UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

 
[X]
Annual Report Pursuant to Section 13 or 15(d)
 
   
of the Securities Exchange Act of 1934
 
(Mark one)
 
for the fiscal year ended December 29, 2012
 
   
Or
 
 
[   ]
Transition Report Pursuant to Section 13 or 15(d)
 
   
of the Securities Exchange Act of 1934
 
   
for the transition period from       to
 

Commission file number 0-20388
LITTELFUSE, INC.
(Exact name of registrant as specified in its charter)

Delaware
36-3795742
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
   
8755 West Higgins Road, Suite 500,
 
Chicago, Illinois
60631
(Address of principal executive offices)
(ZIP Code)

773/628-1000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
 
 
Name of Each Exchange
Title of Each Class On Which Registered
Common Stock, $0.01 par value NASDAQ Global Select MarketSM
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
 
 
 

 

(Cover continued from previous page)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The aggregate market value of 21,676,302 shares of voting stock held by non-affiliates of the registrant was approximately $1,233,164,821 based on the last reported sale price of the registrant’s Common Stock as reported on the NASDAQ Global Select MarketSM on June 30, 2012.

As of February 15, 2013, the registrant had outstanding 23,608,450 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Littelfuse, Inc. Proxy Statement for the 2013 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.
 
 
2

 
 
TABLE OF CONTENTS

 
Page
   
FORWARD-LOOKING STATEMENTS
4
     
PART I
   
Item 1.
Business.
4
Item 1A.
Risk Factors.
12
Item 1B.
Unresolved Staff Comments.
16
Item 2.
Properties.
16
Item 3.
Legal Proceedings.
18
Item 4.
Mine Safety Disclosures.
18
     
PART II
   
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
19
Item 6.
Selected Financial Data.
21
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
21
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
35
Item 8.
Financial Statements and Supplementary Data.
37
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
76
Item 9A.
Controls and Procedures.
76
Item 9B.
Other Information.
77
     
PART III
   
Item 10.
Directors, Executive Officers and Corporate Governance.
78
Item 11.
Executive Compensation.
80
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
80
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
80
Item 14.
Principal Accounting Fees and Services.
80
     
PART IV
   
Item 15.
Exhibits, Financial Statement Schedules.
81
 
Schedule II – Valuation and Qualifying Accounts and Reserves.
82
 
Signatures.
83
 
Exhibit Index.
84
 
 
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FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K that are not historical facts are intended to constitute “forward-looking statements” entitled to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995 (“PSRLA”). These statements may involve risks and uncertainties, including, but not limited to, risks relating to 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, 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 being less than assumed, integration of acquisitions and other risks that may be detailed in “Item 1A. Risk Factors” below and in the company’s other Securities and Exchange Commission filings.

PART I

ITEM 1. BUSINESS.

GENERAL

Littelfuse, Inc. and its subsidiaries (the “company” or “Littelfuse” or “we” or “our”) is the world’s leading supplier of circuit protection products for the electronics, automotive and electrical industries. In addition to the broadest and deepest portfolio of circuit protection products and solutions, the company offers a comprehensive line of highly reliable electromechanical and electronic switch and control devices for commercial and specialty vehicles and sensors for automobile safety systems, as well as protection relays and power distribution centers for the safe control and distribution of electricity. The company has a network of global labs that develop new products and product enhancements, provide customer application support and test products for safety, reliability and regulatory compliance.

In the electronics market, the company supplies leading manufacturers such as Alcatel-Lucent, Cisco, Celestica, Delta, Flextronics, Foxconn, Hewlett-Packard, HTC, Huawei, IBM, Intel, Jabil, LG, Motorola, Nokia, Panasonic, Quanta, Samsung, Sanmina-SCI, Seagate, Siemens and Sony. The company is also the leading provider of circuit protection for the automotive industry and the third largest producer of electrical fuses in North America. In the automotive market, the company’s end customers include major automotive manufacturers in North America, Europe and Asia such as BMW, Caterpillar, Chrysler, Daimler Trucks NA, Ford Motor Company, General Motors, Hyundai Group and Volkswagen. The company also supplies wiring harness manufacturers and auto parts suppliers worldwide, including Advance Auto Parts, Continental, Delphi, Lear, Leoni, O’Reilly Auto Parts, Pep Boys, Sumitomo, Valeo and Yazaki. In the electrical market, the company supplies representative customers such as Abbott, Acuity Brands, Dow Chemical, DuPont, GE, General Motors, Heinz, International Paper, John Deere, SMA, First Solar, Samsung, Merck, Poland Springs, Procter & Gamble, Rockwell, United Technologies and 3M. Through the company’s Electrical business, the company supplies industrial ground fault protection in mining and other large industrial operations to customers such as Potash Corporation, Mosaic, Agrium and Cameco. See “Business Environment: Circuit Protection Market.”

The company reports its operations by three business unit segments: Electronics, Automotive, and Electrical. For segment and geographical information and consolidated net sales and operating earnings see “Item 7. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” and Note 16 of the Notes to Consolidated Financial Statements included in this report.
 
 
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On May 31, 2012, the company acquired 100% of ACCEL AB (“Accel”), a manufacturer of advanced electromechanical products, including sensors and switches primarily for the automotive industry, for approximately $23.9 million. The acquisition allows the company to expand its automotive product offering and establish a presence in the growing automotive sensor market within its Automotive business unit segment. Accel is based in Vänersborg, Sweden with a manufacturing facility located in Kaunas, Lithuania. The company funded the acquisition with available cash.

On September 26, 2012, the company acquired 100% of Terra Power Systems, LLC ("Terra Power")  , a U.S. manufacturer of electromechanical components including power distribution modules and fuse holders for commercial vehicle products in the automotive industry for $10.6 million. The acquisition allows the company to strengthen its position in the commercial vehicle products market by adding new products and new customers within its Automotive business unit segment. Terra Power is based in Bellingham, Washington. The company funded the acquisition with available cash.

Net sales by business unit segment for the periods indicated are as follows (in thousands):

   
Fiscal Year
 
   
2012
   
2011
   
2010
 
Electronics
  $ 329,466     $ 354,487     $ 373,370  
Automotive
    206,222       197,586       139,096  
Electrical
    132,225       112,882       95,555  
Total
  $ 667,913     $ 664,955     $ 608,021  

The company operates in three geographic regions: the Americas, Europe and Asia-Pacific. The company manufactures products and sells to customers in all three regions.

Net sales in the company’s three geographic regions, based upon the shipped to destination, are as follows (in thousands):

   
Fiscal Year
 
   
2012
   
2011
   
2010
 
Americas
  $ 303,598     $ 288,592     $ 227,747  
Europe
    107,512       114,895       115,113  
Asia-Pacific
    256,803       261,468       265,161  
Total
  $ 667,913     $ 664,955     $ 608,021  

The company’s products are sold worldwide through distributors, a direct sales force and manufacturers’ representatives. For the fiscal year ended December 29, 2012, approximately 67% of the company’s net sales were to customers outside the United States, including approximately 21% to China.

The company manufactures many of its products on fully integrated manufacturing and assembly equipment. The company maintains product quality through a Global Quality Management System with most manufacturing sites certified under ISO 9001:2000. In addition, several of the Littelfuse manufacturing sites are also certified under TS 16949 and ISO 14001.

References herein to “2012” or “fiscal 2012” refer to the fiscal year ended December 29, 2012. References herein to “2011” or “fiscal 2011” refer to the fiscal year ended December 31, 2011. References herein to “2010” or “fiscal 2010” refer to the fiscal year ended January 1, 2011.
 
 
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The company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through the “Investor Relations” section of the company’s Internet website (http://www.littelfuse.com), as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”), accessible via a link to the website maintained by the SEC. Except as otherwise provided herein, such information is not incorporated by reference into this Annual Report on Form 10-K.

BUSINESS ENVIRONMENT: CIRCUIT PROTECTION MARKET

Electronic Products
Electronic circuit protection products are used to protect circuits in a multitude of electronic systems. The company’s product offering includes a complete line of overcurrent and overvoltage solutions, including (i) fuses and protectors, (ii) positive temperature coefficient (“PTC”) resettable fuses, (iii) varistors, (iv) polymer electrostatic discharge (“ESD”) suppressors, (v) discrete transient voltage suppression (“TVS”) diodes, TVS diode arrays and protection thyristors, (vi) gas discharge tubes, (vii) power switching components and (viii) fuseholders, blocks and related accessories.

Electronic fuses and protectors are devices that contain an element that melts in an overcurrent condition. Electronic miniature and subminiature fuses are designed to provide circuit protection in the limited space requirements of electronic equipment. The company’s fuses are used in a wide variety of electronic products, including mobile phones, flat-screen TVs, computers and telecommunications equipment. The company markets these products under trademarked brand names including PICO® II and NANO2® SMF.

Resettable fuses are PTC polymer devices that limit the current when an overcurrent condition exists and then reset themselves once the overcurrent condition has cleared. The company’s product line offers both radial leaded and surface mount products. Varistors are ceramic-based, high-energy absorption devices that provide transient overvoltage and surge suppression for automotive, telecommunication, consumer electronics and industrial applications. The company’s product line offers both radial leaded and multilayer surface mount products.

Polymer ESD suppressors are polymer-based devices that protect an electronic system from failure due to rapid transfer of electrostatic charge to the circuit. The company’s PulseGuard® line of ESD suppressors is used in PC and PC peripherals, digital consumer electronics and wireless applications.

Discrete diodes, diode arrays and protection thyristors are fast switching silicon semiconductor structures. Discrete diodes protect a wide variety of applications from overvoltage transients such as ESD, inductive load switching or lightning, while diode arrays are used primarily as ESD suppressors. Protection thyristors are commonly used to protect telecommunications circuits from overvoltage transients such as those resulting from lightning. Applications include telephones, modems, data transmission lines and alarm systems. The company markets these products under trademarked brand names including TECCOR®, SIDACtor®, Battrax® and SPA™.

Gas discharge tubes are very low capacitance devices designed to suppress any transient voltage event that is greater than the breakover voltage of the device. These devices are primarily used in telecommunication interface and conversion equipment applications as protection from overvoltage transients such as lightning.
 
 
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Power switching components are used to regulate energy to various types of loads most commonly found in industrial and home applications. These components are easily activated from simple control circuits or interfaced to computers for more complex load control. Typical applications include heating, cooling, battery chargers and lighting.

In addition to the above products, the company is also a supplier of fuse holders (including OMNI-BLOK®), fuse blocks and fuse clips primarily to customers that purchase circuit protection devices from the company.

Automotive Products
Fuses are extensively used in automobiles, trucks, buses and off-road equipment to protect electrical circuits and the wires that supply electrical power to operate lights, heating, air conditioning, radios, windows and other controls. Currently, a typical automobile contains 30 to 100 fuses, depending upon the options installed. The fuse content per vehicle is expected to continue to grow as more electronic features are included in automobiles. The company also supplies fuses for the protection of electric and hybrid vehicles.

The company is a primary supplier of automotive fuses to United States, Asian and European automotive original equipment manufacturers (“OEM”), automotive component parts manufacturers and automotive parts distributors. The company also sells its fuses in the replacement parts market, with its products being sold through merchandisers, discount stores and service stations, as well as under private label by national firms. The company invented and owns U.S. and foreign patents related to blade-type fuses, which is the standard and most commonly used fuse in the automotive industry. The company’s automotive fuse products are marketed under trademarked brand names, including ATO®, MINI®, MAXI, MIDI®, MEGA®, MasterFuse, JCASE® and CablePro™.

A majority of the company’s automotive fuse sales are made to main-fuse box and wire harness manufacturers that incorporate the fuses into their products. The remaining automotive fuse sales are made directly to automotive manufacturers, retailers who sell automotive parts and accessories, and distributors who in turn sell most of their products to wholesalers, service stations and non-automotive OEMs.

The company has expanded the Automotive Business Segment into the commercial vehicle market with the acquisition of Cole Hersee and Terra Power. Additional products in this market include:  power distribution modules, low current switches, high current switches, solenoids and relays, electronic switches, battery management products and ignition key switches.

The company has expanded into the automotive sensor market with the acquisition of Accel AB. Additional products in this market include advanced electromechanical sensors and switches.

Electrical Products
The company entered the electrical market in 1983 and manufactures and sells a broad range of low-voltage and medium-voltage circuit protection products to electrical distributors and their customers in the construction, OEM and industrial maintenance, repair and operating supplies (“MRO”) markets.  The company also designs and manufactures portable custom electrical equipment for the mining industry in Canada as well as protection relays for the global mining, oil and gas, industrial and marine markets.

Power fuses are used to protect circuits in various types of industrial equipment and in industrial and commercial buildings. They are rated and listed under one of many Underwriters Laboratories’ fuse classifications. Major applications for power fuses include protection from over-load and short-circuit currents in motor branch circuits, heating and cooling systems, control systems, lighting circuits, solar and electrical distribution networks.
 
 
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The company’s POWR-GARD® product line features the Indicator™ series power fuse used in both the OEM and MRO markets. The Indicator™ technology provides visual blown-fuse indication at a glance, reducing maintenance and downtime on production equipment. The Indicator™ product offering is widely used in motor protection and industrial control panel applications.

Protection relays are used to protect personnel and equipment in mining, oil & gas and industrial environments from excessive currents, over voltages and electrical shock hazards called ground-faults. Major applications for protection relays include protection of motor, transformer and power-line distribution circuits. Ground-fault relays are used to protect personnel and equipment in wet environments such as underground mining or water treatment applications where there is a greater risk for electricity to come in contact with water and create a shock hazard.

Custom electrical equipment is used in harsh environments such as underground mining where standard electrical gear will not meet customer needs for reliability and durability.  Portable power substations are used to transform and distribute electrical power to mobile equipment such as mining cutting machines and other electrical machinery. Miner control units provide power management for critical electrically operated underground production equipment.

PRODUCT DESIGN AND DEVELOPMENT

The company employs scientific, engineering and other personnel to continually improve its existing product lines and to develop new products at its research and engineering facilities in Champaign and Chicago, Illinois, Boston, Massachusetts, Canada, China, Germany, the Philippines, Taiwan, and Mexico. The Product & Development Technology departments maintain a staff of engineers, chemists, material scientists and technicians whose primary responsibility is to design and develop new products.

Proposals for the development of new products are initiated primarily by sales and marketing personnel with input from customers. The entire product development process usually ranges from a few months to 18 months based on the complexity of development, with continuous efforts to reduce the development cycle. During fiscal years 2012, 2011 and 2010, the company expended $21.2 million, $19.4 million and $17.6 million, respectively, on research, product design and development (“R&D”). During 2010, the company completed moving R&D operations to lower cost locations closer to its customers. R&D operations are now in Canada, China, Germany, the Philippines, Taiwan, and Mexico, as well as the United States.

PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY

The company generally relies on patent and trademark laws and license and nondisclosure agreements to protect intellectual property and proprietary products. In cases where it is deemed necessary by management, key employees are required to sign an agreement that they will maintain the confidentiality of the company’s proprietary information and trade secrets.

As of December 29, 2012, the company owned 219 patents in North America, 100 patents in the European Union and 149 patents in other foreign countries. The company also has registered trademark protection for certain of its brand names and logos. The 219 North American patents are in the following product categories: 135 electronics, 49 automotive and 35 electrical. Patents and licenses are amortized over a period of 7-12 years, with a weighted average life of 11.8 years. Distribution networks are amortized over a period of 3-20 years, with a weighted average life of 13.6 years. Trademarks and tradenames are amortized over a period of 5-20 years, with a weighted average life of 13.5 years. The company recorded amortization expense of $6.1 million, $6.6 million and $5.0 million in 2012, 2011 and 2010, respectively, related to amortizable intangible assets.
 
 
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New products are continually being developed to replace older products. The company regularly applies for patent protection on such new products. Although, in the aggregate, the company’s patents are important in the operation of its businesses, the company believes that the loss by expiration or otherwise of any one patent or group of patents would not materially affect its business.

License royalties amounted to $0.7 million, $1.0 million and $0.2 million for fiscal 2012, 2011 and 2010, respectively, and are included in other expense (income), net on the Consolidated Statements of Net Income.

MANUFACTURING

The company performs the majority of its own fabrication, stamps some of the metal components used in its fuses, holders and switches from raw metal stock and makes its own contacts and springs. In addition, the company fabricates silicon wafers for certain applications and performs its own plating (silver, nickel, zinc, tin and oxides). All thermoplastic molded component requirements used for such products as the ATO®, MINI® and MAXI fuse product lines are met through the company’s in-house molding capabilities. After components are stamped, molded, plated and readied for assembly, final assembly is accomplished on fully automatic and semi-automatic assembly machines. Quality assurance and operations personnel, using techniques such as statistical process control, perform tests, checks and measurements during the production process to maintain the highest levels of product quality and customer satisfaction.

The principal raw materials for the company’s products include copper and copper alloys, heat-resistant plastics, zinc, melamine, glass, silver, gold, raw silicon, solder and various gases. The company uses a sole source for several heat-resistant plastics and for zinc, but believes that suitable alternative heat-resistant plastics and zinc are available from other sources at comparable prices. All other raw materials are purchased from a number of readily available outside sources.

A computer-aided design and manufacturing system (CAD/CAM) expedites product development and machine design and the company’s laboratories test new products, prototype concepts and production run samples. The company participates in “just-in-time” delivery programs with many of its major suppliers and actively promotes the building of strong cooperative relationships with its suppliers by utilizing early supplier involvement techniques and engaging them in pre-engineering product and process development.

MARKETING

The company’s domestic sales and marketing staff of over 35 people maintains relationships with major OEMs and distributors. The company’s sales, marketing and engineering personnel interact directly with OEM engineers to ensure appropriate circuit protection and reliability within the parameters of the OEM’s circuit design. Internationally, the company maintains a sales and marketing staff of over 100 people with sales offices in the U.K., Germany, Spain, Italy, Singapore, Taiwan, Japan, Brazil, Hong Kong, Korea, China and India. The company also markets its products indirectly through a worldwide organization of over 60 manufacturers’ representatives and distributes through an extensive network of electronics, automotive and electrical distributors.
 
 
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Electronics
The company uses manufacturers’ representatives to sell its electronics products domestically and to call on major domestic and international OEMs and distributors. The company sells approximately 15% of its domestic products directly to OEMs, with the remainder sold through distributors nationwide.

In the Asia-Pacific region, the company maintains a direct sales staff and utilizes distributors in Japan, Singapore, Korea, Taiwan, China, Malaysia, Hong Kong, India and the Philippines. In the Americas, the company maintains a direct sales staff in the U.S. and Brazil and utilizes manufacturers’ representatives and distributors in Canada.  In Europe, the company maintains a direct sales force and utilizes manufacturers’ representatives and distributors to support a wide array of customers.

Automotive
The company maintains a direct sales force to service all the major automotive and commercial vehicle OEMs and system suppliers domestically. Over 20 manufacturers’ representatives sell the company’s products to aftermarket fuse retailers such as O’Reilly Auto Parts and Pep Boys. The company also uses about 15 manufacturers’ representatives to sell to the commercial vehicle aftermarket. In Europe, the company uses both a direct sales force and manufacturers’ representatives to distribute its products to OEMs, major system suppliers and aftermarket distributors. In the Asia-Pacific region, the company uses both a direct sales force and distributors to supply to major OEMs and system suppliers.

Electrical
The company markets and sells its power fuses and protection relays through over 35 manufacturers’ representatives across North America. These representatives sell power fuse products through an electrical and industrial distribution network comprised of approximately 2,000 distributor buying locations. These distributors have customers that include electrical contractors, municipalities, utilities and factories (including both MRO and OEM).

The company’s field sales force (including regional sales managers and application engineers) and manufacturers’ representatives call on both distributors and end-users (consulting engineers, municipalities, utilities and OEMs) in an effort to educate these customers on the capabilities and characteristics of the company’s products.

CUSTOMERS

The company sells to over 5,000 customers and distributors worldwide. Sales to Arrow Electronics (an Electronics distributor) were less than 10% of net sales for 2012 and 2011, respectively, but were 10.4% for 2010.  No other single customer accounted for more than 10% of net sales during any of the last three years.  During fiscal 2012, 2011 and 2010, net sales to customers outside the United States accounted for approximately 67%, 66% and 69%, respectively, of the company’s total net sales.

COMPETITION

The company’s products compete with similar products of other manufacturers, some of which have substantially greater financial resources than the company. In the electronics market, the company’s competitors include Cooper Industries, Bel Fuse, Bourns, EPCOS, On Semiconductor, STMicroelectronics, Semtech, Vishay and TE Connectivity. In the automotive market, the company’s competitors include Cooper Industries, Pacific Engineering (a private company in Japan) and MTA (a private company in Italy). In the electrical market, the company’s major competitors include Cooper Industries and Mersen. The company believes that it competes on the basis of innovative products, the breadth of its product line, the quality and design of its products and the responsiveness of its customer service, in addition to price.
 
 
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BACKLOG

The backlog of unfilled orders at December 29, 2012 was approximately $79.2 million, compared to $92.4 million at December 31, 2011. Substantially all of the orders currently in backlog are scheduled for delivery in 2013.

EMPLOYEES

As of December 29, 2012, the company employed approximately 6,000 employees worldwide. Approximately 730 employees in Mexico and three employees in Germany are covered by collective bargaining agreements. The Mexico collective bargaining agreement, covering employees in Piedras Negras, expires January 31, 2014.

The Germany collective bargaining agreement, covering three employees in Essen, expires March 31, 2013. During 2011, a collective bargaining agreement covering 28 employees at the company’s Dünsen, Germany facility was terminated as a result of plant closure.

Approximately 12% of the company's total workforce was employed under collective bargaining agreements at December 29, 2012.  The employees covered by a collective bargaining agreement that will expire within one year of December 29, 2012 represent less than 1% of the company's total workforce.

Overall, the company has historically maintained satisfactory employee relations and considers employee relations to be good.

ENVIRONMENTAL REGULATION

The company is subject to numerous foreign, federal, state and local regulations relating to air and water quality, the disposal of hazardous waste materials, safety and health. Compliance with applicable environmental regulations has not significantly changed the company’s competitive position, capital spending or earnings in the past and the company does not presently anticipate that compliance with such regulations will change its competitive position, capital spending or earnings for the foreseeable future.

The company employs an environmental engineer to monitor regulatory matters and believes that it is currently in compliance in all material respects with applicable environmental laws and regulations.

Littelfuse GmbH, which was acquired by the company in May 2004, is responsible for maintaining closed coal mines from legacy acquisitions. The company is compliant with German regulations pertaining to the maintenance of the mines and has an accrual related to certain of these coal mine shafts based on an engineering study estimating the cost of remediating the dangers (such as a shaft collapse) of certain of these closed coal mine shafts in Germany. The reserve is reviewed annually and calculated based upon the cost of remediating the shafts that the study deems most risky. Further information regarding the coal mine liability reserve is provided in Note 11 of the Notes to Consolidated Financial Statements included in this report.
 
 
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ITEM 1A. RISK FACTORS.

Our business, financial condition and results of operations are subject to various risks and uncertainties, including the risk factors we have identified below. These factors are not necessarily listed in order of importance. We may amend or supplement the risk factors from time to time by other reports that we file with the SEC in the future.

Our industry is subject to intense competitive pressures.
 
We operate in markets that are highly competitive. We compete on the basis of price, quality, service and/or brand name across the industries and markets we serve. Competitive pressures could affect the prices we are able to charge our customers or the demand for our products.
 
We may not always be able to compete on price, particularly when compared to manufacturers with lower cost structures. Some of our competitors have substantially greater sales, financial and manufacturing resources and may have greater access to capital than Littelfuse. As other companies enter our markets or develop new products, competition may further intensify. Our failure to compete effectively could materially adversely affect our business, financial condition and results of operations.

We may be unable to manufacture and deliver products in a manner that is responsive to our customers’ needs.
 
The end markets for our products are characterized by technological change, frequent new product introductions and enhancements, changes in customer requirements and emerging industry standards. The introduction of products embodying new technologies and the emergence of new industry standards could render our existing products obsolete and unmarketable before we can recover any or all of our research, development and commercialization expenses on capital investments. Furthermore, the life cycles of our products may change and are difficult to estimate.

Our future success will depend upon our ability to manufacture and deliver products in a manner that is responsive to our customers’ needs. We will need to develop and introduce new products and product enhancements on a timely basis that keep pace with technological developments and emerging industry standards and address increasingly sophisticated requirements of our customers. We invest heavily in research and development without knowing that we will recover these costs. Our competitors may develop products or technologies that will render our products non-competitive or obsolete. If we cannot develop and market new products or product enhancements in a timely and cost-effective manner, our business, financial condition and results of operations could be materially adversely affected.
 
Our business may be interrupted by labor disputes or other interruptions of supplies.
 
A work stoppage could occur at certain of our facilities, most likely as a result of disputes under collective bargaining agreements or in connection with negotiations of new collective bargaining agreements. In addition, we may experience a shortage of supplies for various reasons, such as financial distress, work stoppages, natural disasters or production difficulties that may affect one of our suppliers. A significant work stoppage, or an interruption or shortage of supplies for any reason, if protracted, could substantially adversely affect our business, financial condition and results of operations. The transfer of our manufacturing operations and changes in our distribution model could disrupt operations for a limited time.
 
 
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Our revenues may vary significantly from period to period.
 
Our revenues may vary significantly from one accounting period to another due to a variety of factors including:
 
·
changes in our customers’ buying decisions;
 
·
changes in demand for our products;
 
·
changes in our distributor inventory stocking;
 
·
our product mix;
 
·
our effectiveness in managing manufacturing processes;
 
·
costs and timing of our component purchases;
 
·
the effectiveness of our inventory control;
 
·
the degree to which we are able to utilize our available manufacturing capacity;
 
·
our ability to meet delivery schedules;
 
·
general economic and industry conditions;
 
·
local conditions and events that may affect our production volumes, such as labor conditions and political instability; and
 
·
seasonality of certain product lines.

The bankruptcy or insolvency of a major customer could adversely affect us.
 
The bankruptcy or insolvency of a major customer could result in lower sales revenue and cause a material adverse effect on our business, financial condition and results of operations. In addition, the bankruptcy or insolvency of a major U.S. auto manufacturer or significant supplier likely could lead to substantial disruptions in the automotive supply base, resulting in lower demand for our products, which likely would cause a decrease in sales revenue and have a substantial adverse impact on our business, financial condition and results of operations.

Our ability to manage currency or commodity price fluctuations or shortages is limited.
 
As a resource-intensive manufacturing operation, we are exposed to a variety of market and asset risks, including the effects of changes in foreign currency exchange rates, commodity prices and interest rates. We have multiple sources of supply for the majority of our commodity requirements. However, significant shortages that disrupt the supply of raw materials or result in price increases could affect prices we charge our customers, our product costs and the competitive position of our products and services. We monitor and manage these exposures as an integral part of our overall risk management program, which recognizes the unpredictability of markets and seeks to reduce the potentially adverse effects on our results. Nevertheless, changes in currency exchange rates, commodity prices and interest rates cannot always be predicted. In addition, because of intense price competition and our high level of fixed costs, we may not be able to address such changes even if they are foreseeable. Substantial changes in these rates and prices could have a material adverse effect on our results of operations and financial condition. For additional discussion of interest rate, currency or commodity price risk, see "Item 7A. Quantitative and Qualitative Disclosures about Market Risks.”

Operations and supply sources located outside the United States, particularly in emerging markets, are subject to greater risks.
 
Our operating activities outside the United States contribute significantly to our revenues and earnings. Serving a global customer base and remaining competitive in the global marketplace requires the company to place our production in countries outside the United States, including emerging markets, to capitalize on market opportunities and maintain a cost-efficient structure. In addition, we source a significant amount of raw materials and other components from third-party suppliers in low-cost countries. Our international operating activities are subject to a number of risks generally associated with international operations, including risks relating to the following:

 
·  
general economic conditions;
 
 
13

 
 
 
·  
currency fluctuations and exchange restrictions;
 
·  
import and export duties and restrictions;
 
·  
the imposition of tariffs and other import or export barriers;
 
·  
compliance with regulations governing import and export activities;
 
·  
current and changing regulatory requirements;
 
·  
political and economic instability;
 
·  
potentially adverse income tax consequences;
 
·  
transportation delays and interruptions;
 
·  
labor unrest;
 
·  
natural disasters;
 
·  
terrorist activities;
 
·  
public health concerns;
 
·  
difficulties in staffing and managing multi-national operations; and
 
·  
limitations on our ability to enforce legal rights and remedies.

Any of these factors could have a material adverse effect on our business, financial condition and results of operations.
 
We engage in acquisitions and may encounter difficulties in integrating these businesses.
 
We are a company that, from time to time, seeks to grow through strategic acquisitions. We have in the past acquired a number of businesses or companies and additional product lines and assets. We intend to continue to expand and diversify our operations with additional acquisitions. The success of these transactions depends on our ability to integrate the assets and personnel acquired in these acquisitions. We may encounter difficulties in integrating acquisitions with our operations and may not realize the degree or timing of the benefits that we anticipated from an acquisition.

Environmental liabilities could adversely impact our financial position.
 
Federal, state and local laws and regulations impose various restrictions and controls on the discharge of materials, chemicals and gases used in our manufacturing processes or in our finished goods. These environmental regulations have required us to expend a portion of our resources and capital on relevant compliance programs. Under these laws and regulations, we could be held financially responsible for remedial measures if our current or former properties are contaminated or if we send waste to a landfill or recycling facility that becomes contaminated, even if we did not cause the contamination. We may be subject to additional common law claims if we release substances that damage or harm third parties. In addition, future changes in environmental laws or regulations may require additional investments in capital equipment or the implementation of additional compliance programs. Any failure to comply with new or existing environmental laws or regulations could subject us to significant liabilities and could have a material adverse effect on our business, financial condition or results of operations.
 
In the conduct of our manufacturing operations, we have handled and do handle materials that are considered hazardous, toxic or volatile under federal, state and local laws. The risk of accidental release of such materials cannot be completely eliminated. In addition, we operate or own facilities located on or near real property that was formerly owned and operated by others. Certain of these properties were used in ways that involved hazardous materials. Contaminants may migrate from, within or through these properties. These releases or migrations may give rise to claims. Where third parties are responsible for contamination, the third parties may not have funds, or not make funds available when needed, to pay remediation costs imposed upon us under environmental laws and regulations.
 
 
14

 
 
The company is responsible for the maintenance of discontinued coal mining operations in Germany.  The risk of environmental remediation exists and the company is in the process of remediating the mines considered to be the most at risk.

We derive a substantial portion of our revenues from customers in the automotive, consumer electronics and communications industries, and we are susceptible to trends and factors affecting those industries as well as the success of our customers’ products.
 
Net sales to the automotive, consumer electronics and communications industries represent a substantial portion of our revenues. Factors negatively affecting these industries and the demand for products also negatively affect our business, financial condition or results of operations. Any adverse occurrence, including industry slowdown, recession, political instability, costly or constraining regulations, armed hostilities, terrorism, excessive inflation, prolonged disruptions in one or more of our customers’ production schedules or labor disturbances, that results in significant decline in the volume of sales in these industries, or in an overall downturn in the business and operations of our customers in these industries, could materially adversely affect our business, financial condition or results of operations. For example, the automotive industry as well as the consumer electronics market is highly cyclical in nature and sensitive to changes in general economic conditions, consumer preferences and interest rates. In addition, the global automotive and electronic industries have overall manufacturing capacity far exceeding demand. To the extent that demand for certain of our customers’ products declines, the demand for our products may decline. Reduced demand relating to general economic conditions, consumer preferences, interest rates or industry over-capacity may have a material adverse effect upon our business, financial condition or results of operations.

The inability to maintain access to capital markets may adversely affect our business and financial results.
 
Our ability to invest in our businesses, make strategic acquisitions and refinance maturing debt obligations may require access to the capital markets and sufficient bank credit lines to support short-term borrowings. If we are unable to access the capital markets or bank credit facilities, we could experience a material adverse affect on our business, financial condition and results of operations.
 
Fixed costs may reduce operating results if our sales fall below expectations.
 
Our expense levels are based, in part, on our expectations for future sales. Many of our expenses, particularly those relating to capital equipment and manufacturing overhead, are relatively fixed. We might be unable to reduce spending quickly enough to compensate for reductions in sales. Accordingly, shortfalls in sales could materially and adversely affect our operating results.
 
The volatility of our stock price could affect the value of an investment in our stock and our future financial position.

The market price of our stock has fluctuated widely. Between January 1, 2012 and December 29, 2012, the closing sale price of our common stock ranged between a low of $43.81 and a high of $64.86, experiencing greater volatility over that time than the broader markets. The volatility of our stock price may be related to any number of factors, such as general economic conditions, industry conditions, analysts’ expectations concerning our results of operations, or the volatility of our revenues as discussed above under “Our Revenues May Vary Significantly from Period to Period.” The historic market price of our common stock may not be indicative of future market prices. We may not be able to sustain or increase the value of our common stock. Declines in the market price of our stock could adversely affect our ability to retain personnel with stock incentives, to acquire businesses or assets in exchange for stock and/or to conduct future financing activities with or involving our common stock.
 
 
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Customer demands and new regulations related to conflict-free minerals may force us to incur additional expenses.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires disclosure of use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries and efforts to prevent the use of such minerals. In the semiconductor industry, these minerals are most commonly found in metals. As there may be only a limited number of suppliers offering “conflict free” metals, we cannot be sure that we will be able to obtain necessary metals in sufficient quantities or at competitive prices. Also, we may face challenges with our customers and suppliers if we are unable to sufficiently verify that the metals used in our products are “conflict free.”

Our Information Technology (“IT”) systems could be breached.

We face certain security threats relating to the confidentiality and integrity of our IT systems. Despite implementation of security measures, our IT systems may be vulnerable to damage from computer viruses, cyber attacks and other unauthorized access and these security breaches could result in a disruption to our operations. A material network breach of our IT systems could involve the theft of intellectual property or customer data which may be used by competitors. To the extent that any security breach results in a loss or damage to data, or inappropriate disclosure of confidential or proprietary information, it could cause damage to our reputation, affect our customer relations, lead to claims against us, increase our costs to protect against future damage and could result in a material adverse effect on our business and financial position.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

LITTELFUSE FACILITIES

The company’s operations are located in 44 owned or leased facilities worldwide, totaling approximately 1.6 million square feet. The company’s corporate headquarters is located in the U.S. in Chicago, Illinois.  The company has North American manufacturing facilities in Saskatoon, Canada, Piedras Negras, Mexico, Melchor Muzquiz, Mexico and Bellingham, Washington. During 2010, the European headquarters and the primary European distribution center, previously located in Utrecht, the Netherlands, until the property was sold in 2010, were relocated to Dünsen, Germany. The Dünsen facility was closed during 2011 and sold in 2012.  Manufacturing operations were transferred from Dünsen to Piedras Negras, Mexico. The office and European headquarters were subsequently transferred to Bremen, Germany. The company has added manufacturing facilities in Roskilde, Denmark and Kaunas, Lithuania through acquisitions completed in 2011 and 2012, respectively. The company has entered into a binding agreement for the future sale of its Des Plaines, Illinois, property which was closed in 2009. The Des Plaines building was demolished in 2010 to facilitate the sale of the underlying property. The Dundalk, Ireland facility, which was also closed in 2009, was sold in 2012.
 
 
16

 

Asia-Pacific operations include sales and distribution centers located in Singapore, Taiwan, Japan, China and Korea, with manufacturing plants in China and the Philippines. The manufacturing plant previously located in Taiwan was closed and sold during 2012. The company does not believe that it will encounter any difficulty in renewing its existing leases upon the expiration of their current terms. Management believes that the company’s facilities are adequate to meet its requirements for the foreseeable future.

The following table provides certain information concerning the company’s facilities at December 29, 2012, and the use of these facilities during fiscal 2012:

Location
Use
Size
(sq. ft.)
Lease/Own
Lease
Expiration
Date
Primary Product
Chicago, Illinois
Administrative, Engineering, Research and Testing
54,838
 
Leased
2024
Auto, Electronics and Electrical
Elk Grove Village, Illinois
Engineering and Research
5,000
 
Leased
2013
Auto and Electronics
Bensenville, Illinois
Research and Development
3,140
 
Leased
2013
Electronics
Champaign, Illinois
Research and Development
13,503
 
Leased
2025
Auto and Electronics
Campbell, California
Engineering
1,001
 
Leased
2014
Electronics
Troy, Michigan
Sales
2,224
 
Leased
2016
Auto
Boston, Massachusetts
Administrative, Engineering, Research and Development
26,000
 
Leased
2016
Auto
Schertz, Texas
Warehouse and Distribution
32,000
 
Leased
2014
Auto
Melchor Muzquiz, Mexico
Manufacturing
39,365
 
Leased
2016
Auto
Bellingham, Washington
Manufacturing
8,000
 
Leased
2013
Auto
Piedras Negras, Mexico
Administrative / Manufacturing
99,822
 
Leased
2015
Auto
Piedras Negras, Mexico
Manufacturing
68,088
 
Leased
2013
Electrical
Piedras Negras, Mexico
Manufacturing
22,381
 
Leased
2013
Electrical
Piedras Negras, Mexico
Manufacturing
164,785
 
Owned
Auto
Eagle Pass, Texas
Distribution
15,400
 
Leased
2016
Auto, Electronics and Electrical
Saskatoon, Canada
Manufacturing
67,500
 
Owned
Electrical
Calgary, Canada
Sales
1,000
 
Leased
2017
Electrical
Sao Paulo, Brazil
Sales
538
 
Leased
2013
Electronics and Auto
Manaus, Brazil
Warehouse
2,002
 
Leased
2014
Electronics and Auto
Roskilde, Denmark
Administrative, Manufacturing, Research and Development and Sales
18,740
 
Leased
2017
Electrical
Dubai, UAE
Sales
1,356
 
Leased
2014
Electrical
Swindon, U.K.
Administrative
304
 
Leased
2013
Electronics
             
Bremen, Germany
Administrative
13,455
 
Leased
2015
Auto, Electronics and Electrical
Essen, Germany
Leased to third party
37,244
 
Owned
Essen, Germany
Administrative
3,703
 
Leased
2013
Auto and Electronic
 
 
17

 
 
Location
Use
Size
(sq. ft.)
Lease/Own
Lease
Expiration
Date
Primary Product
Amsterdam, Netherlands
Warehouse
21,851
 
Leased
2013
Auto and Electronic
Trollhättan, Sweden
Sales
3,281
 
Leased
2015
Auto
Stockholm, Sweden
Sales
150
 
Leased
2013
Auto
Kaunas, Lithuania
Administrative, Manufacturing, Testing, Research and Engineering
15,640
 
Owned
Auto
Kaunas, Lithuania
Manufacturing
35,984
 
Leased
2014
Auto
Singapore
Sales and Distribution
1,572
 
Leased
2015
Electronics
Taipei, Taiwan
Sales
7,876
 
Leased
2014
Electronics
Seoul, Korea
Sales
3,643
 
Leased
2013
Auto and Electronics
Lipa City, Philippines
Manufacturing
116,046
 
Owned
Electronics
Lipa City, Philippines
Manufacturing
22,733
 
Leased
2013
Electronics
Dongguan, China
Manufacturing
264,792
 
Leased
2014
Electronics
Suzhou, China
Manufacturing
143,458
 
Owned
Auto and Electronics
Beijing, China
Sales
452
 
Leased
2013
Electronics
Shenzen, China
Sales
3,100
 
Leased
2015
Electronics
Shanghai, China
Sales
4,774
 
Leased
2015
Auto and Electronics
Chu-Pei City, Taiwan
Research and Development
5,328
 
Leased
2013
Electronics
Wuxi, China
Manufacturing
221,429
 
Owned
Electronics
Hong Kong, China
Sales
743
 
Leased
2014
Auto, Electronics and Electrical
Yokohama, Japan
Sales
3,509
 
Leased
2015
Auto, Electronics and Electrical
 
 
Properties with lease expirations in 2013 renew at various times throughout the year. The company does not anticipate any material impact as a result of such expirations.

ITEM 3. LEGAL PROCEEDINGS.

The company is not a party to any material legal proceedings, other than routine litigation incidental to our business.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

 
18

 
 
PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Shares of the company’s common stock are traded under the symbol “LFUS” on the NASDAQ Global Select MarketSM. As of February 15, 2013, there were 91 holders of record of the company’s common stock.

Stock Performance Graph
 
The following stock performance graph and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Act of 1934, each as amended, except to the extent that the company specifically incorporates it by reference into such filing.

The following stock performance graph compares the five-year cumulative total return on Littelfuse common stock to the five-year cumulative total returns on the Russell 2000 Index and the Dow Jones Electrical Components and Equipment Industry Group Index. The company believes that the Russell 2000 Index and the Dow Jones Electrical Components and Equipment Industry Group Index represent a broad market index and peer industry group for total return performance comparison. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.
 

 
19

 
 
The Dow Jones Electrical Components and Equipment Industry Group Index includes the common stock of American Superconductor Corp.; Amphenol Corp.; Anaren Microwave, Inc.; Arrow Electronics, Inc.; Avnet, Inc.; AVX Corp.; Benchmark Electronics, Inc.; C&D Technologies, Inc.; Capstone Turbine Corp.; CTS Corp.; General Cable Corp.; Hubbell Inc. Class B; Jabil Circuit, Inc.; KEMET Corp.; Littelfuse, Inc.; Methode Electronics, Inc.; Molex, Inc. and Molex, Inc. Class A; Park Electrochemical Corp.; Plexus Corp.; Power-One, Inc.; Powerwave Technologies, Inc.; Pulse Electronics, Inc.; Regal-Beloit Corp.; Sanmina Corp.; Thomas & Betts Corp.; Valence Technology, Inc.; Vicor Corp.; and Vishay Intertechnology, Inc.

In the case of the Russell 2000 Index and the Dow Jones Electrical Components and Equipment Industry Group Index, a $100 investment made on December 31, 2007, and reinvestment of all dividends is assumed. In the case of the company, a $100 investment made on December 31, 2007, is assumed. (The company paid no dividends in  2007, 2008 or 2009 but did pay dividends in 2010, 2011 and 2012.) Returns for the company’s fiscal years presented above are as of the last day of the respective fiscal year which were  December 27, 2008, January 2, 2010, January 1, 2011, December 31, 2011 and December 29, 2012 for the fiscal years 2008, 2009, 2010, 2011 and 2012 respectively.

The company initiated cash dividends in the fourth quarter of 2010. The company previously had not paid any cash dividends prior to fiscal 2010. Future dividend policy will be determined by the Board of Directors based upon its evaluation of earnings, cash availability and general business prospects. Currently, there are restrictions on the payment of dividends contained in the company’s credit agreements that relate to the maintenance of a minimum net worth and certain financial ratios. However, the company expects to continue paying cash dividends on a quarterly basis for the foreseeable future.

The Board of Directors authorized the repurchase of up to 1,000,000 shares of the company’s common stock under a program for the period May 1, 2012 to April 30, 2013. The company did not repurchase any shares during 2012 and 1,000,000 shares remain available for purchase under the initial program as of December 29, 2012.

The company withheld 27,417 shares of stock in lieu of withholding taxes on behalf of employees who became vested in restricted share units during fiscal 2012. Shares withheld were 23,081 during the period March 31, 2011 to April 28, 2012 and 4,336 during the period June 30, 2012 to July 28, 2012.  Shares withheld are classified as Treasury stock on the Consolidated Balance Sheet.

The table below provides information with respect to the company’s quarterly stock prices and cash dividends declared and paid for each quarter during fiscal 2012 and 2011:

   
2012
   
2011
 
      4Q       3Q       2Q       1Q       4Q       3Q       2Q       1Q  
High
  $ 61.23     $ 58.26     $ 64.86     $ 62.70     $ 52.04     $ 61.76     $ 64.82     $ 58.10  
Low
    51.93       50.50       55.05       43.81       38.65       38.56       54.40       48.44  
Close
    59.97       56.54       56.89       62.70       42.98       40.21       60.54       58.10  
Dividends
    0.20       0.20       0.18       0.18       0.18       0.15       0.15       0.15  
 
 
20

 
 
ITEM 6. SELECTED FINANCIAL DATA.

The information presented below provides selected financial data of the company during the past five fiscal years and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes to Consolidated Financial Statements set forth in Item 7 and Item 8, respectively, for the respective years presented (amounts in thousands, except per share data):

   
2012
   
2011
   
2010
   
2009
   
2008
 
Net sales
  $ 667,913     $ 664,955     $ 608,021     $ 430,147     $ 530,869  
Gross profit
    258,467       256,694       233,872       125,361       143,669  
Operating income
    106,870       113,904       107,574       13,695       8,495  
Net income
    75,332       87,024       78,663       9,411       8,016  
Per share of common stock:
                                       
Income from continuing operations
                                       
- Basic
    3.45       3.96       3.58       0.43       0.37  
- Diluted
    3.40       3.90       3.52       0.43       0.37  
Cash dividends paid
    0.76       0.63       0.15              
Cash and cash equivalents
    235,404       164,016       109,720       70,354       70,937  
Total assets
    777,728       678,424       621,129       533,127       538,928  
Short-term debt     84,000       85,000       33,000       14,183       8,000  
Long-term debt, less current portion
                41,000       49,000       72,000  

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Littelfuse, Inc. and its subsidiaries (the “company” or “Littelfuse”) design, manufacture and sell circuit protection devices for use in the electronics, automotive and electrical markets throughout the world. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide the reader with information that will assist in understanding the company’s Consolidated Financial Statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect the Consolidated Financial Statements. The discussion also provides information about the financial results of the various business unit segments to provide a better understanding of how those segments and their results affect the financial condition and results of operations of Littelfuse as a whole.

Business Segment Information

U.S. Generally Accepted Accounting Principles (“GAAP”) dictates annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Within U.S. GAAP, an operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. The CODM is the company’s President and Chief Executive Officer.
 
 
21

 
 
The company reports its operations by three business unit segments: Electronics, Automotive and Electrical. The following table is a summary of the company’s operating segments’ net sales by business unit and geography (in millions):

   
Fiscal Year
 
   
2012
   
2011(b)
   
2010
 
Business Unit
                 
Electronics
  $ 329.5     $ 354.5     $ 373.4  
Automotive(b) (d)
    206.2       197.6       139.1  
Electrical(c)
    132.2       112.9       95.5  
Total
  $ 667.9     $ 665.0     $ 608.0  
                         
Geography(a)
                       
Americas(c)
  $ 303.6     $ 288.6     $ 227.7  
Europe(d)
    107.5       114.9       115.1  
Asia-Pacific
    256.8       261.5       265.2  
Total
  $ 667.9     $ 665.0     $ 608.0  

 
(a)
Sales by geography represent sales to customer or distributor locations.
 
(b)
2012 and 2011 include Cole Hersee net sales of $47.2 million and $46.9 million for fiscal years 2012 and 2011, respectively.
 
(c)
2012 and 2011 include Selco net sales of $6.0 million and $3.2 million for fiscal years 2012 and  2011, respectively.
 
(d)
2012 includes Accel and Terra Power net sales of $11.2 million and $1.7 million, respectively.

Business unit segment information is described more fully in Note 16 of the Notes to Consolidated Financial Statements. The following discussion provides an analysis of the information contained in the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements at December 29, 2012 and December 31, 2011, and for the three fiscal years ended December 29, 2012, December 31, 2011 and January 1, 2011.

Results of Operations — 2012 compared with 2011

Net sales increased $2.9 million or less than 1% to $667.9 million for fiscal year 2012 compared to $665.0 million in fiscal year 2011 due primarily to an incremental $16.6 million from business acquisitions and growth in protection relays, custom mining products and automotive products, offset by lower electronics sales. The company also experienced $9.4 million in unfavorable foreign currency effects in 2012 as compared to 2011 primarily resulting from sales denominated in euros and, to a lesser extent, Canadian dollars and Korean won. Excluding acquisitions and currency effects, net sales decreased $4.3 million or less than 1% year over year. The Automotive business segment sales increased $8.6 million or 4% to $206.2 million. The Electronics business segment sales decreased $25.0 million or 7% to $329.5 million, and the Electrical business segment sales increased $19.3 million or 17% to $132.2 million. Sales levels in 2012, excluding acquisitions and currency effects, were negatively impacted by slowing demand for the company’s electronics products coupled with channel inventory de-stocking. Sales levels in 2011, excluding acquisitions and currency effects, were negatively impacted by slowing demand for the company’s electronics products coupled with inventory de-stocking in the supply chain.

The increase in Automotive sales was primarily due to an incremental $12.9 million in sales related to the Accel and Terra Power acquisitions in 2012 and organic growth in the passenger vehicle market. This was offset by a decline in commercial vehicle sales and unfavorable currency effects. Lower commercial vehicle sales reflected weakness in the construction and heavy truck markets. Currency effects reduced sales by $5.0 million in 2012 compared to 2011 primarily due to the weaker euro. Excluding incremental sales from acquisitions and currency effects, Automotive sales increased $0.7 million or less than 1% year over year.
 
 
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The decrease in Electronics sales reflected slowing demand across all geographies. There was weakness in the telecom, PC and TV end markets in addition to distributor channel inventory de-stocking. In addition, sales were negatively impacted by net unfavorable currency effects of $3.2 million, primarily from sales denominated in euros and Korean won.

The increase in Electrical sales was due to continued strong growth for protection relays and custom mining products, an upturn in solar sales reflecting the success of new products, and improvement in the industrial fuse market. The Electrical business segment also had $3.7 million in incremental sales from the Selco acquisition in 2011. The Electrical segment experienced net unfavorable currency effects of $1.2 million primarily from sales denominated in Canadian dollars. Excluding incremental sales from acquisitions and currency effects, Electrical sales increased $16.8 million or 15% year over year.

On a geographic basis, sales in the Americas increased $15.0 million or 5% in 2012 as compared to 2011. This increase resulted from an increase in the company’s Automotive and Electrical business segments offset by a decline in the Electronics business segment. Automotive sales increased $1.7 million or 2% primarily reflecting incremental sales from Terra Power. Excluding the acquisition, Automotive sales were essentially flat year-over-year as growth in the passenger vehicle market was offset by declines in the commercial vehicle market. Electrical sales increased $15.5 million or 15% resulting from increases in demand for protection relays, custom products and industrial power fuses. Electronics sales decreased $2.2 million or 2% primarily reflecting inventory de-stocking. The Americas region also experienced $0.9 million in unfavorable currency effects resulting from sales denominated in Canadian dollars.

European sales decreased $7.4 million or 6% in 2012 compared to 2011. This resulted from decreases in the company’s Electronics and Automotive business segments offset by an increase in the Electrical business segment. Automotive sales decreased $0.4 million or less than 1% in 2012 primarily reflecting lower demand in the passenger vehicle markets. Excluding the impact of incremental sales from acquisitions and  unfavorable currency effects, primarily from a weaker euro, Automotive sales declined $6.5 million or 10%. Electronics sales decreased $10.3 million or 24% reflecting lower demand resulting from a weaker economy during 2012. Electrical sales increased $3.3 million or 63% primarily from the incremental sales of Selco. Excluding incremental sales and currency effects, Electrical sales increased $0.1 million or 2% year-over-year. Overall European sales in 2012 included unfavorable currency effects of $8.6 million, resulting primarily from sales denominated in euros.

Asia-Pacific sales decreased $4.7 million or 2% in 2012 compared to 2011. This decrease resulted from  a decrease in the Electronics business segment offset by increases at the company’s Automotive and Electrical business segments. Electronics sales decreased $12.5 million or 6% reflecting slowing end-market demand and inventory de-stocking. Automotive sales increased $7.4 million or 20% reflecting continued increased demand for passenger vehicles in the developing Asian markets as well as gains in market share. Electrical sales increased $0.5 million or 9%. Current year results included favorable currency effects of $0.1 million resulting from sales denominated in Chinese yuan partially offset by sales denominated in Korean won and Japanese yen.

Gross profit was $258.5 million or 38.7% of sales in 2012, compared to $256.7 million or 38.6% of sales in 2011. Gross profit in both 2012 and 2011 were negatively impacted by purchase accounting adjustments in cost of sales of $0.6 million and $4.1 million, respectively. These charges were the additional cost of goods sold for Accel and Selco inventory which had been stepped-up to fair value at the acquisition dates as required by purchase accounting rules. Excluding the impact of these charges, gross profit was $259.1 million or 38.8% of sales for 2012 as compared to $260.8 million or 39.2% of sales in 2011. The decline in gross margin was primarily attributable to the unfavorable impact of currency effects on sales as described above.
 
 
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Total operating expense was $151.6 million or 22.7% of net sales for 2012 compared to $142.8 million or 21.5% of net sales for 2011. The increase in operating expenses primarily reflects incremental operating expenses of $6.5 million from business acquisitions and $5.1 million in charges related to the settlement of pension liabilities for certain former employees. Further information regarding the company’s pension settlement charge is provided in Note 13 of the Notes to Consolidated Financial Statements included in this report.

Operating income was $106.9 million or 16.0% of net sales in 2012 compared to $113.9 million or 17.1% of net sales in the prior year. The decrease in operating income in the current year was due primarily to the limited sales growth and an increase in costs as described above.

Interest expense was unchanged at $1.7 million in both 2012 and 2011 and is primarily related to the company’s revolving credit facility.

Impairment and equity in net loss of unconsolidated affiliate was $7.3 million in 2012. During the fourth quarter, the company determined that it had the ability to exert significant influence over Shocking Technologies, Inc. (“Shocking”) and as a result began accounting for the investment using the equity method. In accordance with Accounting Standards Codification (“ASC”) 323, the company retroactively recorded its proportional share of Shocking’s operating losses, which amounted to approximately $4.0 million in 2012. The proportional amount of operating losses in 2011 was not material. In addition, the company concluded that there was an other-than-temporary impairment which existed for its remaining investment in Shocking. The company engaged a third-party valuation firm to assist in developing the fair value of the investment in Shocking. Based on the then fair value, the company determined that there was an impairment of approximately $3.3 million which was recorded as a non-operating impairment and equity loss of unconsolidated affiliate in the Consolidated Statements of Net Income. See Note 6 of the Notes to Consolidated Financial Statements included in this report.
 
Other expense (income), net, consisting of interest income, royalties, non-operating income and foreign currency items was $2.2 million of income in 2012 compared to $2.9 million of income in 2011.The year-over-year decrease in income primarily reflects the impact of unfavorable currency translation effects (primarily due to the weakening of the euro against the U.S. dollar) in 2012.

Income before income taxes was $100.1 million in 2012 compared to $115.1 million in 2011. Income tax expense was $24.7 million in 2012 compared to $28.1 million in 2011. The 2012 effective income tax rate was 24.7% compared to 24.4% in 2011. The 2012 effective tax rate is lower than the statutory tax rate primarily due to the result of more income earned in low tax jurisdictions.
 
 
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Results of Operations — 2011 compared with 2010

Net sales increased $57.0 million or 9% to $665.0 million for fiscal year 2011 compared to $608.0 million in fiscal year 2010 due primarily to an incremental $50.1 million from business acquisitions and growth in protection relays, custom mining products and automotive products, offset by lower electronics sales. The company also experienced $10.4 million in favorable foreign currency effects in 2011 as compared to 2010. The favorable foreign currency impact primarily resulted from sales denominated in euros and, to a lesser extent, Canadian dollars and Japanese yen. Excluding acquisitions and currency effects, net sales decreased $3.5 million or 1% year over year. The Automotive business segment sales increased $58.5 million or 42% to $197.6 million. The Electronics business segment sales decreased $18.9 million or 5% to $354.5 million, and the Electrical business segment sales increased $17.4 million or 18% to $112.9 million. Sales levels in 2011, excluding acquisitions and currency effects, were negatively impacted by slowing demand for the company’s electronics products coupled with inventory de-stocking in the supply chain. Sales levels in 2010 were positively impacted by the global economic recovery, distributor inventory replenishment and effective execution of the company’s strategic growth plans.

The increase in Automotive sales was primarily due to an incremental $46.9 million in sales related to Cole Hersee, organic growth in all regions and favorable currency effects. Excluding Cole Hersee, automotive sales increased $11.6 million or 8.4% year over year. Currency effects added $4.3 million to sales in 2011 compared to 2010 primarily due to the stronger euro.

The decrease in Electronics sales reflected slowing demand across all geographies coupled with inventory de-stocking in the supply chain. In addition, the effects of the Japan disaster in March 2011 negatively impacted sales by approximately $3 to $4 million in 2011. The negative impact from a decrease in volume was partially offset by net favorable currency effects of $4.0 million primarily from sales denominated in euros and Japanese yen.

The increase in Electrical sales was due to continued strong growth for protection relays and custom mining products and steady improvement in the industrial fuse market. This was partially offset by a slowdown in the solar market. The Electrical segment experienced net favorable currency effects of $2.0 million primarily from sales denominated in Canadian dollars.

On a geographic basis, sales in the Americas increased $60.8 million or 27% in 2011 compared to 2010. This increase resulted from increases in the company’s Automotive and Electrical business segments offset by a decline in the Electronics business segment. Automotive sales increased $46.8 million or 100% primarily reflecting incremental sales from Cole Hersee. Excluding Cole Hersee, Automotive sales increased $2.7 million or 6% reflecting increased demand in the passenger and commercial vehicle markets. Electrical sales increased $17.5 million or 21% resulting from increases in demand for protection relays, custom products and industrial power fuses partially offset by a decline in solar fuse sales. Electronics sales decreased $3.5 million or 4% reflecting slowing end-market demand and inventory de-stocking. The Americas region also experienced $1.9 million in favorable currency effects resulting from sales denominated in Canadian dollars.

European sales decreased $0.2 million for fiscal year 2011 compared to 2010. This resulted from decreases in the company’s Electronics and Electrical business segments offset by an increase in the Automotive business segment. Automotive sales increased $7.2 million or 12% in 2011 primarily reflecting increased end-market demand and favorable currency effects. Electronics sales decreased $6.9 million or 14% reflecting lower demand resulting from a weaker economy during 2011. Electrical sales decreased $0.5 million or 9%. Overall European sales in 2011 included favorable currency effects of $5.3 million, resulting from sales denominated in euros.
 
 
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Asia-Pacific sales decreased $3.7 million or 1% in 2011 compared to 2010. This decrease resulted from  a decrease in the Electronics business segment offset by increases at the company’s Automotive and Electrical business segments. Electronics sales decreased $8.5 million or 4% reflecting slowing end-market demand and inventory de-stocking. Automotive sales increased $4.4 million or 14% reflecting continued increased demand for passenger vehicles in the developing Asian markets as well as gains in market share. Also contributing to the increase in Automotive sales was incremental sales from Cole Hersee. Excluding Cole Hersee, Automotive sales increased $2.3 million or 7%. Electrical sales increased $0.4 million or 7%. Current year results included favorable currency effects of $3.2 million resulting from sales denominated in Japanese yen, Korean won and Chinese yuan.

Gross profit was $256.7 million or 38.6% of sales in 2011, compared to $233.9 million or 38.5% of sales in 2010. Gross profit in 2011 was negatively impacted by $4.1 million of purchase accounting adjustments recorded in cost of sales. These charges were the additional cost of goods sold for Cole Hersee and Selco inventory which had been stepped-up to fair value at the acquisition dates as required by purchase accounting rules. Excluding the impact of these charges, gross profit was $260.8 million or 39.2% of sales for 2011. The improvement in gross margin was attributable to improved operating leverage resulting from higher production volumes in 2011 as well as cost reductions related to manufacturing transfers.

Total operating expense was $142.8 million or 21.5% of net sales for 2011 compared to $126.3 million or 20.8% of net sales for 2010. The increase in operating expenses primarily reflects incremental operating expenses of $12.8 million from business acquisitions.

Operating income was $113.9 million or 17.1% of net sales in 2011 compared to $107.6 million or 17.7% of net sales in the prior year. The increase in operating income in the current year was due primarily to the increase in sales and reduction in costs as described above.

Interest expense, net, increased to $1.7 million in 2011 compared to $1.4 million for 2010 primarily due to amortization of debt issuance costs incurred related to the new credit agreement in 2011.

Other expense (income), net, consisting of interest income, royalties, non-operating income and foreign currency items, was $2.9 million of income in 2011 compared to $1.5 million of income in 2010. The year over year increase resulted primarily from dividend and royalty income.

Income before income taxes was $115.1 million in 2011 compared to $107.7 million in 2010. Income tax expense was $28.1 million in 2011 compared to $29.0 million in 2010. The 2011 effective income tax rate was 24.4% compared to 27.0% in 2010. The 2011 effective tax rate is lower than the statuatory tax rate primarily due to the result of more income earned in low tax jurisdictions and a large tax benefit from revaluation of a deferred tax asset.

Liquidity and Capital Resources

As of December 29, 2012, $227.3 million of the $235.4 million of the company’s cash and cash equivalents was held by foreign subsidiaries. Of the $227.3 million held by foreign subsidiaries, approximately $28.1 million could be repatriated with minimal tax consequences. The company expects to maintain its foreign cash balances (other than the aforementioned $28.1 million) for local operating requirements, to provide funds for future capital expenditures and for potential acquisitions. The company does not expect to repatriate these funds to the U.S.
 
 
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The company historically has financed capital expenditures through cash flows from operations. Management expects that cash flows from operations and available lines of credit will be sufficient to support both the company’s operations and its debt obligations for the foreseeable future.

Term Loan
 
On September 29, 2008, the company entered into a Loan Agreement with various lenders that provided the company with a five-year term loan facility of up to $80.0 million for the purposes of (i) refinancing certain existing indebtedness; (ii) funding working capital needs; and (iii) funding capital expenditures and other lawful corporate purposes, including permitted acquisitions. The company terminated this loan agreement on June 13, 2011 at which time any outstanding amounts were refinanced under the company’s new revolving credit facility effective June 13, 2011.

Revolving Credit Facilities

The company had an unsecured domestic financing arrangement, which expired on July 21, 2011, consisting of a credit agreement with banks that provided a $75.0 million revolving credit facility, with a potential to increase up to $125.0 million upon request of the company and agreement with the lenders.  The company refinanced this loan agreement with proceeds from a new revolving credit facility on June 13, 2011.  The company’s revolving credit facility is an uncommitted and discretionary facility, subject to withdrawal at any time by the lender upon due notice to the company.
 

On June 13, 2011, the company entered into a new credit agreement with certain commercial banks that provides an unsecured revolving credit facility in an amount of up to $150.0 million, with a potential to increase up to $225.0 million. At December 29, 2012, the company had available approximately $65.0 million of borrowing capacity under the revolving credit agreement at an interest rate of LIBOR plus 1.25% (1.46% as of December 29, 2012). The credit agreement replaces the company’s previous credit agreement dated July 21, 2006 and term loan agreement dated September 29, 2008, and, unless terminated earlier, will terminate on June 13, 2016. During the second quarter of 2011, $0.2 million of previously capitalized debt issuance costs were written off as a non-cash charge and $0.7 million of new debt issuance costs incurred was capitalized and will be amortized over the life of the new credit agreement.

This arrangement contains covenants that, among other matters, impose limitations on the incurrence of additional indebtedness, future mergers, sales of assets, payment of dividends, and changes in control, as defined in the agreement. In addition, the company is required to satisfy certain financial covenants and tests relating to, among other matters, interest coverage and leverage. At December 29, 2012, the company was in compliance with all covenants under the revolving credit facility.

During the second quarter of 2011, as part of the new refinancing arrangement discussed above, $47.0 million of indebtedness that was due on the previous term loan was settled and rolled-over into the revolving credit facility by the lender.

Other Obligations

For the fiscal year ended December 29, 2012, the company had $0.8 million outstanding in letters of credit. No amounts were drawn under these letters of credit at December 29, 2012. For the fiscal year ended December 31, 2011, the company had $2.3 million available in letters of credit. No amounts were drawn under these letters of credit at December 31, 2011.
 
 
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Cash Flows and Working Capital

The company started 2012 with $164.0 million of cash. Net cash provided by operating activities in 2012 was approximately $116.2 million and included $75.3 million in net income and $46.0 million in non-cash adjustments (primarily $31.4 million in depreciation and amortization), partially offset by $5.2 million of changes in operating assets and liabilities.

Changes in operating assets and liabilities in 2012 (including short-term and long-term items) that negatively impacted cash flows in 2012 consisted of changes in accounts receivable ($1.6 million), accrued expenses including post-retirement ($9.6 million), accrued payroll and severance ($4.4 million), accrued taxes ($0.4 million), and prepaid expenses and other (less than $0.1 million). Accrued expenses including post-retirement included $10.0 million in pension contributions in 2012. Positively impacting cash flows were changes in inventory ($5.4 million) and accounts payable ($5.4 million).

Net cash used in investing activities in 2012 was approximately $51.7 million and included $22.5 million in purchases of property, plant and equipment (primarily production equipment for capacity expansion and new products at the company’s facilities in Mexico, China and the Philippines), $4.6 million for purchases of short-term investments, $34.0 million for the acquisitions of Accel and Terra Power, a $2.0 million secured loan to and $10.0 million of additional investment in Shocking Technologies. Offsetting the cash used in investing activities was $3.7 million in proceeds from sales of property, plant and equipment and $17.8 million in proceeds from maturities of short-term investments.

Net cash provided by financing activities in 2012 was approximately $0.8 million, which included $1.8 million in net payments from borrowing, $2.7 million in excess tax benefits on share-based compensation and $16.4 million in cash proceeds from the exercise of stock options. Additionally the company paid cash dividends of $16.6 million during the year. Information regarding the company’s debt is provided in Note 7 of the Notes to Consolidated Financial Statements included in this report.

The effect of exchange rate changes increased cash by $6.2 million in 2012. The net cash provided by operating activities less net cash used in financing and provided by investing activities plus the effect of exchange rate changes, resulted in a $71.4 million increase in cash and cash equivalents in 2012. This left the company with a cash balance of $235.4 million at December 29, 2012.

Days sales outstanding (DSO) in accounts receivable was 58 days at year-end 2012 compared to 57 days at year-end 2011 and 58 days at year-end 2010 (excluding the year-end Cole Hersee balance). Days inventory outstanding was 69 days at year-end 2012, compared to 73 days at year-end 2011 and 70 days at year-end 2010 (excluding the year-end Cole Hersee balance).

The ratio of current assets to current liabilities was 2.9 to 1 at year-end 2012, compared to 2.5 to 1 at year-end 2011 and 2.9 to 1 at year-end 2010. The change in the current ratio at the end of 2012 compared to the prior year reflected increased current assets in 2012, primarily related to higher cash and cash equivalents balances. The carrying amounts of total debt decreased $1.0 million in 2012, compared to an increase of $11.0 million in 2011 and an increase of $10.8 million in 2010. The decrease in 2012 is due to lower net amounts borrowed under the revolving credit facility in 2012. The ratio of long-term debt to equity was 0.00 to 1 at year-end 2012 and 2011 and 0.09 to 1 at year-end 2010. Further information regarding the company’s debt is provided in Note 7 of the Notes to Consolidated Financial Statements included in this report.
 
 
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The company started 2011 with $109.7 million of cash. Net cash provided by operating activities in 2011 was approximately $120.8 million and included $87.0 million in net income and $39.6 million in non-cash adjustments (primarily $32.3 million in depreciation and amortization), partially offset by $5.8 million of changes in operating assets and liabilities.

Changes in operating assets and liabilities in 2011 (including short-term and long-term items) that negatively impacted cash flows in 2011 consisted of decreases in accounts payable ($5.3 million), accrued expenses including post-retirement ($0.4 million), accrued payroll and severance ($3.2 million) and accrued taxes ($6.1 million). The decrease in accounts payable resulted from decreased purchases related to low production levels at the end of 2011. The decrease in accrued payroll and severance resulted from lower severance accruals in 2011. Positively impacting cash flows were decreases in accounts receivable ($4.8 million), a decrease in inventory ($2.6 million) and a decrease in prepaid expenses and other current assets ($1.8 million).

The company’s capital expenditures were $22.5 million in 2012, $17.6 million in 2011 and $22.4 million in 2010. The company expects capital expenditures in 2013 to increase to between $25 and $30 million primarily related to building expansion in Mexico to support the company’s growth initiatives. The company expects to fund 2013 capital expenditures from operating cash flows.

The company’s Board of Directors authorized the repurchase of up to 1,000,000 shares of the company’s common stock under a program for the period May 1, 2012 to April 30, 2013. The company did not repurchase any shares of its common stock during 2012 under this program.

The company withheld 27,417 shares of stock in lieu of withholding taxes on behalf of employees who became vested in restricted stock option grants during 2012.

Contractual Obligations and Commitments

The following table summarizes contractual obligations and commitments as of December 29, 2012:

(In thousands )
 
Total
   
< 1 Year
   
> 1 - < 3 Years
   
> 3 - < 5 Years
   
> 5 Years
 
Revolving credit facility
  $ 84,000     $ 84,000     $     $     $  
Supplemental Executive Retirement Plan
    2,422       31       62       62       2,267  
Operating lease payments
    37,913       8,101       8,677       4,991       16,144  
Purchase obligations
    27,226       27,226                    
Total
  $ 151,561     $ 119,358     $ 8,739     $ 5,053     $ 18,411  

Off-Balance Sheet Arrangements

As of December 29, 2012, 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; and 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.

 
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Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The new guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The company adopted the new guidance on January 1, 2012. There was no significant impact on its consolidated financial statements upon adoption.

In June 2011, the FASB issued authoritative guidance that will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in equity. The guidance does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. This guidance is effective for interim and annual periods beginning after December 15, 2011. The company adopted the new guidance on January 1, 2012, which resulted in a different presentation in its consolidated financial statements.

In September 2011, the FASB issued authoritative guidance on testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step 1 of the goodwill impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. The guidance does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. In addition, the guidance does not amend the requirement to test goodwill for impairment between annual tests if events or circumstances warrant; however, it does revise the examples of events and circumstances that an entity should consider. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The company adopted the new guidance on January 1, 2012. There was no significant impact on its consolidated financial statements upon adoption. Goodwill testing was completed in September 2012 using the previous methodology, as permitted.

In July 2012, the FASB issued authoritative guidance on testing indefinite-lived intangible assets for impairment. Under the revised guidance, entities testing indefinite-lived intangible assets for impairment will have the option first to assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is not impaired, then the entity is not required to take further action. The amendment is effective for annual and interim indefinite-lived asset impairment tests performed for fiscal years beginning after September 15, 2012. The company believes that adoption of the new guidance will have no effect on its consolidated financial statements.

Critical Accounting Policies and Estimates

Certain of the accounting policies as discussed below require the application of significant judgment by management in selecting the appropriate estimates and assumptions for calculating amounts to record in the financial statements. Actual results could differ from those estimates and assumptions, impacting the reported results of operations and financial position. Significant accounting policies are more fully described in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report. Certain accounting policies, however, are considered to be critical in that they are most important to the depiction of the company’s financial condition and results of operations and their application requires management’s subjective judgment in making estimates about the effect of matters that are inherently uncertain. The company believes the following accounting policies are the most critical to aid in fully understanding and evaluating its reported financial results, as they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. The company has reviewed these critical accounting policies and related disclosures with the Audit Committee of its Board of Directors.
 
 
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Net Sales

Revenue Recognition: The company recognizes revenue on product sales in the period in which the sales process is complete. This generally occurs when products are shipped (FOB origin) to the customer in accordance with the terms of the sale, the risk of loss has been transferred, collectability is reasonably assured and the pricing is fixed and determinable. At the end of each period, for those shipments where title to the products and the risk of loss and rewards of ownership do not transfer until the product has been received by the customer, the company adjusts revenues and cost of sales for the delay between the time that the products are shipped and when they are received by the customer. The company’s distribution channels are primarily through direct sales and independent third party distributors.
 
Revenue and Billing: The company accepts orders from customers based on long term purchasing contracts and written sales agreements. Contract pricing and selling agreement terms are based on market factors, costs and competition. Pricing normally is negotiated as an adjustment (premium or discount) from the company’s published price lists. The customer is invoiced when the company’s products are shipped to them in accordance with the terms of the sales agreement.
 
Returns and Credits: Some of the terms of the company’s sales agreements and normal business conditions provide customers (distributors) the ability to receive price adjustments on products previously shipped and invoiced. This practice is common in the industry and is referred to as a “ship and debit” program. This program allows the distributor to debit the company for the difference between the distributors’ contracted price and a lower price for specific transactions. Under certain circumstances (usually in a competitive situation or large volume opportunity), a distributor will request authorization to reduce its price to its buyer. If the company approves such a reduction, the distributor is authorized to “debit” its account for the difference between the contracted price and the lower approved price. The company establishes reserves for this program based on historic activity and actual authorizations for the debit and recognizes these debits as a reduction of revenue.

The company has a return to stock policy whereby a customer with previous authorization from Littelfuse management can return previously purchased goods for full or partial credit. The company establishes an estimated allowance for these returns based on historic activity. Sales revenue and cost of sales are reduced to anticipate estimated returns.

The company properly meets all of the criteria for recognizing revenue when the right of return exists. Specifically, the company meets those requirements because:
 
 
1.
The company’s selling price is fixed or determinable at the date of the sale.
 
2.
The company has policies and procedures to accept only credit worthy customers with the ability to pay the company.
 
3.
The company’s customers are obligated to pay the company under the contract and the obligation is not contingent on the resale of the product. (All “ship and debit” and “returns to stock” require specific circumstances and authorization.)
 
 
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4.
The risk ownership transfers to the company’s customers upon shipment and is not changed in the event of theft, physical destruction or damage of the product.
 
5.
The company bills at the ship date and establishes a reserve to reduce revenue from the in-transit time until the product is delivered for FOB destination sales.
 
6.
The company’s customers acquiring the product for resale have economic substance apart from that provided by Littelfuse. All distributors are independent of the company.
 
7.
The company does not have any obligations for future performance to bring about resale of the product by its customers.
 
8.
The company can reasonably estimate the amount of future returns.
 
Volume Rebates: The company offers incentives to certain customers to achieve specific quarterly or annual sales targets. If customers achieve their sales targets, they are entitled to rebates. The company estimates the future cost of these rebates and recognizes this estimated cost as a reduction to revenue as products are sold.

Allowance for Doubtful Accounts: The company evaluates the collectability of its trade receivables based on a combination of factors. The company regularly analyzes its significant customer accounts and, when the company becomes aware of a specific customer’s inability to meet its financial obligations, the company records a specific reserve for bad debt to reduce the related receivable to the amount the company reasonably believes is collectible. The company also records allowances for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer, macroeconomic considerations and past experience. Historically, the allowance for doubtful accounts has been adequate to cover bad debts. If circumstances related to specific customers change, the estimates of the recoverability of receivables could be further adjusted.

Inventory

The company performs regular detailed assessments of inventory, which include a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing, shelf life and quality issues. Based on the analysis, the company records adjustments to inventory for excess quantities, obsolescence or impairment when appropriate to reflect inventory at net realizable value. Historically, inventory reserves have been adequate to reflect inventory at net realizable values. During 2012, 2011 and 2010, the company was required to step up the value of inventory acquired in business combinations to its selling prices less the cost to sell under business combination accounting. This was approximately $0.6 million in 2012 for Accel and Selco, $0.4 million in 2011 for Selco and $3.7 million in 2010 for Cole Hersee.

Goodwill and Other Intangible Assets

The company annually tests goodwill for impairment on the first day of its fiscal fourth quarter or at an interim date if there is an event or change in circumstances that indicates the asset may be impaired. The company has seven reporting units for goodwill testing purposes.  Management determines the fair value of each of its reporting units by using a discounted cash flow model (which includes forecasted five-year income statement and working capital projections, a market-based weighted average cost of capital and terminal values after five years) to estimate market value. In addition, the company compares its derived enterprise value on a consolidated basis to the company’s market capitalization as of its test date to ensure its derived value approximates the market value of the company when taken as a whole.
 
 
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As of the most recent annual test conducted on September 30, 2012, the company concluded the fair value of each of the reporting units exceeded its carrying value of invested capital and therefore, no potential goodwill impairment existed. Specifically, the company noted that its headroom, defined as the excess of fair value over the carrying value of invested capital, was 66%, 113%, 59%, 99%, 96%, 247% and 119% for its electronics (non-silicon), electronics (silicon), automotive (excluding Cole Hersee), Cole Hersee, relay, custom products and fuse reporting units, respectively, at September 30, 2012. Certain key assumptions used in the annual test included a discount rate of 12.7% for all reporting units. A long-term growth rate of 3.0% was used for all seven reporting units.

In addition, the company performed a sensitivity test at September 30, 2012 that showed either a 100 basis point increase in its discount rate or a 100 basis point decrease in the long-term growth rate for each reporting unit would not have changed the company’s conclusion that no potential goodwill impairment existed at September 30, 2012.

The company will continue to perform a goodwill impairment test as required on an annual basis and on an interim basis, if certain conditions exist. Factors the company considers important, which could result in changes to its estimates, include underperformance relative to historical or projected future operating results and declines in acquisitions and trading multiples. Due to the diverse end user base and non-discretionary product demand, the company does not believe its future operating results will vary significantly relative to its historical and projected future operating results.

Long-Lived Assets

The company evaluates long-lived asset groups on an ongoing basis. Long-lived asset groups are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the related asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted cash flows expected to be generated by the asset group. If it is determined to be impaired, the impairment recognized is measured by the amount by which the carrying value of the asset exceeds its fair value. The company’s estimates of future cash flows from such assets could be impacted if it underperforms relative to historical or projected future operating results. The company recorded asset impairment charges of $0.5 million, $2.3 million and $3.0 million for the fiscal years ended 2012, 2011 and 2010, respectively. Further information regarding asset impairments is provided in Note 12 of the Notes to Consolidated Financial Statements included in this report.

The company evaluates its investments quarterly or when there is an indicator of a potential impairment. During the fourth quarter of 2012, company management determined that an indicator of impairment existed for the company’s investment in Shocking Technologies, Inc. Subsequently, the company engaged a third party asset valuation firm to perform an analysis for purposes of assisting management in determining the amount of impairment. Further information regarding the impairment of the company’s investment in Shocking Technologies, Inc. is provided in Note 6 of the Notes to Consolidated Financial Statements included in this report.

 
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Environmental Liabilities

Environmental liabilities are accrued based on estimates of the probability of potential future environmental exposure. Expenses related to on-going maintenance of environmental sites are expensed as incurred. If actual or estimated probable future losses exceed the company’s recorded liability for such claims, it would record additional charges as other expense during the period in which the actual loss or change in estimate occurred. The company evaluates its reserve for coal mine remediation annually utilizing a third party expert.

Pension and Supplemental Executive Retirement Plan

Littelfuse has a number of company-sponsored defined benefit plans primarily in North America, Europe and the Asia-Pacific region. The company recognizes the full unfunded status of these plans on the balance sheet. Actuarial gains and losses and prior service costs and credits are recognized as a component of accumulated other comprehensive income. Accounting for pensions requires estimating the future benefit cost and recognizing the cost over the employee’s expected period of employment with the company. Certain assumptions are required in the calculation of pension costs and obligations. These assumptions include the discount rate, salary scales and the expected long-term rate of return on plan assets. The discount rate is intended to represent the rate at which pension benefit obligations could be settled by purchase of an annuity contract. These assumptions are subject to change based on stock and bond market returns and other economic factors. Actual results that differ from the company’s assumptions are accumulated and amortized over future periods and, therefore, generally affect its recognized expense and accrued liability in such future periods. While the company believes that its assumptions are appropriate given current economic conditions and its actual experience, significant differences in results or significant changes in the company’s assumptions may materially affect its pension obligations and related future expense. Further information regarding these plans is provided in Note 13 of the Notes to Consolidated Financial Statements included in this report.

Stock-based Compensation

Stock-based compensation expense is recorded for stock-option grants and restricted share units based upon the fair values of the awards. The fair value of stock option awards is estimated at the grant date using the Black-Scholes option pricing model, which includes assumptions for volatility, expected term, risk-free interest rate and dividend yield. Expected volatility is based on implied volatilities from traded options on Littelfuse stock, historical volatility of Littelfuse stock and other factors. Historical data is used to estimate employee termination experience and the expected term of the options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The company initiated a quarterly cash dividend in 2010 and expects to continue making cash dividend payments in the foreseeable future.

Total stock-based compensation expense was $7.3 million, $5.8 million and $5.2 million in 2012, 2011 and 2010, respectively. Further information regarding this expense is provided in Note 14 of the Notes to Consolidated Financial Statements included in this report.

Income Taxes
 
The company accounts for income taxes using the liability method. Deferred taxes are recognized for the future effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. The company recognizes deferred taxes for temporary differences, operating loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Federal and state income taxes are provided on the portion of foreign income that is expected to be remitted to the U.S. and be taxable.
 
 
34

 

The company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

Further information regarding income taxes, including a detailed reconciliation of current year activity, is provided in Note 15 of the Notes to Consolidated Financial Statements included in this report.

Outlook

The company’s 2012 revenue, excluding acquisitions ($16.6 million) and unfavorable currency effects ($9.4 million), was essentially flat compared to 2011 ($660.7 million in 2012 versus $665.0 million in 2011). The outlook for 2013 is guarded due to global economic uncertainty. The electronics book-to-bill ratio is beginning to improve. Automotive passenger vehicle sales continue to be strong in Asia, solid in the U.S. and weak in Europe. The commercial vehicle market remains weak but has shown some early signs of improvement. Electrical continues to show solid performance in the powerfuse business.  There is a world-wide slowdown in Potash mining which may impact the company’s relay/custom business. Revenues for 2013 are expected to be in the range of $680.0 to $720.0 million. Capital expenditures are expected to be in the range of $25.0 to $30.0 million.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The company is exposed to market risk from changes in interest rates, foreign exchange rates and commodity prices.

Interest Rates
 
The company had $84.0 million in debt outstanding at December 29, 2012 related to the unsecured revolving credit facility, which is described in Item 7 under Liquidity and Capital Resources. While this debt has a variable interest rate of LIBOR plus 1.25%, the company’s interest expense is not materially sensitive to changes in interest rate levels since debt levels and potential interest expense increases are insignificant relative to earnings.

Foreign Exchange Rates
 
The majority of the company’s operations consist of manufacturing and sales activities in foreign countries. The company has manufacturing facilities in the U.S., Mexico, Canada, Denmark, China, Lithuania, Taiwan and the Philippines. During 2012, sales to customers outside the U.S. were approximately 67% of total net sales. Substantially all sales in Europe are denominated in euros and substantially all sales in the Asia-Pacific region are denominated in U.S. dollars, Japanese yen, Korean won, Chinese yuan and Taiwanese dollars.

The company’s foreign exchange exposures result primarily from sale of products in foreign currencies, foreign currency denominated purchases, employee-related and other costs of running operations in foreign countries and translation of balance sheet accounts denominated in foreign currencies. The company’s most significant long exposure is to the euro, with lesser long exposures to the Canadian dollar, Japanese yen and Korean won. The company’s most significant short exposures are to the Mexican peso, Philippine peso and Chinese renminbi. Changes in foreign exchange rates could affect the company’s sales, costs, balance sheet values and earnings. The company uses netting and offsetting intercompany account management techniques to reduce known foreign currency exposures where possible and also, from time to time, utilizes derivative instruments to hedge certain foreign currency exposures deemed to be material.
 
 
35

 

Commodity Prices
 
The company uses various metals in the manufacturing of its products, including copper, zinc, tin, gold and silver. Prices of these commodities can and do fluctuate significantly, which can impact the company’s earnings. The most significant of these exposures is to copper, zinc, gold and silver, where at current prices and volumes, a 10% price change would affect annual pre-tax profit by approximately $1.9 million for copper, $0.7 million for zinc, $0.6 million for gold and $1.0 million for silver.

The cost of oil fluctuated dramatically over the past several years. Consequently, there is a risk that a return to high prices for oil and electricity in 2013 could have a significant impact on the company’s transportation and utility expenses.

While the company is exposed to significant changes in certain commodity prices and foreign currency exchange rates, the company actively monitors these exposures and takes various actions to mitigate any negative impacts of these exposures.
 
 
36

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index
Page
   
Report of Independent Registered Public Accounting Firm – Consolidated Financial Statements
38
Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting
39
Consolidated Financial Statements
 
 
Consolidated Balance Sheets
40
 
Consolidated Statements of Net Income
41
 
Consolidated Statements of Comprehensive Income
41
 
Consolidated Statements of Cash Flows
42
 
Consolidated Statements of Equity
43
Notes to Consolidated Financial Statements
 
 
1. Summary of Significant Accounting Policies and Other Information
44
 
2. Acquisition of Businesses
50
 
3. Inventories
53
 
4. Goodwill and Other Intangible Assets
54
 
5. Other Investments
55
 
6. Investment in Unconsolidated Affiliate
55
 
7. Debt
56
 
8. Financial Instruments and Risk Management
58
 
9. Fair Value of Assets and Liabilities
58
 
10. Restructuring
60
 
11. Coal Mine Liability
61
 
12. Asset Impairments
61
 
13. Benefit Plans
62
 
14. Shareholders’ Equity
67
 
15. Income Taxes
70
 
16. Business Unit Segment Information 
72
 
17. Lease Commitments
74
 
18. Earnings Per Share
75
 
19. Selected Quarterly Financial Data (Unaudited)
76
 
 
37

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Littelfuse, Inc.

We have audited the accompanying consolidated balance sheets of Littelfuse, Inc. as of December 29, 2012 and December 31, 2011, and the related consolidated statements of net income and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 29, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Littelfuse, Inc., and subsidiaries at December 29, 2012 and December 31, 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 29, 2012, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Littelfuse, Inc.'s internal control over financial reporting as of December 29, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2013 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Chicago, Illinois
February 27, 2013
 
 
38

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Littelfuse, Inc.

We have audited Littelfuse, Inc.'s internal control over financial reporting as of December 29, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Littelfuse, Inc. management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Littelfuse, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 29, 2012, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Littelfuse, Inc., as of December 29, 2012 and December 31, 2011, and the related consolidated statements of net income and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 29, 2012 of Littelfuse, Inc., and our report dated February 27, 2013 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Chicago, Illinois
February 27, 2013
 
 
39

 
 
CONSOLIDATED BALANCE SHEETS

(In thousands of USD)
 
December 29, 2012
   
December 31, 2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 235,404     $ 164,016  
Short-term investments
          13,997  
Accounts receivable, less allowances (2012 - $13,508; 2011 - $12,306)
    100,559       92,088  
Inventories
    75,580       75,575  
Deferred income taxes
    11,890       11,895  
Prepaid expenses and other current assets
    16,532       14,219  
Assets held for sale
    5,500       6,592  
Total current assets
    445,465       378,382  
Property, plant, and equipment:
               
Land
    6,243       4,888  
Buildings
    54,559       52,730  
Equipment
    304,954       281,521  
Accumulated depreciation
    (244,845 )     (220,255 )
Net property, plant and equipment
    120,911       118,884  
Intangible assets, net of amortization:
               
Patents, licenses and software
    11,144       10,753  
Distribution network
    18,964       19,307  
Customer lists, trademarks and tradenames
    18,704       14,523  
Goodwill
    133,592       115,697  
Investment in unconsolidated affiliate
    8,666       6,000  
Other investments
    10,327       8,867  
Deferred income taxes
    8,090       4,191  
Other assets
    1,865       1,820  
Total assets
  $ 777,728     $ 678,424  
LIABILITIES AND EQUITY
               
Current liabilities:
               
Accounts payable
  $ 27,226     $ 19,934  
Accrued payroll
    20,540       23,048  
Accrued expenses
    11,062       8,861  
Accrued severance
    1,033       1,843  
Accrued income taxes
    11,559       10,591  
Current portion of long-term debt
    84,000       85,000  
Total current liabilities
    155,420       149,277  
Accrued post-retirement benefits
    22,338       15,292  
Other long-term liabilities
    12,412       12,752  
Shareholders’ equity:
               
Preferred stock, par value $0.01 per share: 1,000,000 shares authorized; no shares issued and outstanding
           
Common stock, par value $0.01 per share: 34,000,000 shares authorized; shares issued and outstanding, 2012 –22,029,446; 2011 – 21,552,529
    220       216  
Treasury stock, at cost: 1,561,967 and 1,534,550 shares, respectively
    (60,496 )     (58,834 )
Additional paid-in capital
    195,803       174,375  
Accumulated other comprehensive income
    16,548       8,631  
Retained earnings
    435,340       376,572  
Littelfuse, Inc. shareholders’ equity
    587,415       500,960  
Non-controlling interest
    143       143  
Total equity
    587,558       501,103  
Total liabilities and equity
  $ 777,728     $ 678,424  
See accompanying Notes to Consolidated Financial Statements.
 
 
40

 
 
CONSOLIDATED STATEMENTS OF NET INCOME

   
Year Ended
 
(In thousands of USD, except per share amounts)
 
December 29, 2012
   
December 31, 2011
   
January 1, 2011
 
                   
Net sales
  $ 667,913     $ 664,955     $ 608,021  
Cost of sales
    409,446       408,261       374,149  
Gross profit
    258,467       256,694       233,872  
                         
Selling, general and administrative expenses
    124,277       116,740       103,671  
Research and development expenses
    21,231       19,439       17,602  
Amortization of intangibles
    6,089       6,611       5,025  
Total operating expenses
    151,597       142,790       126,298  
Operating income
    106,870       113,904       107,574  
                         
Interest expense, net
    1,701       1,691       1,437  
Impairment and equity in net loss of unconsolidated affiliate
    7,334              
Other expense (income), net
    (2,217 )     (2,888 )     (1,542 )
Income before income taxes
    100,052       115,101       107,679  
Income taxes
    24,720       28,077       29,016  
Net income
  $ 75,332     $ 87,024     $ 78,663  
                         
Income per share:
                       
Basic
  $ 3.45     $ 3.96     $ 3.58  
Diluted
  $ 3.40     $ 3.90     $ 3.52  
                         
Weighted-average shares and equivalent shares outstanding:
                       
Basic
    21,822       21,901       21,875  
Diluted
    22,098       22,255       22,214  


 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

   
Year Ended
 
(In thousands of USD )
 
December 29, 2012
   
December 31, 2011
   
January 1, 2011
 
                   
Net income
  $ 75,332     $ 87,024     $ 78,663  
Other comprehensive income (loss):
                       
Pension liability adjustments (net of tax of $4,181, $3,587 and $1,517, respectively)
    (7,301 )     (6,703 )     (3,044 )
Unrealized gain (loss) on investments
    1,225       (2,702 )     696  
Unrealized gain on derivatives
                92  
Foreign currency translation adjustments
    13,993       (3,205 )     4,770  
Comprehensive income
  $ 83,249     $ 74,414     $ 81,177  
 
See accompanying Notes to Consolidated Financial Statements.
 
 
41

 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Year Ended
 
(In thousands of USD)
 
December 29, 2012
   
December 31, 2011
   
January 1, 2011
 
OPERATING ACTIVITIES
                 
Net income
  $ 75,332     $ 87,024     $ 78,663  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation
    25,344       25,641       26,980  
Amortization of intangibles
    6,089       6,611       5,025  
Impairment of assets
    549       2,320       2,988  
Provision for bad debts
    242       444       353  
Non-cash inventory charge
    567       4,145        
Pension settlement losses
    5,348              
Impairment and equity in net loss of unconsolidated affiliate
    7,334              
(Gain) loss on sale of property, plant and equipment
    (1,443 )     183       (615 )
Stock-based compensation
    7,348       5,805       5,243  
Excess tax benefit on share-based compensation
    (2,728 )     (4,220 )     (1,617 )
Deferred income taxes
    (2,661 )     (1,363 )     7,784  
Changes in operating assets and liabilities:
                       
Accounts receivable
    (1,587 )     4,768       (12,804 )
Inventories
    5,439       2,612       (15,147 )
Accounts payable
    5,353       (5,272 )     (1,800 )
Accrued expenses (including post-retirement)
    (9,570 )     (421 )     (13,645 )
Accrued payroll and severance
    (4,387 )     (3,226 )     2,384  
Accrued taxes
    (357 )     (6,057 )     14,878  
Prepaid expenses and other
    (42 )     1,756       5,399  
Net cash provided by operating activities
    116,170       120,750       104,069  
                         
INVESTING ACTIVITIES
                       
Acquisitions of businesses, net of cash acquired
    (34,016 )     (11,077 )     (48,292 )
Purchases of short-term investments
    (4,616 )     (14,228 )      
Proceeds from maturities of short-term investments
    17,805              
Investments in unconsolidated affiliate
    (10,000 )     (6,000 )      
Loan to unconsolidated affiliate
    (2,000 )            
Purchases of property, plant and equipment
    (22,529 )     (17,555 )     (22,433 )
Proceeds from sale of property, plant and equipment
    3,664       217       4,997  
Net cash used in investing activities
    (51,692 )     (48,643 )     (65,728 )
                         
FINANCING ACTIVITIES
                       
Proceeds from debt
    23,251       110,000       39,345  
Payments of term debt
          (49,000 )     (8,000 )
Payments of revolving credit facility
    (25,032 )     (50,000 )     (20,624 )
Proceeds from exercise of stock options
    16,367       23,036       18,496  
Debt issuance costs
          (716 )      
Cash dividends paid
    (16,564 )     (14,508 )     (3,248 )
Excess tax benefit on share-based compensation
    2,728       4,220       1,617  
Purchases of common stock
          (37,092 )     (25,377 )
Net cash provided by (used in) financing activities
    750       (14,060 )     2,209  
Effect of exchange rate changes on cash and cash equivalents
    6,160       (3,751 )     (1,184 )
Increase in cash and cash equivalents
    71,388       54,296       39,366  
Cash and cash equivalents at beginning of year
    164,016       109,720       70,354  
Cash and cash equivalents at end of year
  $ 235,404     $ 164,016     $ 109,720  

See accompanying Notes to Consolidated Financial Statements.
 
 
42

 
 
CONSOLIDATED STATEMENTS OF EQUITY

   
Littelfuse, Inc. Shareholders’ Equity
             
(In thousands of USD)
 
Common Stock
   
Addl. Paid in Capital
   
Treasury Stock
   
Accum. Other Comp. Inc. (Loss)
   
Retained Earnings
   
Non-controlling Interest
   
Total
 
Balance at January 2, 2010
  $ 218     $ 130,870     $     $ 18,727     $ 228,641     $ 143     $ 378,599  
Comprehensive income:
                                                       
Net income for the year
                            78,663             78,663  
Change in net unrealized gain on derivatives*
                      92                   92  
Pension liability adjustments *
                      (3,044 )                 (3,044 )
Unrealized gain on investments*
                      696                   696  
Foreign currency translation adjustments
                      4,770                   4,770  
Comprehensive income
                                                    81,177  
Stock-based compensation
          5,243                               5,243  
Withheld 11,207 shares on restricted stock grants for withholding taxes
                (422 )                       (422 )
Purchase of 643,777 shares of common stock
    (6 )     (2,247 )     (23,124 )                       (25,377 )
Stock options exercised, including tax impact of ($1,808)
    6       16,682                               16,688  
Cash dividends paid ($0.15 per share)
                            (3,248 )           (3,248 )
Balance at January 1, 2011
  $ 218     $ 150,548     $ (23,546 )   $ 21,241     $ 304,056     $ 143     $ 452,660  
Comprehensive income:
                                                       
Net income for the year
                            87,024             87,024  
Pension liability adjustments *
                      (6,703 )                 (6,703 )
Unrealized (loss) on investments*
                      (2,702 )                 (2,702 )
Foreign currency translation adjustments
                      (3,205 )                 (3,205 )
Comprehensive income
                                                    74,414  
Stock-based compensation
          5,805                               5,805  
Withheld 20,537 shares on restricted stock grants for withholding taxes
                (1,203 )                       (1,203 )
Purchase of 859,029 shares of common stock
    (9 )     (2,998 )     (34,085 )                       (37,092 )
Stock options exercised, including tax impact of ($2,009)
    7       21,020                               21,027  
Cash dividends paid ($0.63 per share)
                            (14,508 )           (14,508 )
Balance at December 31, 2011
  $ 216     $ 174,375     $ (58,834 )   $ 8,631     $ 376,572     $ 143     $ 501,103  
Comprehensive income:
                                                       
Net income for the year
                            75,332             75,332  
Pension liability adjustments *
                      (7,301 )                 (7,301 )
Unrealized gain on investments*
                      1,225                   1,225  
Foreign currency translations adjustments
                      13,993                   13,993  
Comprehensive income
                                                    83,249  
Stock-based compensation
          7,348                               7,348  
Withheld 27,417 shares on restricted stock grants for withholding taxes
                (1,662 )                       (1,662 )
Stock options exercised, including tax impact of ($2,283)
    4       14,080                               14,084  
Cash dividends paid ($0.76 per share)
                            (16,564 )           (16,564 )
Balance at December 29, 2012
  $ 220     $ 195,803     $ (60,496 )   $ 16,548     $ 435,340     $ 143     $ 587,558  
*Including related tax impact (see Note 15).

See accompanying Notes to Consolidated Financial Statements.
 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies and Other Information

Nature of Operations: Littelfuse, Inc. and subsidiaries (the “company”) design, manufacture, and sell circuit protection devices for use in the automotive, electronic and electrical markets throughout the world.

Fiscal Year: The company’s fiscal years ended on December 29, 2012, December 31, 2011 and January 1, 2011 and contained 52 weeks each.

Basis of Presentation: The Consolidated Financial Statements include the accounts of Littelfuse, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The company’s Consolidated Financial Statements were prepared in accordance with generally accepted accounting principles in the United States of America and include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries and majority-owned subsidiaries over which the company exercises control.

Use of Estimates: The process of preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses and the accompanying notes. The company evaluates and updates its assumptions and estimates on an ongoing basis and may employ outside experts to assist in its evaluation, as considered necessary. Actual results could differ from those estimates.

Cash Equivalents: All highly liquid investments, with an original maturity of three months or less when purchased, are considered to be cash equivalents.

Short-Term and Long-Term Investments: The company has determined that certain of its investment securities are to be classified as available-for-sale. Available-for-sale securities are carried at fair value with the unrealized gains and losses reported as a component of “Accumulated Other Comprehensive Income (Loss).” Realized gains and losses and declines in unrealized value judged to be other-than-temporary on available-for-sale securities are included in other expense (income), net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.

Fair Value of Financial Instruments: The company’s financial instruments include cash and cash equivalents, accounts receivable, investments and long-term debt. The carrying values of such financial instruments approximate their estimated fair values.

Accounts Receivable: The company performs credit evaluations of customers’ financial condition and generally does not require collateral. Credit losses are provided for in the financial statements based upon specific knowledge of a customer’s inability to meet its financial obligations to the company. Historically, credit losses have consistently been within management’s expectations and have not been a material amount. A receivable is considered past due if payments have not been received within agreed upon invoice terms. Write-offs are recorded at the time a customer receivable is deemed uncollectible.

The company also maintains allowances against accounts receivable for the settlement of rebates and sales discounts to customers. These allowances are based upon specific customer sales and sales discounts as well as actual historical experience.
 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies and Other Information, continued

Inventories: Inventories are stated at the lower of cost or market (first in, first out method), which approximates current replacement cost. The company maintains excess and obsolete allowances against inventory to reduce the carrying value to the expected net realizable value. These allowances are based upon a combination of factors including historical sales volume, market conditions, lower of cost or market analysis and expected realizable value of the inventory.

Cost and Equity Method Investments/Investment in unconsolidated affiliate: Investments in unconsolidated affiliates over which the company has significant influence over the investees’ operating and financing activities are accounted for under the equity method of accounting. Investments in affiliates over which the company does not have the ability to exert significant influence over the investees’ operating and financing activities are accounted for under the cost method.

Property, Plant and Equipment: Land, buildings and equipment are carried at cost. Depreciation is calculated using the straight-line method with useful lives of 21 years for buildings, seven to nine years for equipment, seven years for furniture and fixtures, five years for tooling and three years for computer equipment.

Goodwill and Indefinite-Lived Intangible Assets: The company annually tests goodwill and indefinite-lived intangible assets for impairment on the first day of its fiscal fourth quarter or at other dates if there is an event or change in circumstances that indicates the asset may be impaired. The company has seven reporting units for testing purposes. Management determines the fair value of each of its reporting units by using a discounted cash flow model (which includes forecasted five-year income statement and working capital projections, a market-based weighted average cost of capital and terminal values after five years) to estimate market value.  In addition, the company compares its derived enterprise value on a consolidated basis to the company’s market capitalization as of its test date to ensure its derived value approximates the market value of the company when taken as a whole.

As of the most recent annual test conducted on September 30, 2012, the company concluded the fair value of each of the reporting units exceeded its carrying value of invested capital and therefore, no potential goodwill impairment existed. Specifically, the company noted that its headroom, defined as the excess of fair value over the carrying value of invested capital, was 66%, 113%, 59%, 99%, 96%, 247% and 119% for its electronics (non-silicon), electronics (silicon), automotive (excluding Cole Hersee), Cole Hersee, relay, custom products and fuse reporting units, respectively, at September 30, 2012. Certain key assumptions used in the annual test included a discount rate of 12.7% for all reporting units. A long-term growth rate of 3.0% was used for all seven reporting units.

In addition, the company performed a sensitivity test at September 30, 2012 that showed a 100 basis point increase in its discount rate or a 100 basis point decrease in the long-term growth rate for each reporting unit would not have changed the company’s conclusion that no potential goodwill impairment existed at September 30, 2012.

The company will continue to perform a goodwill and indefinite-lived intangible asset impairment test as required on an annual basis and on an interim basis, if certain conditions exist. Factors the company considers important, which could result in changes to its estimates, include underperformance relative to historical or projected future operating results and declines in acquisitions and trading multiples. Due to the diverse end user base and non-discretionary product demand, the company does not believe its future operating results will vary significantly relative to its historical and projected future operating results.
 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies and Other Information, continued

Other Intangible Assets: Trademarks and tradenames are amortized using the straight-line method over estimated useful lives that have a range of five to 20 years. Patents, licenses and software are amortized using the straight-line method or an accelerated method over estimated useful lives that have a range of seven to 12 years. The distribution networks are amortized on either a straight-line or accelerated basis over estimated useful lives that have a range of three to 20 years. Other intangible assets are also tested for impairment when there is a significant event that may cause the asset to be impaired.

Environmental Liabilities: Environmental liabilities are accrued based on engineering studies estimating the cost of remediating sites. Expenses related to on-going maintenance of environmental sites are expensed as incurred. If actual or estimated probable future losses exceed the company’s recorded liability for such claims, the company would record additional charges during the period in which the actual loss or change in estimate occurred.

Pension and Other Post-retirement Benefits: Accounting for pensions requires estimating the future benefit cost and recognizing the cost over the employee’s expected period of employment with the company. Certain assumptions are required in the calculation of pension costs and obligations. These assumptions include the discount rate, salary scales and the expected long-term rate of return on plan assets. The discount rate is intended to represent the rate at which pension benefit obligations could be settled by purchase of an annuity contract. These assumptions are subject to change based on stock and bond market returns and other economic factors. Actual results that differ from the company’s assumptions are accumulated and amortized over future periods and therefore generally affect its recognized expense and accrued liability in such future periods. While the company believes that its assumptions are appropriate given current economic conditions and its actual experience, significant differences in results or significant changes in the company’s assumptions may materially affect its pension obligations and related future expense. During the fourth quarter of 2012, the company amended the Littelfuse Inc., Retirement Plan to allow participants who met certain requirements to elect to receive their vested retirement benefits in a lump sum on (or for certain participants annuity payments, on and after) December 1, 2012. This amendment resulted in a settlement charge of $5.1 million in 2012. See Note 13 for additional information.

Reclassifications: Certain items in the 2011 and 2010 financial statements have been reclassified to conform to the 2012 presentations – specifically, the 2011 presentation of the Investment in unconsolidated affiliate of $6.0 million has been separately presented. It was previously included as part of Other investments. These reclassifications had no impact on net income or shareholders’ equity for any period.

Revenue Recognition: The company recognizes revenue on product sales in the period in which the sales process is complete. This generally occurs when products are shipped (FOB origin) to the customer in accordance with the terms of the sale, the risk of loss has been transferred, collectability is reasonably assured and the pricing is fixed and determinable. At the end of each period, for those shipments where title to the products and the risk of loss and rewards of ownership do not transfer until the product has been received by the customer, the company adjusts revenues and cost of sales for the delay between the time that the products are shipped and when they are received by the customer. The company’s distribution channels are primarily through direct sales and independent third party distributors.
 
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS