Dear Shareholders,

2011 was another great year for Littelfuse. We achieved record sales, earnings and cash flow for the second consecutive year. We also made excellent progress in many other strategic areas that not only contributed to our strong performance in 2011, but built the foundation for future growth.

The theme of this report, Growth by Design, says it all. Step by step, we are executing on our strategies to grow the company and build shareholder value.

Delivering Results

Sales increased 9.4% to $665.0 million in 2011. Our compound annual sales growth rate over the past ten years is 9.3%, underscoring our track record for delivering consistent performance over the long term. Diluted earnings per share rose 10.8% to $3.90 in 2011. Cash provided by operating activities increased 16.0% to $120.8 million and our free cash flow exceeded $100 million for the first time. We achieved this strong performance by remaining focused on our goals and successfully executing on our strategies.

With our improved cost structure, we are generating higher margins which we believe can be sustained. Our core circuit protection business is healthy, successful and growing, and we are expanding beyond circuit protection into several attractive markets that complement our core business.

Strong growth, both organic and through acquisitions, in the automotive and electrical businesses more than offset a 5% decrease in electronics sales in 2011. Automotive sales were a record $197.6 million, a 42% increase from the prior year. Core automotive sales increased 8% excluding sales related to Cole Hersee, a major supplier to the commercial vehicle market that we acquired in December 2010. Our 2011 automotive sales were strong in all geographies, especially China.

Electrical sales of $112.9 million increased 18% from the prior year and were up 15% excluding Selco A/S, the Danish protection relay and engine control products company we acquired in August 2011. Sales of protection relays and custom electrical products continued to drive the overall increase in electrical sales, although we are encouraged by the improvement we saw in our base fuse business in the fourth quarter.

Electronic sales, which account for approximately half of our total sales, decreased 5% to $354.5 million in 2011. We made steady progress in the first half of the year. However, an inventory correction in the distribution channels during the second half of 2011 impacted what otherwise would have been a solid year for this business.

In addition to achieving record results in 2011, we also delivered on our goal of building value for our shareholders. In September, we increased the quarterly cash dividend by 20% to $0.18 per share. This increase came just three quarters after our very first cash dividend payment of $0.15 per share in December 2010. In addition, we returned value to our shareholders through the repurchase of 859,029 shares of our stock during the year.

Strong Product Portfolio

Littelfuse® continues to be the number-one brand in circuit protection, with the broadest and deepest product portfolio in the world. Our technology expertise, strong customer and distributor relationships, ongoing reinvestment in our businesses and successful expansion into new markets have made us the supplier of choice for thousands of customers around the globe. Ongoing investments in our business are the foundation of our industry leadership. Capital expenditures were $17.6 million in 2011, and we invested an additional $19.4 million in developing new products in all three of our businesses.

In our automotive business, we introduced a number of exciting new products that meet continually evolving customer needs. These include the compact Z-Case MasterFuse, fuses for the hybrid electric vehicle (HEV) market, and new ignition switches and electronic controllers for commercial vehicles. The compact Z-Case MasterFuse and other MasterFuse products are specifically designed for the higher current loads in today’s vehicles. The Z-Case MasterFuse has been especially well received because it protects high-current content in a smaller package — an important feature that is driving increased sales of this product line. The HEV product line solves some of the challenges faced by original equipment manufacturers and we believe positions us to take a leadership role in the future of the electric vehicle segment. The new commercial vehicle products (CVP) provide robust and reliable solutions for specific customer applications.

We also introduced several new products in our electrical business. Our line of high-efficiency 1,000 volt direct current (DC) string and array fuses is designed for the solar market. A new family of arc-flash protection relays addresses a rapidly growing need in the industrial markets to protect workers against very dangerous electrical arc flashes.

In the consumer electronics market, increasing data speeds and volumes are driving sales of several new Littelfuse products. Our new TVS diode arrays and 3.6 x 10mm cartridge fuses protect sensitive electronic components and chipsets against voltage surges, electrostatic discharge (ESD) and other occurrences in products ranging from LCD TVs, tablets and e-readers to high-power communications infrastructure equipment. The Littelfuse 3.6 x 10mm cartridge fuse is the smallest form factor in the market and a perfect example of our industry-leading innovation.

Building Momentum

As our new product innovation and strong financial performance indicate, Littelfuse is building momentum. This has not happened by chance—it is the result of well thought-out strategies in the key areas of our business. We began several years ago by simplifying our cost structure. Our focus now is on growing the business. We are investing in human capital, such as growing the number of sales and engineering teams actively pursuing new business opportunities in targeted geographic regions. We are also investing in Lean production practitioners who are leading our efforts to continually improve our operations and better serve our customers.

Over the past two years, we have focused on specific growth areas where we believe we can leverage our industry expertise into increased sales and earnings. One of these areas is the newly created CVP segment of our automotive business. This segment includes heavy-duty vehicles, which is an exciting growth market that provides more content for us than passenger cars. A major step in growing this business was the acquisition of Cole Hersee, a manufacturer of electromechanical and solid-state switches and control devices. We combined the Cole Hersee® products with our existing off-road, truck and bus product line to form the new CVP segment of our automotive business. With Cole Hersee, we now have a solid platform in a growing market that extends our business beyond circuit protection.

Custom electrical products and protection relays are two of the fastest-growing product families in our portfolio. Like Cole Hersee, these products also extend our capabilities beyond our core circuit protection business. The largest market for both of these product lines is the mining industry. We entered this business three years ago with the acquisition of Canada-based Startco Engineering. We further expanded our capabilities with the August 2011 acquisition of Selco A/S of Denmark, which gives us protection relay products for the marine and industrial markets, as well as a larger international presence. As a result of our latest acquisitions, our automotive and electrical businesses together now contribute almost 50% of total Littelfuse sales. This helps to balance the more volatile electronics business and adds overall stability to Littelfuse. We expect to continue to pursue potential acquisition opportunities that expand our product portfolio in all three of our businesses.

Another strategic focus area for us is the solar market. We are optimistic that this market will resume its growth in 2012 after a down year marked by a glut of inventory in the pipeline. Our new solar products put us in a good position to add market share over the next few years. Geographic expansion is another key element of the overall growth strategy for all three of our businesses. We want to step-up the pace of our growth by increasing our presence in faster-growing emerging economies, such as China, South America, India and Eastern Europe. Our investments in geographic expansion include new sales and engineering resources in Brazil and India. We also established a local presence in Russia and Poland, and added a sales and engineering facility in Denmark and a sales office in Dubai, United Arab Emirates, through the Selco acquisition. 

Together, our product innovation, high quality, strategic locations and efficient business model have made Littelfuse the supplier of choice for many customers. For example, we received supplier excellence awards from two of the leading electronics distributors, TTI, Inc. and Arrow Electronics, Inc. and won new product awards from The Electrical Distributor magazine and Plant Engineering magazine.

The foundation of our strategy is deploying Lean across our operations. This is a multi-phase initiative that impacts every functional area and company facility worldwide. Over 50 full-time, global Lean practitioners are participating in our Lean training program, and in 2011, they completed more than 170 Lean events generating a savings-to-cost ratio of over five to one. We are also collaborating with customers and suppliers in utilizing Lean to become even more responsive and to better meet their needs.

Even though building a Lean Enterprise is a recent initiative, we already have many success stories. The automotive engineering group utilized Lean principles to identify improvements to their new product development program and is now working toward a 30% reduction in development lead times. In Wuxi, China, the Lean semiconductor wafer fab team modified a process to use 37% less material, which will likely save us hundreds of thousands of dollars per year. The electrical team in Piedras Negras, Mexico, achieved a 50% reduction in changeovers and a 25% improvement in output. Other projects in Piedras Negras led to a large reduction in freight expedite costs, and built a foundation for an anticipated increase in inventory turns for the automotive business.

Our People, Our Future

The credit for our strong 2011 performance goes to our more than 6,000 associates across the globe. We invest in the best people, who every day live our core values and fulfill our promise to apply expertise and deliver answers that help our customers to achieve their goals.

In summary, we believe we have the pieces in place to grow both organically and through acquisitions, and by expanding our presence in high-growth markets and fast-growing geographic regions. We are well positioned financially, with robust cash flow and a strong balance sheet. We have three well-established businesses with opportunities for future growth, and defined strategies that will help us to achieve our goals.

Although there may be uncertainty in the year ahead about the global economy, we remain focused on long-term Growth by Design and are optimistic about the future of Littelfuse. Thank you to our associates for a year of many achievements, to our customers for trusting us to protect their products and to our shareholders for their ongoing support. We look forward to another successful year in 2012

 

Gordon Hunter
Chairman, President and Chief Executive Officer