Littelfuse Inc (LFUS) 2004 Q3 法說會逐字稿

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  • Operator

  • Good day, everyone, and welcome to the Littlefuse Inc. third quarter 2004 earnings conference call.

  • Today's call is being recorded.

  • At this time, I would like to turn the call over to the Chairman, President and Chief Executive Officer, Mr. Howard Witt.

  • Please go ahead, sir.

  • Howard Witt - Chairman, President & CEO

  • Thank you.

  • Good morning.

  • This is Howard, and with me are Gordon Hunter, our Chief Operating Officer, and Phil Franklin, our Vice President of Operations Support and Chief Financial Officer.

  • I introduced Gordon to you in our last two calls, and Phil has traveled with Gordon to visit many of you, actually, throughout the year.

  • Gordon will be taking over leadership of Littlefuse at the end of this year upon my retirement after 25 years with this great business.

  • I will remain on the Littlefuse's Board and be consultant to the Company for several years.

  • As I mentioned on previous calls, Gordon brings many years of experience in our industry, originally with Raychem, and most recently with Intel.

  • He's also been a Littlefuse Board member for several years, and has been onboard with us over a year -- actually a year this month -- as our Chief Operating Officer.

  • Our company is in experienced hands with Gordon and our strong management team.

  • This morning Phil will lead off discussing the quarter in detail, and then Gordon will provide additional background on the progress of our 3 SBUs (ph).

  • This call will, as usual, last about 45 minutes, including approximately 15 for Q&A, questions and answers.

  • We're very pleased to share the news this morning of the record sales and earnings for the third quarter, as we are experiencing the positive impact of our strategy playing out.

  • Our business revenue increased in all markets, in all geographies, with electronics providing the largest increases.

  • Significantly, we also experienced major improvements in all of our businesses as the result of our revenue increases and the cost reduction control activities.

  • All of this leads to hitting our 15% operating margin target for the base business for the first time since the year 2000.

  • Our Teccor acquisition in 2003 and Heinrich majority share purchase of 2004 are already contributing significantly to our top and bottom lines.

  • Cash flow also remains strong following our long history of positive cash flow.

  • Having said this, we have seen recent slowing in some of our businesses.

  • Gordon has just returned from the Far East, and he will comment first-hand on recent trends as he has seen them.

  • Phil will now cover the specifics of the quarter.

  • Phil?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Thanks, Howard.

  • Let me start with the Safe Harbor language.

  • Any forward-looking statements contained herein involve risks and uncertainties, including but not limited to, product demand risks; the effect of economic conditions; the impact of competitive products and pricing; acquisition integration risks; commercialization and technological difficulties; capacity and supply constraints; exchange rate fluctuations; the effect of the Company's accounting policies; labor disputes; restructuring costs in excess of expectations; and other risks which may be detailed in our company's SEC filings.

  • Sales for the third quarter of 2004 were 136 million, up 44% from the prior year period.

  • Diluted earnings per share were $0.49 compared to $0.19 for the prior year period.

  • Both sales and earnings were records for Littlefuse.

  • The strong topline growth for the third quarter was due to the recent acquisition of Heinrich, continued strong performance of our electronics business, and improving conditions in our electrical market.

  • Excluding Heinrich, sales grew 19% for the third quarter, led by 27% organic growth in electronics, with electrical growing 9% and automotive growing 1%.

  • All geographies contributed almost equally to the 19% growth rate, with North America up 19%, Europe up 19%, and Asia up 18%.

  • Excluding currency effects, Europe growth for the quarter was 10% and Asia growth was 16%.

  • We continued to hit our cost reduction and profit improvement targets.

  • Consolidated operating margin of 13.5% was up 110 basis points sequentially, and for the first time since 2000, as Howard just mentioned, operating margin for the base business exceeded 15%.

  • Major cost savings contributing to this margin improvement were continued manufacturing consolidation and transfers to lower-cost facilities, negotiation of lower labor rates in our Mexico plants, and the effects of global sourcing and logistics initiatives.

  • Free cash flow was outstanding for the quarter at over $16 million, even with capital expenditures ramping up to $7 million for the quarter.

  • So, with year-to-date free cash flow at 26 million, we're almost certain to exceed $30 million for the third consecutive year.

  • Now I'll turn it over to Gordon for some comments on our markets.

  • Gordon Hunter - COO

  • Thanks, Phil.

  • Let me give you, first of all, an update on the automotive market.

  • Overall, automotive global production has realized over 5% volume growth through the end of third quarter over the same time last year in recent data from JD Power.

  • This growth is primarily attributed to production growth in Asia and Europe.

  • Asia has grown at over 14% quarter-over-quarter with the majority contribution from China.

  • Total Europe also realized almost 3% increase with all contribution coming from Eastern Europe, which had 24% growth.

  • North America is slightly down at minus 1.5%, and Western Europe is flat.

  • These last two geographies are the regions where Littlefuse has its strongest presence.

  • Littlefuse automotive sales and content per vehicle maintains growth as vehicle fuse counts continue to increase with increased electronics content, and as we gain market share in high vehicle volume growth areas like China and Eastern Europe.

  • However, as stated last quarter, we had a significant contribution in the second quarter from a recall program, which decreased in the third quarter.

  • Our traditional blade fuse business continues to grow as new philosophies of adding additional layers of upstream protection in the form of bold fuses, cable fuses, and multi-element high current fuses are taking hold.

  • As demand for these products expands, opportunities for Littlefuse to provide higher-value products increases.

  • The addition of the German-based automotive R&D team of Heinrich supports these opportunities.

  • Looking forward, the growth of overcurrent and overvoltage protection in automotive electronics remains an opportunity.

  • Automotive electronic content continues to grow, by many estimates at over 10% per year.

  • For example, even factoring in price reductions for auto electronic systems, some OEMs have predicted the electronic cost of their vehicles to rise from 20% of today's cost to over 40% by 2014.

  • As auto makers work to enhance their design and reliability scales for software controls, more and more systems make their way into the vehicle.

  • The needs driving the growth in electronic systems are primarily in three areas.

  • One, enhanced safety; two, improved performance, such as economy, emissions, comfort and inconvenience; and thirdly, improved function and reduced cost to traditionally purer mechanical systems.

  • Examples of proliferating electronics include electronics stability control systems that now accept inputs for center-of-gravity detection to provide anti-rollover protection; the continued proliferation of four-wheel-drive and all-wheel-drive systems; steerable headlamps that improve illumination by 90%; panoramic rear-facing CCD cameras to detector rear hazards; and navigation systems.

  • All of these are opportunities for circuit protection.

  • Now let me switch to a second market, the SBU that we call the electrical business, known as POWR-Gard products.

  • This is a North America business and represents approximately 9% of total Littlefuse sales.

  • This business unit sales were up 9% over the prior year third quarter.

  • In addition to some continued growth as a result of new customer additions, all three market drivers -- this is the MRO, the maintenance repair area, the OEMs, the original equipment manufacturer, and the non-residential construction -- all continued or began to show positive comparisons to 2003 indices.

  • The MRO segment, which is 30% of our mix, was driven by overall manufacturing plant activity, increasing the need for replacement fuses, and showed a positive comparison to the prior year.

  • But the rate of improvement in activity slowed by comparison to the first and second quarters.

  • This overall improvement exists despite the exodus of manufacturing outside North America.

  • The OEMs segment, which is 20% of our mix and is driven by shipments of electrical industrial control products that use our fuses, continued to show improvement in the positive comparison to the prior year.

  • Third quarter showed a more favorable comparison to the prior year in both first and second quarters.

  • The third segment, the non-residential construction area, which is 50% of our business and is driven by the need for fuses in new construction, actually, for the first time this year, showed an improvement.

  • The third-quarter comparison to prior year finally turned positive.

  • The improvement trend should continue into next year if the price inflation in construction materials continues to stabilize as we move forward.

  • In addition to the strength experienced in the overall market sectors, the electrical business unit continued to see positive price realization in the third quarter as a result of price increases which we announced earlier in the year.

  • The third-quarter sales performance, however, was dampened somewhat by the slowdown in the HVAC OEM segment as a result of the very cool summer across most of North America.

  • Electrical SBU continues to focus on the MRO segment of the business, anticipating plant overall activity to continue to improve as a result of the improvement in the overall economy.

  • The Electric SBUs are continuing to push their MROplus inventory management program, which is aimed at reducing operating costs through proper fuse selection.

  • This program has continued to stimulate MRO Company conversions as a result of the value added solutions the program offers.

  • The electrical SBU was just notified by Plant Engineering Magazine that this program was accepted as a finalist in their product of the year competition.

  • Now let me switch to our third SBU, the electronics SBU, and give you some market update here.

  • The overall electronics end markets have started to see a decrease in growth rates from the double-digit growth rates of earlier in the year.

  • We are now seeing this to be more in the mid-single digits.

  • This slowdown is across most major electronic market segments, although cell phone still had a very robust third quarter.

  • Our initial projections are for a slower end market growth rate to continue into next year.

  • As we mentioned last quarter and stated earlier by Phil, the good portion of our sales growth through distribution has filled out its course, some correction in our channels.

  • Let me take you through a couple of the end markets to give you some information on the growth rates we're seeing.

  • In the telecom area, overall we've seen a general slowing in telecom spending.

  • However, the problems we feel are concentrated in the second half of 2004.

  • Spending from January through June of this year was 18% higher than during the first half of '03.

  • Outlays in the second half are expected to be 3% lower than the year earlier period.

  • However, we feel that our telecom business is not overly exposed to this lower equipment spend as there are tremendous circuit protection opportunities in the faster growing CPE, or customer premise equipment, end markets.

  • Two of these fast-growing segment are broadband modems and IP telephony systems, known as VoIP or voiceover Internet protocol.

  • Circuit protection content for VoIP port is now up to $1.00, potentially using up to four of our technologies, fuses, protection thyristors, gas discharge tubes, and resetable fuses.

  • This is a key area where we can leverage our circuit protection expertise and product offering that none of our competitors can match.

  • Many times the circuit protection solution for this type of telecom applications require a coordination of components, and we feel that our portfolio of products and design and expertise gives us a strategic advantage within these applications.

  • The first half of 2004 saw a 61% increase in spending on VoIP equipment compared with the same period last year.

  • According to the Dell'Oro Group in Redwood City, California, nearly a third of the phone switches purchased in the last three months were Internet-based.

  • This is up from only 17% a year earlier.

  • The key players in this part of the telecom market are the same that we have been dealing with for many years, and that would include many Chinese and Taiwanese ODMs and OEMs.

  • We aggressively focus our (indiscernible) sales and marketing teams into this very important segment.

  • Now let me switch to the handheld segment.

  • The mobile market is now expected to peek at 670 million units in 2004.

  • This is up 10% from the forecast that was provided by Strategy Analytics last quarter.

  • This growth represent a 29% increase from the 2003 shipment figure of 520 million cell phones.

  • Predictions for next year are expected to be less robust as the upgrades to color screens slows down.

  • Camera phones accounted for 29% of the 670 million phones, and flip phones, or the clam shell designs, account for 50% of the total mobile phone shipments for the year.

  • These deviations from traditional brick phones, or no-frill phones, tend to have more circuit protection because of the higher functionality, as well as increased display functionality.

  • The trend for the future is for both of these phone types to continue to take more share of the mobile phone market.

  • We are well-positioned at the major mobile phone OEMs, and more importantly, the Taiwanese and Chinese ODMs.

  • These are the original design and manufactures that design and build these phone types.

  • At the high end of the market, global shipments of smartphones, handsets that can run advanced computer-style software, have nearly tripled to 4.46 million units in the third quarter from the same period a year earlier.

  • As better devices and lower prices combine with all new factors to fuel growth and meet demand, smartphone shipments are set to rise dramatically over the next five years, reports In-stat MDO.

  • According to the high-tech market research firm, smartphone shipments will experience a 44% compound annual growth rate over the next five years.

  • Strategy Analytics said 160 million handsets were shipped during the third quarter, 25% more than the 135 million handsets sold in the third quarter of 2003.

  • This research firm said that the market benefited from vigorous growth in developing regions, notably Latin America, and from consumers in developing markets looking to upgrade their phones to more sophisticated models.

  • In addition to manufacturing for the local mobile phone market, China now manufactures 30% of the world's mobile phones.

  • Local Chinese companies like Bird (ph), TCL and Conquer (ph), are starting to invest in R&D capabilities to create new and innovative products for the export market.

  • Littlefuse has been significantly investing over the last few quarters and adding more sales and technical design and resources in China to focus on this and other segments.

  • Now let me switch to a third end-user segment, that of consumer electronics.

  • This is another area of focus for our sales and marketing teams in this rapidly-changing segment.

  • With fast-growing applications like digital televisions, set-top boxes and DVD players as examples, consumer electronics products are starting to use a new data speed protocol called HDMI.

  • This stands for high-definition, multimedia interface.

  • This allows for the transfer of audio and video information between consumer electronics device at speeds of up to 5 GB per second.

  • Circuit protection of devises that send data at such speeds is a growing concern for consumer electronic companies, and Littlefuse is focusing on providing solutions to this particular segment.

  • We have a focused sales, marketing and development effort to provide circuit protection devices in this key new market.

  • In-stat projects that over 100 million consumer electronic devices will use this data protocol by 2008.

  • Although the digital video interface, the DVI, has continued to gain design wins in PCs and a handful of PC peripherals, high-definition multimedia interface will find even more success in consumer electronics, according to In-stat.

  • The high-tech market research firm, however, expects that DVI-enabled devices will grow at a rapid 34% between 2003 to 2008, also to over 100 million consumer electronic devices in 2008.

  • Now let's switch to the computer segment.

  • The projections for 2004 PC shipments have been raised slightly to 14% from the 13% that International Data Corporation projected in June.

  • However, growth rates for 2005 have been lowered slightly to 10.5%.

  • First-half growth for this segment was in the mid-twenties, but projections of the growth will slow to 9% for the second half of 2004.

  • As we have indicated in past quarters, much of the design, both desktop and notebook, is actually done by the Taiwanese ODMs, where we continue to develop deeper relationships.

  • Gartner said that the third-quarter worldwide PC shipments rose 9.7% from a year ago to 46.9 million units, a figure which we'd said was slightly below previous forecast expectations.

  • U.S. home notebook shipments were strong during the quarter, but desktop demand was weaker, which brought down the back-to-school shipments overall.

  • Let me talk a little about the ODMs.

  • As we've mentioned in the past, these are the key focus for our sales and marketing teams.

  • The largest of these ODM manufactures continue to broaden their product portfolios.

  • Most Taiwanese ODMs initially focused on desktop PC motherboard manufacturing, but have started to design and manufacture mobile phones, LCD TVs, digital cameras and so on to relieve the margin pressures of their desktop business.

  • These larger ODMs, such as Quanta, Compal, Wistron and Foxcon (ph), continue to invest very heavily in design engineers to support this expanded portfolio and customer base.

  • Lastly, let me talk about the general electronics segment.

  • This includes applications such as white goods, medical electronics, lighting, robotics, and industrial instrumentation.

  • While these end markets have not had the double-digit growth of some of the other segments, it still has shown very strong single-digit growth, and provides such growth year-in and year-out.

  • Set-top boxes are an example of one of these subsegments that's both significant growth potential as well as significant circuit protection content.

  • Circuit protection contents per unit can vary between $0.25 to almost $1 for the most sophisticated designs.

  • Strategy Analytics forecast 50 million set-top boxes for 2004.

  • Since these boxes are really a computer with some RF signal ports, digital signal ports, a modem and a power supply, many of the Littlefuse technologies are deployed in set-top box designs, such as Gas Plasma, SIDACtors, Oristas (ph), TVS Arrays, PulseGuard and fuses.

  • Finally, let me just add a few words about the progress of the Heinrich Company in Germany and China.

  • As I stated last quarter, we are very pleased with the progress of the Heinrich team and the integration into the Littlefuse strategy.

  • The three business units of the Heinrich business were on plan for the third quarter, and we're seeing many opportunities in new product development and companion sales to continue to develop our total solution provider approach.

  • Now I'll hand back to Phil for some closing comments.

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Thanks, Gordon.

  • So looking forward, as Gordon mentioned in some detail, our end markets still seem relatively healthy grade.

  • Despite this, though, we've had some recent softness in our bookings rate.

  • The book-to-bill ratio, which had been about 1.2 for the second quarter, dropped off steadily in the third quarter, bottoming out at about 0.8 in September.

  • October book-to-bill was only slightly better than 0.8, although sales continued relatively strong at levels similar to the third quarter.

  • What seems to be happening here in the distributors who earlier in the year were placing orders out as much as 90 to 120 days because of concerns about extending lead-times, are now only order what they need for the current month because of concerns about inventory levels.

  • Thus, we are back to having very little forward visibility in our business.

  • This said, the fourth quarter seems to be shaping up as a seasonally typical one where sales start out relatively strong and begin to weaken as we get into the holiday season.

  • There's some risk that the end-of-the-year drop-off will be more pronounced than usual if distributors attempt to drive down inventory as we close in on year end.

  • Our best guess at this point is that sales will be 5 to 7% lower than the third quarter, which would be a fairly typical seasonal drop-off for Littlefuse.

  • At this sales level, earnings per share for the fourth quarter should be in the range of $0.40 to $0.44.

  • That concludes our prepared remarks, and now we'd like to open it up for questions.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Reik Read, Robert Baird & Co.

  • Reik Read - Analyst

  • Can you give us a little bit more of an update on the Heinrich operating margin -- where they are trying to come in for the quarter, if you can talk about that?

  • It looks like -- just back-of-the-envelope -- it was maybe up at 5 or 6%.

  • And then, can you give us a status update in terms of the moves and the actions that are under way where you are, and what the impact of those actions might bring in the next three to six month?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • The margin, as we mentioned, the Heinrich margins have been improving and are essentially on target.

  • From what we expected going into this acquisition, you are right, the operating margins are in the general neighborhood of 5% at this point.

  • In terms of the integration activities, things are pretty much on track, although as we have mentioned up front, this is going to be a considerably slower integration than what we have done in the past with Teccor, because of the international nature of this business and multi plants, and it's just more difficult in general.

  • But things are on track.

  • There is cost coming out of the business from some of the activities that are going on, probably the biggest one being the movement of the electronics manufacturing to China.

  • And we, as a result of those activities, expect to continue to see margin improvement as we go through the end of this year and into next year.

  • Reik Read - Analyst

  • Can you give us a little bit more sense, Phil, in terms of where some of those moves are, in terms of how much has been completed at this point and how much you have to go?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • In terms of the actual integration itself, i.e. bringing Heinrich into Littlefuse, we are very early stages there.

  • We've set up common approaches to the market, coordinated approaches to the market that, in terms of cost-savings relative to consolidation activities, as we had talked about on the last call -- those savings will really all be out into 2005.

  • So we really haven't begun to experience any savings from those yet.

  • Operator

  • John Franzreb with Sidoti & Co.

  • John Franzreb - Analyst

  • Phil, just to piggyback on that last question -- how much of costs have you incurred in consolidating some of these electronic manufacturing businesses to China?

  • How much has hit the P&L during the quarter?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Are you talking specifically relative to Heinrich?

  • John Franzreb - Analyst

  • Yes, relative to Heinrich.

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • It's not huge amounts.

  • It's a few hundred thousand dollars, I believe.

  • We have a lot of integration and consolidation activities going on.

  • Really, we've had them going on all throughout this year and we expect into next year, so I wouldn't look at any of these costs as being particular blips here.

  • I think they're more just kind of ongoing.

  • What we are going to be doing -- and Heinrich will continue to incur those costs well out into 2005 as they continue to take on some of these activities.

  • There isn't anything particularly unusual in terms of onetime costs that are going on now; it's really there are those costs, but it's costs that we are going to continue to incur going forward.

  • John Franzreb - Analyst

  • And if we're early on in this process, when do you think we'll reach the peak of the process of integrating Heinrich?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • I think in terms of the costs take-out, it's probably going to be in the back half of '05.

  • John Franzreb - Analyst

  • That far away?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Yes.

  • Operator

  • Jeff Rosenberg, William Blair.

  • Jeff Rosenberg - Analyst

  • First, I guess I wanted to -- if there's a little bit of color when you look at the fourth quarter sequential decline.

  • Automotive is obviously normally seasonally up, but I would assume this is not a normal year for automotive.

  • So maybe a little bit of delineation between trends in electronics and automotive?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Sure.

  • I'll give you a little bit of color on each of the businesses.

  • Automotive would typically be up slightly Q3 to Q4, and flat to up slightly, and that's generally what we're expecting this year.

  • Electrical would be down somewhat, Q3 generally being the peak quarter for that business.

  • And again, we don't have any reason to expect that that's going to be any different.

  • And so most of the drop-off that we're expecting would be coming from the electronics business.

  • And really the issues there -- generally we do see that kind of a drop-off, particularly from distributors, as we go into the end of the year and they manage their inventories pretty tightly.

  • This year, as I said earlier, Jeff, we may experience a little bit more pronounced inventory, distributor inventory effect, as we go into the end of the year.

  • It's a little unclear at this point how that is going to shake out.

  • In summary, the bulk of the sequential decline, we believe, will be coming out of the electronics business.

  • Jeff Rosenberg - Analyst

  • Is there any effected, if any, on the fact that you've consolidated your distributors earlier in the year on how this is all playing out?

  • And maybe also could you just talk about quantifying, if you can, the amount of inventory you think distributors have right now?

  • Gordon Hunter - COO

  • This is Gordon.

  • I think there may be some impact from that.

  • As Phil mentioned, I think that the distributors have become more cautious in terms of their inventory.

  • We think that the end markets would be more or less the same throughout the year, but the distributors got a little bit ahead on inventory in on the second and beginning of the third quarter.

  • And I think there's a correction from distribution now.

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • In terms of the distributor consolidation, it's not a major impact, we don't believe.

  • We are trading out some distributors and we trade out some inventory as a result of that.

  • We take some inventory back from some guys and we give stocking orders to other guys.

  • Net-net, we don't think that's having a major impact, or should have a major impact, on the fourth quarter.

  • Jeff Rosenberg - Analyst

  • How much have your lead-times changed?

  • I was thinking specifically about Teccor, we'd certainly love to hear about it broadly.

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Generally speaking, our lead-times have come in to more normal levels.

  • I think that there still are some lines where we have some capacity constraints, multilayer Varsitors over in Ireland being one of those, where we still, for certain products, have -- our lead-times are still out pretty far.

  • But for the most part, I would characterize our lead-times at this point as pretty close to normal.

  • Teccor may still be slightly longer than what I'd call normal lead-times they're, but in general, the majority of our products are back to pretty normal lead-times.

  • Jeff Rosenberg - Analyst

  • And on the margin front, Phil, you had suggested that it was going to be difficult to expand operating margins in the base business without revenue growth.

  • Yet you did manage to do that the quarter.

  • What do we look for in terms of what the revenue drop does to margins in Q4?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Yes, I think that the -- certainly with the revenue drop-off, we would normally expect margins to declines some and they probably will decline a little bit.

  • We still feel, because of the success of some of our cost take-out efforts, that there is an underlying improvement trend that's still going on there that will mitigate that to a significant degree.

  • But having said that, I think you can still expect to see a modest margin decline, both at the gross margin level and the operating margin level.

  • Jeff Rosenberg - Analyst

  • And could you quantify this quarter what the cost reductions spending -- I think it was 1.4 million in Q2 -- what that was this quarter?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • No, we didn't.

  • You're talking about the costs we were in incurring related to some of these consolidation activities?

  • Jeff Rosenberg - Analyst

  • Yes, the ones you broke out, I think, in Q1, and then said it would take place over Q2 and Q3.

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • We still incur those expenses.

  • The number was probably slightly over $1 million.

  • And the reason we did not break it out is, we've gotten into this year and we looked forward -- we are going to be incurring some amount of these costs, really almost every quarter for the next several quarters out, as far as we can see right now.

  • Some quarters they may be a little less than a million, and some quarters they may be a little more than a million.

  • As long as they're in that general range, we're just not going to break them out anymore.

  • And if we have some extraordinary costs that are in the several million dollar range, we'll talk about those separately.

  • Jeff Rosenberg - Analyst

  • So we should expect that the whole circumstance is pretty flat in Q4 relative to what it has been?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Yes.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Alexander Paris, Barrington Research Associates.

  • Alexander Paris - Analyst

  • Great quarter.

  • I had some questions on the inventories.

  • I think you answered them.

  • Generally, the increase in inventories among distributors was more due to their more aggressive accumulation because they wanted to have more on tap, rather than the slowing of their end markets, is that you?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Yes, generally speaking, in the second quarter, as lead-times started to go out and some products became a little bit short from a supply standpoint, distributors started placing their orders further and further out to make sure they were going to have inventory and that they were in the queue.

  • We did see inventory build.

  • There was some modest drop-off in their point-of-sale business, but it was not as steep as what we have seen on the order front because of this inventory.

  • So I guess to summarize that, we think a significant piece of what we've seen over the last five or six months, with the big ramp-up in the second quarter and then the book-to-bills going negative, had to do with really the way the distributors have managed inventory in the channel here.

  • Alexander Paris - Analyst

  • And I think someone asked this question, but I don't know if you answered it.

  • In terms of the amount of inventories -- would you say that, if they do their normal, or maybe a little bit more normal year end reduction of inventories, that they would be back to normal, whatever that is nowadays, by the first quarter?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • I'm not sure we have a clear view on that.

  • We don't think this is a three or four quarter kind of correction.

  • But certainly it could continue into the first quarter of next year.

  • But again, we're trying to assess that as we go forward here into the quarter.

  • It's not quite clear to us at this moment.

  • Alexander Paris - Analyst

  • And then finally, is this an inventory problem primarily of North American distributors?

  • Or is the same kind of thing going on in Europe?

  • And I understand Asian distributors don't carry much inventory anyway.

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Yes, that is generally the case.

  • In it's probably more of a North American phenomenon.

  • Although we have seen similar order and sales patterns pretty much across the world, but the specific issue with channel inventories, it certainly more relates to North America than it does to Asia, you're right.

  • Operator

  • Greg Halter with LJR Great Lakes Review.

  • Greg Halter - Analyst

  • Congratulations on a very good quarter.

  • You've commented in the past relative to price, and there was some commentary on the electrical side in terms of price.

  • But could you comment on the other two SBUs as well?

  • Gordon Hunter - COO

  • Yes, the electrical business -- we mentioned in the first half of the year we had two price increases, and so that came through to a positive trend in this.

  • But that's a little unusual compared to automotive and the electronics business.

  • It's much more normal to price declines in electronics, a price decline of around about 5%.

  • And in the automotive area, a price decline of between 3 and 4%.

  • Which is more or less in plan, by the way, with what we expected for the year.

  • Greg Halter - Analyst

  • And relative to capacity utilization, can you provide some commentary there on the different areas?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • In the electronics area, as we were ramping things up in the second quarter, we've seen our capacity utilization go up into the '80s.

  • And it's now come back down a little bit, but it's still in the neighborhood of 80%, maybe trending slightly below that kind of a number.

  • That's a good overall rate for us; it means we're pretty fully utilizing our equipment, but we're not having to work seven days a week, three shifts a day, to get product out.

  • And then the automotive business typically runs in the 85 to 90% range of capacity utilization, and we are currently right around there.

  • Greg Halter - Analyst

  • And on that Teccor side?

  • I know you've provided that in the past on the fabs.

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • We are in pretty good shape on the fab there.

  • It's probably overall fairly similar to the 75 to 80% utilization range that we mentioned for the overall electronics business.

  • Greg Halter - Analyst

  • And your receivables and inventory book of about 40 plus percent -- and obviously your sales are up as well as Heinrichs in there -- how much of that is due to the acquisition, if you can break that out?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Including Heinrich, about 40%.

  • Greg Halter - Analyst

  • Right.

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • If you break out -- you can see it in our cash-flow statement.

  • I think our inventories actually did go up in Q3 by about $6 million.

  • I believe our receivables were about flat.

  • That would really strip out the impact of the Heinrich acquisition in those numbers.

  • The reason for the inventory increase, in our case, about half of it was really related to planned increases that we had for some of these moves, these plant moves that we have going on, where we'd put some additional inventory in to just buffer the risk that we had in making some of those moves.

  • And then I'd say the other half was due to just the fact that we had a little bit higher forecast than what we do now for the rest of the year.

  • When things softened a little bit in the early part of the third quarter, we overshot our actual demand a little bit, and that part of the inventory should come out in the fourth quarter.

  • Greg Halter - Analyst

  • And you may have discussed this previously, but if you could just update us -- with the current portion of long-term debt at 38 million, what are the plans for that debt as you go forward?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Well, at the rate we are generating cash-flow, that'll be paid off pretty quickly.

  • Right now we have 30-some million of debt, but we have 27 million of cash on the books.

  • We are generating cash at a pretty rapid rate, 8 to $15 million a quarter the last couple of quarters.

  • I guess the real question is -- what are we going to do with the free cash?

  • And as we said before, our thoughts on that really haven't changed.

  • We will pay down the debt.

  • I think we have our last principal payment on our senior debt that comes due next September, so we will have that paid off.

  • And at the rate we are generating cash, we will have our revolver paid off, barring any future acquisitions.

  • We continue to look at acquisitions, and we have a number of things in the pipeline.

  • Nothing is imminent at the moment, but we still feel that there's some acquisitions that could enhance our portfolio.

  • And as we did in the third quarter, when this stockprice looks attractive, we've jumped into the market, and we'll be buying back stock as well.

  • Greg Halter - Analyst

  • And how much do you have available that you could repurchase at this time?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • We had a million-dollar purchase authorization that we -- a million shares, sorry.

  • A purchase authorization that I think we announced that the Board authorized back in the second quarter of this year.

  • We purchased, I think, we said roughly 168,000 shares in the third quarter, and that's all we've purchased against that authorization.

  • So we have about 830,000 or so left to go.

  • Greg Halter - Analyst

  • And one last one.

  • What do you see as the primary variables for 2005 relative to earnings either being up to a new record or not?

  • Gordon Hunter - COO

  • Could you ask a more narrow question? (laughter)

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Gordon, do you want to take that one on?

  • Obviously, the top line is going to be the big driver.

  • We feel like our cost position continues to improve, and we have good plans for 2005 that will continue to drive that.

  • So it's really going to revolve around the top line.

  • I will let Gordon take a crack at that one.

  • Gordon Hunter - COO

  • Yes, I think that's why I tried to explain that, although it doesn't really matter which architecture or which OEM or design of computer or telecom equipment or cell phone really wins in the market, it's the overall volume that's critical to us.

  • As long as we are with and designed into to all of the critical OEMs, or ODMs as this business moves to a design with those companies.

  • And cell phone growth has been particularly strong this year, plus this trend to more sophisticated phones really helps the circuit protection content.

  • While we think that trend of more sophisticated phones will surely continue, it's not clear that the unit volume growth will be as robust next year and the year, as it has been this year.

  • There's been a lot of people upgrading phones to having color screens and flip phones.

  • Whether or not that trend will continue next year is a question in the market.

  • It's that overall volume trend, whether it is a PC trend or a cell phone trend, that really drives our top line, that is ultimately what drives the earnings.

  • Howard Witt - Chairman, President & CEO

  • Let me add a color comment too on that on the cost side.

  • Phil related to that a little bit and commented in the release.

  • But just coming back from a visit to our facilities in China and Philippines.

  • The nice thing behind all this, we feel very comfortable with the continued move of products to lower-cost areas.

  • Phil alluded to in the release with our 2700 employees in Mexico, we've actually negotiated lower labor rates in those areas.

  • The bottom line, we feel whatever that revenue number is that's out there, both on a capacity basis, as Phil answered, in most of our product categories as well as the ability to manufacture a low-cost, we feel comfortable.

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Thank you for that elaboration.

  • Operator

  • Eric Elbell with Fenimore Asset Management.

  • Eric Elbell - Analyst

  • Couple of quick ones.

  • The Heinrich impact, the 23.4 -- what would the breakout of that be between the different segments, if you're willing to provide that?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • We don't provide that specifically.

  • But what we've said before there is that the electronics part of that is the biggest piece.

  • I think it's approaching 40%.

  • Automotive is the smallest piece, and it's probably in the neighborhood of about 20% or so.

  • And the electrical business is somewhere between the two.

  • Eric Elbell - Analyst

  • Good enough.

  • Secondly, on your SG&A, it did creep up a little bit from the first and second quarter levels.

  • I know you have Heinrich in there for full quarter.

  • Is there anything beyond that in terms of other cost pressures you're seeing that led into that number?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • I think, if you look at or SG&A line, there are a number of things happening there.

  • The first -- we've been talking since the beginning of the year about some of the talent that we're been putting in, technical talent in the R&D area and some sales talent to execute on our solutions selling strategy.

  • So there is some increases that are due to putting some of those key positions in.

  • There's also, a piece of that is our earnings and sales have continued to exceed expectations as we go through the year.

  • We've had to add to our bonus accruals for the year.

  • The final significant piece is the whole Sarbanes-Oxley compliance area, where we are spending certainly more money than we planned for and more money than any of us could have imagined in that area.

  • To try to get compliant with 404 before the end of the year, which we seem to be in good shape to do.

  • But it certainly hasn't come easy and it hasn't come cheap.

  • Eric Elbell - Analyst

  • Right.

  • And lastly on your cash flow, you recorded the 11 million 683 in other net as a positive.

  • What's in that number?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • I'm not going to take you through all those items, but it is a large range of things.

  • It ranges from areas where we increased our accruals, additional expense that was non-cash expense for a whole range of different issues.

  • It ranges to -- there's some items in there that are prepaid assets that decline during the quarter.

  • There's some items in there that are tax liabilities, that we have deferred taxes or tax accruals that went up so that we booked more tax expense through the P&L than we actually paid out in cash for the quarter.

  • So there were a number of different items like that that all contributed to a large number, but here wasn't any single one that was more than probably a couple of million dollars.

  • Howard Witt - Chairman, President & CEO

  • We are getting close to about an hour.

  • By the way, we really appreciate all the interest and the questions you're asking, some very meaningful ones.

  • Maybe ask one more question, and then Phil will always be available, as usual, at this time of the month for phone calls.

  • One more question.

  • Operator

  • Tom Leach (ph), DLM?

  • Tom Leach - Analyst

  • I had to hop off the call for a few minutes.

  • Could you review your revenue guidance and your EPS guidance for December?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • The revenue guidance that we gave for the quarter was down 5 to 7% sequentially from Q3.

  • And the earnings guidance was $0.40 to $0.44.

  • Tom Leach - Analyst

  • $0.40 to $0.44.

  • And you guys recognize revenue on sell in to distribution, right?

  • Phil Franklin - Vice President of Operations Support and Chief Financial Officer

  • Yes, sell in to distribution with reserves taken for things like price protection and inventory returns.

  • Tom Leach - Analyst

  • And you'd mentioned you had pretty good luck in selling products to the Chinese ODMs on cell phones and all?

  • Gordon Hunter - COO

  • Yes, that's an area of specific focus, and has been for us for some time.

  • And we believe that all the investment we've made in sales and technical support people in Taiwan and China is a critical part of our strategy.

  • Tom Leach - Analyst

  • Do they have a fair amount of inventory themselves?

  • Because we've seen some pain in it from those guys lately.

  • Gordon Hunter - COO

  • We don't think that has been a huge area of inventory build for us.

  • It's very quick design cycles, and we don't think that that's a concern.

  • Tom Leach - Analyst

  • Okay.

  • Because I thought I heard that Nokia being it's price down is giving those guys trouble.

  • Howard Witt - Chairman, President & CEO

  • Again, thanks for being on the call this morning and for your investment in our shares.

  • We look forward to your shareholding in the future.

  • Have a good day.

  • Operator

  • That does conclude today's conference call.

  • At this time you may disconnect.