Excess Channel Inventory Derails Littelfuse

Soft electronics demand will persist throughout 2019, adding to the company's problems.

Timothy Green
Timothy Green
Jul 31, 2019 at 9:35PM
Technology and Telecom

Circuit protection product manufacturer Littelfuse (NASDAQ:LFUS) reported its second-quarter results before the market opened on July 31. Revenue and adjusted earnings tumbled as trade tensions, a weak automotive market, and bloated channel inventories posed major challenges. High inventories will be a problem for the rest of the year, likely killing any chance of a significant rebound in the second half.

Littelfuse results: The raw numbers

Metric

Q2 2019

Q2 2018

Year-Over-Year Change

Revenue

$397.9 million

$459.2 million

(13.3%)

Net income

$43.8 million

$42.3 million

(3.5%)

GAAP earnings per share

$1.75

$1.67

4.8%

Non-GAAP earnings per share

$1.91

$2.68

(28.7%)

Data source: Littelfuse.

What happened with Littelfuse this quarter?

  • Excluding the impact of acquisitions, divestitures, and currency, organic revenue slumped 11% year over year. The company blamed global trade uncertainties, efforts by distribution partners to reduce excess electronics channel inventories, and declines in global auto production.
  • Electronics revenue was down 13% year over year, or down 11% organically, to $259.6 million.
  • Automotive revenue was down 15% year over year, or down 12% organically, to $108.7 million.
  • Industrial revenue was down 9% year over year, or up 1% organically, to $29.7 million.
  • Electronics operating income was down 35.2% to $43.6 million; automotive operating income was down 34.1% to $10.3 million; and industrial operating income was up 10.5% to $5.8 million.
  • Adjusted earnings were significantly impacted by lower sales volumes compared to the prior-year period.
  • Littelfuse repurchased 188,214 shares of stock during the second quarter.
  • Operating cash flow was $49.2 million, and free cash flow was $38.0 million.
Littelfuse solar fuses.

Image source: Littelfuse.


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What management had to say

During the earnings call, Littelfuse CEO David Heinzmann gave an update on the electronics channel inventory situation:

While we have seen reduced absolute inventory levels of our product, slower end market demand resulted in a static level of weeks of inventory in the channel. As we exited the second quarter, channel inventories across most of our electronics products remained at the upper end of our normal range, which is typically 11 to 14 weeks. As a result, we expect continued softness through this year, with ongoing distributor inventory destocking.

Littelfuse's automotive business performed worse than expected during the second quarter, partially due to the company's customer base. "Japanese and Korean OEM car builds where we have the lowest levels of content were down only 1%. North American, European, and Chinese OEM car builds where we have our highest levels of the content, were down more than 10%," explained Heinzmann.

The company has also run into trouble with its sensor business in China, according to Heinzmann: "While the China market has been a strong driver of top line growth for our sensor business in the past few years, the increased local competition in some applications has driven unattractive margin profiles for us and we've begun to step back from portions of this business."

Looking forward

Littelfuse provided the following guidance for the third quarter:

  • Revenue between $362 million and $374 million, down 16.2% year over year at the midpoint.
  • Non-GAAP earnings per share between $1.50 and $1.64, down from $2.49 in the third quarter of 2018.

Littelfuse predicted a stronger second half back in May, driven by normalizing channel inventory levels. But with inventory levels still elevated, a rebound isn't in the cards, at least not in the third quarter.