Letter to Shareholders
2016 was a milestone year for Littelfuse. We had tremendous success in many areas, but the following achievements were especially significant:
- Exceeded $1 billion in revenues
- Reported record adjusted earnings and cash flow from operations
- Completed acquisitions that will add $250 million of annual revenue
- Achieved our prior five-year strategy goals
- Launched a new five-year strategy with accelerated organic growth
- Completed a planned CEO transition
STRONG FINANCIAL PERFORMANCE
2016 sales of $1.056 billion increased 22 percent compared to 2015. The results were led by strength across the electronics and automotive segments, which more than offset weakness in our industrial segment.
Electronics sales increased 32 percent to $535 million, with growth across most end markets. Automotive sales of $415 million were up 22 percent, driven by strong performance in our automotive fuses and sensors businesses, offset by weakness in our commercial vehicle products business. Industrial sales decreased 14 percent to $106 million, as key end markets including heavy industrial, mining and solar remained soft.
Net earnings were $4.60 per share. Adjusted net earnings increased 26 percent to $6.26 per share. Cash from operating activities was a record $180 million, a nine percent growth over last year. Capital expenditures were $46 million, resulting in record free cash flow of $134 million for the year, a 10 percent growth.
This was our most successful year ever for acquisitions. We completed three strategic acquisitions that will contribute approximately $250 million in annualized revenue. All three additions expand our product portfolio in targeted growth markets.
Our purchase of the circuit protection business (“PolySwitch”) of TE Connectivity Ltd. for $350 million was the largest acquisition in our history. The PolySwitch business is an excellent fit with our existing circuit protection products and gives us a leading position in polymer-based resettable circuit protection devices. It also expands our presence in automotive electronics and battery protection and gives us a world-class manufacturing facility and long-term customer relationships in Japan.
We acquired a select portfolio of semiconductor products from ON Semiconductor Corporation that extends our footprint in power semiconductors and in the automotive electronics market. We pIan to invest approximately $30 million over the next several quarters in our semiconductor capabilities, including adding capacity at our semiconductor fabricating locations.
Also in 2016, we acquired Menber’s S.p.A. of Legnago, Italy, which expands our commercial vehicle products platform and global footprint.
We continued to return capital to shareholders through a 15 percent increase in our cash dividend rate. This was our sixth consecutive year of double-digit dividend growth. As further validation of our success, our market capitalization exceeded $3 billion in 2016 and we joined the S&P MidCap 400 index.
STRATEGY GOALS ACHIEVED
We are pleased to report that we largely achieved the strategic growth goals we established in 2012.
We said we wanted to achieve double-digit sales growth – five percent organic and 10 percent through acquisitions. We delivered a 15 percent compound annual growth rate (CAGR) in revenues – five percent organic growth, excluding currency impacts, and 10 percent annualized revenue growth through acquisitions.
We said that by maintaining an operating margin in the high teens, we believed we could achieve double-digit growth in earnings per share. Again we delivered, with a 13 percent CAGR in adjusted earnings per share for the period. We also achieved our targets for cash flow from operations, capital expenditures and capital allocation, returning 30 percent of free cash flow to shareholders through dividends and share repurchases.
Our shareholders benefited from our strong performance, with a total shareholder return of 164 percent for the four-year period. This was more than double the S&P 500 index.
2017 GO-FORWARD STRATEGY
At our Analyst Day in December 2016, we launched our strategy for the next five years. This go-forward strategy builds on the achievements of the prior strategy, with a focus on increased organic growth and continued growth through acquisitions.
We have positioned our business to benefit from global mega trends that will continue impacting our future and where we can leverage our established presence and industry-leading products. These mega trends include safety, energy efficiency and the connected world.
By following our five-year strategy roadmap, we believe we can achieve the following financial targets:
- Double-digit annual sales growth, with an increased organic growth rate of five to seven percent and growth from strategic acquisitions of another five to seven percent;
- Double-digit annual growth in earnings per share, achieved through an operating margin of 17 to 19 percent;
- Free cash flow that approximates or exceeds net income; and
- Balanced capital allocation, returning 40 percent of free cash flow to shareholders through dividends and share repurchases, with the remainder focused on strategic acquisitions.
We will continue to emphasize the three major areas of expertise that define our business: protect, control and sense. We will continue to grow our core circuit protection business, accelerate sales of power control products and double the sales of our sensor platform.
In the core circuit protection business, we have many meaningful opportunities for organic growth. One of these opportunities is the Internet of Things. All Internet-enabled devices need protection against overheating, electrical surges, ESD and other occurrences. These connected devices access massive amounts of data that in turn require robust data center and cloud infrastructure equipment that also needs circuit protection. Many of these devices require batteries, so battery charging systems are another growth area. Other significant circuit protection opportunities include hybrid and electric vehicles and the charging equipment they need, as well as the ever-expanding amount of electronic content in today’s vehicles.
We’ve been in the power control market for some time and believe we are uniquely positioned to step-up our growth. Our power control products are used in industrial and automotive power systems, motor drives and power conversion applications. In the commercial vehicle market, they are designed into heavy trucks and construction and agricultural equipment.
In 2016, we added additional power control capabilities to our existing portfolio. We acquired insulated gate bipolar transistor (IGBT) products used in automotive ignition applications from ON Semiconductor. We continue to target the silicon carbide market through our investment in Monolith Semiconductor, a start-up company with a team of experts experienced in this technology. We believe silicon carbide products have good growth potential because they switch faster and provide more efficient power conversion than traditional silicon-based devices.
We entered the sensor business five years ago, through our first acquisition in this space. With additional acquisitions and organic growth, our $160 million sensor business is now our fastest growing platform, crossing both our automotive and electronic segments. Examples include occupant safety, solar and position sensors for automotive applications, and reed switch and pulse wave guide technologies for small appliances and white goods. We are also investing in our capabilities to combine several sensing technologies into a single module that is smaller and more efficient.
One of the largest organic growth drivers over the next five years will be cross-segment opportunities where technologies and customer relationships intersect. We have modified some of our electronic components to protect automotive electronic devices, a targeted growth area. There are also several cross-segment opportunities between automotive and industrial. As vehicles require higher voltage systems and hybrid and full electric vehicles continue to grow, the technologies in our industrial segment can be applied to automotive applications such as battery protection, charging systems and wiring harness systems. We are adjusting our approach to these markets to take advantage of these intersection points and drive sales of our combined product offerings.
Innovation has been the foundation of Littelfuse since day one. We work closely with our customers to understand their needs and then develop products that meet their specifications. We can bring existing components into new markets or find new technologies that are growing faster than the core market that we can invest in or acquire. We develop new products and test our customers’ products through our network of 15 global design centers and testing labs. In 2016, we opened our new Silicon Valley Technology Center in Fremont, California, close to the engineering facilities of several major automotive and electronic customers.
At our core, we are a manufacturing company. Our ultimate success depends on the strength of our execution on the operational side of the business. We have made excellent progress in driving our Lean and Six Sigma culture throughout the organization. We have a proven track record in successfully integrating acquisitions and developing new technologies and products. Every year, we are recognized by customers and channel partners for our manufacturing and supply chain capabilities and exceptional quality. Operational excellence has been, and will continue to be, a foundational element of our success.
A MILESTONE YEAR
The credit for our milestone year belongs to our teams across the globe who executed our growth strategies; to our customers who choose our products; and to our shareholders who have placed their confidence in us. To everyone involved with Littelfuse, thank you.
|DAVE HEINZMANN||GORDON HUNTER|
|President and Chief Executive Officer||Executive Chairman|
 Excluding certain expenses for manufacturing transfers and acquisitions and divestitures, impairment charges and certain foreign currency impacts. A reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP is set forth on page 13 of the 2016 Annual Report.
 Calculated as cash from operating activities less capital expenses.