Littelfuse Inc (LFUS) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the Littelfuse, Incorporated fourth-quarter 2010 conference call.Today's call is being recorded.

At this time, I will turn the call over to Chairman, President and Chief Executive Officer, Mr.

Gordon Hunter.

Please go ahead, sir.

Thank you, and good morning.

Welcome to the Littelfuse fourth-quarter 2010 conference call.

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

As you probably saw in the news release, this was a very good quarter and an excellent year for Littelfuse.

We achieved record sales, earnings, and cash flow for the year.

Sales of $608 million increased 41% from 2009.

Diluted earnings per share were up sharply to $3.52, which was more than double our previous high of $1.64.

Cash provided by operating activities increased more than threefold from 2009.

Our fourth-quarter numbers came in as we expected.

Sales were up 11% over the fourth quarter of 2009, with increases in all three businesses and all geographic regions.

Our earnings were very strong as we continue to benefit from the higher sales and our improved cost structure.

Going into the fourth quarter, we had a very successful string of six consecutive quarters of sequential sales growth.

But as we discussed in our call last quarter, we anticipated a decline in fourth-quarter electronic sales, beyond the seasonal decline we typically experience, as our distributors began to reduce their inventories following the tremendous ramp-up early in the year.

As a result, our fourth-quarter sales were down 13% sequentially from the third quarter, as we had forecast.

Inventories have since normalized, and as we indicated in the news release, order rates began improving early in 2011, and the electronics book to bill was 1.1 for the month of January.

There are many other positive achievements in the fourth quarter and the year in all three of our businesses.

Before I go into these in more detail, I will turn the call over to Phil Franklin who will give the Safe Harbor statement and a brief summary of the news release.

Thanks, Gordon, and good morning, everyone.

Before we proceed, let me remind everyone that comments made during this call include forward-looking statements based on the environment as we currently see it, and as such do include various risks and uncertainties.

Please refer to our press release and SEC filings for more information on the specific risk factors that may cause actual results to differ materially from those expressed in forward-looking statements.

As Gordon said, the fourth quarter played out just about as we expected.

Sales for the fourth quarter of $142.6 million were up 11% year-over-year, but down 13% sequentially.

Diluted earnings on a GAAP basis were $0.88 per share, which was above our guidance due to a lower than expected tax rate resulting from favorable reserve adjustments, and more income earned in low-tax jurisdictions.

Using a normalized tax rate and excluding $0.8 million of one-time costs related to legacy operations, we earned $0.82 per share, which was just above mid-range of our guidance.

We were pleased to see that even in a quarter where the top line was relatively weak, our new cost structure enabled us to deliver an upper-teens operating margin and our third-best earnings performance ever.

This is a good indication that our cost model is working.

Not only are our overall margins much improved, but it appears that we are now better able to sustain profitability when sales cycle down.

Cash flow was another highlight for the quarter.

On the heels of our record $49 million of operating cash in the third quarter, we delivered another $29 million of operating cash in the fourth quarter.

Capital expenditures for the fourth quarter were $7 million, which left us with $22 million of free cash.

In fact, over the last two quarters we generated more than enough free cash to fully fund the $50 million Cole Hersee acquisition.

Now looking at the full-year 2010, sales were $608 million, which was a 41% increase from 2009, reflecting the global economic recovery, distributor restocking, and effective execution of the Company's strategic growth plans.

Diluted earnings per share in 2010 improved to $3.52 per share, from $0.43 per share in 2009, primarily as a result of the strong sales recovery, combined with our leaner cost structure.

Cash provided by operating activities was $104 million after spending $16 million to fully fund our frozen pension plans in the US and Germany.

This compares to operating cash flow of $30 million in 2009.

Capital expenditures for 2010 were $22 million, compared to $16 million in 2009.

So, in summary, 2010 was a record year by most every financial measure.

While we are pleased with this performance, we are equally excited about the future.

With a balance sheet that has never been stronger, a much improved cost structure that we believe is sustainable, and a business model that generates sufficient cash to fund acquisitions, pay dividends and repurchase stock, the future looks bright for Littelfuse.

Now, I'll turn it back to Gordon for some color on market trends and business performance.

Thanks, Phil.

Now let's move on to a review of our three business units, starting with electronics.

Electronic sales were $89.4 million for the fourth quarter, a 13% increase from the fourth quarter of 2009.

For the full year, electronic sales increased 48% to $390 million.

There was strength across all geographies and end markets in 2010, with notable strength in consumer electronics, and market share gains from some very good design wins.

We've discussed many of these design wins on our calls throughout the year.

And we also benefited from significantly lower lead times than our competition for most of the year.

Fourth-quarter sales increased in all major end markets, with continued strong demand for consumer electronic products such as the Apple iPad, e-book readers, set top box, and smartphone applications.

We saw a general draw-down of inventories during the quarter, particularly in Asia, but as I indicated earlier, we began to see improvement in January.

A source of strength behind our nearly 50% growth in 2010 electronic sales is our semiconductor business.

Revenues from semiconductor products increased almost 70% over the prior year, due to new product introductions, key customer penetration, and outstanding manufacturing and supply chain execution.

As we have discussed during the year, we have significantly expanded our silicon protection array of product offerings for protection of electronic applications from electrostatic discharge transients and over-voltage surge events.

A substantial sales contribution came form the wins we reported during the past year at a major LCD and LED TV customer, a popular e-reader device, and several set-top box applications.

We are very pleased with the progress we're making, and will continue to invest in this product line.

Also fueling sales last year was the investment we made in factory capacity.

We completed our investment in wafer fabrication and backhand assembly operations in Wuxi, China, and transferred all of our Texas and Mexico operations, which constitute the majority of our semiconductor production, to Wuxi.

The outstanding performance of our manufacturing and supply chain team to establish the operation, transfer production, and ramp up volume, all while leading the industry in lead times, enabled us to become qualified at more customers and increase market share for our semiconductor business.

The significant semiconductor sales increase, combined with the successful Wuxi manufacturing investment, production transfers, and the efforts of our semiconductor team have all resulted in a healthy business, which we are optimistic about continuing to grow.

Another positive driver behind our electronic sales performance in 2010 was the growth in sales of fuse products, which now account for half of our total electronic revenues.

The revenue increase in this product line were also one of the factors behind the improved profitability of our electronics business, despite rising commodity costs.

During the past two years, we released a number of new products that are based on the theme of more energy in a smaller body.

As products continue to become even smaller, our expanding line of miniature fuse products has enabled us to add value, and work more closely with customers, as well as differentiate Littelfuse in the market.

We have talked about some of these products on prior calls, including the 3.6 by 10mm cartridge fuse, which is the smallest cartridge fuse in the market, and is the preferred choice by many customers for LCD and LED TV applications.

Our surface mount series of fuses is the smallest of its fuse type, and has been very successful in notebook applications.

In China, we have the smallest footprint fuse in the market for CDMA mobile phones.

Other successful new fuse lines are being developed for the high-voltage ballast and UPS markets.

Turning to design wins, the successful design win of a nano fuse in the direct current input for Samsung's new tablet, called the Galaxy Tab, was completed in July and we begin shipping product in September.

Our first win in the tablet market was the 3.6 by 10mm fuse we designed into the charger for Apple's iPad in late 2009.

Now we have a very strong position for fuse products with these leading tablet manufacturers.

We continued our momentum in the tablet market with a recent win with Simplo technology, an ODM supplier.

They were looking for a higher breaking capacity fuse in a smaller form factor device for battery pack protection on the new RIM Tablet PC.

We worked with Simplo to select the best solution for this application, one of our surface mount ceramic fuses, and are now a leading supplier of this product to Simplo.

Our solid position with these fuse products puts us in a good position to piggyback on the forecasted aggressive growth of the tablet market going into 2011.

Another growth area for our electronics business is providing over-voltage protection for wireless data transmission infrastructure applications.

The well-publicized increase in data communications is driving additional spending on equipment, and we have a very strong offering of over-voltage protection products for these higher-power applications, as well as good engineering involvement with the market leaders on the equipment side.

New high-power products launched in 2010 contributed to the revenue increase in the fourth quarter, and based on end-customer forecasts, are expected to continue to increase in 2011, with the potential to increase sales of these products by over $1 million.

These examples highlight the strengths we bring to the market -- our investments in new product development, our well-established circuit protection expertise; and our focus on growing with evolving end-customer segments, are the key elements of what's been a very successful growth strategy for our electronics business.

We remain watchful of further inventory pullbacks, but the year is off to a good start with the inventory in Asia, our largest region, being closer to normal levels.

However, we do expect headwinds from commodity costs to continue.

Over the past two years, we have been successful in sharing some of these cost pressures with customers, and we plan to continue this approach.

Overall, our electronics business made an excellent rebound from the economic downturn, with our more efficient cost structure, and continued focus on new products and new business opportunities.

We believe the pieces are in place for us to continue building on that momentum in the coming year.

So that brings us to our second business unit, automotive.

Fourth-quarter automotive sales of $31.8 million were up 6% year-over-year, but were relatively flat sequentially.

Sales for the full year were $130.3 million, a 32% increase from 2009.

Although we are not back to the level of sales before the downturn, our automotive business continues to steadily recover, with our 2010 sales only about $5 million away from the record sales of $135.1 million that we achieved in 2007.

For the fourth quarter, global car production was up about 6% from the third quarter.European car production was up 11%, and our sales in Europe were up 12%.

And as these numbers indicate, Europe was experiencing a surprisingly strong recovery.

This was a strong quarter for our automotive business in India, driven by new business with Tata Motors for the retrofit of almost 20,000 vehicles with new high-current circuit protection.

This one-time order was specific for the fourth quarter.

Going forward, we will continue to sell these products for series production, but at a lower monthly rate.

We have talked about Tata Motors, which is India's largest automotive company, on several calls, and our relationship with this customer continues to grow.

Asia continues to be a focus for us, especially China, which leads the region's growth in vehicle production and sales.

This fact was highlighted by GM's recent announcement that for the first time, it sold more cars and trucks in China in 2010 than in the US.

We are investing in the long-term growth of our automotive business in Asia, and continue to pursue new business opportunities with our developing as the market expands and evolves to higher levels of circuit protection

We also continue to invest in growing our presence in the off-road truck and bus segment.

In late December, we announced the acquisition of Cole Hersee Company for $50 million in cash.

Headquartered in Boston, Cole Hersee is a major supplier of electromechanical and electronic switch and control devices to the heavy-duty vehicle market.

The company has annual sales of almost $46 million, and very established sales channels into both the OEM and aftermarket segments of the heavy-duty market.

The Cole Hersee acquisition is a perfect fit for Littelfuse in virtually every area.

We have said we want to make strategic acquisitions that expand our product portfolio in targeted markets.

Cole Hersee has an established product line that is well respected in the OTB segment, which is one of the markets we are focusing on for expansion.

The company's size, products, customer base, and sales channels strengthen our existing business, and provide excellent opportunities for future growth.

The integration of Cole Hersee into Littelfuse is going very well, and as you can tell, we are very pleased with this acquisition, and we expect this business to be accretive to Littelfuse earnings in 2011.

Another growth area for our automotive business is our high-current fuse products, including MasterFuse and our other standard and high-current fuses.

Factors contributing to the increasing demand for these products include the need for additional fuse boxes when batteries are both under the hood and in the trunk, and the trend towards more electric-driven functions in the vehicle, such as power steering.

And speaking of MasterFuse, the new business for the Ford Explorer in North America that we highlighted on our call last quarter launched late in the fourth quarter, and will continue to ramp up in 2011.

Moving to design wins and new business awards, we won a new contract with O'Reilly Auto Parts in the fourth quarter.

O'Reilly is a major national and auto parts retailer with more than 3,400 stores across 38 states.

This is new business for Littelfuse, and we are excited to partner with this leader in the automotive aftermarket segment.

Looking to 2011, JD Power and Associates is reporting a growth rate in global car production of about 4.5% for the year, and we expect a solid growth year in our revenues.

However, there will be some challenges for us in 2011, such as increasing commodity costs, which are a concern.

For our customers that use our large form-factor copper products, we address this with a clause in our contracts that allows us to pass through a commodity increase.

Overall, with the growth in global car production, the Cole Hersee acquisition, and new products in development for both the OTB and OEM segments, we expect that 2011 will be another year of good progress for our automotive business unit.

Moving on to the electrical business unit, the overall results of this business continued to be very strong.

Fourth-quarter sales of $21.4 million were up 14% from the fourth quarter of 2009.

For the full year, sales of $87.8 million were up 28%.

The majority of this improvement continued to come from the protection relay and custom product side of the business.

Sales for the base fuse business were down 3.2% in the fourth quarter from the prior-year quarter.

The fourth-quarter sales were still very solid, but not as strong on a year-over-year basis as the first three quarters, and there are several reasons for this.

Our business started to recover in the fourth quarter of 2009, presenting a tougher comparison this quarter.

Industrial activity slowed in the fourth quarter as we predicted, and there were seasonal declines in our solar business in November and December.

Distributor orders for inventory also slowed towards the end of the year.

For the full year, sales in the base fuse business were up 11%, and this was very impressive considering the fact that the non-residential building segment was down another 9% in 2010, from the already weak numbers of 2009.

This segment represents at least 40% of our base fuse business, so the impact on our results is significant.

The fact that we were able to grow in spite of this challenging environment is due to several factors.

We had some distributor inventory replenishment in 2010 after a dismal 2009, and we benefited from several new distributor conversions during the year.

The industrial market was much stronger overall than in 2009, and our industrial distributors also rebounded.

Our solar initiative, which is one of the focus growth areas for Littelfuse, drove new OEM dollars into the business that we did not have in 2009.

In addition, a price increase later in the year helped our top line.

We looked at the industrial production index as a measure of industrial activity, and the index was up 5.8% for the year and is expected to continue to show positive growth in 2011, although not at the level of 2010.

During the fourth quarter, we continued the strong OEM activity in the solar markets that we have discussed throughout the year.

We secured new positions at inverter and spring manufacturers during the quarter, a trend we see continuing into 2011.

An exciting new business win in the solar market was with a manufacturer of high-current combiner boxes.

Our ability to deliver a high-quality product in the timeframe the customer wanted was the driving force behind this opportunity.

With new business wins and multiple new product launches in the pipeline, we anticipate another year of strong growth for our solar business.

Another nice win for us during the quarter was a contract for fuses and new fuse blocks for an elevator OEM, and two customers that originally came to us for help with new national electrical requirements have turned into wins for fuse-box products used in the industrial control panels.

We expect the fuse business will continue to be primarily driven by the industrial segment in 2011, and we believe our work in the OEM market, especially with solar OEMs, should be incremental above normal industrial market growth, and enable us to grow faster in the general industrial market.

We expect that commodity prices will continue to be a challenge.

We have been able to pass through commodity costs in the form of price increases in the past, and if costs continue to go up, we expect we would be able to again pass these increases through.

We continue to optimize our prices on new opportunities, and also regularly review our low-margin business for improvement.

The other side of the electrical business unit is the protection relay and custom products business.

We added this business in 2008 with the acquisition of Startco Engineering.

Since then, we have often referred to this business as Startco, but since it's been over two years and the acquisition is fully integrated into Littelfuse, going forward we are going to refer to this business by its product lines, protection relays and custom products.

The markets for protection relays and custom products remained strong in the second half of the year.

Fourth-quarter combined sales of relays and custom products slightly exceeded third-quarter sales, which in turn were higher than in the second quarter.

Strong global demand for minerals, particularly potash, and metal commodities including copper and gold, continue to drive expansion in the global mining industry, and our top line growth as well.

Our sales also benefited from our ongoing efforts to expand relay sales into new markets and geographies in the mining segment.

The story is also very positive for our custom power centers, where we increased our production output in 2010 over the previous year, and we continue to add new orders.

With the fast-paced growth of the protection relay and custom products business, come opportunities to look at how we can improve costs in the face of rising commodity prices.

Just as our sales have increased, so have our purchasing volumes, and during the year we'll be aggressively renegotiating supply contracts, and looking at how we can leverage our higher volumes and to reduce costs.

Potential price increases are also being considered to partially offset rising material costs, along with adopting lean processes to reduce waste and increase efficiencies.

There are numerous indicators that the long-term growth of mining operations will remain strong, and we expect continued growth for this business in 2011.

In response to the increasing demand for our products, we are planning to expand the production capacity of our location in Saskatoon, Canada, in 2011.

You may recall that we moved into a new facility in Saskatoon shortly after we purchased the business.

The need for another expansion in such a short time reflects our success in this market, and its future growth potential for Littelfuse.

In 2011, we will also continue to seek out strategic acquisition opportunities that could complement and expand this business.

We are optimistic about the growth potential for both areas of our electrical businesses, protection relays and custom products for the mining industry, and the base fuse business in expanding markets such as lighting and solar.In spite of the headwinds in non-residential construction, the electrical business is performing well and is positioned for continued growth.

You have heard about the progress and opportunities in all three of our business units.

We have talked about many successes around our products, expertise, and customers.

We believe 2011 is going to be an exciting year for many reasons.

Our four-year restructuring program is almost at an end; only a few small items remain.

And while it was a long and sometimes challenging process, the program progressed pretty much on schedule, and we met the majority of the milestones we established for the plant moves and expansion.

This, in itself, is a significant achievement, given the broad geographic and operational scope of the initiative.We now have what we believe are the optimal manufacturing footprint and cost structure, and we expect to continue to realize the benefits of the restructuring for many years.

Just a few weeks ago, we celebrated the official grand opening of our new technical center in the research park located on the University of Illinois campus.

We are delighted to be linked so closely to this facility and the students of one of the top electrical engineering schools the US.

The new technical center includes a high-power test lab and research staff for our POWR-GARD electrical products.

We are excited about the technology innovations that will come out of this facility, and the positive impact it will have on our ability to develop the circuit protection products of the future.

From a financial viewpoint, 2010 was a tremendous bounce-back from 2009.

We set new records in sales, earnings, and cash flow.

We initiated a quarterly dividend of $0.15 per share in december, which is a reflection of the financial health of the Company, and our confidence in our ability to continue our strong performance.

Our substantial cash flow enabled us to fund our organic growth, make an excellent acquisition, provide for the expenses of the plant moves, and pay our first dividends.

We still have cash left over, which was used to repurchase some of our stock.

In all areas of the business, Littelfuse is a stronger global competitor than ever.

We are not going to rest on our laurels.

It is onto the new year, and we are in a great position to build on what we have ready accomplished.

We are focused on growth, organic growth, and growth through acquisitionsWe are also focused on continuous operational improvement through our global lean initiative.

You heard about several of our targeted growth areas today, the offroad truck and bus market, and the solar market.

Geographic expansion is another area of focus, particularly in the emerging markets of Asia, Brazil and India.

On the product side, we are focusing on protection relays and custom electrical products for the mining industry, our new silicon protection array product family for LCD TVs and other consumer products, and battery protection products for advanced power systems for vehicles.

Acquisitions remain a priority, but they must meet our criteria to broaden our product portfolio, and expand the customer base, and they must also be at the right price.

We are continually looking at potential acquisition opportunities, and hope that we will be able to further strengthen our business with successful strategic acquisitions in 2011.

The world economy is improving, and while increased commodity and transportation costs are a concern, we have managed through them in the past, and we have the processes in place to manage through them again.

So in summary, we look forward to the year ahead, and the many opportunities we will have to continue to build value for our customers, associates and shareholders.

I will now turn the call back to Phil, who will provide the outlook for the first quarter and the full year of 2011, and then we will open the call for questions.

Thanks, Gordon.

The following is our outlook for the first quarter of 2011.

Sales for the first quarter, including Cole Hersee, are expected to be in the range of $156 million to $165 million, which represents 8% to 14% year-over-year growth.

Cole Hersee is expected to contribute $11 million to $13 million of sales in the first quarter.

Earnings for the first quarter of 2011, including Cole Hersee, are expected to be in the range of $0.83 to $0.97 per diluted share, assuming a tax rate of 29%.

Cole Hersee is expected to be approximately $0.02 accretive to earnings in the first quarter.

Going into 2011, the full-year sales are expected to be in the range of $670 million to $690 million, which represents 10% to 13% growth over 2010.

Earnings for 2011 are expected to be in the range of $3.75 to $4.05 per diluted share, with a tax rate expected to be in the range of 28% to 30%.

Capital spending for 2011 is expected to be in the range of $29 million to $32 million as we add capacity for protection relays, electronic fuses, and some automotive products.

This concludes our prepared remarks.

Now we would like to open it up for questions.

(Operator Instructions)John Franzreb with Sidoti and Company.

Please proceed.

Good morning, Gordon, Phil.

Good morning, John.

My first question is regarding the organic revenue profile versus new programs, and what Cole Hersee is adding.

Can you separate the three for us of how much the revenue increase you're looking for in 2011 is new programs coming on stream versus organic growth and acquisitions?

We can talk about our -- it's a little hard to separate new programs from other organic growth.

I think we look at those as all in the same bucket.

But we are looking at mid-single-digit growth opportunity in 2011, which we certainly think there is some upside to that.

The numbers we gave in guidance would assume something in the mid-single digits overall or on the organic basis, with Cole Hersee adding another $46 million or so to that number.

Okay.

Historically, you have lived in an environment where there was price concessions.

Gordon, you referenced a couple times about raw material cost pressures, and that you actually have some built-in pass-throughs on some product lines.

Can you talk a little bit about, if you expect that environment to return?

Are you going to have to give price concessions?

And maybe a little bit more color of what percentage of your products are actually covered by raw-material pass-throughs?

That is a good question.

I think that probably like a lot of companies in last year probably feel that the pricing environment was more favorable as the industry rebounded, and availability of product was probably more important to purchasing people than negotiating tough on price.

And I think there's a natural expectation as things slow down a little as we expect a more reasonable growth environment this year, and not the rapid growth of last year, that probably pricing will become a little bit more under pressure.

But we are not expecting it to be traumatically different.

I think we've said in the past that our electronics business, we expect to see mid-single-digit pricing.

I think as we have grown dramatically the semiconductor products, I think that we would expect that to continue to be in that range of the mid-single-digit area.

I think we are just very aware that pricing is a critical thing for the Company.

It's a competence we have to focus on, and particularly when we have expected cost increases from commodities.

In the automotive area, typically we have long-term contracts, and what we have been trying to do is increase the percent of those, particularly on the larger form-factor products, what we call high-current products, high-current fuses like the MasterFuse and these products which are around the battery that have a lot of copper content, that we make sure that we build in clauses for price increases.

And then the pricing in automotive typically has been negotiated over a several-year period when the contract is awarded, with expected price declines maybe in the 2% to 3% area that we would expect that we would have to make up that amount in our operational efficiencies, and we have generally managed to do that.

And then in the electrical segment, where the products are much bigger, and they do have a lot more material content, we have been able to pass those prices, those cost increases through, and we have quite a few years of doing that and getting that through the channel.

So, I would say overall we have three different strategies in the different market segments for how we deal with pricing.

The electrical one, there is more likelihood to get a price increase, and certainly doing that when the commodity costs go up, and that's across the board of all the products in the electrical business, so it is a very strong, very high percentage there.

In automotive, it is probably -- I would say somewhere in the 20% to 30% of our products where we have the ability to really pass through commodity costs increase where there's larger form-factor products.

The high-volume, low-current fuses are more locked into contracts that have a price decline built into them, so we will have to manage carefully the commodity costs there.

And then in electronics, the material content is much less; but still, with very high volumes, we are very much paying attention to commodity costs there.

And I would say, being able to hold down the price decreases as we look at the strategy in electronics, and we've certainly managed to do that the last year.

That was very, very helpful.

Thank you.

One last question.

It seems to me that the first quarter guidance was what I would call unusually wide.

Is there any reason for that?

I wouldn't say it was unusually wide, John.

I think that it's pretty consistent with the ranges that we've given in the past in terms of the first quarter.

We give a little bit wider range for the year, for obvious reasons.

But I wouldn't characterize it as unusually wide.

Okay.

Maybe I will rephrase, then.

What are the puts and takes to get you to the top and the bottom ends of that range?

Well, certainly one of them -- the biggest driver of our ability to drive to the high end is going to be revenues, of course.

With the operating leverage that we get, a few million dollars more of sales certainly makes a huge difference.

That would be number one, and number two would be probably the commodity price trends.

I think as we've seen, we saw a big spike recently in those.

It seems to have settled into a range, but probably the headwinds that we face are certainly in the area of some of these costs going up, commodity costs as well as some of the cost pressures that we are seeing over in China that everybody else is facing as well, with labor rates going up and exchange rates moving against us there.

So, those are some of the headwinds, but we feel that as best we can we have built that into the guidance.

Okay.

I will get back into queue, thanks a lot, Phil.

Shawn Harrison with Longbow Research.

Please proceed.

Good morning.

Good morning, Shawn.

Good morning, Shawn.

In terms of the first quarter SG&A and R&D, is there a range that you can provide us, in terms of dollars?

The first quarter SG&A and R&D?

Yes.

So, our operating expenses in the last couple quarters, I would expect similar ranges to what you saw in Q3 and Q4.

We will have the puts and takes, we talked about in 2010, we had more incentive comp expense because of the strong year that we were having that was coming through the P&L.

That will come down in the first quarter, but then we've also talked about some investments that we are making in strategic growth initiatives, so that will at least partially offset some of the lower comp expense that we have coming through the P&L.

So net-net, I would not expect a big change from what you have seen in the last quarter or so in SG&A or R&D expense.

Is that prior to whatever SG&A and R&D Cole brings into the mix?

Yes, exactly.

So, Cole Hersee, they are going to add another -- there's going to be some additional amortization there.

So, maybe $2.5 million or so a quarter of SG&A, and then some additional amortization as well.

So in total, maybe in the neighborhood of a little over $3 million of operating expense.

Okay.

That is very helpful.

And then maybe as a follow-up to that, if I flat-line SG&A out for the year, and put revenues to the midpoint of your guidance, it implies, at least on a full year, that gross margins -- you either see flattish gross margins or a little bit of gross margin compression.

Is that the way to think about it progressing through the year?

Yes, I would say flattish gross margins.

I think we will see -- some of it depends on what commodity prices do, and how much of that we are able to share with our customers.

But I think what we are planning for is some very modest improvement in gross margins in the base business.

Cole Hersee gross margins are going to be a little bit lower, so if you net all that together, and you're looking at gross margins that are probably pretty flat year-over-year.And then we will get some leverage on operating expenses versus what we had in 2010.

But overall, I think what we are planning for our operating margins that would not look too much different than the 2010 operating margins, all included.

Okay, and then with Cole, does the earnings accretion forecast change, in terms of improve, as we progress through the year, or should we expect something like an annualized $0.08 to $0.09 number?

I think it depends on a number of factors, and it depends on how well we are able to integrate that, how much we are able to take advantage of where we think some of the sales synergies are.

Our hope is that we are able to see that start to increase as the year goes on, as we get more integrated.

But I would say the base case and the minimum cases, assume it's going to be similar to that throughout the year, but we will be challenging our guys to do a little bit better than that.

Okay.

And then my final question, just on the electrical business, understanding your forecast for the base of the legacy businesses, moderate growth in 2011, and with solar maybe providing some upside.

The protection and relay business, that has been growing leaps and bounds for the past few years.

What should that growth rate be in the business for 2011?

Is it 10%, is it 20%?

Can it be greater than that?

Shawn, I think we are very bullish about that.

The end markets have long cycles, and so there is a fair amount of predictability, particularly in the mining segments with these big programs of investments in mines and potash and the need to put electrical systems into there, so we have quite a large backlog in that business.

So we're very comfortable in saying that is going to be double-digit growth.

I think both the protection relay and the custom products, we think both of those areas will have double-digit growth, and we think there's real room for upside there.

Okay.

Thanks very much, and congratulations on the quarter.

Thank you.

Alek Gasiel with Barrington Research.

Please proceed.

Hello, Gordon, hello, Phil.

Hello, good morning, Alex.

Great quarter.

If you can remind me, book-to-bill was strong for the month of January, at 1.1; is that normal?

I'm just curious to know the seasonality for the first quarter, and the impact of Chinese New Year.

I'm just concerned on the OEM distribution channel, is there a lot more ordering going on in that month, in anticipation of Chinese New Year?

If you guys can straighten me out, that would be great.

I think generally we see book-to-bill start to improve as we start to get into the first quarter.

So it is not unusual that it would be -- 1.10 maybe a little bit higher than normal, but I would not think it would be that much different.

Generally the orders start to decline as we go through the fourth quarter, and then they start to pick up as we get into the first quarter, and particularly coming out of Chinese New Year.

I do not think anything really surprising there, but I think it is indicative that we are on track to see things start to sequentially improve as we come out of the Chinese New Year and get towards the end of the first quarter, which is a pretty typical seasonal pattern for us in the electronics business.

Okay.

Now, with the semi-fab restructuring, is there anything left on that, or is that basically done with the Wuxi plant move?

As we've said in the past, we also had the very successful acquisition of Concord Semiconductor in Taiwan that came with its own fab, and we moved the back end of that production to Wuxi.

The fab in Taiwan has been a slight delay.

The reason for that was that we had such dramatic growth in volume of the products that we make there during last year that the TVS diodes had a very successful year.

So, that did not get completed as we originally thought, by the end of this last year, but we expect that completion to happen by the end of the second quarter.

So that will be the last real factory move, is that fab facility being decommissioned in Taiwan and being moved into Wuxi.

So, then we will be fully integrated in Wuxi with all of our front-end fab and all of our back-end production.

So that is really the last major part of a site or a factory that needs to be moved.

And we are very confident that that will be moved in the way we have managed to do all the other moves.

And unfortunately with commodity prices rising, we shouldn't see any marginal benefit then once that's done.

Is that fair to say?

Well, I think if we look at that business alone, that semiconductor business with that move, it will increase certainly the profitability of that business.

I think in the overall scheme for the Company, we will get some benefit of that, and we will get some probably headwinds of commodity costs.And I think as Phil mentioned to Shawn's question earlier, overall I think looking at gross margins being constant through the year is probably our best prediction.

We have some cost saves that we know will come, but we have some headwinds that we are expecting, and overall we think that it's going to be flattish, would be our best prediction for that.

And we have talked about a little bit in excess of $2 million of savings, of annual savings, coming from the final consolidation.

But as Gordon said, that is really savings that will help us at least partially offset some of these other headwinds.

I know you guys talked about initiating lean programs in the custom product relay area.

Are you going to be increasing that across the board as part of a strategy of offsetting raw materials?

Absolutely.

We have had a lean initiative in the Company, and we continue to emphasize it.When we make an acquisition like the example with Startco, and more recently with Cole Hersee, we realized that there was probably quite a bit of room for us to take our lean factory and lean capability resources, and focus on that.

So, with all of the moves we have made in the past, into the Philippines and our other factories in China and Mexico where we have very strong lean initiatives, the intent is to really focus on that.

The Startco business has been such strong growth, and as I mentioned moving into a new facility, so the focus has really been on getting production out.

Really, we have to make those long-term investments in leaning out the factory.

By the way, lean is something we are driving across the whole enterprise in everything, not just in our factories.

So, that is a major part of our focus for this year, a major initiative for everyone in the Company, is looking at lean as a way of making the Company much more efficient.

You might have mentioned this, and I apologize for asking this.

With Startco, and I know in the Q3 quarter you mentioned about recording sales from other regions.

Is that the case -- looking at the revenue, is it still make up a majority from Canada with the potash?

Or are you seeing steady increase in other mining areas?

Well, it's yes and yes.

The majority is still in Canada in potash, because it continues to grow.

We are also growing in other areas, examples I've given on other calls such as copper mines in Chile, some coal mines in China and Australia.So we are continuing to grow that business in other areas, but the potash business is very solid for us.

Those are the key customers that we have.

We have a large backlog, a very strong order book, particularly for custom products.

So, it is growing in both areas.

I think that over a long period, as we get more sales channels and presence in places like Australia and South America where we have not really had a long history, I think we will eventually see the percentage of the business, that's not Canada, increase.

But right now, we are in the healthy position where it is increasing in both regions.

And you have added additional sales headcount for those other regions.

Is that correct?

We have.

That is one of the things that is an active program for us, we talked about an example of adding people in Chile, people in Brazil, India, places where we have not had enough presence in the past.

That is a key initiative.

There is a lot of room for global expansion, actually for almost all of our products, but in particular the products from Startco.

Even in the US, the historical Startco business that we bought didn't have much in the US at all, and so we are adding resources there as well, where there are a lot of opportunities in some of these industrial applications, as well as mining.

Okay, and final question.

Phil, interest expense, looking at that into fiscal 2011, I am wondering if you could provide any guidance on that.

Well, I think you can figure that we have -- right now I think we have about $40 million in debt or so.

We are paying about libor plus 150 on most of that, so it's a relatively small number, and should decline over time as we generate cash and pay that debt down, barring any future acquisitions.

Okay.

Thank you guys for answering my questions.

Okay, Alex.

(Operator Instructions)Anthony Kure with Keybanc Capital Markets.

Please proceed.

Good morning, gentlemen.

This is Karl Ackerman filling in for Tony.

How are you guys?

Hi.

Good morning.

If I may, I would like to go back to the pricing, the fourth quarter.

You guys had talked about -- and I think it's obvious through some competitors as well, that there has been a heightened commodity cost environment.

So, I was just wondering if you could maybe talk about the stickiness of the price increase that was announced September 1?And maybe rank the impact on operating margins in the fourth quarter, between maybe lower volume and the higher commodity costs?

Let me address the first part, and I'll ask Phil to do the second part.

I think the stickiness really is a very good question, and that really depends on the market segment, the vertical market segment, the geographical segment.

Certainly, our prices in the electrical business we find very sticky, and we find that the programs that we have there are very strong.

As I mentioned in automotive, you get on a program for three or four years, and the prices are really pre-negotiated in that contract, so it's extremely sticky and extremely predictable.

The only thing that we found in the last couple of years, automotive volumes were not as predictable as they used to be with that incredible downturn we had.

But going forward, we expect it to be a very predictable business in terms of volumes, and the prices are really fixed for the length of the program.

And the electronics business is really a mix.

It really depends on the region.

There's some very sticky design wins with some of our key OEMs, where again, the business is negotiated on a contract.And then there is a lot of, I'd say, the ODM contract manufacturing business, particularly in Taiwan and China where you have to be prepared to renegotiate that business every [broad span], it could be every six months to a year.

So, lots of price negotiation in some parts of the electronics business.

So, it ranges across the different segments, but overall I think the position that we have, it's a relatively sticky business in terms of circuit protection being a critical component, and does not have the excess swings of price declines that maybe some other components have.

I'll let Phil answer the second part.

If you look at the sequential decline in margin from -- we had an exceptional margin in Q3, up in the low 20%s and it declined down to the 17% to 18% range.

Certainly the biggest factor there is just the negative operating leverage on the lower volumes.

That drove the majority of it.

But you are right, commodities also played a role there.

I think our commodity prices probably hit us to the tune of $1.5 million to $2 million in the fourth quarter versus the third quarter.

So that was probably about 1.5 points of margin there, maybe a little less than that, and the rest of it would be due to negative operating leverage on the lower sales.

Okay, great.

And just another question.

You talked about an improvement on book-to-bill for the first quarter of January in the electronic segment.

Just curious to see if you could talk about maybe where you think distributor inventory levels are now, and if possible, maybe you could have an indication of what the book-to-bill ratios are at the distributors.

So, I think generally speaking, Gordon alluded to this in his script that distributor inventories with only very few exceptions have pretty much came back in line during the fourth quarter.

Going into the fourth quarter, we talked about excessive inventory for some of the consumer products over in Asia, at some of the distributors there, those have pretty much worked themselves through.

I think most of the big US distributors' inventories are also in pretty decent shape as we -- there are a couple of them that still probably have a little bit of inventory they have to work through, but the majority of them have their inventories probably pretty much where they need them now.

We feel pretty good about that, and that is the primary thing that gives us confidence that we are going to see some sequential improvement in the electronics business coming from a relatively soft Q4 into a somewhat better Q1, when normally that is usually flattish in electronics, so we think that will lead to a little bit better result.

Your other question was?

Maybe if you could parse between the book-to-bill ratio at the distributor level?

So, from what we're hearing from our distributors, all of the information we're getting is saying that their, what we call their POS, their sales to their end customers, that all seems pretty strong for the most part.

They are generally -- not, I wouldn't say bullish trends, but generally positive trends there in their bookings from their customers, as well as their overall POS trends seem to be pretty healthy.

So again, it gives us reasonable confidence going into the year that this is going to be an okay year.

It is not going to be the boom, 30%, 40% growth year like last year, but it should be a solid year where we have more typical, little bit better than GDP growth.

That is more than fair.

Thank you.

Thank you.

John Franzreb with Sidoti & Company.

Please proceed.

Hello, guys.

Gordon, you said something in your prepared remarks that I just want you to revisit.

You talked about the growth in the tablet market and your penetration there.

How should we think about that, when some of the discussion is that that is actually going to offset by declines in maybe the netbook or laptop market.

Do you end up in a net positive in products selling into those channels, or how does that play out?

That is a good question, John.

When I read things from some of the people who are making tablets and making laptops, I think Intel has clearly said that they think that tablets are incremental, and they do not expect in Intel's forecasts, that it's going to impact too much laptops and netbooks.

I am not sure anyone really knows.

I know a lot of people are getting a tablet, and they are still keeping their laptop, and they are upgrading their laptop, and they feel the laptop still is critical, and the tablet is an additional thing that is nice to have.

I think that I'm in the camp of people who believe that it's, at least for a lot people, it's another device, it is instantly on, it has some different functionality, and the very strong growth that we are seeing of it.

I am not sure that I am seeing, in my view, a dramatic impact against laptop growth and netbook growth.

I think this is all incremental, I'd say not all incremental, but certainly a lot of incremental growth.

And I think the rush by Samsung and RAM and HP all to try and jump onto the iPad segment I think is indicative of people realizing that this was maybe a little bit different.

It is in between the smartphone and the laptop.

People are going to keep those, and I believe it is going to be a strong market for some period of time.

It certainly provides functionality that the laptop doesn't, but at least from my experience, there is still laptop functionality that is difficult to get in the tablets as well, so I agree with Gordon.

I have all three myself, and the netbook seems the least useful at this point.

But anyway, I was just curious about how it plays out for you on a P&S view.

Certainly for us, establishing a very strong position as we have done, as being the leader there, has been critical.

And you might have addressed this, and I missed it, so I apologize.

It sounds to me like when it comes to acquisitions, you do not want to overpay, you want something that fits right for the Company, but still generate a nice cash flow.

Is it safe to assume that priorities for cash would be to repay the debt before, all things being equal, or are you going to build the cash position for an acquisition?

Well, generally, how much cash we use to pay down debt probably has more to do with where that cash is getting generated, and if we have cash that is being generated overseas, and we have future use for that cash, we're not going to bring it back and use it to pay for an acquisition, because we would have to pay higher taxes on that.

It is probably driven more by tax strategy than anything else, but we're generating a lot of cash.

We have a lot of availability on our credit line still.

We don't really feel like we have any constraints there, and if we have, certainly to the extent that we have excess cash, that we either have in the US or could easily bring back to the US, and we don't have an acquisition clearly in near-term sight, we will just use it to pay down our revolver or pay down our term loan.

That's actually helpful, Phil.

How much of your cash is, in general, generated here in the States?

It will start to become a larger number now.

If you go back the last couple of years, we have not generated a lot of cash.

The cash that we have generated in the US we've largely used to pay a lot of these restructuring costs, et cetera.

Going forward, we should be generating more cash there.

But I think if you look at our overall profile, still the biggest, some of the biggest cash generation is outside of the US.

In some of the places we manufacture over in Asia, in particular.

We also generate quite a bit of cash in Europe because we do not have a lot of costs over there now, we've stripped out a lot of the costs there.

We're generating cash in all three regions of the world right now.

Okay.

Thanks a lot, guys.

Good quarter.

Ladies and gentlemen, this concludes the Q&A portion of the call.

I would now like to turn the conference back over to Gordon Hunter for his closing remarks

Well, thank you for joining us on the call this morning, and for your comments and your questions.

I [understand] that 2010 was an excellent year for Littelfuse, and we feel we are positioned for growth, and we look forward to continuing our strong performance in the year ahead.

So, as always, we appreciate your interest and support.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.