Littelfuse Inc (LFUS) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse, Inc. second quarter 2006 earnings conference call.

Today's call is being recorded.

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

Thank you.

Good morning and welcome to the Littelfuse second quarter 2006 conference call.

Here with me today is Phil Franklin, our Vice President of Operations Support and Chief Financial Officer.

As you saw from our news release, this was another great quarter for Littelfuse.

Sales and operating cash flow both set new records for the second quarter.

Excluding special charges, it was also a very strong earnings quarter.

Phil will begin today's call with the Safe Harbor statement and a brief summary of our press release.

I will provide additional comments on our second-quarter results, as well as future trends and activities related to our major corporate initiatives.

After that we will open the call up for questions, and we expect this call to last about 45 minutes.

I'll now turn the call over to Phil.

Thanks, Gordon.

First, the Safe Harbor language.

Any forward-looking statements contained herein involve risks and uncertainties, including, but not limited to, product demand and market acceptance risks, the effect of economic conditions, the impact of competitive products and pricing, product development and patent protection, commercialization and technological difficulties, capacity and supply constraints, the impact of changes in commodity prices, exchange rate fluctuations, actual purchases under agreement, the effect of the Company's accounting policies, labor disputes, restructuring costs in excess of expectations, and other risks which may be detailed in the Company's SEC filings.

As Gordon mentioned, our operating performance for the quarter was outstanding.

Sales increased 19% to a record 138 million.

Earnings per share, excluding special items, more than doubled to $0.52 a share, and free cash flow for the quarter exceeded $20 million for the first time ever, and through six months stands at over $30 million.

Quarter-end cash exceeded debt by $9 million, even though we closed and paid cash for three acquisitions in the first half of the year.

That said, reported earnings for the second quarter were only $0.02 per share, which included a number of special items.

During the quarter we announced the varistor product line currently manufactured in Ireland would be moved to China, and we reserved $17 million for termination costs.

During the quarter we entered into a contract to sell the Heinrich electronics site in Witten, Germany, which necessitated a $2.8 million non-cash charge.

The sale will close by the end of the year, by which time all manufacturing will have been moved to Asia.

On the positive side, we recorded a $2.8 million tax credit during the quarter related to a net operating loss acquired as part of the Teccor acquisition.

This was partially offset by a $900,000 onetime tax charge.

So, for the quarter, we set in motion the final plans to exit the Ireland and Witten, Germany cites, and cleared the decks for the remaining -- of the remaining large exit costs.

At the same time, we gained a glimpse of the earnings power and cash-generating capability of our current business model, once these legacy issues are behind us.

Now let me turn it back to Gordon for some market commentary and more detailed discussion of our business performance.

Thanks, Phil.

Let me start with the electronics business, which was the major driver behind our strong performance for the quarter.

Electronics is our largest business unit, accounting for about two-thirds of total sales.

Second-quarter sales were up 27% year-over-year, and increased 13% sequentially over the first quarter.

Year-over-year second-quarter sales increased across all end markets and all geographic areas.

The telecom market continued to be very strong in all geographic areas, and we saw continued growth in the general electronics end markets.

In Asia, we also benefited from a strong digital consumer electronics market and design wins generated through our customer-focused solution strategy.

New design wins amounted to $4.9 million in the second quarter, bringing us to a total of 8.2 million for the year-to-date.

This puts us well on our way towards our target of $20 million for the year.

We achieved solid growth across all product categories.

Silicon products were up 17%, fuses increased 22%, and other electronic products were up 38% for the quarter.

The only potential grey cloud in this very positive report is our concern that part of the sales [roundup] we are currently seeing is an inventory build in our distribution channels.

That being said, based on the data we have, we are optimistic about the rest of the year.

We believe the third quarter will be similar to the very strong second quarter.

We have the capacity to accommodate this increased demand.

Together, our expansion in Asia, worldwide distribution, and lean manufacturing programs give us the flexibility we need to quickly adapt to changes in our markets.

In consumer electronics, LCD TVs and DVD players are among the biggest drivers, with higher-than-market growth rates.

Almost 42 million flat-panel LCD sets are expected to be sold this year, about double the 21 million sold last year, according to DisplaySearch.

Sales of competing plasma TVs are also rising.

We have this market covered, with a variety of our fuses and ESD devices protecting the sensitive circuitry in both of these product categories.

A related and also fast-growing area is digital set-top boxes.

Consumers are trending towards higher-end advanced set-top boxes that will accommodate the latest technology, such as digital video recorders and the increasing number of HDTV channels.

Sales of computers and laptops remain strong; in fact IDC recently rated the projected growth rate for this market in 2006 from 10.5% to 10.8%.

MP3 players continue to be one of the hottest items in consumer electronics today.

Apple's iPod has a U.S. market share of over 75% for these products.

The company shipped 8.1 million iPods in its recently ended third quarter, a 32% increase from the same period last year, and Littelfuse circuit protection products are in every single one of these devices.

In the mobile phone market, Nokia recently indicated it expects third-quarter volumes to be up sequentially.

The company continues to expect a 15% increase in unit shipments for the mobile phone market in 2006.

Much of this growth continues to be in China and in developing countries such as India.

Our increased sales of thin-film fuses and our ESD product offerings are benefiting from the steady growth of this market segment.

On the customer premise equipment side of the telecom market, applications such as voice over IP are also gaining market share.

As these growth rates indicate, we are in the right place at the right time.

We offer circuit protection products for every one of these end-market applications and, more importantly, we are the circuit protection supplier of choice for many of these leading global manufacturers.

We are also well positioned to work closely with our customers in developing the products of the future.

Getting our products designed into new products and product applications is one of our corporate growth initiatives.

As I mentioned earlier, we had a successful second quarter in this regard, with $4.9 million in sales resulting from a number of major design wins.

One of our recent wins is a $1 million opportunity with a Japanese gaming manufacturer that will use our lead-free fuses in the power supply for a new game console.

We were already well positioned for this business, as we've had good relationships with this customer for many years.

The project required strong coordination among our sales teams, as the design is done in Taiwan, the manufacturing in Thailand, and the ultimate design authority in Japan.

It also involves a fast, high-volume ramp up.

Another aspect of this win is that it highlights our ability to meet the green demands of our customers with a complete line of lead-free products.

The second new win is another $1 million opportunity, this one to provide overvoltage circuit protection for a 3G wireless telecom base station being developed by a Chinese company.

Each base station will contain an average of $15 of Littelfuse TVS diodes.

As 3G begins to be accepted throughout the world, we have a growing number of opportunities to provide the circuit protection components these manufacturers need.

In fact, we currently have design wins with several other mobile phone manufacturers in the U.S., Europe and Asia.

These are just two examples of the many new design-in business opportunities we are pursuing.

They illustrate the successful combination of circuit protection expertise, global presence, and worldwide manufacturing and distribution capabilities that Littelfuse brings to the table.

Two other corporate strategies are to leverage and improve the Asia position and make strategic acquisitions that strengthen our product portfolio and add new markets and customers to Littelfuse.

The electronics business continued to move forward with both of these initiatives in the second quarter.

We completed the acquisition of Concord Semiconductor, a leading Taiwan-based designer and manufacturer of TVS diodes and other overvoltage circuit protection products.

This acquisition enhances our product line and adds a silicon wafer fab facility in Asia to our existing silicon design and manufacturing capabilities in Irving, Texas and Matamoras, Mexico.

Our plan is to expand the Concord Semiconductor operations in Asia as we continue to grow in this region.

As Phil discussed earlier, in late June we announced an agreement to acquire the assets of Song Long Electronics.

Song Long has been a supplier of some metal oxide varistors to Littelfuse for the past five years.

We have developed a strong working relationship with the Song Long management team and are impressed with their workforce.

Song Long's significant lower-cost manufacturing platform and location close to our customers in China made this acquisition an excellent fit for Littelfuse that we believe will yield benefits for many years to come.

We continued our acquisition momentum last week with the purchase of the gas discharge tube assets of SRC Devices.

The acquisition adds a base of industrial applications to this line and further strengthens our presence in the telecom market.

We plan to move production of this line to our existing facility in Suzhou, China to reduce costs and add additional volumes to the China facility operation.

The completion of these three acquisitions brings our total number of acquisitions in the electronics business to four for the year.

Together these acquisitions not only expand our product portfolio, but they also enhance our ability to develop the leading-edge circuit protection products of the future.

In addition to internal product development and acquisitions, another growth opportunity for us is licensing our technology to other companies.

On Monday we announced an agreement to license our innovative TMOV technology to Walsin Technology, a Taiwanese company.

The TMOV integrates metal oxide varistors with a thermal fuse to protect against both power surges and overheating.

It was a major breakthrough in varistor technology when we introduced it about four years ago.

The license agreement with Walsin makes our technology the standard footprint in the industry and broadens the customer base for this product.

We will continue to look for future opportunities to leverage our investments in new product development.

Looking ahead, new products that we believe will continue to drive the electronics market, including LCD TVs, DVD players and set-top boxes in the consumer segment -- consumer electronics segment.

In the customer premise equipment segment and the telecom market, applications such as voice over IP are expected to grow at a fast pace.

As more and more manufacturers incorporate the emerging HDMI, or High Definition Multimedia Interface, into their products, we expect that consumers will change out their current equipment and upgrade to this new technology.

This is good news for our line of polymer ESD products, which are specifically designed for high data rate applications and provides for stringent performance demanded by the HDMI circuit.

Many of the recent acquisitions we've made and much of our new product development is focused on taking advantage of these fast-growing markets.

In summary, we are cautiously optimistic about the rest of the year for our electronics business.

We believe our electronics business is well positioned for the long-term and we look forward to continuing to execute our growth strategies.

Next I'd like to comment on our automotive business unit, which accounts for about 25% of total Littelfuse sales.

For the second quarter, global automotive sales were up 6% over the same quarter last year on a 1% global increase in car build.

New business in China and the off-road truck and bus segments were the main contributors to this improved performance.

As you may recall, the off-road truck and bus segment is a new market focus for us in 2006.

This market provides opportunities to expand our customer base and leverage our core products and technologies into new applications.

Global automotive sales were up 2.1% sequentially from the first quarter, on a 2.4% decrease in global car builds.

All geographic regions, except North America, improved in the second quarter.

Car builds declined by 2% in North America, as the market continued to move away from light trucks and SUVs, where we have higher product content, to passenger cars.

We are actively pursuing and seeing success with design-in opportunities for the passenger car market, as well as for new trucks and SUVs under development.

These opportunities have the potential to benefit us over the mid to long-term.

However, as you know, there is considerable leadtime for new product development in this business due to the length of the design cycles for new vehicles.

J.D.

Power's current outlook for 2006 forecasts an increase in global vehicle production of about 4%.

The forecast still shows very modest car build increases in North America and Europe of 1 to 1.5%.

Most of the growth in global vehicle production is expected to come from Asia and South America, with Asia growth estimated at 8% and South America at 7%.

China, Korea, Southeast Asia, and even Japan, are all set to expand production, driven by both domestic growth and export demand.

Growth in South America will be led by exports for Volkswagen and continued domestic market expansion, with the majority of this growth in the small compact car segment.

In response to these trends, we will continue to increase our emphasis on Asia.

We're particularly focused on the design-in of new products in Japan.

A significant win in this area is a recently signed agreement with a major Tier 1 supplier in Japan.

This agreement paves the way for us to launch our new low-profile mini fuse with them.

This new business will begin in late 2006, with our products being used on the platforms of several global OEMs.

In addition, the steady car build increases in China and the emerging India market also provide opportunities to expand our automotive business.

We are continuing our investment and penetration into non-passenger car markets in Europe and North America, and are encouraged by our recent successes in this new area as well.

Demand for our new high-current products, such as MasterFuse, CablePro and BF Inline continues to grow.

We have responded to many new inquiries and quote opportunities in Japan, Korea, India, Europe and North America for most major OEMs, and received several prototype orders.

We've also secured design wins for platforms at Renault, BMW, VW, Ford, Chrysler and General Motors.

Business on some platforms started this year, but most will start in 2007 and 2008.

These leading global OEMs recognize that our high-current products are the perfect solution to protect the increasing number of systems in the vehicle that require higher power.

These include electronic power assist steering, PGC heating systems in diesel engines, and beltless engine systems.

Our acquisition strategy applies to all three of our business units.

In addition to the acquisitions I mentioned earlier in the electronics discussion, we also completed a strategic acquisition in our automotive business unit.

In June we acquired the assets of Catalina Performance Accessories.

Catalina markets the Smart Glow blade fuse in an automotive aftermarket.

The Smart Glow product is a standard automotive blade fuse that features an indicating light that glows when the fuse is blown.

This product complements our broad product offering in the aftermarket.

We believe it also offers growth opportunities in the off-road truck and bus market.

But, along with opportunities come challenges.

The most significant challenge we have right now is the substantial increase we are experiencing in commodity prices, particularly zinc, copper and silver.

We do not see significant improvements in the near-term, and as a result, we are continuing our efforts to pass these cost increases through to our customers.

Commodity surcharges are being implemented with customers where possible, and where we have long-term contracts we are working with our customers to find appropriate solutions.

We believe we will be able to moderate the impact of the commodity cost increases over the next few months.

In summary, while our automotive business unit has short-term challenges, we are continuing to strengthen our position in this market.

We're excited about the opportunities we have to further grow this business in the months and years ahead.

That brings me to our third business unit, the PowerGuard electrical business, which sells products only in North America and comprises about 10% of total Littelfuse sales.

Sales in this business increased 6% in the second quarter of 2006 over the same quarter last year.

Bookings were very strong in the second quarter, increasing 13% over the same period last year.

Both of our electric market segments are strong right now.

We're getting some help from the weather, too, as industrial facilities across the country are cranking up their air conditioners to get away from the high temperatures, helping to drive the demand for replacement fuses.

Another very positive development is our success in continuing to pass on price increases and effectively manage pricing.

We've been able to implement two price increases in 2006.

Typically we receive one price increase each year, but the commodity pricing on copper was strong enough to justify a second increase.

We believe the positive impact of both increases will go a long way in offsetting the higher raw material costs we are experiencing.

A significant portion of our electrical sales are in the non-residential construction market, with the remainder in the industrial market.

The nonresidential construction market has been very robust in 2006.

And despite what we've been reading about concerns with the fundamentals of this market -- including rising short-term interest rates, inflation and key construction material prices, and the economy -- the American Institute of Architects has a positive outlook for this segment.

That AIA Consensus Construction Forecast Panel recently predicted solid levels of activity for the remainder of 2006 and throughout 2007.

The AIA Panel is forecasting a 6.3% increase in nonresidential activity in 2006, and an additional 6.2% increase next year, with growth evenly balanced between the commercial, industrial and institutional sectors.

If achieved, this would be the best two-year period of nonresidential construction since this market grew by 30% in 1997 and 1998.

On the industrial side of our electrical business, the industrial sector that we sell our MRO replacement fuses into grew 4% in the second quarter, according to information from the Federal Reserve Board.

This is slightly stronger than the 3.5% increase in the first quarter.

Another measure of our markets is shipments of OEM products that use our fuses.

These shipments were very strong in the second quarter, increasing 12.8%.

This is on top of a 9.8% increase in the first quarter.

As these numbers indicate, the second quarter was considerably stronger than the first quarter.

We believe these positive upward trends provide the potential for continued growth in this business in the third quarter and beyond.

To facilitate that growth, our electrical business continues to move forward with several growth initiatives.

These include pursuing opportunities in the OEM segment and strengthening customer relationships by offering services that help them better operate their business.

In the OEM segment, we want to leverage our circuit protection products and expertise by working closely with our customers to develop niche products that meet their specific needs.

We've been pursuing a number of opportunities in this area and hope to begin seeing the fruits of our labor in the second half of this year.

Our thrust into selling services is also beginning to take shape.

As I discussed in more detail last quarter, one of these key services is educating customers of the dangers of an arc-flash event and offering arc-flash hazard assessments.

As the global leader in circuit protection, we are an excellent resource for our customers in helping them to assure the safety of their manufacturing facilities, and we want to maximize this competitive advantage.

Looking ahead, both the industrial and nonresidential construction drivers are expected to remain strong in the third quarter and the balance of the year.

Our efforts in the OEM and services area could also lead to additional growth in the third and fourth quarters.

As in our automotive business, the biggest challenge to the electrical business continues to be commodity pricing, especially copper.

The price increases I mentioned earlier are one part of the equation.

Another part is our ongoing efforts to help offset the increases by reducing our own costs.

We are currently utilizing our Asia sourcing tame to locate vendors that can assist us with our cost reduction programs and facilitate our new product development efforts.

The transfer of production from Arcola, Illinois to our facility in Piedras Negras, Mexico has been completed, and we are now focusing on process improvements, quality improvements, and lean manufacturing.

We are hopeful that the combination of price increases and lower costs resulting from the move to Mexico will soften the impact of [planned] materials prices as the year progresses.

That completes my review of our three business units.

Looking at the Company as a whole, one of the challenges of being the leader is to stay on top.

Two of the keys to our future success are developing new technology and strengthening our global competitive position.

Littelfuse has a circuit protection technology base that is second to none.

We're continually building on this base through acquisitions and the internal development of innovative new products like the TMOV.

Research and development expenditures were up nearly 13% in the second quarter over the same quarter last year, as we continue to develop leading-edge circuit protection products for our customers.

Littelfuse is also a strong competitor.

Moving the varistor line to China and transferring electrical production to Mexico are two more steps in our strategy to continually improve our cost structure.

We also have numerous programs under way to reduce operating costs and increase efficiency.

The improvement in our operating margin that Phil discussed indicates the progress we are making on this front.

In summary, the first half of 2006 is off to a strong start.

While commodity prices continue to be a challenge, we're optimistic that we will continue our momentum in the second half of the year.

Now I'll turn the call back to Phil for comments on our guidance for the third quarter, and then we'll open for questions.

Thanks, Gordon.

Third-quarter sales, as we said in the press release, are expected to increase zero to 3% sequentially as a result of the recent acquisitions of Concord, Catalina and SRC Devices.

These acquisitions contributed approximately $2 million in sales to the second quarter, and are expected to contribute about $5 million in sales to the third quarter.

And in the aggregate, they will be modestly accretive to earnings.

Operating margin for the third quarter is expected to be somewhat lower than the adjusted operating margin for the second quarter.

The lower expected margin for the third quarter reflects the impact of higher commodity prices and temporary overhead cost increases.

We expect the impact of commodity prices to be approximately $1 million higher in the third quarter than in the second quarter.

We are implementing price increases, as Gordon said, to pass on as much of this as possible, since the largest of these increases will not take effect until late this year or early next year because of existing contracts.

The temporary overhead cost increases relate to situations where we are transferring products into our consolidating facilities, in which we have to add headcount at the receiving location before we reduce headcount at the sending location.

These temporary redundancies are expected to add about 500,000 to 700,000 of incremental cost to the third quarter.

These redundant costs will be mostly eliminated by the end of the year.

So, with the zero to 3% sequential sales increase and the higher costs just discussed, diluted earnings per share for the third quarter are expected to be in the range of $0.45 to $0.50.

The fourth quarter is expected to show the typical seasonal sales decline of about 5% sequentially.

While we are not ready to give guidance out past 2006, we would like to comment on the large number of projects currently in process that we believe in the aggregate will fundamentally change our future cost structure.

These include -- Heinrich integration and closure of the Witten, Germany plant;

GDT product line transfer to China and closure of the Swindon, England plant; varistor product line transfer to China and closure of the Ireland plant; transfer of thin-film fuse [back-end] from Chicago to the Philippines; and Asia logistics simplification and closure of the Japan and Singapore distribution facilities.

The production moves to Asia, elimination of legacy facilities, and streamlining of our supply chain are major steps on the way to a less complex, lower-cost model for Littelfuse, which we believe will deliver consistently higher margins with less variability in the future.

This concludes our prepared remarks.

Now we would like to open it up for questions.

(OPERATOR INSTRUCTIONS). [David Callas], [Segal Bryant].

I have three questions.

In relation to your $0.45 to $0.50 guidance that you put out for the second quarter, could you tell me what you feel you guys actually earned in the quarter?

Going through the numbers I got sort of three different numbers.

Could you help me with that a little bit, where you came out?

You're talking about for the second quarter.

Well, I think you have to do a couple of things, and one is to remove the special charges that we talked about, which would be the Ireland restructuring charge and the non-cash write-down of the German real estate.

So if you remove those, if you remove the onetime tax benefit that we had, net of the tax increase -- or the tax charge that we talked about, what we've really done -- we look at that is you've got to take those out, but then we've normalized the tax rate to what we think the go-forward rate will be for the rest of the year, which is about 35%, as we said in the press release.

So you take out the two major charges, you normalize the tax rate, and we get a number of about $0.52 a share for the second quarter.

Secondly, the sequential growth -- so, approximately 138 million in revenues for this quarter; approximately 141-ish for next quarter, if you look (multiple speakers) guidance. 5 million of that looks like it's going to be from acquisitions.

Actually, incrementally about 3 million of that is from acquisitions, because we had a couple million in the first quarter -- in the second quarter, and then we get an -- we get 5 in the second quarter.

So the increment is a little over 3 million.

But to my point, that is -- so essentially the core business is going to be down a little bit sequentially.

Flat to down slightly.

Just looking at the numbers that I have, that looks to be below sort of normal growth.

Is that fair, and should I take away anything from that?

Are you guys just being cautious, or are you seeing something in the distribution channel at this point?

That's a good question.

First of all, the automotive business typically takes a seasonal decline in Q3 because of the plant -- because of our customer shutdowns in both Europe and North America.

So that's contributing to it.

But I think your point is still a fair point, and I guess I would characterize it that we -- coming off a very strong second quarter, and a slightly better-than-expected second quarter, we were somewhat cautious in projecting really any kind of an increase in Q3, even though, I think, on the upside we could potentially achieve that.

So are you -- I don't want to [parse] this too much, but are you being cautious, or are you actually -- I know the book-to-bill is 1.03, and I know last quarter you said that there was some difference between orders and shipment.

Are you actually seeing anything out there, or are you just getting the sense from just the distis that inventory is building to a level where they need to, and you've got a potential slowing economy and concerns that way?

Let me take that.

I think we are just being cautious from what we hear from distribution, and I think what other companies are also seeing is that we're just wanting to be on the cautious side of that.

I don't think we [now are] on our own data that we're really concerned.

Finally, and you may (indiscernible) the incremental cost due to the commodities in the second quarter was what?

I guess it really -- it depends on incremental to what.

But let's talk about -- let's talk about -- if we talk about it all relative to kind of the average commodity price for 2005, we took about a -- roughly, about a $2 million hit in the second quarter.

We think we'll take about a $3 million hit in the third quarter.

Does that help?

That helps.

Jeff Rosenberg, William Blair & Company.

(technical difficulty) on the impact of margins in the third quarter.

I would have thought that one of the negatives quarter-on-quarter would be the greater effect of the acquisitions on the margin number.

Is that the case?

Can you talk a little bit about whether that's diluting margin at all as you pull these in?

It's a small enough number, and it will be slightly dilutive to margins, but it's not going to move the dial very much.

I mean, we said that the acquisition -- we still believe some very modest accretion from the acquisitions.

But it will have a slightly dampening effect on the margin for the quarter.

Great.

I was interested in the comments you made at the very end of your prepared remarks about your ability to avoid some of the volatility in your margins through the cycle.

I was wondering at all if you had any willingness to kind of quantify what your target is as to how -- how you could keep margins from going down as much as they have in the past.

We're early enough on in this that we're not going to throw a target out there yet.

The things that we think that we're doing that will reduce volatility in the future is -- number one, as we make some of these moves that we discussed on the call, and we've discussed in the past, and as we -- particularly as we close some of these high-cost, high-fixed cost legacy facilities in high-cost areas and move to the Far East, not only do we get -- not only do we get a significant improvement in labor rates, but we also get a fairly dramatic reduction in fixed cost overall, just because all the cost that goes to support that facility and support that plant is generally at a much lower level putting that into one of our Asian sites.

So we think this lower cost structure -- particular a lower fixed cost structure as we make these moves, by having generally lower overhead in our Asian facilities than we do in our North American and European facilities, and also having fewer facilities generally.

As we've made a number of these acquisitions, we have a lot of extra plants in our system that we're now consolidating into a fewer number.

So that also will help us drive lower overhead costs.

A big part of it is taking the overhead costs down.

Another piece of it that we didn't talk about on this call but we've talked about in the past is just the new product revenue that we generate that, even in the down cycle, will help us mitigate some of that trough in sales that we've seen in the past.

Can you talk about leadtimes, particularly at Teccor, and what they've done trending-wise lately?

The Teccor leadtimes had been out as far as 20 weeks, out from the norm for certain products -- out from a norm of roughly 10 weeks on those, our historical norm.

Many of those leadtimes have been brought back in some, but we still have a number of Teccor products that are out significantly more then our 10-week historical standard -- probably in the 15, and there may be a few that are still out close to 20 weeks.

We have brought the leadtimes in a little bit in the last couple of months, due to production increases, not due to demand reductions.

Right.

And do you feel like there's much inventory out there with those customers as they've had to be operating in that leadtime environment?

We think that most of our customers for the Teccor products would love to have more if we could get it to them.

My last question is on automotive.

You talk about the relative difficulty of the challenges there profit-wise.

Historically I think of automotive as being above corporate margin business.

Is that still the case, or have these struggles taken that down to where it's more of a slight drag on the overall?

I would say it's in the general area of our corporate average, but you're right; it has come down from -- historically it has been our most consistent and, generally, one of our more profitable businesses.

It's still a very attractive business.

But with the commodity prices, the pressures that we've seen, we have seen those margins come down.

As we implement price increases out towards the end of this year and into next year, which is really where the biggest price increases really are scheduled to come from out of the automotive business, we expect to claw back some of that margin that we've lost.

John Franzreb, Sidoti & Co.

I apologize if you said any of this before, but I'm actually on vacation calling from a cell, and it's kind of bouncing in and out on me.

It seems to me like you rattled off six or so initiatives that kind of then bring down the fixed cost structure (indiscernible) some move or what's going on with your Japan distribution facilities.

Can you give us a sense of the timing of the completion of these projects -- what's going to be done in '06, what's going to be done in mid-'07, what the aggregate kind of cost savings or margin benefit those moves will have on the Company?

I will try to generally characterize that for you.

A lot of these initiatives -- the Heinrich integration and closure of the Witten, Germany plant, the transfer of the thin-film back-end to the Philippines, the GDT product line transfer to China, closure of the Swindon, England, plant -- those all are completed in -- either by the end of 2006 or the early part of 2007.

We also talked about Asia logistics simplification and closure of the Japan and Singapore distribution facilities.

That will occur in that same timeframe as well.

The only one that really is significantly further out is the varistor product line transfer to China and the closure of the Ireland plant.

That's more of a 2008 event, although we will get some benefit in 2007 as well.

And that is the biggest number of all.

We talked about that being a $10 million annual savings.

To characterize the other ones, probably in the aggregate, are going to be that level -- that magnitude, or maybe even slightly more than that.

But Ireland is the biggest.

So once fully complete, do all these moves keep you at your historical op margin, or are we looking for margin improvement when everything is all said and done, give given the current pricing and raw material environment we're in?

We're looking for margin improvement when all is said and done, and we're looking for less margin volatility.

We think that the plan we have over the next couple of years for all these cost takeouts and fixed cost reductions in the business get us to something like the 15% operating margin target that we've been talking about for a while.

Obviously we're going to see some variation around that.

We're not going to get rid of the cycle, but we think, fundamentally, we're at a better margin level than we've been historically when we get all this done, even with price erosion.

One last question.

The distributors -- if I look back on some of the selling patterns over the past couple of years, it seemed like September is when there was stocking up more so, even with the seasonality that's going on in auto, and commercial wasn't as strong the past two years.

It seems like there's a lot of buying in September.

Are you suggesting that there's forward buying to June that will eat into your normal September selling?

We've always had the December dip.

Are they buying even in advance of that?

Can you kind of walk me through what's going on out there?

I wouldn't say that.

I think that -- we did have a very strong second quarter, for sure.

I wouldn't say that -- typically, we see Q2 and Q3 are pretty similar for us.

We usually see maybe a slight up in electronics and a slight down in automotive, and net net, it's pretty flat from Q2 to Q3.

We're not saying that we're going to see anything much different this quarter, although I think we've tempered -- we had such a strong second quarter for electronics, we've probably tempered our guidance a little bit just based on that, more than anything else.

[Jason Rogers], Great Lakes Review.

Going forward, what's your appetite for acquisitions, given all the ones you've made thus far, versus share repurchases with your strong free cash flow, cash balances?

I think if the stock price stays where it is right now, we'd definitely increase our appetite for share repurchases.

That said, we still think that we have an ongoing number of acquisition opportunities and companies in the pipeline that we think are right up our alley in terms of our strategy.

And we fully intend to continue to do acquisitions that support directly our strategy and our focus on the circuit protection market that we're in.

Are these acquisitions -- companies more small in nature, versus some big ones?

As we've said in the past, the ones that we feel confident that we can bring to conclusion over the next couple years, that we can target and go and figure out how to make the transaction happen, would tend to be smaller ones, similar to slightly larger than the last four or five that we announced this year.

But there are some larger ones out there that are going to be more opportunistic.

Most of the larger ones are not for sale today.

As we all know, things change, and they could be for sale sometime in the future.

And if that were to happen, we have a fairly good list of companies that are larger than the traditional acquisitions that we've done that we'd be very interested in.

Finally, the after-tax cost of stock options for the quarter -- was that $0.04 per share?

It would have been -- I think it was a little over $0.03.

It was between $0.03 and $0.04.

Alexander Paris, Barrington Research.

Great quarter.

I think most of my questions got answered.

The market didn't seem to like your report, however;

I'm kind of looking at it.

On distributors, we've talked about it quite a bit.

But just in general, looking at distributor inventories, as far as you can tell, are they about normal for this time of year?

(indiscernible) although I think the thing, the caveat we always add to that is that our business, particularly electronics, which is the bulk of the distribution business, is moving so much to Asia that now more than half of our business is there.

Predicting what is sort of average, I think, is a little more challenging as the business has grown in Asia.

But where we have much better data in North America, we would say it's certainly [at] average.

That was going to be [another of my questions].

Looking at the acquisitions and so forth, roughly, you said 50% of your business is now in Asia?

More than 50% of the electronics business.

There's quite a different geographical profile between each of our business units. (multiple speakers) it's very little in Asia, but (indiscernible) there, and our electrical business does not participate really very much at all in Asia.

Looking forward, your acquisitions are adding 10 million in the second half.

Does that include the last one that doesn't close until the fourth quarter?

We aren't assuming we will get any meaningful revenue from that in 2006; that will be a 2007 event.

So that's an acquisition that will, rough order of magnitude, add another $5 million to the annual run rate once it does close.

But that's not in the numbers at all that I gave you.

For the four, then, that you have closed, can you give just a rough idea of what the -- now that you've had it for a while -- the annual run rate on those are?

The Concord business we talked about being about a $16 million annual run rate.

And obviously that's something that we will grow over time and are focused on doing that.

SRC is -- SRC Devices is in the neighborhood of about a $5 billion run rate, and Catalina is about a $2 million annual run rate.

The SurgX business was really a technology acquisition.

And while it will help us leverage our polymer ESD business, ultimately we're not attributing any revenues specifically to that; no revenues came along with that business.

So we'll put that one in at zero.

And then the Song Long acquisition -- as we mentioned, that adds in the neighborhood of about $5 million of annual revenue.

That wasn't the reason we bought it, but we will have some ongoing revenue related to that business.

Just one other thing.

The assets (indiscernible) you've got gas discharge in there, and [read] switches], relays.

Is that mostly, though, gas discharge tubes?

That's all we bought.

We didn't buy -- we bought the asset that relates specifically to the gas discharge tube business; we didn't buy the company.

I guess I'm not real familiar with where they (indiscernible) you were already in the gas discharge business in, what was that, Mexico?

No, actually it was -- that was the Semitron acquisition that we did back in '03, where we bought some semiconductor products, but along with that we got a gas discharge tube line.

Right now that's the only product that's still made in Swindon, England, and we're in the process of transferring that to our plant in Suzhou, China.

And that transition will be complete by the end of the year.

And then, as we talked about with the SRC gas discharge tubes, they are currently being produced in Mexico.

We will not be buying the Mexico facility; we'll be buying some of the assets in that facility.

Over the next year or so we will be transferring those assets to China and be building those products in our facility in China.

For a while we will be buying -- we will be contracting with the previous owner of these assets to build product for us.

And the gas discharge tubes, I'm trying to figure out where they fit in with your overall product line, and what the market opportunities are for it.

Are they significant?

The product line that we have that came with the Semitron acquisition is about a 4 to $5 million product line for us, and this gives us two things with SRC -- more presence in North America, where SRC has been stronger, where our customers were primarily in Europe with the Swindon business -- so we get a geographical presence; and also, the products are slightly different in that they are more attributive to the industrial segment, whereas our existing products more fit into the telecom sector.

And so this sort of broad-based industrial market segment is attractive to us and gets us into that segment.

(OPERATOR INSTRUCTIONS).

Reik Read, Robert W. Baird.

Phil, with respect to the third-quarter EPS guidance that you gave, $0.45 to $0.50, can you give us an idea of what tax rate you're assuming for that?

That's a good question.

What we said in the press release was that the tax rate should average about 35% for the rest of the year.

So that was the rate that we did assume in our guidance.

It's conceivable that for Q3, actually, it actually could be a little bit lower than that.

But the guidance assumes a 35% tax rate.

Great.

Just a follow-up question on the distribution channel inventory.

It sounds like from what I'm hearing you say, Gordon, that the key risk factor is that you don't have as much visibility as a result of more of the business shifting to Asia.

Is that the case, and is there something else in there?

And can you give us a sense for what you think the risk -- the swing factor might be there if things go against you?

Yes, I think that's exactly the message.

When we talk distribution -- and everyone talks about metrics or book-to-bill and POS and POA and distributor inventory -- (indiscernible) really refer to the very transparent way of doing business in North America with distributors, and that's not really the case in Asia.

That's in fact not the case in Europe, either.

And so as we increase the business in Asia, the risk increases there.

And more than 80% of our business in Asia -- and that's more than 50% of the total electronics business -- is going through distribution.

And it's just that it's had a very strong first half that we just want to be cautious, as we don't have as much visibility, will that strength continue.

I guess I'm hearing you say you don't see any direct evidence of it; you're just saying because you have less visibility, you're trying to be a little bit more cautious?

That's true.

With respect to the price increases, I just want to make sure I'm clear on this.

It sounds like some of them you've tried to put through.

And I guess I'm wondering what's the receptivity to those that you've put through?

And then, as you go through the negotiation process on some of these longer-term contracts, what's the receptivity there?

It really depends on the segment.

First of all, we've had very good success in the electrical segment.

And the electrical distribution channel in North America accepts that, and I think we've had very good success, as we have the last couple of years.

Unfortunately the electrical business is only 10% of our total.

The biggest challenge is, clearly, in automotive, and that's where we are impacted mostly with these commodities.

It's the products have large form factors that go into [one of] fuse boxes, and that means negotiating with the Tier 1's that have to then try and pass that price increase through to the automotive OEMs.

And that's a very tough negotiation.

And some of them have long-term contracts where we're really fixed at the prices that we have.

So, the reception is not great, but we realize this is critical to keep the profitability of the automotive segment.

And so we've met with every single one of our top customers, all of those top Tier 1's, told them about the surcharge, explained the reasons for that, and made sure that we are pretty firm in making sure that we get these price increases.

But they're not going to happen, for many of them, in the short-term because of the contracts that we have existing.

The last question.

Just from a capacity standpoint, you guys had commented that you're about 85% overall.

Is that a comfortable level of utilization for you guys?

Or if you get a little higher than that, does that start suggesting that you need to add capacity?

And what would be your plans to do that?

The problem with an average number, obviously, is that it's just that, it's just an average.

To get to the 85% we have some that are at 70 and some that are close to 100.

So, areas right now where we're capacity-constrained, we've talked a lot about Teccor.

At this point, it's not so much physical capacity constraints as it is just getting ramped up, although we probably do have a few areas where we have some bottlenecks where we may have to spend some money.

But it's more in the back-end than in the wafer fab.

So the wafer fab -- our capacity is adequate to service levels higher than where we are right now, and we're moving to five-inch wafers, which will give us even more capacity there.

So the wafer side isn't an issue.

The back-end has been the bottleneck, and we're starting to see that improve.

But that -- even though we're listing that as 85% capacity, there are certain products we're maxed out on right now, and that's why we have these long leadtimes.

Some of our other products are constrained because we're in the process of moving them from one location to another.

Examples of that would be Ireland.

Another example would be the Heinrich TR5 electronic fuse that we're moving from Germany to China, and then the GDT product line as well that we're moving from Swindon, England to China.

All those are kind of maxed out on capacity because we're in the process of moving them.

And once we get the moves done, we should have adequate capacity to service the market.

So, I think, generally speaking, we're not -- we don't feel like we have to invest huge amounts of dollars into capacity additions at this point.

But we are capacity constrained in some areas for different reasons.

[Todd Peters], American Century.

Real quick, on the book-to-bill that you quoted there, can you give a little more color on where was the strength, more or less, in the second quarter, and then a little bit more color on what was -- well, I guess Q1 was high -- and then Q2?

The book-to-bill is referencing our electronics business.

Certainly we -- what we said, and it's really true, is we really saw pretty consistent strength across our business.

We saw good ramp-up in our North American distribution and also in our European electronics business.

Those businesses had been pretty soft in the latter parts of the prior year, and we saw a nice ramp-up there.

Asia also continues very strong.

And even though they had a pretty decent year the prior year, Asia is still showing -- and just about every part of Asia is showing strong year-over-year comps as well, up 20-plus% percent for the electronics business.

So it's pretty widely spread and across the board that we've seen this increase.

I guess my comment was it was at 1.17; then it fell to 1.03.

I'm not sure if there was one particular area that saw weakness sequentially, or --?

Part of that was just that we were able to get our shipments ramped up, so the book-to-bill -- it wasn't just the booking falling off, it was partially the shipments increasing as well.

I think we saw a strong ramp-up on our business in the first quarter.

And it happened pretty quickly, and so we saw a big slug of orders come in towards the middle to the end of the first quarter to balloon that book-to-bill up.

And the orders have backed off a little bit since then, but they're still coming in at a rate that supports our current shipping rate.

Jason Rogers.

A quick question on the third-quarter guidance.

Does that include or exclude stock option expense?

All the numbers we've given include stock option expense.

Other than some supplementary schedules that we'll put in our press releases, just so people can compare apples to apples and understand what the stock option charge is in there, we will not refer to stock compensation expense.

Just assume that it's in the numbers.

Gentlemen, there are no further questions at this time.

I will return the conference to you for any continuing and closing remarks.

Thank you.

We appreciate your taking the time to join us this morning, and for your continuing interest in Littelfuse.

We look forward to talking to you again next quarter.

Have a good day.

Thanks.

That does conclude today's conference call.

I would like to thank everyone for joining us today.