, as of July 2, 2022.
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 2, 2022, the effective interest rate on revolving loan and term loan outstanding borrowings was 2.875%.
As of July 2, 2022, the Company had no amount outstanding in letters of credit and had available $600.0 million of borrowing capacity under the revolving Credit Facility. As of July 2, 2022, the Company was in compliance with all covenants under the Credit Agreement.
Debt Issuance Costs
During three and six months ended July 2, 2022, the Company paid debt issuance costs of $2.2 million in connection with the new amended Credit Agreement on June 30, 2022 which, along with the remaining balance of debt issuance costs of the previous credit facility, are being amortized over the life of the new amended Credit Agreement.
Senior Notes
On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold €212 million aggregate principal amount of senior notes in two series. The funding date for the Euro denominated senior notes occurred on December 8, 2016 for €117 million in aggregate amount of 1.14% Senior Notes, Series A, due December 8, 2023 (“Euro Senior Notes, Series A due 2023”), and €95 million in aggregate amount of 1.83% Senior Notes, Series B due December 8, 2028 (“Euro Senior Notes, Series B due 2028”) (together, the “Euro Senior Notes”). Interest on the Euro Senior Notes is payable semiannually on June 8 and December 8, commencing June 8, 2017.
On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold $125 million aggregate principal amount of senior notes in two series. On February 15, 2017, $25 million in aggregate principal amount of 3.03% Senior Notes, Series A, due February 15, 2022 (“U.S. Senior Notes, Series A due 2022”), and $100 million in aggregate principal amount of 3.74% Senior Notes, Series B, due February 15, 2027 (“U.S. Senior Notes, Series B due 2027”) (together, the “U.S. Senior Notes due 2022 and 2027”) were funded. Interest on the U.S. Senior Notes due 2022 and 2027 is payable semiannually on February 15 and August 15, commencing August 15, 2017. 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.
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 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, 2032.
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 2, 2022, 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 $2.3 million and $2.5 million for the three months ended July 2, 2022 and June 26, 2021, respectively, and $8.4 million and $8.7 million for the six months ended July 2, 2022 and June 26, 2021, respectively.
9. Fair Value of Assets and Liabilities
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, the Company classifies each fair value measurement as follows:
Level 1—Valuations based on unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2—Valuations based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and
Level 3—Valuations based upon one or more significant unobservable inputs.
Following is a description of the valuation methodologies used for instruments measured at fair value and their classification in the valuation hierarchy.
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
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. Changes in fair value of derivatives that are designated as cash flow hedges are deferred in accumulated other comprehensive (loss) income 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. There were no transfers in or out of Level 1, Level 2 and Level 3 during the period.
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.
As of July 2, 2022, the fair values of our derivative financial instrument and their classifications on the Condensed Consolidated Balance Sheets was as follows:
| | | | | | | | | | | | | |
(in thousands) | Consolidated Balance Sheet Classification | | July 2, 2022 | | |
| Derivative assets | | | | | |
| Interest rate swap agreement: | | | | | |
| Designated as cash flow hedge | Prepaid expenses and other current assets | | $ | 206 | | | |
| Other long-term liabilities | | $ | 918 | | | |
| | | | | |
The pre-tax losses recognized on derivative financial instruments in the Condensed Consolidated Statements of Operations for the three and six months ended July 2, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | Six Months Ended |
| (in thousands) | | Classification of Loss Recognized in the
Condensed Consolidated Statements of Operations | | July 2, 2022 | | | | July 2, 2022 | | |
| Derivatives designated as cash flow hedges | | | | | | | | | | |
| Interest rate swap agreement | | Interest expense, net | | 21 | | | | | 21 | | | |
The pre-tax losses recognized on derivative financial instruments in the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 2, 2022 were as follows:
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Six Months Ended |
| (in thousands) | | July 2, 2022 | | | | July 2, 2022 | | |
| Derivatives designated as cash flow hedges | | | | | | | | |
| Interest rate swap agreement | | $ | 712 | | | | | $ | 712 | | | |
The pre-tax gain of $0.2 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 2, 2022 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of July 2, 2022 and January 1, 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 2, 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 | | $ | 251,502 | | | $ | — | | | $ | — | | | $ | 251,502 | |
| Investments in equity securities | | 12,112 | | | — | | | — | | | 12,112 | |
| Mutual funds | | 13,441 | | | — | | | — | | | 13,441 | |
| Total | | $ | 277,055 | | | $ | — | | | $ | — | | | $ | 277,055 | |
The following table presents assets measured at fair value by classification within the fair value hierarchy as of January 1, 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 | | $ | 12,475 | | | $ | — | | | $ | — | | | $ | 12,475 | |
| Investments in equity securities | | 26,070 | | | — | | | — | | | 26,070 | |
| Mutual funds | | 15,021 | | | — | | | — | | | 15,021 | |
| Total | | $ | 53,566 | | | $ | — | | | $ | — | | | $ | 53,566 | |
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 Credit Facilities’ fair values approximate book value at July 2, 2022 and January 1, 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 2, 2022 and January 1, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | July 2, 2022 | | January 1, 2022 |
| (in thousands) | | Carrying
Value | | Estimated
Fair Value | | Carrying
Value | | Estimated
Fair Value |
| Euro Senior Notes, Series A due 2023 | | $ | 122,533 | | | $ | 121,472 | | | $ | 132,444 | | | $ | 134,119 | |
| Euro Senior Notes, Series B due 2028 | | 99,494 | | | 91,857 | | | 107,540 | | | 110,837 | |
| USD Senior Notes, Series A due 2022 | | — | | | — | | | 25,000 | | | 25,055 | |
| USD Senior Notes, Series B due 2027 | | 100,000 | | | 96,318 | | | 100,000 | | | 104,828 | |
| USD Senior Notes, Series A due 2025 | | 50,000 | | | 48,762 | | | 50,000 | | | 51,720 | |
| USD Senior Notes, Series B due 2030 | | 125,000 | | | 117,255 | | | 125,000 | | | 131,837 | |
10. Benefit Plans
The Company has company-sponsored defined benefit pension plans covering employees in the U.K., Germany, the Philippines, China, Japan, Mexico, Italy and France. The amount of the retirement benefits provided under the plans is based on years of service and final average pay.
The Company recognizes interest cost, expected return on plan assets, and amortization of prior service, net within Other expense (income), net in the Condensed Consolidated Statements of Net Income. The components of net periodic benefit cost for the three and six months ended July 2, 2022 and June 26, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended | | For the Six Months Ended |
| (in thousands) | | July 2, 2022 | | June 26, 2021 | | July 2, 2022 | | June 26, 2021 |
| Components of net periodic benefit cost: | | | | | | | | |
| Service cost | | $ | 750 | | | $ | 700 | | | $ | 1,518 | | | $ | 1,402 | |
| Interest cost | | 628 | | | 443 | | | 1,272 | | | 883 | |
| Expected return on plan assets | | (380) | | | (371) | | | (783) | | | (738) | |
| Amortization of prior service and net actuarial loss | | 96 | | | 334 | | | 197 | | | 665 | |
| Net periodic benefit cost | | $ | 1,094 | | | $ | 1,106 | | | $ | 2,204 | | | $ | 2,212 | |
The Company expects to make approximately $2.6 million of contributions to the plans and pay $1.8 million of benefits directly in 2022.
The Company also sponsors certain post-employment plans in foreign countries and other statutory benefit plans. The Company recorded expense of $0.5 million for both the three months ended July 2, 2022 and June 26, 2021, respectively, and $1.0 million for both the six months ended July 2, 2022 and June 26, 2021, respectively, in Cost of Sales and Other expense (income), net within the Condensed Consolidated Statements of Net Income. The pre-tax amounts recognized in other comprehensive loss (income) as components of net periodic benefit costs for these plans were $0.1 million and $0.2 million for the three months ended July 2, 2022 and June 26, 2021, respectively, and $0.2 million and $0.3 million for the six months ended July 2, 2022 and June 26, 2021, respectively.
11. Other Comprehensive (Loss) Income
Changes in other comprehensive (loss) income by component were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended
July 2, 2022 | | Three Months Ended
June 26, 2021 |
| | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
| Defined benefit pension plan and other adjustments | | $ | 722 | | | $ | 83 | | | $ | 639 | | | $ | 372 | | | $ | 43 | | | $ | 329 | |
| Cash flow hedge | | (712) | | | (171) | | | (541) | | | — | | | — | | | — | |
| Foreign currency translation adjustments (1) | | (32,167) | | | (720) | | | (31,447) | | | 5,125 | | | — | | | 5,125 | |
| Total change in other comprehensive (loss) income | | $ | (32,157) | | | $ | (808) | | | $ | (31,349) | | | $ | 5,497 | | | $ | 43 | | | $ | 5,454 | |
| | | | | | | | | | | | |
| (in thousands) | | Six Months Ended
July 2, 2022 | | Six Months Ended
June 26, 2021 |
| | Pre-tax | | Tax | | Net of Tax | | Pre-tax | | Tax | | Net of Tax |
| Defined benefit pension plan adjustments | | $ | 1,045 | | | $ | 96 | | | $ | 949 | | | 878 | | | 95 | | | $ | 783 | |
| Cash flow hedge | | (712) | | | (171) | | | (541) | | | — | | | — | | | — | |
| Foreign currency translation adjustments (1) | | (35,382) | | | (1,422) | | | (33,960) | | | $ | (200) | | | $ | — | | | $ | (200) | |
| Total change in other comprehensive (loss) income | | $ | (35,049) | | | $ | (1,497) | | | $ | (33,552) | | | $ | 678 | | | $ | 95 | | | $ | 583 | |
(1) 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) income by component for the six months ended July 2, 2022 and June 26, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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) | |
| | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Defined benefit pension plan and other adjustments | | | | Foreign currency translation adjustment | | Accumulated other comprehensive loss |
| Balance at December 26, 2020 | | $ | (34,141) | | | | | $ | (57,016) | | | $ | (91,157) | |
| | | | | | | | |
| Activity in the period | | 783 | | | | | (200) | | | 583 | |
| Balance at June 26, 2021 | | $ | (33,358) | | | | | $ | (57,216) | | | $ | (90,574) | |
Amounts reclassified from accumulated other comprehensive (loss) income to earnings for the three and six months ended July 2, 2022 and June 26, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Six Months Ended |
| (in thousands) | | July 2, 2022 | | June 26, 2021 | | July 2, 2022 | | June 26, 2021 |
| Pension and Postemployment plans: | | | | | | | | |
| Amortization of prior service and net actuarial loss | | $ | 198 | | | $ | 509 | | | $ | 395 | | | $ | 774 | |
| | | | | | | | |
| | | | | | | | |
The Company recognizes the amortization of prior service costs in Other expense (income), net within the Condensed Consolidated Statements of Net Income.
12. Income Taxes
The effective tax rate for the three and six months ended July 2, 2022 was 20.6% and 16.1%, respectively, compared to the effective tax rate for the three and six months ended June 26, 2021 of 13.8% and 16.7%, respectively. The effective tax rate for the second quarter of 2022 is higher than the effective tax rate for the comparable 2021 period, primarily due to foreign exchange losses with no related tax benefit in the 2022 period, as compared to foreign exchange gains with limited tax expense during the comparable 2021 period.
The effective tax rate for the first six months of the 2022 period is lower than the applicable U.S. statutory tax rate due to a one-time deduction that resulted from the dissolution of one of the Company’s affiliates, as well as the forecasted impact of income earned in lower tax jurisdictions. The effective tax rate for the comparable 2021 period is lower than the applicable U.S. statutory tax rate primarily due to the forecasted impact of income earned in lower tax jurisdictions.
13. Earnings Per Share
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 2, 2022 | | June 26, 2021 | | July 2, 2022 | | June 26, 2021 |
| Numerator: | | | | | | | | |
| Net income as reported | | $ | 87,016 | | | $ | 82,095 | | | $ | 204,534 | | | $ | 139,808 | |
| | | | | | | | |
| Denominator: | | | | | | | | |
| Weighted average shares outstanding | | | | | | | | |
| Basic | | 24,734 | | | 24,592 | | | 24,712 | | | 24,562 | |
| Effect of dilutive securities | | 251 | | | 308 | | | 274 | | | 332 | |
| Diluted | | 24,985 | | | 24,900 | | | 24,986 | | | 24,894 | |
| | | | | | | | |
| Earnings Per Share: | | | | | | | | |
| Basic earnings per share | | $ | 3.52 | | | $ | 3.34 | | | $ | 8.28 | | | $ | 5.69 | |
| Diluted earnings per share | | $ | 3.48 | | | $ | 3.30 | | | $ | 8.19 | | | $ | 5.62 | |
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 88,130 and 41,216 for the three months ended July 2, 2022 and June 26, 2021, respectively, and 72,970 and 20,266 for the six months ended July 2, 2022 and June 26, 2021, 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 any shares of its common stock for the three and six months ended July 2, 2022, and June 26, 2021.
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended July 2, 2022 | | Three Months Ended June 26, 2021 |
| (in millions) | | Powersem | EB Tech | ATEC | | Powersem | EB Tech | ATEC |
| | | | | | | | |
| Purchase material/service from related party | | $ | 0.1 | | $ | 0.1 | | $ | 3.0 | | | $ | 0.7 | | $ | 0.1 | | $ | 2.8 | |
| | | | | | | | |
| | For the Six Months Ended July 2, 2022 | | For the Six Months Ended June 26, 2021 |
| (in millions) | | Powersem | EB Tech | ATEC | | Powersem | EB Tech | ATEC |
| Sales to related party | | $ | — | | $ | — | | $ | — | | | $ | 0.2 | | $ | — | | $ | — | |
| Purchase material/service from related party | | 0.3 | | 0.2 | | 5.9 | | | 1.8 | | 0.2 | | 5.8 | |
| | | | | | | | |
| | | July 2, 2022 | | January 1, 2022 |
| (in millions) | | Powersem | EB Tech | ATEC | | Powersem | EB Tech | ATEC |
| | | | | | | | |
| Accounts payable balance | | $ | — | | $ | — | | $ | 1.8 | | | $ | — | | $ | — | | $ | 1.8 | |
15. Segment Information
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, 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 infrastructure, 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, off-road vehicle, material handling, agricultural, construction 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, construction, agriculture, material handling and marine.
•Industrial Segment: Consists of industrial circuit protection (industrial fuses), industrial controls (protection relays, contactors, and transformers) and temperature sensors for use in various applications such as renewable energy and energy storage systems, electric vehicle infrastructure, HVAC systems, industrial safety, non-residential construction, MRO, mining and industrial automation.
Segment information is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Six Months Ended |
| (in thousands) | | July 2, 2022 | | June 26, 2021 | | July 2, 2022 | | June 26, 2021 |
| Net sales | | | | | | | | |
| Electronics | | $ | 358,176 | | | $ | 325,347 | | | $ | 723,997 | | | $ | 611,882 | |
| Transportation | | 182,027 | | | 133,318 | | | 366,531 | | | 261,847 | |
| Industrial | | 78,233 | | | 64,823 | | | 151,238 | | | 113,553 | |
| Total net sales | | $ | 618,436 | | | $ | 523,488 | | | $ | 1,241,766 | | | $ | 987,282 | |
| | | | | | | | |
| Depreciation and amortization | | | | | | | | |
| Electronics | | $ | 14,511 | | | $ | 15,114 | | | $ | 29,904 | | | 30,495 | |
| Transportation | | 10,628 | | | 6,946 | | | 21,372 | | | 14,019 | |
| Industrial | | 2,181 | | | 2,155 | | | 4,342 | | | 3,899 | |
| | | | | | | | |
| Total depreciation and amortization | | $ | 27,320 | | | $ | 24,215 | | | $ | 55,618 | | | $ | 48,413 | |
| | | | | | | | |
| Operating income | | | | | | | | |
| Electronics | | $ | 105,958 | | | $ | 74,236 | | | $ | 226,535 | | | $ | 129,759 | |
| Transportation | | 18,309 | | | 19,258 | | | 44,617 | | | 39,574 | |
| Industrial | | 15,285 | | | 8,375 | | | 27,790 | | | 11,881 | |
Other(a) | | (5,388) | | | (5,612) | | | (14,188) | | | (8,476) | |
| Total operating income | | 134,164 | | | 96,257 | | | 284,754 | | | 172,738 | |
| Interest expense | | 4,368 | | | 4,626 | | | 8,670 | | | 9,299 | |
| Foreign exchange loss (gain) | | 14,124 | | | (1,676) | | | 21,860 | | | 5,161 | |
| Other expense (income), net | | 6,060 | | | (1,890) | | | 10,487 | | | (9,627) | |
| Income before income taxes | | $ | 109,612 | | | $ | 95,197 | | | $ | 243,737 | | | $ | 167,905 | |
(a) 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 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.
Included in “Other” Operating income for the 2021 second quarter was $3.3 million ($6.8 million year-to-date) of purchase accounting inventory step-up charges, $0.5 million ($1.3 million year-to-date) of legal and professional fees and other integration expenses related to Hartland and other contemplated acquisitions, and $0.8 million ($1.3 million year-to-date) of restructuring, impairment and other charges, primarily related to employee termination costs. See Note 7, Restructuring, Impairment, and Other Charges, for further discussion. In addition, there was a loss of $1.0 million recorded during the second quarter of 2021 for a total year-to-date gain of $0.9 million from the sale of a building within the Electronics segment.
The Company’s net sales by country were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Six Months Ended |
| (in thousands) | | July 2, 2022 | | June 26, 2021 | | July 2, 2022 | | June 26, 2021 |
| Net sales | | | | | | | | |
| United States | | $ | 224,743 | | | $ | 154,797 | | | $ | 444,981 | | | $ | 285,728 | |
| China | | 162,322 | | | 156,086 | | | 327,104 | | | 295,244 | |
Other countries(a) | | 231,371 | | | 212,605 | | | 469,681 | | | 406,310 | |
| Total net sales | | $ | 618,436 | | | $ | 523,488 | | | $ | 1,241,766 | | | $ | 987,282 | |
The Company’s long-lived assets by country were as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | July 2, 2022 | | January 1, 2022 |
| Long-lived assets | | | | |
| United States | | $ | 65,445 | | | $ | 57,923 | |
| China | | 115,567 | | | 122,867 | |
| Mexico | | 108,829 | | | 107,283 | |
| Germany | | 36,495 | | | 39,055 | |
| Philippines | | 77,256 | | | 74,918 | |
Other countries(a) | | 32,091 | | | 35,843 | |
| Total long-lived assets | | $ | 435,683 | | | $ | 437,889 | |
The Company’s additions to long-lived assets by country were as follows:
| | | | | | | | | | | | | | |
| | | Six Months Ended |
| (in thousands) | | July 2, 2022 | | June 26, 2021 |
| Additions to long-lived assets | | | | |
| United States | | $ | 6,527 | | | $ | 1,732 | |
| China | | 15,623 | | | 7,127 | |
| Mexico | | 14,244 | | | 13,231 | |
| Germany | | 2,432 | | | 2,533 | |
| Philippines | | 10,138 | | | 6,941 | |
Other countries(a) | | 2,558 | | | 1,793 | |
| Total additions to long-lived assets | | $ | 51,522 | | | $ | 33,357 | |
(a)Each country included in other countries is less than 10% of net sales.
16. Subsequent events
On July 19, 2022, the Company acquired 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, aerospace, and datacom. At the time the Company and C&K entered into the definitive agreement, C&K had annualized sales of over $200 million. The business will be reported as part of the Electronics-Passive Products and Sensors business within the Company's Electronics segment. The Company financed the transaction through a combination of cash on hand and debt.