Letter to Shareholders
14.5 PERCENT INCREASE IN SALES
In 2006 we increased our expertise and capabilities across the spectrum of circuit protection, expanded our low-cost manufacturing platform, deepened our customer relationships, extended our presence in Asia and delivered one of the strongest fiscal years in the history of Littelfuse with record sales results, record cash flow and significantly improved earnings. Our sales were a major highlight as they exceeded the half-billion-dollar milestone for the first time, with a year-end total of $534.9 million, up 14.2 percent over 2005 sales. A key growth engine was our electronics business with a 19.5 percent increase. Our automotive business was up 4.5 percent and our POWR-GARD electrical business contributed a 7.5 percent increase. Recent acquisitions contributed $11.8 million of our total sales.
Diluted earnings per share totaled $1.06, up from $0.78 in 2005, on the strength of increased sales, cost reductions and a lower effective tax rate significantly offset by higher restructuring charges.
Cash from operating activities set a historic mark of $80.9 million, up from $38.1 in 2005, due to stronger profitability and improved working capital performance. We put this cash to good use – funding $19.6 million of capital expenditures, $37.8 million in acquisitions and $10.3 million worth of stock repurchases while still increasing our cash balance and enabling us to remain net debt-free.
ACQUISITION AND RESTRUCTURING
A major focus area of 2006 was acquisition and restructuring. We announced five acquisitions, which brought us new capabilities, a greater presence in Asian markets, and a lower-cost manufacturing platform.
LEADERSHIP IN CIRCUIT PROTECTION Our mission is to be the undisputed global leader in circuit protection solutions, a position we hold by virtue of our customer relationships around the globe and our expertise across nine core circuit protection technologies. The opportunity to build on and profit from this position is vast. Toward that end, we are guided by four strategic objectives – in which we made significant progress in 2006. Our first strategic objective is to build stronger relationships with our customers. One indication of success in this area is design-in wins. Our electronics business has worked with customers in the design phases of new products ranging from Apple iPods, portable flash drives and the newly announced iPhone to the blockbuster Nintendo Wii game console, numerous LCD TVs, an array of telecom applications and many other electronics devices and applications. In our automotive business unit, we had a number of wins in China and Japan for our Masterfuse and Cable Pro products that provide high-current circuit protection for improved safety and performance in today’s vehicles. And our POWR-GARD business launched a new services offering and made inroads into developing products to meet the specific needs of OEM customers. Our second strategic objective is leveraging and improving our Asia position. We made great strides during 2006 in building our infrastructure in Asia by expanding our organization, facilities and staff levels in this high-growth region, which advanced our ability to fully participate in strategic collaborations with key customers. Our Board of Directors is closely involved in our Asian expansion, and in 2006 they traveled to China and Taiwan for a series of meetings with our Asian management team.
Our third strategic objective is to redefine and establish the Littelfuse brand. In 2007 we will celebrate the 80th anniversary of Littelfuse as a company. Over those 80 years, we developed a reputation for being a worldwide leader, an ethical company with strong values, making billions of parts one-at-a-time and delivering them with reliable quality, constantly getting smarter and reducing costs. And over the past decade, we have transformed ourselves from leading fuse manufacturer to global leader in circuit protection solutions. Our branding opportunity is to retain the equity of our 80 years of leadership and to strengthen awareness of our leadership across a broad range of circuit protection technologies and our ability to partner with OEMs in the design of their next-generation products. In 2006 we developed a more expansive brand position that better reflects our full array of circuit protection products and capabilities.
Our fourth strategic objective is to make strategic acquisitions. The intent is to solidify our position as the undisputed global leader in circuit protection solutions. The five acquisitions we announced in 2006 strengthened our positions in six of the nine technologies that we define as the circuit protection industry. They added leadership and management talent to our Asian team. They brought us new options in low-cost manufacturing. They enhanced our ability to build customer relationships in our fastest-growing business unit (electronics) and in the most growth-intensive region of the world (Asia-Pacific).
A COMMITMENT TO GROWTH
We increased our R&D investment in every business unit – a total increase of 12 percent over 2005 levels – with the goal of advancing our leadership positions. Key development projects included circuit protection for high-definition multimedia interfaces and broadband and telecom applications.
We continued to leverage the full portfolio. With the potential for six different circuit protection technologies in laptops and automotive applications, five in mobile phones and digital cameras, and four in MP3 players, we focused on solutions that optimize the use of our full portfolio and circuit protection expertise.
We continued to extend into new markets. In automotive, for example, with a few product modifications, we branched out from our historic focus on passenger vehicles to create profitable solutions in the off-road, truck and bus segment. We also obtained our automotive specialty certification for our Taiwan silicon facility, which will enable the launch of TVS diodes for automotive applications.
We continued to partner with our customers in the development of their next-generation products. Design-in projects in 2006 enabled us to work with more customers at earlier stages of their development process and employ deeper measures of our circuit protection expertise while leveraging our full portfolio of technologies and product lines. These projects will pay dividends over the remainder of this decade.
We continued to invest in people. With the Concord and Song Long acquisitions, we added key members of our Asian leadership team. We welcomed Ryan Stafford as our new vice president of human resources and our first in-house chief legal officer. As we continue to grow, Ryan’s leadership in human resources will be increasingly important in the execution of our long-term strategies.
GOVERNANCE
In February, 2007, Bill Noglows, Chairman, President and Chief Executive Officer of Cabot Microelectronics Corporation, was elected to our board. We look forward to calling on his deep knowledge of digital industry R&D, new product development, manufacturing and marketing on a global scale.
When Littelfuse became a publicly traded company in 1991, Bruce Karsh was elected to our initial Board of Directors. There he stayed to help guide and direct our evolution from a $100 million fuse company to a half-billion-dollar global leader in circuit protection solutions – until he chose to retire at the expiration of his term in 2007. On behalf of the Board of Directors and the entire Littelfuse community, we want to thank Bruce for his valuable contributions. His knowledge, experience and leadership over the past two decades were instrumental in creating our current growth trajectory.
With our market leadership position, our clear growth agenda and our low-cost manufacturing platform in Asia, we are confident we will be able to deliver above average returns for the foreseeable future.
Sincerely,
Gordon Hunter
Chairman, President and Chief Executive Officer
In 2006 we increased our expertise and capabilities across the spectrum of circuit protection, expanded our low-cost manufacturing platform, deepened our customer relationships, extended our presence in Asia and delivered one of the strongest fiscal years in the history of Littelfuse with record sales results, record cash flow and significantly improved earnings. Our sales were a major highlight as they exceeded the half-billion-dollar milestone for the first time, with a year-end total of $534.9 million, up 14.2 percent over 2005 sales. A key growth engine was our electronics business with a 19.5 percent increase. Our automotive business was up 4.5 percent and our POWR-GARD electrical business contributed a 7.5 percent increase. Recent acquisitions contributed $11.8 million of our total sales.
Diluted earnings per share totaled $1.06, up from $0.78 in 2005, on the strength of increased sales, cost reductions and a lower effective tax rate significantly offset by higher restructuring charges.
Cash from operating activities set a historic mark of $80.9 million, up from $38.1 in 2005, due to stronger profitability and improved working capital performance. We put this cash to good use – funding $19.6 million of capital expenditures, $37.8 million in acquisitions and $10.3 million worth of stock repurchases while still increasing our cash balance and enabling us to remain net debt-free.
ACQUISITION AND RESTRUCTURING
A major focus area of 2006 was acquisition and restructuring. We announced five acquisitions, which brought us new capabilities, a greater presence in Asian markets, and a lower-cost manufacturing platform.
- Our acquisition of Concord Semiconductor, which designs and manufactures TVS diodes and other overvoltage circuit protection products for the automotive, consumer electronics, computer, industrial and telecom markets, brought us silicon manufacturing capabilities in Taiwan and China.
This acquisition enabled us to begin moving production from our silicon wafer manufacturing facility in Irving, Texas, to a new facility that is being constructed adjacent to an existing Concord wafer factory in Wuxi, China. - We added new polymer technology with the acquisition of SurgX Corporation of San Jose, California. This acquisition solidified our leadership in electrostatic discharge protection devices for high-definition TV and other applications for moving large amounts of data at high speeds.
- Our acquisition of the Smart Glow blade fuse product line strengthened our automotive aftermarket portfolio. We are the only company in the world offering this product which features an indicating LED to glow when the fuse has blown.
- By acquiring the assets of our long-term manufacturing partner Song Long Electronics Co., Ltd.’s metal oxide varistor business – announced in 2006 and expected to close in the second quarter of 2007 – we will add lower-cost varistor production capacity in Dongguan, China. We also announced plans to move our existing varistor production from Ireland to Dongguan to increase the profitability of this product line.
- We acquired the gas discharge tube (GDT) assets of SRC Devices of La Jolla, California. This acquisition enhanced our already solid position in the telecom market. Production will be moved from SRC’s facility in Mexico to our existing operation in Suzhou, China, where it will be paired with the GDT operations that we also moved to Suzhou in 2006 from Swindon, England.
- In addition, we moved our back-end assembly of thin-film production from Des Plaines to the Philippines to reduce costs and shorten the distance between our production line and our customers in Asia. And we completed the move of our Heinrich electronics production from Germany to China.
LEADERSHIP IN CIRCUIT PROTECTION Our mission is to be the undisputed global leader in circuit protection solutions, a position we hold by virtue of our customer relationships around the globe and our expertise across nine core circuit protection technologies. The opportunity to build on and profit from this position is vast. Toward that end, we are guided by four strategic objectives – in which we made significant progress in 2006. Our first strategic objective is to build stronger relationships with our customers. One indication of success in this area is design-in wins. Our electronics business has worked with customers in the design phases of new products ranging from Apple iPods, portable flash drives and the newly announced iPhone to the blockbuster Nintendo Wii game console, numerous LCD TVs, an array of telecom applications and many other electronics devices and applications. In our automotive business unit, we had a number of wins in China and Japan for our Masterfuse and Cable Pro products that provide high-current circuit protection for improved safety and performance in today’s vehicles. And our POWR-GARD business launched a new services offering and made inroads into developing products to meet the specific needs of OEM customers. Our second strategic objective is leveraging and improving our Asia position. We made great strides during 2006 in building our infrastructure in Asia by expanding our organization, facilities and staff levels in this high-growth region, which advanced our ability to fully participate in strategic collaborations with key customers. Our Board of Directors is closely involved in our Asian expansion, and in 2006 they traveled to China and Taiwan for a series of meetings with our Asian management team.
Our third strategic objective is to redefine and establish the Littelfuse brand. In 2007 we will celebrate the 80th anniversary of Littelfuse as a company. Over those 80 years, we developed a reputation for being a worldwide leader, an ethical company with strong values, making billions of parts one-at-a-time and delivering them with reliable quality, constantly getting smarter and reducing costs. And over the past decade, we have transformed ourselves from leading fuse manufacturer to global leader in circuit protection solutions. Our branding opportunity is to retain the equity of our 80 years of leadership and to strengthen awareness of our leadership across a broad range of circuit protection technologies and our ability to partner with OEMs in the design of their next-generation products. In 2006 we developed a more expansive brand position that better reflects our full array of circuit protection products and capabilities.
Our fourth strategic objective is to make strategic acquisitions. The intent is to solidify our position as the undisputed global leader in circuit protection solutions. The five acquisitions we announced in 2006 strengthened our positions in six of the nine technologies that we define as the circuit protection industry. They added leadership and management talent to our Asian team. They brought us new options in low-cost manufacturing. They enhanced our ability to build customer relationships in our fastest-growing business unit (electronics) and in the most growth-intensive region of the world (Asia-Pacific).
A COMMITMENT TO GROWTH
We increased our R&D investment in every business unit – a total increase of 12 percent over 2005 levels – with the goal of advancing our leadership positions. Key development projects included circuit protection for high-definition multimedia interfaces and broadband and telecom applications.
We continued to leverage the full portfolio. With the potential for six different circuit protection technologies in laptops and automotive applications, five in mobile phones and digital cameras, and four in MP3 players, we focused on solutions that optimize the use of our full portfolio and circuit protection expertise.
We continued to extend into new markets. In automotive, for example, with a few product modifications, we branched out from our historic focus on passenger vehicles to create profitable solutions in the off-road, truck and bus segment. We also obtained our automotive specialty certification for our Taiwan silicon facility, which will enable the launch of TVS diodes for automotive applications.
We continued to partner with our customers in the development of their next-generation products. Design-in projects in 2006 enabled us to work with more customers at earlier stages of their development process and employ deeper measures of our circuit protection expertise while leveraging our full portfolio of technologies and product lines. These projects will pay dividends over the remainder of this decade.
We continued to invest in people. With the Concord and Song Long acquisitions, we added key members of our Asian leadership team. We welcomed Ryan Stafford as our new vice president of human resources and our first in-house chief legal officer. As we continue to grow, Ryan’s leadership in human resources will be increasingly important in the execution of our long-term strategies.
GOVERNANCE
In February, 2007, Bill Noglows, Chairman, President and Chief Executive Officer of Cabot Microelectronics Corporation, was elected to our board. We look forward to calling on his deep knowledge of digital industry R&D, new product development, manufacturing and marketing on a global scale.
When Littelfuse became a publicly traded company in 1991, Bruce Karsh was elected to our initial Board of Directors. There he stayed to help guide and direct our evolution from a $100 million fuse company to a half-billion-dollar global leader in circuit protection solutions – until he chose to retire at the expiration of his term in 2007. On behalf of the Board of Directors and the entire Littelfuse community, we want to thank Bruce for his valuable contributions. His knowledge, experience and leadership over the past two decades were instrumental in creating our current growth trajectory.
With our market leadership position, our clear growth agenda and our low-cost manufacturing platform in Asia, we are confident we will be able to deliver above average returns for the foreseeable future.
Sincerely,
Gordon Hunter
Chairman, President and Chief Executive Officer
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