Littelfuse Inc (LFUS) 2005 Q3 法說會逐字稿

Good day everyone and welcome to the Littelfuse Inc. 1st quarter earnings conference call.

Today’s call is being recorded.

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

Please go ahead sir.

Thank you.

Good morning and welcome to the Littelfuse 3rd quarter conference call.

This is the Gordon Hunter, CEO of Littelfuse and with me today is Phil Franklin the 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.

This morning we plan to give an overview of our 3rd quarter results as well as some details of our end markets and how we are progressing on some of key corporate initiatives.

We’ll then open up to some questions and I expect this call to last about 40 minutes.

I’ll now hand you over to Phil.

Thanks Gordon.

Any forward-looking statements contained herein involves risks and uncertainties included, but not limited to, product demand risk, the effects of economic conditions, the impact of competitive products and pricing, acquisition and integration risk, commercialization and technological difficulties, capacity and supply constraints, exchange rate fluctuations, the effects of the Company's accounting policies, labor distributes, restructuring costs in excess of expectations and other risks which may be detailed in the Company’s SEC filings.

Third quarter financial results showed the expected improvement in both sales and operating margin over the first two quarters of the year.

Sales for the 3rd quarter of 131 million were up 5.8% sequentially compared to our guidance of the 2% to 5% sequential increase.

In earnings per share of $0.28, including all special items was at the high end of our $0.24 to $0.28 guidance range.

In the 3rd quarter we began to integrate Heinrich into Littelfuse such that it will no longer be possible to cleanly break out Heinrich and Littelfuse sales.

However, I can tell you that Heinrich sales were in the range of $23 million for the quarter, which was up sequentially and roughly flat with the prior year quarter.

All comments from here forward will refer to Littelfuse and Heinrich combined.

Electronic sales were down 10% compared to the prior year due in part to the distributor inventory build that occurred in the prior year quarter but also will give you the continued weakness in Telecom end markets.

However electronic sales were up 7% sequentially primarily due to improving sales trends in Taiwan, Southeast Asia and Korea, driven largely by digital consumer end markets.

Automotive sales were up 9% over a week prior year comparison due to strength in North America and Korea.

The electrical business had a record quarter and was up 15% compared to the prior year reflecting new business wins, price realization and generally positive market trends.

Operating margins improved sequentially in the 3rd quarter despite the expected Ireland restructuring charge and the unexpected 1.0 million Delphi accounts receivable reserve.

The Ireland restructuring charge was booked to cost of sales and the Delphi charges flipped to operating expense.

Margin improvement reflected improved operating leverage and continued cost reduction.

The effective tax rate increased from 35% to over 40% for the quarter.

This reflected several one time items in addition to the limited tax shield from the Ireland restructuring charges.

We had a one time gain in the 3rd quarter of 1.4 million related to sales of our 40% interest in our wafer fab in Swindon, England acquired as part of the Semitron acquisition.

All semiconductor products previously made in this wafer fab have been transferred to other manufacturing sources, in some cases the Teccor fab in Texas and in another cases to subcontractors in Asia.

The gas discharge tube line, also acquired in the Semitron, is currently in the process of being transferred to our facility in [Sujeev], China.

Free cash flow improved to $10 million in the 3rd quarter after being negative for the first half of 2005 due to improved profitability at a working capital performance and lower capital expenditures.

We should have another good free cash flow quarter in Q4 even though we expect an increase in capital spending.

In the 3rd quarter, we repurchased 245 thousand shares at an average price of $27.65.

We currently have 755 thousand shares remaining on our repurchase authorization.

Now before I turn it back to Gordon, let me briefly address the Delphi situation.

Our Delphi receivable that is impacted by the recent bankruptcy filings approximately, $3 million.

Based on the most current information we believe that at least two thirds – a two thirds recovery of this is likely.

Therefore we have taken a reserve of approximately $1 million.

Our total business with Delphi is a little over $20 million per year.

Today we are doing business as usual with Delphi and are expecting no major disruptions or changes in this relationship going forward.

Even if Delphi were to stumble further, we do not expect it will materially impact our business in the long term and if any Delphi share loss would likely be picked up by another one of our customers given that we have a large share of the U.S. market.

Now I’ll turn it back to Gordon for some more detailed market commentary.

Thanks Phil.

Now if I would like to talk about some of the progress made in each of three strategic business units during the last quarter.

First our automotive business unit which accounts for about a quarter of our revenues, our Q3 automotive revenues were up 9% compared to the same quarter last year on a 2.3% global increase in car build.

Revenues were down 2.3% sequentially from Q2 on a normal seasonally slow quarter that showed, in fact, an 8% decline in car builds.

Our ability to out pace car build was driven largely by new vehicle launches and strong performance in our aftermarket business.

Even with a very strong North America car sales in June and July, JD Power is still projecting the year to finish with North American and European car builds flat to modestly down compared to 2004 and 4% growth in Asia.

Our current expectation is that after this normal seasonally slower 3rd quarter, we will begin to show steady, modest improvement in our 4th quarter and 2006 revenues.

This improvement is being driven by the launch of new models and new car platforms utilizing Littelfuse products.

A few examples would be the launch of several Hyundai and Kia platforms in Korea, which are utilizing our medium current midi fuses.

The launch of the Audi A6 in Europe utilizing our new BF inline cable protector and the launch of General Motors light trucks and SUVs, which utilize our new low profile JCASE fuse.

JD Powers current outlook on 2006 shows modest car build increases in North American and Europe and a more robust growth of 7% in Asia.

With this trend, we continue to increase our focus on Asia.

We have particular focus on the emerging hybrid electric vehicle market in Japan, the steady car build increases in China, market share gains in a strong Korean market and the emerging India market.

We’ve completed the fundamental integration activities of the German based Pudenz business.

Pudenz is the automotive subsidiary of Heinrich Industries, which we acquired during 2005.

We’ve successfully consolidated all customer service and distribution activities into our existing facility in the Netherlands.

The full integration of this business is also a significantly accelerated global product development capabilities and improved key customer relationships in Germany and France as we've consolidated and strengthened our European sales team.

We see strong growth in new product opportunities with customers resulting from our increased focus on R&D and business development activity.

We continue to increase staff levels in both areas while implementing tools to increase the efficiency of these resources.

With the addition of the development team in Germany, we’ve increased our R&D expenditures to 4.5% of sales.

We're seeing wide interest in our new battery cable protection devices such as CablePro and BF inline and have initiated a significant new project with a major U.S.

OEM with the objective to incorporate an inline protection device in each of their vehicles.

Customer interest, product development and designing activities for our master fuse high current fuse arrays continue to intensify as well as U.S., European and Korean OEMs.

These three new product types our used under the hood of a vehicle and protect the high current cables that deliver power between the battery, alternator, starters and primary junction boxes.

With two to three design cycles in the automotive industry, meaningful revenues impacts will not begin until the back half of 2006, which should gain momentum as we move into 2007.

Now let me switch to our electronics business unit.

Overall electronic sales were down 8 million or 10% when compared to the 3rd quarter of 2004, which was the peak quarter of the inventory build up last year.

However sales for the 3rd quarter of 2005 were up 4.5 million, or 7%, versus the 2nd quarter of ’05 and this marks the 2nd quarter of sequential sales growth this year.

The worldwide inventory correction affecting our electronics SBU seems to be largely complete as we discussed in last quarters call.

Let me talk about regional performance.

In Asia, during the quarter we saw continued improvement in our electronics Asia sales numbers.

Sales in Asia were up 10% versus Q3 2004 and were up 11% sequentially.

This growth was driven by firstly continued firming end market demand in the digital consumer market.

Secondly continued firming demand in the customer premise portion of the Telecom market and third continued examples of success in our solution selling approach to circuit protection.

Turning to North America, recorded sales were 27% less then Q3 2004 which we may remember was the peak of last years industry build cycle.

However there was a 4% sequential increase in sales versus the 2nd quarter with distribution sales up 7% sequentially and our OEM sales sequentially flat.

In Europe, sales continue to be relatively soft due to a continuing weak wire line Telecom market and the continuing migration of business to Asia.

Sales were down 34% versus the Q3 2004 inventory peak and down 4% versus the Q2 2005.

I’ll talk later about the call about the weak traditional Telecom market as well as the stronger performing new and emerging Telecom segments.

Talking about sales by technology, the Teccor Telecom products were down 34% versus last year’s Q3 peak and down 11% sequentially.

While we see an exciting future for these products in the Telecom market, we have seen a temporary decline in this market in ’05 as we have discussed in quarters past.

We attribute the 2005 decline to three main issues.

One, excess distribution inventory from 2004 being consumed in 2005, secondly, China limited spending on Telecom infrastructure for both voice and data communications in 2005 to compare economic growth, this has resulted in a slow down of demand from all the major Chinese OEMs who are focused on the local market and thirdly, equipment production for DSL deployment has slowed as the industry migrates from ADSL to VDSL in readiness for video over IP.

We see many of these issues behind us and are cautiously optimistic about a return to modest Teccor overall growth in 2006.

Now let me talk about some of the trends we are seeing in the different geographies.

First of all Asia, as indicated previously, our improved overall sales line is mostly due to sales growth in Asia.

In fact, Asian sales have now grown to over 50% of electronics revenues.

This growth is due to our expanding product line, our solutions approach and our strong deep relationships with the Asian ODMs and OEMs.

Well known OEMs in Asia, such as Sony, Samsung and LG, continue to develop new and exciting products from well known consumer products like LCD TVs and LCD monitors to more innovative products such as HDMI enabled TVs and DVD recorders, as well as smart phones and satellite radios and we’ve seen 50% sequential quarter growth with these customers.

Our growth comes from our customers growth as well as we more deeply penetrated of these customers with increased circuit protection content.

The lesser known OEMs and ODMs continue to play a more significant role in the continued evolution at the electronics market.

Foxcom, Quanta, Liteon and Mototech the Taiwanese ODMs continue to aggressively grow outside their initial focus and now design and manufacture many new end products such as laptop computers, PDAs, mobile phones, voice over Internet protocol modems, XDSL modems and LCD monitors.

Both use benefits both at this costumer base expanded into new applications and as they take market shares from the existing OEMs.

Our sales to this customer base have increased by 32% this year.

Much of this growth is in Taiwan, is focused on the CPE, the customer premise equipment portion of the Telecom market segment where much of the new and emerging Telecom market is being designed.

In North America and Europe, we continue to have tougher places due to the migration of production and increasingly design through Asia as well as due to the decline of the old publicly switched Telecom network, the PSTN Telecom network.

Increasingly in these geographies we are focused on the general electronics opportunities, which I will discuss in the general electronic segment.

If you look at the trends by application in the Telecom area, we have discussed a lot of this in recent calls as this segment and its performance have greatly impacted our overall performance.

I would like to talk about our current Telecom market environment, what it means to Littelfuse and also talk about some of the recent successes we have had in this very exciting market.

There's an architecture change, to state it simply, the delivery of voice information over the traditional Telecom architecture is in the midst of a significant change.

The Telecom architecture is starting to evolve from a PSTN network to an internet protocol based system encrypts voice and data packets.

A growing percent of the sector protection market is moving to this internet protocol delivery more commonly known as VOIP.

This technology development is in the first phase of the convergence of voice, video and data over a single network into the home.

High Supply, a well known industry market research for past voice-over internet protocol subscribers will increase from a modest 5 million in 2004 to 197 million in 2010.

In 2005 voice over internet protocol equipment sales will grow by 60% to $12.9 billion.

Each subscriber requires a voice-over internet protocol modem to provide voice and data lines to the home and each modem requires protection on the incoming and outgoing lines.

We view this as an exciting opportunity to drive circuit protection revenues in the Telecom and datacom segments and to provide further scope to develop the already differentiated portfolio.

Circuit protection content for voice modems currently averages upwards of $1.50 per unit.

This circuit protection content is made up of a multitude of our product technologies including fuses, protection thyristors, gas discharge tubes and diode arrays.

We feel that we are well-positioned to be successful in this evolving and changing market that is heavily influenced by reference designs of the Telecom chip set designers.

Our strong North American sales and technical teams have solid relationships with this important group.

These relationships in our strong local Asian selling organization focused on the equipment manufacturer, allow us to understand the needs of the applications and drive Littelfuse design-ins.

We have significant designing efforts of many regions of Asia, but especially Taiwan as many as the VOIP modems are designed there.

Now let me talk a little about digital electronics.

Worldwide unit shipments of personal computers, both desktops and laptops were up 17% in the 3rd quarter compared to the same quarter last year.

IDC an industry market research company sighted strong back to school season in the United States covered with strong consumer market demand in Japan and China as fueling this improvement.

LCD monitors were up 10% for the quarter according to Display Search, another industry market research company.

Circuit protection averages between $0.10 and $0.25 of these computer and computer-related devices.

Recent successes for the Littelfuse would be mostly in Asia as most of these customers are now in that region.

As in Telecom, our broad circuit protection portfolio plays well here.

We sell fuses, PTCs, thyristors, diode arrays and polymer ESD devices into this market.

Strong sales performance at the major ODMs such as Quanta, Litec, Liteon and [Asis] help drive strong performance for us in this segment.

Worldwide mobile phone unit shipments were up 9% sequentially and were up 25% over the same quarter last year.

And full year growth is expected to be 21% according to Nokia.

Circuit protection content for mobile phones can range from around $0.20 to just under a dollar per phone depending on the amount of ESD protection that exists in the mobile phone.

A mobile phone could potentially use a variety of our products, PTCs, fuses, MLVs, diode arrays and polymer ESD devices.

Recently we have had success in a variety of Asian customers most notably some of the Taiwan ODMs as well as the major worldwide brands.

We have also been focusing much of our sales and marketing efforts on HDMI, this is the high definition multimedia interface.

This is an evolving data interface primarily being used in consumer electronics such as LCD TVs, and DVD recorders.

We would be working with many of the leading adopters in this data interface, many of which are in Japan.

Because of the high data rates of these applications, our ultra low capacitates polymer ESD product lines Pulseguard is seeing strong growth especially this past quarter.

ESD protection for an HDMI port can add an additional $0.40 per TV, this is a high definition TV, above a baseline $0.40 of circuit protection per standard TV. [InStat] has forecast that the HDTV market will grow to 15.5 million units in 2005.

We have also focused efforts on the rapidly growing MP3 market player.

High supply forecasts that this market will grow from 36 million units to 58 million units in 2005, an increase in 57%.

We work with a major OEMs in this exciting market on their circuit protection needs.

Circuit protection ranges between $0.05 and $0.40 for a stand alone device depending on the amount of ESD protection is used.

In the general electronics area, of both the digital conceiver markets and Telecom markets offer high growth and very visible and exciting end markets.

General electronics market still has growth opportunities in what some would consider a more ordinary applications.

The general electronics market is a very broad segment including test and measurement applications, medical equipment, transient voltage surge suppression devices, aerospace defense applications and white goods.

I would like to spend a minute talking about the white goods market and where we see at Littelfuse in this market segment.

An exciting dynamic affecting our business in Asia has to do with the expanding Asian middle class.

As these developing economies expand, China and India as examples, there is more money for the middle class to spend on ordinary items such as washers, dryers and other white goods in addition to the mobile phones and automobiles.

IMS another well known market research company in our industry projects triple digit growth in many of these white good applications such as washing machines, dryers, dishwashers and freezers over the next year in Asia, particularly China and India.

IMS is forecasting 11 to 12% growth in these two countries for washing machines market over the next few years.

In 2008 almost 50% of the washing machine market will be in Asia.

Circuit protection per appliance can be in the $0.10 to $0.40 range, which includes fuses, power switching thyristors and varistors.

We'd be partnering with many white goods manufacturers in Asia to maximize our penetration in this rapidly growing sub market.

While one would not necessarily see this as a growth market in North America, it is definitely a growth market in Asia right now.

Let me talk about our strategy of solution selling.

One notable solution selling example is in 3G telephony base stations being deployed throughout the world to support increased mobile phone services.

In this application there are several circuit protection opportunities where we can provide our design and consulting total solutions product portfolio.

Each base station requires protection of the T1 line to the telephone network as they are powered remotely; the power line also needs protecting.

A typical solution would use echo site active devices for lightening protection and our Telecom nano fuses for over current protection on the T1 line.

The power supply would use unique Littelfuse AK series high powered diodes to protect the power supplies.

All together the circuit protection value in this total solution exceeds $15.00 per base station.

As we have discussed in previous earnings calls we have been steadily investing in our solution selling approach and in addition to investing in both sales and technical marketing people, we've continued to invest in the tools you need to be successful.

Over the last two quarters we have invested in translations of the Littlefuse.com website and much of our technical materials into Chinese and Japanese languages.

This enables the local engineers to learn about Littelfuse solutions in their local language.

Our investment in research and development continues.

R&D as a percent of sales is now 3% in 2005 and the most recent quarter new product revenue accounted for 10% of electronic sales.

We expect to see our continued investment in solution selling and R&D drive this number higher in future quarters.

So in summary, the Q3 electronics performance was an improvement over Q2 and Q1 and as the inventory levels appear to have stabilized worldwide and we continue to see strength in Asia in some of our targeted applications and gradual traction in our solution selling strategy.

While Q3 has been a healthy sequential growth quarter, it is normally our strongest quarter seasonally this should be taken into account when developing expectations for the electronics 4th Quarter, which normally shows a seasonably weaker pattern.

Now let me switch to our electrical business units.

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

This business unit was up 17% versus the same quarter in the prior year and up 7% sequentially.

The 3rd quarter is typically our strongest quarter due to the seasonality impacts of the construction business but this was a record quarter for the electrical business as many of the key marketing programs are showing success.

The electrical business as it makes up 50% industrial and 50% construction.

We continue to see new customer growth in the 3rd quarter for general market dynamics were also positive.

In the industrial sector we are experiencing mixed results while overall manufacturing activity which drives the MRO segment has continued to show a positive comparisons verses the prior year.

But shipments of OEM products using our fuses slowed during the 2nd quarter and continued this trend into the 3rd quarter and now actually show a negative trend year to year, year to date versus last year.

And on that [inaudible] construction market, overall activity for 2005 has been running below 2004 levels through the first half of the year but we continue to see improvement in the 3rd quarter as commodity prices for raw materials continue to stabilize.

We might even expect to see a positive year-to-date comparison to 2004 levels by year end.

Unless we see a large increase in the price of building raw materials as a result of the hurricanes and their disruption to supply.

Electrical business continues to benefit from strong price realization as a result of the 1st quarter price increases.

We expect our bottom line to continue to benefit fro--through the balance of the year.

We continue to manage pricing very closely.

Unfavorable PPV based primarily on higher copper prices continues to offset some of the favorable impact of our price realization.

A very hot summer across the U.S. has had a very favorable impact on our HVSE fuse demand.

We have had some positive demand impact as a result of the hurricane activity since this is continuing to operate a strategic profit level targets and planned capacity is in very good shape allowing us to quickly react to any upward changes in overall demand.

The final transfer of the manufacturing from our central Illinois factory to a low-cost manufacturing in Mexico will be concluded by the year end.

So we continue to focus on our new product development process with anticipation that this will lead to more opportunities in OEM market segments.

We are continuing to educate customers on the dangers associated at this point as what is called an ARC flash event, a random dangerous short circuit event that can occur in industrial setting.

Fuses, where properly applied can help minimize the dangers associated with such an event.

Finally, let me quote some recent industry forecasts from the [Gorhill] construction data's.

The 7% increase for total construction during the first 8 months of 2005 compared to the last year was a result of the following performance by major sectors.

Residential building up 12%, non-building construction up 7%, and non-residential buildings down 1%.

While non-residential building over the January to August period was still behind last year, the gap in the year to date statistics has narrowed considerably during the most recent three months.

By geography total construction in the January/August period reflected this pattern, South Atlantic up 10% to Western South Central each up 9% and North East up 8% and the Mid West unchanged.

Non-residential building of recent months has picked up the pace following its lackluster performance at the outset of ’05 related to the reevaluation of projects in the face of higher costs.

Further increases in the price of materials will make it more difficult for non-residential building to maintain the improving trends that seem to be taking hold during the spring and the summer.

In the summer it was an excellent quarter for our Electrical business unit, we are very positive about the prospects for the future.

I will now hand you back to Phil for some further comments.

So looking to the 4th quarter, we expect as Gordon said, our typical seasonal decline compared to Q3.

Primarily because of fewer work days and the typical year-end slow down.

We expect he sales will be down 5 to 6% sequentially compared to the 3rd quarter.

Before restructuring charges 4th quarter earnings per share should be in the range of $0.24 to $0.26, as indicated in the press release, however we expect to take that to $2.5 million charge related to further downsizing our Ireland operation and moving certain products to lower cost Asian subcontractors.

Because of the limited tax deductibility of these expenses we expect this charge to have roughly a $0.10 negative impact on the 4th quarter.

So while our effective tax rate will again be above normal in the 4th quarter, we expect the tax rate to revert to historical levels in 2006, since going forward we have other favorable tax items that should offset any negative impact from the 2006 expected Ireland restructuring charges.

And that concludes our prepared remarks, so we’d be ready to open it up for questions.

Thank you. [OPERATOR’S INSTRUCTIONS] We’ll take our first question from John Franzreb from Sidoti and Company.

My first question is in regards to the automotive sector.

In your press release you alluded to the fact you got price increases in the quarter, could you talk a little bit about that?

And you talked a little bit about the expectations next year, just could you provide a little color about how weak you think North America may be as opposed to being offset by the growth in Asia?

John, it would have been nice if we actually did get price increases in our automotive business.

I think what the press release referred to the electrical market in the automotive aftermarket but not the auto OEM market where we have our normal pricing scenarios there which is down 3% or 4% a year.

Okay so you had no – so you had pricing in the aftermarket?

Yes, which is, as you know, it’s a small percentage of our total.

The biggest price – price improvement was actually in our electrical business, which we talked about in previous quarters.

Okay.

And your outlook next year in the auto?

Gordon.

Yes, I think that we expect price decreases, for sure in automotive, on all of the major programs that we have and then we expect to offset most of that where we can with manufacturing efficiencies.

This year, by the way, has been very tough in that because of the PPV work with a lot of the raw materials, so it’s been a much tougher year then they’ve had ground up.

But we do see a lot of new vehicle launches which are happening right now where we have increased content.

We do see increases in focus on Asia, particularly Korea, which is very strong and as we focus more and more into China and new product development, which I’ve mentioned the new products such as the in line and the CablePro master fuse, which are products outside our traditional junction box focus.

So we do expect those new products, as well as new geographies, to be a focus of growth for next year.

So we expect to see a growth year, I’d say modest, mid single digits and strengthening towards the end of the year because these programs take some time to ramp up as we will get wings on new vehicle programs, strengthening towards the end of the year and then strengthening into ’07.

But mostly off the backs off our new product programs, not really expecting much market growth.

Okay.

Could you just touch a little bit on the [Aldalva] content and current trends in hybrid vehicles versus your traditional vehicles and what you see going on there?

Yes there’s a real different architecture and a need for new products in that and that’s a major area of focus for us.

However, much as we – we want to point out that we’re very invested in that and really focused on it, in particularly in Japan.

The actual total volume of that is still relatively small, so we don’t expect to have that having significant impact yet.

It’s certainly an investment for the future.

So could you just quantify what’s insignificant – what kind of number that hybrid business does?

Yes, there – I think at this point it's less than $1 million of business for us in terms of the hybrid specific fuses that we sell.

Okay.

And one last question, when we start to think about Heimrich again and the restructuring actions your taking, are you still sticking to that $5 to $7 million in cost savings or do you think the opportunity might be above or below that amount?

I think the – we still feel comfortable with the $5 to $7 million that we talked about previously, John.

Okay.

Thank you.

I thank you.

We’ll take our next question from Reik Reed at Robert Baird and Company.

Can you guys just spend a little bit of time talking about the production levels in – I think in the past you’ve said that they’ve come down – they’ve been low, are they staying flat, are they trending up and can you give us some sense for where utilization is and maybe going?

Production – our production levels, and we can talk about the various markets, the electronics it is--I think we had talked about a capacity utilization of some where in the neighborhood of 70% and that--overall that hasn’t changed very significantly.

We’ve seen some of our product categories ramp up some, we’ve seen some that have remained pretty flat, so we may have seen some very modest improvements there in a few areas but overall not a whole lot of change there, it still remains in the low 70s at the utilization levels.

Automotive utilization is very strong, in the 90 plus % range, maybe closer to mid 90 based on the way we measure it.

And we continue to add incremental automotive sales as we need to support the ongoing increases in unit volumes, which we’re expecting to continue.

And the electrical business, as we’ve said before, capacity really isn’t an issue there.

And are you at the point where you are seeing those Phil in the electronics area that it is starting to pick up, in terms of production levels?

Yes, we saw it pickup – some pickup in the majority of our product categories in the 3rd quarter.

Okay.

And then with respect to Heinrich in the 5 to 7 million you just spoke about.

Can you give us a sense knowledge as we’re another quarter along in this and you’ve made some more progress – what stage will you start to see more meaningful improvement there?

Is it going to be a situation where it’s going to be a steady state map or at some point is there going to be an inflection as you get to a certain milestone?

Just in terms of the overall margin improvement, we would expect it to really accelerate as we get into the middle of 2006.

We’re starting to see some modest gains in, and will through the 3rd quarter – through the 4th quarter but they are rather modest at this point.

Really what we’re doing right now, most of the work is setting the stage for – to enable larger savings going forward and the work that has been first and foremost right now has been getting [SAP] into the Heinrich business and those programs are going, as we’ve talked about, I think the last call – we had a stage program where we were doing different geographies and different parts of the Heinrich business at different times between the start at mid-2005 and will continue into the 1st quarter of 2006.

But that’s going well, it’s on schedule, making good progress there, we’re starting to bring the businesses together in a meaningful way which should allow us to take significant cost out as we get towards the middle of 2006.

Okay.

And then, also, just on Heinrich real quick.

Have there been significant costs associated with this kind of squeeze out process that you’ve gone through and now that you’re nearing the end of it, will there be a change there?

Well there’s been some ongoing costs without question, but we haven’t seen a lot of costs flowing through the P&L related to that.

There's not going to be a meaningful impact of seeing that--those costs go away, although certainly it’s been more of a focus issue for us and I think it allows us certainly to move forward more aggressively and focus on the real task on hand, which is integrating the business.

We’ll take our next question from Alexander Paris at Barrington Research Associates.

Just on Ireland – it sounds likes you two phases.

The first phase – the 1.6 million charge in the 3rd quarter, that was the first phase, there was nothing from this latest phase that you mentioned, is that right?

Really what we have – we have – the reductions are phased, Alexander, and we’re also accruing for those costs over a period of roughly three – three quarters or so, which doesn’t necessarily relate to exactly when the people are leaving the business.

It relates to just applying the accounting rules based on when notification has occurred and how we’re required to accrue for those costs.

But the program that we’re talking about here should be largely complete by the 2nd quarter of 2006.

So – by – what I meant to – the 1.6 million, that was the kind of the end of the initially announced restructuring and then the new one, the 2.5 and a 2.1 are for the new ones – the new initiatives, right?

Yes, in a sense they’re really part and parcel to the same thing, Alexander.

I think that we announced it earlier because we had planned a modest downsizing to occur.

I think when we announced this was like – was almost—was probably three or four quarters ago and we announced that this was going to happen.

We announced about a $1.5 million charge we finally took in the 3rd quarter.

Basically what we’ve done is we’ve made that a more aggressive program where we taken more product out of Ireland and taking more people out.

So it’s really part of the same – to continue – I would look at it more as a continuation of the program that we announced back three quarters ago.

And any cost savings from that?

Is that included in this 5.7 million or is that mostly Heinrich?

No.

That would be Heinrich is the 5 to 7 million.

Yes.

There would be certainly cost savings related to Ireland that we would – it would be part of our cost savings for 2006 that we’ll be talking about probably in our next conference call.

Okay.

And the – could you just give the sales – the electronic sales themselves in the Americas, Asia Pacific and Europe?

Either percent change or the dollars?

Well for electronics it’s now over 50% of our sales, about 52% is in Asia and Asia did have good sequential growth and growth over a year ago.

I think that of the remainder there’s probably 30 to 35 – between 30% and 35% would be North America and the remaining 15% to 20% being Europe.

And both still suffering very challenging times as more and more of the OEMs have been not only moving their production but moving their design to Asia.

And when you mentioned that you isolated the weakness in Telecom in North America and Europe, is that mostly infrastructure or phones or both?

Yes.

Mainly the what I would call the old line phone system, the telephone network where the well known Telecom equipment manufacturers have made traditional equipment, is rapidly changing, it’s not a growth business anymore and there's really a movement to this voice over IP network which is really falling into the hands of a lot of the Asian OEMs and ODMs.

So that’s partly the outsourcing problem also from the U.S.

It’s part outsourcing; it’s part of this change in architecture and change of the equipment itself in fact.

Right.

And you’re just picking up in Asia what you’re losing in North America, I presume.

Well it’s some of that.

Some of it is also a change of the actual equipment and some of the change of the actual – at a macro level your right, I mean that’s true.

But at the micro level for us it’s sometimes different designs and very different customers, it’s not as if a large American OEM has moved it’s design group there and we’re with the same customer.

It’s often very different emerging customers in Taiwan who we need to develop relationships with.

And with different products as well.

Yes.

And you see the weakness in your structure – infrastructure in Telecom mostly as a kind of temporary transitional problem and then it becomes more positive later?

Yes I think so.

I think we’re just seeing the shift over in architecture to voice going over IP and ultimately video over IP, and that’s just a different way everyone will be connected.

And just one other quick question.

You’re content in hybrid cars, how does that differ from a standard vehicle?

Alexander, we’re – standard vehicle with standard fuses that we’ve historically made, this doesn't includes some the newer higher current products that we’re working on, but the standard product is in the neighborhood of $3.00 a car.

A hybrid vehicle in addition to that normal compliment of fuses of $3.00 or so we’ve had some higher power fuses that would go into it unique to the hybrid architecture that could be another $3.00 to let’s say $5.00 of content.

I see, all right.

Thanks very much.

We’ll take our next question from Todd Peters from American Century Investments.

A quick clarification on your earnings guidance the $0.24 to $0.26 does that include the restructuring charge?

No.

No, it does not?

That does not include the restructuring charge.

I expect that’s excluding the charge.

Okay.

And, did you say what your tax rate would be then, or you just said it would be normal?

We didn’t say what the rate would be, but we think that it will certainly be impacted by this charge that had limited deductibility that we think will make it an after tax charge of somewhere in the neighborhood of $0.10.

All right.

And, then the other thing -- two things.

Capital spending you said was a little lower in the quarter?

Yes.

Do you see yourself still coming in around $25 to $30 million for the year?

Yes, I think it will be -- I we had previously guided to a somewhat higher number in the lower 30’s.

We think it will be closer to 30, probably $30 million.

We see a little bit more spending in the 4th quarter, but we’re not going to get -- it’s unlikely that we’ll get above $30 million as we initially thought we might.

Okay.

And, then good comments on your Asian automotive business with your product wins there.

Do you have an idea what your share is in South Korea and who the other competitors are there?

We know the major competitor is a Japanese company called Pacific Electric who certainly have the -- specific engineering who have the dominant share for sure, in Japan and probably the majority share in Korea.

So, I would say we’re the second player there.

I guess our share’s are in the 30 to 40 --.

I think maybe a third of the market, 30%, 35%.

Okay, very good.

That’s all I have.

We’ll take our next question from Jeff Rosenberg with William Blair & Company.

First question that I wanted to ask you.

If you look at your gross margin performance during the quarter relative to the sequential increase you saw in sales, did you get as much leverage as you would have expected, or you maybe some commentary there on some of flips and takes in terms of pricing of raw materials and how that affected your overall results.

Yes Jeff, we -- there were some flips and takes in the quarter as you suggest and certainly pricing in electronics continues to be a challenge although we didn’t see any trend changes there.

We are continuing to have some impact from raw materials.

Again, no major trend change there either, but certainly year-over-year it’s having an impact.

We saw some other charges flow through that weren’t called out that -- some inventory charges that relate to this switch over to [Lettree] Products that went through the 3rd quarter that I think as we get out into 2006 that will be mostly behind us.

Then we said we had some other miscellaneous charges.

Assets write down to things that weren’t large enough in the visual aides to be called out.

So I think your point is well taken and I think your implication was that gee you would have thought we would have seen a little bit more leverage on the gross margin line.

In fact, I think we did see a little bit more than probably what you’re seeing coming through there because of some of these other charges.

Okay and a couple other follow-ups on that, I mean one would be how much is Teccor hurting your gross margin relative to the profile we’ve seen of the company in the past -- I’ll start with that.

Certainly, the fact that Teccor’s running at relatively low levels of utilization, particularly on the fab is having an impact.

As Gordon mentioned, we have some volume, we believe coming that should -- that we should be able to start to see that ramp up some in 2006.

But it’s been obviously disappointing this year, as we go through this change over of technologies from the old PSDN’s systems to the voice-over IP and 3G and some of the newer stuff where these products are being used.

And right now, certainly the path utilization is impacting our margins -- no question about it and will continue certainly through the 4th quarter.

Okay.

And then, the other question on that was with your shipping business to Asia in the electronics side, does that changed the competitive environment at all and maybe the question I’m asking is can you remind us what your typical expectations for your annual pricing declines and where you are right now in terms of what you’re seeing in recent quarters.

Yes, I don’t really think it’s changed dramatically.

I think we always had competition in Asia.

But I certainly think that there is an expectation as the design cycles and the product life cycles get shorter and every new product design is an expectation that component costs are going down.

We’re only getting about 7% overall price decline for electronics for this year.

We expected it to be at about the same nature next year.

And, of course, we are constantly trying to make that up in manufacturing efficiencies.

Although this last year, as we’ve mentioned more so in our automotive and electrical business the negative affects of raw materials can impact us and the effects of transportation, so another reason to have plants in Asia is to be close to our customers.

So we’ll be moving our production there -- that’s really, where the customers are for electronics.

So, when you look at next year and you look at your margins of the operating line.

I don’t know it’s probably not fair to ask you to give us guidance as to what you'd expect to do, but what’s a fair expectation as to we’re a long way from the mid-teen’s operating margins that ultimately we’re targeting.

But I mean how much ground do you think you can make up in a mid-single digit growth environment in operating margin over the next year.

Yes, good question Jeff.

We’re not going to get huge amounts of operating leverage although we are -- we’re certainly are going to see some good unit volume increases.

We’ll be introducing some newer products that in some cases will have some attractive margins in leveraging some of our recently introduced products that have that.

The expectation is that we’ll see a little less of some of the noise that we had this year related to some of the inventory change between leaded and lead-free.

So I think we are certainly expecting some meaningful improvements year-over-year, but with the kind of growth we’re talking about we’re not going to make it to double digits operating margin in 2006.

I think the goal would be that we'd be looking at double digit operating margins exiting the year, but for the full year it’s going to be something less than that.

Okay.

And, then the last question I had was just on your characterization that you’re seeing normal seasonality in Q4.

I guess I would have felt like with the mix shift you’ve seen in your electronics business while consumer electronics more Asia that perhaps you would be a little bit seasonal that you’ve been in the past.

Anything else happening in the business that is offsetting that or am I just I wrong in that the business for you is still pretty seasonally down in Q4 still?

I think it’s still seasonally down in Q4, you’re correct that as we start to move more -- more of the electronics business -- as it continues to move to Asia.

That will dampen that seasonal impact I--certainly Asia doesn’t see the same impact from some of the year-end holidays as we do here.

Although, I think we still see -- we still see some slow down in Asia even as we get towards the end of the year.

So, we haven’t really seen a step change in our Asian exposure, we’ve seen some gradual change and therefore, you know we’re planning for at least a fairly typical seasonal impact.

But there is nothing else underlying that would cause us to be more negative about the 4th quarter at this point.

Did you say what the book to build was in the 4th quarter?

We -- no we didn’t but I can tell you that the end of the quarter with a book to build is – that was around one to one.

Okay.

Great, thank you.

Next is Greg Halter at Great Lakes Review.

Gordon, thank you very much for all the commentary on the different sectors in the electronics, I appreciate that.

Phil, I wondered if you could provide some more detail on the tax or the repatriation, how much and what the tax impact was specifically.

There was a lot in the ways of the tax rate in the 3rd quarter and as I think many of you probably appreciate with the new accounting regs whereas in the past we were able to kind of look forward and show a smooth rate over time.

Now we’re required to flow current items that are current quarter items right through the P&L from a tax rate perspective.

So we have those, they flow through, and there was just -- there were a number of item including some issues with repatriation that hit us that I characterized as one time items.

The one piece of that, that will be recurring to some degree as we also talked about, was the Ireland restructuring charge.

But I think as we get past that we would expect our--and as we said in the commentary, as we get up into 2006 we see some other positive things that will help our tax rate and certainly at this point we see our ability to offset any impacts of the Ireland charges that we expect at this point in 2006 and have something that looks like more of our traditional tax rate going forward.

And, that’s around 35%?

It’s around 35%, right.

And in the quarter, you had other income of about $3 million.

I know, or at least, I think $1.4 million of that was the gain.

Yes, actually, we had $1.6 million flow through that line relative to the gain and then we had a couple hundred thousand that came off the balance sheet relative to that property that netted to $1.4.

So there was $1.6 in there -- there was some rental income that we typically have that was several hundred thousand dollars and then there was probably about a million dollars of foreign exchange balance sheet re-valuation for an exchange gains that flowed through there and then some other noise.

So most of that is more or less one time specific to the -- to this 3rd quarter?

Yes, I would say that other than the rental income is the only thing that we would be able to count on going forward and then yes, that’s probably right.

Obviously, the foreign exchange gains can continue or they can switch back the other way.

Right, okay.

And can you provide some further thoughts on the Company’s thinking regarding the share re-purchase again, specifically with the stock at 24 I think it is as of today.

Yes, well we liked the stock at 27 plus when we were buying it earlier in the 3rd quarter and so I think we haven’t changed our view of that and so we still have 750,000 or so shares left on our re-purchase authorization so you know that’s certainly something that we’ll be looking at as a use for our free cash.

And if you hit that 755 let's say, is that something where you would go back to the board to re-look at upping the authorization?

It’s certainly -- we could.

We’ll face that when we come to it but certainly, it’s something that could potentially happen.

Okay, I just want to want to get this right, I think it’s been asked a couple of times relative to the 4th quarters guidance.

If you remove the $2.5 million charge of the after tax $0.10 it’s giving you an operating margin of around double digits 10% or so.

No, it's not going to give us an operating margin double digits – I’m not sure--

Excluding the $2.5 million charge?

When we talk about double digit operating margins, we’re talking about exiting 2006, not exiting in 2005.

Okay.

And so we, no – we would – obviously the operating margin for that charge is going to be—it's going to be a lot lower than that, it’s going to be in the same general range as what we’ve seen in the last two quarters.

That’s with the charge?

With the charge, yes.

Okay.

All right.

Thank you for the clarification.

Yes.

I think we probably have time for one more question.

Okay, our last question will come from David [Pollett] at Siegel Bryant.

I don’t mean to ask the same question again, but if we just focus on sort of your operating numbers for the 4th quarter.

Do you believe that your margin will be up year on year ex the charges of operating margin in the 4th quarter?

We believe that it will be up year over year, ex the charges.

Be it relative to – well relative to last year’s 4th quarter?

Yes, assuming the number of 7.4% operating margin for last year is correct.

Are you looking for an increase in operating margin ex the charges?

Let me do some math here –yes, I think it’s going to be – it’s probably going to be in the general range of where it was last year, would be my guess.

And it may be slightly higher, but not dramatically so.

Okay.

Now the charge is, the way that I understood it, it is at 2.5 million is that $0.10 per share and then there was something with the tax rate in there, though, no?

There was – basically the – we get limited tax shield on that charge, because of our specific tax situation in Ireland.

One tax rate there and you have some specific issues there relating--impact our tax rate, so we get limited deductibility there at AA so that – a significant piece of that 2.5 million jumps right through to the net income line, so it effects – that’s the $0.10 that I was referring to.

Okay, so if the $2.5 million charge which equals $0.10 per share but that charge is increased because of the limited – that $0.10 is potentially increased because of the limited tax shield that you have?

If it was fully tax protected, it would be more like $0.06 or $0.07.

Okay.

But on a – but when you give the guidance of $0.23 to $0.26, is that – that includes a full $0.10 charge in there, it doesn’t have any tax affect on it.

So you believe your operating number will be somewhere around $0.25 for the 4th quarter, is that --?

Yes– the $0.24 to $0.26 was excluding the charge.

Okay.

And so we think we’ll take the $0.10 charge off that number.

Okay.

Okay.

Okay.

Thank you very much.

That concludes your question and answer session today.

At this time, Mr. Hunter, I’d like to turn the conference back over to you for any additional closing remarks.

Thank you very much.

Thanks for your questions and we look forward to talking to you one quarter from now.

Thank you.

That does conclude today’s conference.

We appreciate your attendance.

You may disconnect at this time.