Note 1 - Summary of Significant Accounting Policies and Other Information

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Significant Accounting Policies [Text Block]

1.

Summary of Significant Accounting Policies and Other Information

Nature of Operations

Littelfuse, Inc. and subsidiaries (the “company”) design, manufacture, and sell circuit protection devices for use in the automotive, electronics, and industrial markets throughout the world. The company is

one

of the world’s leading suppliers of circuit protection products for the electronics, automotive, and industrial markets, with expanding platforms in sensors and power control components and modules. In addition to circuit protection products and solutions, the company offers electronic reed switches and sensors, automotive sensors for comfort and safety systems and a comprehensive line of highly reliable electromechanical and electronic switch and control devices for commercial and specialty vehicles, as well as protection relays and power distribution centers for the safe control and distribution of electricity. The company has a network of global engineering centers and labs that develop new products and product enhancements, provides customer application support and test products for safety, reliability, and regulatory compliance. The company’s devices protect products in virtually every market that uses electrical energy, from consumer electronics to automobiles to industrial equipment.

Fiscal Year

References herein to

“2016”,

“fiscal

2016”

or “fiscal year

2016”

refer to the fiscal year ended

December

31,

2016.

References herein to

“2015”,

“fiscal

2015”

or “fiscal year

2015”

refer to the fiscal year ended

January

2,

2016.

References herein to

“2014”,

“fiscal

2014”

or “fiscal year

2014”

refer to the fiscal year ended

December

27,

2014.

The company operates on a

52

-

53

week fiscal year

(4

-

4

-

5

basis) ending on the Saturday closest to

December

31.

Therefore, the financial results of certain fiscal years and the associated

14

week quarters will not be exactly comparable to the prior and subsequent

52

week fiscal years and the associated quarters having only

13

weeks. As a result of using this convention, each of fiscal

2016

and fiscal

2014

contained

52

weeks whereas fiscal

2015

contained

53

weeks.

Basis of Presentation

The Consolidated Financial Statements include the accounts of Littelfuse, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The company’s Consolidated Financial Statements were prepared in accordance with generally accepted accounting principles in the United States of America and include the assets, liabilities, sales and expenses of all wholly-owned subsidiaries and majority-owned subsidiaries over which the company exercises control.

Use of Estimates

The process of preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses and the accompanying notes. The company evaluates and updates its assumptions and estimates on an ongoing basis and

may

employ outside experts to assist in its evaluation, as considered necessary. Actual results could differ from those estimates.

Cash Equivalents

All highly liquid investments, with an original maturity of

three

months or less when purchased, are considered to be cash equivalents.

Short-Term and Long-Term Investments

The company has determined that certain of its investment securities are to be classified as available-for-sale. Available-for-sale securities are carried at fair value with the unrealized gains and losses reported as a component of “Accumulated Other Comprehensive Income (Loss).” Realized gains and losses and declines in unrealized value judged to be other-than-temporary on available-for-sale securities are included in other expense (income), net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. Short-term investments, which are primarily certificates of deposits, are carried at cost which approximates fair value.

Accounts Receivable

The company performs credit evaluations of customers’ financial condition and generally does not require collateral. Credit losses are provided for in the financial statements based upon specific knowledge of a customer’s inability to meet its financial obligations to the company. Historically, credit losses have consistently been within management’s expectations and have not been a material amount. A receivable is considered past due if payments have not been received within agreed upon invoice terms. Write-offs are recorded at the time a customer receivable is deemed uncollectible.

The company also maintains allowances against accounts receivable for the settlement of rebates and sales discounts to customers. These allowances are based upon specific customer sales and sales discounts as well as actual historical experience.

Inventories

Inventories are stated at the lower of cost or market

(first

in,

first

out method), which approximates current replacement cost. The company maintains excess and obsolete allowances against inventory to reduce the carrying value to the expected net realizable value. These allowances are based upon a combination of factors including historical sales volume, market conditions, lower of cost or market analysis and expected realizable value of the inventory.

Investment

s

As of

December

31,

2016

the company had investments in Polytronics Technology Corporation Ltd. (“Polytronics”), a Taiwanese publicly traded company and Monolith Semiconductor, Inc. (“Monolith”), a Texas-based startup company.

Polytronics

The company’s Polytronics shares held at the end of fiscal

2016

and

2015

represent approximately

7.2%

of total Polytronics shares outstanding. The Polytronics investment is classified as available-for-sale and is carried at fair value with the unrealized gains and losses reported as a component of “Accumulated Other Comprehensive Income (Loss).” The fair value of the Polytronics investment was

€10.0

million (approximately

$10.4

million) at

December

31,

2016

and

€10.7

million (approximately

$11.7

million) at

January

2,

2016.

Included in

2016

and

2015,

other comprehensive income is an unrealized loss of

$0.8

million and an unrealized gain of

$0.9

million, respectively, due to changes in fair market value of the Polytronics investment. The remaining movement year over year was due to the impact of changes in exchange rates.

Monolith

In

December

2015,

the company invested

$3.5

million in the preferred stock of Monolith, a U.S. start-up company developing silicon carbide technology, which represents approximately

12%

of the common stock of Monolith on an as-converted basis. The company accounts for its investment in Monolith under the cost method with any changes in value recorded in other comprehensive income. The value of the Monolith investment was

$3.5

million at

December

31,

2016

and

January

2,

2016.

Property, Plant

,

and Equipment

Land, buildings, and equipment are carried at cost. Depreciation is calculated using the straight-line method with useful lives of

21

years for buildings,

seven

to

nine

years for equipment,

seven

years for furniture and fixtures,

five

years for tooling and

three

years for computer equipment.

Goodwill and Indefinite-Lived Intangible Assets

The company annually tests goodwill and indefinite-lived intangible assets for impairment on the

first

day of its fiscal

fourth

quarter or at other dates if there is an event or change in circumstances that indicates the asset

may

be impaired. Management determines the fair value of each of its reporting units by using a discounted cash flow model (which includes forecasted

five

-year income statement and working capital projections, a market-based weighted average cost of capital and terminal values after

five

years) to estimate market value. In addition, the company compares its derived enterprise value on a consolidated basis to the company’s market capitalization as of its test date to ensure its derived value approximates the market value of the company when taken as a whole.

Due to negative events in the potash market in

2016,

management revisited its long term projections and conducted a step

one

goodwill impairment analysis for its custom products reporting unit in the

third

quarter of

2016.

The reporting unit failed the step

one

test and management conducted a step

two

analysis with the revised projections. The fair value of the unit was estimated using the expected present value of future cash flows over a

seven

year forecast period and appraisal of certain assets. As a result, the company recognized a charge for goodwill impairment of

$8.8

million as it wrote off the entire goodwill balance. In addition, the company recognized intangible assets impairments aggregating

$6.0

million, including a

$3.8

million reduction of the custom products trade names to a

$0.7

million remaining value and a

$2.2

million reduction of the reporting unit’s customer relationships to

zero

value.

As of the most recent annual test conducted on

October

2,

2016,

the company had

seven

reporting units for goodwill testing purposes and concluded the fair value of each of the reporting units exceeded its carrying value of invested capital and therefore, no potential goodwill impairment existed. Specifically, the company noted that the excess of fair value over the carrying value of invested capital, was

65%,

154%,

218%,

132%,

70%,

15%,

and

150%

for its reporting units; electronics (non-silicon), electronics (silicon), passenger car, commercial vehicle products, sensors, relays, and power fuse, respectively, at

October

2,

2016.

Certain key assumptions used in the annual test included a discount rate of

9.8%

and a long-term growth rate of

3.0%

which were used for all reporting units except for relays which had a discount rate of

10.3%

as a result of a

0.5%

premium factor.

The company will continue to perform a goodwill and indefinite-lived intangible asset impairment test as required on an annual basis and on an interim basis, if certain impairment conditions exist. Factors the company considers important, which could result in changes to its estimates, include underperformance relative to historical or projected future operating results and declines in acquisitions and trading multiples. Due to the diverse end user base and non-discretionary product demand, the company does not believe its future operating results will vary significantly relative to its historical and projected future operating results. However, it is possible that we could recognize impairment charges for the relays reporting unit if we have declines in profitability or projected future operating results due to changes in volume, market pricing, cost, or the business environment. As of the

2016

annual test date, the relays reporting unit had

$41.4

million of goodwill and intangible assets.

Other Intangible Assets

Customer relationships, trademarks and tradenames are amortized using the straight-line method over estimated useful lives that have a range of

five

to

20

years. Patents, licenses and software are amortized using the straight-line method or an accelerated method over estimated useful lives that have a range of

five

to

17

years. The distribution networks are amortized on either a straight-line or accelerated basis over estimated useful lives that have a range of

three

to

20

years. Other intangible assets are also tested for impairment when there is a significant event that

may

cause the asset to be impaired. As described above, in

2016

the company recognized an impairment charge of

$2.2

million to reduce the custom products reporting unit’s customer relationships to

zero

value.

Environmental Liabilities

Environmental liabilities are accrued based on engineering studies estimating the cost of remediating sites. Expenses related to on-going maintenance of environmental sites are expensed as incurred. If actual or estimated probable future losses exceed the company’s recorded liability for such claims, the company would record additional charges during the period in which the actual loss or change in estimate occurred.

Pension and Other Post-retirement Benefits

Accounting for pensions requires estimating the future benefit cost and recognizing the cost over the employee’s expected period of employment with the company. Certain assumptions are required in the calculation of pension costs and obligations. These assumptions include the discount rate, salary scales and the expected long-term rate of return on plan assets. The discount rate is intended to represent the rate at which pension benefit obligations could be settled by purchase of an annuity contract. These assumptions are subject to change based on stock and bond market returns and other economic factors. Actual results that differ from the company’s assumptions are accumulated and amortized over future periods and therefore generally affect its recognized expense and accrued liability in such future periods. While the company believes that its assumptions are appropriate given current economic conditions and its actual experience, significant differences in results or significant changes in the company’s assumptions

may

materially affect its pension obligations and related future expense. During

2015,

the company terminated the U.S. defined benefit pension plan which resulted in a settlement of the plan’s liabilities resulting in a pre-tax charge of

$29.9

million. See Note

10,

Benefit Plans

, for additional information.

Revenue Recognition

The company recognizes revenue on product sales in the period in which the sales process is complete. This generally occurs when persuasive evidence of an arrangement exists, products are shipped (FOB origin) to the customer in accordance with the terms of the sale, the risk of loss has been transferred, collectability is reasonably assured, and the pricing is fixed and determinable.

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 company’s distribution channels are primarily through direct sales and independent

third

party distributors.

Revenue and Billing

The company accepts orders from customers based on long term purchasing contracts and written sales agreements. Contract pricing and selling agreement terms are based on market factors, costs, and competition. Pricing normally is 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.

Returns and Credits

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 to reduce its price to its buyer. If 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 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 a customer 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 incentives to certain customers to achieve specific quarterly or annual sales targets. If customers achieve their sales targets, they are entitled to rebates. The company estimates the future cost of these rebates and recognizes this estimated cost as a reduction to revenue as products are sold.

Allowance for Doubtful Accounts

The company evaluates the collectability of its trade receivables based on a combination of factors. The company regularly analyzes its significant customer accounts and, when the company becomes aware of a specific customer’s inability to meet its financial obligations, the company records a specific reserve for bad debt to reduce the related receivable to the amount the company reasonably believes is collectible. The company also records allowances for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer, macroeconomic considerations and past experience. Accounts receivable balances that are deemed to be uncollectible, are written off against the reserve on a case-by-case basis. Historically, the allowance for doubtful accounts has been adequate to cover bad debts. If circumstances related to specific customers change, the estimates of the recoverability of receivables could be further adjusted. However, due to the company’s diverse customer base and lack of credit concentration, the company does not believe its estimates would be materially impacted by changes in its assumptions.

Advertising Costs

The company expenses advertising costs as incurred, which amounted to

$2.9

million,

$2.3

million, and

$2.8

million in

2016,

2015,

and

2014,

respectively, and are included as a component of selling, general, and administrative expenses.

Shipping and Handling Fees and Costs

Amounts billed to customers related to shipping and handling is classified as revenue. Costs incurred for shipping and handling of

$9.1

million

$7.0

million, and

$6.7

million in

2016,

2015,

and

2014,

respectively, are classified in selling, general, and administrative expenses.

Foreign Currency Translation

/

Remeasurement

The company’s foreign subsidiaries use the local currency or the U.S. dollar as their functional currency, as appropriate. Assets and liabilities are translated using exchange rates at the balance sheet date, and revenues and expenses are translated at weighted average rates. The amount of foreign currency gain or loss from remeasurement recognized in the income statement was a loss of

$0.5

million in

2016,

a gain of

$1.5

million in

2015,

and a loss of

$3.9

million in

2014.

Adjustments from the translation process are recognized in “Shareholders’ equity” as a component of “Accumulated other comprehensive income.”

Stock-based Compensation

The company recognizes compensation expense for the cost of awards of equity compensation using a fair value method. Benefits of tax deductions in excess of recognized compensation expense are reported as both operating and financing cash flows. See Note

11,

Shareholders’ Equity

, for additional information on stock-based compensation.

Coal Mining Liability

Included in other long-term liabilities is an accrual related to former coal mining operations at Littelfuse GmbH (formerly known as Heinrich Industries, AG) for the amounts of

€1.4

million

($1.5

million) and

€1.8

million

($2.0

million) at

December

31,

2016

and

January

2,

2016,

respectively.  Management, in conjunction with an independent

third

-party, performs an annual evaluation of the former coal mining operations in order to develop an estimate of the probable future obligations in regard to remediating the dangers (such as a shaft collapse) of abandoned coal mine shafts in the former coal mining operations. Management accrues for costs associated with such remediation efforts based on management's best estimate when such costs are probable and reasonably able to be estimated. The ultimate determination can only be done after respective investigations because the concrete conditions are mostly unknown at this time. The accrual is not discounted as management cannot reasonably estimate when such remediation efforts will take place.

Other Expense (Income), Net

Other expense (income), net generally consists of interest income, royalties, and non-operating income.

Income Taxes

The company accounts for income taxes using the liability method. Deferred taxes are recognized for the future effects of temporary differences between financial and income tax reporting using enacted tax rates in effect for the years in which the differences are expected to reverse. The company recognizes deferred taxes for temporary differences, operating loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Federal and state income taxes are provided on the portion of foreign income that is expected to be remitted to the U.S. and be taxable.

Reclassifications

Certain amounts presented in the

2015

financial statements have been reclassified to conform to the

2016

presentation. In

April

2015,

the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No.

2015

-

03,

Interest - Imputation of Interest

(Subtopic

835

-

30):

Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amended guidance is effective for financial statements issued for fiscal years beginning after

December

15,

2015,

including interim periods within those fiscal years. The amended guidance is to be applied on a retrospective basis. The company adopted the new guidance on

January

3,

2016

and has made the corresponding reclassification on its balance sheet for the fiscal year ended

January

2,

2016.

The adoption of the new guidance had no effect on the company’s net income, cash flows or shareholders’ equity. Additionally, the company has reclassified a portion of its current tax position at

January

2,

2016

to more accurately reflect its prepaid/liability position at a jurisdictional level.

Recently Issued Accounting Standards

In

May

2014,

the FASB issued ASU No. 

2014

-

09,

"Revenue from Contracts with Customers" (Topic

606)

which supersedes the revenue recognition requirements in ASC

605,

"Revenue Recognition." This ASU provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The guidance permits

two

implementation approaches,

one

requiring retrospective application of the new standard with restatement of prior years and

one

requiring prospective application of the new standard with disclosure of results under old standards. In

August,

2015,

the FASB issued ASU No.

2015

-

14,

which postponed the effective date of ASU No.

2014

-

09

to fiscal years, and interim periods within those fiscal years, beginning after

December

15,

2017,

with early adoption permitted on the original effective date of fiscal years beginning after

December

15,

2016.

The company is in the process of performing its initial assessment of the potential impact on its consolidated financial statements and has not concluded on its adoption methodology. While the company is currently assessing the impact of the new standards, the company’s revenue is primarily generated from the sale of finished products to customers. Those sales predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks, and rewards transfer. These are largely un-affected by the new standard. The company does not expect this new guidance to have a material impact on the amount of overall sales recognized; however, the timing of sales on certain projects

may

be affected. The company has not yet quantified this potential impact.

In

February

2016,

the FASB issued ASU No.

2016

-

02,

"Leases" (Topic

842).

This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than

twelve

months. The accounting by lessors will remain largely unchanged. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after

December

15,

2018,

with early adoption permitted. Adoption will require a modified retrospective transition. The company is currently evaluating the impact of this ASU on its consolidated financial statements.

In

January

2017,

the FASB issued ASU No.

2017

-

04,

“Intangibles-Goodwill and Other” (Topic

350).

This ASU modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because the update will eliminate Step

2

from the goodwill impairment test, it should reduce the cost and complexity of evaluating goodwill for impairment. This ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after

December

15,

2020,

with early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after

January

1,

2017.