Littelfuse Inc (LFUS) 2006 Q3 法說會逐字稿

Good day everyone and welcome to the Littelfuse, Inc.

Q3 2006 Earnings Conference Call.

Today's call is being recorded.

At this time, I will turn the call over to Mr. Gordon Hunter, CEO.

Please go ahead, sir.

Thank you.

Good morning and welcome to the Littelfuse Q3 2006 conference call.

Here with me today is Phil Franklin, our VP of Operations Support and CFO.

Actually, for us it's late evening, as we're conducting this call from Shanghai.

We've been in Asia all week with our Board of Directors, visiting a number of our offices, facilities, and customers in Asia.

We are pleased with this opportunity for our board to see firsthand our facilities in Asia and how we are executing on our corporate initiatives to expand our presence in the region.

As you saw from our news release, both sales and earnings were in line with our previous guidance.

Sales were again at record levels and both cash flow and net earnings, excluding special charges, continue to be strong.

Phil will begin with today's safe harbor statement and a brief summary of our news release.

Then I will provide additional comments our third quarter results and our activities this week in Asia.

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

I'll now turn the call over to Phil.

Thanks, Gordon.

Let me read the safe harbor.

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 agreements, the effect of the Company's accounting policies, labor disputes, structuring costs and excess of expectations and other risks which may be detailed in the Company's SEC filings.

As Gordon mentioned, it was another strong quarter and in line with our guidance.

Let me recap the highlights.

Sales grew 17% to a record $143 million, reflecting strong growth in our electronics business, particularly in Asia.

Earnings per share, excluding special items, were $0.48, up 50% year on year.

Free cash flow for the quarter was $11 million.

It now stands at $40 million year to date, which is already above our previous full-year record.

This has allowed us to pay cash for four acquisitions this year and still increase our net cash balance.

Improved inventory management has been a significant contributor to the record cash performance, as turns have increased this year from 4.9 to 5.8.

Now, I would like to talk about the quarter in a little bit more detail.

The GAAP earnings for the quarter were $0.42, which included several special items.

The first was a $3.9 million pre-tax charge related to the final phase of the Heinrich consolidation. $2.3 million of this related to employee contractual obligations, most of which will be paid over the next several months.

The remaining $1.6 million was a non-cash asset impairment charge relating to the pending shutdown of German operations.

On the positive side, we booked a $1.2 million tax benefit related to a favorable adjustment to our tax reserve position.

Third quarter operating margin, adjusted for special items, while up significantly year on year, declined 110 basis points sequentially.

This was consistent with our guidance, which called for somewhat lower operating margin due to higher commodity prices and temporary cost increases related to plant, warehouse, and office consolidations.

Higher commodity prices contributed about 50 basis points to the sequential margin decline, while temporary cost increases related to consolidation activities accounted for about 100 basis points of decline.

These were partially offset by favorable operating leverage due to higher sales.

While these higher commodity prices and temporary costs related to consolidation activities will continue to effect us through the end of this year, we should begin to see improvement in 2007, as commodity surcharges to our customers begin to take effect and the temporary transition costs significantly reduce as we complete the Heinrich acquisition, the Swindon GDT consolidation, and the Asia logistics rationalization.

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

Thanks, Phil.

Overall, third quarter sales increased across the electronic and electrical end markets compared to the third quarter of last year, while automotive sales were flat.

Sales were strong in all geographic areas, with the Americas up 8%, Europe up 18%, and Asia up 27%.

I'll start the operations review with the electronics business, which once again 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.

This was a record quarter for electronics, with third quarter sales of $101.1 million, up 25% year over year and up 6% sequentially over the second quarter.

Asia sales accounted for 57% of total electronic sales, another indicator of why we are here this week and the excellent growth potential we have in this region.

Although second and third quarter electronic sales were up strongly, they appear to have gotten ahead of the end market demand.

On the positive side, we believe these increased sales levels are due in part to market share gains coming from our strategy to partner closely with our customers to provide them with the circuit protection products needed for their specific applications.

However, as we discussed in the second quarter conference call, we believe that has also been some build up of inventory over the last two quarters.

Year-to-date 2006 electronic sales, excluding acquisitions, is up 20% over the prior year.

We estimate that roughly one-third of that growth is due to inventory build up.

As reported on October 9th by the trade journal Electronics News, inventory is up slightly in the electronics industry, but this time it's being stockpiled at foundries, contract manufacturers, and OEM sites.

While we do not have the ability to monitor inventory in our distribution channels and know that inventory has increased in the second and third quarters, we have limited visibility to inventory at the contract electronic manufacturers and OEMs, but we do believe there has been some inventory build up, as indicated by Electronics News.

An example of this for us is at [Hia], a major Chinese white goods manufacturer.

Orders for our products from Hia have slowed recently as Hia works to reduce inventory levels.

Both the telecom market and the general electronics end markets continue to be strong across all geographic areas in the third quarter.

However, we do see some slowing in demand at one key telecom account.

Orders from Huawei, the Chinese telecom equipment manufacturer for our SIDACtor products, have slowed due to the delay in the British telecom rollout of broadband services.

Reflecting the inventory buildup and slowing orders from some key customers, electronics book-to-bill ratio has declined each of the last two quarters.

It dropped below 1 to 1 in the third quarter and was .83 to 1 in October.

While we normally expect the fourth quarter to be seasonally lower than the third quarter, the inventory buildup and lower order rates will result in a larger than seasonal decline in the fourth quarter, as Phil has indicated.

Consistent with the order trends that we are seeing, i-Supply recently reduced forecasted 2006 electronic equipment growth of 6.8% down to 5.1%.

This represented a decline from 8% growth in 2005. i-Supply attributes its decline in growth to the softening consumer electronics market, which is expected to drop from 13% growth in 2005 to less than a 3% increase in 2006.

I would now like to turn to Asia and our expansion in this important region.

Our electronics business is the major focus of the board's visit to Asia this week.

Asia is home to many of our electronics customers, either because they're headquartered in the region or they have manufacturing facilities here.

There are several reasons behind our Asia expansion.

The first is to be closer to our growing customer base in the region, the second is to participate in the expansion of the region as a whole, and the third is to continue to benefit from the lower labor rates in the region.

The electronics market research firm, In-stat, recently reported that China's consumer electronics manufacturing industry is expected to more than double by 2010 to $167 billion, due to China's low labor costs and fast growing domestic market.

Another research firm, China Outlook Consulting, estimated that China's market demand for semiconductors and passive components will reach $170 billion in 2006, a 15% year-over-year increase.

As the global leader in circuit protection, we believe we are well positioned to benefit from this growth, with the right locations, technical talent, and investment plan to successfully partner with our Asian customers.

We continue to invest in and expand our Suzhou manufacturing site.

At this location, which is our largest facility in Asia, we produce glass cartridge fuses and gas discharge tube products that are used in a wide variety of end markets.

As Phil indicated, we have nearly completed the transfer of our U.K.-based GDT line to Suzhou and are now in the process of transferring the recently acquired SRC GDT line also to Suzhou.

The Concord Semiconductor acquisition add silicon manufacturing to our existing capabilities in Asia, which we need to support our growth in TVS diodes and our other Over Voltage circuit protection products.

Concord also brings [technical difficulty] China assembly site, which we will continue to grow.

We are also in the process of closing on the acquisition of Song Long Electronics that we announced in June, Song Long manufacturers' metal oxide varistors at a plant in Dongguan, China.

Our plans are to move our metal oxide varistor production from Ireland to Dongguan and to close the facility in Ireland.

We expect to conclude this transaction at the end of this year or in the first quarter of 2007.

The final timing depends on when we receive the approvals we need from the Chinese government.

We continue to invest in our Philippines assembly site, as we transition our thin film fuse lines to this location in the last half of 2006.

We're also investing in new product engineering capabilities in the Philippines to extend the product offering of fuses manufactured at this site.

We have an experienced Taiwan sales and engineering support team that supports our OEM customers in the region, as well as original design and manufacturers, the fastest growing segment of our electronics business.

This team is also very involved in pursuing new business and designing opportunities.

Much of the growth we are seeing in China is tied to design activity that occurs in Taiwan.

We also now have experienced sales and technical support teams in Korea, Japan, Beijing, Hong Kong, Shanghai, Shenzhen, and India.

With these teams in place, we can continue to grow our Asia sales.

New design wins amount to $6.3 million of sales in the third quarter, bringing us to a total of $14.6 million for the year to date.

This puts us well inside of our target of $20 million for the year.

With our visit here in Asia, I thought it would be appropriate to highlight several recent wins in the region.

The first is an opportunity for a Concord Semiconductor product we had with Cummins Onan, the U.S.

Company that is the world's largest designer and manufacturer of diesel engines.

Our regional sales manager identified an opportunity for Littelfuse TVS diode products to provide the circuit protection needed in the Company's portable power generation units.

Initially, Cummins Onan was looking at using two devices that together could handle the power requirements of the product.

Our team identified the need for a single product that could also be quickly customized to mount more easily in the customer's equipment.

Concord Semiconductor had a single product that met the requirement and we expect to see the first orders this month.

Another design and example comes out of our office in Seoul, Korea.

It's for a nano fuse that will be used in a plasma display panel for a 42-inch TV.

Up to eight of these fuses will be used in each panel.

The customer had initially considered a fuse from one of our competitors; however, as they got into the process they realized that our delivery and quality control capabilities were a better fit for the tight deadlines involved.

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

In summary, we anticipate a dip in sales in the fourth quarter, due to the seasonality of our business and the inventory build up in the distribution channel and the customers.

We expect this slowdown to be across all product lines and geographical areas, although we anticipate a more substantial decrease in Europe and Asia.

Long term, we believe our electronics business is positioned for continued growth.

Hand in hand with the ongoing new product development in markets such as telecom, mobile phones, consumer electronics, computers, and handheld devices is the need for components that protect the sensitive circuits in these products.

Our electronics business is in the right place at the right time with the right products to participate in the industry growth.

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

Global automotive sales were flat in the third quarter on a 0.9% increase in global car builds.

Sequentially, third quarter global automotive sales were down 4.4% on a 10.8% decrease in global car bills.

North America automotive revenues were up sequentially from the second quarter, but were down compared to the third quarter of last year.

The year-over-year decrease reflects the decline in production at Ford, GM, and Chrysler, which amounted to more than 10% overall.

The continued trend away from light trucks and SUVs, where we have more product content than passenger cars, also contributed to the third quarter sales decrease.

General belief of the North America OEMs is that this trend will stabilize in 2007.

European automotive revenues were up almost 10% from the third quarter of 2005 on a 1% decrease in car build.

This was largely driven by increases in the off-road truck and bus segment that we've been targeting more aggressively.

Our automotive business in Asia was up about 40% from a relatively small base in last year's third quarter.

This compares very favorably to the 9% increase in Asia car build in the third quarter.

The increase was due to new program wins in China and Korea, plus new automotive electronics business that we started servicing this year.

We've seen recent wins in China and Southeast Asia for our Cable Pro battery cable protection product.

This product has been designed in by global divisions of Ford and General Motors as part of their global electrical architecture and their battery cable supplier's products in Asia.

The Cable Pro product is being designed in to replace competitive wire fuse links that are less reliable, as the Cable Pro allows a much more robust protection of their battery cables.

We will begin shipping against these wins in 2007 and expect to set up additional production capacity in our Suzhou, China facility for the end of 2007.

Later this quarter, we will also launch our new Low Profile MINI fuse.

We expect this new product to result in several new program wins, some of which should contribute to revenues in 2007.

A Low Profile MINI fuse is an improved mini fuse with a lower overall height that allows for weight and space savings in the vehicle.

We've been increasing our focus and resources on the fast growing automotive business in Asia and are accelerating our progress in this critical area.

We're in the process of relocating our global marketing director to Shanghai.

We're also strengthening our local teams in Japan, China, and Korea.

We plan to increase the field application, engineering, and technical support team as well as the sales team.

These enhanced resources are necessary to support the recent design wins and to accelerate future design in activities.

Throughout 2006, we've also been increasing our focus on the off-road truck and bus segment and have seen strong interest in business opportunities in both Europe and North America.

We've intensified our efforts to target the high growth automotive electronics segment, we're investing further in Concord Semiconductor TVS diode products for automotive applications, and are making inroads with key customers in both the passenger car and off-road truck and bus segments.

The major challenge in our automotive business continues to be the increased costs of zinc, copper, and silver and our ongoing efforts to pass on these costs.

If there is a bright spot here it's that all of our competitors are experiencing the same commodity cost increases that we are.

As a result, pricing pressure has eased a bit everywhere.

We've implemented price increases to most after-market customers in both North America and Europe, but we're still working with our global OEM accounts to implement a metal surcharge.

In some cases, long-term agreements have hindered our ability to introduce the surcharge, but we're engaged with all of our customers on this challenge.

We've been successful in negotiating a surcharge for several large OEM customers and expect to start seeing the impact of these successful negotiations later this quarter and into early 2007.

Helping to offset somewhat the overall impact of the higher metals costs are the operational improvements we've made.

Significant improvements in efficiencies and equipment utilization have enabled us to increase volume outputs on our major product lines.

In addition, our operations team has an aggressive cost reduction program underway that focuses on gains from lean manufacturing projects and other process improvements.

Looking ahead, we have a solid growth opportunity in several areas.

In addition to increased focus on the off-road truck and bus and automotive electronic segments, our emphasis on Asia growth and new products like Cable Pro, Low Profile MINI, and MasterFuse will contribute to increased sales.

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

Sales in this business unit increased 5% in the third quarter of 2006 over the same quarter last year.

Both of our electrical market segments are strong right now, although we are beginning to see some softening from prior run rates.

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

The non-residential construction market has been very robust in 2006 and continues to show strength.

This is supported by a recent report from the U.S.

Commerce Department indicating that spending on construction projects edged up in August, with the best gain in non-residential activity in 11 months, offsetting the continued decline in home building.

On the industrial side of our electrical business, the industrial sector that we sell our MRO replacement fuses into, is showing signs that manufacturing activity is beginning to slow, though not significantly.

Like our automotive business, our electrical business unit has also been affected by commodity pricing.

For this business, it's primarily the cost of copper.

We put through several price increases this year and believe the magnitude of these increases will be enough to offset the negative impact of the raw material cost increases.

We are pursuing a number of growth opportunities for the electrical business.

One, which I discussed on the call last quarter, is our thrust into the OEM market segment where we wanted to leverage our circuit protection expertise by working closely with our customers to develop niche products that meet their specific needs.

Our efforts in this area are beginning to take shape and should increase as we move into 2007.

We're also making good progress on our thrust into selling services.

One of these key services is educating customers through seminars on the dangers of an out flash event and offering out flash hazard assessments.

As the global leader in circuit protection, we're an excellent resource for our customers in helping them to assure the safety of their manufacturing facilities.

In summary, our price increases are continuing to keep pace with the negative impact of commodity price pressures.

Non-residential construction activity is expected to be strong, but the slowing in industrial manufacturing could impact on MRO replacement business.

Long term, we are encouraged by the progress in our growth initiatives and the opportunities to expand this business into new markets.

That completes my review of our three business units.

I hope you can see from my comments the progress we are making on our corporate growth initiatives.

We are working more closely with our customers to develop products that can be designed in to their specific applications.

All three of our businesses have made progress in this area.

We're broadening our technology base through acquisitions and through internal product development.

Research and development expenditures were up 9% in the third quarter over the same quarter last year, as we continued to develop leading-edge circuit protection products.

We're focused on how we can offset the current challenges in commodity pricing through initiatives that will reduce operating costs and increase efficiency now and in the future.

We're executing on our strategy to build on our presence in Asia.

I hope that in our comments today you've seen the many benefits our Asia expansion brings to Littelfuse and most importantly the tremendous growth opportunities that we have in the region.

We expect to continue our progress in the fourth quarter, although as we said in the release, we will need to work through the electronics inventory correction and complete the acquisition integrations and manufacturing transitions.

Overall, however, we expect 2006 to be another good year for Littelfuse.

With that lead in, I'll turn the call back to Phil for more specific comments on our guidance for the fourth quarter.

Then we'll open the call for questions.

Thanks, Gordon.

As we stated in the press release, we expect sales for the fourth quarter to be down 10 to 15% sequentially, which is 5 to 10 points more than the normal seasonal decline.

This reflects the market factors that Gordon mentioned earlier, including buildup of inventory in the channel, slowing of growth rates in some digital consumer categories, and delays in the British telecom DSL build out.

We believe these effects are temporary and we are confident that we have not lost market share.

At these sales levels, earnings per share is expected to be in the $0.18 to $0.25 range, reflecting negative operating leverage, continued costs related to acquisition integrations and manufacturing transitions, and a temporary increase in the tax rate to 36 to 38%.

While this temporary setback is obviously disappointing, it has not thinned our enthusiasm for the medium to longer term.

We believe we are in attractive markets.

We are confident that our growth strategies are firmly in place.

You've heard some evidence of that from Gordon.

Our cost structure will be improving significantly in the first half of 2007, as we complete the Heinrich integration, the Swindon, England plant closure, and the Asia logistics rationalization, as well as several smaller projects.

The completion of these three projects alone will result in $2.5 million per quarter of cost reduction by mid-2007.

These cost reductions, combined with pass-through of several million dollars of commodity surcharges, should put us back on track toward our long-term operating margin target of 15%.

We will also benefit from a lower tax rate in 2007, most likely around 32%.

So barring a more sustained downturn than we currently see, we believe $2.00 per share for 2007 is still doable.

This concludes our prepared remarks.

Now we would like to open it for questions.

[Operator Instructions.] Jeff Rosenberg, William Blair

Can you give us -- should we assume that the level of decline across business units would be more normal seasonality in automotive and electrical and then the greater than normal is all in electronics or is there something more there?

I think your first statement is correct.

It's really normal seasonality in the other two business units.

Okay.

And when you look to next year, when we talk about -- what kind of revenue growth do you need to be able to achieve the overall outlook you're preliminarily giving here?

We think that we can achieve that, as we talked about previously, in a relatively flat market where we would have some acquisition growth in 2007 and also some new product and new business opportunity growth.

So, overall, the revenue growth to get to that kind of number, we think might only be in the 5 or 6% range.

And the timing of when things -- I mean, normally in Q1 things look pretty flat from Q4.

Do you expect to see a little bit more of a snapback?

Is that part of your scenario?

Well, I think that's -- at this point it's a little tough to call that, given the weak visibility that we have.

I think hitting $2 obviously is going to depend on a snapback, at least in the first half of the year, probably in the early first half of the year.

So we do believe that with the programs that we itemized and discussed that that's a doable number.

Obviously, if the inventory correction turns out to be longer than a quarter or two, then that's going to be a more difficult thing to achieve, but we do think we can -- the point is, we do think we can do that on relatively modest growth, given the cost structure improvements that we know are coming.

All right.

And my last question is what should -- what are you looking for specifically in terms of the gross margin decline in Q4 and maybe some color as to whether or not there is much of a falloff at Teccor given the British telecom weakness?

Yes, Teccor certainly is a contributor in the falloff and, as you know, Jeff, that's a source of negative operating leverage when that happened.

So certainly part of the falloff in margin gets us into the earnings range that we talked about with the Teccor negative operating leverage.

And specifically what sort of gross margin do you think is in embedded or like a range there in your guidance?

Well, I think that to get to that kind of number you'd be talking about something in the neighborhood of a 300 basis point sequential decline in gross margin.

Alexander Paris, Barrington Research Associates

I'm just trying to get to a little more to your inventory correction.

I presume that's most of the shortfall that you're talking about.

I hear talk from many people that there is some inventory correction going on, cautious businessmen.

Most of the same people also say that there's been good control so that the inventories are not really excessive.

Yours, I don't -- it seems on the surface that yours is -- your expected decline is bigger than most.

Maybe you are right and the other ones are wrong, but usually it's been a distributor but it seems from what you've been saying is that more of the decline is coming from ODMs and OEMs, which would imply more into, geographically, in Asia than in North America.

Is that correct?

Yes, I think that's true.

I think it is one of the -- still the challenges of our business moving more to Asia and moving more into the CEMs and the ODMs.

And also, our Asia distribution channels are not as transparent as we'd be used to for years in the electronics industry in North America.

So while I think it's a real attractive market for us to be growing in Asia, I think we have to realize that the visibility of and tracking of data in the channel is more of a challenge.

We did discuss this in the call last quarter and we sensed that we were really seeing that buildup throughout the channel without necessarily having a lot of real hard data for that.

And I think as the quarter went through we've been correct in sensing that.

Whether that's ahead of other people, I'm not really sure, Alex.

But some of the way to sort of looking at it is we've -- we think about a third of the growth that we've had, so that's sort of 20% growth year to date in electronics, if we really looked at the underlying growth of the end markets and the new products we've introduced, new business we've won and the market share gains, that maybe -- two-thirds of that is real and maybe as much as a third.

So maybe 6 or 7 percentage points, which would come to about $15 million has maybe been growing in the channels.

Okay.

Where you do have harder numbers, like say North American distributors, do they seem excessive or is it just that they're leveling off?

Yes, Alex, I think -- I guess it really all depends on your view of what the looking forward market was like.

If you look back, based on the sales that they did over the last quarter, the inventories, although they've gone up significantly since the beginning of the year, they don't necessarily look excessive.

If you assume that there is some plateauing out of the growth that we've been seeing and that the end markets are going to be somewhat softer and flatter in the fourth quarter, then the inventories start to look somewhat over what they should be.

I guess somebody asked a variation of this question, but does it look like the inventory negative will be the largest in the fourth quarter and then moderating quite a bit after that, although not necessarily disappearing for the following first and second quarter?

We can really only speculate on that at this point.

I mean, obviously we're hoping that it flushes through as quickly as possible and I think the indications that we have so far would not indicate that this is going to be a protracted issue that we ought to get through it in a quarter or two.

But at the beginning of these corrections you never quite have the clear view.

So it would only be speculation to say how far out does this go.

So looking at the acquisitions then for 2007, are you having a swing factor?

You are obviously having some cost, transition costs, integrated in the acquisitions as well as the changing the manufacturing from the U.K. and so forth over to the Asia.

Does that all become a significant plus in next year in terms of savings?

Is it a pretty good swing factor?

Yes, absolutely.

It's -- what I said in my comments were that if you compare where we are now to the middle of 2007, we pick up about $2.5 million a quarter related to just three programs alone.

That would be the Swindon move and plant closure, the Heinrich, the final phase of the Heinrich consolidation, and then the logistics and distribution rationalization that we're doing in Asia.

Okay, just finally, quickly, in autos, do you have -- in Europe, what is the percentage of your business, of the auto business in Europe, now with Heinrich?

The percentage of our total automotive business that's in Europe?

Yes.

It's about -- it's a little over 40%.

40%.

And do you have any significant wins that you start delivering on in 2007 in Europe?

Yes, we have several that we mentioned;

Cable Pro products and last quarter we talked about our product MasterFuse.

So there has been significant investment and, of course, the [Dunsun] team.

So we have invested in new product development R&D programs and expect to see 2007 have significant growth.

Todd Peters, American Century

My question is on your acquisitions.

Which ones remain -- have you closed on everything?

At the end of the quarter, the Song Long, and I know Concord was done a while ago, but does everything, does the cash reflect the payments for those on your balance sheet today?

Not Song Long.

Song Long is not closed yet.

We're still waiting.

As we talked about last quarter, there was a Chinese approval process that was going to take some time to work through.

And we said that that would likely close towards the end of the year.

It looks like it could possibly close by the end of the year, but if not it will close in early 2007.

Okay.

Then I guess my other question was on your balance sheet then.

You've got -- oh, I think I answered my own question.

That's all right.

That's all I had.

[Operator Instructions.] Satish Athavale, KSA Capital

Gordon, can you outline for us what was the core growth versus acquisitions during the quarter in terms of revenue?

And then also price, volume, foreign exchange, the mix?

Yes.

So the revenue coming from the three acquisitions that we have that are revenue-generating acquisitions was $4.7 million for the third quarter.

And what was the other question?

The price, volume, mix, and how much benefit did you get from FX?

The benefit from FX was pretty minimal in the quarter.

Pricing, as Gordon indicated, was -- we always have some price reductions certainly in our automotive and electronics business, although so far this year the price reductions, in electronics particularly, have been less than normal.

But we still would have had some modest declines during the quarter.

Okay, thank you.

And, Gordon, if I can ask one more question.

Within the electronics business, are there any areas that are growing, even though the overall market is kind of slower?

Well, we have had -- I mean, if you look at our growth for electronics this year, it's 20% for the three quarters over the previous year.

Yes.

And so we've had many segments and certainly, geographically -- certainly Asia has been outstanding in growth and the telecom segment, which had a pretty weak year in '05, really has grown very substantially.

So all of the equipment that would go into broadband networks, voice over IP equipment, satellite set-top boxes, we've seen very good growth in many of those segments in the first three quarters.

So I think overall we feel this has been a very good nine months of the year in much of the electronics area, it's just that -- I think, as we've said a couple of times and were highlighting the end of the quarter last time, there is some inventory build that -- so it's not really a 20% growth year, it's a good solid low teens growth, but not 20% of natural growth.

And I think that would indicate that we are bringing you products, we're winning applications, we're gaining market share, if we're growing really the solid business in the mid-teens.

Reik Reed, Robert W. Baird

Just with respect to the inventory at the ODMs, I mean those guys tend to try to run fairly lean.

So I'm just wondering why is that built up there?

Are there some programs that are transitioning or how is that working from that standpoint?

Well, this is a -- I think what we've been reading in the general industry that I think that the consumer electronics, many of those segments, that we're gearing up for higher growth at the year end, and Christmas sales around the world have maybe slowed little.

Maybe their build got a little bit ahead.

Once they start to see those signals that some of that consumer electronics equipment is not going as fast as they expected, they in turn start to back off their inventory needs to their distribution channels to buy from us.

So that's how we see our book-to-builds going down.

So I think it really starts at a market that's still growing but not growing as fast as it was and I think that the i-Supply numbers cited in the consumer electronics segment growth, dropping from about 13% to 3%, is really what causes the ODMs to slow down and that starts the chain through impacting our shipments to our distribution channels.

So does that suggest that most of the inventory issues are in consumer or is a little bit broader than that?

Well, I think the data would say that the consumer electronics is a big part of this.

And I think that's what we've heard from some of our peer group companies, the analog semiconductor companies have cited that, and then I think we have looked at some specifics in some of the telecom programs, like we mentioned with Huawei.

But I think consumer electronics is looked on as the place that was really getting ahead of itself with a lot of optimism.

But really a 13% growth for that segment is really not sustainable.

And then if I can just switch back over, on the telecom side with the BT project, you guys have commented last quarter that you thought there was at least some reasonable visibility through the end of the year.

Can you just talk a little bit about what has happened in that project that's caused it to -- is it delayed indefinitely or is there a timeframe in which you can see that coming back?

No, this is certainly coming back.

This is a major program by British Telecom called Century 21, where they are going to spend several billions of dollars to really complete a broadband rollout across the country.

And Huawei, the Chinese telecom equipment manufacturer have won a lot of that business for supplying that equipment.

And I think that's just being a project that several of our peer group companies have sensed the same.

That it's a very big program that sometimes gets ahead of itself and the deployment gets a little delayed and then it continues.

But there is I think a huge commitment to that program and I think Huawei will be participating for several years in the future.

I just don't think it's going to be very smooth for us in our shipments into Huawei because of the way that program schedule is managed.

So you're saying it is more of a management issue, Gordon, rather than anything from a softening of that project.

Absolutely, yes.

[Operator Instructions.] Jeff Rosenberg, William Blair

What's your confidence level that you can get the tax rate down to 32%?

Is that something you think should be part of our forecast for next year?

Yes, it's pretty high, Jeff.

As it has this year, we'll see that bounce around from quarter to quarter, but we have a high level of confidence that for the year it will be in the low 30s.

Okay, and I guess my last kind of summary question is, just looking at all of the different moving pieces, do you have a feel for what revenue level you need to get back to in order to be -- call in the $0.45 to $0.50 per -- for earnings per share per quarter range?

Well, we were clicking along at those kinds of numbers in the 140ish million a quarter range.

I think certainly with our improved cost structure at those kinds of levels, once we get out into the middle of next year we ought to be there or above.

So I think it's reasonable to think that we could be at those kinds of numbers at levels below 140.

Yes, I guess, because I'm just assuming that at least in terms of before we get some real internal growth that your revenues kind of spiked above 140 temporarily due to some pulling in of forward demand.

So I was wondering how low you thought you could get that level of earnings back.

Yes, I mean, I'm not going to give you a specific number, but clearly the -- with the programs that we talked about, even -- when we were hitting those kinds of numbers, we were getting some -- certainly some benefit from the inventory build, but we are also getting hit hard by commodity prices and a lot of these transitional costs that we talked at some length about.

So I think it's reasonable to think that we would be able to get to those kinds of levels.

It's significantly lower revenue numbers than the 140s that we were in there.

So, whether it's 130 or 135, I can't give you a specific number, but it's certainly below 140.

Fair enough.

I have one other detail question.

What was the option expense during the quarter?

It's in the supplemental schedule.

I think it was about $1.2 million.

It appears there are no further questions at this time.

Mr. Hunter, I would like to turn the conference back to you for any additional or closing remarks.

Thank you.

We appreciate you taking the time to join us this morning and for your continued interest in Littelfuse and we look forward to talking to you again next quarter.

Thank you.

Ladies and gentlemen, that does conclude today's call.

Thank you for your participation.

You may now disconnect.