Littelfuse Inc (LFUS) 2005 Q1 法說會逐字稿

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  • Operator

  • Good day, everyone, and welcome to Littelfuse Incorporated first quarter earnings conference call.

  • Today's call is being recorded.

  • At this time, I will turn the call over to Chief Executive Officer, Mr. Gordon Hunter.

  • Please go ahead, sir.

  • - Pres, CEO

  • Thank you.

  • Good morning, and welcome to the Littelfuse first quarter conference call.

  • This is Gordon Hunter, CEO of Littelfuse.

  • With me today is Phil Franklin, CFO and Vice President of Operations support.

  • First, Phil will read our Safe Harbor statement, and then give a brief summary of our press release, which was issued earlier this morning.

  • We plan to give you an overview of our first quarter results, as well as some details on how we see our performance in the end-user markets that we serve.

  • We'll then open it up for some questions.

  • We expect this call to last about 40 minutes.

  • I'll now hand you over to Phil.

  • - CFO, VP - Operations Support

  • Thanks, Gordon.

  • First, let me read the Safe Harbor.

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

  • First quarter financial results were similar to the fourth quarter and consistent with our guidance.

  • Sales for the quarter were 122 million, up the prior year quarter of 111 million, due to the addition of Heinrich.

  • Excluding Heinrich, sales declined 11% compared to the prior year quarter due primarily to inventory correction, and electronic distributors, and weakness in the telecom markets in North America and China.

  • Automotive sales while up sequentially were down compared to a strong prior year comp.

  • Electrical sales on the other hand were up 15%, compared to the prior year, due primarily to strong industry fundamentals.

  • Heinrich sales showed showed similar trends to the Littelfuse base business, as both are being impacted by weakness in the electronics markets.

  • Operating margin for the first quarter of 2005 was flat sequentially, but well below the prior year quarter, due to the addition of the lower margin Heinrich business. $1.7 million of restructuring charges and reduced operating leverage related to lower sales in the base business.

  • Earnings per share for the first quarter of 2005 was $.20 -- or $.24 excluding restructuring charges, compared to $0.43 for the prior year quarter, due primarily to the lower-based business sales and the resulting negative operating leverage.

  • The Heinrich business had roughly a neutral impact on earnings for the quarter.

  • When we gave guidance last quarter, we indicated we would take a restructuring charge of approximately $3.5 million in the first quarter.

  • As previously mentioned, the actual charges booked in the first quarter were only $1.7 million.

  • The remaining 1.8 million is expected to be booked over the next two quarters with approximately 400,000 in Q2 and the remainder in Q3.

  • Cash provided by operating activities was .1 million for the quarter, compared to 2.9 million in the prior year quarter.

  • Capital expenditures increased significantly in the first quarter compared to our recent history.

  • This relates largely to our increased focus on developing and introducing new products and providing adequate production capacity in the right parts of the world to execute our growth strategy.

  • For 2005, we now expect to spend in the neighborhood of $32 million or 6% of sales, compared to our historical baseline of about 5.5% of sales.

  • This increase over the historical baseline relates primarily to new automotive products and investments in the semiconductor part of our product portfolio.

  • In the first quarter, we repurchased 101,500 shares at an average price of $31.50.

  • On May 6, the Littelfuse Board passed a new 1 million share repurchase authorization.

  • Now let me turn it back to Gordon for some more detailed market commentary.

  • - Pres, CEO

  • Thanks, Phil.

  • Now I'd like to give you some details about the quarter for each of our strategic business units.

  • First of all, our automotive business unit, which accounts for about 25% of our total business.

  • Comparing the first quarter '05 to the first quarter of '04, our automotive revenue was down by 7%, largely related to a 3 to 4% reduction in car builds in North America and Europe, and the lack of the revenue from a one-time recall program, which helped to give us a very strong quarter in 2004.

  • On a global basis, car builds were actually flat for the first quarter of 2004, with growth in Asia offsetting the aforementioned declines in North America and Europe.

  • These types trends drive one of our core strategies to increase automotive investments in Asia for manufacturing and business development.

  • The first quarter automotive revenue did increase, sequentially, from the fourth quarter 2004 on a global car build increase of 1.2%.

  • This revenue increase was largely driven by strong performance in Europe.

  • The European performance related to currency gains and new business wins.

  • Our current expectation is that our automotive business will show steady improvement through the first half of 2005, as we rebound from the slow second half demands and car builds of 2004, and the slow start to 2005.

  • As noted last quarter, we continue to feel that our renewed focus on new product and market development in our automotive business unit will continue to yield new design wins over the mid to long-term.

  • Planned launches of low-profile products remain on track for later this year, with one significant customer program being pulled ahead by several months.

  • These low-profile products include the low profile MINI, which is the development of our blade fuse, and the low profile JCASE, which is the next generation of our female fuse, which saves space inside the fusebox as space continues to be at a premium in these locations.

  • New customer projects for our new cable protection products continue to be driven by concern for higher system reliability and safety.

  • Indeed, new design in activities have started in North America, Europe, and in Asia for this products.

  • Cable protection products are being designed in applications where we previously did not participate.

  • Commodity material prices had a negative impact on the automotive business.

  • Zinc, copper, and plastic resins were most negatively impacted, and we expect this negative comparison to last year's price to continue for the majority of 2005.

  • Now I'd like to switch to some comments about our electronic strategic business unit.

  • Overall sales for the first quarter of 2005 were down by $12 million or 16%.

  • The electronics business compared to the first quarter of last year.

  • As indicated in our February earnings call, one of the key issues affecting our performance for Q4 '04 and Q1 '05 would be inventory correction and in our global distribution channels as they reduce inventory levels to say support a slower end-of-market growth rate.

  • We've seen significant reduction in global inventory levels in reaction to these slower end markets.

  • Distributor orders have dramatically improved over the past two months, so this correction appears to be largely complete.

  • The overall trend affecting our performance has been broad-based slow down in the overall growth rates of the end-markets we serve.

  • Our served electronics market have slowed from 12% weighted average for 2004, to a 6% weighted average growth rate for 2005.

  • This slowdown in end-markets is across all major end-markets we participate in.

  • Telecom, Computer and Peripheral, General Electronics, Handheld Devices, Automotive Electronics and Consumer Electronics.

  • Geographically speaking, this appears to be a relatively uniform slowing trend across all regions.

  • Together the aforementioned distribution inventory reduction and the end-market slowdown have a compounding effect on our shipments during the quarter.

  • As we discussed in last call, this combination has affected our first quarter sales comparisons.

  • The first quarter of last year had both a stronger end-market driving it, but also a channel gearing toward that higher growth rate, driving to a higher-channel inventory level.

  • In Q4 '04 and Q1 '05, we experienced the reversal of that buildup.

  • Let me give you some specifics on the end-market growth rates.

  • Computer segment growth projections for the full year have been reduced to 9.7%.

  • Mobile phone unit shipments were up 20% for the first quarter, but full-year estimates are in the 12 to 15% range.

  • This is a significant decrease from the 32% unit increase last year.

  • The Telecom segment is significantly softer worldwide for the quarter, and the full-year estimates are only showing 5% unit growth.

  • This overall slowdown in the Telecom segment is a significant contributor to the change in our served end-markets weighted average.

  • All indications are that the consumer electronics market will continue to grow in the 8 to 10% range, also as previously forecasted.

  • Our General and Industrial Electronics segment performance is also expected to grow only in the low-single digits, about 3 to 5%.

  • All in all, these end-market trends indicate a 6% composite growth rate for Littelfuse Electronics Division demand, down from 12% last year.

  • In addition, to the overall market slowdown, we've continued to see a slowdown in the China Electronics market due to its government's actions to slow down the economy.

  • This affected both our shipments in China, as well as some builds outside of China of China-bound end product.

  • This slowdown was mainly seen in the Telecom and Industrial General Electronics segment.

  • We're also seeing resurgence of orders in the past two months in China, indicating that the market slowdown is also passing.

  • Finally, we saw softness in the North American region in the Telecom and Industrial General Electronics segment in Q1, continuing from Q4 '04.

  • Our bookings levels in these segments and generally in North America started to do recover over the past two months, and look to be poised for a stronger rest of the year 2005.

  • So while there's been a significant mark slowdown for Electronics, the inventory reduction effect seemed to have been completed, as a result, bookings have have recovered over the past two months on a global basis.

  • We're , therefore, cautiously optimistic for an improved rest of the year.

  • We're starting to see real traction in our solution-selling approach.

  • We're also continuing to see increases in the amount of design inactivity that our sales and marketing teams are involved in.

  • This is a broad increase in activity across all regions and market segments.

  • We feel that this is positioning us well for the upcoming quarters.

  • Over the last year, we've made significant investments in building a stronger technical sales and marketing organization to help us in our designing efforts.

  • This investigation, coupled with the edition of the many strong people that were part of our tech co-acquisition has truly allowed us to build a stronger go-to-market organization.

  • We see examples where this investment is it starting to pay off.

  • Many of these new successes are happening in some of the newer applications and segments within the Electronics market, and we are positioning Littelfuse well within those.

  • I will highlight some examples of our efforts in some of these emerging applications, and how we're seeing success.

  • One is Satellite Radio.

  • We are working with the designers and manufacturers of Satellite Radios.

  • This is an excellent product offering, excellent example of where our global sales organization, broad product offering and deep technical understanding of the circuit protection issues with handheld devices, come together to provide the customer with the needed solution and circuit protection consulting expertise.

  • Because of the extreme mobile nature of these products, frequent docking into a base station and various speeds they send and receive data, these products experience a variety of circuit protection issues that require unique solutions.

  • These customers also typically have multiple design in locations responsible for the end product.

  • We're able to work with the customer locally in each of these design locations, suggest the correct circuit protection technologies for the various needs within the application, and provide the testing for our products on the customer circuit boards.

  • Our global teams are then able to follow and support the progression from design phase, through to manufacturing, which typically happens at a different customer or contract manufacturer location, and where the product is originally designed.

  • Now let me talk about the ODMs.

  • These are the original design manufacturers.

  • We're continuing to see success with these, especially in Taiwan.

  • We grew at a rate of 32% in this important customer group during the first quarter.

  • This significant growth rate is because of two main factors.

  • The first of these is that key customers are starting to branch out of their traditional segment focus of computers, and starting to get involved in other segments of electronics industry.

  • These additional segments would include digital-still cameras, mobile phones, MP3 players, and the start of many handheld devices.

  • These devices have MP3, mobile phone, and digital camera functionality.

  • We find our ability to provide multiple circuit protection technologies and the expertise associated with their application, a significant strategic advantage.

  • A design engineer at one of these applications would be faced with a variety of circuit protection issues, such as latchup, catastrophic damage due to ESD transients, as well as overload conditions and thermal run away of Lithium battery.

  • The design engineer will be concerned about these transients at many entry points into the handheld device, including DC-power port protection, keypad protection, and tana protection.

  • Our strong technical relationships with these customers have allowed us to grow at these ODMs and take share in these new areas.

  • In addition, we are starting to enjoy multiple technology sales within this customer base, as we protect against these multiple transients expanding our share of the circuit protection market of these customers.

  • These two factors are allowing us to grow at a faster rate than the market and the ODMs themselves.

  • The growing ODM market is approximately $50 billion now, growing 38% last year, according to IDC.

  • The Taiwanese ODMs account for over 80% of the market.

  • So our continued focus there is a critical part of our strategy.

  • So in summary, although the Q1 Electronics performance was negatively impacted by distributor inventory corrections, and slower growth of our end-markets, we're seeing an end to the inventory reduction trends.

  • We've starting to see a more robust order book over the last two months, with signals toward a stronger Q2.

  • Our book-to-bill in many areas is at it's strongest it's been over the last six months.

  • For the longer term, the progress we're making with our solution-selling approach, especially as it relates to some of our hottest growth segment, is very encouraging and a clear indication that our total solution provider strategy is working.

  • Now let me switch to our Electrical business unit.

  • The Electrical business unit, known as POWR-GARD products, is predominantly a North American business, and represents approximately 9% of our total sales.

  • This business unit was up 15% over the prior year, same quarter, and 12% over the prior quarter.

  • In addition, to some continued growth in the first quarter, as a result of new customer additions, both major market demand segments, the industrial MRO and OEM and the nonresidential construction continued to provide favorable momentum and stimulate sales growth.

  • In the Industrial sector, both manufacturing activity and shipments of OEM products continue to be strong through the first quarter.

  • In a nonresidential construction market, we are continuing to benefit from the robust fourth quarter 2004 activity levels.

  • We're slightly concerned that the slow first quarter 2005 activity levels in nonresidential construction spending might impact us later in the year, we feel very optimistic about the short term.

  • In addition, to the strength exhibited in both market demand segments, the Electrical business unit continue to experience strong price realization, as a result of a first quarter price increase.

  • However, some of the positive impact on the bottom line, as a result of this price realization was offset by unfavorable commodity PPV, as a result of copper prices being so high, versus 2004.

  • This business is completed its manufacturing plant transfer from central Illinois, to a much more cost effective Mexico plant, and is currently running at our strategic profit target levels.

  • Plant capacity is in very solid shape with capacity available.

  • The electrical SBU continues to focus on value-added products and programs to benefit customers in the MRO segment.

  • They work very closely with their distributor partners to take these products and services to the MRO Industrial customers.

  • In fact, the POWR-GARD products division was just notified in April that they won the TED magazines Best-of-the-Best Marketing Award in the literature of selling tools category for the MROplus Program.

  • This is an inventory management program which provides distributor sales personnel with customized documentation of their customers, demonstrating how they can reduce operating costs through proper fuse selection and inventory analysis.

  • Now, let me add a few comments about our Heinrich business.

  • We continued down the path toward the legal ability to combine the two businesses and full ownership of Heinrich.

  • The next step is later in week, in a Heinrich shareholder meeting, to vote on resolutions to one, put in place a domination agreement that would allow Littelfuse to move forward with integration steps, and two, to start a legal process to purchase the remaining 2.8% of share.

  • Pending approval of a domination agreement in Q2, Littelfuse will begin the integration.

  • The Heinrich U.S. operations will be integrated first and will be complete by either Q3.

  • Planning for the combination of the Heinrich and Littelfuse operations in Europe and Asia has begun and integration will be complete by year end.

  • In the meantime, Heinrich has continued to take steps to reduce costs, including manufacturing moves to lower labor costs locations.

  • Recently, Heinrich announced further line moves from Germany to its factory in Dong Wong, China.

  • We look forward to realizing the benefits of this strategic investment and believe that the addition of Heinrich people and products will strength Littelfuse.

  • So in summary, while the first quarter was disappointing, it was exactly in line with the forecasts that we gave in February.

  • We also stated then, that we expect to see the market, especially in Electronics, picking up as we progress through the year, and see the distributor inventory correction moving through the channel and our inventory levels decreasing.

  • After two tough quarters, we expect to see a gradual climb out from these levels and belief we are well positioned for upturn in the markets.

  • We are confident the business model will serve us well in the months and years ahead.

  • I'll now pass it back to Phil for some closing comments.

  • - CFO, VP - Operations Support

  • Thanks, Gordon.

  • So as expected going into the year, we began to see order rates improve coming off Chinese New Year in late February.

  • Book-to-bill which had been hovering of about 1 to 1 in January and February, began to improve in March and April, with book-to-bill for the month of April at 1.07 to 1.

  • This uptick in orders is being largely driven by improving market conditions for Electronics in China, and southeast Asia, and the Electronics inventory correction, which Gordon talked about having mostly run its course in North American distribution channels.

  • We now expect sales for the second quarter to increase about 8%, sequentially, driven primarily by Electronics, although, we are also expecting more modest sequential improvements in both our Automotive and Electrical businesses.

  • Margins should show improvement as we begin to benefit from increasing operating leverage.

  • Earnings per share for the second quarter are expected to be in the range of $0.28 to $0.32, including the 0.4 million restructuring charge carried over from the first quarter.

  • This concludes our prepared remarks.

  • We will now be happy to take any questions.

  • Operator

  • Thank you.

  • The question-and-answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] We'll go first to Reik Read with Robert Baird and Company.

  • - Analyst

  • Good morning.

  • You guys had talked about the improving environment that you've seen in China and the rest of Asia.

  • Can you talk a little bit about how the North American market is doing?

  • That has been weak as well?

  • Is that showing similar signs of improvement?

  • And can you also just comment on what the pricing outlook is for each of those markets?

  • - Pres, CEO

  • Let me handle that.

  • I think that it's very different depending on the segment.

  • First of all, our Electrical business has been surprisingly strong in both the OEM and nonresidential construction area.

  • Automotive, obviously, has been disappointing.

  • Automotive car build has been less than originally predicted, and down this first quarter, versus a year ago.

  • So the Automotive area is tough market conditions.

  • Then if our Electronics area, we really were impacted by the inventory -- the distribution inventory correction, but some of the end-market segments there were also slow.

  • Telecom in particular, was one which really impacted us there.

  • So we're somewhat optimistic that we will get back to the growth rates that we had a year ago.

  • I think that we've really been through a downturn also in the Electronics area.

  • - Analyst

  • But it does sound like Gordon, from what you're saying is that those markets while still somewhat weaker than you'd like to see, the inventory issue has been corrected, and that's the bigger deal for you at this point in terms of seeing those bookings come up?

  • - Pres, CEO

  • Certainly that's been a bigger deal.

  • When we're comparing to a year ago -- and we'll see that comparison still in the second quarter, there was inventory building clearly in the channels, at that time, in excess of end-market growth.

  • I think now, we're going to start seeing a more stable comparison as we get to the end of the year.

  • You also mentioned about price declines.

  • Would you have actually had a price increase that we had in the Electrical segment in the first quarter, which is helping our Electrical business, very strong.

  • The market dynamics are very different in the Electronics area, where on a worldwide basis, we're now seeing our price declines to be about 7% for this year.

  • - Analyst

  • Just a follow-up on -- now seeing those bookings improve a little bit.

  • What are your expectations for your own levels of production from where they are now, having brought them down to account for the inventory situation?

  • - Pres, CEO

  • Let me ask Phil to answer that.

  • He's been keeping track here more about our capacity and plant utilization numbers.

  • - CFO, VP - Operations Support

  • Yes, Reik.

  • On the production basis, yes, you're right.

  • We have taken our production rates down, as we anticipate some improvements in demand, and starting to see some improvements in demands.

  • Obviously, we're starting to bring those up a little bit in certain product lines.

  • But overall, at the end of the quarter, we are running about -- in most of our Electronics areas about 60 to 70% capacity utilization, much higher rates in the Automotive business, as we traditionally run something in the low 90's, and we are right in that general range.

  • And the Electrical business, we really never have any capacity constraints there.

  • We are running it so that we have plenty of room to accommodate growth there.

  • - Analyst

  • And giving what you are seeing Phil, in the Electronics area, would those bookings come back?

  • Do you expect to see sequential improvements in production, say over the next two quarters?

  • - CFO, VP - Operations Support

  • Yes.

  • Certainly the the second quarter would be higher than the first, and we expect that the third quarter will be higher than the second, based on what we see right now.

  • - Analyst

  • Okay.

  • Thanks you.

  • - CFO, VP - Operations Support

  • Okay Reik. .

  • Operator

  • We'll go next to Jeff Rosenberg with William Blair.

  • - Analyst

  • Good morning.

  • First of all on the charge, should we think of that as all coming in the gross margin line, or was it broken out at all between different line items?

  • - CFO, VP - Operations Support

  • The biggest piece of it was in the gross margin line, but there was -- there was probably in the first quarter in the neighborhood of about a half million dollars that showed up in SG&A.

  • - Analyst

  • Okay.

  • And then on the -- just looking at as you see the revenue increase this quarter, do you feel like that brings you all the way back to end-market consumption?

  • I don't think if you look at it based upon distributor point-of-sale, or if you have any feel for it Asia?

  • How far below consumption had we fallen as we worked through inventories?

  • Are we all the way back and then we grow more with the markets from that point forward or any sort of color there?

  • - CFO, VP - Operations Support

  • I think it's about -- I think, we believe that we're at about a point -- at a point where we're seeing demands from our distributors that are reasonably close to the end-market demands at this point.

  • In most cases, certainly North America, that seems to be the case roughly across the board.

  • I think, mostly in Asia as well.

  • There may be a few instances where we still have some excess inventory, we need to work off and maybe some of the Telecom areas and that kind of thing.

  • Generally, I think, we're pretty close to seeing end-market demand from our distributors.

  • - Analyst

  • Okay.

  • And on the margin front or just in general on the bottom line?

  • It looks like you're going to have sales levels where a year ago you were earning substantially better margins than you will be here.

  • Is that a function -- should we think of that relative to just still ramping utilization?

  • Or maybe talk about how margins have been effected by raw materials?

  • What should we think about as have that effect?

  • - CFO, VP - Operations Support

  • I think, that there are a couple of things.

  • Certainly the expectation is that the base business will not be back to the levels we were a year ago from a revenue standpoint.

  • So we're still suffering some from some operating leverage issues.

  • I mean, we are seeing some -- Gordon alluded to some commodity price increases.

  • While those aren't tremendously significant for us, not multi, multimillions of dollars, we do see some pretty significant impacts, in things like zinc and copper on the automotive, and a little bit lesser extent on the Electrical business.

  • So there are some of those impacts.

  • The single biggest issue really is the operating leverage issue.

  • We need to -- we need to see another step up in demand from what we're seeing right now, to be looking at margins in the base business, back to levels close to where we were a year ago.

  • - Analyst

  • What sort of revenue levels do you think we need to get back to?

  • - CFO, VP - Operations Support

  • In the base business revenues were -- last year when we were blowing and going, I think, they were more in the 100, $115 million range.

  • Somewhere in that neighborhood in Q2, in Q3 -- we're not going to be quite there, but if you look at our gross margins, we would expect those would start to approach last year's levels, as we ramp into Q3, based on what we see right now.

  • - Analyst

  • Okay.

  • And then on Heinrich, assuming you are able to achieve this agreement later this week and move ahead with the plans as the way you outlined them, what sort of operating margin might you think you'd exit 2005 with in that business?

  • - CFO, VP - Operations Support

  • That's a good question.

  • I think we will begin integrating, as Gordon said, probably as early as June.

  • We'll start some integration activities.

  • The real cost savings from those won't really start to appear until we get very late in the year.

  • I think some of it, obviously, depends also on what happens to their revenue trends.

  • Right now, they aren't seeing quite the same positive trending that we've been seeing in the Littelfuse Electronics business yet, although, hopefully, we'll be seeing that sometime later in the year.

  • I think that exiting the year, we will almost certainly still be in the single digits, but we start to move up from the very low-single digits we're in now, probably into higher single-digit kind of numbers.

  • - Analyst

  • Okay.

  • Thanks a lot.

  • Operator

  • And our next question comes from David Calus (ph) Segal Bryant Investments.

  • We'll go next to Todd Peters with American Century.

  • - Analyst

  • Hello.

  • Good morning.

  • Thanks for taking my call and question here.

  • It's around the capital spend dollar, incrementally.

  • Where are you spending the dollars, I think, you said in lower cost areas?

  • And what are you doing in the semiconductor area?

  • - CFO, VP - Operations Support

  • We have a number of activities.

  • In terms of lower cost areas, we still are in the process of moving production.

  • We'll continue over some period of time to move production, particularly, in the Electronics business to Asia, and there's some capital related to that.

  • In the semiconductor area, we are making some investments.

  • In the technical core business related to some process improvements that we're looking at there, as well as a number of new product initiatives, where we're making investments for -- you know, to be able to accommodate revenues that we don't expect to hit until later in 2005, and then into 2006.

  • - Analyst

  • Okay.

  • And then one other follow-up.

  • On the share repurchase on May 6th, so that was a new Board authorization just last week?

  • - CFO, VP - Operations Support

  • Yes, it was.

  • - Analyst

  • Okay, thank you.

  • Operator

  • We'll return to David Calus (ph), with Segal Bryant Investments.

  • - CFO, VP - Operations Support

  • Sorry Dave.

  • - Analyst

  • Can you hear?

  • - CFO, VP - Operations Support

  • Yes.

  • - Analyst

  • Okay.

  • A question on the charges.

  • I know a couple quarters ago, you didn't run -- you ran it right to the balance sheet, and now you're taking a charge off balance sheet.

  • Can you talk about why that changed, if I'm understanding that correctly.

  • - CFO, VP - Operations Support

  • You said we ran straight to the balance sleet --

  • - Analyst

  • The income statement.

  • - CFO, VP - Operations Support

  • Yes.

  • We are -- what we generally have done is where we have large -- we are -- we are running everything through the P&L, and we're running it through operating income.

  • So make no mistake about that.

  • We are -- because of the charge that we originally anticipated in the first quarter was such a big number, we called that out separately.

  • Like in some cases, we did not do that, and last year, where we had much lower numbers, smaller numbers, we kind of ran through the P&L in a couple different quarter.

  • We chose to call this number out as a separate item, that 3.5 million.

  • But it is all -- all the numbers last year ran through operating income, as are the numbers this year.

  • - Analyst

  • So the total charge is going to be 3.5 million.

  • You took 1.7 in the first quarter.

  • You anticipate taking 700,000 in the second quarter?

  • - CFO, VP - Operations Support

  • We said about 400,000 in the second quarter and the remainder in the third quarter.

  • - Analyst

  • Okay.

  • Okay.

  • And then I know there were some comments on margins with Heinrich.

  • I'm not sure if I caught it all.

  • Can you give us a flavor for where the margins are at today, versus corporate margins?

  • - CFO, VP - Operations Support

  • We indicated that the Heinrich business is operating just above break-even, right at the moment.

  • And similar kind of margin, unfortunately, to what it was when we acquired them, reflecting a couple things.

  • Reflecting our inability so far to really begin in any meaningful way with some of the integration activities, where we have opportunities to take costs out of the business, but also to the Heinrich business.

  • Particularly, to the Electronics part of the Heinrich business, being impacted by some of the same factors that we cited for our base business.

  • So their sales have declined since the middle of last year, when we acquired the business.

  • We've made progress in some areas.

  • The operating margin has stood pretty still.

  • - Analyst

  • Okay.

  • Now, it went quite a bit.

  • I know it's at the same point where you acquired it.

  • It went up a couple quarters subsequent to that, didn't it?

  • - CFO, VP - Operations Support

  • We saw it, I think in the third quarter, we saw it go up a little bit.

  • That was largely driven by somewhat higher revenues that we had in that business, and then things dropped off significantly in the fourth quarter, just like they did our business

  • - Analyst

  • Okay.

  • And then just to make sure I understand the guidance, you said it is 8% sequentially, on revenue and then $0.28 to $0.32, not including the 400,000?

  • - CFO, VP - Operations Support

  • That was including the 400,000.

  • - Analyst

  • All right, thank you.

  • - CFO, VP - Operations Support

  • Okay.

  • Sure.

  • Operator

  • We'll go next to Victor Holly with RCB Investment Management.

  • - Analyst

  • Good morning.

  • A little bit more on the Heinrich.

  • As you start to integrate, any type of delays we should expect we should expect due to European work laws, and how soon you can rationalize your operations there?

  • - CFO, VP - Operations Support

  • Yes.

  • I think, we've become pretty familiar with those work laws over the last year.

  • The Heinrich business -- this is a really apart from some of the integration activities which had been held up.

  • They had been in the process over the last year of transferring some of their electronics production to China.

  • So they have been dealing with the work councils on a regular basis there and continue to engage with them, just on activities that they would have been in the process of doing had we not acquired them.

  • So those discussions are already going on.

  • We are not anticipating any major issues, at this point that would further delay the integration activities from where -- from where they are right now.

  • - Analyst

  • Okay.

  • And the accounting delays you had, due to integrating with their systems with your policies and so on, I assume that's all completed?

  • - CFO, VP - Operations Support

  • Yeah.

  • We've made a lot of progress over the last three months on that.

  • We have -- we believe we have a process in place now, where we can get their numbers converted to U.S.

  • GAAP appropriately and on a timely basis, and shouldn't cause any further concerns

  • - Analyst

  • Okay.

  • Thank you.

  • - CFO, VP - Operations Support

  • Okay.

  • Operator

  • We'll go next to Greg Halter with had LJR Great Lakes Review.

  • - Analyst

  • Good morning, guys and thanks for taking the question.

  • Relative to Heinrich, again, do you have any sort of cost savings expectations that you're looking at?

  • I think, you had previously discussed a figure of at least $5 million.

  • - CFO, VP - Operations Support

  • Yeah.

  • Greg, that is the number we mentioned shortly after the acquisition.

  • We haven't given another number at this point.

  • We believe that we will do at least that number.

  • As we proceed further along with the integration activities, we'll update that and tell you where we think we are.

  • But we think, that's still a reasonable number to look at, is the minimum amount of cost to take out.

  • - Analyst

  • Is it reasonable to assume there might be 20% of that in '05 with the balance going out into the out years?

  • - CFO, VP - Operations Support

  • I think, it's reasonable to think we will get some benefits in the fourth quarter.

  • I don't think we'll get a whole lot prior to that.

  • So, I mean, we could get -- sure we could get $1 million of benefit in the year possibly.

  • That's not an unrealistic expectation.

  • - Analyst

  • Okay.

  • And Gordon, you talked about the electrical price increase and the business being held by a price increase.

  • I think, last year you had a total of 7 to 8% on the price side.

  • Can you talk about what that was in the for the quarter in general terms?

  • - Pres, CEO

  • We had two price increases, If you correctly remember.

  • Then in the first quarter -- was it?

  • - CFO, VP - Operations Support

  • Yes.

  • I think the 7 or 8 may have been the --

  • - Pres, CEO

  • Last year?

  • - CFO, VP - Operations Support

  • Yeah.

  • I think that was the price lists increase.

  • I'm not sure we realized all of that, but we did have significant price realization.

  • No question.

  • I think, we got another -- again, I think -- the book price increase may have been a little bit more, but I think, we'll get several points of realization again in the first quarter.

  • - Analyst

  • Okay.

  • In looking your commodity costs, you talked about zinc, and copper and resins.

  • Do you do anything on hedging or forward buying, or can you doing anything?

  • In terms of mitigating some of that?

  • - CFO, VP - Operations Support

  • We have chosen, at this point, not to actually doing any derivatives on some of the commodities.

  • What we do do from time to time is we would work deals with suppliers where we would lock in prices for periods of time going forward.

  • We don't have any -- we don't have any, material agreements there that -- where we've done that at this point.

  • - Analyst

  • Okay.

  • And on your share repurchase, I think you had about 800,000 left, and you but 100,000.

  • So that would give you 700, plus the million.

  • Am I right in assuming it's 1.7 million left?

  • - CFO, VP - Operations Support

  • No.

  • The purchase authorizations are good for a year, and then they expire.

  • So we basically re-up on a minimum shares, and we're starting with fresh million shares right now, but no more than that.

  • The other remainder expired just before the Board meeting.

  • - Analyst

  • Okay.

  • Hope you guys are out of the way of that train?

  • Two last ones on accounts receivable in inventory, receivables up 18 million in inventory 23.

  • Obviously, I realize Heinrich is in there.

  • Can you break that down on a core basis, what kind of an increase you have had?

  • Acquisitions and currency?

  • - CFO, VP - Operations Support

  • No.

  • I don't have those numbers in front of me, Greg.

  • Maybe we could talk offline, if you want more details.

  • But generally speaking, there were a couple things on the receivables front.

  • But certainly Heinrich was the significant piece of it.

  • We also had some changes in our distributor terms for Electronics where we eliminated an early payment discount, that was a good economic decision for us, but it also did cause receivables to extend out a little bit on the electronics distributors.

  • As far as past dues and all those type of metrics, we're relative clean at the moment and don't have any major issues there.

  • - Analyst

  • Okay, and actually on the day-basis, looks like receivables and inventory are about the same of a little bit better based on 12-months worth of data.

  • - CFO, VP - Operations Support

  • Yes.

  • - Analyst

  • Okay.

  • Thank you.

  • - CFO, VP - Operations Support

  • Yes.

  • Operator

  • [OPERATOR INSTRUCTIONS]

  • - Pres, CEO

  • Actually, I think we're coming very close to the end of the allocated time, if there is one more question, we'll take it.

  • Operator

  • We have one last question from John Franzreb with Sidoti and Company.

  • - Analyst

  • Good morning.

  • If I remember correctly, when we had the pull back last Fall, you had to incur some costs on high-cost inventory.

  • That was an issue weighing into Q1 and may have weighed into Q2.

  • With the accelerated book-to-bill, are you still carrying that higher cost inventory?

  • - CFO, VP - Operations Support

  • Yes, we would be carrying some higher cost inventory, John, because of the low operating rates that we had during the first quarter, and the inventory that we built in the first quarter at those low rating rates is still at inventory going into Q2.

  • We have got to liquidate that inventory.

  • We will have some of that higher cost inventory going through the P&L in Q2.

  • It's part of the reason that we don't get a stronger ramp up with in earnings for the sales increase we talked about.

  • We should see that start to dissipate, basically, as we get into Q3.

  • - Analyst

  • Great.

  • Gordon, could you talk a little bit about what's go on in the R&D line?

  • Last couple of quarters it's been pretty high.

  • You're talking about support from new products.

  • What should we think about the line that going forward?

  • - Pres, CEO

  • Yes, I think that, we said that we wanted to commit to the long-term investment in new products.

  • I mentioned in particularly, in Automotive, where we have in both of traditional fusebox products, the new low-profile products, low profiles JK's, the low-profile MINI, as well as Cablepro products..

  • The Heinrich acquisition, ironically, the Prudenz (ph) business there had been spending much more, more than 5% on R&D, and the historical 2.7 that Littelfuse had been spending.

  • So we expect to continue to investment in R&D.

  • We have not set a strategic number and given a percent that we aim to be at.

  • We're being very cautious as we ramp that up and really making sure it's in line with customer programs and customer demand.

  • But I would expect it to be at the similar rates we got now for future

  • - Analyst

  • So we won't see absolute dollars drop as the year progresses?

  • - Pres, CEO

  • Sorry.

  • We won't see absolute?

  • - Analyst

  • Dollars spent .

  • - Pres, CEO

  • I think it will be consistent at the levels that we are at now.

  • - Analyst

  • Okay.

  • Thank you.

  • - Pres, CEO

  • I think that comes to the end of our allotted time.

  • Thank you all for your questions.

  • Operator

  • This does conclude today's conference.

  • You may disconnect.

  • We thank you for your participation.