LITTELFUSE INC /DE 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Regarding Forward-Looking Statements Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”). Certain statements in this section and other parts of this Quarterly Report on Form 10-Q may constitute "forward-looking statements" within the meaning of the federal securities laws and are entitled to the safe-harbor provisions of the PSLRA. These statements include statements regarding the Company’s future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future. Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy, although not all forward-looking statements contain such terms. The Company cautions that forward-looking statements, which speak only as of the date they are made, are subject to risks, uncertainties and other factors, and actual results and outcomes may differ materially from those indicated or implied by the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, risks and uncertainties relating to general economic conditions; the severity and duration of the coronavirus disease 2019 ("COVID-19") pandemic and the measures taken in response thereto and the effects of those items on the Company’s business; product demand and market acceptance; economic conditions; the impact of competitive products and pricing; product quality problems or product recalls; capacity and supply difficulties or constraints; coal mining exposures reserves; cybersecurity matters; failure of an indemnification for environmental liability; exchange rate fluctuations; commodity price fluctuations; the effect of the Company's accounting policies; labor disputes; restructuring costs in excess of expectations; pension plan asset returns less than assumed; uncertainties related to political or regulatory changes; integration of acquisitions may not be achieved in a timely manner, or at all; and other risks that may be detailed in Item 1A. "Risk Factors" of the Company's Annual Report on Form 10-K for the year ended December 31, 2022, and the Company's other filings and submissions with the Securities and Exchange Commission. The Company does not undertake any obligation to update or revise any forward-looking statements to reflect future events or circumstances, new information or otherwise. This report, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with information provided in the consolidated financial statements and the related Notes thereto appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide information that is supplemental to, and should be read together with, the consolidated financial statements and the accompanying notes. Information in MD&A is intended to assist the reader in obtaining an understanding of (i) the consolidated financial statements, (ii) the changes in certain key items within those financial statements from year-to-year, (iii) the primary factors that contributed to those changes, and (iv) any changes in known trends or uncertainties that the Company is aware of and that may have a material effect on future performance. In addition, MD&A provides information about the Company’s segments and how the results of those segments impact the results of operations and financial condition as a whole. 29 Table of Contents Executive Overview Founded in 1927, Littelfuse is a diversified, industrial technology manufacturing company empowering a sustainable, connected, and safer world. Across more than 20 countries, and with approximately 18,000 global associates, we partner with customers to design and deliver innovative, reliable solutions. Serving over 100,000 end customers, our products are found in a variety of industrial, transportation and electronics end markets – everywhere, every day. The Company maintains a network of global laboratories and engineering centers that develop new products and product enhancements, provide customer application support and test products for safety, reliability, and regulatory compliance. The Company conducts its business through three reportable segments: Electronics, Transportation, and Industrial. Within these segments, the Company designs, manufactures and sells components and modules empowering a sustainable, connected, and safer world. Our products protect against electrostatic discharge, power surges, short circuits, voltage spikes and other harmful occurrences, safely and efficiently control power and improve productivity and are used to identify and detect temperature, proximity, flow speed and fluid level in various applications. Executive Summary For the second quarter of 2023, the Company recognized net sales of $612.0 million, a decrease of $6.4 million, or 1.0% as compared to $618.4 million in the second quarter of 2022 including $0.5 million or 0.1% of unfavorable changes in foreign exchange rates. The decrease in net sales was due to lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment that more than offset $40.0 million or 6.5% and $4.8 million or 0.8% of incremental net sales from the C&K and Western Automation acquisitions, respectively, and higher volume in the Industrial segment. The Company recognized net income of $70.1 million, or $2.79 per diluted share, in the second quarter of 2023 compared to $87.0 million, or $3.48 per diluted share in the second quarter of 2022. The decrease in net income was primarily due to a decrease in operating income in the Electronics and Transportation segments driven by lower volume. On June 28, 2023, the Company entered into a definitive purchase agreement to acquire a 200mm wafer fab located in Dortmund, Germany (“Dortmund Fab”) from Elmos Semiconductor SE. The acquisition of the Dortmund Fab is expected to close in early fiscal year 2025. The total purchase price for the fab is approximately 93 million Euro, of which approximately 37 million Euro will be paid after regulatory approvals and approximately 56 million Euro will be paid at closing. The transaction is not expected to have a material impact on the Company’s fiscal year 2023 or 2024 financial results and will be reported in the Electronics-Semiconductor business within the Company’s Electronics segment. On February 3, 2023, the Company acquired Western Automation Research and Development Limited (“Western Automation”) for approximately $162 million in cash. Headquartered in Galway, Ireland, Western Automation is a designer and manufacturer of electrical shock protection devices used across a broad range of high-growth end markets, including e-Mobility off-board charging infrastructure, industrial safety and renewables. Western Automation has annualized sales of approximately $25 million and will be reported within the company’s Industrial segment. The company does not expect the acquisition to have a material impact to its 2023 financial results. The Company financed the transaction with cash on hand. Net cash provided by operating activities was $151.6 million for the six months ended July 1, 2023 compared to $165.3 million for the six months ended July 2, 2022. The decrease in net cash provided by operating activities was primarily due to lower cash earnings, partially offset by reductions in working capital. Risks Related to Market Conditions The Company continues to operate in a challenging macro environment, including but not limited to, supply chain disruptions, varying regional dynamics, and some pockets of end market softness. The ongoing war in Ukraine has had a modest impact on the Company, as the Company suspended sales into and purchases from Russia. The Company does not have any direct operations in Ukraine or Russia. Results of Operations The following table summarizes the Company’s unaudited condensed consolidated results of operations for the periods presented. The second quarter of 2023 includes $3.9 million ($7.2 million year-to-date) of legal and professional fees and other integration expenses related to completed and contemplated acquisitions, and $2.9 million ($4.8 million year-to-date) of restructuring charges, primarily related to employee termination costs. In addition, during the second quarter of 2023, the Company recognized a $3.9 million impairment charge related to the land and building in the commercial vehicle business within the Transportation segment. See Note 7, Restructuring, Impairment, and Other Charges, for further discussion. 30 Table of Contents The second quarter of 2022 includes $4.8 million ($8.6 million year-to-date) of legal and professional fees primarily related to the acquisition of C&K and other integration expenses related to completed and contemplated acquisitions, and $0.6 million ($0.8 million year-to-date) of restructuring, impairment and other charges, primarily related to employee termination costs, and $4.8 million year-to-date of purchase accounting inventory step-up charges. See Note 7, Restructuring, Impairment, and Other Charges, for further discussion. Second Quarter First Six Months (in thousands) 2023 2022 Change % Change 2023 2022 Change % Change Net sales $ 611,997 $ 618,436 $ (6,439) (1.0) % $ 1,221,779 $ 1,241,766 $ (19,987) (1.6) % Cost of sales 377,165 355,465 21,700 6.1 % 741,990 720,199 21,791 3.0 % Gross profit 234,832 262,971 (28,139) (10.7) % 479,789 521,567 (41,778) (8.0) % Operating expenses 142,779 128,807 13,972 10.8 % 277,095 236,813 40,282 17.0 % Operating income 92,053 134,164 (42,111) (31.4) % 202,694 284,754 (82,060) (28.8) % Income before income taxes 85,451 109,612 (24,161) (22.0) % 194,354 243,737 (49,383) (20.3) % Income taxes 15,380 22,596 (7,216) (31.9) % 35,538 39,203 (3,665) (9.3) % Net income $ 70,071 $ 87,016 $ (16,945) (19.5) % $ 158,816 $ 204,534 $ (45,718) (22.4) % Net Sales Net sales decreased $6.4 million, or 1.0%, for the second quarter of 2023 compared to the second quarter of 2022 including $0.5 million or 0.1% of unfavorable changes in foreign exchange rates. The sales decrease was due to lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment that more than offset $40.0 million or 6.5% and $4.8 million or 0.8% of incremental net sales associated with the C&K and Western Automation acquisitions included in the Electronics and Industrial segments, respectively, and higher volume from the Industrial segment. Net sales decreased $20.0 million, or 1.6%, for the first six months of 2023 compared to the first six months of 2022, including $10.4 million or 0.8% of unfavorable changes in foreign exchange rates. The sales decrease was primarily due to lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment that more than offset $82.5 million or 6.6% and $7.5 million or 0.6% incremental net sales associated with the C&K and Western Automation acquisitions included in the Electronics and Industrial segments, respectively, and higher volume from the Industrial segment. Cost of Sales Cost of sales was $377.2 million, or 61.6% of net sales, in the second quarter of 2023, compared to $355.5 million, or 57.5% of net sales, in the second quarter of 2022. As a percent of net sales, cost of sales increased 4.1% driven by lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment. Cost of sales was $742.0 million, or 60.7% of net sales, in the first six months of 2023, compared to $720.2 million, or 58.0% of net sales, in the first six months of 2022. As a percent of net sales, cost of sales increased 2.7% driven by lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment, partially offset by volume leverage, and favorable product mix from the Industrial segment. Gross Profit Gross profit was $234.8 million, or 38.4% of net sales, in the second quarter of 2023 compared to $263.0 million, or 42.5% of net sales, for the second quarter of 2022. The $28.1 million decrease in gross profit was primarily due to lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment, partially offset by the acquisition of C&K within Electronics segment. Gross profit was $479.8 million, or 39.3% of net sales, in the first six months of 2023 compared to $521.6 million, or 42.0% of net sales, for the first six months of 2022. The $41.8 million decrease in gross profit was primarily due to lower volume in the Electronics segment and the commercial vehicle business within the Transportation segment, partially offset by the acquisition of C&K within Electronics segment, and volume leverage and favorable product mix from the Industrial segment and $4.8 million or 0.4% of purchase accounting inventory charges recorded during the first six months of 2022. 31 Table of Contents Operating Expenses Operating expenses were $142.8 million, or 23.3% of net sales, for the second quarter of 2023 compared to $128.8 million, or 20.8% of net sales, for the second quarter of 2022. The increase in operating expenses of $14.0 million was primarily due to higher restructuring, impairment, and other charges of $6.2 million, including a $3.9 million impairment charge related to the land and building in the commercial vehicle business within the Transportation segment, and higher amortization, selling, general, and administrative, and research and development expenses of $5.3 million, $1.5 million, and $1.0 million, respectively mainly due to the C&K and Western Automation acquisitions. This increase in operating expenses was partially offset by lower variable incentive compensation expense. Operating expenses were $277.1 million, or 22.7% of net sales, for the first six months of 2023 compared to $236.8 million, or 19.1%of net sales, for the first six months of 2022. The increase in operating expenses of $40.3 million was primarily due to higher selling, general, and administrative expenses of $14.3 million, higher amortization expense of $9.4 million and research and development expenses of $8.7 million mainly due to the C&K and Western Automation acquisitions, and higher restructuring, impairment, and other charges of $7.9 million, including a $3.9 million impairment charge related to the land and building in the commercial vehicle business within the Transportation segment. This increase in operating expenses was partially offset by lower variable incentive compensation expense. Operating Income Operating income was $92.1 million, representing a decrease of $42.1 million, or 31.4%, for the second quarter of 2023 compared to $134.2 million for the second quarter of 2022. The decrease in operating income was due to lower gross profit from the Electronics and Transportation segments and higher operating expenses as noted above. Operating margins decreased from 21.7% in the second quarter of 2022 to 15.0% in the second quarter of 2023 driven by lower volume in the Electronics and Transportation segments and the higher operating expenses mentioned above. Operating income was $202.7 million, representing a decrease of $82.1 million, or 28.8%, for the first six months of 2023 compared to $284.8 million for the first six months of 2022. The decrease in operating income was due to lower gross profit from the Electronics and Transportation segments and higher operating expenses as noted above. Operating margins decreased from 22.9% in the first six months of 2022 to 16.6% in the first six months of 2023 driven by lower volume in the Electronics and Transportation segments and the higher operating expenses mentioned above. Income Before Income Taxes Income before income taxes was $85.5 million, or 14.0% of net sales, for the second quarter of 2023 compared to $109.6 million, or 17.7% of net sales, for the second quarter of 2022. In addition to the factors impacting comparative results for operating income discussed above, income before income taxes was primarily impacted by foreign exchange gains of $1.4 million in the second quarter of 2023 compared to foreign exchange losses of $14.1 million during the second quarter of 2022 and lower unrealized losses of $6.7 million compared to the second quarter of 2022 related to one of the Company's equity investments. Income before income taxes was $194.4 million, or 15.9% of net sales, for the first six months of 2023 compared to $243.7 million, or 19.6% of net sales, for the first six months of 2022. In addition to the factors impacting comparative results for operating income discussed above, income before income taxes was primarily impacted by foreign exchange gains of $3.1 million during the six months ended July 1, 2023 compared to foreign exchange losses of $21.9 million during the six months ended July 2, 2022, unrealized gains of $0.7 million during the six months ended July 1, 2023 compared to unrealized losses of $12.5 million during the six months ended July 2, 2022 related to one of the Company's equity investments. Income Taxes Income tax expense for the second quarter of 2023 was $15.4 million, or an effective tax rate of 18.0%, compared to $22.6 million, or an effective tax rate of 20.6%, for the second quarter of 2022. The effective tax rate for the second quarter of 2023 is lower than the effective tax rate for the comparable 2022 period, primarily due to the impact of foreign exchange losses with no related tax benefit in the 2022 period. Income tax expense for the first six months of 2023 was $35.5 million, or an effective tax rate of 18.3%, compared to $39.2 million, or an effective tax rate of 16.1%, for the first six months of 2022. The effective tax rate for the first six months of 2023 is higher than the effective tax rate for the comparable 2022 period, primarily due to the impact of a one-time deduction in the first quarter of 2022 that resulted in a net benefit of $7.2 million from the dissolution of one of the Company’s affiliates. The effective tax rates for both periods were lower than the applicable U.S. statutory tax rate primarily due to income earned in 32 Table of Contents lower tax jurisdictions, while for the 2022 period, the effective tax rate was also lower due to the impact of the one-time deduction previously noted. Segment Results of Operations The Company reports its operations by the following segments: Electronics, Transportation and Industrial. Segment information is described more fully in Note 15, Segment Information , of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report. The following table is a summary of the Company’s net sales by segment: Second Quarter First Six Months (in thousands) 2023 2022 Change % Change 2023 2022 Change % Change Electronics $ 350,147 $ 358,176 $ (8,029) (2.2) % $ 708,740 $ 723,997 $ (15,257) (2.1) % Transportation 172,048 182,027 (9,979) (5.5) % 338,689 366,531 (27,842) (7.6) % Industrial 89,802 78,233 11,569 14.8 % 174,350 151,238 23,112 15.3 % Total $ 611,997 $ 618,436 $ (6,439) (1.0) % $ 1,221,779 $ 1,241,766 $ (19,987) (1.6) % Electronics Segment Net sales decreased $8.0 million, or 2.2%, in the second quarter of 2023 compared to the second quarter of 2022 and included unfavorable changes in foreign exchange rates of $0.1 million. The sales decrease was mainly due to lower volume from the Electronics products business driven by inventory rebalancing at certain distributors and reduced demand across certain electronics markets, including consumer facing and personal electronics, and telecom, which more than offset the incremental net sales of $40.0 million from the C&K acquisition and $1.4 million of higher volume from the semiconductor business driven by increased demand predominantly in our industrial and medical end markets. Net sales decreased $15.3 million, or 2.1%, in the first six months of 2023 compared to the first six months quarter of 2022 and included unfavorable changes in foreign exchange rates of $4.9 million. The sales decrease was mainly due to lower volume from the Electronics products business driven by inventory rebalancing at certain distributors and reduced demand across certain electronics markets, including consumer facing and personal electronics, and telecom, which more than offset the incremental net sales of $82.5 million from the C&K acquisition and $15.5 million of higher volume from the semiconductor business driven by increased demand predominantly in our industrial and medical end markets. Transportation Segment Net sales decreased $10.0 million, or 5.5%, in the second quarter of 2023 compared to the second quarter of 2022 and included unfavorable changes in foreign exchange rates of $0.2 million. The sale decrease was mainly from the commercial vehicle business which had net sales decline of $15.7 million driven by reduced demand largely due to inventory rebalancing at certain distributors and customers, and some demand reduction in commercial vehicle end markets, partially offset by an increase of $6.1 million from the passenger car products business driven by global car build growth, as well as the ongoing electronification and electrification of vehicles. Net sales decreased $27.8 million, or 7.6%, in the first six months of 2023 compared to the first six months of 2022 and included unfavorable changes in foreign exchange rates of $4.9 million. The commercial vehicle business net sales declined $25.4 million driven by reduced demand largely due to inventory rebalancing at certain distributors and customers, and some demand reduction in commercial vehicle end markets, partially offset by an increase of $3.3 million from the passenger car products business driven by the ongoing electronification and electrification of vehicles. The automotive sensors business had net sales declines of $5.7 million primarily due to lower demand in China. Industrial Segment Net sales increased by $11.6 million, or 14.8%, in the second quarter of 2023 compared to the second quarter of 2022, which included unfavorable changes in foreign exchange rates of $0.2 million. The sales increase was primarily due to higher growth across various markets including construction/MRO, renewables and industrial safety end markets, and the acquisition of Western Automation which contributed net sales of $4.8 million. 33 Table of Contents Net sales increased by $23.1 million, or 15.3%, in the first six months of 2023 compared to the first six months of 2022, which included unfavorable changes in foreign exchange rates of $0.6 million. The sales increase was primarily due to higher volume in the construction/MRO, renewables, and industrial safety end markets, and the acquisition of Western Automation which contributed net sales of $7.5 million. Geographic Net Sales Information Net sales by geography represent net sales to customer or distributor locations. The following table is a summary of the Company’s net sales by geography: Second Quarter First Six Months (in thousands) 2023 2022 Change % Change 2023 2022 Change % Change Asia-Pacific $ 229,691 $ 252,809 $ (23,118) (9.1) % $ 457,703 $ 513,027 $ (55,324) (10.8) % Americas 227,896 247,591 (19,695) (8.0) % 461,750 484,821 (23,071) (4.8) % Europe 154,410 118,036 36,374 30.8 % 302,326 243,918 58,408 23.9 % Total $ 611,997 $ 618,436 $ (6,439) (1.0) % $ 1,221,779 $ 1,241,766 $ (19,987) (1.6) % Asia-Pacific Net sales decreased $23.1 million, or 9.1%, in the second quarter of 2023 compared to the second quarter of 2022 and included unfavorable changes in foreign exchange rates of $2.7 million. The decrease in net sales was primarily due to lower net sales across all businesses within the Electronics segment and lower net sales from the commercial vehicle business within the Transportation segments, partially offset by incremental sales from the acquisition of C&K. Net sales decreased $55.3 million, or 10.8%, in the first six months of 2023 compared to the first six months of 2022 and included unfavorable changes in foreign exchange rates of $6.6 million. The decrease in net sales was primarily due to lower net sales from electronics products business within the Electronics segment and lower net sales from the commercial vehicle and automotive sensors businesses within the Transportation segments, partially offset by incremental sales from the acquisition of C&K. Americas Net sales decreased $19.7 million, or 8.0%, in the second quarter of 2023 compared to the second quarter of 2022 and included unfavorable changes in foreign exchange rates of $0.1 million. The decrease in net sales was primarily due to lower volume from the Electronics products business within the Electronics segment and lower volume from the commercial vehicle business within the Transportation segment, partially offset by incremental sales from C&K acquisition within the Electronics segment, and higher sales within the Industrial segment compared to the second quarter of 2022. Net sales decreased $23.1 million, or 4.8%, in the first six months of 2023 compared to the first six months of 2022 and included unfavorable changes in foreign exchange rates of $0.4 million. The decrease in net sales was primarily due to lower volume from the Electronics products business within the Electronics segment and lower sales across all businesses within the Transportation segment, partially offset by incremental sales from C&K acquisition within the Electronics segment and higher sales within the Industrial segment compared to the first six months of 2022. Europe Net sales increased $36.4 million, or 30.8%, in the second quarter of 2023 compared to the second quarter of 2022 and included favorable changes in foreign exchange rates of $2.3 million. The increase in net sales was primarily due to incremental sales from the acquisition of C&K, increased volume from the semiconductor business within the Electronics segment and the passenger car products business within the Transportation segment, and incremental sales from the Western Automation acquisition included within the Industrial segment compared to the second quarter of 2022. Net sales increased $58.4 million, or 23.9%, in the first six months of 2023 compared to the first six months of 2022 and included unfavorable changes in foreign exchange rates of $3.4 million. The increase in net sales was primarily due to incremental sales from the acquisition of C&K, increased volume from the semiconductor business within the Electronics 34 Table of Contents segment, and incremental sales from the Western Automation acquisition included within the Industrial segment compared to the first six months of 2022, partially offset by lower net sales from the Electronics products business within the Electronics segment. Liquidity and Capital Resources The Company has historically supported its liquidity needs through cash flows from operations. Management expects that the Company’s (i) current level of cash, cash equivalents, and marketable securities, (ii) current and forecasted cash flows from operations, (iii) availability under existing funding arrangements, and (iv) access to capital in the capital markets will provide sufficient funds to support the Company’s operations, capital expenditures, investments, and debt obligations on both a short-term and long-term basis. Cash and cash equivalents were $480.7 million as of July 1, 2023, a decrease of $81.8 million as compared to December 31, 2022. As of July 1, 2023, $127.4 million of the Company's $480.7 million cash and cash equivalents was held by U.S. subsidiaries. Revolving Credit Facility and Term Loan On June 30, 2022, the Company amended and restated its Credit Agreement, dated as of April 3, 2020 (the “Credit Agreement”) to effect certain changes, including, among other changes: (i) adding a $300 million unsecured term loan credit facility; (ii) making certain financial and non-financial covenants less restrictive on the Company and its subsidiaries; (iii) replacing LIBOR-based interest rate benchmarks and modifying performance-based interest rate margins; and (iv) extending the maturity date to June 30, 2027 (the “Maturity Date”). Pursuant to the Credit Agreement, the Company may, from time to time, increase the size of the revolving credit facility or enter into one or more tranches of term loans in minimum increments of $25 million if there is no event of default and the Company is in compliance with certain financial covenants. Loans made under the available credit facility pursuant to the Credit Agreement ("the Credit Facility") bear interest at the Company’s option, at either Secured Overnight Financing Rate ("SOFR"), fixed for interest periods of one, two, three or six-month periods, plus 1.00% to 1.75%, plus a SOFR adjustment of 0.10% or at the bank’s Base Rate, as defined in the Credit Agreement, plus 0.00% to 0.75%, based upon the Company’s Consolidated Leverage Ratio, as defined in the Credit Agreement. The Company is also required to pay commitment fees on unused portions of the Credit Facility ranging from 0.10% to 0.175%, based on the Consolidated Leverage Ratio, as defined in the Credit Agreement. The Credit Agreement includes representations, covenants and events of default that are customary for financing transactions of this nature. Under the Credit Agreement, revolving loans may be borrowed, repaid and reborrowed until the Maturity Date, at which time all amounts borrowed must be repaid. The Company borrowed $300.0 million under a term loan on June 30, 2022. The principal balance of the term loans must be repaid in quarterly installments on the last day of each calendar quarter in the amount of $1.9 million commencing September 30, 2022, through June 30, 2024, and in the amount of $3.8 million commencing September 30, 2024, through March 31, 2027, with the remaining outstanding principal balance payable in full on the Maturity Date. Accrued interest on the loans is payable in arrears on each interest payment date applicable thereto and at such other times as may be specified in the Credit Agreement. Subject to certain conditions, (i) the Company may terminate or reduce the Aggregate Revolving Commitments, as defined in the Credit Agreement, in whole or in part, and (ii) the Company may prepay the revolving loans or the term loans at any time, without premium or penalty. During the three and six months ended July 1, 2023, the Company made payments of $1.9 million and $3.8 million on its term loan, respectively. The revolving loan and term loan balance under the Credit Facility was $100.0 million and $292.5 million, respectively, as of July 1, 2023. On May 12, 2022, the Company entered into an interest rate swap agreement to manage interest rate risk exposure, effectively converting the interest rate on the Company's SOFR based floating-rate loans to a fixed-rate. The interest rate swap, with a notional value of $200 million, was designated as a cash flow hedge against the variability of cash flows associated with the Company's SOFR based loans scheduled to mature on June 30, 2027. As of July 1, 2023, the effective interest rate on revolving loan and term loan outstanding borrowings was 6.45%. As of July 1, 2023, the Company had $0.2 million outstanding letters of credit under the Credit Facility and had $599.8 million of borrowing capacity available under the revolving Credit Facility. As of July 1, 2023, the Company was in compliance with all covenants under the Credit Agreement. Senior Notes On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold €212 million aggregate principal amount of senior notes in two series. The funding date for the Euro denominated senior notes 35 Table of Contents occurred on December 8, 2016 for €117 million in aggregate amount of 1.14% Senior Notes, Series A, due December 8, 2023 (“Euro Senior Notes, Series A due 2023”), and €95 million in aggregate amount of 1.83% Senior Notes, Series B due December 8, 2028 (“Euro Senior Notes, Series B due 2028”) (together, the “Euro Senior Notes”). Interest on the Euro Senior Notes is payable semiannually on June 8 and December 8, commencing June 8, 2017. On December 8, 2016, the Company entered into a Note Purchase Agreement, pursuant to which the Company issued and sold $125 million aggregate principal amount of senior notes in two series. On February 15, 2017, $25 million in aggregate principal amount of 3.03% Senior Notes, Series A, due February 15, 2022 (“U.S. Senior Notes, Series A due 2022”), and $100 million in aggregate principal amount of 3.74% Senior Notes, Series B, due February 15, 2027 (“U.S. Senior Notes, Series B due 2027”) were funded. During the first quarter of 2022, the Company paid off $25 million of U.S. Senior Notes, Series A due on February 15, 2022. Interest on the U.S. Senior Notes due 2027 is payable semiannually on February 15 and August 15, commencing August 15, 2017. On November 15, 2017, the Company entered into a Note Purchase Agreement pursuant to which the Company issued and sold $175 million in aggregate principal amount of senior notes in two series. On January 16, 2018, $50 million aggregate principal amount of 3.48% Senior Notes, Series A, due February 15, 2025 (“U.S. Senior Notes, Series A due 2025”) and $125 million in aggregate principal amount of 3.78% Senior Notes, Series B, due February 15, 2030 (“U.S. Senior Notes, Series B due 2030”) (together, the “U.S. Senior Notes due 2025 and 2030”) were funded. Interest on the U.S. Senior Notes due 2025 and 2030 is payable semiannually on February 15 and August 15, commencing on August 15, 2018. On May 18, 2022, the above note purchase agreements were amended to, among other things, update certain terms, including financial covenants to be consistent with the terms of the restated Credit Agreement and the 2022 Purchase Agreement, as defined below. On May 18, 2022, the Company entered into a Note Purchase Agreement (“2022 Purchase Agreement”) pursuant to which the Company issued and funded on July 18, 2022 $100 million in aggregate principal amount of 4.33% Senior Notes, due June 30, 2032 (“U.S. Senior Notes, due 2032”) (together with the U.S. Senior Notes due 2025 and 2030, the Euro Senior Notes and the U.S. Senior Notes due 2022 and 2027, the “Senior Notes”). Interest on the U.S. Senior Notes due 2032 is payable semiannually on June 30 and December 30, commencing on December 30, 2022. Debt Covenants The Company was in compliance with all covenants under the Credit Agreement and Senior Notes as of July 1, 2023 and currently expects to remain in compliance based on management’s estimates of operating and financial results for 2023. As of July 1, 2023, the Company met all the conditions required to borrow under the Credit Agreement and management expects the Company to continue to meet the applicable borrowing conditions. Acquisitions On June 28, 2023, the Company entered into a definitive purchase agreement to acquire a 200mm wafer fab located in Dortmund, Germany (“Dortmund Fab”) from Elmos Semiconductor SE. The acquisition of the Dortmund Fab is expected to close in early fiscal year 2025. The total purchase price for the fab is approximately 93 million Euro, of which approximately 37 million Euro will be paid after regulatory approvals and approximately 56 million Euro will be paid at closing. The transaction is not expected to have a material impact on the Company’s fiscal year 2023 or 2024 financial results and will be reported in the Electronics-Semiconductor business within the Company’s Electronics segment. On February 3, 2023, the Company acquired Western Automation for approximately $162 million in cash. Headquartered in Galway, Ireland, Western Automation is a designer and manufacturer of electrical shock protection devices used across a broad range of high-growth end markets, including e-Mobility off-board charging infrastructure, industrial safety and renewables. At the time the Company and Western Automation entered into the definitive agreement, Western Automation had annualized sales of approximately $25 million. The business is reported within the Company’s Industrial segment. The Company financed the transaction with cash on hand. Dividends During the second quarter of 2023 the Company paid quarterly dividends of $14.9 million to the shareholders. On August 1, 2023, the Company announced the declaration of a quarterly cash dividend of $0.65 per share, a 8% increase from the first quarter, payable on September 7, 2023 to stockholders of record as of August 24, 2023. 36 Table of Contents Cash Flow Overview First Six Months (in thousands) 2023 2022 Net cash provided by operating activities $ 151,633 $ 165,322 Net cash used in investing activities (199,020) (65,367) Net cash (used in) provided by financing activities (32,686) 245,017 Effect of exchange rate changes on cash, cash equivalents, and restricted cash (1,772) (15,511) (Decrease) increase in cash, cash equivalents, and restricted cash (81,845) 329,461 Cash, cash equivalents, and restricted cash at beginning of period 564,939 482,836 Cash, cash equivalents, and restricted cash at end of period $ 483,094 $ 812,297 Cash Flow from Operating Activities Operating cash inflows are largely attributable to sales of the Company’s products. Operating cash outflows are largely attributable to recurring expenditures for raw materials, labor, rent, interest, taxes and other operating activities. Net cash provided by operating activities was $151.6 million for the six months ended July 1, 2023 compared to $165.3 million for the six months ended July 2, 2022. The decrease in net cash provided by operating activities was primarily due to lower cash earnings, partially offset by reductions in working capital. Cash Flow from Investing Activities Net cash used in investing activities was $199.0 million for the six months ended July 1, 2023 compared to $65.4 million during the six months ended July 2, 2022. Net cash paid for acquisitions was $158.3 million and $9.8 million during the six months ended July 1, 2023 and July 2, 2022, respectively. Capital expenditures were $41.5 million, representing a decrease of $14.7 million compared to six months ended July 2, 2022. During the six months ended July 1, 2023 and July 2, 2022, the Company received proceeds of $0.7 million from the sale of a property within the Electronics segment, and $0.5 million from the sale of a property within the Transportation segment, respectively. Cash Flow from Financing Activities Net cash used in financing activities was $32.7 million for the six months ended July 1, 2023 compared to net cash provided by financing activities of $245.0 million for the six months ended July 2, 2022. On June 30, 2022, the Company amended its Credit Agreement and borrowed $300.0 million through a term loan. During the six months ended July 1, 2023, the Company made payments of $3.8 million on the term loan. During the six months ended July 2, 2022, the Company paid $25.0 million of U.S. Senior Notes, Series A due on February 15, 2022. Additionally, the Company paid dividends of $29.8 million and $26.2 million in the six months ended July 1, 2023 and July 2, 2022, respectively. Share Repurchase Program On April 28, 2021, the Company announced that the Board of Directors authorized a new three-year program to repurchase up to $300 million in the aggregate of shares of the Company’s common stock for the period May 1, 2021 to April 30, 2024 to replace its previous 2020 program. The Company did not repurchase shares of its common stock for the three and six months ended July 1, 2023, and July 2, 2022. Off-Balance Sheet Arrangements As of July 1, 2023, the Company did not have any off-balance sheet arrangements, as defined under SEC rules. Specifically, the Company was not liable for guarantees of indebtedness owed by third parties, the Company was not directly liable for the debt of any unconsolidated entity and the Company did not have any retained or contingent interest in assets. The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. Critical Accounting Policies and Estimates 37 Table of Contents The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the Condensed Consolidated Financial Statements, the Company uses estimates and makes judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. The assumptions, estimates, and judgments are based on historical experience, current trends, and other factors the Company believes are relevant at the time it prepares the Condensed Consolidated Financial Statements. The significant accounting policies and critical accounting estimates are consistent with those discussed in Note 1, Summary of Significant Accounting Policies and Other Information, to the consolidated financial statements and the MD&A section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. During the six months ended July 1, 2023, there were no significant changes in the application of critical accounting policies. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of the Company's Annual Report on Form 10-K for the year ended December 31, 2022. During the six months ended July 1, 2023, there have been no material changes in the Company's exposure to market risk.