Letter to Shareholders
Dear Shareholders,
2007 was a year of progress in many areas. Both our automotive and electrical business units achieved record performance in 2007. We also made significant strides on our initiatives to simplify the business, reduce costs, expand our global footprint and strengthen customer relationships.
The many positive developments of 2007 were dampened, however, by a challenging year for our largest business, electronics. The first half of the year was especially disappointing for this business, due to an inventory correction in the distribution channels and at end customers, as well as weakness in the telecom market. Although business picked up in the second half, it wasn’t enough to generate the overall improvement we had set out to achieve in 2007.
2007 Financial Highlights
We ended the year with sales of $536.1 million, a slight increase from 2006, but still a new record for Littelfuse. Automotive sales increased nine percent and electrical sales rose 14 percent for the year, while electronic sales were down five percent. Geographically, sales increased three percent in Asia-Pacific and six percent in Europe, and were down five percent in the Americas. The decrease in the Americas was mainly due to the weakness in electronics, offset partially by the increases in automotive and electrical.
Net earnings were $1.64 per diluted share for 2007, compared to $1.06 in 2006. The increase was primarily due to a gain on the sale of property in Ireland in 2007 and higher restructuring charges related to manufacturing transfers in 2006.
2007 was another good year for cash flow. We generated $59.9 million of cash from operating activities and $8.6 million from asset disposals, primarily real estate. This enabled us to fund $40.5 million of capital expenditures, $4.5 million of acquisitions and $16.4 million of stock repurchases, while cash net of debt increased $21.0 million to $51.6 million.
Although we did not meet our expectations for 2007 from the perspective of financial performance, there were many other achievements that set the stage for continued growth and improved financial performance in the years ahead.
Reducing Costs and Expanding our Global Presence
Expanding our global presence is a key initiative for Littelfuse, and the Asia-Pacific region is the focal point of this strategy. We are investing in our people and facilities to be closer to our customers, reduce our cost structure and benefit from the fast-paced growth of the region itself. Sales are strong in China, Korea and Japan, and we also see good growth potential in India and Brazil.
These cost-reduction initiatives are well underway. The objective is to leverage our fixed costs over fewer plants located in lower-cost countries that are close to our customers’ operations. To achieve this, we are moving production from Europe and the U.S. to Mexico, China and the Philippines. Our Board of Directors is very involved in this initiative and in February 2008 attended a dedication ceremony for our new thin-film production facility in the Philippines. To facilitate other product-line manufacturing moves, new facilities have been built in Piedras Negras, Mexico and Wuxi, China, and we are expanding our Dongguan, China location. We are on track with our plan to close our Des Plaines, Illinois manufacturing facility by the middle of 2009. At that point, we will have reduced our manufacturing plants from 14 to six. When all of the plant and line moves are completed, we expect to achieve the results we have targeted—a 15% operating margin following the completion of these moves and earnings per share of $2.50 for fiscal 2009.
Along with the line transfers, we are implementing lean manufacturing practices and streamlining our global supply chain. Our SAP business enterprise system has been rolled-out across the globe, helping us to run the business very efficiently. In addition, the system has been designed to support a higher level of sales with the same level of IT spending.
The major multi-year project to streamline our business and reduce costs requires significant capital investments and has reduced operating income over the short term. However, we believe this is a strategic investment in time and resources that will generate improved sales and earnings in the years ahead.
Strengthening Operations and Customer Relationships
In conjunction with cost-reduction initiatives, we reorganized our management structure, putting the manufacturing operations for all three business units under the direction of Dave Heinzmann, Vice President of the newly-created Global Operations Group. Dave has been with Littelfuse since 1985, most recently serving as Vice President and General Manager of the Automotive Business Unit. Succeeding Dave in leading the automotive business is Dieter Roeder, who formerly led our European sales team based in Germany. With all of our manufacturing operations under one leader, we expect to improve our operational execution and leverage the synergies between the three businesses.
This move enables our business unit leaders—Dave Samyn for electronics, Dal Ferbert in electrical and Dieter in automotive—to focus on those areas that drive their business. These include sales, marketing, new product development and customer service. Supporting all of these efforts is Ryan Stafford, our vice president responsible for recruiting, training and developing our global workforce.
As in every business, customer relationships are a critical ingredient in our success. For us, building strong relationships means placing sales and engineering staff, who speak the local language, close to our customers around the globe. It means utilizing our knowledge and expertise to recommend the appropriate circuit protection safety solution for their application and working side-by-side with customers to design our technologies into their new products.
The electronics business won numerous design-in programs with major customers during the year, including Cisco, Alcatel, GE, Samsung and LG, that we expect to begin generating incremental revenue in 2008. We also expanded the sales team in the Asia-Pacific region to further strengthen customer relationships.
The automotive business is also working to expand its global presence, with added sales and engineering teams in China, the Philippines, India and Brazil. This was a good year for design-in wins for this business unit, with major programs for MasterFuse high-voltage applications signed with BMW, GM, Ford of Australia, Renault and Volkswagen. Significant inroads were also made in the off-road, truck and bus market, including a win for the first off-road, truck and bus MasterFuse product with Volvo Europe. A double-digit increase in European sales, design wins with major OEMs including Volvo-Mack Truck, and the addition of several new sales channels further position this business for continued growth.
The electrical business made significant headway on its two strategic growth objectives in 2007—engineering custom products in the OEM segment and expanding hazard assessment consulting services. The business won contracts on the OEM front with major commercial lighting and heating, ventilation and air conditioning (HVAC) manufacturers, as well as an irrigation equipment manufacturer. In the services segment, the electrical business unit had success with warehouse and distribution centers, the plastics industry and major food processors, and is also beginning to gain traction in the utilities segment. As industries move toward a more comprehensive understanding of in-plant regulatory and safety requirements, the electrical business is well-positioned to capitalize on this growth opportunity.
As the global leader in circuit protection, our customers look to us for new technologies and product enhancements to meet their needs in an evolving marketplace. We continue to execute on this objective. The electronics business launched an expanded line of TVS diodes in the fourth quarter of 2007 and additional new products for the telecom, mobile phone and consumer electronics markets are scheduled to launch in 2008. In the automotive business, in addition to the new MasterFuse product, we will launch a flexible electric junction box for the off road, truck and bus market in 2008. And in the electrical business, selling our safety services, engineering custom OEM products and introducing a new product for industrial material handling will be the focus in 2008.
Acquisitions Add Products and Capabilities
Coming off a very active 2006, our acquisition activity was pretty quiet in 2007, although we continue to pursue opportunities that enhance our product lines and our production capabilities.
The acquisitions we announced in 2006 also support our strategic objectives of reducing costs and expanding our product portfolio. For example, the Song Long acquisition gave us the varistor production facility in Dongguan, China that we are currently expanding.
The Concord Semiconductor acquisition brought us our initial wafer fabrication manufacturing location in China and also expanded our diode business. In addition, the acquisition of Catalina Performance Accessories added the Smart-Glow fuse line to our automotive aftermarket business. Each of these acquisitions added value to Littelfuse and to our customers.
New Board Members
We welcomed two new members to our Board of Directors during the year, T.J. Chung and Bill Noglows. Both of these talented leaders are chief executive officers of technology companies and bring strong Asia-Pacific experience to our already talented and highly-valued Board.
Celebrating 80 Years of Leadership
In 2007, we celebrated the 80th anniversary of Littelfuse. Since 1927, partnering with Littelfuse has guaranteed customers innovative technologies, industry-leading expertise and access to our global pool of resources. This leadership was underscored by an independent brand awareness study that recognized Littelfuse as the global brand leader in circuit protection. We were also ranked by Forbes magazine as number 100 on its annual “Top 200 Best Small Companies in America” listing and rang the opening bell at the Nasdaq Stock Market to celebrate our 15th anniversary on the exchange.
I believe it’s no coincidence that this significant recognition came together for us in 2007. These awards for product and performance leadership reflect the years of strategic planning, product placement and solid execution that have brought us where we are today.
There are uncertainties about the strength of the American economy in 2008. As the global leader in circuit protection, we believe we are well positioned to weather these challenging times. Nearly two-thirds of our business comes from outside North America. We have a broad and deep product portfolio and a well-defined strategy to reduce costs and expand our global footprint. We are financially strong. And we have a talented and dedicated workforce.
Expertise Applied | Answers Delivered
All of us across the globe are committed to our brand promise: Expertise Applied I Answers Delivered. By continuing to execute on this commitment, we can achieve our goal of long-term growth and success for our company, customers and shareholders.
Gordon Hunter
Chairman, President and Chief Executive Officer
2007 was a year of progress in many areas. Both our automotive and electrical business units achieved record performance in 2007. We also made significant strides on our initiatives to simplify the business, reduce costs, expand our global footprint and strengthen customer relationships.
The many positive developments of 2007 were dampened, however, by a challenging year for our largest business, electronics. The first half of the year was especially disappointing for this business, due to an inventory correction in the distribution channels and at end customers, as well as weakness in the telecom market. Although business picked up in the second half, it wasn’t enough to generate the overall improvement we had set out to achieve in 2007.
2007 Financial Highlights
We ended the year with sales of $536.1 million, a slight increase from 2006, but still a new record for Littelfuse. Automotive sales increased nine percent and electrical sales rose 14 percent for the year, while electronic sales were down five percent. Geographically, sales increased three percent in Asia-Pacific and six percent in Europe, and were down five percent in the Americas. The decrease in the Americas was mainly due to the weakness in electronics, offset partially by the increases in automotive and electrical.
Net earnings were $1.64 per diluted share for 2007, compared to $1.06 in 2006. The increase was primarily due to a gain on the sale of property in Ireland in 2007 and higher restructuring charges related to manufacturing transfers in 2006.
2007 was another good year for cash flow. We generated $59.9 million of cash from operating activities and $8.6 million from asset disposals, primarily real estate. This enabled us to fund $40.5 million of capital expenditures, $4.5 million of acquisitions and $16.4 million of stock repurchases, while cash net of debt increased $21.0 million to $51.6 million.
Although we did not meet our expectations for 2007 from the perspective of financial performance, there were many other achievements that set the stage for continued growth and improved financial performance in the years ahead.
Reducing Costs and Expanding our Global Presence
Expanding our global presence is a key initiative for Littelfuse, and the Asia-Pacific region is the focal point of this strategy. We are investing in our people and facilities to be closer to our customers, reduce our cost structure and benefit from the fast-paced growth of the region itself. Sales are strong in China, Korea and Japan, and we also see good growth potential in India and Brazil.
These cost-reduction initiatives are well underway. The objective is to leverage our fixed costs over fewer plants located in lower-cost countries that are close to our customers’ operations. To achieve this, we are moving production from Europe and the U.S. to Mexico, China and the Philippines. Our Board of Directors is very involved in this initiative and in February 2008 attended a dedication ceremony for our new thin-film production facility in the Philippines. To facilitate other product-line manufacturing moves, new facilities have been built in Piedras Negras, Mexico and Wuxi, China, and we are expanding our Dongguan, China location. We are on track with our plan to close our Des Plaines, Illinois manufacturing facility by the middle of 2009. At that point, we will have reduced our manufacturing plants from 14 to six. When all of the plant and line moves are completed, we expect to achieve the results we have targeted—a 15% operating margin following the completion of these moves and earnings per share of $2.50 for fiscal 2009.
Along with the line transfers, we are implementing lean manufacturing practices and streamlining our global supply chain. Our SAP business enterprise system has been rolled-out across the globe, helping us to run the business very efficiently. In addition, the system has been designed to support a higher level of sales with the same level of IT spending.
The major multi-year project to streamline our business and reduce costs requires significant capital investments and has reduced operating income over the short term. However, we believe this is a strategic investment in time and resources that will generate improved sales and earnings in the years ahead.
Strengthening Operations and Customer Relationships
In conjunction with cost-reduction initiatives, we reorganized our management structure, putting the manufacturing operations for all three business units under the direction of Dave Heinzmann, Vice President of the newly-created Global Operations Group. Dave has been with Littelfuse since 1985, most recently serving as Vice President and General Manager of the Automotive Business Unit. Succeeding Dave in leading the automotive business is Dieter Roeder, who formerly led our European sales team based in Germany. With all of our manufacturing operations under one leader, we expect to improve our operational execution and leverage the synergies between the three businesses.
This move enables our business unit leaders—Dave Samyn for electronics, Dal Ferbert in electrical and Dieter in automotive—to focus on those areas that drive their business. These include sales, marketing, new product development and customer service. Supporting all of these efforts is Ryan Stafford, our vice president responsible for recruiting, training and developing our global workforce.
As in every business, customer relationships are a critical ingredient in our success. For us, building strong relationships means placing sales and engineering staff, who speak the local language, close to our customers around the globe. It means utilizing our knowledge and expertise to recommend the appropriate circuit protection safety solution for their application and working side-by-side with customers to design our technologies into their new products.
The electronics business won numerous design-in programs with major customers during the year, including Cisco, Alcatel, GE, Samsung and LG, that we expect to begin generating incremental revenue in 2008. We also expanded the sales team in the Asia-Pacific region to further strengthen customer relationships.
The automotive business is also working to expand its global presence, with added sales and engineering teams in China, the Philippines, India and Brazil. This was a good year for design-in wins for this business unit, with major programs for MasterFuse high-voltage applications signed with BMW, GM, Ford of Australia, Renault and Volkswagen. Significant inroads were also made in the off-road, truck and bus market, including a win for the first off-road, truck and bus MasterFuse product with Volvo Europe. A double-digit increase in European sales, design wins with major OEMs including Volvo-Mack Truck, and the addition of several new sales channels further position this business for continued growth.
The electrical business made significant headway on its two strategic growth objectives in 2007—engineering custom products in the OEM segment and expanding hazard assessment consulting services. The business won contracts on the OEM front with major commercial lighting and heating, ventilation and air conditioning (HVAC) manufacturers, as well as an irrigation equipment manufacturer. In the services segment, the electrical business unit had success with warehouse and distribution centers, the plastics industry and major food processors, and is also beginning to gain traction in the utilities segment. As industries move toward a more comprehensive understanding of in-plant regulatory and safety requirements, the electrical business is well-positioned to capitalize on this growth opportunity.
As the global leader in circuit protection, our customers look to us for new technologies and product enhancements to meet their needs in an evolving marketplace. We continue to execute on this objective. The electronics business launched an expanded line of TVS diodes in the fourth quarter of 2007 and additional new products for the telecom, mobile phone and consumer electronics markets are scheduled to launch in 2008. In the automotive business, in addition to the new MasterFuse product, we will launch a flexible electric junction box for the off road, truck and bus market in 2008. And in the electrical business, selling our safety services, engineering custom OEM products and introducing a new product for industrial material handling will be the focus in 2008.
Acquisitions Add Products and Capabilities
Coming off a very active 2006, our acquisition activity was pretty quiet in 2007, although we continue to pursue opportunities that enhance our product lines and our production capabilities.
The acquisitions we announced in 2006 also support our strategic objectives of reducing costs and expanding our product portfolio. For example, the Song Long acquisition gave us the varistor production facility in Dongguan, China that we are currently expanding.
The Concord Semiconductor acquisition brought us our initial wafer fabrication manufacturing location in China and also expanded our diode business. In addition, the acquisition of Catalina Performance Accessories added the Smart-Glow fuse line to our automotive aftermarket business. Each of these acquisitions added value to Littelfuse and to our customers.
New Board Members
We welcomed two new members to our Board of Directors during the year, T.J. Chung and Bill Noglows. Both of these talented leaders are chief executive officers of technology companies and bring strong Asia-Pacific experience to our already talented and highly-valued Board.
Celebrating 80 Years of Leadership
In 2007, we celebrated the 80th anniversary of Littelfuse. Since 1927, partnering with Littelfuse has guaranteed customers innovative technologies, industry-leading expertise and access to our global pool of resources. This leadership was underscored by an independent brand awareness study that recognized Littelfuse as the global brand leader in circuit protection. We were also ranked by Forbes magazine as number 100 on its annual “Top 200 Best Small Companies in America” listing and rang the opening bell at the Nasdaq Stock Market to celebrate our 15th anniversary on the exchange.
I believe it’s no coincidence that this significant recognition came together for us in 2007. These awards for product and performance leadership reflect the years of strategic planning, product placement and solid execution that have brought us where we are today.
There are uncertainties about the strength of the American economy in 2008. As the global leader in circuit protection, we believe we are well positioned to weather these challenging times. Nearly two-thirds of our business comes from outside North America. We have a broad and deep product portfolio and a well-defined strategy to reduce costs and expand our global footprint. We are financially strong. And we have a talented and dedicated workforce.
Expertise Applied | Answers Delivered
All of us across the globe are committed to our brand promise: Expertise Applied I Answers Delivered. By continuing to execute on this commitment, we can achieve our goal of long-term growth and success for our company, customers and shareholders.
Gordon Hunter
Chairman, President and Chief Executive Officer
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