Littelfuse Inc (LFUS) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Littelfuse Inc.

Fourth Quarter 2017 Conference Call.

Today's call is being recorded.

At this time I would turn the call over to President and CEO, Mr. Dave Heinzmann.

Please go ahead, sir.

Thank you, and good morning.

Welcome to the Littelfuse Fourth Quarter 2017 Conference Call.

Here with me, as always, is Meenal Sethna, our Chief Financial Officer.

Our fourth quarter performance provided a solid finish to a terrific year for Littelfuse.

Adjusted fourth quarter earnings per share of $1.81 increased 15% over last year.

Sales of $305 million were at the top end of our estimates, up 7% over a very strong fourth quarter in 2016.

Organic growth for -- organic growth of 4% was led by our industrial and automotive segments, with electronics also growing against an exceptionally strong quarter last year.

For the full year, net sales of $1.2 billion, up 16% versus last year, with 7% organic growth.

Adjusted earnings per share was $7.74, up 24% from 2016.

In 2017, the first full year of our updated strategy, we delivered record sales, earnings and cash flow.

We also made substantial progress in several of our key strategic initiatives.

We took a majority ownership position in Monolith Semiconductor and launched our first silicon carbide products.

We acquired US Sensor, expanding our sensor portfolio in several key electronics and industrial end markets.

And we announced the IXYS acquisition, the largest in our history, which closed 2 weeks ago.

Back in December of 2016 we held our Analyst Day, where we shared our updated strategy.

We outlined our plans to achieve double-digit top line growth and sustained profitability through a combination of organic growth and acquisitions.

At the intersection of the key global mega trends of safety, energy efficiency and the connected world, the focus of our strategy is to grow our core circuit protection business, accelerate power control and double our sensor platform.

This strategy builds on the strength of our previous strategy.

About 5 years ago, we saw opportunities in sensor technologies.

Through strategic acquisitions and organic growth, we built a global sensor platform with $160 million in sales.

We also saw the increasing growth opportunities across the power control space.

The addition of IXYS aligns with our strategy to accelerate growth across our power control platform.

IXYS brings an extensive power semiconductor portfolio and technology expertise that diversifies and expands our presence within the industrial electronics market.

I will discuss IXYS in more detail in a few minutes.

We continue the strong traction with our strategy by focusing and investing in high-growth markets.

Our teams have done an outstanding job of executing on our strategy, and I want to thank our associates around the world for their dedication and hard work on all that we accomplished in 2017.

Another topic we are focused on is U.S. tax reform implications.

Overall, we believe tax reform will be another positive catalyst for the U.S. economy and for Littelfuse.

We are a growing company and tax reform gives us additional financial flexibility to achieve our future performance goals.

As a U.S.-headquartered company, we will continue to invest in our people and innovation to drive organic growth.

Acquisitions are another key part of our strategy and many of our acquisitions have been U.S.-based.

Given these opportunities, our capital allocation strategy remains unchanged.

We expect M&A will continue to use about 60% of our free cash flow, with the remainder returned to our shareholders in the form of dividends and periodic share buybacks.

With that, I'll turn the call over to Meenal, who will provide some additional color on tax reform and a summary of our fourth quarter results.

Thanks, Dave.

During this call, certain comments we will make contain forward-looking statements.

These forward-looking statements may involve significant risks and uncertainties.

We ask you to review today's press release in our Forms 10-K and 10-Q for more details about important risks that could cause actual results to differ materially from our expectations.

Also our remarks today refer to non-GAAP financial measures.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures is provided in our earnings release and available on our Investor Relations website.

Before I discuss our 2017 results and 2018 outlook, I'll start with a summary of the impact of the new U.S. tax reform to our fourth quarter results and our estimate of the 2018 impact and beyond.

As noted in our press release, we recorded an estimated onetime $49 million tax charge on a deemed repatriation of accumulated foreign earnings.

This $49 million charge equates to $2.16 of EPS for the fourth quarter, resulting in a GAAP loss per share of $0.48.

This charge has been excluded from our adjusted earnings.

With available tax credits, we expect the net cash impact of this charge to be approximately $35 million, payable over the next 8 years.

This charge only includes the legacy Littelfuse impact and is our best estimate based on the information we have as of today.

We will have details on the IXYS estimated onetime tax charge as part of our first quarter earnings call.

The IXYS charge will be included as part of our acquisition purchase accounting and will not impact our 2018 earnings.

U.S. tax reform gives us increased financial flexibility to bring cash back to the U.S. This aligns well with our near-term capital allocation focus, which is debt paydown.

As part of our IXYS acquisition strategy, we targeted getting our debt-to-EBITDA leverage back to 2.0x this year.

For the full year 2018, we are guiding to an adjusted effective tax rate of 18% to 21%.

Within the past few weeks, 2 major events have had an impact to our estimated tax rates.

The IXYS acquisition; and new U.S. tax legislation.

IXYS has historically had a tax rate that is much higher than the legacy Littelfuse rate.

When we announced the acquisition, we noted that it would take us some time and planning to reduce our combined adjusted effective tax rate to our targeted 17% to 19% range.

We are still in the early stages of our planning and analysis of the impacts of U.S. tax reform to our overall tax rate.

However, given the already low rate for our legacy business, we expect some near-term rate increase from provisions and limitations in the new U.S. tax legislation.

Beyond 2018, we expect to bring our adjusted effective tax rate back to our targeted 17% to 19% range.

Over the next few years, we expect the benefits of U.S. tax reform and of the IXYS acquisition to more than offset our near-term tax rate increase.

And now moving on to highlights from our fourth quarter and the full year 2017.

We capped off an outstanding year with our finish in the fourth quarter as we finished at the high-end of our sales guidance and above our guidance for adjusted earnings per share.

Sales in the fourth quarter were $305 million, up 7% over last year and up 4% organically.

GAAP operating margin finished at 16.7% and our adjusted operating margin was 17.4%, as we expanded margins 140 basis points over the same quarter last year.

Our adjusted operating income was up 16% over last year, with another quarter of strong leverage.

We recorded a GAAP diluted loss per share of $0.48.

Our adjusted diluted EPS was $1.81, which increased 15% over last year.

For the full year of 2017, sales of $1.22 billion were up 16% with organic growth of 7% led by electronics.

We expanded margins 160 basis points for the year with adjusted operating margins finishing at 18.7%.

GAAP diluted earnings per share were $5.21, while our adjusted earnings per share finished at $7.74, that was up 24% over 2016 driving strong leverage through the P&L.

Looking at performance by business, electronics finished the year at a record 23.5% operating margin, led by double-digit sales growth, which drove strong leverage and continued strong operational performance.

Automotive margins were 13.8% for the year, down slightly versus last year.

Margins were impacted by continued commodity price increases during the year.

Our industrial segment essentially finished the year at 10% operating margins, returning the segment back to double-digit operating margins.

Cash flow was a record for the year as we generated $269 million in operating cash flow and $203 million in free cash flow.

Our free cash to net income conversion was a very strong 120%, which excludes the noncash impact of the $49 million tax charge in net income.

We invested $66 million of capital expenditures back into the business, much of it to add capacity and growth in new customer programs and products.

On the capital allocation front, we issued $175 million in senior notes in conjunction with the IXYS transaction.

This additional fixed rate debt limits our interest rate exposure as rates continues to rise.

Along with our expanded credit facility we noted last quarter, our existing capital structure gives us the continued financial flexibility to execute our strategy.

In summary, the fourth quarter was a solid finish to an outstanding year and gives us good momentum into 2018.

And with that, I'll turn it back to Dave for more color on business performance and market trends.

Thanks, Meenal.

Starting with the electronics segment.

Fourth quarter sales of $163 million increased 4% year-over-year and were up 1% organically.

For the full year, sales of $662 million increased 24% overall and grew 10% organically.

The robust electronics cycle we've seen for more than a year now, still has momentum going into 2018 as indicated by our strong backlog across all regions.

We saw increased orders through the fourth quarter with a book to bill of 1.11, well above our historical fourth quarter average.

We continue to closely monitor channel inventories and distributor sales and customers, and believe they are at reasonable levels.

Fourth quarter sales were strong in Europe and North America, but as expected were down year-over-year in Asia due to the exceptional fourth quarter of 2016.

For the full year, we saw solid growth across most vertical markets, with strong increases in automotive electronics, the Internet of Things, appliances, and building and home automation.

I will highlight a few wins we had in these markets.

Our automotive electronics business had another good quarter.

We had $3 million as new business wins in the fourth quarter for product applications that include LED headlights, dashboards and other general automotive electronics systems.

These include 2 wins of customers in Japan, one of our target markets.

We also saw wins for EV battery management and charger applications.

In the Internet of things and infrastructure space, we had good design wins for our protection thyristor which protect document data network equipment.

We also secured a number of 5G network infrastructure design wins for a high-powered TVS diodes.

We expect these wins to contribute more than $3.5 million in 2018 revenues.

We have ongoing design wins with appliance manufacturers as they look to improve energy efficiency and shift to even more electronic functionality.

From temperature sensors to magnetic position sensors, washing machines to coffee makers, we are leveraging our product portfolio and great engineer-to-engineer relationships to win new business.

Our building and home automation revenues grew about 20% year-over-year.

We expect our growth in both the building and home automation and appliance categories to continue, driven by efforts to improve energy, efficiency and safety.

This will not only provide growth opportunities for our circuit production products and position sensors, but also for the temperature sensing portfolio we acquired last year.

As I mentioned earlier, we are pleased with the investment in Monolith Semiconductor and believe silicon carbide is a promising and innovative technology.

We are seeing strong interest in the marketplace, with initial wins for our new silicon carbide MOSFET, which we just launched in October.

These wins are for solar micro-inverters in North America, EV charging stations in China and industrial power supplies in Europe.

We believe these initial wins are an indicator of the long-term growth potential and diverse customer base for silicon carbide, an important element of our strategy to further strengthen our position in the power semiconductor industry.

With our broad product line and extensive engineering experience, we have the capabilities our customers want and need to help their products operate safely and efficiently.

From automotive electronics, EV charging and battery management to data centers, cloud computing and appliances, we are well positioned in these evolving industry trends.

Our focus on targeted growth areas is delivering growth both across sales and margins.

We look forward to continuing this momentum in 2018.

As I wrap up my commentary on the electronics segment, I wanted to take a moment to talk about the IXYS acquisition.

Starting next quarter, we will begin reporting the IXYS results in the electronics segment.

IXYS has been a global pioneer in the power semiconductor industry for more than 30 years.

With IXYS, we will be able to diversify and expand our presence within the industrial electronics markets, leveraging a tremendous industrial OEM customer base.

We also see long-term opportunities to increase our content for vehicle by expanding the IXYS power semiconductor portfolio with Littelfuse's automotive customers.

One example here is EV charging.

We expect IXYS products will add to our already attractive content opportunity.

IXYS ended the December quarter with approximately $89 million in sales and full year calendar 2017 sales of approximately $343 million.

Similar to what we and others are seeing across the electronics and industrial market, IXYS demand continues to be very strong.

Since our announcement in August, we've been working closely on integration plans and discussing opportunities for growth across our combined portfolio.

We have also had many discussions on leveraging best practices and processes and how we can share our technologies across our portfolio.

However, as 2 public companies, we've been limited in our ability to share certain information until after the closing.

We started to meet with customers and distribution partners to discuss our combined product portfolio and how we can best serve them.

Initial feedback has been quite positive.

We're also starting to discuss synergy opportunities across our combined manufacturing and supply chain operations where we share common processes, materials and suppliers.

With the planning that is already underway, we remain confident in our target to achieve more than $30 million of annualized cost savings within the first 2 years.

We will provide additional detail on our progress during our first quarter earnings call.

Our automotive segment continues to perform well.

Fourth quarter sales of $115 million increased 6% organically, led by growth across our commercial vehicle products and passenger car fuse businesses.

For the full year, automotive sales of $453 million were up 4% organically over the prior year.

As in the fourth quarter, we saw strong organic growth in our CVP and automotive fuse businesses.

Our growth was dampened by the decline in our auto sensor business due to the planned exit of low-margin legacy programs during 2017.

Excluding the decline in sensors, our automotive segment grew a very robust 9% organically.

Our passenger car fuse sales growth continued to outperform the global car build growth during the quarter.

Geographically, we had double-digit growth in both North America and Europe, while Asia was down due to the challenging comparison from the strong 2016 fourth quarter, included China tax incentive impacts.

In North America, we saw strong demand for our next-generation fuse products, particularly in the light truck and SUV markets.

In addition, we completed a short-term program at the end of the year with the German-based automaker.

The higher sales in Europe were driven by a strong car build and the continued penetration of our new products.

In Asia, sales were especially strong in India.

We continue to focus our growth across Asia on content increases and move to more electrification of vehicles.

We continue to see increased development activities globally for our high-voltage fuses for hybrid and electric vehicles and battery charging systems.

This increased demand is being driven by discussions underway in Europe demand, diesel-powered cars in larger cities as well as new regulations in China and India that support the introduction of electric vehicles.

As a recent example in India, the government has established a goal of 100% electric vehicles by 2030.

New fourth quarter program awards for our hybrid and electric vehicle fuses totaled $4.5 million annually at peak.

This includes programs for 2 European passenger car manufacturers as well as a power converter application in China.

In automotive sensors, we expanded our seatbelt buckle sensor technology platform to broaden our product offering.

As a result, we won significant new business in this category, including a major win with a key passenger car platform at a large European OEM.

We also secured new business with a large OEM in China.

Together, the 2 wins will generate about $4 million of annual revenues at peak.

We expect our auto sensor business to return to solid growth in 2018 as we look at the new product launches underway and positive developments with strategic customers.

Sales of our commercial vehicle products grew double digits in the fourth quarter due in large part to strength in the overall commercial vehicle market relative to prior year.

We won new CVP business in the fourth quarter with a North American specialty vehicle manufacturer in our strategic growth area of power distribution models.

We made progress on our strategy to grow beyond North America with strong sales in Europe as we release new products over the past year.

We also invested in additional plant capacity in Europe to support our CVP sales growth.

Overall, we won more than $16 million in new businesses across our automotive segment this quarter, giving us good momentum as we head into 2018.

With global trends towards greater fuel efficiency and our existing product portfolio, technical expertise and well-established customer relationships, we are well positioned for above market growth in this segment.

Now let's move on to the industrial segment.

Fourth quarter sales of $27 million grew 21% organically.

And for the year, sales of $106 million were up 7% organically.

We continue to broaden our distribution channels and expand our business outside North America, with Asia sales up double-digits in the quarter.

After a sluggish start to 2017, our global solar business also picked up in the fourth quarter with sales reaching their highest level in 2 years.

On the new business front, we won our first project in the energy storage market with a customer in Korea for our new high-speed, square body fuse.

Launched earlier this year, the fuse is designed to protect sensitive power semiconductors used in devices such as variable frequency drives, uninterruptible power supplies and inverters.

Last quarter, we achieved our goal of returning the industrial segment to double-digit operating margins.

We continued that trajectory in the fourth quarter with an operating margin of 17% and expect to maintain double-digit operating margins going forward.

Our industrial segment is in much better position today than it was a year ago.

Our sales growth, cost position and operating performance have improved significantly.

We are seeing the benefit from our focus on strategic growth markets, geographic and distributor expansion, and new product development.

This gives us a solid base for continued improvement in 2018.

Before we discuss fourth quarter guidance, I wanted to reflect on my thoughts after visiting CES earlier this month.

With our extensive portfolio of technologies, nearly every company with a booth at the show is either a customer or a potential customer.

The show provides us with good visibility into the trends impacting our business.

Walking the show, I saw a very broad-based use of connected devices and the continued growth of the Internet of Things, more progress in autonomous driving technologies and ongoing advancements in electrification of vehicles.

These factors reinforce the direction we are heading.

Based on the macro indicators and the trends seen at CES, safety, energy efficiency in the connected world, we remain bullish on the opportunities ahead.

We are optimistic about 2018 and our ability to continue our momentum.

We are seeing solid bookings across our electronics segment and in the IXYS business.

While the increase in global car build is expected to be modest in 2018, we expect to continue to perform -- outperforming the market because the sophistication of vehicle architecture is driving increased content per vehicle.

The end markets in our industrial segment are improving and we expect to see continued enhancements to profitability.

For all those reasons, I'm convinced we have the right strategy in place and we are executing well.

On that note, I will turn the call back to Meenal who will provide the outlook for the first quarter, then we will take your questions.

Thanks, Dave.

Turning to our guidance.

Please note that our outlook includes IXYS operations and the first quarter outlook includes approximately 2.5 months of IXYS as the transaction closed in mid-January.

Based on the current foreign exchange rates and the regulatory environment, we expect sales for the first quarter of 2018 to be in the range of $384 million to $396 million.

The midpoint of the guidance reflects 37% reported sales growth and 6% organic growth over last year.

We expect adjusted earnings per diluted share to be in the range of $1.73 to $1.87, representing a 6% growth over last year.

This assumes an adjusted effective tax rate of 22.5% to 23.5% for the first quarter compared to an 18% rate in Q1 last year.

Our first quarter EPS growth would be 13% at a flat year-over-year tax rate.

While our 2018 tax rate range is 18% to 21%, the rate within individual quarters may vary due to the timing of certain discrete tax items.

The net IXYS transaction is slightly diluted this quarter when factoring in the additional interest expense and dilution from the shares we issued.

With our synergy planning and execution underway, we still expect the transaction will net $0.05 to $0.10 of positive EPS or accretive EPS for 2018.

For the full year, a few additional financial model updates.

With the additional shares we issued for the IXYS transaction, our basic share count as of the transaction close was approximately 24.8 million shares and our diluted shares were approximately 25.2 million.

We are projecting interest expense for the year in the range of $23 million to $24 million.

This includes additional debt we incurred for the IXYS transaction.

Note that the interest expense will be heavier weighted earlier in the year as our debt paydown plan will reduce our expense later in the year.

We are projecting noncash amortization expense of approximately $41 million for the year.

This includes an estimated $16 million in amortization expense related to IXYS.

If we have further updates, we'll provide you with our new revised estimates.

Overall, we're pleased with our 2017 finish and look forward to continued success in 2018.

This concludes our prepared remarks.

Now we'd like to open it up for questions.

Ryan?

(Operator Instructions) Our first question comes from the line of George Godfrey from CL King.

Two questions.

The first one is the revenue -- I understand the cost synergy is $30 million or more annualized over the next 2 years.

When do you think -- if you can put a dollar figure on the revenue synergies, when do you think they start kicking in?

And then my second question is electronics margins dip into Q4, I'm guessing that's just a difficult compare and the lower organic growth.

Sure.

You know what, why don't I take both of those.

From a synergy perspective, George, we'd always talked about with the $30 million run rate, it would definitely be heavier weighted in the second year as we think about it.

Just because with actions we have to take, some of which involve manufacturing processes and facilities that will just take some time to put in place as we look at the overall footprint.

But having said that, some of the synergies have already started if you think about public company costs, for example.

Immediately upon close, we'll start to see some savings when it comes to things like audit fees and other types of infrastructure expenses like that.

But I would say, definitely, heavier weighted as we get into later in the year.

I'd say the other piece related to that is also interest expense.

We got to start the debt paydown, which will start we expect in the second quarter.

So the interest expense will be lighter as we get into the back half of the year.

And then on your second question on the electronics operating margin, we had -- we don't talk about all the different footprint things we're doing, but we had a couple of product line consolidations that we were doing in the electronics segment where we're removing stuff between plants, relative to the PolySwitch acquisition from a couple of years ago.

And every time we do that there's always some cleanup involved, some onetime clean up cost that we end up through the P&L.

So that was really more of a onetime hit that we took in the P&L in this quarter.

Nothing out of the ordinary and it's pretty typical when we do plant or product-like consolidations.

Our next question comes from the line of Steven Fox from Cross Research.

Just first, broadly speaking, you guys were correctly concerned about the step down in organic growth for the electronics business, but the book to bill looks very strong.

So I was wondering if you could just sort of give your updated view on the cycle, your general outlook for organic growth from that business in 2018.

And then I had a follow-up.

Sure.

Steve, so when we look at -- we expected a normal seasonal downturn in electronics for the fourth quarter and we did see some of that softening as kind of expected.

But for the orders, kind of through the quarter, actually strengthened.

So we did have a fourth quarter book to bill of 1.11, which is well above what we would typically see going into fourth quarter.

So what I would say is we remain -- we continue to see strong order rates from the customer base.

So we expect to kind of improve the level of demand that we have in electronics cycle right now.

We're seeing it continue.

I'm not suggesting necessarily we're going to have the same growth rates for the full year of 2018 that we saw in 2017, but still at this elevated level, still solid demand patterns.

And if there's any reference point we kind of look back towards, which is really published demand rate that on semiconductor discretes, which we're projecting somewhere in the range of organic growth of about 4% for the year, we think that's probably a reasonable point to reference.

Great.

And then with the IXYS acquisition now closed, I understand it's only 2.5 months for this quarter and you gave the revenues for the full year.

I'm just curious if -- as on a standalone basis before you get into any sales synergies, what kind of organic growth that business should produce in Q1?

And then how quickly could you see sales synergies as the 2 teams get together?

Yes.

I think IXYS is also seeing very strong bookings and demand on their business as most of the peer companies are seeing as well, and as certainly as Littelfuse is seeing.

So I think the demand pattern is quite solid for IXYS.

I would say that, perhaps, IXYS is a little more capacity limited than Littelfuse is.

And so therefore, the ability to grow that business in the near term is constrained by their capacity.

So we may not see as much growth of that business as we'd like to until we're able to address capacity capabilities and things in that business over time.

So we expect it to be a solid year out of the IXYS business, with good solid demand.

But maybe we can't take advantage of all the demand because of factory limitations in the first part of the year.

And synergies are -- when do you think you can start commercializing some of the things you mentioned?

Yes.

I think sales synergies, when you look across the businesses, IXYS, one of the strengths they have is really strong relationships into industrial OEM accounts, stronger than Littelfuse.

So we think that will be a help for us to begin to bring Littelfuse into those accounts and drive that.

We've talked about, longer term, the ability to take advantage of our relationships in the automotive industry and bringing some of the key, high-quality products out of the IXYS portfolio into those customer bases.

The automotive synergies will clearly take time, and those will largely not be impacting this year.

Perhaps in the industrial side, there are some opportunities.

But I think, really, sales synergies are kind of back-end loaded in the year, probably in the IXYS side of things, and really more about in the coming year or 2.

Our next question comes from the line of David Leiker from Baird.

This is David.

A couple of things.

Just staying on IXYS here for a minute.

I guess 2 points, 2 items there from my perspective.

One, I mean, you've got this business model process in terms of bringing in acquired companies.

I just want to understand, again with being a public company, my guess is that, that probably is going to take a little longer to implement and for us to see?

And then secondly, there are some pieces of that IXYS business that seem like they didn't quite fit and if you've been able to come to any thoughts there in terms of how you might either fix those or do other things with them.

So I think from the integration model, yes, we clearly we've built up over the last few years and acquisitions we've done a fairly standardized model of how we approach integration.

I would certainly say that IXYS is as a public company in the way that they are structured.

They tend to be structured as several independent businesses within IXYS.

So it takes perhaps a little more time to work through those independencies and look for places for us to try to integrate with other parts of Littelfuse, I think.

So I think you're probably appropriate in assuming the integration takes a bit longer here.

And some of it from things like systems perspective, you recall the PolySwitch acquisition as the carve out from CE, we had no choices to get off of CE systems and have them on our system very, very rapidly, which we did.

In this case, there are several different ERP systems that exist throughout IXYS, so it will take a little more measured approach to address that.

We'll be highly focused on making sure the customer engagement and customer interface is as flawless as possible.

And so we think there's opportunities in and around that, but we'll spend a lot of time and energy in the near term.

But perhaps, it takes a little bit longer.

From a product or business portfolio analysis, we closed the business -- we closed on the acquisition 2 weeks ago.

Clearly we've begun those discussions with the broader organization.

It's too early at this point for us to kind of call out if there are things we think we want to invest in more heavily or if there are things we want to move away from, we just haven't completed that work yet.

But I think we'll probably be able to share a bit more color both on integration and where we're at on portfolio when we have our first quarter earnings call.

Great.

And then just one last item here.

You had made some comments as it relates to your sensor business overall.

Can you talk -- and that business has been a little bit choppy.

It's good to see the thought that there's some improvement there, but what do you think that cadence looks like over the course of the year by quarter?

Is that something that ramps up over the course of time?

Or is that something that can come a little bit more steady in terms of performance earlier?

Yes.

I think it ramps up over the course of the year.

Clearly, we think the business has the potential of double-digit sorts of growth.

And we have seen that prior to kind of stepping away from legacy pieces of the business we didn't like and we've kind of created a hole for ourselves.

But when we look at launches of new programs and platforms and in applications, we'll see heavier growth in the back of the year than we will on the first part of the year.

But we do think the businesses, overall, has that potential double-digit growth for us.

Our next question comes from the line of Shawn Harrison from Longbow Research.

Thanks for kind of giving us a baseline for the electronics business for 2018.

If we can maybe do a little bit of that for the automotive and industrial business as well, I think you grew probably -- outgrew auto production by maybe 7 full points, ex the sensor headwinds last year.

Is that kind of the range in terms of maybe the expected outgrowth for auto in 2018?

And then the industrial business, it's just very difficult to forecast given the volatility, maybe if you could kind of set us on the path there, that would be helpful.

Yes.

I think let's start with the automotive side.

If we look at automotive results, and we're not giving full year guidance for the businesses, but kind of directionally what I would say is we had a very strong year in this past year.

I think car build is a bit softer.

Maybe in 2018 and whether it's 1% to 2%, it's somewhere in that range of car build, and if you look at the mix of where the car build strength is, I think you know that we have particular strengths in places like North America and Europe and now growing in Asia, particularly China.

What I would say is, overall, the passenger car side of the business, our ability to expand and grow beyond the car build rate, probably continues.

It's kind of the experience we've been having.

I believe our -- the commercial vehicle side of the automotive business, which has been extremely robust in 2017, while we see that momentum continuing right now, most of that we see as maybe that's a little softer in the back end of the year because it's a tougher comparative.

So maybe the overall organic growth, maybe it's a bit less than what we saw last year, but it's hard to say.

It really kind of depends on kind of those puts and takes.

And certainly, as in the back half of the year, particularly the sensor business picks up, that will help support that organic growth.

On the industrial side, very broad-based mix of customers.

And what I would say, overall, oil and gas, mining, those things have been slowly improving.

They continue to slowly improve.

End markets, which can be a little more volatile for us and how they translate down to us in things like solar applications.

It's improved through the course of 2017.

It looks really good right now, but there's -- there are some wildcards out there with what's going to happen in North America on solar implications with the new tariffs.

So it's a little lumpy to figure that up.

Very fair.

Meenal, if I may follow-up.

In terms of the acquisition, if you could maybe just level set us in terms of what the gross margin was for calendar '17 as well as operating expenses?

And then I also was hoping to get some feedback just on your R&D spending.

And I think it's -- as a percentage of sales on a dollar basis, the fourth quarter was, I think, the highest the company has ever had.

And so maybe where that money is going and how we should think about your core R&D spending for calendar '18?

Yes.

I guess just for IXYS to frame it, I mean, they've got a historical view.

But I'd say, for us, the go-forward view a little looks different.

I'd say the growth margins have trended in the low 30s, generally, like compared to our target around the 40% mark, so that's one area.

And I would just generally say, EBITDA margins have also been in the very low-double digits.

So you can kind of break into the operating expenses there.

There's some puts and takes, right, because they have some amortization expense that will go away but we're going to add new stuff, so that's why it's hard to do a comparison on the old IXYS versus integrated with Littelfuse on that first one.

And then, I'm sorry, repeat the second question for me again?

Yes.

Just the R&D spending, I think, was a record on both the dollar basis and a percentage of sales basis for the fourth quarter.

Where is the money being spent now?

And then second, what should we expect in terms of the run rate for kind of core Littelfuse R&D spending in 2018?

Sure.

From the R&D side, we've historically trended in what I'd say is the 3% to 4% of sales.

When we took over majority ownership of Monolith earlier in the year, we started including that R&D spend now as part of our P&L.

So that upped us to the 4 -- actually, the 4-plus range on R&D.

I'd say a combination of that as well as we talked about in our Analyst Day that we're working on making more investments for our organic growth, and we've upped the spend in a few other areas beyond Monolith as well.

So I think I would trend out, outside of IXYS on the core Littelfuse side, I think of somewhere in the range of 4%, 4.5% R&D spend is probably where we'll trend at.

Our next question comes from the line of Christopher Glynn from Oppenheimer.

Just a couple of margin questions.

Wondering on the electronics segment, with still high levels of volumes, if we're kind of contemplating a stable kind of margin outlook with the 2017 levels?

So we've been -- we hit a record at -- for the year at 23.5%.

I would say in -- definitely in places on the electronic side, we're starting to hit capacity.

And so for us to -- if we continue to see growth, we're adding in now additional capacity, either that's equipment or at some point we'd have to look at something more.

So when you start to balance that in with additional cost of doing that, I think we're starting to hit the high point on margins.

We've historically talked about electronics of this 20%, 21%.

You know, 20%, 21% is great, and we're running above that.

I would say the other thing that we're benefiting from right now has been, generally for that business, has been foreign currency.

And we've got other puts and takes elsewhere, but currency has been a tailwind for us in the past couple of years.

So I would say electronics margins are definitely at the higher end right now.

Okay.

And then on free cash flow, I think if we take adjusted net income you had about 115% conversion.

I think $56 million combined accrued taxes and deferred taxes.

And I know you had the TCGA, some noncash there put.

CFO grew $90 million year-over-year and adjusted net income was up $35 million.

So wondering how you're thinking about long-term free cash to adjusted net income conversion?

And 2018, are there any timing differences versus any benchmark type of thoughts?

Yes.

So in all those questions, maybe a couple of things.

One, is if you're doing a '16 -- a '17 to '16 compare.

If you recall back in '16, we were spending a fair amount of cash on the PolySwitch integration and also we've started spending a lot of cash on the [On] integration as well.

So I would say that was about $30 million or so of, I'd call it, more onetime integration cost on the cash side.

So that's part of the high growth you see there.

At the same time, our '17 cash flow was good on a standalone basis.

We've been doing a lot more active management around -- and if you take a look at our DSO, our receivable days, we're in good shape there.

We've been working on increasing our payable days.

And there's just some other things that we've been doing to be more focused around cash flow, so the cash generation has been strong and we expected that.

I'd say -- and that's about call it 115%, 120% conversion.

For 2018, we'd still expect it to be strong.

But similar to what we saw in 2016, we are going to have a bunch of onetime cash costs as it relates to not just integration but even deal cost relating to IXYS.

So as an example, in the first quarter of this year, you can expect we'll have about $10 million or $15 million hit to cash flow just related to the IXYS deal from a cash side.

So I'd say that -- net-net, I would say the cash conversion will not be as strong.

We don't expect it to be as strong in 2018, but it should still be very solid.

(Operator Instructions) Our next question comes from the line of Matt Sheerin from Stifel.

Just a question, Meenal, regarding the tax rate, which starts at 23% and works its way down into the 2019 to that -- your normalized range of the 18% range or so.

Could you just kind of walk us through how you get there and what are the key moving parts to look for there?

Yes.

I would say -- so if I step back for a second, right, we are a month into U.S. tax reform as well as the IXYS transactions.

So the combination of those 2 kind of thrown our tax rate into a little bit of a spin right now.

Specifically, if you think about some moving pieces, we've got to do some more planning work as it relates to IXYS.

Maybe we will get a little bit of benefit back into the year.

And so that's a little bit what's baked in, but that's going to take us a while.

We've got some discreet items that are just running through in the first quarter or 2, so we have that.

And I'd say the third piece is, some of our -- the lower tax rate we have is because we have what I'd call tax incentives or tax holidays in many of the locations that we manufacture in.

And until we get confirmation from the government about when those -- that those tax exemptions have been renewed, we've got to book a higher tax rate.

And that's what you're seeing now where we've got some of those coming up for renewal later this year.

So that some of the timing on the tax rate as well.

Okay.

All right.

And then, Dave, just back to your commentary on electronics which appears a little bit better than it was a quarter ago when you were a little bit more cautious, and of course you talked about the tough comps in Asia.

But if you look at the areas, the different regions and end markets, on the margin, which ones do you feel may be a little bit better about than you did a month ago based on the orders that you're seeing?

Yes.

I think it's pretty broad based.

We continue to see very strong patterns out of Europe.

Europe has been a really strong market for us for the last couple of years and that continues to be the case.

So we see that, of course, Asia.

We're looking for how things bounce back after the Chinese New Year.

But overall, kind of globally we see it.

And it's not just one end market, it's very many applications in end markets.

So it's pretty broad based, but I would say led by Europe.

Our next question comes from the line of John Franzreb from Sidoti & Company.

Just could you talk a little bit about the pricing environment in electronics, especially given, Dave, I think you mentioned earlier something about higher commodity costs.

How is that playing out?

And also, along these lines, could you also touch on what you're seeing in pricing on the automotive side of the business, especially if we're looking at it at downward buildup rate in North America?

Sure.

So let's talk about electronics first.

And certainly I would say when there's a robust cycle, we have the advantage sometimes that even if our product lines are not capacity constrained, many of the products that our customers and the sourcing groups of our customers are chasing after are, and so they spend more time and energy in and around chasing and making sure they don't have a capacitor missing that's keeping them from shipping their end product.

So there's a little less focus on pricing.

So I would say in 2017, certainly, the pricing environment was probably favorable in the market in electronics.

I don't see that changing dramatically right now because there continues to be a pretty robust demand, but we'll see how the year evolves.

And if things start to kind of stabilize, then -- likely in the back half of the year, maybe pricing gets back to more normal rates.

But right now you see it continuing to be a pretty good environment for us where our price pressures are a little less than normal.

On the automotive side, they're far less volatile.

In most cases, in our automotive business, we have long-term agreements, multiyear agreements often with our customers, whether it's in a broad based with the Tier 1 or whether it's on a platform, or when we book the business or win the business, there's price concession that's built in year-over-year in that contract.

So I would not say that automotive pricing environment has changed too much, and we don't see that changing.

With that said, automotive pricing pressures are built less than what they are in the electronics world in general.

But we don't see as much volatility in that in the automotive segment.

Okay.

Got it.

And in regards to bringing IXYS over to the automotive side of your customer base, would that mean you producing some of their products, as you mentioned, that they are somewhat capacity constrained already?

Or you'd be adding capacity to their existing footprint?

Yes.

I think there's a couple of things that happened in there.

You kind of look at different places within automotive, so I mentioned like EV charging.

In the case of EV charging, we'll focus on that pretty quickly because it's a little faster to get in our approvals in an infrastructure side in automotive than it is on vehicle.

So perhaps IXYS is a bit more prepared for that in their quality systems and controls and things like that.

So we likely -- so we'll look at optimizing capacity at the IXYS locations.

There's not huge overlap on our fabs versus the fabs in IXYS and things like that.

And in fact, part of the IXYS business runs in a fabless model.

So we will be focusing on looking at capacity in the IXYS world and where we can add and where we can drive efficiencies out of their factories.

On vehicle applications, we will be focused on making sure IXYS has the systems in place to support expectations from automotive customers.

That will take some time to have in place and to get qualifications by customers of the IXYS manufacturing locations.

So we'll be highly focused on doing that and we can -- at the same time, be working on trying to win IXYS business in automotive applications, but revenues may not start for 12, 18 months behind that as they've got to get qualifications and launch of new platforms and things like that.

And I am showing no further questions.

I would now like to turn the call back to Dave Heinzmann for any further remarks.

Well, thank you for joining us on the call -- on today's call.

With our record 2017 performance and the many growth opportunities we have highlighted today, we expect 2018 to be another good year for Littelfuse.

And we look forward to talking with you again next quarter and hope you all have a great day.

Thanks.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program and you may all disconnect.

Everyone, have a great day.